-----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, WkSD+9XAOUdNbgl99vN80rIpYofpvPfDtOI+awRICMAKR0G0HB/3PzY5J8KhcQdb XauWsMBGvAC0hPwBkzhIHA== 0000950144-98-014087.txt : 19981228 0000950144-98-014087.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950144-98-014087 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981222 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-K405 SEC ACT: SEC FILE NUMBER: 001-07810 FILM NUMBER: 98773531 BUSINESS ADDRESS: STREET 1: 2101 SIXTH AVE N CITY: BIRMINGHAM STATE: AL ZIP: 35203 BUSINESS PHONE: 2053262700 MAIL ADDRESS: STREET 1: 2101 SIXTH AVE 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-K405 SEC ACT: SEC FILE NUMBER: 033-70466 FILM NUMBER: 98773532 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-K405 1 ENERGEN CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED SEPTEMBER 30, 1998 [ ] 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 (205) 326-2700 ht.//www.energen.com Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED - ------------------- ---------------------------- Energen Corporation Common Stock, $0.01 par value New York Stock Exchange Energen Corporation Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicate by a check mark whether 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 by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Aggregate market value of the voting stock held by non-affiliates of the registrants as of December 10, 1998: Energen Corporation $533,117,692 Indicate number of shares outstanding of each of the registrant's classes of common stock as of December 10, 1998: Energen Corporation 29,505,273 shares Alabama Gas Corporation 1,972,052 shares Alabama Gas Corporation meets the conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format pursuant to General Instruction I(2). DOCUMENTS INCORPORATED BY REFERENCE - - Energen Corporation Proxy Statement to be filed on or about December 22, 1998 (Part III, Item 10-13) - - Portions of Energen Corporation 1998 Annual Report to Shareholders are incorporated by reference into Part II, Items 5, 6, 7, and 8 of this report 2 ENERGEN CORPORATION 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................................3 Item 2. Properties...............................................................8 Item 3. Legal Proceedings........................................................9 Item 4. Submission of Matters to a Vote of Security Holders......................9 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....12 Item 6. Selected Financial Data.................................................12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................12 Item 7a. Quantitative and Qualitative Disclosures about Market Risk..............12 Item 8. Financial Statements and Supplementary Data.............................13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................13 PART III Item 10. Directors and Executive Officers of the Registrants.....................14 Item 11. Executive Compensation..................................................14 Item 12. Security Ownership of Certain Beneficial Owners and Management..........14 Item 13. Certain Relationships and Related Transactions..........................14 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........15
2 3 This Form 10-K is filed on behalf of Energen Corporation (Energen or the Company) and Alabama Gas Corporation (Alagasco). PART I ITEM 1. BUSINESS GENERAL Energen is a Birmingham-based diversified energy holding company engaged primarily in the purchase, distribution, sale and transportation of natural gas, principally in central and north Alabama, and in the acquisition, development, exploration and production of oil and gas in the continental United States. Its two major subsidiaries are Alabama Gas Corporation (Alagasco) and Energen Resources Corporation. (As discussed more fully in Note 1 to the Consolidated Financial Statements, Energen Resources previously was known as Taurus Exploration Inc.) Energen was incorporated in Alabama in 1978 in connection with the reorganization of its largest subsidiary, Alagasco. Alagasco was formed in 1948 by the merger of Alabama Gas Company into Birmingham Gas Company, the predecessors of which had been in existence since the mid-1800s. Alagasco became a public company in 1953. Energen Resources was formed in 1971 as a subsidiary of Alagasco and became a subsidiary of Energen in the 1978 reorganization. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The information required by this item is incorporated by reference from Note 15, Industry Segment Information, to the Consolidated Financial Statements of the 1998 Annual Report to Shareholders and is attached herein as Part IV, Item 14, Exhibit 13. NARRATIVE DESCRIPTION OF BUSINESS - - NATURAL GAS DISTRIBUTION GENERAL: Alagasco is the largest natural gas distribution utility in the state of Alabama. Alagasco purchases natural gas through interstate and intrastate marketers and suppliers and distributes the purchased gas through its distribution facilities for sale to residential, commercial and industrial customers and other end-users of natural gas. Alagasco also provides transportation services to industrial and commercial customers located on its distribution system. These transportation customers, using Alagasco as their agent or acting on their own, purchase gas directly from producers, marketers or suppliers and arrange for delivery of the gas into the Alagasco distribution system; Alagasco then charges a fee to transport this customer-owned gas through its distribution system to the customer's facility. Alagasco's service territory is located in central and parts of north Alabama and includes more than 185 cities and communities in 27 counties. The aggregate population of the counties served by Alagasco is estimated to be 2.3 million. Among the cities served by Alagasco are Birmingham, the center of the largest metropolitan area in Alabama, and Montgomery, the state capital. During fiscal year 1998, Alagasco served an average of 423,602 residential customers, 34,733 small commercial and industrial sales and transportation customers, and 49 large commercial and industrial transportation customers. The Alagasco distribution system includes approximately 9,060 miles of main and more than 9,800 miles of service lines, odorization and regulation facilities, and customer meters. Alagasco also operates two liquified natural gas (LNG) facilities which it uses to meet peak demand. APSC REGULATION: As an Alabama utility, Alagasco is subject to regulation by the Alabama Public Service Commission (APSC). Alagasco's rate-setting process, Rate Stabilization and Equalization (RSE), was 3 4 established by the APSC in 1983, extended with modifications in 1985, 1987 and 1990, and extended without further change in 1996. RSE replaced the traditional utility rate case with quarterly reviews and adjustments designed to give Alagasco an opportunity to earn a return on average equity at year-end within a designated range, which presently is 13.15 percent to 13.65 percent. Alagasco has earned at or near its allowed range since fiscal 1990, when the APSC modified RSE to include a forward-looking test year and approved a temperature adjustment rider to Alagasco's rate tariff. On October 7, 1996, RSE was extended without change for a five-year period, through January 1, 2002. Under the terms of the extension, RSE will continue after January 1, 2002, unless, after notice to the Company and a hearing, the APSC votes to 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. 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) expenses. If the change in O&M 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 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. The APSC approved an Enhanced Stabilization 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. The temperature adjustment rider to Alagasco's rate tariff, approved by the APSC in 1990, was designed to mitigate the earnings impact of variances from normal temperatures. Alagasco performs this real-time temperature adjustment calculation monthly, and the adjustments to customers' bills are made in the same billing cycle in which the weather variations occurred. 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, including Gas Supply Realignment (GSR) surcharges imposed by Alagasco's suppliers resulting from changes in gas supply purchases related to the implementation of Federal Energy Regulatory Commission (FERC) Order 636. The APSC on October 7, 1996, issued an order providing for the refund to customers prior to January 31, 1997, of approximately $17 million of supplier refunds, including interest. Alagasco refunded these amounts to customers during January 1997. The refunds were collected from a variety of sources and most related to the settlement of rate case and FERC Order 636 proceedings of Southern Natural Gas Company (Southern). GAS SUPPLY: Alagasco's distribution system is connected to and has firm transportation contracts with two major interstate pipeline systems' Southern and Transcontinental Gas Pipe Line Corporation (Transco). On Southern's system, Alagasco has 251,679 Mcfd (thousand cubic feet per day) of No-Notice Firm Transportation service through October 31, 2008, and 40,000 Mcfd and 92,373 Mcfd of Firm Transportation service through April 30, 2002 and October 31, 2008, respectively. Alagasco also has 12,464,074 Mcf of storage capacity on Southern's system, with a maximum withdrawal rate of 251,679 Mcfd from storage and a maximum injection rate of 95,878 Mcfd to storage. The Transco Firm Transportation contract, which expires in 2002, provides for 4 5 up to 100,000 Mcfd. As a result, Alagasco has a peak day firm interstate pipeline transportation capacity of 484,052 Mcfd. Alagasco purchases gas from various gas producers and marketers, including affiliates of Southern and Transco, and from certain intrastate producers and marketers. Alagasco has contracts in place to purchase up to 276,764 Mcfd of firm supply, of which 232,373 Mcfd is supported by firm transportation on the Transco and Southern systems and approximately 23,600 Mcfd is purchased at the city gate under intrastate firm supply contracts. These firm supply volumes along with Alagasco's maximum withdrawal from storage of 251,679 Mcfd and LNG peak-shaving capacity of 200,000 Mcfd, give Alagasco a peak day firm supply of 728,443 Mcfd. Alagasco also utilizes the Southern and Transco pipeline systems to access spot market gas in order to supplement its firm system supply and serve its industrial and large commercial transportation customers. Deliveries of sales and transportation gas totaled 115,347 million cubic feet (MMcf) in fiscal 1998. RATE FLEXIBILITY AND COMPETITION: The price of natural gas is a significant competitive factor in Alagasco's service territory, particularly among large commercial and industrial transportation customers. Propane, coal and fuel oil are readily available, and many industrial customers have the capability to switch to alternate fuels and/or alternate sources of gas. In the residential and small commercial and industrial markets, electricity is the principal competitor. With the support of the APSC, Alagasco has implemented a variety of flexible rate strategies to help it compete for the large customers' gas load in the deregulated marketplace. Rate flexibility remains critical as the utility faces intense competition for the large customer load. To date, the utility has been effective in utilizing its flexible rate strategies to minimize bypass and price-based switching to alternate fuels and alternate sources of gas. In 1994 Alagasco implemented the P Rate in response to the competitive challenge of interstate pipeline capacity release. Under this tariff provision, Alagasco releases much of its excess pipeline capacity and repurchases it as agent for its transportation customers under 12 month contracts. The transportation customers benefit from lower pipeline costs. Alagasco's core market customers benefit, as well, since the utility uses the revenues received from the P Rate to decrease gas costs for its residential and small commercial and industrial customers. In fiscal 1998, approximately 285 of Alagasco's transportation customers utilized the P Rate, and the resulting reduction in core market gas costs totaled approximately $9.6 million. The Competitive Fuel Clause (CFC) and Transportation Tariff also have been important to Alagasco's ability to compete effectively for customer load in its service territory. The CFC allows Alagasco to adjust large customer rates on a case-by-case basis to compete with alternate fuels and alternate sources of gas. The GSA rider to Alagasco's tariff increases the rates paid by other customers to recover the reduction in rates allowed under the CFC because the retention of any customer, particularly large commercial and industrial transportation customers, benefits all customers by recovering a portion of the system's fixed costs. The Transportation Tariff allows Alagasco to transport gas for customers rather than buy and resell it to them. The Transportation Tariff is based on Alagasco's sales profit margin, so operating margins are unaffected. The Transportation Tariff also may be adjusted under the CFC. Alagasco also uses long-term special contracts as a vehicle for retaining large customer load. At the end of fiscal 1998, 37 of the utility's largest commercial and industrial transportation customers were under special contracts of varying lengths. During 1998 substantially all of Alagasco's large commercial and industrial customer deliveries were the transportation of customer-owned gas. In addition, Alagasco served as gas purchasing agent for approximately 99 percent of its transportation customers. Natural gas service available to Alagasco customers generally falls into two categories: interruptible and firm. Interruptible service is contractually subject to interruption by Alagasco for various reasons, the most common of which is curtailment of industrial customers during periods of peak residential heating demand. Firm service, 5 6 in general, is not subject to interruption and, therefore, is more expensive. Firm service is generally provided to residential and small commercial and industrial customers, while interruptible service is generally provided to large commercial and industrial transportation customers which typically have the capability to reduce gas consumption by adjusting their production schedules or by switching to alternate fuels during periods of interruption. GROWTH: Customer growth presents a major challenge for Alagasco, and its low customer growth rate in 1998 underscores the utility's mature status and the slow-growth nature of its service territory. Customer growth in fiscal 1998 was relatively flat. At the same time, the utility penetrated 88 percent of the new single-family homes built in its service territory and 53 percent of the new multi-family construction. Meanwhile, Alagasco's saturation rate of approximately 70 percent exceeds the national average of approximately 51 percent. A vehicle for supplementing Alagasco's normal growth continues to be Alagasco's municipal acquisition program. Since 1985 Alagasco has acquired 22 municipally-owned systems, adding more than 42,000 customers through initial system purchases and subsequent customer additions. Alagasco has been successful in increasing the systems' relatively low saturation rates subsequent to purchase through a variety of marketing efforts including offering natural gas service to propane customers located on the municipal system's lines, expanding into nearby neighborhoods that desire natural gas service, and marketing natural gas appliances to existing and new customers. Approximately 78 municipal systems remain in Alabama. Although Alagasco did not acquire any new municipal gas systems in 1997 or 1998, it continues to pursue the purchase of municipal gas systems, and company management believes that such acquisitions offer future growth opportunities. WEATHER: Alagasco's gas distribution business is highly seasonal since a material portion of the utility's total sales and delivery volumes is to customers (principally residential and small commercial and industrial) whose use varies depending upon temperature. Alagasco's rate tariff includes a temperature adjustment rider which is designed to mitigate the effect of departures from normal temperature on Alagasco's earnings. The calculation is performed monthly, and adjustments are made to customers' bills in the actual month the weather variation occurs. ENVIRONMENTAL MATTERS: Alagasco is in the chain of title of eight former manufactured gas plant sites and five manufactured gas distribution sites. It still owns four of the plant sites and one of the distribution sites. Preliminary investigations indicate no need at present for remediation activities. Management expects that, should remediation of any such sites be required in the future, Alagasco's share of any associated costs will not affect materially the results of its operations or financial condition. OTHER: For a discussion of risks inherent in the company's businesses, including Alagasco, see management's Discussion and Analysis in the 1998 Annual Report to Shareholders (pages 25 and 26), which is attached herein as Part IV, Item 14, Exhibit 13. - - OIL AND GAS ACTIVITIES GENERAL: Energen Resources is involved primarily in the acquisition and exploitation of producing oil and natural gas properties with varying levels of development potential and, to a lessor extent, in the exploration and development of new reservoirs. Energen Resources also provides fee-based coalbed methane operating services in the Black Warrior Basin for its partners and third parties. All of Energen Resources' operations are located in the United States. At the end of fiscal 1998, Energen Resources' remaining recoverable reserves totaled 764.9 billion cubic feet equivalent (Bcfe) and were located primarily in Alabama, New Mexico, Texas, Mississippi and Louisiana. Energen Resources' reserve base is conservative in nature, with more than 85 percent of year-end reserves classified as proved developed; in addition, the reserve base is long-lived, with a year-end reserves-to-production ratio of 13-to-1. Energen Resources' reserves also are concentrated in areas with multiple pay zone opportunities, such as the San Juan, Black Warrior and Permian Basins. Natural gas represents more than 70 6 7 percent of Energen Resources' reserves, with oil and natural gas liquids comprising the balance. Energen Resources' production in fiscal 1998 totaled 57.4 Bcfe and is estimated to reach 87 Bcfe in fiscal 1999. GROWTH STRATEGY: Fiscal 1998 marked the third year of Energen's aggressive growth strategy which calls for significant capital investment in Energen Resources' oil and gas activities. Over the last three fiscal years, Energen Resources has invested approximately $365 million to acquire producing properties, $60 million in associated exploitation and development drilling, and $75 million in exploration and related development. This $500 million of capital investment has added approximately 820 Bcfe of proved reserves. Over the five-year period ending September 30, 2003, Energen Resources anticipates spending approximately $1 billion in the acquisition and exploitation of producing properties and in exploration and related development. PROPERTY ACQUISITIONS AND EXPLOITATION: Energen Resources' acquisition efforts focus on the purchase of producing properties which have varying degrees of potential for increased reserves and production through exploitation and development. During fiscal years 1996, 1997 and 1998, Energen Resources acquired an estimated 740 Bcfe of proved reserves for approximately $365 million, resulting in an average acquisition cost of 49 cents per Mcfe. In addition, Energen Resources spent $60 million over the three years in exploitation and development costs and plans to spend approximately $70 million over the next several years on development of these reserves. In fiscal 1998, Energen Resources invested approximately $85 million to acquire an estimated 120 Bcfe of proved reserves. Energen Resources' largest acquisition of fiscal 1998 occurred in the first quarter with the $43.3 million purchase of Permian Basin oil and gas reserves from B.C. Oil and Gas Ltd. and affiliates. Of the estimated 80 Bcfe of proved reserves in west Texas, approximately 70 percent were oil and approximately 40 Bcfe were classified as behind-pipe or proved undeveloped. Most significant was that Energen Resources gained a substantial operating presence in the Permian Basin by assuming operations for approximately 70 percent of the wells. Energen Resources' presence in the Permian Basin was enhanced in September 1998 when the Company traded the majority of its shallow water Gulf of Mexico interests for the Permian Basin interests of EEX Corporation. Energen Resources gained an estimated 58 Bcfe of oil, natural gas and liquids reserves from EEX in exchange for 38 Bcf of proved natural gas reserves, with interests in 30 offshore blocks and $10.4 million in cash. Energen Resources also assumed operations for approximately 30 percent of the properties and received EEX's interests in 40,000 net undeveloped acres in the Permian Basin. Subsequent to year-end, Energen Resources acquired TOTAL Minatome Corporation (TOTAL) and, immediately upon closing, sold an undivided 31 percent interest in TOTAL's assets to Westport Oil and Gas Company, Inc. Energen Resources' net investment totaled approximately $134.6 million, including the assumption of certain legal and financial obligations, for approximately 200 Bcfe of proved oil and gas reserves. Plans call for Energen Resources to spend an estimated $70 million over the next several years on exploitation of the approximately 45 percent of behind-pipe and proved undeveloped reserves. An expanding part of Energen Resources' business strategy is the exploitation and development of acquired properties. Energen Resources has achieved particular success in the San Juan Basin, where production increased approximately 8 million cubic feet per day as the result of low-cost operational improvements for an associated cost of $1.1 million. In fiscal 1998, Energen Resources also drilled eight successful development wells for $6.7 million and added approximately 18.5 Bcfe of reserves for 36 cents per Mcfe. In the Permian Basin, exploitation activities are proceeding as planned. During 1998, Energen Resources drilled four new wells and eight well recompletions, thus developing approximately 442,000 barrels of previously classified proved undeveloped reserves at an associated cost of $1.9 million, or approximately $4 per barrel. Over the next four years, Energen Resources plans to drill approximately 60 development wells in the San Juan Basin and perform 125 well recompletions at a net cost of some $48 million. In the Permian Basin, Energen 7 8 Resources plans to drill approximately 20 wells and perform 15 recompletions at a net cost of about $7 million. EXPLORATION AND DEVELOPMENT: Energen Resources' business strategy also calls for limited exploration and related development. During 1998, the property swap with EEX Corporation (discussed above) marked an important strategic shift for Energen Resources by refocusing the company's future exploration efforts away from the offshore Gulf and toward onshore areas where it has a strong operating presence. In connection with the EEX transaction, Energen Resources also received interests in 40,000 net undeveloped acres in the Permian Basin. Energen Resources did not participate in any offshore exploratory drilling in fiscal 1998. As a 9 percent interest partner, Energen Resources participated in the drilling of one unsuccessful well in the Cotton Valley Pinnacle Reef play in the east Texas salt basin. During 1998 Energen Resources invested approximately $11 million in exploration and related development. RISK MANAGEMENT: Energen Resources attempts to lower the risk associated with its oil and gas business plan. A key component of the company's efforts to manage risk is its acquisition orientation and the conservative character of the company's reserve base. To help reduce short-term commodity price risk, Energen Resources uses market-driven pricing estimates and hedging strategies. In pursuing an acquisition, Energen Resources uses in its models then-current oil and gas futures prices, the prevailing swap curve and, for the longer-term, its own pricing assumptions. After a purchase, Energen Resources may use futures, swaps and/or fixed-price contracts to hedge targeted prices on a portion of the acquisition's flowing production. Typically, where used, such acquisition related hedges have been for 12 to 36 months. On an on-going basis, Energen Resources may hedge up to 80 percent of its flowing production in any given fiscal year depending on its pricing outlook. For fiscal 1999, Energen Resources entered into contracts and swaps for 48.9 Bcf of its flowing gas production at an average contract price (before basis differentials) of $2.31 per Mcf and 1,080 MBbl of its oil production at an average contract price of $16.31 per barrel. For fiscal 2000 and 2001, Energen Resources entered into contracts and swaps for 5.2 Bcf of its flowing gas production at an average contract price (before basis differentials) of $2.22 per Mcf and 180 MBbl of its oil production at an average contract price of $17.31 per barrel. (See Item 7a, Quantitative and Qualitative Disclosures About Market Risk, and the Forward-Looking Statements and Risk in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for further discussion with respect to price and other risk.) ENVIRONMENTAL MATTERS: Energen Resources is subject to various environmental regulations. Management believes that Energen Resources is in compliance with currently applicable standards of the environmental agencies to which it is subject and that potential environmental liabilities, if any, are minimal. Also, to the extent that Energen Resources has operating agreements with various joint venture partners, environmental costs, if any, would be shared proportionately. OTHER: For a discussion of risks inherent in the Company's businesses, see Management's Discussion and Analysis in the 1998 Annual Report to Shareholders (pages 25 and 26) which is attached herein as Part IV, Item 14, Exhibit 13. EMPLOYEES The Company has 1,421 employees; Alagasco employs 1,238; Energen Resources employs 171; and Energen's other subsidiaries employ 12. ITEM 2. PROPERTIES The corporate headquarters of Energen, Alagasco and Energen Resources are located in recently constructed office space in Birmingham, Alabama. The Company expects to close negotiations on a sale and leaseback of the new headquarters building facility in fiscal 1999. The proceeds from the sale are expected to approximate the investment in the facility. 8 9 The properties of Alagasco consist primarily of its gas distribution system, which includes more than 9,060 miles of main, more than 9,800 miles of service lines, odorization and regulation facilities, and customer meters. Alagasco also has two liquified natural gas facilities, eight division offices, 10 payment centers, six district offices, nine service centers, and other related property and equipment, some of which are leased by Alagasco. For a further description of Alagasco's properties, see discussion under Item I-Business. For a description of Energen Resources' oil and gas properties, see the discussion under Item 1-Business. Information concerning Energen Resources' production, reserves and development is included in Note 14, Oil and Gas Producing Activities (unaudited), to the Consolidated Financial Statements which is incorporated by reference from the 1998 Annual Report to Shareholders and included in Part IV, Item 14, Exhibit 13, herein. The proved reserve estimates are consistent with comparable reserve estimates filed by Energen Resources with any federal authority or agency. ITEM 3. LEGAL PROCEEDINGS Energen and its affiliates are, from time to time, parties to various pending or threatened legal proceedings. Certain of these lawsuits include claims for punitive damages in addition to other specific relief. Based upon information presently available and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the respective financial positions of Energen and its affiliates. It should be noted, however, that Energen and its affiliates conduct business in Alabama and other jurisdictions in which the magnitude and frequency of punitive damage awards may bear little or no relation to culpability or actual damages thus making it increasingly difficult to predict litigation results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. 9 10 EXECUTIVE OFFICERS OF THE REGISTRANTS ENERGEN CORPORATION
Name Age Position (1) ---- --- ------------ Wm. Michael Warren, Jr. 51 Chairman of the Board President and Chief Executive Officer (2) Geoffrey C. Ketcham 47 Executive Vice President, Chief Financial Officer and Treasurer (3) Gary C. Youngblood 55 President and Chief Operating Officer of Alagasco (4) James T. McManus 40 President and Chief Operating Officer of Energen Resources (5) Dudley C. Reynolds 45 General Counsel and Secretary (6) J. David Woodruff, Jr. 42 Vice President-Legal and Assistant Secretary and Vice President-Corporate Development (7) Grace B. Carr 43 Controller (8)
NOTES: (1) All executive officers of Energen except for Ms. Carr have been employed by Energen or a subsidiary for the past five years. Officers serve at the pleasure of its Board of Directors. (2) Served as Senior Vice President and General Counsel of Alagasco from September 1983 to October 1984, when he was elected President and Chief Operating Officer of that corporation. Elected Executive Vice President of Energen June 1987 and elected President and Chief Operating Officer of Energen April 1991. Elected President and Chief Operating Officer of all Energen subsidiaries January 1992. Elected Chief Executive Officer of Alagasco and Energen Resources effective October 1995. Elected Chief Executive Officer of Energen February 1997. Elected Chairman of the Board of Energen effective January 1, 1998. Serves as a Director of Energen and each of its subsidiaries. (3) Elected Controller of Alagasco November 1981, Vice President and Controller June 1984, Vice President-Finance and Planning of Alagasco June 1985, and Vice President-Planning of Energen August 1986. Elected Vice President-Finance, Chief Financial Officer and Treasurer of Energen and each of its subsidiaries June 1987. Elected Senior Vice President-Finance, Chief Financial Officer and Treasurer of Energen and each of its subsidiaries April 1989. Elected Executive Vice President, Chief Financial Officer and Treasurer of Energen and each of its subsidiaries April 1991. (4) Served as District Manager-Birmingham District until June 1985, when he was elected Vice President-Birmingham Operations; Elected Senior Vice President-Administration of Alagasco April 1991, Executive Vice President of Alagasco October 1993, Chief Operating Officer of Alagasco effective October 1995, and President of Alagasco April 1997. (5) Served as Director of Corporate Accounting of Energen until November 1988, when he was elected Controller of Energen; Elected Controller of Alagasco May 1989, Assistant Vice President-Corporate Development of Energen June 1990, Vice President-Finance and Corporate Development of Energen and Vice President-Finance and Planning of Alagasco effective April 1991, Executive Vice President 10 11 and Chief Operating Officer of Energen Resources effective October 1995, and President of Energen Resources April 1997. (6) Served as Staff Attorney for Energen and its subsidiaries until November 1984, when he was named Senior Attorney. Elected Assistant Secretary in 1985 and Secretary effective September 1986, Vice President-Legal and Secretary of Energen and each of its subsidiaries June 1987, and General Counsel and Secretary of Energen and each of its subsidiaries April 1991. (7) Served as Staff Attorney for Alagasco until June 1987, when he was named Senior Attorney. Elected Assistant Vice President-Legal and Assistant Secretary of Energen and each of its subsidiaries November 1988, Vice President-Legal and Assistant Secretary of Energen and each of its subsidiaries April 1991, Vice President-Legal, and Assistant Secretary of Energen and each of its subsidiaries and Vice President-Corporate Development of Energen October 1995. (8) Served as Director of Accounting and Budgets for Alagasco until June 1987, when she was elected Controller of Alagasco. Served as Controller of Alagasco until April 1989 and was not employed from April 1989 through December 1997. Elected Controller of Energen in January 1998. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information regarding Energen's common stock and the frequency and amount of dividends paid during the past two years with respect to such stock is incorporated by reference from the 1998 Annual Report to Shareholders, page 26, and is included in Part IV, Item 14, Exhibit 13, herein. At December 10, 1998, there were approximately 9,140 holders of record of Energen's common stock. For restrictions on Energen's present and future ability to pay dividends, see Note 3 to the Consolidated Financial Statements which is incorporated by reference from the 1998 Annual Report to Shareholders and included in Part IV, Item 14, Exhibit 13, herein. At the date of this filing, Energen Corporation owns all the issued and outstanding common stock of Alabama Gas Corporation. ITEM 6. SELECTED FINANCIAL DATA The information regarding selected financial data is incorporated by reference from the 1998 Annual Report to Shareholders, pages 50-51, and is included in Part IV, Item 14, Exhibit 13, herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information is incorporated by reference from the 1998 Annual Report to Shareholders, pages 19-26, and is included in Part IV, Item 14, Exhibit 13, herein. ITEM 7A. 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, 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 $0.6 million and deferred losses of $12.9 million on the balance sheet at September 30, 1998, and September 30, 1997, respectively. The Company uses a sensitivity analysis to evaluate the hypothetical effect that changes in the market value of crude oil and natural gas may have on the fair value of its derivative instruments. This analysis measures the impact on the commodity derivative instruments and, thereby, does not consider the underlying exposure related to the commodity. At September 30, 1998, the Company estimates that a 10 percent change in the underlying commodities prices would result in a $13.4 million change in the fair value of open derivative contracts. However, gains and losses on derivative contracts are expected to be similarly offset by sales at the spot market price. Due 12 13 to the short duration of the contracts, time value of money is ignored. The hypothetical change in fair value is calculated by multiplying the difference between the hypothetical price and the contractual price by the contractual volumes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item for Energen Corporation and subsidiaries is incorporated by reference from the 1998 Annual Report to Shareholders and is included in Part IV, Item 14, Exhibit 13, herein. The information required by this item for Alabama Gas Corporation is contained in Part IV, Item 14, herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 13 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS Information regarding the executive officers of Energen is included in Part I. The other information required by Item 10 is incorporated herein by reference from Energen's definitive proxy statement for the Annual Meeting of Shareholders to be held January 27, 1999. The proxy statement will be filed on or about December 22, 1998. ITEM 11. EXECUTIVE COMPENSATION The information regarding executive compensation is incorporated herein by reference from Energen's definitive proxy statement for the Annual Meeting of Shareholders to be held January 27, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The information regarding the security ownership of the beneficial owners of more than five percent of Energen's common stock is incorporated herein by reference from Energen's definitive proxy statement for the Annual Meeting of Shareholders to be held January 27, 1999. B. SECURITY OWNERSHIP OF MANAGEMENT The information regarding the security ownership of management is incorporated herein by reference from Energen's definitive proxy statement for the Annual Meeting of Shareholders to be held January 27, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding certain relationships and related transactions is incorporated herein by reference from Energen's definitive proxy statement for the Annual Meeting of Shareholders to be held January 27, 1999. 14 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS The financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this report and are included in Part IV, Item 14, Exhibit 13, herein. (2) FINANCIAL STATEMENT SCHEDULES The financial statement schedules listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this report. (3) EXHIBITS The exhibits listed on the accompanying Index to Exhibits are filed as part of this report. B. REPORTS ON FORM 8-K (1) Form 8-K dated June 24, 1998, reporting the adoption of a new Shareholders Rights Plan to replace the existing Rights Plan when it expired at the close of business on July 27, 1998. (2) Form 8-K dated October 15, 1998, reporting Energen Resources' acquisition of TOTAL Minatome Corporation. 15 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. ENERGEN CORPORATION (Registrant) ALABAMA GAS CORPORATION (Registrant) December 16, 1998 /s/Wm. Michael Warren, Jr. - ------------------------- -------------------------------------------------- DATE Wm. Michael Warren, Jr. Chairman, President and Chief Executive Officer of Energen Corporation, Chairman and Chief Executive Officer of Alabama Gas Corporation 16 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrants and in the capacities and on the dates indicated: December 16, 1998 /s/Wm. Michael Warren, Jr. - ------------------------- -------------------------------------------------- DATE Wm. Michael Warren, Jr. Chairman, President and Chief Executive Officer of Energen Corporation, Chairman and Chief Executive Officer of Alabama Gas Corporation December 16, 1998 /s/Geoffrey C. Ketcham - ------------------------- -------------------------------------------------- DATE Geoffrey C. Ketcham Executive Vice President, Chief Financial Officer and Treasurer of Energen Corporation and Alabama Gas Corporation December 16, 1998 /s/Grace B. Carr - ------------------------- -------------------------------------------------- DATE Grace B. Carr Controller of Energen Corporation December 16, 1998 /s/Paula H. Rushing - ------------------------- -------------------------------------------------- DATE Paula H. Rushing Vice President-Finance of Alabama Gas Corporation December 16, 1998 /s/J. Mason Davis, Jr. - ------------------------- -------------------------------------------------- DATE J. Mason Davis, Jr. Director December 16, 1998 /s/Julian W. Banton - ------------------------- -------------------------------------------------- DATE Julian W. Banton Director December 16, 1998 /s/R. D. Cash - ------------------------- -------------------------------------------------- DATE R. D. Cash Director December 16, 1998 /s/James S. M. French - ------------------------- -------------------------------------------------- DATE James S. M. French Director December 16, 1998 /s/Rex J. Lysinger - ------------------------- -------------------------------------------------- DATE Rex J Lysinger Director 17 18 ENERGEN CORPORATION ALABAMA GAS CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ITEM 14(A)
