UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 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 August 12, 1999:
Energen Corporation, $0.01 par value 29,822,627 shares
Alabama Gas Corporation, $0.01 par value 1,972,052 shares
ENERGEN CORPORATION AND ALABAMA GAS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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
(f) 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 Segment Data of Energen Corporation 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II: OTHER INFORMATION
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 Nine months ended
June 30, June 30,
(in thousands, 1999 1998 1999 1998
except share data)
Operating Revenues
Natural gas distribution $63,296 $66,327 $279,545 $323,829
Oil and gas operations 45,224 34,385 131,333 100,744
Total operating revenues 108,520 100,712 410,878 424,573
Operating Expenses
Cost of gas 22,475 28,066 109,053 159,112
Operations and maintenance 42,133 38,067 127,591 108,114
Depreciation, depletion and
amortization 22,156 19,401 67,803 61,553
Taxes, other than
income taxes 8,354 8,372 29,289 31,420
Total operating expenses 95,118 93,906 333,736 360,199
Operating Income 13,402 6,806 77,142 64,374
Other Income (Expense)
Interest expense (8,930) (7,490) (28,135) (22,391)
Other, net 476 427 990 1,752
Total other expense (8,454) (7,063) (27,145) (20,639)
Income (Loss) Before
Income Taxes 4,948 (257) 49,997 43,735
Income tax (benefit) expense 1,435 (172) 273 (2,599)
Net Income (Loss) $ 3,513 $ (85) $ 49,724 $46,334
Basic Earnings Per
Avg. Common Share $ 0.12 $ 0.00 $ 1.68 $ 1.60
Diluted Earnings Per
Avg. Common Share $ 0.12 $ 0.00 $ 1.66 $ 1.58
Dividends Per Common Share $ 0.16 $ 0.155 $ 0.48 $ 0.465
Basic Avg. Common
Shares Outstanding 29,720 29,160 29,581 29,024
The accompanying Notes are an integral part of these financial
statements.
3
CONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
June 30, 1999 September 30, 1998
(in thousands) (unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,445 $103,231
Accounts receivable, net of
allowance for doubtful
accounts of $4,027 at
June 30, 1999, and
$3,547 at September 30, 1998 60,275 64,173
Inventories, at average cost
Storage gas 22,672 21,237
Materials and supplies 8,058 8,670
Liquified natural gas in storage 3,458 3,381
Deferred gas cost 1,885 1,774
Deferred income taxes 15,482 12,569
Prepayments and other 13,941 3,418
Total current assets 130,216 218,453
Property, Plant and Equipment
Oil and gas properties,
successful efforts method 665,302 516,040
Less accumulated depreciation,
depletion and amortization 125,577 88,306
Oil and gas properties, net 539,725 427,734
Utility plant 632,469 632,165
Less accumulated depreciation 322,857 307,488
Utility plant, net 309,612 324,677
Other property, net 4,099 3,933
Total property, plant
and equipment, net 853,436 756,344
Other Assets
Deferred income taxes 19,253 10,942
Deferred charges and other 7,294 7,716
Total other assets 26,547 18,658
TOTAL ASSETS $1,010,199 $993,455
The accompanying Notes are an integral part of these financial
statements.
