-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQEfZftvMZXL55hLZQbozDISlEJVyGN6hXS5tJJat60YOxf6jJ6OJ4KnMMUmjiFC 41aVj1/bhAOf4Xfp7S4L+Q== 0000277595-99-000001.txt : 19990215 0000277595-99-000001.hdr.sgml : 19990215 ACCESSION NUMBER: 0000277595-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENERGEN CORP CENTRAL INDEX KEY: 0000277595 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 630757759 STATE OF INCORPORATION: AL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07810 FILM NUMBER: 99534321 BUSINESS ADDRESS: STREET 1: 605 21ST STREET N CITY: BIRMINGHAM STATE: AL ZIP: 35203 BUSINESS PHONE: 2053262700 MAIL ADDRESS: STREET 1: 605 21ST STREET N CITY: BIRNINGHAM STATE: AL ZIP: 35203 FORMER COMPANY: FORMER CONFORMED NAME: ALAGASCO INC DATE OF NAME CHANGE: 19851002 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA GAS CORP CENTRAL INDEX KEY: 0000003146 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 630022000 STATE OF INCORPORATION: AL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-70466 FILM NUMBER: 99534322 BUSINESS ADDRESS: STREET 1: 2101 SIXTH AVE NORTH CITY: BIRMINGHAM STATE: AL ZIP: 35203 BUSINESS PHONE: 2053262742 MAIL ADDRESS: STREET 1: 2101 SIXTH AVE NORTH CITY: BIRMINGHAM STATE: AL ZIP: 35203 10-Q 1 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 DECEMBER 31, 1998 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 February 11, 1999: Energen Corporation, $0.01 par value 29,569,925 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 DECEMBER 31, 1998 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 Business Segment Data of Energen Corporation 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 PART II: OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME ENERGEN CORPORATION (Unaudited) Three months ended December 31, (in thousands, except share data) 1998 1997 Operating Revenues Natural gas distribution $71,557 $95,755 Oil and gas production activities 42,411 30,133 Total operating revenues 113,968 125,888 Operating Expenses Cost of gas 26,663 50,747 Operations and maintenance 42,847 34,282 Depreciation, depletion and amortization 23,204 17,836 Taxes, other than income taxes 8,293 9,881 Total operating expenses 101,007 112,746 Operating Income 12,961 13,142 Other Income (Expense) Interest expense (9,875) (7,235) Other, net 478 818 Total other expense (9,397) (6,417) Income Before Income Taxes 3,564 6,725 Income tax (benefit) expense (278) 598 Net Income $ 3,842 $6,127 Basic Earnings Per Average Common Share* $ 0.13 $ 0.21 Diluted Earnings Per Average Common Share* $ 0.13 $ 0.21 Dividends Per Common Share* $ 0.16 $0.155 Basic Average Common Shares Outstanding* 29,435,038 28,887,220 *Share amounts reflect a 2-for-1 stock split effective March 2, 1998 The accompanying Notes are an integral part of these financial statements. 3 CONSOLIDATED BALANCE SHEETS ENERGEN CORPORATION December 31, 1998 September 30, 1998 (in thousands) (unaudited) ASSETS Current Assets Cash and cash equivalents $ 7,349 $103,231 Accounts receivable, net of allowance for doubtful accounts of $3,543 at December 31, 1998, and $3,547 at September 30, 1998 90,988 64,173 Inventories, at average cost Storage gas 26,405 21,237 Materials and supplies 7,759 8,670 Liquified natural gas in storage 3,667 3,381 Deferred gas cost 10,430 1,774 Deferred income taxes 11,627 12,569 Prepayments and other 8,090 3,418 Total current assets 166,315 218,453 Property, Plant and Equipment Oil and gas properties, successful efforts method 670,653 516,040 Less accumulated depreciation, depletion and amortization 110,425 88,306 Oil and gas properties, net 560,228 427,734 Utility plant 641,969 632,165 Less accumulated depreciation 313,491 307,488 Utility plant, net 328,478 324,677 Other property, net 2,938 3,933 Total property, plant and equipment, net 891,644 756,344 Other Assets Deferred income taxes 11,139 10,942 Deferred charges and other 7,707 7,716 Total other assets 18,846 18,658 TOTAL ASSETS $1,076,805 $993,455 The accompanying Notes are an integral part of these financial statements. 