Reference Page ---------------- 1998 1998 Annual 10-K Report ---- ------ 1. Financial Statements ENERGEN CORPORATION Report of Independent Certified Public Accountants...................... 49 Consolidated Statements of Income for the years ended September 30, 1998, 1997 and 1996....................................... 27 Consolidated Balance Sheets as of September 30, 1998 and 1997........... 28 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1997 and 1996................................. 30 Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996....................................... 31 Notes to Consolidated Financial Statements.............................. 32 ALABAMA GAS CORPORATION Report of Independent Certified Public Accountants...................... 22 Statements of Income for the years ended September 30, 1998, 1997 and 1996....................................... 23 Balance Sheets as of September 30, 1998 and 1997........................ 24 Statements of Shareholder's Equity for the years ended September 30, 1998, 1997 and 1996....................................... 26 Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996....................................... 27 Notes to Financial Statements........................................... 28
18 19
Reference Page ---------------- 1998 1998 Annual 10-K Report ---- ------ 2. Financial Statement Schedules ENERGEN CORPORATION Report of Independent Certified Public Accountants...................... 37 Schedule II Valuation and Qualifying Accounts....................... 38 ALABAMA GAS CORPORATION Schedule II Valuation and Qualifying Accounts....................... 39
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. 19 20 ENERGEN CORPORATION ALABAMA GAS CORPORATION INDEX TO EXHIBITS ITEM 14(A)(3)
Exhibit Number Description 3(a) Restated Certificate of Incorporation of Energen Corporation (composite, as amended February 2, 1998) which was filed as Exhibit 3(b) to Energen's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (File No. 1-7810) *3(b) Articles of Amendment to Restated Certificate of Incorporation of Energen, designating Series 1998 Junior Participating Preferred Stock (July 27, 1998) which was filed as Exhibit 4(b) to Energen's Post Effective Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 333-00395) 3(c) Bylaws of Energen Corporation (as amended through June 22, 1998) *3(d) Articles of Amendment and Restatement of the Articles of Incorporation of Alabama Gas Corporation, dated September 27, 1995, which was filed as Exhibit 3(i) to the registrant's Annual Report on Form 10-K for the year ended September 30, 1995, (file No. 1-7810) 3(e) By-laws of Alabama Gas Corporation (as amended through June 22, 1998) *4(a) Rights Agreement, dated as of July 27, 1998, between Energen Corporation and First Chicago Trust Company of New York, Rights Agent, which was filed as Exhibit 1 to Energen's Registration Statement on Form 8-A, dated July 10, 1998 (File No. 1-7810) *4(b) Indenture, dated as of January 1, 1992, between Energen Corporation and Boatmen's Trust Company, Trustee, which was filed as Exhibit 4 to Energen's Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 33-44936) *4(c) First Supplemental Indenture, dated as of September 5, 1997, between Energen Corporation and The Bank of New York, Trustee, to Indenture dated as of January 1, 1992, which was filed as Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (File No. 1-7810) *4(d) Indenture, dated as of March 1, 1993, between Energen Corporation and Boatmen's Trust Company, Trustee, which was filed as Exhibit 4 to Energen's Registration Statement on Form S-3 (Registration No. 33-25435) *4(e) First Supplemental Indenture, dated as of September 5 ,1997, between Energen Corporation and The Bank of New York, Trustee, to Indenture dated as of March 1, 1993, which was filed as Exhibit 4(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (File No. 1-7810) *4(f) Form of Indenture between Energen Corporation and The Bank of New York, as Trustee, which was dated as of September 1, 1996, and which was filed as Exhibit 4(i) to the Registrant's Registration Statement on Form S-3 (Registration No. 333-11239) *4(g) Indenture dated as of November 1, 1993, between Alabama Gas Corporation and NationsBank of Georgia, National Association, Trustee, which was filed as Exhibit 4(k) to Alabama Gas' Registration Statement on Form S-3 (Registration No. 33-70466)
20 21
Exhibit Number Description *10(a) Form of Service Agreement Under Rate Schedule CSS (No. S10710), between Southern Natural Gas Company and Alabama Gas Corporation which was filed as Exhibit 10(a) to Energen's Annual Report on Form 10-K for the year ended September 30, 1993 (File No. 1-7810) *10(b) Form of Service Agreement Under Rate Schedule FT-NN (No. 866941), between Southern Natural Gas Company and Alabama Gas Corporation which was filed as Exhibit 10(c) to Energen's Annual Report on Form 10-K for the year ended September 30, 1993 (File No. 1-7810) 10(c) Form of Executive Retirement Supplement Agreement between Energen Corporation and certain executive officers 10(d) Form of Severance Compensation Agreement between Energen Corporation and certain executive officers 10(e) Energen Corporation 1988 Stock Option Plan (as amended November 25, 1997) 10(f) Energen Corporation 1992 long-range Performance Share Plan, as amended April 25, 1997, which was filed as Exhibit 10(f) to Energen's Annual Report on Form 10-K for the year ended September 30, 1997 (File 1-7810) *10(g) Energen Corporation 1997 Stock Incentive Plan, which was filed as Appendix A to Energen's Proxy Statement for its January 28, 1998, Annual Meeting (File No. 1-7810) 10(h) Energen Corporation 1997 Deferred Compensation Plan, (as amended September 23, 1998) 10(i) Energen Corporation 1992 Directors Stock Plan, (as amended April 25, 1997) *10(j) Energen Corporation Director Fees Deferral Plan which was filed as Exhibit 10(l) to Energen's Annual Report on Form 10-K for the year ended September 30, 1993 (File No. 1-7810) *10(k) Energen Corporation Annual Incentive Compensation Plan, Revised 5/90, as amended effective October 1, 1993, which was filed as Exhibit 10(m) to Energen's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-7810) 13 Information incorporated by reference from pages 19-53 of the Energen Corporation 1998 Annual Report to Stockholders 21 Subsidiaries of Energen Corporation 23 Consent of Independent Certified Public Accountants (Energen Corporation) 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) 27.3 Restated Financial Data Schedule of Energen Corporation for September 30, 1997 (for SEC purposes only) 27.4 Restated Financial Data Schedule of Energen Corporation for September 30,1996 (for SEC purposes only)
*Incorporated by reference 21 22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF ALABAMA GAS CORPORATION: In our opinion, the accompanying financial statements of Alabama Gas Corporation listed in the index on page 18 of this form 10-K present fairly, in all material respects, the financial position of Alabama Gas Corporation at September 30, 1998 and 1997, and the results of its operations and cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index on page 19 of this form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Birmingham, Alabama October 28, 1998 22 23 STATEMENTS OF INCOME ALABAMA GAS CORPORATION
- --------------------------------------------------------------------------------------------------------------- YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- OPERATING REVENUES $ 369,940 $ 362,984 $ 357,252 - --------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas 176,124 177,837 181,400 Operations and maintenance 98,897 96,211 92,541 Depreciation 25,153 23,486 21,269 Income taxes Current 16,801 11,223 8,699 Deferred, net (4,932) (618) 835 Deferred investment tax credits, net (469) (487) (487) Taxes, other than income taxes 28,103 26,658 26,772 - --------------------------------------------------------------------------------------------------------------- Total operating expenses 339,677 334,310 331,029 - --------------------------------------------------------------------------------------------------------------- OPERATING INCOME 30,263 28,674 26,223 - --------------------------------------------------------------------------------------------------------------- OTHER INCOME Allowance for funds used during construction 400 490 972 Other, net 145 215 (649) - --------------------------------------------------------------------------------------------------------------- Total other income 545 705 323 - --------------------------------------------------------------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 8,843 8,843 7,390 Other interest expense 1,378 1,966 2,195 - --------------------------------------------------------------------------------------------------------------- Total interest charges 10,221 10,809 9,585 - --------------------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE FOR COMMON $ 20,587 $ 18,570 $ 16,961 - ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these statements. 23 24 BALANCE SHEETS ALABAMA GAS CORPORATION
- --------------------------------------------------------------------------------------------------------------- AS OF SEPTEMBER 30, (IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------------------------------------------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility plant $ 632,165 $ 583,630 Less accumulated depreciation 307,488 287,749 - --------------------------------------------------------------------------------------------------------------- Utility plant, net 324,677 295,881 - --------------------------------------------------------------------------------------------------------------- Other property, net 318 347 - --------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash 1,222 2,580 Accounts receivable Gas 32,191 36,098 Merchandise 2,362 2,001 Other 1,621 1,442 Allowance for doubtful accounts (3,482) (3,156) Inventories, at average cost Storage gas inventory 21,237 25,367 Materials and supplies 5,533 5,391 Liquified natural gas in storage 3,381 3,630 Deferred gas costs 1,774 2,512 Deferred income taxes 10,470 5,675 Prepayments and other 2,112 6,696 - --------------------------------------------------------------------------------------------------------------- Total current assets 78,421 88,236 - --------------------------------------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS 4,733 5,917 - --------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 408,149 $ 390,381 - ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these statements. 24 25 BALANCE SHEETS ALABAMA GAS CORPORATION
- -------------------------------------------------------------------------------------------------------------- AS OF SEPTEMBER 30, (IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------------------------------- CAPITAL AND LIABILITIES CAPITALIZATION Common shareholder's equity Common stock, $0.01 par value; 3,000,000 shares authorized, 1,972,052 shares outstanding in 1998 and 1997 $ 20 $ 20 Premium on capital stock 31,682 31,682 Capital surplus 2,802 2,802 Retained earnings 120,205 106,894 - --------------------------------------------------------------------------------------------------------------- Total common shareholder's equity 154,709 141,398 Long-term debt 119,650 125,000 - --------------------------------------------------------------------------------------------------------------- Total capitalization 274,359 266,398 - --------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Long-term debt due within one year 5,350 -- Notes payable to banks 15,000 11,000 Accounts payable Trade 23,217 28,923 Affiliated companies 2,738 4,984 Accrued taxes 19,428 16,745 Customers' deposits 16,344 16,399 Other amounts due customers 12,070 7,347 Accrued wages and benefits 4,217 3,879 Other 11,915 10,481 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 110,279 99,758 - --------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 17,136 16,739 Accumulated deferred investment tax credits 2,661 3,130 Regulatory liability 2,910 3,651 Customer advances for construction and other 804 705 - --------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 23,511 24,225 - --------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL AND LIABILITIES $ 408,149 $ 390,381 - ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these statements. 25 26 STATEMENTS OF SHAREHOLDER'S EQUITY ALABAMA GAS CORPORATION
- ----------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - ----------------------------------------------------------------------------------------------------------------- COMMON STOCK ------------ NUMBER OF PAR PREMIUM ON CAPITAL RETAINED SHARES VALUE CAPITAL STOCK SURPLUS EARNINGS - ----------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 1,972,052 $20 $ 31,682 $2,802 $ 87,638 Net income 16,961 Cash dividends (9,555) - ----------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 1,972,052 20 31,682 2,802 95,044 Net income 18,570 Cash dividends (6,720) - ----------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1997 1,972,052 20 31,682 2,802 106,894 Net income 20,587 Cash dividends (7,276) - ----------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1998 1,972,052 $20 $ 31,682 $2,802 $120,205 - -----------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these statements. 26 27 STATEMENTS OF CASH FLOWS ALABAMA GAS CORPORATION
- --------------------------------------------------------------------------------------------------------------- YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 20,587 $ 18,570 $ 16,961 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,153 23,486 21,269 Deferred income taxes, net (4,932) (618) 835 Deferred investment tax credits (469) (487) (487) Net change in: Accounts receivable 3,693 (7,686) (5,539) Inventories 4,237 2,071 (6,784) Deferred gas costs 738 (537) (549) Accounts payable - gas purchase (7,466) 5,758 (1,614) Accounts payable - other trade 1,760 (593) (788) Amount due customers 4,723 (9,810) 13,942 Other current assets and liabilities 9,129 (5,202) (1,894) Other, net 530 1,124 (1,019) - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 57,683 26,076 34,333 - --------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to property, plant and equipment (53,581) (43,724) (42,037) Net advances (to) from parent company (2,246) 14,054 (8,871) Other, net 62 1,091 1,377 - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (55,765) (28,579) (49,531) - --------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Payment of dividends on common stock (7,276) (6,720) (9,555) Proceeds from medium-term notes - - 24,829 Net change in short-term debt 4,000 11,000 - - --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (3,276) 4,280 15,274 - --------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (1,358) 1,777 76 Cash and cash equivalents at beginning of period 2,580 803 727 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,222 $ 2,580 $ 803 - ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these statements. 27 28 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Alabama Gas Corporation (Alagasco), a wholly-owned subsidiary of Energen Corporation (the Company), is the largest natural gas distribution utility in the State of Alabama, serving customers primarily in central and parts of north Alabama. The following is a description of its significant accounting policies and practices. A. UTILITY PLANT AND DEPRECIATION: Property, plant and equipment is stated at cost. The cost of utility plant includes an allowance for funds used during construction. Maintenance is charged for the cost of normal repairs and the renewal or replacement of an item of property which is less than a retirement unit. When property which represents a retirement unit is replaced or removed, the cost of such property is credited to utility plant and, together with the cost of removal less salvage, is charged to the accumulated reserve for depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of utility property at rates established by the Alabama Public Service Commission (APSC). Approved depreciation rates averaged approximately 4.4 percent in 1998 and 1997 and 4.3 percent in 1996. B. INVENTORIES: Inventories, which consist primarily of gas stored underground, are stated at average cost. C. OPERATING REVENUE AND GAS COSTS: In accordance with industry practice, Alagasco records natural gas distribution revenues on a monthly- and cycle-billing basis. The commodity cost of purchased gas applicable to gas delivered to customers but not yet billed under the cycle-billing method is deferred as a current asset. D. REGULATORY ACCOUNTING: Alagasco is subject to the provisions of Statement of Financial Accounting Standard (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. In general, SFAS No. 71 allows utilities to capitalize or defer certain costs or revenues, based upon approvals received from regulatory authorities, to be recovered from or refunded to customers in future periods. E. INCOME TAXES: Alagasco files a consolidated federal income tax return with its parent. The consolidated federal income taxes are allocated to the appropriate subsidiaries using the separate return method. Deferred income taxes reflect the impact of temporary differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes and are measured in compliance with enacted tax laws. Investment tax credits have been deferred and are being amortized over the lives of the related assets. F. CASH EQUIVALENTS: Alagasco includes highly liquid marketable securities and debt instruments purchased with a maturity of three months or less in cash equivalents. G. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. REGULATORY MATTERS As an Alabama utility, Alagasco is subject to regulation by the APSC which, in 1983, established the Rate Stabilization and Equalization (RSE) rate-setting process. RSE was extended 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 28 29 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, and a $2.5 million annual decrease became effective July 1, 1998. Alagasco calculates a temperature adjustment to customers' monthly bills to remove the effect of departures from normal temperature on Alagasco's earnings. The calculation is performed monthly, and the adjustments to customers' bills are made in the same billing cycle the weather variation occurs. 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, including Gas Supply Realignment (GSR) surcharges imposed by Alagasco's suppliers resulting from changes in gas supply purchases related to the implementation of Federal Energy Regulatory Commission (FERC) Order 636. The APSC on October 7, 1996, issued an order providing for the refund to customers prior to January 31, 1997 of approximately $17 million of supplier refunds, including interest. The Company refunded these amounts to customers during January 1997. The refunds were collected from a variety of sources and most relate to the settlement of rate case and FERC Order 636 proceedings of Southern Natural Gas Company. 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 September 30, 1998 and 1997, a regulatory liability related to income taxes of $2.9 million and $3.7 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. The APSC has allowed the Company to amortize over a three-year period the cost associated with this early retirement program. The excess of total acquisition costs over book value of net assets of acquired municipal gas distribution systems is included in utility plant and is being amortized on a straight-line basis over approximately 23 years. At September 30, 1998 and 1997, the net acquisition adjustment was $15.4 million and $16.4 million, respectively. 29 30 3. LONG-TERM DEBT AND NOTES PAYABLE Long-term debt consists of the following:
- --------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------- Medium-term Notes, interest ranging from 5.4% to 7.97%, for notes redeemable December 1, 1998, to September 23, 2026 $ 125,000 $ 125,000 Less amounts due within one year 5,350 -- - --------------------------------------------------------------------------------------------------------------- Total $ 119,650 $ 125,000 - ---------------------------------------------------------------------------------------------------------------
The aggregate maturities of long-term debt for the next five years are as follows:
- --------------------------------------------------------------------------------------------------------------- Years ending September 30, (in thousands) - --------------------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 - --------------------------------------------------------------------------------------------------------------- $ 5,350 $ - $ 4,650 $ 5,000 $ 5,000 - ---------------------------------------------------------------------------------------------------------------
Energen and Alagasco have short-term credit lines and other credit facilities of $228 million available as of September 30, 1998 to either entity for working capital needs. The following is a summary of information relating to notes payable to banks:
- --------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------- Alagasco outstanding $ 15,000 $ 11,000 $ -- Other Energen outstanding 138,000 141,000 59,000 - --------------------------------------------------------------------------------------- Notes payable to banks 153,000 152,000 59,000 Available for borrowings 75,000 51,000 97,000 - --------------------------------------------------------------------------------------- Total $228,000 $203,000 $156,000 - --------------------------------------------------------------------------------------- Maximum amount outstanding at any month-end $ 36,000 $ 41,000 $ 22,000 Average daily amount outstanding $ 13,225 $ 9,962 $ 6,672 Weighted average interest rates based on: Average daily amount outstanding 5.94% 5.83% 5.73% Amount outstanding at year-end 5.75% 5.99% -- - ---------------------------------------------------------------------------------------
Total interest expense for Alagasco in 1998, 1997 and 1996 was $10,221,000, $10,809,000 and $9,585,000, respectively. 4. INCOME TAXES The components of income taxes consist of the following:
- ------------------------------------------------------------------------------------------ For the years ended September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------ Taxes estimated to be payable currently: Federal $ 15,306 $ 10,219 $7,924 State 1,495 1,004 775 - ------------------------------------------------------------------------------------------ Total current 16,801 11,223 8,699 - ------------------------------------------------------------------------------------------ Taxes deferred: Federal (4,962) (1,050) 274 State (439) (55) 74 - ------------------------------------------------------------------------------------------ Total deferred (5,401) (1,105) 348 - ------------------------------------------------------------------------------------------ Total income tax expense $ 11,400 $ 10,118 $9,047 - ------------------------------------------------------------------------------------------
30 31 Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1998 and 1997 are as follows:
- ----------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- Current Noncurrent Current Noncurrent - ----------------------------------------------------------------------------------------------- Deferred tax assets: Deferred investment tax credits $ -- $ 850 $ -- $ 1,024 Regulatory liabilities -- 1,081 -- 1,356 Enhanced stability reserve 1,452 -- -- -- Unbilled revenue 1,770 -- 1,699 -- Gas supply adjustment 768 -- -- -- Insurance and accruals 3,320 -- 2,854 -- Inventories 574 -- 520 -- Allowance for uncollectible accounts 1,293 -- 1,173 -- Other, net 1,586 61 1,267 156 - ----------------------------------------------------------------------------------------------- Subtotal 10,763 1,992 7,513 2,536 Valuation allowance -- -- -- -- - ----------------------------------------------------------------------------------------------- Total deferred tax assets 10,763 1,992 7,513 2,536 - ----------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation and basis differences -- 18,170 -- 18,349 Gas supply adjustment -- -- 1,308 -- Other, net 293 958 530 926 - ----------------------------------------------------------------------------------------------- Total deferred tax liabilities 293 19,128 1,838 19,275 - ----------------------------------------------------------------------------------------------- Net deferred tax assets (liabilities) $10,470 $(17,136) $5,675 $(16,739) - -----------------------------------------------------------------------------------------------
No valuation allowance with respect to deferred taxes is deemed necessary, as Alagasco anticipates generating adequate future taxable income to realize the benefits of all deferred tax assets on Alagasco's balance sheet. Total income tax expense differs from the amount which would be provided by applying the statutory federal income tax rate to earnings before taxes as illustrated below:
- -------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Income tax expense at statutory federal income tax rate $ 11,195 $ 10,042 $ 9,103 Increase (decrease) resulting from: Investment tax credits-deferred (469) (487) (487) State income taxes, net of federal income tax benefit 688 617 559 Other, net (14) (54) (128) - -------------------------------------------------------------------------------------------------- Total income tax expense $ 11,400 $ 10,118 $ 9,047 - --------------------------------------------------------------------------------------------------
There were no tax-related balances due to affiliates at September 30, 1998 or 1997. 5. EMPLOYEE BENEFIT PLANS All information presented concerning retirement income and other benefit plans includes other affiliates of Energen Corporation as well as Alagasco. The Company has two defined benefit non-contributory pension plans which cover a majority of the employees. Benefits are based on years of service and final earnings. The Company's policy is to use "the projected unit credit" actuarial method for funding and financial reporting purposes. The expense for the plan covering the majority of employees (Plan A) for the years ended September 30, 1998, 1997 and 1996 was $1,716,000, $1,228,000, and $412,000, respectively. The expense for the plan covering employees under certain labor union agreements (Plan B) for 1998, 1997 and 1996 was $403,000, $437,000, and $197,000, respectively. 31 32 The funded status of the plans is as follows:
- ---------------------------------------------------------------------------------------------------------- As of June 30, (in thousands) PLAN A PLAN B - ---------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Vested benefits $(67,476) $(57,617) $(16,467) $(14,610) Nonvested benefits (5,268) (4,739) (2,431) (2,256) - ---------------------------------------------------------------------------------------------------------- Accumulated benefit obligation (72,744) (62,356) (18,898) (16,866) Effects of salary progression (15,537) (11,402) -- -- - ---------------------------------------------------------------------------------------------------------- Projected benefit obligation (88,281) (73,758) (18,898) (16,866) Fair value of plan assets, primarily equity and fixed income securities 90,661 84,859 23,081 20,820 Unrecognized net (gain) loss (2,773) (6,477) (2,944) (2,747) Unrecognized prior service cost 3,025 29 791 998 Unrecognized net transition obligation (asset) (2,686) (3,494) 226 282 - ---------------------------------------------------------------------------------------------------------- Accrued pension asset (liability) $ (54) $ 1,159 $ 2,256 $ 2,487 - ----------------------------------------------------------------------------------------------------------
At September 30, 1998 and 1997, the discount rate used to measure the projected benefit obligation for both plans was 7 percent and 7.75 percent, respectively, and the expected long-term rate of return on plan assets was 8.25 percent. The annual rate of salary increase for the salaried plan was 5.25 percent in 1998 and 5.75 percent in 1997. The components of net pension expense for 1998, 1997 and 1996 were:
- --------------------------------------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) PLAN A PLAN B - --------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Service Cost $ 2,386 $ 2,227 $ 2,147 $ 224 $ 243 $ 255 Interest cost on projected benefit obligation 5,842 5,524 4,617 1,261 1,238 1,166 Actual return on plan assets (9,516) (12,629) (15,280) (3,450) (3,803) (2,971) Net amortization and deferral 3,004 6,106 8,928 2,368 2,759 1,747 - ---------------------------------------------------------------------------------------------------------------------------------- Net pension expense $ 1,716 $ 1,228 $ 412 $ 403 $ 437 $ 197 - ----------------------------------------------------------------------------------------------------------------------------------
The Company has deferred compensation plan agreements with certain key executives providing for payments on retirement, termination, death or disability. Expense under these agreements for 1998, 1997 and 1996 was ($54,000), $399,000, and $1,002,000, respectively. At June 30, 1998 and 1997, the accumulated post-retirement benefit obligation related to these agreements was $2,901,000 and $5,961,000, respectively, and the projected benefit obligation was $7,088,000 and $9,839,000, respectively. A prepaid post-retirement benefit asset of $434,000 and $499,000 was recorded at June 30, 1998 and 1997, respectively. In addition to providing pension benefits, the Company provides certain post-retirement health care and life insurance benefits. Substantially all of the Company's employees may become eligible for such benefits if they reach normal retirement age while working for the Company. While the Company has not adopted a formal funding policy, all of its accrued post-retirement liability was funded at year-end. The expense for salaried employees for the years ended September 30, 1998, 1997, and 1996 was $2,040,000, $2,221,000, and $1,984,000, respectively. The expense for union employees was $4,367,000, $4,204,000, and $4,076,000 during 1998, 1997 and 1996, respectively. The "projected unit credit" actuarial method was used to determine the normal cost and actuarial liability. 32 33 A reconciliation of the estimated status of the obligation is as follows:
- ------------------------------------------------------------------------------------------------------------------ As of June 30, (in thousands) SALARIED EMPLOYEES UNION EMPLOYEES - ------------------------------------------------------------------------------------------------------------------ 1998 1997 1998 1997 ------------------------- --------------------------- Retirees $ (13,916) $ (9,590) $ (15,162) $ (14,529) Active, fully-eligible (3,107) (2,121) (4,957) (4,340) Other active (12,289) (8,309) (17,632) (14,151) - ------------------------------------------------------------------------------------------------------------------ Accumulated post-retirement benefit obligation (29,312) (20,020) (37,751) (33,020) Fair value of plan assets, primarily equity and fixed income securities 30,476 23,719 23,081 13,363 Unamortized amounts (1,561) (4,686) 13,558 17,405 - ------------------------------------------------------------------------------------------------------------------ Accrued post-retirement benefit liability $ (397) $ (987) $ (1,112) $ (2,252) ==================================================================================================================
Net periodic post-retirement benefit expense for the years ended September 30, 1998, 1997, and 1996 included the following:
- --------------------------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) SALARIED EMPLOYEES UNION EMPLOYEES - --------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 ------------------------------- ----------------------------- Service cost $ 967 $ 979 $ 516 $ 1,314 $ 1,198 $ 876 Interest cost on accumulated post-retirement benefit obligation 2,049 2,204 1,679 2,612 2,542 2,195 Amortization of transition obligation 723 723 723 1,285 1,285 1,285 Amortization of actuarial gains and losses (510) (568) (277) (107) - - Deferred asset gain (loss) 4,972 3,682 658 5,891 2,006 177 (Gain) or loss on plan assets (6,161) (4,799) (1,315) (6,628) (2,827) (457) ===================================================================================================================== Net periodic post-retirement benefit expense $ 2,040 $ 2,221 $ 1,984 $ 4,367 $ 4,204 $ 4,076 =====================================================================================================================
The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7 percent in 1998 and 7.75 percent in 1997. The expected long-term rate of return on assets is 8.25 percent for both years, and the tax rate on investment income is assumed to be 40 percent. The weighted average health care cost trend rate used in determining the accumulated post-retirement benefit obligation was 7.5 percent and 8.25 percent in 1998 and 1997, respectively. That assumption has a significant effect on the amounts reported. For example, with respect to salaried employees, increasing the weighted average health care cost trend rate by 1 percent would increase the accumulated post-retirement benefit obligation by 2.7 percent and the net periodic post-retirement benefit cost by 2.4 percent. For union employees, increasing the weighted average health care cost trend rate by 1 percent would increase the accumulated post-retirement benefit obligation by 7.3 percent and the net periodic post-retirement benefit cost by 7.1 percent. For pay-related life insurance benefits, the salary scale averages 5.25 percent and 5.75 percent in 1998 and 1997, respectively. For both defined benefit plans and other post-retirement plans, certain financial assumptions are used in determining the Company's projected benefit obligation. These assumptions are examined periodically by the Company, and any required changes are reflected in the subsequent determination of projected benefit obligations. The Company has a long-term disability plan covering most salaried employees. Expense for the years ended September 30, 1998, 1997, and 1996 was $173,000, $163,000, and $370,000, respectively. 6. CAPITAL STOCK Alagasco's authorized common stock consists of 3 million, $0.01 par value common shares. At September 30, 1998 and 1997, 1,972,052 shares were issued and outstanding. Alagasco is authorized to issue 120,000 shares of preferred stock par value $0.01 per share, in one or more series. There are no preferred shares currently outstanding. 33 34 7. COMMITMENTS AND CONTINGENCIES CONTRACTS AND AGREEMENTS: Alagasco has various firm gas supply and firm gas transportation contracts which expire at various dates through the year 2008. These contracts typically contain minimum demand charge obligations on the part of Alagasco. ENVIRONMENTAL MATTERS: Alagasco is in the chain of title of eight former manufactured gas plant sites, of which it still owns four, and five manufactured gas distribution sites, of which it still owns one. A preliminary investigation of the sites does not indicate the present need for remediation activities. Management expects that, should remediation of any such sites be required in the future, Alagasco's share, if any, of such costs will not affect materially the results of operations or financial condition of Alagasco. LEGAL MATTERS: Alagasco is, from time to time, party to various pending or threatened legal proceedings. Certain of these lawsuits include claims for punitive damages in addition to other specified relief. Based upon information presently available, and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the financial position of Alagasco. It should be noted, however, that Alagasco conducts business in Alabama and other jurisdictions in which the magnitude and frequency of punitive damage awards bear little or no relation to culpability or actual damages thus making it increasingly difficult to predict litigation results. Various legal proceedings arising in the normal course of business are currently in progress, and Alagasco has accrued a provision for estimated costs. LEASE OBLIGATIONS: Total payments related to leases included as operating expense were $2,292,000, $2,280,000 and $2,146,000 in 1998, 1997 and 1996, respectively. Minimum future rental payments (in thousands) required after 1998 under leases with initial or remaining noncancelable lease terms in excess of one year are as follows:
- ---------------------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 2004 AND THEREAFTER - ---------------------------------------------------------------------------------------------------------------- $ 2,538 $ 2,252 $ 2,193 $ 2,149 $ 2,133 $ 4,223 - ----------------------------------------------------------------------------------------------------------------
The Company expects to close negotiations on a sale and leaseback of the new building headquarters in fiscal 1999. Accordingly, anticipated rentals payments under that lease are included in the preceding table. 8. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental information concerning cash flow activities is as follows:
- ------------------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Interest paid, net of amount capitalized $ 11,256 $ 10,192 $ 9,216 Income taxes paid $ 16,253 $ 13,228 $ 5,932 Noncash investing activities: Capitalized depreciation $ 187 $ 168 $ 166 Allowance for funds used during construction $ 400 $ 490 $ 972 Noncash financing activities (debt issuance costs) $ - $ -- $ 171 - -------------------------------------------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT FINANCIAL INSTRUMENTS: The fair value of cash and cash equivalents, trade receivables (net of allowance), and short-term debt approximates fair value due to the short maturity of the instruments. The fair value of fixed-rate long-term debt, including the current portion, with a carrying value of $125,000,000, would be $130,003,000 at September 30, 1998. The fair value was based on the market value of debt with similar maturities and with interest rates currently trading in the marketplace. Alagasco has entered into an agreement with a financial institution whereby it can sell on an ongoing basis, with recourse, certain installment receivables related to its merchandising program up to a maximum of $20 million. 34 35 During 1998, 1997 and 1996, Alagasco sold $8,100,000, $7,926,000 and $8,831,000, respectively, of installment receivables. At September 30, 1998 and 1997, the balance of these installment receivables was $17,105,000 and $17,160,000, respectively. Receivables sold under this agreement are considered financial instruments with off-balance sheet risk. Alagasco's exposure to credit loss in the event of non-performance by customers is represented by the balance of installment receivables. CONCENTRATION OF CREDIT RISK: Natural gas distribution operating revenues and related accounts receivable are generated from state-regulated utility natural gas sales and transportation to more than 468,000 residential, commercial and industrial customers located in central and north Alabama. A change in economic conditions may affect the ability of customers to meet their obligations; however, Alagasco believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. 10. RECENT PRONOUNCEMENTS OF THE FASB In fiscal 1998, the Company adopted SFAS No. 128, Earnings Per Share (EPS), which specifies computation, presentation, and disclosure requirements for EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and the denominator of the basic EPS computation to that of the diluted computation. The Company also adopted during fiscal 1998, SFAS No. 129, Disclosures of Information about Capital Structure. It contains no change in disclosure requirements for public entities that were previously subject to the requirements of Accounting Principles Board No. 10 and No. 15 and SFAS No. 47. As a result, SFAS 129 had no impact on the Company's consolidated financial statements. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be required, was issued in June 1997. SFAS No. 131 relates solely to disclosure provisions, and therefore does not have any effect on the results of operations or financial position of the Company. The Company has chosen to early adopt this pronouncement as of September 30, 1998. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which requires the reporting and display of comprehensive income and its components in an entity's financial statements. There are currently 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 is currently being evaluated. 35 36 11. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) The following data summarize quarterly operating results. Alagasco's business is seasonal in character and strongly influenced by weather conditions.