4
CONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
June 30, 1999 September 30, 1998
(in thousands, except share data) (unaudited)
CAPITAL AND LIABILITIES
Current Liabilities
Long-term debt due within one year $ 1,955 $ 7,209
Notes payable to banks 115,000 153,000
Accounts payable 33,359 33,533
Accrued taxes 21,982 21,255
Customers' deposits 16,534 16,344
Amounts due customers 14,066 12,070
Accrued wages and benefits 19,449 15,299
Other 36,161 25,531
Total current liabilities 258,506 284,241
Deferred Credits and Other Liabilities
Other 7,316 7,183
Total deferred credits and
other liabilities 7,316 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,
29,806,947 shares outstanding
at June 30, 1999, and
29,326,597 shares outstanding
at September 30, 1998 298 293
Premium on capital stock 204,092 195,874
Capital surplus 2,802 2,802
Retained earnings 165,806 130,280
Deferred compensation plan 1,889 873
Treasury stock, at cost
(131,330 shares at June 30, 1999,
and 49,096 shares at
September 30, 1998) (2,331) (873)
Total common shareholders' equity 372,556 329,249
Long-term debt 371,821 372,782
Total capitalization 744,377 702,031
TOTAL CAPITAL AND LIABILITIES $1,010,199 $993,455
The accompanying Notes are an integral part of these financial
statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
ENERGEN CORPORATION
(Unaudited)
Nine months ended June 30, (in thousands) 1999 1998
Operating Activities
Net income $49,724 $46,334
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation, depletion and
amortization 67,803 61,553
Deferred income taxes, net (11,644) (17,189)
Deferred investment tax credits, net (336) (351)
Gain on sale of assets (2,900) (1,193)
Net change in:
Accounts receivable 3,298 935
Inventories (900) 5,606
Deferred gas cost (111) 444
Accounts payable - gas purchases 8,556 (3,947)
Accounts payable - trade (17,223) (2,666)
Other current assets and liabilities 16,263 16,246
Other, net 819 1,449
Net cash provided by
operating activities 113,349 107,221
Investing Activities
Additions to property,
plant and equipment (85,339) (134,338)
Acquisition, net of cash acquired (123,816) --
Proceeds from sale of assets 48,331 1,868
Other, net (675) 385
Net cash used in
investing activities (161,499) (132,085)
Financing Activities
Payment of dividends on common stock (14,197) (13,500)
Issuance of common stock 8,222 7,711
Purchase of treasury stock (442) --
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 62,571 (70,364)
Net cash used in financing activities (50,636) (77,118)
Net change in cash and cash equivalents (98,786) (101,982)
Cash and cash equivalents
at beginning of period 103,231 105,402
Cash and Cash Equivalents at End of Period $ 4,445 $ 3,420
The accompanying Notes are an integral part of these financial
statements.
6
STATEMENTS OF INCOME
ALABAMA GAS CORPORATION
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
(in thousands) 1999 1998 1999 1998
Operating Revenues $63,296 $66,327 $279,545 $323,829
Operating Expenses
Cost of gas 22,868 28,496 110,426 160,674
Operations and maintenance 25,597 24,737 75,400 73,230
Depreciation 6,693 6,318 19,886 18,747
Income taxes
Current 2,045 108 20,438 21,130
Deferred, net (1,700) (514) (3,671) (6,261)
Deferred investment
tax credits, net (112) (117) (336) (351)
Taxes, other
than income taxes 5,292 5,668 21,052 23,838
Total operating expenses 60,683 64,696 243,195 291,007
Operating Income 2,613 1,631 36,350 32,822
Other Income (Expense)
Allowance for funds
used during construction 159 127 327 311
Other, net 195 25 (288) 271
Total other income 354 152 39 582
Interest Charges
Interest on long-term debt 2,135 2,210 6,477 6,632
Other interest expense 325 159 1,352 1,230
Total interest charges 2,460 2,369 7,829 7,862
Net Income (Loss) $ 507 $ (586) $28,560 $25,542
The accompanying Notes are an integral part of these financial
statements.
7
BALANCE SHEETS
ALABAMA GAS CORPORATION
June 30, 1999 September 30, 1998
(in thousands) (unaudited)
ASSETS
Property, Plant and Equipment
Utility plant $632,469 $632,165
Less accumulated depreciation 322,857 307,488
Utility plant, net 309,612 324,677
Other property, net 306 318
Current Assets
Cash and cash equivalents 4,316 1,222
Accounts receivable
Gas 33,466 32,191
Merchandise 2,190 2,362
Affiliated companies 29,387 --
Other 1,284 1,621
Allowance for doubtful accounts (3,944) (3,482)
Inventories, at average cost
Storage gas 22,672 21,237
Materials and supplies 5,464 5,533
Liquified natural gas in storage 3,458 3,381
Deferred gas cost 1,885 1,774
Deferred income taxes 12,349 10,470
Prepayments and other 3,789 2,112
Total current assets 116,316 78,421
Deferred Charges and
Other Assets 4,010 4,733
TOTAL ASSETS $430,244 $408,149
The accompanying Notes are an integral part of these financial
statements.