4 CONSOLIDATED BALANCE SHEETS ENERGEN CORPORATION (in thousands, December 31, 1998 September 30, 1998 except share data) (unaudited) CAPITAL AND LIABILITIES Current Liabilities Long-term debt due within one year $ 4,984 $ 7,209 Notes payable to banks 190,000 153,000 Accounts payable 46,900 33,533 Accrued taxes 18,693 21,255 Customers' deposits 17,395 16,344 Amounts due customers 13,911 12,070 Accrued wages and benefits 15,864 15,299 Other 53,118 25,531 Total current liabilities 360,865 284,241 Deferred Credits and Other Liabilities Other 11,353 7,183 Total deferred credits and other liabilities 11,353 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, 29,512,994 shares outstanding at December 31, 1998, and 29,326,597 shares outstanding at September 30, 1998 295 293 Premium on capital stock 199,296 195,874 Capital surplus 2,802 2,802 Retained earnings 129,410 130,280 Deferred compensation plan 959 873 Treasury stock, at cost (49,203 shares at December 31, 1998, and 49,096 shares at December 31, 1997) (959) (873) Total common shareholders' equity 331,803 329,249 Long-term debt 372,784 372,782 Total capitalization 704,587 702,031 TOTAL CAPITAL AND LIABILITIES $1,076,805 $993,455 *Share amounts reflect a 2-for-1 stock split effective March 2, 1998 The accompanying Notes are an integral part of these financial statements. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS ENERGEN CORPORATION (Unaudited) Three months ended December 31, (in thousands) 1998 1997 Operating Activities Net income $ 3,842 $ 6,127 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 23,204 17,836 Deferred income taxes, net 618 (1,375) Deferred investment tax credits, net (112) (117) Net change in: Accounts receivable (8,614) (20,274) Inventories (4,543) 1,261 Deferred gas cost (8,656) (14,165) Accounts payable - gas purchases 12,870 17,211 Accounts payable - trade 497 (1,890) Other current assets and liabilities 5,609 1,462 Other, net 4,198 872 Net cash provided by operating activities 28,913 6,948 Investing Activities Additions to property, plant and equipment (34,481) (68,556) Acquisition, net of cash acquired (123,816) - Other, net 15 433 Net cash used in investing activities (158,282) (68,123) Financing Activities Payment of dividends on common stock (4,711) (4,480) Issuance of common stock 3,423 2,982 Payment of note payable issued to purchase U.S. Treasury securities (100,571) (98,636) Net change in short-term debt 135,346 64,636 Net cash provided by (used in) financing activities 33,487 (35,498) Net change in cash and cash equivalents (95,882) (96,673) Cash and cash equivalents at beginning of period 103,231 105,402 Cash and Cash Equivalents at End of Period $ 7,349 $ 8,729 The accompanying Notes are an integral part of these financial statements. 6 STATEMENTS OF INCOME ALABAMA GAS CORPORATION (Unaudited) Three months ended December 31, (in thousands) 1998 1997 Operating Revenues $71,557 $95,755 Operating Expenses Cost of gas 27,146 51,404 Operations and maintenance 24,995 25,000 Depreciation 6,588 6,197 Income taxes Current 1,022 2,148 Deferred, net 593 (927) Deferred investment tax credits, net (112) (117) Taxes, other than income taxes 5,746 7,252 Total operating expenses 65,978 90,957 Operating Income 5,579 4,798 Other Income (Expense) Allowance for funds used during construction 66 85 Other, net (97) 79 Total other income (expense) (31) 164 Interest Charges Interest on long-term debt 2,199 2,210 Other interest expense 494 569 Total interest charges 2,693 2,779 Net Income $ 2,855 $ 2,183 The accompanying Notes are an integral part of these financial statements. 7 BALANCE SHEETS ALABAMA GAS CORPORATION December 31, 1998 September 30, 1998 (in thousands) (unaudited) ASSETS Property, Plant and Equipment Utility plant $641,969 $632,165 Less accumulated depreciation 313,491 307,488 Utility plant, net 328,478 324,677 Other property, net 315 318 Current Assets Cash and cash equivalents 3,008 1,222 Accounts receivable Gas 42,725 32,191 Merchandise 2,170 2,362 Other 2,029 1,621 Allowance for doubtful accounts (3,482) (3,482) Inventories, at average cost Storage gas 26,405 21,237 Materials and supplies 5,511 5,533 Liquified natural gas in storage 3,667 3,381 Deferred gas cost 10,430 1,774 Deferred income taxes 9,455 10,470 Prepayments and other 6,265 2,112 Total current assets 108,183 78,421 Deferred Charges and Other Assets 4,682 4,733 TOTAL ASSETS $441,658 $408,149 The accompanying Notes are an integral part of these financial statements. 