- ------------------------------------------------------------------------------------------------------------- Fiscal year 1998 quarters (in thousands) First Second Third Fourth - ------------------------------------------------------------------------------------------------------------- Operating revenues $ 95,755 $ 161,747 $ 66,327 $ 46,111 Operating income (loss) $ 4,798 $ 26,393 $ 1,631 $ (2,559) Net income (loss) available for common $ 2,183 $ 23,946 $ (586) $ (4,956) - ------------------------------------------------------------------------------------------------------------- Fiscal year 1997 quarters (in thousands) - ------------------------------------------------------------------------------------------------------------- Operating revenues $ 83,305 $ 160,152 $ 70,147 $ 49,380 Operating income (loss) $ 4,055 $ 22,963 $ 4,282 $ (2,626) Net income (loss) available for common $ 1,807 $ 20,163 $ 1,701 $ (5,101) - -------------------------------------------------------------------------------------------------------------
12. TRANSACTIONS WITH RELATED PARTIES Alagasco purchased natural gas from affiliates amounting to $4,142,000, $5,165,000 and $5,097,000, in 1998, 1997 and 1996, respectively. These amounts are included in gas purchased for resale. Alagasco had net payables to affiliates of $2,738,000 and $4,984,000 at September 30, 1998 and 1997, respectively. 36 37 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF ENERGEN CORPORATION: Our report on the consolidated financial statements of Energen Corporation and subsidiaries has been incorporated by reference in this Form 10-K from page 49 of the 1998 Annual Report to Stockholders of Energen Corporation and subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 19 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects the information required to be included therein. PricewaterhouseCoopers LLP Birmingham, Alabama October 28, 1998 37 38 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ENERGEN CORPORATION AND SUBSIDIARIES
======================================================================================================== YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997 1996 ======================================================================================================== ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE AT BEGINNING OF YEAR $ 3,185 $ 3,002 $ 2,533 - -------------------------------------------------------------------------------------------------------- Additions: Charged to income 3,472 1,837 2,361 Recoveries and adjustments (215) (186) (187) - -------------------------------------------------------------------------------------------------------- Net additions 3,257 1,651 2,174 - -------------------------------------------------------------------------------------------------------- Less uncollectible accounts written off (2,895) (1,468) (1,705) - -------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 3,547 $ 3,185 $ 3,002 ========================================================================================================
38 39 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ALABAMA GAS CORPORATION
======================================================================================================== YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997 1996 ======================================================================================================== ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE AT BEGINNING OF YEAR $ 3,156 $ 2,985 $ 2,000 - -------------------------------------------------------------------------------------------------------- Additions: Charged to income 3,430 1,575 2,349 Recoveries and adjustments (215) (186) (187) - -------------------------------------------------------------------------------------------------------- Net additions 3,215 1,389 2,162 - -------------------------------------------------------------------------------------------------------- Less uncollectible accounts written off (2,889) (1,218) (1,177) - -------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 3,482 $ 3,156 $ 2,985 ========================================================================================================
EX-3.(A) 2 RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3(a) RESTATED CERTIFICATE OF INCORPORATION OF ENERGEN CORPORATION [COMPOSITE, AS AMENDED THROUGH FEBRUARY 2, 1998] STATE OF ALABAMA ) ) COUNTY OF JEFFERSON ) TO THE HONORABLE JUDGE OF PROBATE, JEFFERSON COUNTY, ALABAMA: Pursuant to the provisions of Article 10 of Chapter 2B of Title 10 of the Code of Alabama of 1975 (ss.10-2A-110, et seq.), the undersigned corporation executes the following Restated Certificate of Incorporation: I. NAME OF CORPORATION: 1.01 The name of the corporation shall be Energen Corporation. II. OBJECTS: 2.01 To manufacture, produce, buy, deal in, use, sell, distribute, furnish and supply gas; to construct, equip, use, operate and maintain works for holding, receiving, purifying and distributing gas, and all buildings, works, meters, pipes, fittings, machinery, apparatus and appliances convenient or necessary in connection therewith. 1 2 2.02 To carry on the business of a gas company in all its branches; to manufacture, use, deal in, render salable and sell all products, by-products and residual products obtained in the production of gas; to manufacture, buy, sell, rent and deal in all kinds of goods, wares, merchandise and personal property which may seem calculated directly or indirectly to promote the consumption of gas. 2.03 To manufacture, produce, buy, deal in, use, sell, distribute, furnish and supply petroleum, petroleum products and by-products; to construct, equip, use, operate and maintain works for holding, receiving, purifying and distributing petroleum, petroleum products and by-products, and all buildings, works, meters, pipes, fittings, machinery, apparatus and appliances convenient or necessary in connection therewith. 2.04 To acquire, buy, hold, own, sell, lease, exchange, dispose of, finance, deal in, construct, build, equip, improve, use, operate, maintain and work upon any and all kinds of works, plants, stations, systems, machinery, generators, apparatus, devices, supplies and articles of every kind pertaining to or in anywise connected with the production, use, distribution, regulation, control or application of light, heat, refrigeration, ice, water, water-power, electricity, gas, and any other force. 2.05 To acquire, buy, hold, own, sell, lease, exchange, dispose of, distribute, deal in, use, produce, furnish and supply light, heat, refrigeration, ice, water, water-power, electricity, and any other power or force. 2.06 To acquire, buy, hold, own, sell, lease, exchange and dispose of lands or the gas, oil and mineral rights in lands; to develop such lands by drilling gas and oil wells thereon; to produce therefrom gas, oil or other volatile or mineral substances; to produce, deal in, use, distribute, furnish and sell such gas or oil or other volatile or mineral substances; to install, construct, build, equip, improve, use, operate and maintain any and all manner of plants, machinery and appliances for any and all such purposes and the marketing and selling of such products. 2 3 2.07 To carry on the business of aiding in the construction and operations of plants and works, including those of gas companies, electric companies, and other public utility companies, and for or in connection with any or all of the foregoing purposes to furnish services and advice of engineers, auditors, executives and other experts. 2.08 To acquire, organize, assemble, develop, build up and operate, constructing and operating and other organizations and systems and to hire, sell, lease, exchange, turn over, deliver and dispose of such organizations, in whole or in part, and to enter into and perform contracts, agreements and undertakings of any kind in connection with any or all of the foregoing objects. 2.09 To purchase, acquire, hold, own, develop and dispose of lands and interests in and rights with respect to lands and waters and fixed and movable property, franchises, concessions, consents, privileges and licenses in its opinion useful or desirable for or in connection with any or all of the foregoing objects. 2.10 To acquire by purchase, subscription or otherwise, and to sell, use, assign, transfer, mortgage, pledge, exchange or otherwise dispose of, and to make and enter into all manner and kinds of contracts, agreements and obligations for the purchasing, acquiring, dealing in or selling of, real and personal property of every sort and description and wheresoever situated, including shares of stock, bonds, debentures, notes, scrip, securities, evidences of indebtedness, contracts or obligations of any corporation or corporations, association or associations, domestic or foreign, or of any firm or individual of the United States or any state, territory or dependency of the United States or any foreign country, or any municipality or local authority within or without the United States, and also to issue in exchange therefor stocks, bonds or other securities or evidences of indebtedness of the Corporation and while the owner or holder of any such property, to receive, collect and dispose of the interest, dividends and income on or from such property, and to possess and exercise in respect thereto all of the rights, powers and privileges of ownership, including voting rights. 2.11 To act as financial, business, managing and/or purchasing agent, general or special. 3 4 2.12 To carry on the business of general brokers and dealers in stocks, bonds, securities, mortgages and other choses in action, including the acquisition thereof by original subscription; to make investments in such property; and to hold, manage, mortgage, pledge, sell and dispose of the same in like manner as individuals may do. 2.13 To acquire by purchase or otherwise and to own, hold, buy, sell, donate, convey, lease, mortgage or incumber real or personal property both within and without the State of Alabama; to survey, sub-divide, plat, improve and develop lands for the purposes of sale or otherwise; to lay off such lands in streets, lanes, squares, parks and alleys, city blocks and lots and to sell or otherwise dispose of lots and to secure the purchase by purchase-money notes, mortgages, or otherwise, to open and improve the streets, lanes, parks, squares and alleys which may be laid off and to do and perform all things needful for the development and improvement of such lands for trade or business and to make donations of any of its lands when in the opinion of its Board of Directors the same may be desirable to further the Corporation's interest. 2.14 To engage in and carry on a general mercantile and trade business and to buy, manufacture, produce or otherwise acquire, hold, own, use, import, export, trade or otherwise deal in or turn to account, sell, lease, pledge or otherwise dispose of any and all kinds of goods, wares and merchandise and other articles of commercial and personal property without limit as to character or manner. 2.15 To borrow or otherwise raise moneys for any of the purposes of the Corporation from time to time and without limit as to amount, except as may be provided in a resolution or resolutions adopted by the shareholders of the Corporation, to issue bonds, debentures, notes or other obligations of any nature, or in any manner, and to secure the payment of the principal and interest of any thereof by mortgage upon, or pledge or conveyance or assignment in trust of, the whole or any part of the property of the Corporation, real and personal, whether at the time owned or thereafter acquired, including contract rights; and to sell, pledge, or otherwise dispose of such bonds, debentures, notes or other obligations of any nature of the Corporation for its corporate purposes. 4 5 2.16 To lend and advance money and extend credit, either with or without security, and to underwrite for investment, resale or otherwise stocks, bonds and other securities, and to aid the organization, financing, liquidation or reorganization of corporations, associations or firms. 2.17 To purchase or otherwise acquire and to hold, cancel, re-issue, sell or transfer shares of its own capital stock (so far as may be permitted by law) and its bonds, debentures, notes, scrip or other securities or evidences of indebtedness, provided that it shall not use its funds or property for the purchase of shares of its own capital stock when such use would cause any impairment of its capital, and provided, further, that shares of its own capital stock belonging to it shall not be voted directly or indirectly. 2.18 In connection with the purchase or lease or other acquisition by the Corporation of any property of whatever nature, to pay therefor in cash or property or to issue in exchange therefor shares of its capital stock, bonds, or other obligations or other securities of the Corporation and to assume any liabilities of any person, firm, association or corporation. 2.19 To sell, exchange or barter for other property, assign, transfer, lease as lessor, mortgage, pledge or otherwise dispose of or encumber any part or parts, or all, of the property or assets of the Corporation; to cease to conduct the business connected with any such property or assets so disposed of; to resume any business which it shall cease to conduct; and the Corporation may receive any form of; to resume any business which it shall cease to conduct; and the Corporation may receive any form of consideration for property so sold, exchanged, bartered or otherwise disposed of, including (but not excluding other forms of consideration) bonds, debentures and/or other obligations and/or shares of stock of any existing corporate or other entity or of any corporate or other entity in process of organization. 2.20 To endorse, or otherwise guarantee, or become a surety with respect to, or obligate itself for, or without becoming liable therefor, nevertheless, to pledge or mortgage all or any part of its properties to secure the payment of the principal of, and interest on, or either thereof, any bonds, including construction or performance bonds, debentures, notes, scrip, 5 6 coupons, contracts or other obligations or evidences of indebtedness, or the performance of any contract, lease, construction, performance or other bond, mortgage, or obligation of any other corporation or association, domestic or foreign, or of any firm, partnership, joint venture, or other person whatsoever, in which this Corporation may have a lawful interest, or on account of, or with respect to, any transaction in which this Corporation shall receive any lawful consideration, advantage or benefit, on any account whatsoever. Irrespective of the relative net worth of the corporations, associations, or persons involved, and of the relative amounts of obligations involved, this Corporation shall be deemed to have a lawful interest in any corporation, association or person (A) which owns stock in this Corporation, or (B) which owns stock in another corporation which owns stock in this Corporation, or (C) in which this Corporation owns stock, or (D) in which another corporation owns stock which also owns stock in this Corporation, or (E) in which any one or more persons who own stock in this Corporation also own stock, or (F) which or who has entered into any contractual arrangement pursuant to which any such corporation or persons undertakes corresponding or like obligations of endorsement, guarantee, or suretyship, with respect to all or any such obligations or evidences of indebtedness, contracts of this Corporation, or which may engage with this Corporation, in the conduct of any joint venture or enterprise, or in the use of common facilities or services. 2.21 To engage in any commercial, financial, mercantile, industrial, manufacturing, marine, exploration, mining, agricultural, research, licensing, servicing or agency business not prohibited by law, and any, some or all of the foregoing. 2.22 In general, to do any or all of the things hereinbefore set forth to the same extent as natural persons could do, and as principal or agent or otherwise, and either alone or in conjunction with any other persons, firms, associations or corporations. 2.23 To exercise its powers in accomplishment of its objects and purposes in any part of the world and to have one or more offices out of the State of Alabama. 6 7 2.24 To do all acts and things which it shall find necessary or convenient to do in aid of or in connection with the transaction, promotion and carrying on of the objects and purposes hereinabove stated or necessary or incidental to the protection and benefit of the corporation, and in general to carry on any lawful business necessary or incidental to the attainment of the purposes of the Corporation, whether such business is similar in nature to the objects and powers hereinabove set forth or otherwise. 2.25 The Corporation's power to acquire property of any kind which it is or shall be authorized to acquire may be exercised directly or indirectly through the acquisition of stocks and bonds representative of such property and for the purpose of acquiring and holding either in perpetuity or for a limited period. The foregoing clauses shall be construed as powers and provisions for the regulation of the business and the conduct and affairs of the Corporation, the Directors and stockholders and each class of stockholders, and it is hereby expressly provided that the foregoing specific enumeration shall not be held to limit or restrict in any manner the powers of the Corporation. III. LOCATION: 3.01 The location of the Corporation's principal office in the State of Alabama shall be: 1918 First Avenue North Birmingham, Alabama 35295 IV. CAPITAL STOCK: 4.01 The total number of shares of stock which the Corporation shall have authority to issue is as follows: (a) Five million (5,000,000) shares, par value of $0.01 per share, which are hereby designated as preferred stock (hereinafter called "Preferred Stock"). 7 8 (b) Seventy-five million (75,000,000) shares, par value of $0.01 per share, which are hereby designated as common stock (hereinafter called "Common Stock"). 4.02 (a) The Preferred Stock may be issued in such one or more series as shall from time to time be created and authorized to be issued by the Board of Directors as hereinafter provided. The Board of Directors is hereby expressly authorized, by resolution or resolutions from time to time adopted providing for the issuance of Preferred Stock, to fix and determine, to the extent not fixed by the provisions hereinafter set forth, the relative rights and preferences of the shares of each series of Preferred Stock, including (but without limiting the generality of the foregoing) any of the following with respect to which the Board of Directors may make specific provisions: (i) the distinctive name and any serial designations; (ii) the annual dividend rate or rates and the dividend payment dates; (iii) with respect to the declaration and payment of dividends upon each series of the Preferred Stock, whether such dividends are to be cumulative or noncumulative, preferred, subordinate or equal to dividends declared and paid upon other series of the Preferred Stock or upon any other shares of stock of the Corporation, and the participating or other special rights, if any, of such dividends; (iv) the redemption provisions, if any, with respect to any series, and if any series is subject to redemption, the manner and time of redemption and the redemption price or prices; 8 9 (v) the amount or amounts of preferential or other payment to which any series of Preferred Stock is entitled over any other series of Preferred Stock or over the Common Stock on voluntary or involuntary liquidation, dissolution or winding-up, subject to the provisions set forth in paragraph (c)(ii) of Section 4.02 hereof; (vi) any sinking fund or other retirement provisions and the extent to which the charges therefor are to have priority over the payment of dividends on or the making of sinking fund or other like retirement provisions for shares of any other series of Preferred Stock or for shares of the Common Stock; (vii) any conversion, exchange, purchase or other privileges to acquire shares of any other series of Preferred Stock or of the Common Stock; (viii) the number of shares of such series; and (ix) the voting rights, if any, of such series, subject to the provisions set forth in paragraph (c)(i) of Section 4.02 hereof. Each share of each series of Preferred Stock shall have the same relative rights and be identical in all respects with all the other shares of the same series. Before the Corporation shall issue any shares of Preferred Stock of any series authorized as hereinbefore provided, a statement setting forth a copy of the resolution or resolutions with respect to such series adopted by the Board of Directors of the Corporation pursuant to the foregoing authority vested in said Board shall be made, filed and recorded in accordance with the then applicable requirements, if any, of the laws of the State of Alabama, or, if no statement is then so required, a certificate 9 10 shall be signed and acknowledged on behalf of the Corporation by its Chairman of the Board, President or a Vice-President and its corporate seal shall be affixed thereto and attested by its Secretary or an Assistant Secretary and such certificate shall be filed and kept on file at the principal office of the Corporation in the State of Alabama and in such other place or places as the Board of Directors shall designate. (b) The authority of the Board of Directors to provide for the issuance of any shares of the Corporation's stock shall include, but shall not be limited to, authority to issue shares of stock of the Corporation for any purpose and in any manner (including issuance pursuant to rights, warrants, or other options) permitted by law, for delivery as all or part of the consideration for or in connection with the acquisition of all or part of the stock of another corporation or of all or part of the assets of another corporation or enterprise, irrespective of the amount by which the issuance of such stock shall increase the number of shares outstanding (but not in excess of the number of shares authorized). (c) The following relative rights and preferences of the stock of the Corporation are fixed as follows: (i) Voting Rights. (A) Common Stock. At all elections of directors of the Corporation, and in respect of all other matters as to which the vote or consent of stockholders of the Corporation shall be required to be taken, the holders of the Common Stock shall be entitled to one (1) vote for each share held by them. (B) Preferred Stock. The holders of each series of the Preferred Stock shall have such voting rights as may be fixed by resolution or by resolutions of the Board of Directors providing for the issuance of each such series. 10 11 (ii) Liquidation, Dissolution, etc. In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the assets of the Corporation available for distribution to the stockholders (whether from capital or surplus) shall be distributed among those of the respective series of the outstanding Preferred Stock, if any, as may be entitled to any preferential amounts and among the respective holders thereof in accordance with the relative rights and preferences, if any, fixed and determined for each such series and the holders thereof by resolution or resolutions of the Board of Directors providing for the issue of each such series of the Preferred Stock; and after payment in full of the amounts payable in respect of the Preferred Stock, if any, the holders of any series of the outstanding Preferred Stock who are not entitled to preferential treatment pursuant to resolutions of the Board of Directors providing for the issue thereof and the holders of the outstanding Common Stock shall be entitled (to the exclusion of the holders of any series of the outstanding Preferred Stock entitled to preferential treatment pursuant to resolutions of the Board of Directors providing for the issue thereof) to share ratably in all the remaining assets of the Corporation available for distribution to its stockholders. A merger, consolidation or reorganization of the Corporation with or into one or more corporations, or a sale, lease or other transfer of all or substantially all the assets of the Corporation, that does not result in the termination of the enterprise and distribution of the assets to stockholders, shall not be deemed to constitute a liquidation, dissolution or winding-up of the Corporation within the meaning of this paragraph (c)(ii) of Section 4.02 hereof, notwithstanding the fact that the Corporation may cease to exist or may surrender its Certificate of Incorporation. (iii) Dividends. Dividends on any stock of the Corporation shall be payable only out of earnings or assets of the Corporation legally available for the payment of such dividends and only as and when declared by the Board of Directors. (d) No holder of any share or shares of any class of stock of the Corporation shall have any preemptive rights to subscribe for any shares of stock of any class of the Corporation now or hereafter authorized or for any securities convertible into or carrying any optional rights to purchase or 11 12 subscribe for any shares of stock of any class of the Corporation now or hereafter authorized, provided, however, that no provision of the Certificate of Incorporation shall be deemed to deny to the Board of Directors the right, in its discretion, to grant to the holders of shares of any class of stock at the time outstanding the right to purchase or subscribe for shares of stock of any class or any other securities of the Corporation now or hereafter authorized at such prices and upon such other terms and conditions as the Board of Directors, in its discretion, may fix. 4.03 The amount of the capital stock with which the Corporation shall begin business shall be 1,000 shares of Common Stock. V. OFFICER TO RECEIVE SUBSCRIPTION: 5.01 The name and post office address of the officer designated by the incorporators to receive subscriptions to the capital of the Corporation are: Name: A. S. Lacy Post Office Address: 1918 First Avenue North Birmingham Alabama 35295 12 13 VI. INCORPORATORS AND SHARES: The names and post office addresses of the incorporators and the number of shares of Common Stock subscribed for by each are as follows:
NUMBER OF SHARES OF COMMON STOCK NAME POST OFFICE ADDRESS SUBSCRIBED FOR Howard Higgins 1918 First Avenue North 334 Birmingham, Alabama 35295 Rex J. Lysinger 1918 First Avenue North 333 Birmingham, Alabama 35295 A. S. Lacy 1918 First Avenue North 333 Birmingham, Alabama 35295 ----- Total 1,000
VII. DIRECTORS AND OFFICERS: 7.01 The number of directors constituting the initial board of directors of the Corporation shall be nine. Subject to Section 10.01 of Article X hereof, the number of directors of the Corporation shall be as provided in and fixed by the Bylaws of the Corporation. The names and post office addresses of the directors and the officers chosen for the first year are: 13 14 DIRECTORS
NAME POST OFFICE ADDRESS Emory O. Cunningham Post Office Box 2581 Birmingham, Alabama 35202 James S. M. French Post Office Box 247 Birmingham, Alabama 35201 Robert F. Henry Post Office Box 2230 Montgomery, Alabama 36103 Howard Higgins 1918 First Avenue North Birmingham, Alabama 35295 Norman R. Kerredge 1918 First Avenue North Birmingham, Alabama 35295 Rex J. Lysinger 1918 First Avenue North Birmingham, Alabama 35295 Harry H. Pritchett Post Office Box 2389 Tuscaloosa, Alabama 35401 Richard A. Puryear, Jr. 3700-A Country Club Drive Birmingham, Alabama 35213 Robert S. Weatherly 2865 Stratford Road Birmingham, Alabama 35213
OFFICERS OFFICERS TITLE POST OFFICE ADDRESS Howard Higgins Chairman of the 1918 First Avenue N. Board and CEO Birmingham, AL 35295 Rex J. Lysinger President 1918 First Avenue N. Birmingham, AL 35295 A. S. Lacy Vice President and 1918 First Avenue N. Secretary Birmingham, AL 35295 Richard J. Patzke Vice President and 1918 First Avenue N. Treasurer Birmingham, AL 35295
14 15 VIII. TIME LIMIT: 8.01 The duration of the Corporation shall be perpetual. IX. CERTAIN PROVISIONS RESPECTING BUSINESS COMBINATIONS: 9.01 Definitions. For the purposes of this Article IX: (a) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 11, 1984. (b) "Announcement Date" means, with respect to any Business Combination, the date of the first public announcement of such Business Combination. (c) A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote or direct the vote pursuant to any agreement, arrangement or understanding; or 15 16 (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation. (d) For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph (k) of this Section 9.01 hereof, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by the Interested Stockholder through application of paragraph " of Section 9.01 hereof, but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. (e) "Board" means the Board of Directors of the Corporation. (f) A "Business Combination" shall mean any one or more of the following: (i) any merger or consolidation-dation of the Corporation or any Subsidiary with or into (A) any Interested Stockholder or (B) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Stockholder; or 16 17 (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value of $1,000,000 or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or an Affiliate of any Interested Stockholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity securities, or securities convertible into equity securities, of the Corporation or any Subsidiary, including, without limitation, any class or series of Protected Stock, which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. 17 18 (g) "Consummation Date" means, with respect to any Business Combination, the date on which such Business Combination is effected. (h) "Determination Date" means, with respect to any Interested Stockholder, the date on which such Interested Stockholder first became an Interested Stockholder. (i) "Disinterested Director" means any member of the Board who is unaffiliated with, and not a nominee of, the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is a member of the Board and who is unaffiliated with, and not a nominee of, the Interested Stockholder and was recommended to succeed a Disinterested Director by a majority of Disinterested Directors on the Board at the time of such recommendation. (j) "Fair Market Value" means (i) in the case of stock, the highest closing sale price during the thirty-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange, Inc. Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, Inc., or, if such stock is not listed on the New York Stock Exchange, Inc., on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty-day period preceding the date in question as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good 18 19 faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. (k) "Interested Stockholder" shall mean, in respect of any Business Combination, any person (other than the Corporation) who or which, as of the date of the first public announcement of such Business Combination, or on the day immediately prior to the consummation of any such Business Combination: (i) is the beneficial owner, directly or indirectly, of ten percent (10%) or more of the voting power of the outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of ten percent (10%) or more of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock of the Corporation which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (l) A "person" shall mean any individual, firm, corporation or other entity. (m) "Protected Stock" means all Voting Stock and all other shares of capital stock of the Corporation having, or which may have upon the 19 20 happening of some contingency, the right to vote for the election of some or all of the directors of the Corporation, regardless of whether at the time in question such shares then have a present right to so vote. (n) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation. (o) "Voting Stock" means, at any time, all shares of capital stock of the Corporation entitled to vote generally in the election of directors, which shares shall be considered for the purpose of the vote required by this Article IX as one class. (p) In the event of any Business Combination in which the Corporation survives, the phrase "other consideration to be received" as used in clauses (i) and (ii) of paragraph (b) of 9.03 of this Article IX shall include the shares of Common Stock and/or the shares of any other class of outstanding Protected Stock retained by the holders of such shares. 9.02 Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in 9.03 of this Article IX, any Business Combination shall require the affirmative vote of the holders of at least eighty percent (80%) of the then outstanding shares of Voting Stock. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or under the rules of, or in any agreement with, any United States securities exchange registered under the Securities Exchange Act of 1934, or any successor act thereto, on which any of the Voting Stock is listed, or otherwise. 9.03 When Higher Vote Is Not Required. The provisions of 9.02 of this Article IX shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law and any other Article of this Certificate of Incorporation, if all of the conditions specified in either of the following paragraphs (a) and (b) are met: 20 21 (a) Approval by the Disinterested Directors. The Business Combination shall have been approved by a majority of the Disinterested Directors. (b) Price and Procedure Requirements. All of the following conditions shall have been met: (i) Common Stock. The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of consideration other than cash to be received by holders of the Common Stock of the Corporation in such Business Combination, computed on a per share basis, shall be at least equal to the higher of the following: (A) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by the Interested Stockholder (i) within the two-year period immediately prior to the Announcement Date or (ii) in the transaction or transactions by which the Interested Stockholder became an Interested Stockholder, whichever is higher; or (B) the Fair Market Value per share of the Common Stock on the Announcement Date or the Determination Date, whichever is higher. (ii) Protected Stock. The aggregate amount of cash and the Fair Market Value as of the Consummation Date of consideration other than cash to be received per share by holders of shares of any other class of outstanding 21 22 Protected Stock regardless of whether the Interested Stockholder has previously acquired any shares of a particular class of such Protected Stock shall be at least equal to the highest of the following: (A) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Protected Stock acquired by the Interested Stockholder (i) within the two-year period immediately prior to the Announcement Date or (ii) in the transaction or transactions by which the Interested Stockholder became an Interested Stockholder, whichever is higher; (B) the highest preferential amount per share to which the holders of shares of such class of Protected Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (C) the Fair Market Value per share of such class of Protected Stock on the Announcement Date or the Determination Date, whichever is higher. 22 23 (iii) Form of Consideration. The consideration to be received by holders of a particular class or series of outstanding Protected Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has paid for shares of such class of Protected Stock prior to the Consummation Date. If the Interested Stockholder has paid for shares of any class of Protected Stock with varying forms of consideration, the form of consideration for such class of Protected Stock shall be either cash or the form used to acquire the largest number of shares of such class of Protected Stock previously acquired by it. (iv) Maintain Dividends. After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (A) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock of the Corporation; and (B) there shall have been (i) no reduction in the annual rate of dividends paid on the Common Stock except as necessary to reflect any subdivision of the Common Stock, except as approved by a majority of the Disinterested Directors, and (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors. 23 24 (v) Acquisition of Additional Shares. After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination, such Interested Stockholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (vi) No Disproportionate Benefits. After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vii) Furnish Information. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all stockholders of this Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or any such subsequent provisions). 24 25 9.04 Powers of Board of Directors. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this Article IX on the basis of the information known to them after reasonable inquiry, (1) the number of shares of Voting Stock beneficially owned by any person, (2) whether a person is an Interested Stockholder or is an Affiliate or Associate of another person, (3) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in paragraph (C) of Section 9.01 of this Article IX, (4) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more, or (5) whether the requirements of paragraph (a) or (b) of Section 9.03 of this Article IX have been met with respect to any Business Combination. 9.05 No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article IX shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. 9.06 Amendment, Repeal, Etc. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of the Corporation), the affirmative vote of the holders of at least eighty percent (80%) of the shares of the then outstanding Voting Stock shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article IX of this Certificate of Incorporation. X. BOARD OF DIRECTORS: 10.01 (a) Number, election and terms. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, a Board of Directors which, except as otherwise fixed by or pursuant to the provisions of Article IV hereof relating to the rights of the holders of any class or series of Preferred Stock to elect additional directors under specified circumstances, shall 25 26 consist of not less than nine (9) nor more than fifteen (15) persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. At the annual meeting of stockholders of the Corporation held in 1985, the directors, other than those who may be elected by the holders of any class or series of Preferred Stock, shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class of directors to expire at the annual meeting of stockholders of the Corporation to be held in 1986, the term of office of the second class of directors to expire at the annual meeting of stockholders of the Corporation to be held in 1987 and the term of office of the third class of directors to expire at the annual meeting of stockholders of the Corporation to be held in 1988. At each annual meeting of stockholders of the Corporation following such initial classification and election, and except as otherwise so fixed by or pursuant to the provisions of Article IV hereof relating to the rights of the holders of any or series of Preferred Stock to elect additional directors under specified circumstances, directors elected to succeed those directors whose terms expire at such annual meeting shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders of the Corporation after their election. (b) Vacancies and Newly Created Directorships. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected to serve until the next annual meeting of stockholders. Any directorship to be filled by reason of an increase in the number of directors shall be filled by election at an annual meeting or at a special meeting of stockholders called for that purpose, unless applicable law then permits such directorship to be filled by the affirmative vote of a majority of the remaining directors (even though less than a quorum of the Board of Directors). No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 26 27 (c) Continuance in Office. Notwithstanding the foregoing provisions of Section 10.01 hereof, any director whose term of office has expired shall continue to hold office until his successor shall be elected and qualify. (d) Removal. Subject to the rights of the holders of any class or series of Preferred Stock then outstanding, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all of the shares of the Corporation then entitled to vote for the election of directors. (e) Amendment, repeal, etc. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of the Corporation), the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all of the shares of the Corporation then entitled to vote for the election of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, Section 10.01 hereof. 10.02 In furtherance, not in limitation, of the powers conferred upon the Board of Directors by statute, the Board of Directors is expressly authorized, without any vote or other action by stockholders other than such as at the time shall be expressly required by statute applicable to such action, to exercise in a manner not inconsistent with any of the provisions of the Certificate of Incorporation all of the powers, rights and privileges of the Corporation (whether expressed or implied in this Certificate of Incorporation or conferred by statute) and do all acts and things which may be done by the Corporation, and particularly, among other things: 27 28 (a) Subject to Section 9.06 of Article IX and paragraph (e) of Section 10.01 hereof, to make, alter and repeal Bylaws of the Corporation, subject to the power of the stockholders to alter or repeal Bylaws made by the Board of Directors, which action by the directors shall fully protect third parties in dealing with the Corporation; provided, however, that the Board of Directors may not alter, amend or repeal any Bylaw establishing what constitutes a quorum at any meeting of the stockholders of the Corporation; (b) To determine, subject to the provisions of Article IX hereof, whether any, and if any, what part, of the net income of the Corporation or of its net assets in excess of its capital shall be declared in dividends and paid to the stockholders and whether or not in cash or capital stock of the Corporation or in other property, and generally to determine and direct the use and disposition of any such net income or any such excess of net assets over capital; and to fix the times for the declaration and payment of dividends; (c) From time to time, to fix the amount to be reserved over and above the capital stock of the Corporation paid in and to determine and direct how amount so reserved shall be used; (d) To determine from time to time at what times and places and under what conditions and regulations the accounts and books of the Corporation, or any of them, shall be open to the inspection of stockholders; and no stockholders shall have any right to inspect any account or book or document of the Corporation except as conferred by the laws of the State of Alabama or authorized by resolution of the Board of Directors or of the stockholders; (e) From time to time, and without other limit as to amount, except as may be provided in a resolution or resolutions adopted by the stockholders of the Corporation, to borrow or otherwise raise moneys for any of the purposes of the Corporation; to authorize the issue of bonds, debentures, notes, or other obligations of the Corporation, of any nature, or in any manner, and to authorize the creation of mortgages upon, or the pledge or conveyance or assignment in trust of, the whole or any part of the property of the Corporation, real or personal, whether at the time 28 29 owned or thereafter acquired, including contract rights, to secure the payment of any of such bonds, debentures, notes or other obligations and the interest thereon; and to authorize the sale or pledge or other disposition of such bonds, debentures, notes or other obligations of the Corporation for its corporate purposes; (f) To provide, subject to the requirements of law and the bylaws of the Corporation, for the holding of stockholders and Directors meetings within or without the State of Alabama at such places as may be from time to time designated by resolution of the Board of Directors and to provide for an office or offices and for the keeping of the books of the Corporation (subject to the provisions of the statute) within or without the State of Alabama; (g) By resolution adopted by majority vote of all the Directors of the Corporation as at the time fixed by its bylaws, to designate three or more of their number to constitute an executive committee, which, to the extent provided in such resolution or in the bylaws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it, and by like resolution, from time to time, to constitute other committees out of their number, with such powers as shall be provided in such resolutions or in the bylaws of the Corporation; (h) Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board or such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee; (i) To exercise such further powers as may be conferred by the bylaws of the Corporation in addition to the powers and authority expressly conferred in the foregoing or by law. 29 30 XI. LIMITATION OF LIABILITY: 11.01 A director of the Corporation shall not be liable to the Corporation or its shareholders for money damages for any action taken, or failure to take action, as a director, except for (i) the amount of a financial benefit received by such director to which such director is not entitled; (ii) an intentional infliction of harm by such director on the Corporation or its shareholders; (iii) a violation of Section 10-2B-8.33 of the Code of Alabama of 1975 or any successor provision to such section; (iv) an intentional violation by such director of criminal law; or (v) a breach of such director's duty of loyalty to the Corporation or its shareholders. If the Alabama Business Corporation Act, or any successor statute thereto, is hereafter amended to authorize the further elimination or limitation of the liability of a director of a corporation, then the liability of a director of the Corporation, in addition to the limitations on liability provided herein, shall be limited to the fullest extent permitted by the Alabama Business Corporation Act, as amended, or any successor statute thereto. The limitation on liability of directors of the Corporation contained herein shall apply to liabilities arising out of acts or omissions occurring subsequent to the adoption of this Article XI and, except to the extent prohibited by law, to liabilities arising out of acts or omissions occurring prior to the adoption of this Article XI. Any repeal or modification of this Article XI by the shareholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the liability of a director of the Corporation existing at the time of such repeal or modification. XII. GENERAL PROVISIONS 12.01 Capital surplus, paid-in surplus and premiums on stock of the Corporation now existing or hereafter created shall not be available for the payment of dividends other than liquidating dividends. 12.02 All persons who shall acquire stock in the Corporation shall acquire it subject to the provisions of this Certificate of Incorporation. 30 31 12.03 So far as not otherwise expressly provided by the laws of the State of Alabama, the Corporation shall be entitled to treat the person in whose name any share is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in said share on the part of any other person, whether or not the Corporation shall have notice thereof. 12.04 Attached hereto, marked Exhibit "A" and made a part hereof, is a statement, under oath, made by A. S. Lacy, the officer or agent authorized by the incorporators to receive subscriptions to the capital stock of the Corporation subscribed for and the amount thereof which has been paid in. There is also attached hereto, marked Exhibit "B" and made a part hereof, a true and correct copy of the subscription list of the Corporation showing the amount of capital stock subscribed for by the incorporators and the manner in which such subscriptions are provided to be discharged. The board of directors of the Corporation adopted a resolution with respect to the restatement of the certificate of incorporation of the corporation on July 19, 1984. The foregoing restated certificate of incorporation of the Corporation sets forth all of the operative provisions of the Certificate of Incorporation of the Corporation, correctly sets forth without change the corresponding provisions of the Certificate of Incorporation of the Corporation as heretofore amended and supersedes the original Certificate of Incorporation of the Corporation and all amendments thereto. Dated this 20th day of July, 1984. ENERGEN CORPORATION By /s/ Rex J. Lysinger ------------------------------------- Its Chairman of the Board of Directors and President and /s/ A. S. Lacy ------------------------------------- Its Secretary 31 32 STATE OF ALABAMA ) ) COUNTY OF JEFFERSON ) Before me, the undersigned authority in and for said County in said State, personally appeared Rex J. Lysinger known to me, who being first duly sworn doth depose and say that he is the Chairman of the Board of Directors and President of Energen Corporation, that he signed the foregoing Restated Certification of Incorporation of said corporation as Chairman of the Board of Directors and President of said corporation and with full authority and that the statements made in the foregoing Restated Certification of Incorporation of said corporation are true and correct. /s/ Rex J. Lysinger ------------------------------- Rex J. Lysinger Subscribed and sworn before me on this 20th day of July, 1984, in witness whereof I hereunto subscribe my name and attach the seal in my office. Margaret G. Priola ------------------------------- Notary Public [NOTARIAL SEAL] My Commission Expires: 4/20/85 32 33 EXHIBIT "A" STATE OF ALABAMA ) ) COUNTY OF JEFFERSON ) Before me, Evelyn E. Pulley, a Notary Public in and for said county in said state, personally appeared A. S. Lacy, who is known to me, and who, being by me first duly sworn according to law, deposed and said that he is the officer or agent designated and authorized by the incorporators of Energen Corporation, an corporation proposed to be incorporated under the laws of the State of Alabama, to receive the subscription to the capital stock of said corporation; that the amount of capital stock of said corporation that has been paid in cash is One Thousand Dollars ($1,000.00) which amount is at least twenty percent (20%) of the stock subscribed; that a true copy of the subscription list of capital stock of said corporation and the price paid in cash therefor by each subscriber is attached hereto, marked Exhibit "B" and made a part hereof; and that affiant now holds said cash for delivery to said corporation, upon completion of the organization thereof. /s/ A. S. LACY ------------------------------------------ A. S. Lacy Subscribed and sworn to before me this 26th day of October, 1978. /s/ Evelyn E. Pulley - --------------------------------------- Notary Public in and for the County of Jefferson, Alabama My Commission expires: March 16, 1980 33 34 EXHIBIT "B" SUBSCRIPTION LIST OF THE CAPITAL STOCK OF ENERGEN CORPORATION We, the undersigned, do hereby respectively subscribe for and agree to take and pay in cash for the number of shares of common stock of the par value of One Dollar ($1.00) per share of Energen Corporation, a corporation proposed to be organized under the laws of the State of Alabama, that is set opposite our respective signatures. IN WITNESS WHEREOF, each of the undersigned subscribers has signed his name hereto, all opposite the number of shares subscribed for by each of the undersigned, this 19th day of October, 1978.