8
BALANCE SHEETS
ALABAMA GAS CORPORATION
June 30, 1999 September 30, 1998
(in thousands, except share data) (unaudited)
CAPITAL AND LIABILITIES
Capitalization
Common shareholder's equity
Common stock, $0.01 par value;
3,000,000 shares authorized,
1,972,052 shares outstanding at
June 30, 1999, and
September 30, 1998 $ 20 $ 20
Premium on capital stock 31,682 31,682
Capital surplus 2,802 2,802
Retained earnings 148,764 120,205
Total common
shareholder's equity 183,268 154,709
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 302,918 274,359
Current Liabilities
Long-term debt due within one year -- 5,350
Notes payable to banks -- 15,000
Accounts payable
Trade 28,392 23,217
Affiliated companies -- 2,738
Accrued taxes 27,833 19,428
Customers' deposits 16,534 16,344
Other amounts due customers 14,066 12,070
Accrued wages and benefits 9,554 4,217
Other 9,780 11,915
Total current liabilities 106,159 110,279
Deferred Credits and Other Liabilities
Deferred income taxes 15,764 17,136
Accumulated deferred
investment tax credits 2,325 2,661
Regulatory liability 2,295 2,910
Customer advances for
construction and other 783 804
Total deferred credits
and other liabilities 21,167 23,511
Commitments and Contingencies -- --
TOTAL CAPITAL AND LIABILITIES $430,244 $408,149
The accompanying Notes are an integral part of these financial
statements.
9
STATEMENTS OF CASH FLOWS
ALABAMA GAS CORPORATION
(Unaudited)
Nine months ended June 30, (in thousands) 1999 1998
Operating Activities
Net income $ 28,560 $25,542
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and amortization 19,886 18,747
Deferred income taxes, net (3,671) (6,261)
Deferred investment tax credits (336) (351)
Net change in:
Accounts receivable (304) (2,696)
Inventories (1,443) 5,848
Deferred gas cost (111) 444
Accounts payable - gas purchases 8,556 (3,947)
Accounts payable - trade (3,381) (2,363)
Other current assets and liabilities 12,233 19,590
Other, net 62 1,176
Net cash provided
by operating activities 60,051 55,729
Investing Activities
Additions to property, plant and equipment (31,961) (37,130)
Net advances to affiliates (32,125) (2,488)
Proceeds from sale of assets 27,000 --
Other, net 479 486
Net cash used in investing activities (36,607) (39,132)
Financing Activities
Payment of dividends on common stock -- (7,276)
Net change in short-term debt (20,350) (9,000)
Net cash used in financing activities (20,350) (16,276)
Net change in cash and cash equivalents 3,094 321
Cash and cash equivalents at
beginning of period 1,222 2,580
Cash and Cash Equivalents at End of Period $ 4,316 $ 2,901
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. Following a
year in which a charge against the ESR is made, the APSC provides
for accretions to the ESR of no more than $40,000 monthly 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 $1.7 million
are being returned to ratepayers over approximately 12 years. At
June 30, 1999, and September 30, 1998, a regulatory liability
related to income taxes of $2.3 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 June 30,
1999, a regulatory asset of $2.7 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 losses of $8.5
million and deferred gains of $0.6 million on the balance sheet
at June 30, 1999, and September 30, 1998, respectively.
At June 30, 1999, Energen Resources had entered into contracts
and swaps for 11.6 Bcf of its remaining estimated fiscal 1999
flowing gas production at an average contract price of $2.18 per
Mcf and for 670 MBbl of its remaining estimated flowing oil
production at an average contract price of $14.55 per barrel. In
addition, the Company has hedged the basis difference on 2.7 Bcf
of its remaining fiscal 1999 San Juan Basin production. Fiscal
year 2000 contracts and swaps were in place for 34.0 Bcf of
flowing gas production at an average contract price of $2.38 per
Mcf and for 1,490 MBbl of flowing oil production at an average
contract price of $17.20 per barrel. Fiscal year 2001 swaps were
in place for 0.8 Bcf of flowing gas production at an average
contract price of $2.22 per Mcf. Subsequent to June 30, 1999,
Energen Resources entered into additional contracts for fiscal
year 2000, resulting in a total of 1,625 MBbl of flowing oil
production hedged at an average contract price of $17.28 per
barrel. Additional fiscal year 2001 swaps were entered into
subsequent to June 30,1999, resulting in a total of 4.4 Bcf of
flowing gas production at an average contract price of $2.47 per
Mcf.
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
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, requires that an impairment loss
be recognized when the carrying amount of an asset exceeds the
sum of the undiscounted estimated future cash 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 declining crude oil prices.
5. RECENT PRONOUNCEMENTS OF THE FASB
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
2001. 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 nine months ended June 30, 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 nine months
ended June 30, 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.