8 BALANCE SHEETS ALABAMA GAS CORPORATION December 31, 1998 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 December 31, 1998, and September 30, 1998 $ 20 $ 20 Premium on capital stock 31,682 31,682 Capital surplus 2,802 2,802 Retained earnings 123,059 120,205 Total common shareholder's equity 157,563 154,709 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 277,213 274,359 Current Liabilities Long-term debt due within one year 3,150 5,350 Notes payable to banks 35,000 15,000 Accounts payable Trade 30,959 23,217 Affiliated companies 4,557 2,738 Accrued taxes 18,911 19,428 Customers' deposits 17,395 16,344 Other amounts due customers 13,911 12,070 Accrued wages and benefits 7,827 4,217 Other 9,874 11,915 Total current liabilities 141,584 110,279 Deferred Credits and Other Liabilities Deferred income taxes 16,841 17,136 Accumulated deferred investment tax credits 2,549 2,661 Regulatory liability 2,718 2,910 Customer advances for construction and other 753 804 Total deferred credits and other liabilities 22,861 23,511 Commitments and Contingencies - - TOTAL CAPITAL AND LIABILITIES $441,658 $408,149 The accompanying Notes are an integral part of these financial statements. 9 STATEMENTS OF CASH FLOWS ALABAMA GAS CORPORATION (Unaudited) Three months ended December 31, (in thousands) 1998 1997 Operating Activities Net income $ 2,855 $ 2,183 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,588 6,197 Deferred income taxes, net 593 (927) Deferred investment tax credits (112) (117) Net change in: Accounts receivable (10,750) (21,441) Inventories (5,432) 1,027 Deferred gas cost (8,656) (14,165) Accounts payable - gas purchases 12,870 17,211 Accounts payable - other trade (5,128) (559) Other current assets and liabilities (62) 5,112 Other, net (279) 677 Net cash used in operating activities (7,513) (4,802) Investing Activities Additions to property, plant and equipment (10,307) (8,197) Net advances from affiliates 1,819 3,281 Other, net (13) (21) Net cash used in investing activities (8,501) (4,937) Financing Activities Net change in short-term debt 17,800 14,000 Net cash provided by financing activities 17,800 14,000 Net change in cash and cash equivalents 1,786 4,261 Cash and cash equivalents at beginning of period 1,222 2,580 Cash and Cash Equivalents at End of Period $ 3,008 $ 6,841 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 equity for the fiscal year will be within the allowed range of 13.15 percent to 13.65 percent. Reductions in rates can be made quarterly to bring the projected return within the allowed range; increases, however, are allowed only once each fiscal year, effective December 1, and cannot exceed 4 percent of prior-year revenues. RSE limits the utility's equity upon which a return is permitted to 60 percent of total capitalization and provides for certain cost control measures designed to monitor Alagasco's operations and maintenance (O&M) expense. If the change in O&M expense per customer falls within 1.25 percentage points above or below the Consumer Price Index For All Urban Customers (index range), no adjustment is required. If, however, the change in O&M expense per customer exceeds the index range, three-quarters of the difference is returned to customers. To the extent the change is less than the index range, the utility benefits by one-half of the difference through future rate adjustments. Under RSE as extended, an $11.8 million annual increase in revenue became effective December 1, 1997, a $2.5 million annual decrease in revenue became effective July 1, 1998, and a $6.6 million annual increase in revenue became effective December 1, 1998. Alagasco calculates a temperature adjustment to customers' bills to remove the effect of departures from normal temperature on Alagasco's earnings. The calculation is performed monthly, and the adjustments to customers' bills are made in the same billing cycle the weather variation occurs. 