NUMBER AMOUNT OF PAID SHARES IN CASH /s/ Howard Higgins 334 $334.00 - ------------------------------ Howard Higgins /s/ Rex J. Lysinger 333 $333.00 - ------------------------------ Rex J. Lysinger /s/ A. S. Lacy 333 $333.00 - ------------------------------ A. S. Lacy
34 EX-3.(C) 3 BYLAWS OF ENERGEN 1 Exhibit 3(c) ENERGEN CORPORATION ----------------------- BY LAWS ------------------------ As Amended Through July 22, 1998 I. ANNUAL MEETING OF STOCKHOLDERS. 1.01 TIME OF HOLDING - The annual meeting, for the purpose of electing directors and transacting any other proper business, shall be held at 10:00 a.m. on the fourth Wednesday in January of each year, if not a legal holiday, and if a legal holiday then on the first succeeding business day not a legal holiday or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Special meetings may be held, and shall be called by the Secretary, whenever directed by the Chairman of the Board or the President or whenever requested by a majority of the directors, either by vote at a meeting or in writing. 1.02 NOTICE - At least ten days before each annual and each special meeting and in any event such number of days as will conform with any statutory requirement, the Secretary shall mail or cause to be mailed to each stockholder entitled to vote at the meeting, at his address appearing on the books of the Corporation, a notice which shall state the time and place of the meeting, and, in the case of a special meeting, shall state also the objects or purposes of the meeting. 1.03 PLACE OF MEETING - Annual and special meetings shall be held at the principal office of the Corporation in the State of Alabama, or at such other place, within or without the State of Alabama, as may be designated by the Board of Directors or the person or persons calling the meeting and stated in the notice of the meeting. 1.04 CLOSING STOCK TRANSFER BOOK - RECORD DATE - Prior to each meeting of stockholders, the Board of Directors shall either fix a period of not less than ten days preceding the day of the meeting during which the stock transfer books shall be closed, or fix a date not less than ten days preceding the day of the meeting as a record date for the determination of the stockholders entitled to notice of and to vote at such meeting, and when a record date shall have been so fixed, only stockholders of record on such date shall be entitled to notice of and to vote at such meeting. 1.05 VOTE IN PERSON OR BY PROXY - Stockholders may vote in person or by proxy. The vote of stockholders for the election of directors, or upon any question before a meeting, need not be by ballot except when required by statute or demanded by a stockholder of record entitled to vote at the meeting; when so required or demanded, the vote shall be by ballot. All questions shall be decided by the vote of the holders of a majority of the shares voting on the question, except where otherwise required by statute or by the Certificate of Incorporation, as now in effect or as hereafter amended. 1 2 At any meeting of the stockholders, each stockholder having the right to vote shall be entitled to vote in person or by proxy executed in writing by such stockholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Each proxy shall be delivered to the Judge appointed pursuant to ss.1.08 of these By Laws prior to the vote at the meeting. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the proxy unless the stockholder so attending shall, in writing prior to the meeting or orally at the meeting, notify the secretary of the meeting at any time prior to the voting of the proxy. 1.06 PRESIDING OFFICER - The Chairman of the Board, and in his absence, the President shall call meetings of stockholders to order and act as chairman of such meeting. In the absence of both of these officers, the Board of Directors shall appoint a chairman of the meeting, but if the Board shall not make such appointment, then any stockholder or the proxy of any stockholder may call the meeting to order, and a chairman shall be elected. 1.07 SECRETARY OF THE MEETING - The Secretary or any Assistant Secretary may act as secretary of any meeting of stockholders; but the Board of Directors before the meeting may designate any person to act as secretary thereof, and if no such designation shall have been made or if the person so designated shall fail to attend or shall refuse or be unable to serve, then the chairman of the meeting may appoint any person to act as secretary thereof. 1.08 JUDGE - At each meeting of the stockholders at which the voting shall be by ballot, the voting shall be conducted and all questions touching the qualifications of the voters, the validity of proxies, and the acceptance or rejection of votes shall be decided by one Judge. The Judge may be an officer of the Corporation and may be appointed before the meeting by the Board of Directors, but if no such appointment shall have been made, then by the chairman of the meeting; and if for any reason any judge previously appointed shall fail to attend, or refuse or be unable to serve, then a judge to act in his place shall be appointed by the Chairman of the meeting. No such judge need be a stockholder. 1.09 VOTING, ADJOURNMENT - At each meeting of stockholders, except as otherwise provided by statute or by the Certificate of Incorporation or an amendment thereof, the holders of a majority of all of the stock which at the time shall be entitled to vote, present in person or represented by proxy, shall be requisite for the transaction of business and shall constitute a quorum. A meeting of the stockholders may be adjourned to any day, and from time to time, as such meeting shall determine, whether or not a quorum is present. The time and place to which an adjournment is taken shall be publicly announced at the meeting, and no further notice thereof shall be necessary. 2 3 II. BOARD OF DIRECTORS. 2.01 MANAGEMENT OF CORPORATION; NUMBER OF DIRECTORS; ELECTION OF DIRECTORS; TERMS OF OFFICE - All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, its Board of Directors. The number of Directors of the Corporation, the manner of their election and their terms of office shall be determined as provided in the Certificate of Incorporation, as at any time amended. No person who shall have been first elected a Director of Alabama Gas Corporation subsequent to June 19, 1969 shall be eligible to serve as a Director of the Corporation after the annual meeting of the stockholders of the Corporation next following his seventieth birthday. 2.02 MEETINGS OF THE BOARD - The Board of Directors may provide for stated meetings at regular intervals to be held pursuant to a standing resolution of the Board. No notice of such meetings need be given. Special meetings of the Board may be called upon written instructions signed by the Chairman of the Board, the President, or a Vice President, or at least two of the directors, and delivered to the Secretary of the Corporation, stating the time and place thereof. The Secretary shall give, or cause to be given, notice of the time and place of holding each special meeting by mailing the same at least thirty-six (36) hours before the meeting or by causing the same to be transmitted by telephone, cable, or wire message at least twenty-four (24) hours before the meeting to each director to his address on file with the Secretary of the Corporation. The directors may hold their meetings at such place or places, either within or without the State of Alabama, as the Board shall designate from time to time. 2.03 QUORUM, VACANCIES, ADJOURNMENT - Subject to the provisions of the Certificate of Incorporation, as amended, a majority of the Directors shall constitute a quorum for the transaction of business at meetings of the Board. Subject to the provisions of the Certificate of Incorporation, as amended, vacancies in the Board shall be filled by a majority of the Directors then in office. A majority of the Directors present at any meeting may adjourn the meeting until a later day or hour, or sine die, whether or not a quorum is present. A minute of such adjournment shall be entered on the records by the Secretary, and no further notice thereof shall be necessary. 2.04 RULES - The Board of Directors may adopt such rules and regulations for the conduct of its meetings and the management of the affairs of the Corporation as it may deem proper not inconsistent with these By Laws or the Certificate of Incorporation and the amendments thereof. 2.05 COMPENSATION OF OFFICERS AND DIRECTORS - The Board of Directors shall fix and authorize the payment of compensation for all officers of the Corporation, including such officers as may be directors of the Corporation, for services to the Corporation; and shall fix and authorize the payment of compensation and expenses to the directors for services to the Corporation, including fees and expenses for attendance at meetings of the Board and of all committees of the Board. 3 4 2.06 INDEMNIFICATION OF DIRECTORS AND OFFICERS - LIABILITY INSURANCE - (a) The Corporation does hereby indemnify any officer or director of the Corporation who was, or is, a party, or is threatened to be made a party, to any threatened, pending or completed claim, action, or proceeding, whether civil, criminal, administrative, or investigative, including appeals, other than an action by or in the right of the Corporation, by reason of the fact that he is or was a director, an officer, an employee, or an agent of the Corporation or is, or was, serving at the request of the Corporation as a director, officer, partner, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation does hereby indemnify any officer or director of the Corporation who was, or is, a party, or is threatened to be made a party, to any threatened, pending, or completed claim or action by, or in the right of, the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, an officer, an employee, or an agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of such action if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless, and only to the extent that the court in which such action was brought shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) To the extent that a director or an officer of the Corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in subsections (a) and (b) of this section or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith, notwithstanding that he has not been successful on any other claim, issue, or matter in any such action or proceeding. (d) Any indemnification under subsections (a) and (b) of this section, unless ordered by a court, shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made: 4 5 (i) By the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to, or who have been wholly successful on the merits or otherwise with respect to such claim, action, or proceeding; (ii) If such a quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (iii) By the stockholders. (e) Expenses, including attorneys' fees, incurred in defending a civil or criminal claim, action, or proceeding may be paid by the Corporation in advance of the final disposition of such claim, action, or proceeding as authorized in the manner provided in subsection (d) of this section upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if, and to the extent that, it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this section. (f) The indemnification authorized by this section shall not be deemed exclusive of, and shall be in addition to, any other rights, whether created prior or subsequent to the enactment of this section, to which those indemnified may be entitled under any statute, rule of law, provision of articles of incorporation, by-law, agreement, or vote of stockholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office and shall continue as to a person who has ceased to be a director or an officer, and shall inure to the benefit of the heirs, executors, and administrators of such a person. (g) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director or an officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section. III. OFFICERS AND AGENTS 3.01 EXECUTIVE OFFICERS - The executive officers of this Corporation shall consist of a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, and a Treasurer. In addition, the Board of Directors of this Corporation may, but shall not be required to elect one or more of the following: Executive Vice President, Senior Vice President, Assistant Treasurer, and Assistant Secretary. In addition, the Board of Directors of this Corporation may, but shall not be required to elect a Controller. The Chairman of the Board and the President shall be members of the Board of Directors; the other officers may, but need not be directors. The Chairman of the Board and the President may be the same person, and the Secretary and Treasurer may be the same person, and an Executive Vice President, a Senior Vice President, or a Vice President may also hold the office of Secretary or Assistant Secretary, Treasurer, Controller, or Assistant Treasurer, provided, however, that the Chairman of the Board may not also hold the offices of Executive Vice President, Senior Vice President, or Vice President; that the President may not also hold the office of Executive Vice President, Senior Vice President, or Vice President and that an Executive Vice President, a Senior Vice President, or a Vice President may hold either but not both the offices of Secretary and Treasurer. 5 6 Except where otherwise expressly provided in a written contract duly authorized by the Board of Directors, all officers, agents, and employees shall be subject to removal at any time by the affirmative vote of a majority of the directors for the time being in office, and all officers, agents, and employees other than officers elected or appointed by the Board of Directors shall also be subject to removal at any time by the officer appointing them. In addition to the powers and duties of the officers of the Corporation as set forth in these By Laws and except as otherwise provided in the Certificate of Incorporation, they shall have such authority and shall perform such duties as from time to time may be determined by the Board of Directors. 3.02 CHIEF EXECUTIVE OFFICER - The Board of Directors shall by resolution duly adopted, designate one of the executive officers of the Corporation as the chief executive officer of the Corporation, and the officer so designated by the Board of Directors shall, subject to the control of the Board of Directors, have general charge and control of the business and affairs of the Corporation and shall perform such other duties as may from time to time be assigned to him by the Board of Directors. The designation by the Board of Directors of one of such executive officers other than the Chairman of the Board as the chief executive officer of the Corporation shall not affect the duties required to be performed by the Chairman of the Board of the Corporation under the provisions of Sections 1.06 and 1.08 of these By Laws. 3.03 THE CHAIRMAN OF THE BOARD - The Chairman of the Board shall preside at all meetings of the stockholders and of the directors at which he is present, and shall perform such other duties as may, from time to time, be assigned to him by the Board of Directors. The Chairman of the Board shall, in the absence of the President or in case of his inability to act, perform the duties and exercise the authority of the President. 3.04 THE PRESIDENT - The President shall be the chief operating officer of the Corporation. He shall, from time to time, obtain information concerning the affairs and business of the Corporation and shall promptly lay such information before the Board of Directors. He shall communicate to the Board of Directors all matters presented by any officer of the Corporation for its consideration and shall, from time to time, communicate to the officers such action of the Board of Directors as may, in his judgment, affect the performance of their official duties. He shall have power to appoint and remove all agents, and employees of the Corporation (other than its officers), and shall perform all such other duties as are incident to the office of President and such specific duties as may, from time to time, be assigned to him by the Board of Directors. In the absence of the Chairman of the Board, he shall preside at all meetings of stockholders and at all meetings of the Board of Directors at which he is present. 3.05 VICE PRESIDENTS - Each Vice President may have such title designation, and each Vice President and each Executive Vice President, if there be one or more of them, and each Senior Vice President, if there be one or more of them, shall perform such duties and exercise such authority as from time to time may be prescribed and conferred by the Board of Directors. 6 7 3.06 THE SECRETARY - The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall keep a record of all their proceedings. He shall give due notices of all meetings of the stockholders and of the Board of Directors. He shall notify the several officers of the Corporation of all action taken at any such meeting concerning matters in their respective departments, and shall transmit to the Treasurer for proper record copies of all contracts and resolutions providing for the payment of money to or by the Corporation. He shall procure and keep in his files certified copies of the minutes of all meetings of the stockholders and of the Board of Directors of all companies a majority of whose capital stock is owned by this Corporation. He shall be the custodian of the seal of the Corporation, of mortgages, leases, and of such other papers and documents as shall be committed to his care by the Board of Directors. He shall have charge of the stock transfer department and supervision of the transfer of the stocks and of the registration and transfer of the bonds issued by the Corporation. He shall have power to affix the seal of the Corporation to instruments authorized by the Board of Directors and to attest the same; and shall perform such other duties as shall be assigned to him by the Board of Directors. He shall be sworn to the faithful discharge of his duty. 3.07 ASSISTANT SECRETARIES - The Assistant Secretaries, if there be one or more of them, shall exercise such of the powers and perform such of the duties of the Secretary as shall be assigned to them by the Secretary or the Board of Directors. Each Assistant Secretary of this Corporation be and he hereby is authorized, in the absence or disability of the Secretary, to perform all the duties and exercise all the powers of the Secretary. Any action which in Article I or Article II of these By Laws it is stated shall be taken by or in connection with the Secretary may be taken by or in connection with any Assistant Secretary with the same effect as if he were the Secretary. 3.08 THE TREASURER - The Treasurer is authorized to receive and collect all moneys due to the Corporation and to receipt therefor, and to endorse for deposit to the credit of the Corporation in depositories designated by the Board of Directors, checks, drafts, or vouchers drawn to the order of the Corporation or payable to it. He is authorized to pay interest on obligations and dividends on stock when due and payable. He shall cause to be kept in his office true and full accounts of all receipts and disbursements. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements. He shall also perform such other duties as shall be assigned to him by the Board of Directors. 3.09 CONTROLLER - The Controller, if there be one, shall, subject to the Board of Directors, provide and maintain financial and accounting controls over the business and affairs of the Corporation. He shall maintain, among others, adequate records of the assets, liabilities, and financial transactions of the Corporation, and shall direct the preparation of financial statements, reports, and analyses. He shall perform all acts incident to the position of controller, subject to the control of the Board of Directors, the Chairman, and any Vice President or other executive officer charged by the Board of Directors with general supervision of the financial affairs of the Corporation. If there shall be no Controller, the duties set out above in this ss.3.09 shall be performed by the Treasurer. 3.10 ASSISTANT TREASURERS - The Assistant Treasurers, if there be one or more of them, shall exercise such of the powers and perform such of the duties of the Treasurer as shall be assigned to them by the Treasurer or by the Board of Directors. Each Assistant Treasurer of this Corporation be and he hereby is authorized, in the absence or disability of the Treasurer, to perform all the duties and exercise all the powers of the Treasurer. 7 8 3.11 DELEGATION OF DUTIES - In case of the absence or incapacity of any officer of this Corporation, the Board of Directors may delegate his powers and duties for the time being to any other officer or to any director. IV. ISSUE AND TRANSFER OF STOCK CERTIFICATES 4.01 ISSUANCE AND TRANSFER OF STOCK - The Board of Directors shall provide for issue, transfer, and registration of the certificates representing the capital stock of the Corporation, and shall appoint the necessary officers, transfer agents, and registrars of transfers for that purpose. 4.02 EXECUTION OF CERTIFICATES - Until otherwise ordered by the Board of Directors, stock certificates shall be signed by the President or by a Vice President, and by the Secretary or an Assistant Secretary thereunto authorized by the Board of Directors. 4.03 FACSIMILE SIGNATURES, SEAL - Unless otherwise ordered by the Board of Directors, the signatures on stock certificates of the Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, or a Vice President and the Secretary or an Assistant Secretary of the Corporation may be facsimiles engraved or printed and the corporate seal to be affixed thereto may be facsimile, engraved, or imprinted thereon. In case any officer or officers whose facsimile signatures may be used on any stock certificate cease to be such officer or officers, whether because of death, resignation, or otherwise, before such certificates have been issued, such certificates shall nevertheless be deemed to have been adopted by the Corporation and may be countersigned and issued by any transfer agent or registrar as though such person or persons whose facsimile signatures have been used thereon had not ceased to be such officer or officers of the Corporation. 4.04 TRANSFER OF STOCK - Transfers of stock shall be made on the books of the Corporation only by order of the person in whose name such stock is registered or by his attorney lawfully constituted in writing, and unless otherwise authorized by the Board of Directors, only upon surrender and cancellation of the old certificate. No new stock certificate shall be issued to a transferee until the transfer has been made on the books of the Corporation. 4.05 REPLACEMENT CERTIFICATES - In case any stock certificate shall be lost, by theft or otherwise, or destroyed, the Board of Directors in its absolute discretion may order the issuance of a new certificate in lieu thereof, upon delivery to the Corporation of a bond of indemnity satisfactory to the Board. 4.06 CLOSING TRANSFER BOOKS, RECORD DATE - The Board of Directors may fix in advance any period of not more than thirty days preceding any dividend payment date or any date for the allotment of rights, during which the stock transfer books shall be closed; or in the event that the Board of Directors shall not have fixed such period, it may fix a date not more than thirty days preceding any dividend payment date or any date for the allotment of rights, as a record date for the determination of the stockholders entitled to receive such dividends or rights, as the case may be; and only stockholders of record on such date shall be entitled to receive such dividends or rights, as the case may be. 8 9 V. CHECKS - NOTES - DRAFTS - ETC. 5.01 Unless otherwise directed by the Board of Directors, all notes, acceptances, checks, drafts, and orders for the payment of money shall be signed by the Treasurer, the Controller, or an Assistant Treasurer and any one of the following officers of the Corporation: Chairman of the Board, President, Executive Vice President, Senior Vice President, any Vice President, Secretary, Treasurer, Assistant Secretary, and Assistant Treasurer. VI. GENERAL PROVISIONS 6.01 DUTIES - All officers, agents, and employees, in exercise of the powers conferred and the performance of the duties imposed upon them, by these By Laws or otherwise, shall at all times be subject to the direction, supervision, and control of the Board of Directors. 6.02 EXECUTION OF INSTRUMENTS - Except as otherwise ordered by the Board of Directors, the chairman of the Board, the President, the Executive Vice President, a Senior Vice President, and each Vice President shall severally have power to execute on behalf of the Corporation any deed, bond, indenture, certificate, contract, or other instrument, and to cause the corporate seal thereto to be affixed and attested by the Secretary or an Assistant Secretary. 6.03 STOCK OF THE CORPORATION - Shares of stock belonging to the Corporation need not stand in the name of the Corporation but may be held for the benefit of the Corporation in the individual name of the Chairman of the Board, the President or of the Secretary or the Treasurer or of any other officer designated for the purpose by the Board of Directors. The certificates for stock so held for the benefit of the Corporation shall be in proper transfer form and shall be kept in the safe deposit vaults of the Corporation, subject to access thereto as shall be ordered from time to time by the Board of Directors. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President or any Vice-President, or such other officer as may be designated by the Board of Directors to act in the absence of the Chairman of the Board, the President or any Vice President, shall have full power and authority on behalf of the Corporation to attend and to act and to vote, and to execute a proxy or proxies empowering others to attend and to act and to vote, at any meetings of security holders of any corporation in which the Corporation may hold securities, and at such meetings the Chairman of the Board, or such other officer of the Corporation, or such proxy shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which as the owner thereof the Corporation might have possessed and exercised, if present. The Chairman of the Board, or such other officer of the Corporation, or such proxy may also exercise any part or all of such voting and other authority, rights and power through execution of an action by written consent in lieu of a meeting of shareholders. The Secretary or any Assistant Secretary may affix the corporate seal to any such proxy or proxies so executed by the Chairman of the Board, or such other officer, and attest the same. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. 6.04 WAIVER OF NOTICE - Any stockholder, director, or officer may waive any notice required to be given to him under these By Laws. 9 10 6.05 OFFICES - In addition to its principal office in the State of Alabama, the Corporation may have an office or offices, either within or without the State. 6.06 CORPORATE SEAL - The Corporate seal shall be circular in form, with the words "Alagasco, Inc." on the outer margin thereof and bearing on the inner portion the words "Corporate Seal, 1978". The corporate seal may be affixed by impression, printing, engraving, or by use of a rubber stamp. 6.07 AMENDMENT OF BY LAWS - These By Laws may be altered, amended, or repealed at any meeting of stockholders, by vote of the holders, present in person or by proxy, of a majority of all of the stock which at the time shall be entitled to vote at elections of directors, or by the Board of Directors at any meeting thereof, by vote of a majority of all the members of the Board. 10 EX-3.(E) 4 BYLAWS OF ALABAMA GAS 1 Exhibit 3(e) ALABAMA GAS CORPORATION BY-LAWS As Amended Through July 22, 1998 ARTICLE I SECTION 1. The annual meeting, for the purpose of electing Directors and transacting any other proper business, shall be held at 10:00 A.M. on the fourth Wednesday in January of each year, if not a legal holiday, and if a legal holiday then on the first succeeding business day not a legal holiday, or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Special meetings may be held, and shall be called by the Secretary, whenever directed by the Chairman of the Board or the President or whenever requested by a majority of the directors, either by vote at a meeting or in writing. SECTION 2. At least ten days before each annual and each special meeting and in any event such number of days as will conform with any statutory requirement, the Secretary shall mail or cause to be mailed to each stockholder entitled to vote at the meeting, at his address appearing on the books of the corporation, a notice which shall state the time and the place of the meeting, and, in the case of a special meeting, shall state also the objects or purposes of the meeting. SECTION 3. All meetings of the stockholders, including meetings for the election of directors, shall be held at the principal office of the corporation in the City of Birmingham, Alabama. SECTION 4. Prior to each meeting of stockholders, the Board of Directors shall either fix a period of not less than ten days preceding the day of the meeting during which the stock transfer books shall be closed, or fix a date not less than ten days preceding the day of the meeting as a record date for the determination of the stockholders entitled to notice of and to vote at such meeting, and when a record date shall have been so fixed, only stockholders of record on such date shall be entitled to notice of and to vote at such meeting. SECTION 5. Stockholders may vote in person or by proxy. The vote of stockholders for the election of directors, or upon any question before a meeting, need not be by ballot except when required by statute or demanded by a stockholder of record entitled to vote at the meeting; when so required or demanded, the vote shall be by ballot. All questions shall be decided by the vote of a majority of the shares voting on the question, except where otherwise required by statute or by the Certificate of Incorporation, as now or hereafter amended. SECTION 6. The Chairman of the Board, and in his absence, the President, or in the absence of both, the Executive Vice President, shall call meetings of stockholders to order and act as Chairman of such meeting. In the absence of all these officers the Board of Directors shall appoint a chairman of the meeting, but if the Board shall not make such appointment, then, any stockholder or the proxy of any stockholder may call the meeting to order, and a chairman shall be elected. 1 2 SECTION 7. The Secretary or any Assistant Secretary may act as Secretary of any meeting of stockholders; but the Board of Directors before the meeting may designate any person to act as secretary thereof, and if no such designation shall have been made, then the Chairman of the meeting may appoint any person to act as secretary thereof. SECTION 8. At each meeting of the stockholders at which the voting shall be by ballot, the voting shall be conducted and all questions touching the qualifications of the voters, the validity of proxies and the acceptance or rejection of votes shall be decided by one judge. Such judge may be an officer of the corporation and may be appointed before the meeting by the board of directors, but if no such appointment shall have been made, then by the Chairman of the meeting; and if for any reason any judge previously appointed shall fail to attend, or refuse or be unable to serve, then a judge to act in his place shall be appointed by the Chairman of the meeting. No such judge need be a stockholder. SECTION 9. At each meeting of stockholders, except as otherwise provided by statute or by the Certificate of Incorporation or an amendment thereof, the holders of a majority of all of the stock which at the time shall be entitled to vote, present in person or represented by proxy, shall be requisite for the transaction of business and shall constitute a quorum. A meeting of the stockholders may be adjourned to any day, and from time to time, as such meeting shall determine, whether or not a quorum be present The time and place to which an adjournment is taken shall be publicly announced at the meeting, and no further notice thereof shall be necessary. ARTICLE II Board of Directors SECTION 1. The general management of the property, business and affairs of the Corporation shall be vested in a Board of Directors, eleven in number, who shall hold office until the next annual meeting of the stockholders and until others are duly chosen in their place and shall have qualified. SECTION 2. The Board of Directors may provide for stated meetings at regular intervals to be held pursuant to a standing resolution of the Board. No notice of such meetings need be given. Special meetings of the Board may be called upon written instructions signed by the Chairman of the Board, the President or a Vice President, or at least two of the directors, and delivered to the Secretary of the Corporation, stating the time and place thereof. The Secretary shall give, or cause to be given, notice of the time and place of holding each special meeting by mailing the same at least thirty-six (36) hours before the meeting or by causing the same to be transmitted by telephone, cable or wire message at least twenty-four (24) hours before the meeting to each director to his address on file with the Secretary of the Company. The directors may hold their meetings at such place or places, either within or without the State of Alabama, as the board shall designate from time to time. 2 3 SECTION 3. A majority of the directors shall constitute a quorum for the transaction of business at meetings of the board. Subject to the provisions of the Certificate of Incorporation, as amended, vacancies in the board shall be filled by a majority of the directors then in office. A majority of the directors present at any meeting may adjourn the meeting until a later day or hour, or sine die, whether or not a quorum be present. A minute of such adjournment shall be entered on the records by the Secretary, and no further notice thereof shall be necessary. SECTION 4. The Board of Directors may adopt such rules and regulations for the conduct of its meetings and the management of the affairs of the corporation as it may deem proper not inconsistent with these by-laws or the certificate of incorporation and the amendments thereof. SECTION 5. The Board of Directors shall fix and authorize the payment of compensation for all officers of the corporation, including such officers as may be directors of the corporation, for services to the corporation; and shall fix and authorize the payment of compensation and expenses to the directors for services to the corporation, including fees and expenses for attendance at meetings of the board, of the executive committee and of all other committees. SECTION 6. Each Director and officer, whether or not then in office, shall be indemnified by the Corporation against all costs and expenses reasonably incurred by or imposed upon him after February 28, 1949, in connection with or resulting from any action, suit or proceeding to which he may be made a party by reason of his being or having been a Director or officer of the Corporation, except in relation to matters as to which a recovery shall be had against him by reason of his having been finally adjudged in such action, suit or proceeding to have been derelict in the performance of his duties as such Director or officer. SECTION 7. The foregoing right to indemnity shall include reimbursement of the amounts and expenses paid in settling any such action, suit or proceeding, when settling appears to be in the interest of the Corporation, and shall not be exclusive of other rights to which such Director or officer may be entitled as a matter of law. ARTICLE III Officers and Agents SECTION 1. The officers of this corporation shall consist of a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, and a Treasurer. In addition, the Board of Directors of this corporation may, but shall not be required to, elect one or more of the following: Executive Vice President, Senior Vice President, Assistant Vice President, Assistant Secretary, and Assistant Treasurer. In addition, the Board of Directors of this Corporation may, but shall not be required to, elect a Controller. The Chairman of the Board and the President shall be members of the Board of Directors; the other officers may, but need not be Directors. The Chairman of the Board and the President may be the same person, and the Secretary and Treasurer may be the same person; and the Executive Vice President, a Senior Vice President, or a Vice President may also hold the office of Secretary or Assistant Secretary or Treasurer or Assistant Treasurer or Controller, provided, however, that the Chairman of the Board may not also hold the offices of either Executive Vice President, Senior Vice President, or Vice President; that the President may not also hold the office of Executive Vice President, Senior Vice 3 4 President, or Vice President; and that an Executive Vice President, a Senior Vice President, or a Vice President may not hold both the offices of Secretary and Treasurer. Except where otherwise expressly provided in a written contract duly authorized by the Board of Directors, all officers, agents and employees shall be subject to removal at any time by the affirmative vote of a majority of the Directors for the time being in office, and all officers, agents and employees other than officers elected or appointed by the Board of Directors shall also be subject to removal at any time by the officer appointing them. In addition to the powers and duties of the officers of the corporation as set forth in these By-laws and except as otherwise provided in the Certificate of Incorporation, they shall have such authority and shall perform such duties as from time to time may be determined by the Board of Directors. SECTION 2. The Board of Directors shall by resolution duly adopted, designate one of the executive officers of the corporation as the chief executive officer of the corporation and the officer so designated by the Board of Directors shall, subject to the control of the Board of Directors, have general charge and control of the business and affairs of the corporation and shall perform such other duties as may from time to time be assigned to him by the Board of Directors. The designation by the Board of Directors of one of such executive officers other than the Chairman of the Board as the chief executive officer of the corporation shall not affect the duties required to be performed by the Chairman of the Board of the corporation under the provisions of Sections 6 and 8 of Article I of these By-laws. The Chairman of the Board shall preside at all meetings of the stockholders and of the Directors at which he is present, and shall perform such other duties as may, from time to time, be assigned to him by the Board of Directors. SECTION 3. The President shall be the chief operating officer of the corporation. He shall, from time to time, obtain information concerning the affairs and business of the corporation and shall promptly lay such information before the Board of Directors. He shall communicate to the Board of Directors all matters presented by any officer of the corporation for its consideration and shall, from time to time, communicate to the officers such action of the Board of Directors as may, in his judgment, affect the performance of their official duties. He shall have power to appoint and remove all servants, agents and employees of the corporation (other than its officers), and shall perform all such other duties as are incident to the office of President and such specific duties as may, from time to time, be assigned to him by the Board of Directors. In the absence of the Chairman of the Board he shall preside at all meetings of stockholders and at all meetings of the Board of Directors at which he is present. 4 5 SECTION 4. The Chairman of the Board shall in the absence of the President or in case of his inability to act, perform the duties and exercise the authority of the President. Each Vice President may have such title designation, and each Vice President, and the Executive Vice President, if there be one, each Senior Vice President, if there be one or more of them, and each Assistant Vice President, if there be one or more of them, shall perform such duties and exercise such authority as from time to time may be prescribed and conferred by the Board of Directors. SECTION 5. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall keep a record of all their proceedings. He shall give due notices of all meetings of the Stockholders and of the Board of Directors. He shall notify the several officers of the corporation of all action taken at any such meeting concerning matters in their respective departments, and shall transmit to the Treasurer for proper record copies of all contracts and resolutions providing for the payment of money to or by the corporation. He shall procure and keep in his files certified copies of the minutes of all meetings of the stockholders and of the Board of Directors of all companies a majority of whose capital stock is owned by this corporation. He shall be the custodian of the seal of the corporation, of mortgages, leases, and of such other papers and documents as shall be committed to his care by the Board of Directors. He shall have charge of the transfer department and supervision of the transfer of the stocks and of the registration and transfer of the bonds issued by the corporation. He shall have power to affix the seal of the corporation to instruments authorized by the Board of Directors and to attest the same; and shall perform such other duties as shall be assigned to him by the Board of Directors. He shall be sworn to the faithful discharge of his duty. SECTION 6. The Assistant Secretaries shall exercise such of the powers and perform such of the duties of the Secretary as shall be assigned to them by the Secretary or the Board of Directors. Each Assistant Secretary of this corporation be and he hereby is authorized, in the absence or disability of the Secretary, to perform all the duties and exercise all the powers of the Secretary. Any action which in Article I or Article II of these by-laws it is stated shall be taken by or in connection with the Secretary may be taken by or in connection with any Assistant Secretary with the same effect as if he were the Secretary. SECTION 7. The Treasurer is authorized to receive and collect all moneys due to the corporation and to receipt therefor, and to endorse for deposit to the credit of the corporation in depositories designated by the Board of Directors, checks, drafts or vouchers drawn to the order of the corporation or payable to it. He is authorized to pay interest on obligations and dividends on stock when due and payable. He shall cause to be kept in his office true and full accounts of all receipts and disbursements. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements. He shall also perform such other duties as shall be assigned to him by the Board of Directors. SECTION 8. The Controller, if there be one, shall, subject to the Board of Directors, provide and maintain financial and accounting controls over the business and affairs of the Corporation. He shall maintain, among others, adequate records of the assets, liabilities, and financial transactions of the Corporation, and shall direct the preparation of financial statements, reports, and analyses. He shall perform all acts incident to the position of Controller, subject to the control of the Board of Directors, the Chairman, and any Vice President or other executive officer charged by Board of Directors with general supervision of the financial affairs of the 5 6 Corporation. If there shall be no Controller, the duties set out above in this Section 8 shall be performed by the Treasurer. SECTION 9. The Assistant Treasurers shall exercise such of the powers and perform such of the duties of the Treasurer as shall be assigned to them by the Treasurer or by the Board of Directors. Each Assistant Treasurer of this corporation be and he hereby is authorized, in the absence or disability of the Treasurer, to perform all the duties and exercise all the powers of the Treasurer. SECTION 10. In case of the absence or incapacity of any officer of this corporation, the Board of Directors may delegate his powers and duties for the time being to any other officer or to any Director. ARTICLE IV Issue and Transfer of Stock Certificates SECTION 1. The Board of Directors shall provide for issue, transfer and registration of the certificates representing the capital stock of the corporation, and shall appoint the necessary officers, transfer agents and registrars of transfers for that purpose. SECTION 2. Until otherwise ordered by the Board of Directors, stock certificates shall be signed by the President or by a Vice President, and by the Secretary or an Assistant Secretary thereunto authorized by the Board of Directors. SECTION 3. Unless otherwise ordered by the Board of Directors, the signatures on stock certificates of the President, the Executive Vice President or a Vice President and Secretary or Assistant Secretary of the Company may be facsimiles engraved or printed and the corporate seal to be affixed thereto may be a facsimile, engraved or imprinted thereon. In case any officer or officers whose facsimile signatures may be used on any stock certificate cease to be such officer or officers, whether because of death, resignation, or otherwise, before such certificates have been issued, such certificates shall nevertheless be deemed to have been adopted by the corporation and may be countersigned and issued by any transfer agent or registrar as though such person or persons whose facsimile signatures have been used thereon had not ceased to be such officer or officers of the corporation. SECTION 4. Transfers of stock shall be made on the books of the corporation only by order of the person in whose name such stock is registered or by his attorney lawfully constituted in writing, and unless otherwise authorized by the Board of Directors, only upon surrender and cancellation of the old certificate. No new stock certificate shall be issued to a transferee until the transfer has been made on the books of the corporation. SECTION 5. In case any stock certificate shall be lost, by theft or otherwise, or destroyed, the Board of Directors in its absolute discretion may order the issuance of a new certificate in lieu thereof, upon delivery to the corporation of a bond of indemnity satisfactory to the board. SECTION 6. The Board of Directors may fix in advance any period of not more than thirty days preceding any dividend payment date or any date for the allotment of rights, during 6 7 which the stock transfer books shall be closed; or in the event that the Board of Directors shall not have fixed such period, it may fix a date not more than thirty days preceding any dividend payment date or any date for the allotment of rights, as a record date for the determination of the stockholders entitled to receive such dividends or rights, as the case may be; and only stockholders of record on such date shall be entitled to receive such dividends or rights, as the case may be. ARTICLE V Checks - Notes - Drafts - Etc. SECTION 1. Unless otherwise directed by the Board of Directors, all notes, acceptances, checks, drafts and orders for the payment of money shall be signed by the Treasurer, Controller, or an Assistant Treasurer and any one of the following officers of the corporation: Chairman of the Board, President, Executive Vice President, Senior Vice President, any Vice President, Secretary, Treasurer, Controller, Assistant Secretary and Assistant Treasurer. ARTICLE VI General Provisions SECTION 1. All officers, agents and employees, in exercise of the powers conferred and the performance of the duties imposed upon them, by these by-laws or otherwise, shall at all times be subject to the direction, supervision and control of the Board of Directors. SECTION 2. Except as otherwise ordered by the Board of Directors, the Chairman of the Board, the President, the Executive Vice President and each Vice President shall severally have power to execute on behalf of the corporation any deed, bond, indenture, certificate, contract or other instrument, and to cause the corporate seal to be thereto affixed and attested by the Secretary or an Assistant Secretary. SECTION 3. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President or any Vice-President, or such other officer as may be designated by the Board of Directors to act in the absence of the Chairman of the Board, the President or any Vice President, shall have full power and authority on behalf of the corporation to attend and to act and to vote, and to execute a proxy or proxies empowering others to attend and to act and to vote, at any meetings of security holders of any corporation in which the corporation may hold securities, and at such meetings the Chairman of the Board, or such other officer of the corporation, or such proxy shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which as the owner thereof the corporation might have possessed and exercised, if present. The Chairman of the Board, or such other officer of the corporation, or such proxy may also exercise any part or all of such voting and other authority, rights and power through execution of an action by written consent in lieu of a meeting of shareholders. The Secretary or any Assistant Secretary may affix the corporate seal to any such proxy or proxies so executed by the Chairman of the Board, or such other officer, and attest the same. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. 7 8 SECTION 4. Any stockholder, director or officer may waive any notice required to be given to him under these by-laws. SECTION 5. In addition to its principal office in the State of Alabama, the corporation may have an office or offices, either within or without the State. SECTION 6. The corporate seal shall be an impression on wax or paper, circular in form, with the words "Alabama Gas Corporation, Alabama" on the outer margin thereof and bearing on the inner portion the words "Corporate Seal, 1929." SECTION 7. These by-laws may be altered, amended or repealed at any meeting of stockholders, by vote of the holders, present in person or by proxy, of a majority of all of the stock which at the time shall be entitled to vote at elections of directors, or at any meeting of the Board of Directors, by vote of a majority of all the members of the board. 8 EX-10.(C) 5 FORM OF EXECUTIVE RETIREMENT 1 EXHIBIT 10(c) Form Rev. 9/24/97 EXECUTIVE RETIREMENT SUPPLEMENT AGREEMENT THIS EXECUTIVE RETIREMENT SUPPLEMENT AGREEMENT made effective as of between Energen Corporation, a corporation (the "Company"), and (the "Executive"). RECITALS The Executive has been employed by the Company and/or one or more of its subsidiaries for a number of years, and as an employee has provided capable executive leadership and management so as to enable the Company to operate efficiently and effectively. The Company and the Executive desire to enter into this Agreement to provide for payment to the Executive and the Executive's eligible spouse certain deferred compensation in the form of a retirement supplement under certain circumstances. NOW, THEREFORE, in consideration of the mutual promises of the parties and the parties agree as follows: ARTICLE 1--DEFINITIONS 1.1 Agreement: This document, including any attached schedules, and any amendments to the same. 1.2 Birthday: An anniversary of the Executive's birth regardless of whether the Executive survives to such anniversary. 1.3 Cause: Termination of employment by the Employer for "Cause" shall mean TERMINATION based on any of the following: (a) The willful and continued failure by the Executive to substantially perform such Executive's duties with the Employer (other than any such failure resulting from such Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive specifically identifying the manner in which such Executive has not substantially performed such Executive's duties; (b) The engaging by the Executive in willful misconduct which is demonstrably injurious to the Employer monetarily or otherwise; or (c) The conviction of the Executive of a felony. 1.4 Code: The Internal Revenue Code of 1986, as the same may from time to time be amended. 1.5 Committee: The Officers Review Committee of the Board of Directors of the Company or any person or persons appointed by the Board of Directors to administer the Agreement. 2 1.6 Compensation: The sum of A plus B. For purposes of this definition, A shall equal the average aggregate monthly basic pay from all Employers for the 36 consecutive calendar months during which the Executive had the highest average monthly basic pay out of the 60 calendar months immediately preceding the Severance Date. For purposes of this definition, B shall equal C divided by 12, where C equals the average of the Executive's three highest annual cash incentive awards under the Energen Annual Incentive Compensation Plan (or successor annual cash incentive plan) for the five Company fiscal years immediately preceding the earlier of (i) the fiscal year during which the Severance Date occurs or (ii) the fiscal year during which the Executive's 61st birthday occurs. Compensation shall be calculated without reduction for any amounts deferred by the Executive pursuant to the Energen Corporation 1997 Deferred Compensation Plan and without increase for any amounts distributed to the Executive under said Deferred Compensation Plan. 1.7 Disability: Total and permanent disability which entitles the Executive to a disability benefit under the disability program sponsored and/or maintained by the Company or the Executive's Employer. 1.8 Eligibility Date: The earliest date on which the Executive could be entitled to receive the Executive's "primary insurance amount" or any portion thereof under the federal Social Security Act as amended and in effect on the Severance Date assuming that the Executive survives to such date. 1.9 Employer: The Company and any and all subsidiaries of the Company and their respective successors and assigns. 1.10 Lump Sum Election: An election made by the Executive pursuant to Section 2.5 to receive a lump sum payment in lieu of the Supplemental Retirement Benefit. 1.11 Normal Retirement Date: The first day of the month on or next following the Executive's 60th Birthday; provided, however, if the Executive's employment with an Employer continues beyond such date, the first day of the month on or next following the date on which the Executive actually Retires shall be Normal Retirement Date. 1.12 Present Value: The present value of a benefit or benefits determined using (i) the mortality assumptions which would be utilized to determine actuarial equivalent benefits under the Retirement Plan for a participant retiring on the Severance Date and (ii) either the RIP Discount Rate or the Section 280G Discount Rate, as specified below. The "RIP Discount Rate" is the discount rate which would be utilized to determine actuarial equivalent benefits under the Retirement Plan for a participant retiring on the Severance Date. The "RIP Discount Rate" shall be used to determine Present Value under this Plan if the Severance Date results from a termination of the Executive's employment due to death, Disability or Retirement; provided, that the RIP Discount Rate shall not be used in connection with a Retirement if its use will result in a parachute payment for purposes of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). The "Section 280G Discount Rate" is the discount rate used to determine the present value of payments under Section 280G of the Code (or a successor provision of the Code), which rate is in effect at the date payment is to be made. The 280G Rate shall be used to determine Present Value under this Plan in all instances in which the RIP Discount Rate is not applicable. If there is no Section 280G Discount Rate, then the RIP Discount Rate shall be used. In determining whether use of the RIP Discount 2 3 Rate will result in a parachute payment, the Committee may rely on the advice of its tax and/or legal advisors and, upon the request of the Executive, will at the Company's expense obtain an opinion as to such issue from a nationally recognized firm of certified public accountants to be selected by the Committee in its reasonable discretion (if it otherwise qualifies, the Committee may select a firm that is then or has previously been engaged as the Company's independent auditor). 1.13 Retire or Retirement: Termination of employment (for whatever reason including death) from all Employers after attaining age 60. 1.14 Retirement Plan: The "Energen Corporation Retirement Income Plan," as the same may be amended and in effect from time to time hereafter. 1.15 Retirement Plan Benefit: The monthly amount of retirement benefit payable to the Executive from the Retirement Plan in the normal form, with no election of an optional form of payment, calculated under the terms of the Retirement Plan as in effect on the Severance Date and with the following assumptions: (I) the Executive will accrue no Years of Service or partial Years of Service under the Retirement Plan after the Severance Date; (ii) the first payment to the Executive under the Retirement Plan will be made on the first day of the month on or next following the later of the Executive's 60th Birthday or the Severance Date; and (iii) the Executive will live to the payment date described in the preceding clause (ii). 1.16 Service: The number of the Executive's completed months of continuous employment with the Employer ending on the Executive's Severance Date. 1.17 Service Factor: If the Executive has 240 or more months of Service then the Service Factor shall equal one (l). At any time prior to the time when the Executive has both earned a vested benefit under the Retirement Plan and been continuously employed by an Employer for five years, the Service Factor shall be 0. Except as otherwise provided in the foregoing sentences, the Service Factor shall be a fraction, the numerator of which shall be the number of the Executive's months of Service and the denominator of which shall be 240. 1.18 Severance Date: The earlier of (I) the first date on which (for whatever reason) the Executive is no longer employed by an Employer, or (ii) the date of termination of this Agreement pursuant to Article 3. 1.19 Social Security Benefit: The amount of the monthly benefit, as estimated by the Committee in a consistent and uniform manner, which, under the provisions of the federal Social Security Act as amended and in effect on the Severance Date, such Executive is, or will be, entitled to receive as the Executive's "primary insurance amount" or any portion thereof at the later of the Eligibility Date or the Normal Retirement Date assuming (i) that the Executive has or will make appropriate and timely application for such benefit, (ii) that no event has occurred or will occur by reason of which the amount of such benefit has been or will be delayed, suspended or forfeited in whole or in part, (iii) that if the Severance Date occurs prior to the Executive's 60th Birthday, the Executive will continue to receive, until the Executive's 60th Birthday, earnings at the Compensation rate taxable as wages by the Social Security Act, and (iv) that, after the later to occur of the Executive's 60th birthday or Normal Retirement Date, the Executive will have no further earnings taxable as wages by the Social Security Act. 3 4 1.20 Spouse: The spouse to whom the Executive was married at the date of the Executive's death and throughout the twelve-month period preceding the Executive's Severance Date. 1.21 Supplemental Retirement Benefit: The benefit described in Section 2.2. 1.22 Supplemental Spouse's Retirement Benefit: The benefit described in Section 2.3. 1.23 The masculine gender shall be deemed to include the feminine; the feminine to include the masculine; the singular to include the plural; and the plural to include the singular in each case where appropriate. ARTICLE 2 -- BENEFITS 2.1 Eligibility. The Executive and Spouse, as applicable, shall be entitled to the benefits described in Sections 2.2 and 2.3; provided, that no benefits shall be paid under this Agreement if (I) the Executive's employment by an Employer is terminated for Cause, or (ii) the Severance Date occurs for any reason before the Executive has both earned a vested benefit under the Retirement Plan and been continuously employed by an Employer for five years. 2.2 Supplemental Retirement Benefit. Subject to the other provisions of this Agreement, commencing on the Executive's Normal Retirement Date the Executive shall be entitled to receive a Supplemental Retirement Benefit, which shall be payable monthly during the Executive's life with the last payment being the payment made or due for the month in which the Executive dies. No benefit shall be payable under this Section 2.2 if the Executive dies on or before the Normal Retirement Date. The Supplemental Retirement Benefit shall be an amount equal to the product of "A" multiplied by the Service Factor. With respect to Supplemental Retirement Benefit payments made for periods commencing prior to the Eligibility Date, "A" shall equal the amount by which 60% of Compensation exceeds the Retirement Plan Benefit. With respect to Supplemental Retirement Benefit payments made for periods commencing on or after the Eligibility Date, "A" shall equal the amount by which 60% of Compensation exceeds the sum of the Retirement Plan Benefit plus the Social Security Benefit. If the Executive terminates employment due to Disability, (I) the period that the Executive receives disability benefits from a disability program sponsored or maintained by an Employer shall be treated as Service, and (ii) the Supplemental Retirement Benefit shall not commence, and the Executive shall not be deemed to have had a Severance Date, while the Executive is receiving disability benefits payable from a disability program sponsored or maintained by an Employer. For purposes of this Section 2.2, reclassification under the Retirement Plan from Disability Retirement to Retirement shall constitute cessation of disability benefits. 4 5 2.3 Supplemental Spouse's Retirement Benefit. (a) Subject to the other provisions of this Agreement, following the Executive's death the surviving Spouse shall be entitled to a Supplemental Spouse's Retirement Benefit, which shall be payable monthly commencing on the later of (i) the first day of the month following the month of the Executive's death or (ii) the first day of the month of the Executive's 55th Birthday, and continuing until the Spouse's death. The Supplemental Spouse's Retirement Benefit shall be an amount equal to 50% of the monthly Supplemental Retirement Benefit which the Executive would have been entitled to receive had death not occurred (based on Service through the Severance Date and adjusting on the Eligibility Date); provided that if the Executive's death occurs after the Severance Date, for each of the first three months following the Executive's death the Supplemental Spouse's Retirement Benefit shall be 100% of such amount. (b) If the Executive shall die while a Lump Sum Election is in effect and while the Executive is still employed by the Employer, the surviving Spouse shall receive in lieu of the benefit described in Section 2.3(a) above, a lump sum payment equal to one-half of the Present Value of the Supplemental Retirement Benefit which the Executive would have been entitled to receive based on Service through the Severance Date if the Executive had survived to the Normal Retirement Date. Such benefit shall be paid as promptly as practicable after the Executive's death and, in all events, within forty-five (45) days after the Executive's death. For purposes of this Section 2.3(b), the determination of whether a Spouse has survived the Executive shall be made in accordance with the provisions of Section 43-8-43 of the Code of Alabama of 1975, as the same may from time to time be amended (as of the date of this Agreement, Section 43-8-43 generally treats a person as having predeceased a decedent unless the person survives the decedent by five days). (c) If the Executive shall die after the Severance Date, while a Lump Sum Election is in effect, and prior to receipt of the lump sum payment, the lump sum benefit shall be payable to the Executive's estate and no Supplemental Spouse's Retirement Benefit shall be payable to the surviving Spouse, if any. (d) If the Executive dies after payment of a lump sum pursuant to Section 2.5, no Supplemental Spouse's Retirement Benefit shall be payable to the Executive's surviving Spouse, if any. (e) No benefit shall be payable following the Executive's death except as provided in this Section 2.3. 2.4 Spouse's Age. If a Spouse who is entitled to a benefit under this Article 2 is more than ten (10) years younger than the Executive, any benefit payable to the Spouse under Section 2.3(a) (but not 2.3(b)) shall be reduced by 1/20 for each full year of age difference more than ten (10). 2.5 Payment Elections. (a) By checking the appropriate box on the signature page of this Agreement, the Executive may elect to receive, in lieu of the Supplemental Retirement Benefit to which the Executive will otherwise become entitled under Section 2.2 hereof, a lump sum payment 5 6 that is the Present Value, as of the date payment is made, of such Supplemental Retirement Benefit. Such payment shall be made as promptly as practicable after the Executive's Severance Date and, in all events, within forty-five (45) days after such Severance Date. (b) By executing and filing with the Company a form substantially identical to Exhibit I hereof, or such other form as the Company may prescribe or approve, the Executive may revoke an election made pursuant to paragraph (a) above or may make any election which could be made pursuant to such paragraph, but any such election or revocation of an election shall not become effective if the Executive's Severance Date occurs within one year from the date such revocation or election is made. 2.6 Leave of Absence. In the event the Executive is granted a leave of absence, the Executive's employment shall be deemed to continue and shall be treated as Service, during the period of such leave of absence unless specifically determined to the contrary by the Committee. ARTICLE 3 - - AMENDMENT OR TERMINATION OF AGREEMENT 3.1 Subject to Section 3.2 below, the Company reserves the right to terminate this Agreement at any time by action of its Board of Directors or the Committee, and the continuance of this Agreement is not guaranteed to the Executive. 3.2 No termination of this Agreement shall operate to reduce, cancel or void the Company's obligation to pay benefits provided for under this Agreement and accrued prior to the Severance Date. 3.3 This Agreement may be amended by written instrument executed by the Executive and by an officer of the Company thereunto duly authorized by the Board of Directors of the Company. ARTICLE 4 - - MISCELLANEOUS 4.1 This Agreement shall under no circumstances be deemed to have any effect upon the terms or conditions of employment of the Executive. The establishment and maintenance of this Agreement shall not be construed as creating or modifying any contract between an Employer and the Executive nor is it in lieu of any other benefits. This Agreement shall under no circumstances be deemed to constitute a contract of insurance. 4.2 This Agreement shall not give the Executive the right to be retained in the employ of an Employer or any right or interest hereunder other than as specifically provided herein. 4.3 Benefits under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by the Executive or the Spouse and any attempt to so transfer or encumber the benefits shall be null and void. Benefits under this Agreement shall not be subject to or liable for the debts, contracts, liabilities, engagements or torts 6 7 of the Executive or of the Spouse nor may the same be subject to attachment or seizure by any creditor of the Executive or the Executive's spouse under any circumstances. 4.4 In the event of the Executive's Retirement, Disability or death, the Executive or the Executive's Spouse, as the case may be, should notify the Committee promptly, and the Committee will then provide a Claimant's statement form for completion which should be returned to the Committee together with evidence of Disability or with an official death certificate, if applicable. In the event that any claim hereunder is denied, the Committee will provide adequate notice in writing to the Executive or Spouse, setting forth the specific reasons for such denial and, in addition, the Committee will afford a reasonable opportunity for a full and fair review of those reasons. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has hereunto set his/her hand and seal all as of the day and year first above written. ENERGEN CORPORATION By: -------------------------------------- Its: ------------------------------------- EXECUTIVE ----------------------------------------- ELECTION / / I hereby elect to have my benefit paid as provided in Section 2.2 of this Agreement. / / Pursuant to Section 2.5 of this Agreement, I hereby elect to have my benefit paid in a lump sum. 7 8 EXHIBIT I ELECTION PURSUANT TO EXECUTIVE RETIREMENT SUPPLEMENT AGREEMENT I hereby revoke any and all elections heretofore made by me pursuant to the terms of that certain Executive Retirement Supplement Agreement entered into by and between Energen Corporation and myself dated as of , and elect to have my benefit / / paid as provided in Section 2.2 of such Agreement. / / paid in a lump sum pursuant to Section 2.5 of such Agreement. I understand that the foregoing election (and revocation, if applicable), will not become effective if my Severance Date occurs within one-year from the date of acceptance indicated below. ----------------------------------------- EXECUTIVE ----------------------------------------- Accepted by: ENERGEN CORPORATION ----------------------------------------- By: -------------------------------------- Its: ------------------------------------- Date: ------------------------------------ 8 EX-10.(D) 6 FORM OF SEVERANCE 1 Exhibit 10(d) SEVERANCE COMPENSATION AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of the day of , by and between ENERGEN CORPORATION, an Alabama corporation ("Energen"), and , ("Executive"). W I T N E S S E T H: WHEREAS, Executive is an effective and valuable employee of Energen and/or one or more of its subsidiaries; WHEREAS, Executive desires certain assurances with respect to any change in control of Energen; WHEREAS, Energen recognizes that the uncertainties involved in a potential or actual change in control of Energen could result in the distraction or departure of management personnel such as Executive to the detriment of Energen and its shareholders; and WHEREAS, Energen desires to lessen the personal and economic pressure which a potential or actual change in control may impose on Executive and thereby facilitate Executive's ability to bargain successfully for the best interests of Energen's shareholders in the event of such a change in control; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, Energen and Executive hereby agree as follows: Section 1. Definitions. As used in this Agreement the following words and terms shall have the following meanings: (a) "Applicable Period" means the period commencing with the earliest date that a Change in Control occurs and ending on the last day of the thirty-sixth calendar month following the calendar month during which such Change in Control occurred. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs, and if the Date of Termination with respect to Executive's employment with Energen occurs prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change in Control or (ii) otherwise arose in connection with or in anticipation of the Change in Control, then for all purposes of this Agreement the "Applicable Period" shall be deemed to have commenced on the date immediately preceding the Date of Termination. 2 (b) "Cause". Termination of employment by Employer for "Cause" shall mean termination based on any of the following: (1) The willful and continued failure by the Executive to substantially perform Executive's duties with Employer (other than any such failure resulting from Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive specifically identifying the manner in which Executive has not substantially performed Executive's duties; (2) The engaging by Executive in willful misconduct which is demonstrably injurious to Employer monetarily or otherwise; or (3) The conviction of Executive of a felony. (c) "Change in Control" means the occurrence of any one or more of the following: (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13(d)-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of Energen (the "Outstanding Common Stock") or (ii) the combined voting power of the then outstanding voting securities of Energen entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (1) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by Energen or any corporation controlled by Energen shall not constitute a Change in Control; (2) Individuals who, as of September 1, 1998, constitute the Board of Directors of Energen (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of Energen (the "Board of Directors"); provided, however that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Energen's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; (3) Consummation of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets, of Energen (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting 2 3 securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Energen or all or substantially all of Energen's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Energen or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; (4) Any transaction or series of transactions which is expressly designated by resolution of the Board of Directors to constitute a Change in Control for purposes of this Agreement. (d) "Code" means the Internal Revenue Code of 1986, as the same may be from time to time amended. (e) "Compensation" means an amount equal to the sum of (A) plus (B), where (A) is the Executive's annualized base salary in effect immediately prior to the Change in Control, and (B) is the highest annual bonus awarded Executive by Employer pursuant to the Energen Annual Incentive Compensation Plan (or any successor annual cash incentive plan) with respect to the three (3) fiscal years immediately preceding the fiscal year in which the Change in Control occurs. Compensation shall be calculated without reduction for any amounts deferred by the Executive pursuant to the Energen Corporation 1997 Deferred Compensation Plan. (f) "Date of Termination" means the date that a termination of Executive's employment with Employer is first effective. (g) "Disability" means the total and permanent disability which entitles Executive to a disability benefit under a disability program sponsored and/or maintained by Energen. (h) "Employer" means Energen and its Subsidiaries. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (j) "Good Reason" means the occurrence during an Applicable Period of any of the following events without Executive's prior written consent: 3 4 (1) The assignment to Executive by Employer of duties inconsistent with Executive's position, authority, duties, responsibilities and status with Employer immediately prior to a Change in Control, or a change in Executive's titles or offices as in effect immediately prior to a Change in Control, or any removal of Executive from or any failure to reelect Executive to any of such positions, if such assignment, change, or removal results in a diminution in Executive's position, authority, duties, responsibilities or status with Employer immediately prior to a Change in Control or any other action by Employer that results in such a diminution in Executive's position, authority, duties, responsibilities or status; (2) A reduction in Executive's aggregate rate of monthly base pay from the Employer; (3) The termination or material adverse modification of the Energen Annual Incentive Compensation Plan or the Energen Corporation 1996 Long-Range Performance Share Plan (or any other short or long-term incentive compensation plan in effect immediately prior to a Change in Control) without substitution of new short or long-term incentives providing comparable compensation opportunities for Executive. (4) A failure by Employer to use its best efforts to provide Executive with either the same fringe benefits (including retirement benefits and paid vacations) as were provided to Executive immediately prior to a Change in Control or a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to the Change in Control, is substantially comparable in all material respects to the fringe benefits (taken as a whole) in effect prior to a Change in Control; (5) Executive's relocation by Employer to any place more than 25 miles from the location at which Executive performed the substantial portion of Executive's duties prior to a Change in Control, except for required travel by Executive on Employer's business to an extent substantially consistent with Executive's business travel obligations immediately prior to such Change in Control; (6) Any material breach by Energen of any provision of this Agreement or any other agreement between Energen and Executive which breach continues for a period of thirty days following delivery by Executive to Energen of written notice of such breach. (k) "Independent Auditor" means the firm of certified public accountants which at the time of the Change in Control had been most recently engaged by Energen to prepare Energen's audited financial statements, or any other firm of certified public accountants mutually agreeable to Energen and Executive. (l) "Notice of Termination" has the meaning set forth in Section 2(a) of this Agreement. (m) "Qualified Termination" shall mean 4 5 (1) during a Window Period, any termination (including retirement) of Executive's employment, other than for Cause, death or Disability, and (2) during the Applicable Period but not during a Window Period, (i) any termination by Employer of Executive's employment other than for Cause, (ii) a termination of Executive's employment which Executive and Energen agree in writing will constitute a Qualified Termination for purposes of this Agreement, and (iii) a voluntary termination of Executive's employment by Executive for Good Reason. (n) "Subsidiary" means any corporation, the majority of the outstanding voting stock of which is owned directly or indirectly, by Energen. (o) "Window Period" shall mean the 30-day period immediately following the first anniversary of a Change in Control. Section 2. Notice of Termination. During any Applicable Period: (a) Any termination for Cause or Good Reason shall be communicated to the other party by written notice ("Notice of Termination") referencing this Agreement and, indicating in reasonable detail the facts and circumstances providing a basis for such termination. The failure of Executive or Employer to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or Good Reason shall not waive any right of Executive or Energen hereunder or preclude Executive or Energen from asserting or relying upon the omitted fact or circumstance in enforcing Executive's or Energen's rights hereunder. (b) Termination for Cause or Good Reason shall be effective upon delivery of a Notice of Termination or at such later date as may be specified in the Notice of Termination. In the event that each party delivers a Notice of Termination, the Notice of Termination first delivered shall establish the effective date of such Notice of Termination. Section 3. Severance Payment. In the event of a Qualified Termination, then Executive shall, subject to the provisions of Sections 5 and 8 hereof, receive as severance pay an amount equal to his Compensation multiplied by a factor of [1.5 or 2 or 3]. Subject to Section 5 hereof, any severance payment to be made under this Section 3 shall be paid in one payment and in full on or prior to the thirtieth day following the Date of Termination. Section 4. Other Benefits. Subject to Sections 5 and 8 hereof, in the event of a Qualified Termination, for a period of twenty-four months commencing with the Date of 5 6 Termination, Executive and the Executive's family shall continue to be covered at the expense of Energen by the same or substantially equivalent hospital, medical, dental, vision, accident, disability and life insurance coverages as were provided to Executive and the Executive's family by Employer immediately prior to the Change in Control; provided, however, that if Executive becomes employed with another employer and is eligible to receive benefits of the type described above from such other employer, Energen's obligations under this Section 4 and the benefits described herein shall be secondary to those provided by such other employer. Section 5. Certain Further Payments by the Company. (a) In the event that any amount or benefit paid or distributed to the Executive pursuant to any provision of this Agreement, and/or any amounts or benefits otherwise paid or distributed to the Executive by the Employer or any affiliated company including, without limitation, any distribution or payment made pursuant to the terms of the Employer's compensation plans or arrangements (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, Energen shall pay to the Executive at the time specified in Section 5(d) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to Covered Payments, after deduction of any Excise Tax on Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 5(a), but before deduction for any Federal, state or local income or employment tax withholding on Covered Payments, shall be equal to the amount of the Covered Payments. (b) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's Independent Auditor or tax counsel selected by the Independent Auditor, Energen has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount", or such "parachute payments" are otherwise not subject to such Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Auditor in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 6 7 (i) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (ii) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (d) The Tax Reimbursement Payment (or portion thereof) provided for in Section 5(a) above shall be paid to the Executive not later than ten business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, Energen shall pay to the Executive by such date an amount estimated in good faith by the Independent Auditors to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 7872(f)(2)(A) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall be repaid by Executive in accordance with Section 5(f) below. (e) In the event that the Excise Tax is subsequently determined by the Independent Auditors or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to Energen, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 7872(f)(2)(A) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to Energen has been paid or is payable to any Federal, state or local tax authority, repayment thereof shall not be required unless and until actual refund or credit of such portion has been made to the Executive, and interest payable to Energen shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and Energen shall mutually agree upon the course of action to be pursued in connection with a claim for refund or credit by Executive. (f) In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), Energen shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 7 8 Section 6. No Obligation To Seek Further Employment; No Effect on Other Benefits. (a) Executive shall not be required to seek other employment, nor (except as otherwise provided under Section 4 with respect to insurance coverages) shall the amount of any severance payment or other benefit to be made or provided under this Agreement be reduced by any compensation or benefit earned by Executive as the result of employment by another employer after the Date of Termination, or otherwise. (b) Subject to Section 5 hereof, any severance payment or benefit to be made or provided under this Agreement is in addition to all other benefits, if any, to which Executive may be entitled under other agreements, plans or programs of Energen. Section 7. Continuing Obligations of Executive. As a result of and in connection with Executive's employment by Employer, Executive is involved in a number of matters of strategic importance and value to Employer including various projects, proceedings, planning processes, and negotiations. Any number of these matters may be ongoing and continuing after the Date of Termination. In addition Employee is privy to proprietary and confidential information of Employer including without limitation, financial information and projections, business plans and strategies, customer and vendor lists and information, and oil and gas properties and prospects. The Executive agrees as follows: (a) Consulting Services. For a period of three years following the Date of Termination, Executive agrees to fully assist and cooperate with Employer and its representatives (including outside auditors, counsel and consultants) with respect to any matters with which the Executive was involved during the course of employment with Employer, including being available upon reasonable notice for interviews, consultation, and litigation preparation. Except as otherwise agreed by Executive, Executive's obligation under this Section 7 (a) shall not exceed 80 hours during the first year and 20 hours during each of the following two years. Such services shall be provided upon request of Employer but scheduled to accommodate Executive's reasonable scheduling requirements. Executive shall receive no additional fee for such services but shall be reimbursed all reasonable out-of-pocket expenses. (b) Non-Compete. For a period of twelve months following the Date of Termination, the Executive shall not Compete, (as defined below ) or assist others in Competing with the Employer. For purposes of this Agreement, "Compete" means (i) solicit in competition with Alabama Gas Corporation ("Alagasco") any person or entity which was a customer of Alagasco at the Date of Termination, (ii) offer to acquire any local gas distribution system in the State of Alabama; or (iii) offer to acquire any coalbed methane interest in the State of Alabama. Employment by, or an investment of less than one percent of equity capital in, a person or entity which Competes with Employer does not constitute Competition by Executive so long as Executive does not directly participate in, assist or advise with respect to such Competition. (c) Confidentiality. Executive agrees that at all times following the Date of Termination, Executive will not, without the prior written consent of Energen, disclose to any person, firm or corporation any confidential information of Employer which is now known to Executive or which hereafter may become known to Executive as a result of Executive's 8 9 employment or association with Employer, unless such disclosure is required under the terms of a valid and effective subpoena or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. Section 8. Board Resignation. Energen shall have no obligation under Sections 3 and 4 hereof if Executive shall not, promptly after the Date of Termination and upon receiving a written request to do so, resign from each officer and/or director position which Executive then holds with Energen and any Subsidiary. Section 9. Payment of Professional Fees and Expenses. Energen agrees to pay promptly as incurred, to the full extent permitted by law, all legal, accounting and other professional fees and expenses (Professional Fees) which Executive may reasonably incur (i) as a result of any contest (regardless of the outcome thereof) by Energen, Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by Executive about the amount of any payment pursuant to this Agreement); (ii) as a result of any contest by a taxing authority of Executive's tax treatment of any amounts received under this or any other Employer agreement or plan to the extent such tax treatment is consistent with the determinations made by the Independent Auditor under Section 5; or (iii) the filing and pursuit of a claim for refund or credit in connection with Section 5 (e) above; plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. In addition Energen shall promptly pay to Executive an additional amount (the "Tax Coverage Payment") such that the net amount retained by the Participant with respect to all payments made under this Section 9 after deduction of Taxes, shall be equal to the amount of the Professional Fees reimbursement plus applicable interest. For purposes of this Section 9, "Taxes" means all federal, state and local, employment and income taxes payable or withheld with respect to Professional Fees reimbursement payments (excluding interest) and Tax Coverage Payments. The Independent Auditor, at Energen's expense, shall make all calculations with respect to the Tax Reimbursement Payment and in making such calculations shall follow the assumptions set forth in Section 5(c) above. Section 10. Term. This Agreement shall terminate (except to the extent of any unpaid or unfulfilled obligation with respect to a prior termination of Executive's employment) on the first to occur of (i) any termination of Executive's employment with Employer which does not constitute a Qualified Termination or (ii) expiration of the Term. The initial "Term" of this Agreement shall be for a period of three years from the date hereof. On each anniversary of the date hereof, the Term shall automatically extend by one year unless at least thirty days prior to such an anniversary Energen notifies Executive that there will be no such extension, in which event the term shall continue until the later to occur of (i) two years from such anniversary or (ii) three years from the date of the most recent Change in Control, if any. 9 10 Section 11. Binding Effect; Successors. (a) This Agreement shall be binding upon and inure to the benefit of Executive and Executive's personal representative and heirs, and Energen and its successors and assigns including any successor organization or organizations which shall succeed to substantially all of the business and property of Energen, whether by means of merger, consolidation, acquisition of assets or otherwise, including operation of law. Energen will require any such successor to expressly assume and agree to perform Energen's obligations under this Agreement. (b) Without the prior consent of Energen, Executive may not assign the Agreement, except by will or the laws of descent and distribution. Section 12. Notice. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to Energen or Employer: Energen Corporation 605 21st Street North Birmingham, Alabama 35203 Attention: Chairman If to Executive: ------------------------- ------------------------- ------------------------- or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. Section 13. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and Energen. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Alabama. 10 11 Section 14. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Section 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Section 16. Amendment and Restatement of Prior Agreement. This agreement constitutes a complete amendment and restatement and fully supersedes that certain Severance Compensation Agreement between the parties dated , 19 . IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ENERGEN CORPORATION By -------------------------------- Its -------------------------------- EXECUTIVE -------------------------------- 11 EX-10.(E) 7 ENERGEN 1988 STOCK OPTION PLAN 1 Exhibit 10(e) ENERGEN CORPORATION 1988 STOCK OPTION PLAN (AS AMENDED NOVEMBER 25, 1997) The purpose of this Plan is to provide a means whereby Energen Corporation may, through the grant of stock options, stock appreciation rights, and dividend equivalents to key employees, attract and retain persons of ability as employees and motivate such employees to exert their best efforts on behalf of Energen Corporation and its subsidiaries. 1. DEFINITIONS. Unless otherwise indicated, as used herein the following terms shall have the respective meanings set forth below: "Board" means the Board of Directors of Energen Corporation. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Officer Review Committee of the Board consisting of not less than three members appointed by the Board and serving at the Board's pleasure. "Company" means Energen Corporation and any successor corporation by merger or other reorganization. "Expiration Date" means the last day on which an option issued under the Plan may be exercised, as such date may be extended pursuant to Section 5(a). "Fair Market Value" means, (i) with respect to a share of Stock, the closing price of the Stock on the New York Stock Exchange (or such other exchange or system on which the Stock then trades or is quoted) on the most recent trading date preceding the date of payment, cancellation or withholding for which such valuation is made, and (ii) with respect to other consideration means fair market value as may be reasonably determined by the Committee. "Incentive Stock Options" means options granted under the Plan to purchase Stock which at the time of grant qualify as "incentive stock options" within the meaning of Section 422A of the Code. "Key Employees" means those employees (including officers and inside directors) of the Company or any Subsidiary who, in the judgment of the Committee are of special importance to the success or prospects of the Company. "Nonqualified Stock Options" means options granted under the Plan to purchase Stock which are not Incentive Stock Options. "Plan" means this Energen Corporation 1988 Stock Option Plan. "Stock" means the common stock, par value $.01 per share of the Company. 1 2 "Subsidiary" means any corporation which at the time an option is granted under the Plan qualifies as a subsidiary of the Company under the definition of "subsidiary corporation" contained in Section 425(f) of the Code, or any similar provision hereinafter enacted, except that such term shall not include any corporation which is classified as a foreign corporation pursuant to Section 7701 of the Code. "Ten Percent Stockholder" means an individual who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company. 2. SHARES SUBJECT TO THE PLAN. Options may be granted by the Company from time to time to Key Employees to purchase an aggregate of 180,000 shares of Stock, and such amounts of shares shall be reserved for options granted under the Plan (subject to adjustment as provided in Section 5(h)). The shares issued upon exercise of options granted under the Plan may be authorized and unissued shares or shares held by the Company in its treasury. If any option granted under the Plan shall terminate or expire, other than pursuant to Section 5(j), as to any shares, new options may thereafter be granted covering such shares. If any option granted under the Plan shall be cancelled as to any shares pursuant to Section 5(j) (stock appreciation rights), then new options may not thereafter be granted covering such shares. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. Each member of the Committee shall be both a member of the Board who is not eligible to receive any option under the Plan and a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 or any successor rule or regulation. Any vacancy occurring in the membership of the Committee shall be filled by appointment by the Board. The Committee may interpret the Plan, prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan, or for the continued qualification of any Incentive Stock Options granted thereunder and make such other determinations and take such other actions as it deems necessary or advisable, except as otherwise expressly reserved to the Board in the Plan. Without limiting the generality of the foregoing sentence, the Committee may, in its discretion, treat all or any portion of any period during which an optionee is on military or on an approved leave of absence from the Company or a Subsidiary as a period of employment of such optionee by the Company or such Subsidiary as the case may be, for purposes of accrual of his rights under the Plan. Any interpretation, determination or other action made or taken by the Committee shall be final, binding and conclusive. 4. GRANT OF OPTIONS. Subject to the provisions of the Plan, the Committee shall (a) determine and designate from time to time those Key Employees to whom options are to be granted and the number of shares of Stock to be optioned to each employee; (b) authorize the granting of Incentive Stock Options, Nonqualified Stock Options, or combination of Incentive Stock Options and Nonqualified Stock Option; (c) determine the number of shares subject to each option; (d) determine the time or times when and the manner in which each option shall contain a stock appreciation right and/or dividend equivalents; provided, however, that (i) no Incentive Stock Option shall be granted after the expiration of ten years from the effective date of the Plan specified in Section 8, below and (ii) the aggregate fair market value (determined as of the date the option is granted) of the Stock with respect to which Incentive Stock Options are exercisable for the first time 2 3 by any employee during any calendar year (under all plans of the Company and its Subsidiaries) shall not exceed $100,000. 5. TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Plan shall be evidenced by an agreement, in a form approved by the Committee. Such agreement shall be subject to the following express terms and conditions and to such other terms and conditions as the Committee may deem appropriate: (a) Option Period. Each option agreement shall specify the period for which the option thereunder is granted and shall provide that the option shall expire at the end of such period. The Committee may extend such period provided that, in the case of an Incentive Stock Option, such extensions shall not in any way disqualify the option as an Incentive Stock Option. In no case shall such period for an Incentive Stock Option, including any such extensions, exceed ten years from the date of grant, provided, however that, in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, such period, including extensions, shall not exceed five years from the date of grant. (b) Option Price. The option price per share shall be determined by the Committee at the time any option is granted, and shall be not less than (i) the fair market value, or (ii) in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, 110 percent of the fair market value (but in no event less than the par value) of one share of Stock on the date the option is granted, as determined by the Committee. (c) Exercise of Option. No part of any option may be exercised until the optionee shall have remained in the employ of the Company or of a Subsidiary for such period, if any, as the Committee may specify in the option agreement, and the option agreement may provide for exercisability in installments. The Committee shall have full authority to accelerate for any reason it deems appropriate the vesting schedule of all or any part of any option issued under the Plan. (d) Payment of Purchase Price upon Exercise. Each option shall provide that the purchase price of the shares as to which an option shall be exercised shall be paid to the Company at the time of exercise either in cash, in Stock already owned by the optionee having a total Fair Market Value, equal to the purchase price, or a combination of cash and Stock having a total Fair Market Value, equal to the purchase price. In addition the Committee in its discretion may accept such other consideration or combination of other consideration, cash and/or Stock as the Committee shall deem to be appropriate and to have a total Fair Market Value equal to the purchase price. (e) Exercise in the Event of Death or Termination of Employment. If an optionee's employment by the Company or a Subsidiary shall terminate because of the optionee's (i) death, (ii) disability, or (iii) retirement in accordance with the terms of the Company's tax-qualified retirement plans, the optionee's options may be exercised on or prior to the applicable Expiration Dates, but only to the extent that such options were exercisable on the date of such termination. Except as may be otherwise determined by the Committee, if an optionee's employment by the Company or a subsidiary shall terminate for any reason other than those set forth in the preceding sentence, then all unexercised options under the 3 4 Plan held by the optionee (vested or unvested) shall terminate as of the date of termination of employment. Without limiting the generality of Section 5(c), the Committee shall have full authority to accelerate (including retroactively) the vesting schedule of all or any part of any option issued under the Plan and held by an employee who has terminated or plans to terminate his or her employment, such that a terminated employee, his heirs or personal representatives may exercise (at such time or times on or prior to the applicable Expiration Dates as may be specified by the Committee) any part or all of any unvested option under the Plan held by such employee at the date of his or her termination of employment. (f) Nontransferability. Except as may otherwise be provided in this Section 5(f), no option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution and, during the lifetime of the optionee, an option shall be exercisable only by the optionee. The foregoing notwithstanding, the optionee may transfer Nonqualified Stock Options to (i) the optionee's spouse or natural, adopted or step-children or grandchildren (including the optionee, "Immediate Family Members"), (ii) a trust for the benefit of one or more of the Immediate Family Members, (iii) a family charitable trust established by one or more of the Immediate Family Members, or (iv) a partnership in which the only partners are one or more of the Immediate Family Members. Any options so transferred shall not be further transferable except in accordance with the terms of this Plan, shall remain subject to all terms and conditions of the Plan and the applicable option agreement, and may be exercised by the transferee only to the extent that the optionee would have been entitled to exercise the option had the option not been transferred. (g) Investment Representation. Each option agreement may provide that, to the extent reasonably necessary to assure compliance with all applicable securities laws, upon demand by the Committee for such a representation, the optionee (or any person acting under paragraph 5(e)) shall deliver to the Committee at the time of any exercise of an option or portion thereof or settlement of stock appreciation rights or dividend equivalents a written representation that the shares to be acquired upon such exercise are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to the delivery of any shares issued upon exercise of an option and prior to the expiration of the option period shall be a condition precedent to the right of the optionee or such other person to purchase any shares. (h) Adjustments in Event of Change in Common Stock. In the event of any change in the Stock of the Company by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Stock at a price substantially below fair market value, or of any similar change affecting the Stock, the number and kind of shares which thereafter may be optioned and sold under the Plan and the number and kind of shares subject to option in outstanding option agreements and the purchase price per share thereof shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. (i) Incentive Stock Options. Each option agreement which provides for the grant of an Incentive Stock Option to a participant shall contain such terms and provisions as the 4 5 Committee may determine to be necessary or desirable in order to qualify such option as an "incentive stock option" within the meaning of Section 422A of the Internal Revenue Code of 1954, or any amendment thereof or substitute therefor. (j) Stock Appreciation Right. Each option agreement may provide that the optionee may from time to time elect to cancel all or any portion of the option then subject to exercise, in which event the Company's obligation in respect of such option may be discharged by payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value at the time of cancellation of the shares subject to the option or the portion thereof so cancelled over the aggregate purchase price for such shares as set forth in the option agreement, or, if mutually agreed by the Committee and the optionee (i) the issuance or transfer to the optionee of shares of Stock with a Fair Market Value equal to any such excess, or (ii) a combination of cash and shares of Stock with a combined value equal to any such excess. Any such right to elect such cancellation shall be transferrable only by will or by the laws of descent and distribution. During the lifetime of the optionee, such right shall be exercisable only by the optionee. (k) Dividend Equivalents. Each option agreement may provide that upon (i) exercise of all or part of a Nonqualified Stock Option, (ii) cancellation of all or part of such option pursuant to paragraph 5(j), or (iii) the occurrence of an Expiration Date, for no additional consideration, the optionee shall be paid an additional amount equal to the aggregate amount of cash dividends which would have been paid on the shares of Stock purchased upon such exercise or with respect to which such cancellation or expiration occurs, if such shares had been issued and outstanding during the period commencing with the option grant date and ending on the date of option exercise, cancellation or expiration, plus an amount equal to the interest that such dividends would have earned from the respective dividend payment dates if deposited in an account bearing interest, compounded quarterly on each April 1, July 1, October 1 and January 1, at a rate calculated as follows. For purposes of the preceding sentence, the assumed interest rate in effect for a calendar quarter shall be the announced prime rate of AmSouth Bank, N.A. (or such comparable rate of a comparable institution as the Committee may from time to time determine) in effect on the first day of such calendar quarter. Such additional amount shall be paid by cash, or if mutually agreed by the Committee and the optionee, (i) by the issuance of Stock having a Fair Market Value equal to any such excess or (ii) a combination of cash and shares of Stock having a combined Fair Market Value equal to any such excess. (l) Withholding. The Company shall not be required to issue or deliver any certificates for shares of Stock or make any other payment or settlement with respect to the exercise of an option or settlement of stock appreciation rights or dividend equivalents unless arrangements reasonably satisfactory to the Company have been made for all resulting withholding and other tax obligations which are or may become applicable to the Company. Subject to compliance with all applicable securities and tax laws and regulations and provided that such transaction does not fall within the scope of Section 16(b) of the Securities and Exchange Act of 1934, an optionee may satisfy all or any part of the tax withholding obligation arising from the exercise of stock options or the settlement of stock appreciation rights or dividend equivalents under the Plan, by electing to have the Company withhold (from the Stock to be delivered to the optionee upon such exercise or settlement) 5 6 shares of Stock having a Fair Market Value equal to the amount required to be withheld under applicable tax laws. Any election under this Section 5(l) must be made in writing delivered to the Company prior to the date that the amount of tax to be withheld is to be determined and will be irrevocable. (m) No Rights as Shareholder. No optionee shall have any rights as a shareholder with respect to any shares subject to the optionee's option prior to the date of issuance to the optionee of a certificate or certificates for such shares. (n) No Rights to Continued Employment. The Plan and any option granted under the Plan shall not confer upon any optionee any right with respect to continuance of employment by the Company or any Subsidiary or any right to further grants under the Plan, nor shall they interfere in any way with the right of the Company or any Subsidiary by which an optionee is employed to terminate the optionee's employment at any time. 6. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and exercise of options thereunder, and the obligations of the Company to sell and deliver shares under such options, shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Stock prior to (a) the listing of such shares on any stock exchange on which the Stock may then be listed and (b) the completion of any registration or qualification of such shares under any federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. 7. AMENDMENT AND DISCONTINUANCE. The Board of Directors of the Company may from time to time amend, suspend or discontinue the Plan; provided, however, that, subject to the provisions of paragraph 5(h) no action of the Board of Directors or of the Committee may (i) increase the number of shares reserved for options pursuant to Section 2, (ii) permit the granting of any option at the option price less than that determined in accordance with paragraph 5(b), or (iii) permit the granting of options which expire beyond the period provided for in paragraph 5(a). Without the written consent of an optionee, no amendment or suspension of the Plan shall alter or impair any option previously granted to the optionee under the Plan. 8. EFFECTIVE DATE OF THE PLAN. The effective date of the Plan shall be November 23, 1988, the date of its adoption by the Board, subject to approval by shareholders of the Company holding not less than a majority of the shares present and voting at its January 1989 Annual Meeting. Options may be granted under the Plan by the Committee as provided herein prior but subject to such subsequent shareholder approval of the Plan. 9. NAME. The Plan shall be known as the "Energen Corporation 1988 Stock Option Plan." 10. DEFERRAL UNDER 1997 DEFERRED COMPENSATION PLAN. If and to the extent permitted under the Energen Corporation 1997 Deferred Compensation Plan (the "Deferred Compensation Plan), an optionee may elect pursuant to the Deferred Compensation Plan to defer receipt of part or all of shares of Stock and other consideration deliverable to the optionee under this Plan and upon such deferral shall have no further right with respect to such deferred shares or other consideration other than as provided under the Deferred Compensation Plan. In the event of such a deferral election, certificates for such shares of Stock as would have otherwise been issued under the Plan but for the deferral election may at the discretion of the Company be delivered to the Trustee under 6 7 the Deferred Compensation Plan and registered in the name of the Trustee or such other person as the Trustee may direct. Regardless of whether such deferred shares are issued to the Trustee, they shall constitute "issued" shares for purposes of the Plan's maximum number of shares limitation set forth in Section 2. - -------------------------------------------------------------------------------- As adopted November 23, 1988 by the Board of Directors, approved January 25, 1989 by the Shareholders, and subsequently amended September 24, 1997 and November 25, 1997 by the Board of Directors. 7 EX-10.(F) 8 ENERGEN 1992 PERFORMANCE SHARE PLAN 1 EXHIBIT 10(f) ENERGEN CORPORATION 1992 LONG-RANGE PERFORMANCE SHARE PLAN (AS AMENDED EFFECTIVE APRIL 25, 1997) 1. PURPOSE The purpose of the Energen Corporation 1992 Long-Range Performance Share Plan (the "Plan") is to further the long-term growth in profitability of the Corporation by offering long-term incentives in addition to current compensation to those key executives who will be largely responsible for such growth. 2. DEFINITIONS (a) "Award" means Performance Shares awarded to a Participant pursuant to the terms of the Plan. (b) "Award Period" means the 4-year period (Energen fiscal years) commencing with the first day of the fiscal year in which the applicable Award is granted, except as otherwise determined by the Committee at the time of grant and subject to the other provisions of this Plan. (c) "Board of Directors" means the Board of Directors of Energen. (d) "Cause" Termination of employment by the Corporation for "Cause" shall mean termination based on any of the following: (1) The willful and continued failure by a Participant to substantially perform such participant's duties with the Corporation (other than any such failure resulting from such participant's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant specifically identifying the manner in which such Participant has not substantially performed such Participant's duties; (2) The engaging by a Participant in willful, reckless or grossly negligent misconduct which is demonstrably injurious to the Corporation monetarily or otherwise; or (3) The conviction of a Participant of a felony. (e) "Change in Control" means: 1 2 (1) The acquisition by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (excluding for this purpose, any employee benefit plan of Energen or any of its Subsidiaries which acquires beneficial ownership of voting securities of Energen), of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of either the then outstanding shares of Common Stock or the combined voting power of Energen's then outstanding voting securities, in one transaction or a series of transactions; (2) Individuals who, as of November 27, 1991, constitute the Board of Directors (the "Continuing Directors") cease for any reason to constitute at least a majority of the Board of Directors, provided that any person becoming a director of Energen subsequent to November 27, 1991, whose election, or nomination for election by Energen's stockholders, was approved by a vote of at least a majority of the Continuing Directors (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened solicitation with respect to the election or removal of directors of Energen, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be, for purposes of the Plan, considered as though such person were a Continuing Director; (3) (i) The occurrence of a merger, consolidation or reorganization of Energen in which, as a consequence of the transaction, either the Continuing Directors do not constitute a majority of the directors of the continuing or surviving corporation or any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, controls 25% or more of the combined voting power of the continuing or surviving corporation; (ii) the occurrence of any sale, lease or other transfer, in one transaction or a series of transactions, of all or substantially all of the assets of Energen; or (iii) the adoption by Energen of a plan for its liquidation or dissolution. (f) "Chief Executive Officer" means the chief executive officer of Energen. (g) "Committee" means the Officers Review Committee of the Board of Directors or such other committee of two or more directors as may be determined by the Board of Directors, provided that in all events each member of the Committee shall be a "disinterested person" within the meaning of Rule 16b-3(c)(2) under the Exchange Act. (h) "Common Stock" means the Common Stock, par value $0.01 per share, of Energen as such stock may be reclassified, converted or exchanged by reorganization, merger or otherwise. (i) "Corporation" means Energen and its Subsidiaries. (j) "Employee" means any person (including any officer or director) employed by the Corporation on a full-time salaried basis. (k) "Energen" means Energen Corporation, an Alabama Corporation. (l) "Exchange Act" means the Securities Exchange Act of 1934. (m) "Fair Market Value" means the average of the daily closing prices for a share of stock for the 20 trading days ending on the fifth business day prior to the date of payment of Performance 2 3 Shares for an Award Period or an Interim Period, as the case may be, on the Composite Tape for the New York Stock Exchange -- Listed Stocks, or, if the stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on which the stock is listed, or, if the stock is not listed on any such Exchange, the average of the daily closing bid quotations with respect to a share of the stock for such 20 trading days on the National Association of Securities Dealers, Inc., Automated Quotations System or any system then in use, or, if no such quotations are available, the fair market value of a share of stock as determined by a majority of the Board of Directors; provided, however that if a Change in Control shall have occurred, then such determination shall be made by a majority of the Continuing Directors. (n) "Interim Period" means a 1, 2 or 3 year period within an Award Period for which the Committee determines that there shall be Interim Periods. (o) "Officer" means any Employee of the Corporation who is an "officer" of the Corporation within the meaning of Rule 16a-l(f) under the Exchange Act as well as any Employee who has an officer title with the Corporation. (p) "Participant" means an Employee who is selected by the Committee to receive an Award under the Plan. (q) "Performance Share" means the equivalent of one share of Common Stock. (r) "Qualified Termination" means termination of a Participant's employment with the Corporation which is: (i) An involuntary termination by the Corporation other than for Cause; (ii) Expressly agreed in writing by the Participant and the Corporation to constitute a Qualified Termination for purposes of this Plan; (iii) A result of the death, Disability or Retirement of the Participant; (iv) A voluntary termination by the Participant for Good Reason. The term "Good Reason" means with respect to an Award and a Participant, the occurrence subsequent to the grant of such Award of (A) a reduction in the Participant's aggregate rate of monthly base pay from the Corporation or (B) the termination or materially adverse modification of the Energen Annual Incentive Compensation Plan without substitution of new short-term incentives providing comparable compensation opportunities for the Participant. (s) "Subsidiary" means any corporation, the majority of the outstanding voting stock of which is owned, directly or indirectly, by Energen. 3 4 3. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Committee. No member of the Committee shall be eligible to participate in the Plan while serving as a member of the Committee. Subject to the provisions of the Plan, the Committee shall have the exclusive authority to select the Employees who are to participate in the Plan, to determine the Award to be made to each Employee selected to participate in the Plan, and to determine the conditions subject to which Awards will become payable under the Plan; provided, however, that, subject to the provisions of Section 5(a) hereof, the Committee may delegate to the Chief Executive Officer the authority to select and make Awards to certain Employees. The Committee shall have full power to administer and interpret the Plan and to adopt such rules and regulations consistent with the terms of the Plan as the Committee deems necessary or advisable in order to carry out the provisions of the Plan. Except as otherwise provided in the Plan, the Committee's interpretation and construction of the Plan and of any conditions applicable to Performance Share Awards shall be conclusive and binding on all persons, including the Corporation and all Participants. The Plan shall be unfunded. Benefits under the Plan shall be paid from the general assets of the Corporation. 4. PARTICIPATION Subject to the provisions of Section 5(a) hereof, Participants in the Plan shall be selected by the Committee or the Chief Executive Officer from those Employees of the Corporation, who, in the estimation of the Committee or the Chief Executive Officer, have an opportunity to influence the long-term profitability of the Corporation. 5. PERFORMANCE SHARE AWARDS (a) The Committee, or the Chief Executive Officer upon delegation of authority by the Committee, may from time to time select employees to receive Awards under the Plan. An Employee may be granted more than one Award under the Plan. In its discretion at the time of grant, the Committee may determine that an Interim Period or Interim Periods should be established for payment with respect to Awards. Whenever Interim Periods are established, the terms and conditions with respect to payment after the end of such Interim Period shall be those set by the Committee. The Committee shall make all Awards to Officers. The Committee may, in its discretion, authorize a total number of Performance Shares to be awarded to non-Officer Employees and delegate to the Chief Executive Officer the authority to select such Employees, to determine the number of Performance Shares to be awarded to such Employees and to establish Interim Periods with respect to Awards to such Employees. The Chief Executive Officer shall promptly make a written report to the Committee setting forth the name and positions of the Employees receiving such Awards and the number of Performance Shares awarded to each such employee. 4 5 (b) An Award shall not entitle a Participant to receive any dividends or dividend equivalents on Performance Shares; no Participant shall be entitled to exercise any voting or other rights of a stockholder with respect to any Award under the Plan; and no Participant shall have any interest in or rights to receive any shares of Common Stock prior to the time when the Committee determines the form of payment of Performance Shares pursuant to Section 6. (c) Payment of an Award to any Participant shall be made in accordance with Section 6 and shall be subject to such conditions for payment as the Committee may prescribe at the time the Award is made. (d) Each Award shall be made in writing and shall set forth the terms and conditions set by the Committee for payment of such Award. 6. PAYMENT OF PERFORMANCE SHARE AWARDS Each Participant granted an Award shall be entitled to payment on account thereof as of the close of the Award Period applicable to such Award, but only if the Committee has determined that the conditions for payment of the Award set by the Committee have been satisfied. Participants granted Awards with Interim Periods shall be entitled to partial payment on account thereof as of the close of the Interim Period, but only if the Committee has determined that the conditions for partial payment of the Award set by the Committee have been satisfied. Performance Shares paid to a Participant for an Interim Period need not be repaid to the Corporation, notwithstanding that, based on the conditions set for payment at the end of the Award Period, such Participant would not have been entitled to payment of any portion of such Award. Any Performance Shares paid to a Participant for the Interim Period during an Award Period shall be deducted from the Performance Shares to which such Participant is entitled at the end of the Award Period. At the time it determines whether the conditions for payment have been satisfied, the Committee, in its discretion, shall determine whether the Awards will be paid all in cash, or in some combination of cash and shares of Common Stock, except and provided that the Committee must pay in cash an amount equal to the federal, state and other taxes which the Corporation is required to withhold, and further provided that payment in shares of Common Stock shall be subject to the aggregate share limitation set forth in Section 11. The Corporation shall deduct from the cash portion of all Awards any federal, state and other taxes required by law to be withheld with respect to such Awards. Payment of Awards shall be made by the Corporation as promptly as possible after the determination by the Committee that payment has been earned and upon a date fixed by the Committee to permit calculation of Fair Market Value of the Common Stock. The portion of the Award paid in Common Stock shall be equal to the number of Performance Shares being paid in Common Stock, and the balance shall be an amount of cash equal to the Fair Market Value of the remaining Performance Shares to be paid. Notwithstanding the other provisions of this Plan, a Participant may elect pursuant to the Energen Corporation 1997 Deferred Compensation Plan to defer payment of an Award and upon such deferral shall have no further right with respect to such deferred Award other than as provided under said Deferred Compensation Plan. In the event of such an election, any Awards or portions of Awards 5 6 which become payable to the Participant and which are subject to such deferral election, may at the discretion of the Company be paid to the Trustee under such Deferred Compensation Plan in the form of Common Stock and/or cash as determined from time to time by the Company, which Common Stock shall be registered in the name of the Trustee or such other person as the Trustee may direct. Regardless of whether such deferred Common Stock or cash is delivered to the Trustee, such deferred Awards shall count against the maximum number of Performance Shares awardable under the Plan pursuant to Section 11. Furthermore any such shares of Common Stock delivered to the Trustee shall count against the maximum number of shares of Common Stock which may be issued under the Plan pursuant to Section 11. 7. TERMINATION OF EMPLOYMENT Except in the case of a Qualified Termination if, prior to the close of the Award Period with respect to an Award, a Participant's employment terminates, then any unpaid portion of such Participant's Award shall be forfeited. In the case of a Qualified Termination, the Participant shall remain entitled to payout of any outstanding Awards at the end of the applicable Award Period in accordance with the terms of this Plan including without limitation applicable performance conditions. 8. CONSULTING, NON-COMPETE AND CONFIDENTIALITY A Participant's entitlement, if any, to payout of Awards subsequent to termination of employment shall continue so long as the Participant is in compliance with the following requirements. Failure to comply shall result in forfeiture of all then outstanding Awards. (a) Consulting Services. For a period of three years following the termination of the Participant's employment with the Corporation ("Date of Termination"), Participant will fully assist and cooperate with Corporation and its representatives (including outside auditors, counsel and consultants) with respect to any matters with which the Participant was involved during the course of employment with Corporation, including being available upon reasonable notice for interviews, consultation, and litigation preparation. Except as otherwise agreed by Participant, Participant's obligation under this Section 8(a) shall not exceed 80 hours during the first year and 20 hours during each of the following two years. Such services shall be provided upon request of the Corporation but scheduled to accommodate Participant's reasonable scheduling requirements. Participant shall receive no additional fee for such services but shall be reimbursed all reasonable out-of-pocket expenses. (b) Non-Compete. For a period of twelve months following the Date of Termination, the Participant shall not Compete, (as defined below) or assist others in Competing with the Corporation. For purposes of this Agreement, "Compete" means (i) solicit in competition with Alabama 6 7 Gas Corporation ("Alagasco") any person or entity which was a customer of Alagasco at the Date of Termination; (ii) offer to acquire any local gas distribution system in the State of Alabama; or (iii) offer to acquire any coalbed methane interest in the State of Alabama. Employment by, or an investment of less than one percent of equity capital in, a person or entity which Competes with the Corporation does not constitute Competition by Participant so long as Participant does not directly participate in, assist or advise with respect to such Competition. (c) Confidentiality. Participant agrees that at all times following the Date of Termination, Participant will not, without the prior written consent of Energen, disclose to any person, firm or corporation any confidential information of Corporation which is now known to Participant or which hereafter may become known to Participant as a result of Participant's employment or association with Corporation, unless such disclosure is required under the terms of a valid and effective subpoena or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. 9. Deleted 10. Deleted 11. LIMITATION ON AWARDS The maximum number of Performance Shares which may be awarded under the Plan shall not exceed an aggregate of 500,000 (except as adjusted in accordance with Section 17) and no more than an aggregate of 350,000 shares of Common Stock (similarly adjusted in accordance with Section 17 shall be issued in payment of Performance Share Awards, the remainder being payable in cash. Any Performance Shares awarded under the Plan which are not payable upon expiration or termination of the applicable Award Period, for whatever reason, shall thereupon become available again for award under the Plan. 12. TERM OF THE PLAN The Plan shall be effective October 1, 1991, subject to the approval of the Plan by the stockholders of Energen at the Annual Meeting of Stockholders to be held January 22, 1992. Awards may be granted under the Plan by the Committee prior but subject to such stockholder approval. The Board of Directors may terminate the Plan at any time. If not sooner terminated, the Plan terminates on the date on which all of the Performance Shares subject to award under the Plan have been paid, but no 7 8 grant of Awards may be made after September 30, 2001. No such termination shall adversely affect any right or obligation with respect to an Award theretofore made. 13. CANCELLATION OF PERFORMANCE SHARES With the written consent of a Participant holding Performance Shares granted to such Participant under the Plan, the Committee may cancel such Performance Shares. In the event of any such cancellation, all rights of the former holder of such cancelled Performance Shares in respect of such cancelled Performance Shares under the Plan or otherwise shall terminate. 14. NO ASSIGNMENT OF INTEREST The interest of any person in the Plan shall not be assignable, either by voluntary assignment or by operation of law, and any assignment of such interest, whether voluntary or by operation of law, shall render the Award void. Amounts payable under the Plan shall be transferable only by will or by the laws of descent and distribution. 15. EMPLOYMENT RIGHTS An Award made under the Plan shall not confer any right on the Participant to continue in the employ of the Corporation or limit in any way the right of the Corporation to terminate such Participant's employment at any time. 16. EXPENSES The expenses of administering the Plan shall be borne by the Corporation. 17. DILUTION AND OTHER ADJUSTMENTS If Energen shall at any time issue any shares of Common Stock (i) in subdivision of outstanding shares of Common Stock, by reclassification or otherwise, or (ii) for a stock dividend, the number of Performance Shares which previously have been awarded to Participants and which may be awarded under the Plan shall be increased proportionately; and in like manner, in case of any combination of shares of Common Stock, by reclassification or otherwise, the number of Performance Shares which previously have been awarded to Participants and which may be awarded under the Plan shall be reduced proportionately. If Energen shall at any time declare and pay an extraordinary dividend in cash or property (other than a stock dividend with respect to the Common Stock referred to in clause (ii), above), the number of Performance Shares which previously have been awarded to Participants shall be increased in such manner as the Committee shall determine 8 9 to be fair under the circumstances of such extraordinary dividend; provided, however, that if a Change in Control shall have occurred, such determination shall be made by a majority of the Continuing Directors. 18. CHANGE IN CONTROL The other provisions of the Plan notwithstanding, (i) the Committee is authorized to specify such procedures as it may deem appropriate in connection with a Change in Control of Energen, including without limitation acceleration of payment of part or all of outstanding Awards, the establishment and funding of a trust to be held for the payment of Awards following such Change in Control, and the modification of performance conditions applicable to outstanding Awards and (ii) all Award payments made subsequent to a Change in Control shall be paid in cash. 19. AMENDMENT OF THE PLAN The Board of Directors may amend or suspend the Plan at any time. No such amendment or suspension shall adversely affect any right or obligation with respect to an Award theretofore made, including, without limitation, the right to receive payment of Awards in accordance with Section 18 and procedures adopted thereunder (subject, however, to the right of the Committee to amend or suspend such Section 18 procedures prior to the occurrence of a Change in Control). - -------------------------------------------------------------------------------- As adopted November 27, 1991 by the Energen Corporation Board of Directors with approval January 22, 1992 by the shareholders and subsequently (i) amended September 25, 1996 by the Board, with approval January 26, 1997 by the shareholders, and (ii) amended April 25, 1997 by the Board. 9 EX-10.(H) 9 ENERGEN 1997 DEFERRED COMPENSATION PLAN 1 EXHIBIT 10(h) ENERGEN CORPORATION 1997 DEFERRED COMPENSATION PLAN (As amended September 23, 1998) Energen Corporation, an Alabama corporation, hereby establishes the Energen Corporation 1997 Deferred Compensation Plan, effective as of April 25, 1997, in order to provide deferred compensation to directors and certain key employees of Energen Corporation and its affiliated companies. The purpose of the Energen Corporation Deferred Compensation Plan is to assist Energen Corporation and its affiliated companies in retaining directors and key employees, encouraging their long term commitment to the company's success, and attracting new directors and key employees by offering them an opportunity to defer compensation and participate in the success of Energen Corporation and its affiliated companies, and allowing them to share in increases in the value of Energen Corporation. ARTICLE I. DEFINITIONS Section 1.1 Definitions. When used in this document with initial capital letters, the following terms have the meanings indicated unless a different meaning is plainly required by the context: (a) "Account" or "Accounts" means the account or accounts established and maintained for a Participant pursuant to Article IV of the Plan. A Participant's Account shall consist of the Participant's Investment Account and the Participant's Company Stock Account. (b) "Alagasco" means Alabama Gas Corporation, a subsidiary of Energen Corporation. (c) "Allocation Request Form" means such form or forms as may be approved by Energen from time to time for use by a Participant to request (i) an allocation of certain deferred compensation and/or an allocation or reallocation of the Participant's Investment Account among available investment options pursuant to Section 7.2(c), (ii) that certain deferred compensation be allocated to the Participant's Company Stock Account pursuant to Section 7.1(g); and/or (iii) diversification of part or all of the Company Stock Account pursuant to Section 7.1(h). (d) "Basin" means Basin Pipeline Corporation, a subsidiary of Energen Corporation. (e) "Board of Directors" means the Board of Directors of Energen Corporation. 1 2 (f) "Cash Compensation" means any one or more of the following items of compensation: (i) Base salary; (ii) Awards under the Energen Corporation Annual Incentive Compensation Plan (or any successor plan), as amended from time to time; (iii)Awards under the Energen Corporation Salaried Employee Incentive Compensation Plan (or any successor plan), as amended from time to time; and (iv) Director fees including retainer, meeting, committee, and other fees payable to a Director for service in such capacity. (g) "Change in Control" means: (1) The acquisition by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (excluding for this purpose, any employee benefit plan of Energen or any of its 'subsidiaries" which acquires beneficial ownership of voting securities of Energen), of beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of 50% or more of either the then outstanding shares of Common Stock or the combined voting power of Energen's then outstanding voting securities, in one transaction or a series of transactions; or (2) Individuals who, as of April 25, 1997, constituted the Board of Directors (the "Continuing Directors") cease for any reason to constitute at least a majority of the Board of Directors, provided that any person becoming a director of Energen subsequent to April 25, 1997, whose election, or nomination for election by Energen's stockholders, was approved by a vote of at least a majority of the Continuing Directors (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened solicitation with respect to the election or removal of directors of Energen, as such terms are used in Rule 14a-11 of Regulation 14A under the Securities Exchange Act of 1934) shall be, for purposes of the Plan, considered as though such person were a Continuing Director; or (3) (i) The occurrence of a merger, consolidation or reorganization of Energen in which, as a consequence of the transaction, either the Continuing Directors do not constitute a majority of the directors of the continuing or surviving corporation or any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, controls 50% or more of the combined voting power of the continuing or surviving corporation; (ii) the occurrence of any sale, lease or other transfer, in one transaction or a series of transactions, of all or substantially all of the assets of Energen; or (iii) the adoption by Energen of a plan for its liquidation or dissolution. 2 3 For purposes of this definition of "Change in Control," the term "subsidiary" means any corporation, the majority of the outstanding voting stock of which is owned, directly or indirectly, by Energen. (h) "Code" means the Internal Revenue Code of 1986, as amended. (i) "Common Stock" means the Common Stock, par value $0.01 per share, of Energen Corporation as such stock may be reclassified, converted or exchanged by reorganization, merger or otherwise. (j) "Company Stock Account" means an account established and maintained for a Participant as a record of the Participant's hypothetical investments in shares of Common Stock. (k) "Deferral Election Form" means such the form or forms as may be approved by Energen from time to time for use by a Participant to elect to defer compensation under the Plan. (l) "Director" means a member of the board of directors of a Participating Employer. (m) "Disability" means the total and permanent disability of a Participant which entitles the Participant to a disability benefit under a disability program sponsored or maintained by the Participant's Participating Employer; provided, that if no such program is applicable to the Participant, then "Disability" with respect to such Participant means that, based on medical evidence reasonably satisfactory to Energen, the Participant is totally and permanently unable to engage in any occupation or gainful employment for which the Participant is reasonably suited by background, training, education or experience. (n) "Discretionary Amount" means amounts credited to a Participant's Account pursuant to Section 4.4. (o) "Distributable Event" means an event identified as such in Section 6.1. (p) "EGN" means EGN Services, Inc., a subsidiary of Energen Corporation. (q) "Energen" means Energen Corporation, an Alabama corporation. (r) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 3 4 (s) (i) "Fair Market Value Average", (ii) "Fair Market Value Close", and (iii) "Fair Market Value Twenty" mean respectively: (i) the average of the high and low sales prices on the Composite Tape for the New York Stock Exchange - Listed Stocks ("NYSE composite") for the Common Stock on a specified date, (ii) the closing sales price of the Common Stock on the NYSE composite for a specified date, and (iii) the twenty day average high and low sales prices for the Common Stock on the NYSE composite for the twenty business days ending on a specified date. In the event that the Common Stock is not traded on the NYSE, the Officers Review Committee, in its reasonable discretion, shall specify appropriate alternative measures of Common Stock value. (t) "Heat Tech, Inc." means American Heat Tech, Inc., a subsidiary of Energen Corporation. (u) "Investment Account" means an account established and maintained for a Participant as a record of the Participant's hypothetical investments in available investment options. (v) "Midtown NGV" means Midtown NGV, Inc., a subsidiary of Energen Corporation. (w) "Officer" means an officer of a Participating Employer elected to such position by the board of directors of such Participating Employer. (x) "Officers Review Committee" means the Officers Review Committee of the Board of Directors or such other person or persons as may be designated by the Board of Directors to act on behalf of the Board of Directors in the administration of the Plan. (y) "Participant" means an individual identified as such under Article III of the Plan. (z) "Participating Employer" means any employer participating in the Plan pursuant to Article II of the Plan. (aa) "Plan" means the Energen Corporation 1997 Deferred Compensation Plan, as of its original effective date, including any amendments thereto, which is maintained by Energen and its affiliated companies primarily for the purpose of providing financial incentives for directors and certain key employees of Energen and its affiliated companies. 4 5 (bb) "Qualifying Compensation" means items of compensation which either: (i) first become payable in a calendar year subsequent to the calendar year of the applicable election for services rendered during periods of service subsequent to the date of such election; or (ii) first become payable and determinable in amount during a calendar year subsequent to the calendar year of the applicable election and at least 180 days subsequent to the date of such election. The foregoing notwithstanding, with respect to an election made within thirty days of the effective date of the Plan, "Qualifying Compensation" means items of Compensation which either (i) first become payable subsequent to the date of the applicable election for services rendered during periods of service subsequent to the date of such election; or (ii) first become payable and determinable in amount subsequent to the date of the applicable election. (cc) "stock Compensation" means any one or more of the following items of compensation: (i) Awards under the Restricted Stock Incentive Plan of Energen Corporation, as amended; (ii) Awards under the Energen Corporation 1992 Long-Range Performance Share Plan, as amended from time to time; (iii)Annual or elective grants under the Energen Corporation 1992 Directors Stock Plan, as amended from time to time; (iv) Grants under the Energen Corporation 1988 Stock Option Plan, as amended from time to time; and (v) Awards under the Energen Corporation 1997 Stock Incentive Plan, as amended from time to time. (dd) "Taurus" means Taurus Exploration, Inc., a subsidiary of Energen Corporation. (ee) "Taurus USA" means Taurus Exploration USA, Inc., a subsidiary of Taurus. 5 6 (ff) "Trust" means the trust described in Section 12.4. The Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan. Participants and their beneficiaries shall have no beneficial ownership interest in any assets of any such Trust. (gg) "Trustee" means the corporation or person or persons selected by Energen to serve as Trustee for the Trust. (hh) "Vested" means an interest in the benefit described under the Plan which may be payable to or on behalf of the Participant in accordance with the terms of the Plan. ARTICLE II. PARTICIPATING EMPLOYERS Section 2.1 Eligibility. To be eligible to adopt and participate in the Plan, an employer must be a member of the "controlled group" of corporations, within the meaning of Section 414 of the Code, that includes Energen and must be determined to be eligible to participate in the Plan by Energen. The corporations which are eligible to participate in this Plan as of April 25, 1997, are Energen, Alagasco, Taurus, Taurus USA, Basin, EGN, Heat Tech, and Midtown NGV. Section 2.2 Participation Reimbursements. Energen, the sponsor of the Plan, Alagasco, Taurus, Taurus USA, Basin, EGN, Heat Tech and Midtown NGV are Participating Employers in the Plan effective as of April 25, 1997. Any other affiliated company that is or becomes eligible to adopt the Plan and become a Participating Employer pursuant to Section 2.1 of the Plan may, with the approval of the Board of Directors by resolution of the Board of Directors, adopt this Plan and become a Participating Employer in the Plan. The date on which such eligible company may become a Participating Employer in the Plan shall be stated in the resolutions of the Board of Directors. Each of the Participating Employers agree to make payments of their allocable portion of the benefits provided under the Plan to their respective employee and Director Participants. Energen hereby guarantees the performance by each of the other Participating Employers of their respective obligations under the Plan. Neither the respective benefit payment obligations of the Participating Employers nor Energen's guarantee of performance is secured in any way. Such obligations and guarantee constitute no more than unfunded and unsecured promises of payment and performance. Each Participating Employer, other than Energen, shall reimburse Energen for its allocable share of costs and expenses paid by Energen in connection with the operation and administration of the Plan, and shall reimburse Energen for any benefits paid by Energen under the Plan to Participants to the extent allocable to such Participating Employer and its Participants. Payments made to Participants by the Trust shall constitute payments by Energen and Energen shall be reimbursed for such payments by the appropriate Participating Employers. Section 2.3 Recordkeeping and Reporting. Each Participating Employer, other than Energen, shall furnish to Energen the information with respect to each of its Participants necessary to enable Energen to maintain records sufficient to determine the benefits (and the compensation 6 7 sources of such benefits) which may become payable to or with respect to such Participants and to give those Participants any reports which may be required under the terms of the Plan or by law. Section 2.4 Termination of Participation. A Participating Employer, other than Energen, may withdraw from participation in the Plan at any time by providing Energen with 30 days advance written notice of such withdrawal from participation and the effective date of such Participating Employer's withdrawal, which 30-day notice period may be waived by Energen. In addition, Energen may terminate a Participating Employer's participation in the Plan by providing such Participating Employer with 30 days advance written notice, which 30-day notice period may be waived by the Participating Employer. A Participating Employer which terminates its participation in the Plan shall remain obligated under the Plan with respect to deferrals made prior to such termination by its Participants (including subsequent investment performance adjustments), unless otherwise expressly agreed by Energen with Energen fully assuming such obligations. Section 2.5 Separate Accounting. Energen shall establish and maintain separate Accounts for each of the Participating Employers and their respective Participants. Such separate accounting is intended to comply with Section 404(a)(5) of the Code and Section 1.404(a) - 12 of the Treasury Regulations (which provide that an employer can deduct the amounts contributed to a nonqualified plan in the taxable year in which an amount attributable to the contribution is includable in the gross income of employees participating in the plan, but, in the case of a plan in which more than one employee participates only if separate accounts are maintained for each employee). ARTICLE III. ELIGIBILITY AND PARTICIPATION Section 3.1 Eligibility. Each Director and each Officer of a Participating Employer shall be eligible to participate in the Plan effective as of the later of the effective date of the Plan or the date on which such individual first becomes a Director or Officer. In addition, the Officers Review Committee may by express action designate other management level or highly compensated employees of the Participating Employers as eligible to participate in the Plan. If the Officers Review Committee designates a management level or highly compensated employee as eligible to become a Participant in the Plan, Energen shall inform the employee in writing of such designation and the date on which the employee shall become a Participant in the Plan. Section 3.2 Participation. An individual eligible to participate in the Plan shall become a Participant upon the filing with Energen of a completed Deferral Election Form and acceptance of such form by Energen. The name of each individual eligible to participate in the Plan and the date on which such individual becomes a Participant in the Plan, shall be recorded on Exhibit A, which exhibit is attached hereto and incorporated herein by reference and which shall be revised by Energen from time to time to reflect the operation of the Plan. Once an individual becomes a Participant in the Plan, the individual shall remain a Participant until the benefits which may be payable to the individual under the Plan have been distributed to or on behalf of the individual. 