Nine months ended June 30, 1999 1998
(in thousands) (unaudited)
Operating revenues $410,878 $479,603
Net income $ 49,724 $ 46,542
Basic Earnings Per Average Common Share $ 1.68 $ 1.60
Diluted Earnings Per Average Common Share $ 1.66 $ 1.58
7. RECONCILIATION OF EARNINGS PER SHARE
(in thousands, Three months ended Three months ended
except per share amounts) June 30, 1999 June 30, 1998
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS $3,513 29,720 $ 0.12 $ (85) 29,160 $0.00
Effect of Dilutive Securities
Long-range performance
shares 148 155
Non-qualified stock
options 147 236
Diluted EPS $ 3,513 30,015 $ 0.12 $ (85) 29,551 $0.00
(in thousands, Nine months ended Nine months ended
except per share amounts) June 30, 1999 June 30, 1998
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS $49,724 29,581 $ 1.68 $46,334 29,024 $1.60
Effect of Dilutive Securities
Long-range performance
shares 148 148
Non-qualified stock
options 148 203
Diluted EPS $49,724 29,877 $ 1.66 $46,334 29,375 $1.58
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 operations).
Three months ended Nine months ended
June 30, June 30,
(in thousands) 1999 1998 1999 1998
Operating revenues
Natural gas distribution $63,296 $66,327 $279,545 $323,829
Oil and gas operations 45,224 34,385 131,333 100,744
Total $108,520 $100,712 $410,878 $424,573
Operating income (loss)
Natural gas distribution $2,846 $ 1,108 $52,781 $47,340
Oil and gas operations 11,070 5,922 25,141 17,806
Eliminations and
corporate expenses (514) (224) (780) (772)
Total $13,402 $ 6,806 $77,142 $64,374
Identifiable assets
Natural gas distribution $430,244 $405,913 $430,244 $405,913
Oil and gas operations 627,231 495,563 627,231 495,563
Eliminations and other (47,276) (10,496) (47,276) (10,496)
Total $1,010,199 $890,980 $1,010,199 $890,980
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Energen's net income totaled $3.5 million ($0.12 per diluted
share) for the three months ended June 30, 1999, and compared
favorably to a net loss of $85,000 ($0.00 per diluted share)
recorded in the same period last year. Energen Resources
Corporation, Energen's oil and gas subsidiary, realized net
income of $3.1 million in the current fiscal quarter as compared
with $440,000 in the same period last year primarily due to
increased production-related income and a $1.9 million after-tax
gain on the sale of offshore properties, partially offset by
slightly lower realized sales prices and increased interest
expense. Alagasco, Energen's natural gas utility, reported net
income of $507,000 in the third quarter; this $1.1 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
$49.7 million ($1.66 per diluted share) compared with $46.3
million ($1.58 per diluted share) for the same period in the
prior year. Energen Resources' net income totaled $21.0 million
and compared favorably with $20.6 million of net income for the
first nine months of fiscal 1998. Increased production-related
income and the gain from the sale of properties were offset
largely by increased interest expense as well as increased
administrative expense associated with the 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's current year-to-date earnings
increased $3.0 million to $28.6 as the utility continued to earn
its allowed range of return on an increased level of equity
representing investment in utility plant.
Natural Gas Distribution
Natural gas distribution revenues decreased $3.0 million in a
quarter-to-quarter comparison and $44.3 million on a year-to-date
basis. This primarily was due to decreased sales volumes as well
as decreased gas prices. For the quarter, weather that was 17.9
percent warmer than the same period last year contributed to a
13.7 percent decrease in residential sales volumes. Small
commercial and industrial customers, sensitive to weather,
experienced a 7.4 percent volume decrease. Throughput for the
quarter for large transportation customers was 14.5 percent lower
than the prior period primarily due to variances in electric
peaking demand. For the year-to-date, weather that was 27.3
percent warmer than the same period last year contributed to a
21.9 percent decrease in residential sales volumes. For the same
reasons that influenced the quarter, small commercial and
industrial customers and large transportation customers had a
17.5 percent and a 8.6 percent decrease in sales volumes,
respectively. Decreased gas purchase volumes and lower commodity
gas prices contributed to a 19.8 percent decrease in cost of gas
for the quarter and a 31.3 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. 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.