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 $1.9 million are being returned to ratepayers over approximately 12 years. At December 31, 1998, and September 30, 1998, a regulatory liability related to income taxes of $2.7 million and $2.9 million, respectively, was included in the consolidated financial statements. As of November 1, 1998, the Company offered a Voluntary Early Retirement Program to certain eligible employees. At December 31, 1998, a regulatory asset of $3.2 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. CAPITAL STOCK On January 28, 1998, Energen announced a 2-for-1 split of the Company's common stock.The split was in the form of a 100 percent stock dividend and was payable on March 2, 1998, to shareholders of record on February 13, 1998. All per-share amounts and the number of shares of capital stock outstanding have been adjusted to reflect the stock split. Effective January 30, 1998, the Restated Certificate of Incorporation of Energen Corporation was amended to increase Energen's authorized common stock, par value $0.01 per share, from 30,000,000 shares to 75,000,000 shares. 4. 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 $18.8 million and $0.6 million on the balance sheet at December 31, 1998, and September 30, 1998, respectively. At December 31, 1998, Energen Resources had entered into contracts and swaps for 35.5 Bcf of its remaining estimated 1999 flowing gas production at an average contract price of $2.29 per Mcf and for 810 MBbl of its remaining estimated flowing oil production at an average contract price of $16.80 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 0.9 Bcf of its remaining 1999 San Juan production. 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. 5. ACCOUNTING FOR LONG-LIVED ASSETS SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for LongLived 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 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 a decline in crude oil prices. The expense was recorded as additional depreciation, depletion and amortization. 6. 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. This pronouncement relates solely to disclosure provisions, and therefore will have 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. 7. INDUSTRY SEGMENT INFORMATION Effective September 30, 1998, the Company early 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 December 31, (in thousands) 1998 1997 Operating revenues Natural gas distribution $71,557 $95,755 Oil and gas activities 42,411 30,133 Total $113,968 $125,888 Operating income (loss) Natural gas distribution $ 7,082 $ 5,902 Oil and gas activities 6,196 7,541 Eliminations and corporate expenses (317) (301) Total $ 12,961 $ 13,142 Identifiable assets Natural gas distribution $441,658 $429,905 Oil and gas activities 648,451 476,656 Eliminations and other (13,304) (10,660) Total $1,076,805 $895,901 15 8. RECONCILIATION OF EARNINGS PER SHARE (in thousands, Three months ended Three months ended except per share amounts) December 31, 1998 December 31, 1997 Per Share Per Share Income Shares Amount Income Shares Amount Basic EPS $3,842 29,435 $ 0.13 $ 6,127 28,887 $ 0.21 Effect of Dilutive Securities Long-range performance shares 115 107 Non-qualified stock options 170 173 Diluted EPS $ 3,842 29,720 $ 0.13 $ 6,127 29,167 $ 0.21 9. 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 assets to Westport Oil and Gas Company Inc. Energen Resources' net adjusted price totaled approximately $135 million, including the assumption of certain legal and financial obligations. Energen Resources gained an estimated 200 billion cubic feet 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: Oil and gas properties $ 134,856 Less liabilities assumed (10,611) Less cash acquired (429) Acquisition cost, net of cash acquired $ 123,816 Summarized below are the consolidated results of operations for the three months ended December 31, 1998 and 1997, on an unaudited pro forma basis, as if the TOTAL acquisition were made on October 1, 1997. The pro forma financial information is based on the Company's consolidated results of operations for the three months ended December 31, 1998 and 1997, and on the 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. Three months ended December 31, (in thousands) 1998 1997 Operating revenues $113,968 $148,597 Net income $ 3,842 $ 6,911 Basic Earnings Per Average Common Share $ 0.13 $ 0.24 