7 8 Section 3.3 Suspension of Eligibility. The Officers Review Committee (or the Board of Directors if the affected Participant is a Director) may in its discretion determine that a Participant will no longer be eligible to participate in the Plan and in such event, the Participant's Section 4.1 compensation deferral election will immediately terminate and no additional amounts shall be credited to his or her Accounts under Sections 7.1(a), (b), (c) and 7.2(a) until such time as the individual is again determined to be eligible to participate in the Plan by the Officers Review Committee (or Board of Directors as appropriate) and makes a new Section 4.1 election. However, the Account of such Participant shall continue to be adjusted by the other provisions of Sections 7.1 and 7.2 until fully distributed. ARTICLE IV. BENEFITS Section 4.1 Deferred Compensation. A Participant may elect to defer receipt of part or all of any one or more items of Cash Compensation and/or Stock Compensation. A Participant may defer an item of compensation only to the extent that the Participant is entitled to receive such item of compensation. Upon such deferral, the Participant will have no further right to such deferred compensation other than as provided under the Plan. Such deferred compensation shall be the record of the value of such deferred compensation credited to a Participant's Account and shall be used solely for accounting purposes. Section 4.2 Form and Effectiveness of Deferral Election. Elections to defer compensation under the Plan shall be made in writing on the Deferral Election Form. Such elections may be revised or terminated by the making of a new deferral election on the Deferral Election Form. Deferral elections (including revisions or terminations of prior elections) shall be effective for Qualifying Compensation (subject to the last sentence of this section). Notwithstanding the other provisions of this Plan, a Participant's Deferral Election Form and the various elections and selections made thereon (excepting elections to terminate deferral of one or more items of compensation), shall not become effective unless acceptance thereof by Energen in its sole discretion is acknowledged in writing. A Participant's election to terminate a prior compensation deferral election shall be effective upon delivery to Energen and shall be accepted and honored by the Participating Employers with respect to Qualifying Compensation (subject to the following sentence). An election to reduce or terminate a prior election to defer an item of compensation shall in no event be effective with respect to compensation for services rendered during a period of service commencing prior to the date of such election. Section 4.3 Participant Accounts. A Company Stock Account and an Investment Account shall be established and maintained for each Participant. The Company Stock Account shall be measured in shares of Common Stock and the Investment Account shall be measured in dollars. The Company Stock Account shall be credited as described in Section 7.1 for deferred amounts attributable to (i) Stock Compensation and (ii) such amounts of Cash Compensation as may be 8 9 allocated to the Company Stock Account pursuant to Section 7.1(g). The Investment Account shall be credited as described in Section 7.2 for any deferred amounts of Cash Compensation which are not allocated to the Company Stock Account pursuant to Section 7.1(g). Section 4.4 Discretionary Amounts. In addition to amounts deferred by a Participant, the Board of Directors may from time to time, in its sole discretion, authorize a Participant's Participating Employer to credit the Participant's Company Stock Account with additional amounts (denominated in dollars). Such additional amounts may be authorized for such purpose or purposes as the Board of Directors may deem appropriate, including, without limitation, as mirror employer matching contributions or ESOP contributions made by such Participating Employer with respect to The Energen Corporation Employee Savings Plan. ARTICLE V. VESTING Section 5.1 Vested Benefit. A Participant shall be considered to be 100% Vested in his or her Account. Section 5.2 Limitation on Benefits. The benefits that may be payable to or on behalf of a Participant under the Plan shall be equal to a cash payment equal to the value of the amounts credited to the Participant's Investment Account and a distribution of that number of Common Shares equal to the number of shares credited to the Participant's Company Stock Account (with any fractional share being rounded to a whole share). ARTICLE VI. DISTRIBUTIONS. Section 6.1 Distributable Events. A Participant's Distributable Event shall be the first to occur of the following events; provided, that events (b) - (e) shall be Distributable Events only if so elected by the Participant in the Deferral Election Form and further provided that events (d) - (f) are subject to Section 6.6: (a) the Participant's 70th birthday (i.e., the 70th anniversary of the Participant's birth) or such earlier birthday as the Participant may specify in the Deferral Election Form; (b) Disability (as defined in Section 1.1); (c) the Participant's death; (d) the first date on which the Participant is NEITHER an employee nor a Director of any Participating Employer; 9 10 (e) such other event as the Participant may specify in the Deferral Election Form (subject to approval of Energen); (f) the taking of action by the Board of Directors to terminate the Plan pursuant to Section 14.1, or (g) termination for Cause subject to and in accordance with Section 6.7. A Participant's Distributable Event elections must be made on the Participant's initial Deferral Election Form and are irrevocable; provided, that Energen may in its sole discretion allow a Participant to make different Distributable Event elections applicable only with respect to Qualifying Compensation for services rendered during periods of service commencing after the date of such election. Section 6.2 Distribution of Benefits. (a) Distribution Commencement Date. Excepting withdrawals under Sections 6.3 and 6.4 which shall be distributed in accordance with those Sections, distribution of a Participant's Plan benefit shall commence as of the first day of the second calendar month immediately following the calendar month in which the Participant's applicable Distributable Event occurs. (b) Form of Distribution. Benefits attributable to the value of the Investment Account shall be delivered to the Participant in dollars. Benefits attributable to the Company Stock Account shall be delivered to the Participant in the form of shares of Common Stock. To the extent that the distribution is in the form of shares of Common Stock, such delivery shall be subject to all applicable securities laws and regulations and Energen shall have taken all steps, if any, including registration and listing, as may be necessary to make the shares immediately saleable by the Participant without further regulatory action or compliance on the part of the Participant (other than compliance with paragraphs (f) and (h) of Rule 144 under the Securities Act of 1933). The Participant shall reasonably cooperate with Energen, at Energen's expense, to facilitate such compliance and related actions by Energen. (c) Payment Options. In the event a Participant becomes eligible to receive a payment of benefits under the Plan, the benefits payable to the Participant or, in the event of the Participant's death, to the Participant's designated beneficiary under the Plan shall be paid in accordance with one of the payment options available under the Plan as elected by the Participant on the Participant's Deferral Election Form. The Participant may elect separate payment options with respect to the Investment Account and the Company Stock Account. A Participant may change payment options by electing another payment option available under the Plan on a subsequent Deferral Election Form, but such change in payment option will not be effective until the calendar year following the calendar year in which the change was elected. Further, in no event will any such change in payment option be effective if such change is elected during the calendar year in which the Distributable Event occurs and no further elections may be made once a Distributable Event occurs. The payment options include installment payments over a period certain, a lump sum 10 11 payment, and such other payment method as may be specified by the Participant and accepted by Energen. The Board of Directors may, in its sole discretion, reduce the payment period over which payments would have been made pursuant to the payment option elected by a Participant (including consolidation into a lump sum); provided, that in the event of a Change in Control, no reduction of a payment period may be made prior to the fifth anniversary of such Change in Control. Absent a payment option election, the Board of Directors shall direct the payment of any benefits payable under the Plan to or on behalf of the Participant in a lump sum payment to the Participant, or in the event of the Participant's death, to the Participant's designated beneficiary under the Plan. Section 6.3 Early Withdrawals. Notwithstanding any provision in this Plan to the contrary, a Participant may request, by providing a written request to the Officers Review Committee, a withdrawal prior to the distribution date under the Plan of all or any portion of his or her benefits from any of his or her Accounts under the Plan in increments of 25% (of aggregate Account value). If such a request is approved by the Officers Review Committee, which decision by the Officers Review Committee shall be made in its sole discretion on a case by case basis, a distribution of such benefits may be made to the Participant subject to a penalty for such an early withdrawal at any point equal to a six-month period of nonparticipation (during which no additional amounts will be credited to the Participant's Accounts under Sections 7.1(a), (b), (c) and 7.2(a) of the Plan) for each 25% increment withdrawn. The nonparticipation period would begin as of the date on which the request made by the Participant is approved by the Officers Review Committee. As a result, a Participant withdrawing his or her entire benefit from all of his or her Accounts would be excluded from eligibility to participate in the Plan for a 24-month period beginning as of the date of such approval by the Officers Review Committee. In addition, a penalty of 10% of the amount withdrawn will be imposed on any withdrawal made pursuant to this Section 6.3. Section 6.4 Hardship Withdrawals. In addition to the other distribution and withdrawal provisions of this Article VI and notwithstanding any provision herein to the contrary, in the event a Participant incurs an unforeseeable emergency, the Participant may request, by providing a written request to the Officers Review Committee, a hardship withdrawal of all or any portion of his or her benefits from his or her Accounts under the Plan. An unforeseeable emergency is a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. If such a request is approved by the Officers Review Committee, which decision by the Officers Review Committee shall be made in its sole discretion on a case by case basis, a hardship withdrawal may be permitted under this Section 6.4. Withdrawals of amounts because of an unforeseeable emergency are only permitted to the extent reasonably needed to satisfy the emergency need. This provision shall be interpreted in a manner not inconsistent with Sections 1.457-2(h)(4) and 1.457-2(h)(5) of the Treasury Regulations. 11 12 Section 6.5 Distributions as Result of Tax Determination. Notwithstanding any provision in this Plan to the contrary, if, at any time, a court or the Internal Revenue Service determines that any amounts or shares credited to a Participant's Accounts under the Plan or Trust are includable in the gross income of the Participant and subject to tax, the Officers Review Committee may, in its sole discretion, permit a lump sum distribution of an amount equal to the amounts or shares determined to be includable in the Participant's gross income. Section 6.6 No Parachute Payment. An event described in Sections 6.1(d), (e) and (f) shall not constitute a Distributable Event if the Officers Review Committee in its reasonable discretion following consultation with appropriate tax and/or legal advisors reasonably determines that such distribution will likely constitute a parachute payment for purposes of Section 280G of the Code. Furthermore, if such event occurs subsequent to a Change in Control, the Officers Review Committee shall, at Energen's expense, promptly request a written opinion of the Independent Auditor with respect to the applicability of such Section 280G and such event shall not constitute a Distributable Event unless and until the Independent Auditor delivers its written unqualified opinion, a copy of which shall be provided to the Participant, to the effect that a distribution of benefits as a result of such event will not constitute a parachute payment under Section 280G of the Code. As used in this Section 6.6, the term independent auditor means the firm of certified public accountants which at the time of the Change in Control had been most recently engaged by Energen or such other comparable and nationally recognized firm of certified public accountants as may be selected by the Officers Review Committee in its reasonable discretion. Section 6.7 Distribution Upon Termination for Cause. In the event that a Participant is terminated for Cause (as defined below), the Company may, at its discretion, treat such termination or any date subsequent thereto as a Distributable Event. For purposes of this Plan, termination for Cause means termination based on any of the following: (i) The willful and continued failure by the Participant to substantially perform Participant's duties with a Participating Employer (other than any such failure resulting from Participant's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Participant specifically identifying the manner in which Participant has not substantially performed Participant's duties; (ii) the engaging by Participant in willful misconduct which is demonstrably injurious to any one or more of the Participating Employers monetarily or otherwise; or (iii) the conviction of Participant of a felony. 12 13 ARTICLE VII. VALUATION OF BENEFITS. Section 7.1 Company Stock Account. (a) Stock Award Deferral. When a Participant's Company Stock Account is to be credited for deferred amounts attributable to awards which would otherwise have been distributed to the Participant in the form of Common Stock, then the number of shares of Common Stock which would have otherwise been distributed to the Participant shall be credited to the Participant's Company Stock Account as of the date that such distribution to the Participant would have otherwise occurred. (b) Cash Deferral. When a Participant's Company Stock Account is to be credited for deferred amounts which would have otherwise been distributed to the Participant in the form of cash, then the Participant's Company Stock Account shall be credited with that number of shares of Common Stock equal to the number of such shares that could have been purchased with such cash amounts at the Fair Market Value Average for the last business day of the month during which such cash amounts would have otherwise been distributed to the Participant. (c) Discretionary Amount. When a participant's Company Stock Account is to be credited for a Discretionary Amount, it shall be credited with that number of shares of Common Stock equal to the number of such shares (including fractional shares) that could have been purchased with the dollar amount of the Discretionary Amount at the Fair Market Value Average for the last business day of the month during which such Discretionary Amount is authorized or such other date as may be specified in the Discretionary Amount authorization. (d) Dividends. A Participant's Company Stock Account shall be credited on each Common Stock dividend payment date with that number of shares which could have been acquired through the Energen Corporation Dividend Reinvestment and Direct Stock Purchase Plan or similar successor plan (the "DRIP") by the reinvestment of the dividends payable on the number of shares of Common Stock credited to such Company Stock Account as of the record date for such dividend. In the event that the DRIP is no longer operative, or at such time as the Officers Review Committee in its discretion shall specify, the number of dividend reinvestment shares shall be calculated based on the Fair Market Value Average for the dividend payment date. (e) Stock Dividend, etc. The number of shares of Common Stock shall be adjusted to reflect any change in the outstanding Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change. (f) Transfer upon Change in Control. In the event of a Change in Control, effective as of the close of business on the date of the Change in Control, each Participant's Investment Account shall be credited with an amount measured in dollars equal to the value of such Participant's Company Stock Account based on the Fair Market Value Close on such date (or such 13 14 other valuation method selected by the Section 1.1(g) Continuing Directors in their reasonable discretion), and the Participant's Company Stock Account shall be closed and the Participant shall have no further interest in the Company Stock Account. (g) Allocation of Cash Compensation. A Participant may request that part or all of deferred compensation attributable to Cash Compensation be allocated to the Participant's Company Stock Account. A Participant's request to make such an allocation or change a previous allocation must be in writing on an Allocation Request Form. All such requests are subject to acceptance by Energen in its discretion. If accepted by Energen, the allocation request will be effective as of the date specified by the request. Section 7.2 Investment Account. (a) Deferred Amounts. When a Participant's Investment Account is to be credited with a deferred amount, that amount measured in dollars equal to such deferred amount shall be credited to the Investment Account as of the close of business on the date that such amount would have otherwise been paid to the Participant. (b) Interest. Subject to 7.2(c), as of the close of the last day of each calendar quarter, an additional amount shall be credited to each Participant's Investment Account equal to the product of (i) the average daily balance in such Investment Account for the quarter, times (ii) one-fourth of the annual prime rate for corporate borrowers quoted at the beginning of the quarter by AmSouth Bank of Alabama, Birmingham, Alabama (or such other comparable interest rate as the Officers Review Committee may designate from time to time). (c) Investment Options. Energen may permit a Participant to allocate the Participant's Investment Account among one or more investment options for purposes of measuring the value of the benefit. To the extent that the Investment Account is allocated to an investment option, it shall not be credited with interest under Section 7.2(b). That portion of the Investment Account allocated to an investment option shall be deemed to be invested in such investment option and shall be valued as if so invested, reflecting all earnings, losses and other distributions or charges and changes in value which would have been incurred through such an investment. The determination of which investment options, if any to make available, and the continued availability of selected investment options rests in Energen's sole discretion; provided, that subsequent to a Change in Control, Energen shall maintain the availability of those investment options in place at the time of the Change in Control (or substantially equivalent investment options). (d) Participant Allocation Request. A Participant's request to allocate or reallocate among investment options must be in writing on an Allocation Request Form in such increments as Energen may require. All such requests are subject to acceptance by Energen at its discretion. If accepted by Energen, an allocation request will be effective as of the close of business on the allocation date (as defined in Section 7.4). 14 15 Section 7.3 Hypothetical Accounts. The Accounts established under this Plan shall be hypothetical in nature and shall be maintained for bookkeeping purposes only. Neither the Plan nor any of the Accounts (or subaccounts) shall hold or be required to hold any actual funds or assets. Section 7.4 Allocation Date. Upon acceptance of an allocation request pursuant to Section 7.1(g) or 7.2(d), Energen will process the request as soon as reasonably administratively practicable and the request shall be implemented and reflected in the Participant's account as of the close of business on such date as may be determined by Energen in its reasonable discretion (the "allocation date"). ARTICLE VIII. NONTRANSFERABILITY Section 8.1 Anti-Alienation of Benefits. Any benefits which may be credited to a Participant's Accounts under the Plan, and any rights or privileges pertaining thereto, may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process; and no interest or right to receive a benefit may be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. Section 8.2 Incompetent Participants. If any person who may be eligible to receive a payment under the Plan has been legally declared incompetent and a conservator or other person legally charged with the care of such person or of his or her estate has been appointed, any payment under the Plan to which the person is eligible to receive shall be paid to such conservator or other person legally charged with the care of the person or his or her estate. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Participating Employers and the Plan therefor. Section 8.3 Designated Beneficiary. In the event of a Participant's death prior to the payment of all or a portion of any benefits which may be payable with respect to the Participant under the Plan, the payment of any benefits payable on behalf of the Participant under the Plan shall be made to the Participant's beneficiary designated on a Deferral Election Form. If no such beneficiary has been designated, payment shall be made as required under the Participant's will; or, in the event that there shall be no functioning will under applicable state law, then to such persons as, at the date of the Participant's death, would be entitled to share in the distribution of such deceased Participant's personal estate under the provisions of the applicable statute then in force governing the decedent's intestate property, in the proportions specified in such statute. 15 16 ARTICLE IX. WITHHOLDING Section 9.1 Withholding. The amounts payable pursuant to the Plan may be reduced by the amount of any federal, state or local taxes required by law to be withheld with respect to such payments. ARTICLE X. VOTING OF STOCK Section 10.1 Voting of Company Stock. No Participant shall be entitled to any voting rights with respect to any shares credited to his or her Company Stock Account. ARTICLE XI. ADMINISTRATION OF A PLAN Section 11.1 Administrator. The administrator of the Plan shall be Energen. However, the Board of Directors shall act on behalf of Energen with respect to the administration of the Plan and may delegate authority with respect to the administration of the Plan to the Officers Review Committee or such other committee, person or persons as it deems necessary or appropriate for the administration and operation of the Plan. Section 11.2 Authority of Administrator. Energen shall have the authority, duty and power to interpret and construe the provisions of the Plan as it deems appropriate, to adopt, establish and revise rules, procedures and regulations relating to the Plan, to determine the conditions subject to which any benefits may be payable, to resolve all questions concerning the status and rights of Participants and others under the Plan, including, but not limited to, eligibility for benefits and to make any other determinations which it believes necessary or advisable for the administration of the Plan. Energen shall have the duty and responsibility of maintaining records, making the requisite calculations and disbursing payments hereunder. The determinations, interpretations, regulations and calculations of Energen shall be final and binding on all persons and parties concerned. The Secretary of Energen shall be the agent of the Plan for the service of legal process in accordance with Section 502 of the Employee Retirement Income Security Act of 1974, as amended. Section 11.3 Operation of Plan and Claims Procedures. Energen shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. Energen shall be responsible for the expenses incurred in the administration of the Plan. Energen shall also be responsible for determining eligibility for payments and the amounts payable pursuant to the Plan. Energen shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by Energen with respect to the Plan. The procedures for filing claims for 16 17 payments under the Plan are described below. For claims procedures purposes, the "Claims Manager" shall be Energen. (a) Claim Forms. It is the intent of Energen to make payments under the Plan without the Participant having to complete or submit any claims forms. However, a Participant who believes he or she is entitled to a payment under the Plan may submit a claim for payments in writing to Energen. Any claim for payments under the Plan must be made by the Participant or his or her beneficiary in writing and state the claimant's name and the nature of benefits payable under the Plan on a form acceptable to Energen. If for any reason a claim for payments under the Plan is denied by Energen, the Claims Manager shall deliver to the claimant a written explanation setting forth the specific reasons for the denial, specific references to the pertinent provisions of the Plan on which the denial is based, a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and information on the procedures to be followed by the claimant in obtaining a review of his or her claim, all written in a manner calculated to be understood by the claimant. For this purpose: (i) The claimant's claim shall be deemed to be filed when presented orally or in writing to the Claims Manager. (ii) The Claims Manager's explanation shall be in writing delivered to the claimant within 90 days of the date the claim is filed. (b) Review. The claimant shall have 60 days following his or her receipt of the denial of the claim to file with the Claims Manager a written request for review of the denial. For such review, the claimant or the claimant's representative may review pertinent documents and submit written issues and comments. (c) Decision on Review. The Claims Manager shall decide the issue on review and furnish the claimant with a copy within 60 days of receipt of the claimant's request for review of the claimant's claim. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent provisions in the Plan on which the decision is based. If a copy of the decision is not so furnished to the claimant within such 60 days, the claim shall be deemed denied on review. In no event may a claimant commence legal action for benefits the claimant believes are due the claimant until the claimant has exhausted all of the remedies and procedures afforded the claimant by this Section 11.3. Section 11.4 Participant's Address. Each Participant shall keep Energen informed of his or her current address and the current address of his or her beneficiary. Energen shall not be obligated to search for any person. If the location of a Participant is not made known to Energen within three (3) years after the date on which payment of the Participant's benefits payable under the Plan may be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one (1) additional year after such three-year period has elapsed, or, within three (3) years after the actual death of a Participant, Energen is unable to locate any designated 17 18 beneficiary of the Participant, then Energen shall have no further obligation to pay any benefit hereunder to or on behalf of such Participant or designated beneficiary and such benefits shall be irrevocably forfeited. ARTICLE XII. MISCELLANEOUS PROVISIONS Section 12.1 No Employment Rights. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the service or employ of any Participating Employer. Section 12.2 Participants Should Consult Advisors. Neither any Participating Employer, nor their respective directors, officers, employees or agents makes any representation or warranty with respect to the state, federal or other tax, financial, estate planning, or the securities or other legal implications of participation in the Plan. Participants should consult with their own tax, financial and legal advisors with respect to their participation in the Plan. Section 12.3 Unfunded and Unsecured. The Plan shall at all times be considered entirely unfunded both for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended, and no provision shall at any time be made with respect to segregating assets of any Participating Employer for payment of any amounts hereunder. Any funds invested hereunder allocable to a Participating Employer shall continue for all purposes to be part of the respective general assets of such Participating Employer and available to the general creditors of such Participating Employer in the event of a bankruptcy (involvement in a pending proceeding under the Federal Bankruptcy Code) or insolvency (inability to pay debts as they mature) of such Participating Employer. Energen shall promptly notify the Trustee and the applicable Participants of such bankruptcy or insolvency of a Participating Employer. No Participant or any other person shall have any interests in any particular assets of any Participating Employer by reason of the right to receive a benefit under the Plan and to the extent the Participant or any other person acquires a right to receive benefits under the Plan, such right shall be no greater than the right of any general unsecured creditor of any Participating Employer. The Plan constitutes a mere promise by the Participating Employers to make payments to the Participants in the future. With respect to the guarantee of Energen under Section 2.2, Participants have rights only as general unsecured creditors of Energen. Nothing contained in the Plan shall constitute a guaranty by any Participating Employer or any other person or entity that any funds in any trust or the assets of any Participating Employer will be sufficient to pay any benefit hereunder. Furthermore, no Participant shall have any right to a benefit under the Plan except in accordance with the terms of the Plan. 18 19 Section 12.4 The Trust. (a) Establishment of Trust. In order to provide assets from which to fulfill its obligations to the Participants and their beneficiaries under the Plan, Energen shall establish a Trust by a trust agreement with a third party, the Trustee, to which Energen may, in its discretion, contribute cash or other property, including securities issued by Energen, to provide for the benefit payments under the Plan. The Trustee will have the duty to invest the Trust assets and funds in accordance with the terms of the Trust. Energen shall be entitled at any time, and from time to time, in its sole discretion, to substitute assets of at least equal fair market value for any assets held in the Trust. All rights associated with the assets of the Trust will be exercised by the Trustee or the person designated by the Trustee, and will in no event be exercisable by or rest with Participants or their beneficiaries. The Trust shall provide that in the event of the insolvency of Energen, the Trustee shall hold the assets for the benefit of the general creditors of Energen and its affiliated companies. The Trust shall be based on the model trust contained in Internal Revenue Service Revenue Procedure 92-64 with such changes and modifications as may be approved by Energen. (b) Contribution Upon Change in Control. If as of the close of business on the date of a Change in Control, the aggregate value of the Participant Accounts exceeds the value of the Trust assets, then within thirty days of such Change in Control, Energen shall contribute to the Trust assets having a value at least equal to the amount of such excess. Section 12.5 Plan Provisions. Except when otherwise required by the context, any singular terminology shall include the plural. Section 12.6 Severability. If a provision of the Plan shall be held to be illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. Section 12.7 Applicable Law. To the extent not preempted by the laws of the United States, the laws of the State of Alabama shall apply with respect to the Plan. ARTICLE XIII. AMENDMENTS Section 13.1 Amendment of the Plan. Energen reserves the power to alter, amend or wholly revise the Plan at any time and from time to time by the action of the Board of Directors and the interest of each Participant is subject to the powers so reserved; provided, however, that no amendment made subsequent to a Change in Control shall be effective to the extent that it would have a materially adverse impact on a Participant's reasonably expected economic benefit attributable to compensation deferred by the Participant prior to the Change in Control. An amendment shall be authorized by the Board of Directors and shall be stated in an instrument in writing signed in the name of Energen by a person or persons authorized by the Board of Directors. After the instrument has been so executed, the Plan shall be deemed to have been amended in the 19 20 manner therein set forth, and all parties interested herein shall be bound thereby. No amendment to the Plan may alter, impair, or reduce the benefits credited to any Accounts prior to the effective date of such amendment without the written consent of any affected Participant. ARTICLE XIV. TERM OF PLAN Section 14.1 Term of the Plan. Energen may at any time terminate the Plan by action of the Board of Directors with such termination being effective as of the date that all Participant Accounts have been distributed to Participants in accordance with and subject to the provisions of Article VI of the Plan including, without limitation, Section 6.6 of the Plan. Effective as of the date of such Board of Directors action (or such later date as may be specified therein) all Section 4.1 compensation deferral elections will terminate and no further amounts shall be credited to any Accounts of any Participant under Sections 7.1(a), (b), (c) and 7.2(a) after such date. However, the Participants" Accounts shall continue to be adjusted by the other provisions of Sections 7.1 and 7.2 until all benefits are distributed to the Participants or to the Participants' beneficiaries. 20 EX-10.(I) 10 ENERGEN 1992 DIRECTORS STOCK PLAN 1 EXHIBIT 10(i) ENERGEN CORPORATION 1992 DIRECTORS STOCK PLAN (AS AMENDED APRIL 25, 1997) 1. PURPOSE This Energen Corporation 1992 Directors Stock Plan (the "Plan") is hereby established by Energen Corporation (the "Company"). The purpose of the Plan is to enable the Company to pay part of the compensation of its non-employee directors in shares of the Company's common stock ("Stock"). The Plan provides annual grants of Stock to non-employee directors and in addition permits such directors to elect to take all or part of their cash compensation in the form of Stock. 2. ELIGIBILITY Each member of the Board of Directors of the Company (the "Board") who is not an officer or Employee of the Company or any of its subsidiaries (a "Non-Employee Director") shall be eligible for participation in the Plan. 3. ANNUAL GRANTS As soon as reasonably practicable following the fiscal year ended September 30, 1992 and each fiscal year thereafter so long as this Plan remains in effect, an annual award of Stock (adjusted as described below) shall be granted and issued to each Non-Employee Director who is serving as such on the last day of such year and has held such position for at least six months. The annual award payable at the conclusion of fiscal years ended September 30, 1992-1995 shall be 200 shares. The annual award payable with respect to fiscal years ended September 30, 1996 and thereafter, shall be 300 shares. If the Company shall at any time issue any shares of Stock (i) in subdivision of outstanding shares of Stock, by reclassification or otherwise, or (ii) for a stock dividend, the size of future annual awards shall be increased proportionately; and in like manner, reduced proportionately in case of any combination of shares of Stock. In addition to the foregoing annual awards, a supplemental award of 100 shares shall be made during February, 1996 to each individual who was serving as a Non-Employee Director on December 31, 1995, regardless of length of service. 4. ELECTIVE GRANTS Each Non-Employee Director may elect to have any part or all of the fees payable to such Non-Employee Director for services as a director of the Company and its subsidiaries paid in the form of Stock. Such election shall be delivered to the Company in writing specifying the portion of fees to be paid in Stock. Any such election shall remain in effect and irrevocable until the effective date of a subsequent written election changing or terminating the prior election. The effective date of any election, including without limitation an election to change or terminate a prior election, shall be six months from the date of delivery to the Company. Stock issued in lieu of director fees shall be issued as soon as reasonably practicable following the end of each calendar quarter and the number of shares will be based on a valuation equal to the average of the closing sales prices for the Stock as published in The Wall Street Journal report of the New York Stock Exchange, Inc. - Composite Transactions for the last trading day of each month in such calendar quarter, provided that any fractional share shall be rounded up to a whole share. 2 5. STOCK ISSUANCE Non-Employee Directors shall not be deemed for any purpose to be, or have any rights as, stockholders of the Company with respect to any Stock issued under this Plan except if, as and when shares are issued and then only from the date of the certificates therefor. 6. AMENDMENT AND DISCONTINUANCES The Board of Directors may from time to time amend the Plan; provided, however, that no amendment may without stockholder approval materially increase the benefits accruing to participants under the Plan, materially increase the number of shares of Common Stock which may be issued under the Plan, or materially modify the requirements as to eligibility for participation in the Plan, and further provided, that the Plan shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement income Act, or the rules thereunder. 7. COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS No certificate for shares distributable pursuant to the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements, including, without limitation, compliance with the provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the requirements of the exchanges on which Stock may, at the time, be listed. 8. TERM OF THE PLAN The Plan is subject to and shall only become effective upon approval of the Plan by the stockholders of the Company at the Annual Meeting of Stockholders to be held January 22, 1992. Once effective this Plan shall remain in effect until terminated by action of the Board or the stockholders of the Company. 9. DEFERRAL UNDER 1997 DEFERRED COMPENSATION PLAN Notwithstanding the other provisions of this Plan, a Non-Employee Director may elect pursuant to the Energen Corporation 1997 Deferred Compensation Plan to defer receipt of annual and/or elective grants of Stock otherwise payable under Section 3 or 4 of this Directors Stock Plan and upon such deferral shall have no further right with respect to such deferred grant other than as provided under said Deferred Compensation Plan. In the event of such a deferral election, shares of Stock which would otherwise have been deliverable to such Non-Employee Director may at the discretion of the Company be delivered to the Trustee under such Deferred Compensation Plan and registered in the name of the Trustee or such other person as the Trustee may direct. Adoption: Board of Directors Meeting held November 27, 1991 Shareholder Meeting held January 22, 1992 Amended: Board of Directors Meeting held November 22, 1995 Shareholder Meeting held January 24, 1996 Board of Directors Meeting held April 25, 1997 2 EX-13 11 INFORMATION INCORPORATED BY REFERENCE 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- CONSOLIDATED NET INCOME Energen Corporation's net income for the 1998 fiscal year totaled $36.2 million, or $1.25 per share, and represented an 8.7 percent increase in basic earnings per share (EPS) over prior-year net income of $29 million, or $1.15 per share. The continued financial and operating strength of Energen's utility subsidiary, Alabama Gas Corporation (Alagasco), was enhanced by significant growth at Energen Resources Corporation, Energen's oil and gas subsidiary. In fiscal year 1996, Energen reported earnings of $21.5 million, or $0.98 per share. (As discussed more fully in Note 1 to the Consolidated Financial Statements, Energen Resources previously was known as Taurus Exploration Inc.) 1998 VS 1997: Alagasco achieved record earnings for the eighth consecutive year, with net income increasing $2 million from 1997 to $20.6 million. This growth in income reflected the utility's ability to earn within its allowed range of return on an increased level of equity representing investment in utility plant. Alagasco achieved a return on equity (ROE) of 13.5 percent. Energen Resources' net income in fiscal 1998 increased 52 percent to $15.3. This increase was due in large part to a $6.4 million increase in nonconventional fuels tax credits generated by the prior-year acquisition of coalbed methane reserves in Alabama's Black Warrior Basin. In addition, Energen Resources' oil and gas production increased 55 percent to 57.4 billion cubic feet equivalent (Bcfe) as a result of successful acquisition and exploitation efforts. Partially offsetting these gains were increased depreciation, depletion and amortization (DD&A) expense, which included a $3 million after-tax writedown of certain offshore oil and gas properties under Statement of Financial Accounting Standards (SFAS) No. 121, increased interest expense associated with property acquisitions, and a $1.6 million after-tax writedown of a portion of an unproved leasehold in east Texas. 1997 VS 1996: Alagasco's 1997 net income of $18.6 million increased 9.5 percent over 1996 earnings of $17 million primarily due to the utility earning within its allowed range of return on an increased level of equity. Energen Resources earned $10.1 million in 1997, more than doubling 1996 year-end earnings of $4.5 million. A 130 percent increase in oil and gas production volumes to 37 Bcfe and a $3.8 million increase in nonconventional fuels tax credits primarily resulting from coalbed methane property acquisitions in 1996 and 1997 were the major reasons for the significant increase. Partially offsetting these gains were increased DD&A and interest expense and a $1.3 million after-tax writedown of certain offshore oil and gas properties in anticipation of their sale. OPERATING INCOME Consolidated operating income in 1998, 1997 and 1996 totaled $61.5 million, $52 million and $38.8 million, respectively. The growth in operating income in 1998 and 1997 was influenced significantly by improved financial performances from Energen Resources under Energen's diversified growth strategy, implemented in fiscal 1996. Growth in Alagasco's operating income was consistent with the increased level of equity upon which it was able to earn a return between 13.15 percent and 13.65 percent. ALAGASCO: As discussed more fully in Note 2 to the Consolidated Financial Statements, Alagasco is subject to regulation by the Alabama Public Service Commission (APSC). On October 7, 1996, the APSC issued an order to extend the Company's rate-setting mechanism, Rate Stabilization and Equalization (RSE), for a five-year period through January 1, 2002. Under the terms of the 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. Alagasco generates revenues through the sale and transportation of natural gas. The transportation rate does not contain an amount representing the cost of gas, and Alagasco's rate structure allows similar margins on transportation and sales gas. Weather can cause variations in space heating revenues, but operating margins remain unaffected due to a real-time temperature adjustment which allows Alagasco to adjust customer bills monthly to reflect changes in usage due to departures from Page 19 2 normal weather. Substantially all the customers to whom the temperature adjustment applies are residential, small commercial and small industrial. Alagasco's natural gas and transportation sales revenues totaled $369.9 million, $363 million and $357.3 million in 1998, 1997 and 1996, respectively. In the current fiscal year, weather that was 15.4 percent colder than in the prior year and increased usage from large transportation customers led to increased sales revenue which was partially offset by a $3.9 million deferral of revenue under the Enhanced Stability Reserve (see Note 2) and lower gas prices. Sales revenue in 1997 reflected a higher commodity cost of gas which was largely offset by the impact of warmer weather on throughput. Colder weather in Alagasco's service territory caused a 10 percent increase in residential sales volumes in the current year. Sales and transportation volumes to commercial and industrial customers rose 7.8 percent to 84.3 Bcf, primarily due to increased throughput to several large transportation customers. Residential sales volumes decreased 19 percent in 1997, primarily due to weather that was 12 percent warmer than normal and 22 percent warmer than in the prior year. Sales and transportation volumes to commercial and industrial customers totaled 78.2 Bcf in 1997 and 76.5 Bcf in 1996. Cost of gas remained relatively stable in 1998, as increased purchased volumes related to colder weather were offset by a decrease in the commodity cost of gas. Warmer weather in 1997 decreased purchased volumes, but a higher commodity gas cost offset the effect. Operations and maintenance (O&M) expense at the utility in 1998 increased 2.8 percent primarily due to higher labor and related costs and increases in bad debt and insurance expense. O&M expense increased 4 percent in 1997 primarily due to higher labor and related costs and increased marketing expense, partially offset by a decrease in bad debt expense created when the utility increased its provision for doubtful accounts in 1996 to reflect increased exposure from higher commodity gas costs. In 1998 and 1997, the increase in O&M expense on a per-customer basis fell within the inflation-based cap established by the APSC as part of the utility's rate-setting mechanism. Under the terms of RSE, Year 2000 costs are excluded from the O&M inflation-based cap calculation. Consistent with growth in the utility's depreciable base, depreciation expense rose 7.1 percent in 1998 and 10.4 percent in 1997. Alagasco's expense for taxes other than income primarily reflects various state and local business taxes as well as payroll-related taxes. State and local business taxes generally are based on gross receipts and fluctuate accordingly.