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 (O&M) expense increased slightly in
both the current quarter and year-to-date periods. For the
quarter, the increase was primarily due to higher bad debt,
advertising and Year 2000-related costs. In addition to those
items which influenced the quarter, the year-to-date variance was
impacted by increased labor related costs resulting from
increased qualified benefit plan expenses, partially offset by
decreased insurance expense. The labor savings from the
Voluntary Early Retirement Program effective November 1, 1998,
were primarily 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 Operations
Revenues from oil and gas operations rose 31.5 percent to $45.2
million for the three months ended June 30, 1999, and 30.4
percent to $131.3 million for the year-to-date, largely as a
result of Energen Resources' current- and prior-year property
acquisitions. Natural gas comprised approximately 70 percent of
Energen Resources' production for both the current quarter and
the year-to-date. In the third fiscal quarter, natural gas
production increased 12.2 percent to 13.4 Bcf, oil volumes more
than doubled to 777 MBbl and natural gas liquids volumes rose 6.3
percent to 254 MBbl. For the year-to-date, natural gas
production increased 26.8 percent to 42.1 Bcf, oil volumes
increased 145.9 percent to 2,412 MBbl and natural gas liquids
volumes decreased 10.8 percent to 543 MBbl.
The impact of higher production was partially offset by lower
realized natural gas and oil prices than in the same periods last
year. For the quarter, realized gas prices decreased slightly to
$2.16 per Mcf. Realized oil prices decreased 13.6 percent to
$12.71 per barrel. For the year-to-date, realized gas prices
decreased 2.6 percent to $2.22 per Mcf, while realized oil prices
decreased 27.2 percent to $11.64 per barrel. Natural gas liquids
prices decreased 9.8 percent to an average price of $9.39 per
barrel for the quarter and 10.5 percent to an average price of
$8.30 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 June 30, 1999, Energen Resources had entered into
contracts and swaps for 11.6 Bcf of its remaining estimated
fiscal 1999 flowing gas production at an average contract price
of $2.18 per Mcf and for 670 MBbl of its remaining estimated
flowing oil production at an average contract price of $14.55 per
barrel. In addition, the Company has hedged the basis difference
on 2.7 Bcf of its remaining fiscal 1999 San Juan Basin
production. Fiscal year 2000 contracts and swaps were in place
for 34.0 Bcf of flowing gas production at an average contract
price of $2.38 per Mcf and for 1,490 MBbl of flowing oil
production at an average contract price of $17.20 per barrel.
Fiscal year 2001 swaps were in place for 0.8 Bcf of flowing gas
production at an average contract price of $2.22 per Mcf.
Subsequent to June 30, 1999, Energen Resources entered into
additional contracts for fiscal year 2000, resulting in a total
of 1,625 MBbl of flowing oil production hedged at an average
contract price of $17.28 per barrel. Additional fiscal year 2001
swaps were entered into subsequent to June 30, 1999, resulting in
a total of 4.4 Bcf of flowing gas production at an average
contract price of $2.47 per Mcf.
Energen Resources, in the ordinary course of business, may be
involved in the sale of both non-strategic developed and
undeveloped properties. Energen Resources recorded a pre-tax
gain of $3.1 million in the current quarter as compared to
$23,000 in the prior fiscal quarter and a gain of $3.1 million
year-to-date as compared to $1.1 million in the same period last
year on the sale of various properties. Gains on the sale of
such properties are included in operating revenues. The largest
of several property sales occurred in June 1999 when Energen
Resources recorded a $3.0 million pre-tax gain on the sell of
offshore Gulf of Mexico properties.
O&M expense increased $2.9 million for the quarter and $17.3
million in the current year-to-date primarily due to significant
production growth and acquisition activity at Energen Resources.
Lease operating expenses rose by $2.8 million for the quarter and
$13.7 million for the year-to-date primarily due to the
acquisition of oil and gas properties. The year-to-date variance
was also impacted by increased administrative expense associated
with the first quarter TOTAL acquisition. Exploration expense
changed slightly in both the quarter and year-to-date period
comparisons primarily due to the timing of exploratory efforts
and drilling activity associated with certain properties.
Energen Resources' significantly higher production volumes
generated the majority of the $2.4 million increase in
depreciation, depletion and amortization (DD&A) for the quarter
and the $5.1 million increase for the year-to-date. Partially
offsetting the increase in the year-to-date was 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. The average
depletion rate for the quarter decreased to $0.78 as compared to
$0.82 for the same period last year. For the year-to-date, the
average depletion rate was $0.79 as compared to $0.87, excluding
the effect of the writedown, in the prior fiscal period,
primarily due to trading certain offshore properties in the
fourth quarter of fiscal 1998 for onshore properties which had
lower depletion rates.
Energen Resources' expense for taxes other than income taxes
primarily reflects production-related taxes which were $1.0
million higher this quarter and $2.6 million higher for the year-
to-date as a result of increased production.