Diluted Earnings Per Average Common Share $ 0.13 $ 0.24 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Energen's net income for the three months ended December 31, 1998, totaled $3.8 million ($0.13 per basic share) and compares to net income of $6.1 million ($0.21 per basic share) recorded in the same period last year. Energen Resources Corporation, Energen's oil and gas subsidiary, realized net income of $1.0 million in the first fiscal quarter as compared with $3.8 million in the same period last year. Increased production-related income largely was offset by significantly lower realized oil prices and slightly lower realized gas prices. Also affecting income adversely were increased interest expense and exploration expense and decreased recognition of nonconventional fuels tax credits on an interim basis. Alagasco, Energen's natural gas utility, reported net income of $2.9 million in the current quarter. This $672,000 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. Natural Gas Distribution Natural gas distribution revenues decreased $24.2 million for the quarter primarily due to decreased sales volumes resulting from weather which was significantly warmer than in the prior year as well as a decrease in charges recovered through the Gas Supply Adjustment (GSA) rider. Gas price fluctuations are passed through volumetrically to the customer via the Company's GSA rider. Weather that was 55 percent warmer than the same period last year contributed to a 40.3 percent decrease in residential sales volumes, a 12.8 percent decrease in commercial and industrial sales volumes, and a 47.2 percent decrease in cost of gas primarily due to reduced purchase volumes. The temperature adjustment provision allows customer bills for substantially all residential, small commercial and small industrial customers to be adjusted on a real-time basis so that temperature variances from normal do not affect Alagasco's operating margins for these customers. Operations and maintenance expenses remained stable in the current year, as increases in advertising and bad debt expenses were offset by decreased general liability insurance expense. A slight increase in depreciation expense primarily was due to normal growth of the utility's distribution system. Taxes other than income primarily reflect various state and local business taxes as well as payroll-related taxes. State and local business taxes are generally based on gross receipts and fluctuate accordingly. As discussed more fully in Note 2, Alagasco is subject to regulation by the APSC. On October 7, 1996, the APSC issued an order 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. Oil and Gas Activities Revenues from oil and gas production activities rose 40.7 percent to $42.4 million for the three months ended December 31, 1998, primarily reflecting Energen Resources' current- and prior-year property acquisitions. Natural gas comprised 72 percent of Energen Resources' production for first fiscal quarter. Natural gas production increased 40.7 percent to 14.5 Bcf, and oil volumes more than tripled to 782 MBbl. In addition, Energen Resources' high BTU-content natural gas reserves in the San Juan Basin yielded 158 MBbl in natural gas liquids in the current quarter. Offsetting the impact of higher production were realized natural gas prices that were slightly lower than in the same period last year and significantly lower realized oil prices. For the quarter, realized gas prices decreased 2.3 percent to $2.16 per Mcf while realized oil prices decreased 30.6 percent to $11.91 per barrel. Natural gas liquids sold for an average price of $7.17 per barrel for the quarter as compared to $9.38 per barrel in the prior period. 