Non-Operating Items
Interest expense for the Company increased $1.4 million in the
quarter and $5.7 million year-to-date. Influencing the increase
in interest expense for the current year-to-date 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. Recognition of nonconventional fuels tax credits
on an interim basis was comparable for the quarter and year-to-
date.
FINANCIAL POSITION AND LIQUIDITY
Cash flow from operations for the current year-to-date was $113.3
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 $161.5 million through the
nine months ended June 30, 1999, primarily in the addition of
property, plant and equipment partially offset by the proceeds
from the sale and leaseback of the headquarters building and from
the sale of offshore properties. Energen Resources invested
$177.2 million in capital expenditures year-to-date related to
the acquisition and development of oil and gas properties,
including the stock purchase of TOTAL. 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 $32.0 million year-to-date and
represented primarily normal system distribution expansion and
support facilities.
The Company used $50.6 million for financing activities in the
current year-to-date. 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 $195
million, including an approximate $134 million net adjusted
purchase price for the TOTAL property acquisition and $61 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
other 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 the second
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 maintains an
investment in storage working gas which is expected to average
approximately $21 million in 1999. The Company completed the
sale and leaseback of its new headquarters building in January
1999; the proceeds approximated the investment in the facility.
During fiscal year 2000, Alagasco plans to invest approximately
$65 million in capital expenditures for normal distribution and
support systems and to replace liquifaction equipment at its
liquified natural gas facility. The utility anticipates funding
capital requirements through internally generated capital and the
utilization of short-term credit facilities.
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 by September 30, 1999.
As of June 30, 1999, the Company has incurred approximately $1.5
million 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
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
2001. The impact of this pronouncement on the Company currently
is being evaluated.
19
SELECTED SEGMENT DATA
ENERGEN CORPORATION
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
(in thousands,
except sales price data) 1999 1998 1999 1998
Natural Gas Distribution
Operating revenues
Residential $39,406 $43,683 $183,970 $219,257
Commercial and
industrial - small 14,915 16,214 65,752 79,414
Transportation 7,814 7,894 26,901 27,746
Other 1,161 (1,464) 2,922 (2,588)
Total $63,296 $66,327 $279,545 $323,829
Gas delivery volumes (MMcf)
Residential 4,414 5,113 22,619 28,969
Commercial and
industrial - small 2,311 2,496 10,043 12,172
Transportation 15,312 17,906 46,071 50,424
Total 22,037 25,515 78,733 91,565
Other data
Depreciation
and amortization $6,693 $ 6,318 $19,886 $18,747
Capital expenditures $12,327 $13,607 $31,961 $36,987
Operating income $2,846 $ 1,108 $52,781 $47,340
Oil and Gas Operations
Operating revenues
Natural gas $28,896 $26,323 $93,323 $75,764
Oil 9,879 5,314 28,074 15,681
Natural gas liquids 2,388 2,041 4,504 5,643
Other 4,061 707 5,432 3,656
Total $45,224 $34,385 $131,333 $100,744
Sales volume
Natural gas (MMcf) 13,404 11,948 42,117 33,225
Oil (MBbl) 777 361 2,412 981
Natural gas liquids (MBbl) 254 239 543 609
Average sales price
Natural gas (Mcf) $ 2.16 $ 2.20 $ 2.22 $ 2.28
Oil (barrel) $12.71 $ 14.71 $ 11.64 $15.98
Natural gas liquids (barrel)$9.39 $ 8.55 $ 8.30 $ 9.27
Other data
Depreciation, depletion
and amortization $15,463 $13,083 $47,917 $42,806
Capital expenditures $18,432 $10,300 $177,179 $97,794
Exploration expense $1,055 $ 1,367 $ 3,144 $2,857
Operating income $11,070 $ 5,922 $25,141 $17,806
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 losses of $8.5
million and deferred gains of $0.6 million on the balance sheet
at June 30, 1999, and September 30, 1998, respectively.
21
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 June
30, 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
August 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
August 12, 1999 By /s/ G. C. Ketcham
G. C. Ketcham
Executive Vice President,
Chief Financial Officer and
Treasurer of Energen and
Alabama Gas Corporation
August 12, 1999 By /s/ Grace B. Carr
Grace B. Carr
Controller of Energen
August 12, 1999 By /s/ Paula H. Rushing
Paula H. Rushing
Vice President-Finance
of Alabama Gas
Corporation
23