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 December 31, 1998, Energen Resources had entered into contracts and swaps for 35.5 Bcf of its remaining estimated 1999 flowing gas production at an average contract price of $2.29 per Mcf and for 810 MBbl of its remaining estimated flowing oil production at an average contract price of $16.80 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 0.9 Bcf of its remaining 1999 San Juan production. O&M expense increased $8.6 million for the quarter primarily due to significant production growth and acquisition activity at Energen Resources. Lease operating expenses rose by $5.6 million for the quarter due to the acquisition of oil and gas properties. Exploration expense increased $1.3 million for the quarter 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 $5.0 million increase in depreciation, depletion and amortization for the quarter. The average depletion rate for the quarter decreased to $0.81 as compared to $0.87 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. Energen Resources' expense for taxes other than income primarily reflects production-related taxes which were $1.2 million higher this quarter as a result of increased production. Non-Operating Items Interest expense for the Company increased $2.6 million in the quarter. Influencing the increase in interest expense for the current period is the $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 and expire effective December 31, 2002. They 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. Income tax expense decreased in the current quarter due to lower consolidated pretax income, partially offset by decreased recognition of nonconventional fuels tax credits on an interim basis. FINANCIAL POSITION AND LIQUIDITY Cash flow from operations for the current quarter increased approximately $22 million compared to the same period in the prior year. Net income decreased during the period but was more than offset by increases in working capital items, which are highly influenced by throughput, oil and gas production volumes and timing of payments. The Company invested $158.3 million through the three months ended December 31, 1998, primarily in the addition of property, plant and equipment. Energen Resources invested $147.9 million in capital expenditures for the year-to-date related to the acquisition and development of oil and gas properties. In October 1998, Energen Resources acquired the stock of TOTAL Minatome Corporation (TOTAL) and, immediately upon closing, sold a 31 percent interest in TOTAL's assets to Westport Oil and Gas Company Inc. Energen Resources' net adjusted purchase price totaled approximately $135 million, including the assumption of certain legal and financial obligations. Energen Resources gained an estimated 200 Bcfe of proved domestic oil and natural gas reserves. Utility capital expenditures totaled $10.3 million and represented primarily normal system distribution expansion and support facilities. Cash provided by financing activities totaled $33.5 million for financing activities in the first quarter 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 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 $200 million, including an approximate $135 million net adjusted purchase price for the TOTAL property acquisition and $65 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. 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 1998, Energen increased its available short-term credit facilities to $228 million to accommodate its growth plans. Energen may issue common equity near the end of fiscal year 1999 to assist in financing current-year investing activity. Utility capital expenditures for normal distribution system renewals and expansion plus support facilities could approximate $50 million in fiscal 1999. Alagasco also will maintain an investment in storage working gas which is expected to average approximately $22 million in 1999. The utility anticipates funding these capital requirements through internally generated capital and the utilization of short-term credit facilities. The Company closed on a sale and leaseback of its new headquarters building in January 1999; the proceeds approximated the investment in the facility. Year 2000 Readiness 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 or are in the process of implementation. 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 December 31, 1998, the Company has incurred approximately $755,000 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, contact lists, and other equipment, 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. 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 impacted by lease and rig availability, complex geology and other factors. Results of operations and cash flows also could be affected by future oil and gas prices. Although Energen Resources makes use of futures, swaps and fixed price contracts to mitigate risk, fluctuations in oil and gas prices may affect the Company's financial position and results of operations. OTHER Recent Pronouncements of the FASB 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. This pronouncement relates solely to disclosure provisions, and therefore will have 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. 18 SELECTED BUSINESS SEGMENT DATA ENERGEN CORPORATION (Unaudited) Three months ended December 31, (dollars in thousand, except sales price data) 1998 1997 Natural Gas Distribution Operating revenues Residential $45,347 $62,377 Commercial and industrial - small 16,653 23,494 Transportation 8,553 9,357 Other 1,004 527 Total $71,557 $95,755 Gas delivery volumes (MMcf) Residential 4,679 7,833 Commercial and industrial - small 2,416 3,456 Transportation 14,880 16,374 Total 21,975 27,663 Other data Depreciation and amortization $ 6,588 $ 6,197 Capital expenditures $10,307 $ 8,314 Operating income $ 7,082 $ 5,902 Oil and Gas Activities Operating revenues Natural gas $31,377 $22,789 Oil 9,306 4,445 Natural gas liquids 1,136 1,649 Other 592 1,250 Total $42,411 $30,133 Sales volume Natural gas (MMcf) 14,493 10,304 Oil (MBbl) 782 259 Natural gas liquids (MBbl) 158 176 Average sales price Natural gas (MMcf) $ 2.16 $ 2.21 Oil (barrel) $ 11.91 $ 17.15 Natural gas liquids (barrel) $ 7.17 $ 9.38 Other data Depreciation, depletion and amortization $16,616 $11,639 Capital expenditures $147,990 $60,359 Exploration expenditures $ 1,376 $ 123 Operating income $ 6,196 $ 7,541 19 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 are also 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 $18.8 million and $0.6 million on the balance sheet at December 31, 1998, and September 30, 1998, respectively. 20 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. At the annual meeting of shareholders held on January 27, 1999, the Energen shareholders elected the following Directors to serve for three year terms expiring in 2002: Director Votes cast for Votes withheld J. Mason Davis, Jr. 24,509,924 194,028 James S. M. French 24,529,563 174,389 Wallace L. Luthy 24,520,735 183,217 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 (1) Form 8-K dated October 15, 1998, reporting Energen Resources' acquisition of TOTAL Minatome Corporation. (2) Form 8-KA dated October 15, 1998, reporting supplementary financial information related to Energen Resources' acquisition of TOTAL Minatome Corporation. 21 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 February 11, 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 February 11, 1999 By /s/ G. C. Ketcham G. C. Ketcham Executive Vice President, Chief Financial Officer and Treasurer of Energen and Alabama Gas Corporation February 11, 1999 By /s/ Grace B. Carr Grace B. Carr Controller of Energen February 11, 1999 By /s/ Paula H. Rushing Paula H. Rushing Vice President-Finance of Alabama Gas Corporation 22 EX-27.1 2
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ENERGEN CORPORATION FOR THE THREEMONTHS ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000277595 ENERGEN CORPORATION 1,000 3-MOS SEP-30-1999 OCT-01-1998 DEC-31-1998 PER-BOOK 328,478 563,166 166,315 18,846 0 1,076,805 295 202,098 129,410 331,803 0 0 372,784 190,000 0 0 4,984 0 0 0 177,234 1,076,805 113,968 (278) 101,007 100,729 12,961 (9,397) 13,717 9,875 3,842 0 3,842 4,711 6,820 28,913 0.13 0.13
EX-27.2 3
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ALABAMA GAS CORPORATION FOR THE THREEMONTHS ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000003146 ALABAMA GAS CORPORATION 1,000 3-MOS SEP-30-1999 OCT-01-1998 DEC-31-1998 PER-BOOK 328,478 315 108,183 4,682 0 441,658 20 34,484 123,059 157,563 0 0 119,650 35,000 0 0 3,150 0 0 0 126,295 441,658 71,557 1,503 64,475 65,978 5,579 (31) 5,548 2,693 2,855 0 2,855 0 2,199 (7,513) 0 0 ALABAMA GAS CORPORATION (ALAGASCO) IS A SUBSIDIARY OF ENERGEN CORPORATION. EARNINGS PER SHARE IS NOT CALCULATED FOR ALAGASCO AS AMOUNT WOULD NOT BE MEANINGFUL.
-----END PRIVACY-ENHANCED MESSAGE-----