- -------------------------------------------------------------------------------------------- Years ended September 30, (dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Natural gas and transportation sales revenues ... $ 369,940 $ 362,984 $ 357,252 Cost of natural gas ............................. (176,124) (177,837) (181,400) Revenue taxes ................................... (20,278) (19,676) (20,055) - -------------------------------------------------------------------------------------------- Natural gas and transportation sales margin ..... $ 173,538 $ 165,471 $ 155,797 - -------------------------------------------------------------------------------------------- Natural gas sales volumes (MMcf) Residential ................................... 31,079 28,357 34,963 Commercial and industrial-small ............... 13,705 12,554 15,002 - -------------------------------------------------------------------------------------------- Total natural gas sales volumes ................. 44,784 40,911 49,965 Natural gas transportation volumes (MMcf) ....... 70,563 65,622 61,458 - -------------------------------------------------------------------------------------------- Total deliveries (MMcf) ......................... 115,347 106,533 111,423 - --------------------------------------------------------------------------------------------
ENERGEN RESOURCES: During the first quarter of 1998, Energen Resources acquired approximately 80 Bcfe of proved oil and natural gas reserves in the Permian Basin of west Texas from B.C. Oil and Gas Ltd. and certain affiliated companies for $43.3 million and purchased an estimated 4.5 Bcfe of predominantly natural gas reserves in southwest Mississippi from Oxy USA Inc. for $7.1 million. In the second quarter, Energen Resources purchased Gulf of Mexico properties from Chateau Oil and Gas Inc. (Chateau) for $17 million and, in April 1998, sold approximately 20 percent of its share to a third party. In September 1998, Energen Resources traded substantially all of its Gulf of Mexico interests (including the remaining reserves purchased from Chateau) for certain Permian Basin interests of EEX Corporation. The Company received approximately_58 Bcfe of oil, natural gas and liquids reserves from EEX in exchange for an estimated 38 Bcf of proved natural gas reserves, with interests in 30 offshore blocks, and $10.4 million in cash. Page 20 3 Revenues from oil and gas production activities continued to grow largely as a result of these acquisitions and prior-year property acquisitions. Total production volumes rose 55 percent to 57.4 Bcfe. Natural gas production, including coalbed methane, increased 49.6 percent to 43.9 Bcf. Oil volumes increased 85 percent to 1,434 MBbl and high BTU-content natural gas reserves in the San Juan Basin yielded 817 MBbl in natural gas liquids for the year. Energen Resources also benefited from higher realized natural gas prices in 1998, while realized oil prices declined sharply. Realized gas prices rose 7.8 percent to $2.21 per Mcf, and realized oil prices decreased 17.3 percent to $14.96 per barrel. Natural gas liquids sold for an average price of $8.65 per barrel. During 1997, revenues from oil and gas production activities also grew notably. Total production volumes were 37 Bcfe, increasing 130 percent from the prior year. Average realized gas prices were $2.05 per Mcf, higher than 1996 prices by 4 percent, and oil prices were $18.08 per barrel, up 11 percent. Natural gas liquids sold for $11.45 per barrel in 1997. Coalbed methane operating fees are calculated as a percentage of net proceeds on certain properties, as defined by the related operating agreements, and vary with changes in natural gas prices, production volumes and operating expenses. Revenues from operating fees were $4.3 million, $4.4 million and $3.8 million in 1998, 1997 and 1996, respectively. Yearly variances primarily result from fluctuations in natural gas prices.
- --------------------------------------------------------------------------------------------------------- Years ended September 30, (dollars in thousands, except sales price data) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Revenues Natural gas production ............................................. $ 97,123 $60,228 $24,262 Oil production ..................................................... 21,452 13,981 10,313 Natural gas liquids production ..................................... 7,061 5,772 -- Operating fees ..................................................... 4,342 4,385 3,846 Other .............................................................. 2,709 880 3,769 - --------------------------------------------------------------------------------------------------------- Total Revenues ....................................................... $132,687 $85,246 $42,190 - --------------------------------------------------------------------------------------------------------- Production volumes Natural gas (MMcf) ................................................. 43,853 29,318 12,308 Oil (MBbl) ......................................................... 1,433 775 635 Natural gas liquids (MBbl) ......................................... 817 502 -- - --------------------------------------------------------------------------------------------------------- Average unit sales price Natural gas (per Mcf) .............................................. $ 2.21 $ 2.05 $ 1.97 Oil (barrel) ....................................................... $ 14.96 $ 18.08 $ 16.25 Natural gas liquids (barrel) ....................................... $ 8.65 $ 11.45 -- - ---------------------------------------------------------------------------------------------------------
Energen Resources may, in the ordinary course of business, be involved in the sale of both developed and undeveloped properties. With respect to developed properties, sales may occur as a result of, but not limited to, disposing of non-strategic or marginal assets and accepting offers where the buyer gives greater value to a property than Energen Resources' technical staff. In 1998, 1997 and 1996, Energen Resources recorded pre-tax gains of $2.6 million, $1 million and $3.9 million, respectively, on the sale of various properties. The largest of several property sales occurred in September 1996 when Energen Resources recorded a $3.2 million gain after selling its working interest in reserves associated with PMC Reserve Acquisition Company. Operations expense increased $18 million and $12.2 million in 1998 and 1997, respectively, primarily due to significant production growth and acquisition activity at Energen Resources. Lease operating expense rose by $19.8 million in 1998 and $10.5 million in 1997, mainly due to the acquisition of oil and gas properties. A decrease in exploration expense of $0.9 million primarily was due to decreased drilling activity but was offset partially by a $2.5 million pre-tax writedown of a portion of an unproved leasehold in east Texas. Exploration expense increased $1.2 million in the prior year as a result of Energen Resources' increased exploratory efforts. DD&A expense increased $19.6 million in 1998 largely due to significantly higher production and additional DD&A expense of $4.7 million recorded in 1998 under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived Page 21 4 Assets to Be Disposed Of (see Note 11). DD&A expense rose $16.4 million in 1997 largely due to significantly higher production. The increase for 1997 was offset partially by a decrease in the average depletion rate to $0.90 per Mcf from $1.15 per Mcf in 1996 due to the significant acquisition of long-lived assets in the San Juan Basin. Also during 1997, Energen Resources recorded additional DD&A expense of $2.1 million to writedown the value of certain oil and gas properties. Energen Resources' expense for taxes other than income primarily reflects production-related taxes. For 1998, 1997 and 1996, Energen Resources recorded $9.4 million, $6.3 million and $1.9 million, respectively, in severance taxes. The annual increases resulted from increased production. NON-OPERATING ITEMS CONSOLIDATED: Interest expense increased $7 million in 1998 primarily due to the use of long-term debt to help finance Energen Resources' property acquisitions. Influencing the increase in interest expense for the current year is the $85 million of medium-term notes (MTNs) issued in July 1997 and, in part, the $100 million of MTNs issued in February 1998. The average daily outstanding balance under short-term credit facilities was $81 million for the current year. Fiscal 1997 interest expense increased $9 million primarily due to Energen Resources' growth. The average daily outstanding balance under short-term credit facilities was $88 million in 1997 compared with $38 million in 1996. Also influencing interest expense in 1997 was interest for a full year on $40 million of Energen MTNs issued in the fourth quarter of 1996 and, to a lesser extent, the $85 million of MTNs issued in July 1997. In addition, Alagasco issued $25 million in MTNs in the fourth quarter of 1996. The fluctuation in other income over the three-year period primarily is due to the inclusion in 1996 of an early call premium associated with the redemption of debt at Alagasco in 1995. The Company's effective tax rates in 1998, 1997 and 1996 were 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 1998 due to the recognition of an additional $6.4 million of nonconventional fuels tax credits which partially was offset by higher consolidated pre-tax earnings. Income tax expense in 1997 also decreased primarily due to the recognition of an additional $3.8 million of nonconventional fuels tax credits. FINANCIAL POSITION AND LIQUIDITY - -------------------------------------------------------------------------------- The Company's net cash from operating activities totaled $123.6 million, $63.1 million and $43.5 million in 1998, 1997 and 1996, respectively. In the current year, operating cash flow benefited from significantly higher oil and gas production volumes related to Energen Resources' current and prior year property acquisitions. Operating cash flow in 1997 also benefited from higher oil and gas production volumes as well as higher realized oil and gas prices. Offsetting these amounts was a $17 million payout in January 1997 of supplier refunds to customers. Other working capital items, which generally are the result of timing of payments, combined to create the remaining increases for both years. Colder weather in 1996 had an impact as reflected in increased accounts receivable and payable and in Alagasco's need to utilize and replenish its storage gas inventory. The receipt of amounts from suppliers to be refunded to customers positively affected cash flows in 1996. During fiscal 1998, the Company invested $166.3 million as Energen Resources continued its aggressive growth strategy. Energen Resources invested $121 million in total capital expenditures -- $84.7 million for property acquisitions, $35.3 million for development and $3.9 million for exploration. The Company had current-year reserve additions of 168 Bcfe. Energen Resources sold or traded certain offshore properties along with various other properties during 1998, resulting in cash proceeds of $7.6 million. Utility expenditures for the year totaled $54.2 million and primarily represented support facilities and normal system distribution expansion. Cash used in investing activities was $279.8 million in 1997 and $152.1 million in 1996. The increase in 1997 also is largely due to the acquisition of oil and gas properties. Energen Resources invested $193.7 million for property acquisitions including $16 million to obtain a small working interest in an exploratory joint venture, adding 464 Bcfe of proved developed and undeveloped oil and gas reserves. The 1996 investment in proved property acquisitions with developmental potential totaled $108 million and added 178 Bcfe of proved reserves. Energen Resources sold its entire working interest in reserves associated with the PMC acquisition venture in 1996 resulting in cash proceeds of $13.1 million. Page 22 5 Cash provided by financing activities totaled $40.5 million in 1998. In February 1998, the Company issued $100 million of long-term debt redeemable February 15, 2028. The 7.125 percent MTNs were priced at 99.416 percent to yield 7.173 percent. The $98.5 million in proceeds were used to repay borrowings under Energen's short-term credit facilities which were incurred to finance Energen Resources' growth activity. Financing activities provided a source of $310.8 million in 1997. The Company issued $85 million of MTNs in July 1997. Energen also issued 3,450,000 shares of common stock in January 1997 which generated net proceeds of $49.1 million, and 2,400,000 shares in September 1997 which generated net proceeds of $41.1 million. The proceeds from the debt and equity offerings were used to repay short-term debt incurred mainly to finance Energen Resources' property acquisitions. The Company utilized an additional $45 million in short-term credit facilities primarily for Energen Resources' capital expenditures. For tax planning purposes, the Company borrowed $100.6 and $98.6 million at September 30, 1998 and 1997, respectively, to invest in short-term federal obligations. The treasury bills were sold in early October and the proceeds used to repay the debt. Cash provided by financing activities totaled $83.2 million in 1996. The Company issued $40 million of MTNs and utilized an additional $26.7 million in short-term credit facilities to finance Energen Resources' acquisition strategy. Also included were the proceeds from the issuance of $25 million in Alagasco MTNs. CAPITAL EXPENDITURES NATURAL GAS DISTRIBUTION: During the last three fiscal years, Alagasco invested $140.6 million for capital projects: $77.9 million was spent on normal expansion replacements and support of its distribution system; $49 million was spent on support facilities; $6.8 million was used to develop and implement information systems; $3.6 million was used to improve gas availability; and $3.3 million was used to purchase four municipal gas systems.
- ------------------------------------------------------------------------------------------- Years ended September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------- Capital expenditures for: Renewals, replacements, system expansion and other .... $25,804 $25,392 $26,737 Support facilities .................................... 26,289 14,387 8,327 Additions to improve gas availability ................. 1,002 758 1,799 Municipal gas system acquisitions ..................... -- 3 3,305 Information systems ................................... 1,073 2,737 3,007 - ------------------------------------------------------------------------------------------- Total ............................................... $54,168 $43,277 $43,175 - -------------------------------------------------------------------------------------------
OIL AND GAS ACTIVITIES: Energen Resources spent $500.3 million for capital projects over the last three fiscal years, $13.3 million of which was charged to income as exploration expense. Expenditures for property acquisitions were $388.5 million, exploratory expenditures totaled $27 million, and $81.7 million was spent in development activities.
- ----------------------------------------------------------------------------------------- Years ended September 30, (in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Capital and exploration expenditures for: Property acquisitions ....................... $ 84,747 $193,729 $110,008 Exploration ................................. 3,885 13,277 9,855 Development ................................. 35,307 36,375 10,040 Other ....................................... 1,117 1,406 583 - ----------------------------------------------------------------------------------------- Total ..................................... 125,056 244,787 130,486 Less exploration expenditures charged to income 4,065 5,069 4,169 - ----------------------------------------------------------------------------------------- Net capital expenditures ...................... $120,991 $239,718 $126,317 - -----------------------------------------------------------------------------------------
Page 23 6 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 $209 million, including $162 million for the TOTAL Minatome Corporation (TOTAL) property acquisition and its related development. In October 1998, Energen Resources acquired the stock of TOTAL and, immediately upon closing, sold a 31 percent interest in TOTAL's assets to Westport Oil and Gas Company Inc. Energen Resources' net investment totaled $132.6 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. It should be noted that 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 total available 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. Energen may issue additional equity and debt during fiscal 1999 to finance its acquisition activity. During 1998, Energen increased its available short-term credit facilities to $228 million to help accommodate its growth plans. 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 expects to close negotiations on a sale and leaseback of the new headquarters building facility in the first fiscal quarter of 1999. The proceeds from the sale are expected to approximate the investment in the facility. OUTLOOK - -------------------------------------------------------------------------------- NATURAL GAS DISTRIBUTION: The five-year extension of the RSE in October 1996 gives Alagasco the opportunity to continue earning an allowed return on equity within a range of 13.15 percent to 13.65 percent through fiscal year 2002. Over this period, Alagasco has the potential for net income growth as the investment in additional utility plant and the maintenance of a desired capital structure effect the level of equity required in the business. The utility continues to rely on rate flexibility to effectively prevent bypass of its distribution system. Even though the utility enjoys a market saturation rate much higher than the national average, customer growth in the service territory is limited. Alagasco will continue to focus on the acquisition of municipal systems to supplement normal growth. OIL AND GAS ACTIVITIES: During fiscal year 1999, Energen Resources plans to spend approximately $209 million, including $162 million on the TOTAL acquisition. Production is expected to increase 52 percent to 87 Bcfe, and proved reserves could reach 875 Bcfe by year end. Production from existing properties should generate 55 Bcfe of oil and gas during the year, with an additional 32 Bcfe targeted from the TOTAL acquisition. A significant part of Energen Resources' earnings in fiscal 1999 will be approximately $14 million of tax credits expected to be generated by the Company's coalbed methane production. Over the five-year period ending September 30, 2003, Energen Resources plans to spend approximately $1 billion in the acquisition and development of producing properties and in exploration and related development. With this level of spending, Energen Resources' annual production could reach 125 Bcfe by the end of fiscal year 2003, with proved reserves approximating 1.2 trillion cubic feet equivalent. 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, 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. Page 24 7 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. As Energen Resources begins fiscal 1999, 76 percent of its estimated 1999 gas production and 33 percent of its estimated 1999 oil production is hedged or under contract at average prices of $2.31 per Mcf and $16.31 per barrel, respectively. In addition, the Company has hedged the basis difference on 3.6 Bcf of its remaining 1999 San Juan production. As acquisitions are made, Energen Resources may use futures, swaps and/or fixed-price contracts to lock in commodity prices up to 36 months in order to protect targeted returns. The Company has deferred gains of $0.6 million and deferred losses of $12.9 million on the balance sheet at September 30, 1998 and 1997, respectively. The Company has prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the market value of crude oil and natural gas may have on the fair value of its derivative instruments. This analysis measures the impact on the commodity derivative instruments and, thereby, does not consider the underlying exposure related to the commodity. At September 30, 1998, the Company estimates that a 10 percent change in the underlying commodities prices would result in a $13.4 million change in the fair value of open derivative contracts. However, gains and losses on derivative contracts are expected to be similarly offset by sales at the spot market price. Due to the short duration of the contracts, time value of money is ignored. The hypothetical change in fair value is calculated by multiplying the difference between the hypothetical price and the contractual price by the contractual volumes. YEAR 2000 READINESS DISCLOSURE: 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. A third-party assessment of Year 2000 readiness is scheduled to be conducted by an outside entity for both information technology and non-information technology systems during the first quarter of fiscal 1999. With respect to material third-party relationships, the Company, in addition to responding to questions concerning Year 2000 issues from customers and regulators, is asking of certain vendors and partners for information designed to determine their ability to continue uninterrupted supply of materials or services to the Company. This process is scheduled for completion by the end of calendar year 1998. As of September 30, 1998, the Company has incurred approximately $510,000 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 $1.8 million. 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. Management expects 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 RISK: Certain statements in this report, including statements of the 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 and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, economic and competitive conditions, Page 25 8 inflation rates, 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 fully invest 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 operation. RECENT PRONOUNCEMENTS OF THE FASB - -------------------------------------------------------------------------------- In fiscal 1998, the Company adopted SFAS No. 128, Earnings Per Share, which specifies computation, presentation and disclosure requirements for EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and the denominator of the basic EPS computation to that of the diluted computation. The Company also adopted during fiscal 1998, SFAS No. 129, Disclosures of Information about Capital Structure, which establishes standards for disclosing information about an entity's capital structure. It contains no change in disclosure requirements for public entities that were previously subject to the requirements of Accounting Principles Board No. 10 and No. 15 and SFAS No. 47. As a result, SFAS 129 had no impact on the Company's consolidated financial statements. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be required, was issued in June 1997. SFAS No. 131 relates solely to disclosure provisions, and therefore does not have any effect on the results of operations or financial position of the Company. The Company has chosen to early adopt this pronouncement as of September 30, 1998. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which requires the reporting and display of comprehensive income and its components in an entity's financial statements. There are currently 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 on the Company is currently being evaluated. QUARTERLY MARKET PRICES AND DIVIDENDS PAID PER SHARE *
- ---------------------------------------------------------------------------------------------------------------- Quarter ended (in dollars) HIGH LOW CLOSE DIVIDENDS PAID - ---------------------------------------------------------------------------------------------------------------- December 31, 1996...................................... 15 5/8 11 7/8 15 1/8 .150 March 31, 1997......................................... 15 11/16 14 1/2 14 15/16 .150 June 30, 1997.......................................... 17 9/16 14 9/16 16 27/32 .150 September 30, 1997..................................... 18 7/8 16 5/8 17 25/32 .155 - ---------------------------------------------------------------------------------------------------------------- December 31, 1997...................................... 20 5/8 17 5/16 19 7/8 .155 March 31, 1998......................................... 22 18 3/8 22 .155 June 30, 1998.......................................... 22 1/2 19 20 1/8 .155 September 30, 1998..................................... 20 3/4 15 1/8 19 .160 - ----------------------------------------------------------------------------------------------------------------
*Share prices reflect a 2-for-1 stock split effective March 2, 1998. Page 26 9 CONSOLIDATED STATEMENTS OF INCOME
Energen Corporation - ---------------------------------------------------------------------------------------------------------------- Years ended September 30, (in thousands, except share data) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- OPERATING REVENUES Natural gas distribution ........................................ $ 369,940 $ 362,984 $ 357,252 Oil and gas production activities ............................... 132,687 85,246 42,190 - ---------------------------------------------------------------------------------------------------------------- Total operating revenues ..................................... 502,627 448,230 399,442 - ---------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas ..................................................... 174,051 175,514 178,810 Operations and maintenance ...................................... 148,376 127,998 111,900 Depreciation, depletion and amortization ........................ 80,999 59,688 41,118 Taxes, other than income taxes .................................. 37,716 33,044 28,817 - ---------------------------------------------------------------------------------------------------------------- Total operating expenses ..................................... 441,142 396,244 360,645 - ---------------------------------------------------------------------------------------------------------------- OPERATING INCOME ................................................ 61,485 51,986 38,797 - ---------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense, net of amounts capitalized .................... (30,001) (22,906) (13,920) Other, net ...................................................... 2,544 3,014 1,712 - ---------------------------------------------------------------------------------------------------------------- Total other income (expense) ................................. (27,457) (19,892) (12,208) - ---------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES ...................................... 34,028 32,094 26,589 Income taxes .................................................... (2,221) 3,097 5,048 - ---------------------------------------------------------------------------------------------------------------- NET INCOME ...................................................... $ 36,249 $ 28,997 $ 21,541 - ---------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER AVERAGE COMMON SHARE* ........................ $ 1.25 $ 1.15 $ 0.98 - ---------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER AVERAGE COMMON SHARE* ...................... $ 1.23 $ 1.14 $ 0.97 - ---------------------------------------------------------------------------------------------------------------- BASIC AVERAGE COMMON SHARES OUTSTANDING* ........................ 29,083,855 25,126,192 22,046,868 - ----------------------------------------------------------------------------------------------------------------
*Share amounts reflect a 2-for-1 stock split effective March 2, 1998 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 27 10 CONSOLIDATED BALANCE SHEETS
Energen Corporation - --------------------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents.................................................................... $ 103,231 $ 105,402 Accounts receivable, net of allowance for doubtful accounts of $3,547 in 1998 and $3,185 in 1997......................................................... 64,173 70,676 Inventories, at average cost Storage gas inventory..................................................................... 21,237 25,367 Materials and supplies.................................................................... 8,670 7,281 Liquified natural gas in storage.......................................................... 3,381 3,630 Deferred income taxes........................................................................ 12,569 7,438 Prepayments and other........................................................................ 5,192 22,371 - --------------------------------------------------------------------------------------------------------------------------- Total current assets...................................................................... 218,453 242,165 - --------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Oil and gas properties, successful efforts method............................................ 516,040 454,210 Less accumulated depreciation, depletion and amortization.................................... 88,306 87,554 - --------------------------------------------------------------------------------------------------------------------------- Oil and gas properties, net.................................................................. 427,734 366,656 - --------------------------------------------------------------------------------------------------------------------------- Utility plant................................................................................ 632,165 583,630 Less accumulated depreciation................................................................ 307,488 287,749 - --------------------------------------------------------------------------------------------------------------------------- Utility plant, net........................................................................ 324,677 295,881 - --------------------------------------------------------------------------------------------------------------------------- Other property, net.......................................................................... 3,933 4,466 - --------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment, net..................................................... 756,344 667,003 - --------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Deferred income taxes........................................................................ 10,942 1,144 Deferred charges and other................................................................... 7,716 9,485 - --------------------------------------------------------------------------------------------------------------------------- Total other assets........................................................................ 18,658 10,629 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS................................................................................. $ 993,455 $ 919,797 - ---------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 28 11
- --------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands, except share data) 1998 1997 - --------------------------------------------------------------------------------------------------------------- CAPITAL AND LIABILITIES CURRENT LIABILITIES Long-term debt due within one year ...................................... $ 7,209 $ 1,855 Notes payable to banks .................................................. 153,000 202,000 Accounts payable ........................................................ 33,533 49,196 Accrued taxes ........................................................... 21,255 18,300 Customers' deposits ..................................................... 16,344 16,399 Amounts due customers ................................................... 12,070 7,347 Accrued wages and benefits .............................................. 15,299 13,719 Other ................................................................... 25,531 21,935 - --------------------------------------------------------------------------------------------------------------- Total current liabilities ............................................ 284,241 330,751 - --------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Other ................................................................... 7,183 8,301 - --------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities ......................... 7,183 8,301 - --------------------------------------------------------------------------------------------------------------- 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, 29,326,597 shares outstanding in 1998 and 28,796,218 shares outstanding in 1997 ........................................ 293 288 Premium on capital stock ........................................... 195,874 185,841 Capital surplus .................................................... 2,802 2,802 Retained earnings .................................................. 130,280 112,212 Deferred compensation plan .............................................. 873 -- Treasury stock, at cost (49,096 shares in 1998) ......................... (873) -- - --------------------------------------------------------------------------------------------------------------- Total common shareholders' equity .................................... 329,249 301,143 Long-term debt .......................................................... 372,782 279,602 - --------------------------------------------------------------------------------------------------------------- Total capitalization ................................................. 702,031 580,745 - --------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL AND LIABILITIES ........................................... $ 993,455 $919,797 - ---------------------------------------------------------------------------------------------------------------
*Share amounts reflect a 2-for-1 stock split effective March 2, 1998 Page 29 12 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Energen Corporation - -------------------------------------------------------------------------------- (In thousands, except share amounts) - --------------------------------------------------------------------------------
Common Stock ------------------- Deferred Number of Par Premium on Capital Retained Compensation Treasury Shares Value Capital Stock Surplus Earnings Plan Stock - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 21,843,466 $ 218 $ 81,278 $ 2,802 $ 89,876 $ -- $ (250) Net income 21,541 Purchase of treasury shares (1,985) Shares issued for: Dividend reinvestment plan 161,058 2 1,826 1,511 Employee benefit plans 320,744 3 3,762 724 Cash dividends - $0.585 per share (12,903) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 22,325,268 223 86,866 2,802 98,514 -- -- Net income 28,997 Shares issued for: Stock Offerings 5,850,000 59 89,837 Dividend reinvestment plan 241,604 2 3,610 Employee benefit plans 379,346 4 5,528 Cash dividends - $0.605 per share (15,299) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1997 28,796,218 288 185,841 2,802 112,212 -- -- Net income 36,249 Purchase of treasury shares (406) Shares issued for: Dividend reinvestment plan 172,612 2 3,369 Employee benefit plans 357,767 3 6,664 406 Deferred compensation obligation 873 (873) Cash dividends - $0.625 per share (18,181) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1998 29,326,597 $ 293 $ 195,874 $ 2,802 $ 130,280 $ 873 $ (873) - ----------------------------------------------------------------------------------------------------------------------------
*Share amounts reflect a 2-for-1 stock split effective March 2, 1998 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 30 13 CONSOLIDATED STATEMENTS OF CASH FLOWS
Energen Corporation - ----------------------------------------------------------------------------------------------- Years ended September 30, (in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income ......................................... $ 36,249 $ 28,997 $ 21,541 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization ........ 80,999 59,688 41,118 Deferred income taxes, net ...................... (15,407) (2,646) (672) Deferred investment tax credits, net ............ (469) (487) (487) Gain on sale of assets .......................... (2,789) (1,081) (3,954) Net change in: Accounts receivable ........................... 7,131 (22,550) (17,313) Inventories ................................... 2,990 2,057 (6,809) Accounts payable-gas purchases ................ (7,466) 5,758 (1,614) Accounts payable-trade ........................ 4,719 (131) 2,031 Amounts due customers ......................... 4,723 (9,810) 13,942 Other current assets and liabilities .......... 11,711 3,377 (2,821) Other, net ...................................... 1,232 (73) (1,461) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities ....... 123,623 63,099 43,501 - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to property, plant and equipment ......... (174,578) (283,274) (168,414) Proceeds from sale of assets ....................... 7,636 1,871 13,134 Payments on notes receivable ....................... 730 527 1,557 Other, net ......................................... (96) 1,030 1,627 - ----------------------------------------------------------------------------------------------- Net cash used in investing activities ........... (166,308) (279,846) (152,096) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Payment of dividends on common stock ............... (18,181) (15,299) (12,903) Issuance of common stock ........................... 10,444 99,040 7,828 Purchase of treasury stock ......................... (406) -- (1,985) Reduction of long-term debt ........................ (885) (943) (1,025) Proceeds from issuance of long-term debt ........... 98,541 84,416 64,586 Net change in short-term debt issued to purchase U.S. Treasury securities ................... 1,935 98,636 -- Net change in short-term debt ...................... (50,934) 44,998 26,700 - ----------------------------------------------------------------------------------------------- Net cash provided by financing activities ....... 40,514 310,848 83,201 - ----------------------------------------------------------------------------------------------- Net change in cash and cash equivalents ............ (2,171) 94,101 (25,394) Cash and cash equivalents at beginning of period ... 105,402 11,301 36,695 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period ......... $ 103,231 $ 105,402 $ 11,301 - -----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Page 31 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Energen Corporation 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------------------- Energen Corporation (the Company) is a diversified energy holding company engaged primarily in the purchase, distribution, and sale of natural gas principally in central and north Alabama (natural gas distribution), and in the acquisition, development, exploration and production of oil and gas in the continental United States (oil and gas activities). Following the close of business on September 30, 1998, Taurus Exploration, Inc. (Taurus), Energen's wholly owned oil and gas subsidiary, merged with its wholly owned subsidiary Taurus Exploration U.S.A., Inc. (Taurus U.S.A.). Taurus U.S.A.was the surviving corporation of the merger and at the time of the merger, Taurus U.S.A. changed its name to Energen Resources Corporation. References in this document to Energen Resources refer to Taurus and Taurus U.S.A., collectively. The following is a description of the Company's significant accounting policies and practices. A. PRINCIPLES OF CONSOLIDATION The accompanying financial statements include the accounts of the Company and its subsidiaries, principally Alabama Gas Corporation (Alagasco) and Energen Resources, after elimination of all significant intercompany transactions in consolidation. Certain reclassifications have been made to conform the prior years' financial statements to the current-year presentation. B. NATURAL GAS DISTRIBUTION UTILITY PLANT AND DEPRECIATION: Property, plant and equipment is stated at cost. The cost of utility plant includes an allowance for funds used during construction. Maintenance is charged for the cost of normal repairs and the renewal or replacement of an item of property which is less than a retirement unit. When property which represents a retirement unit is replaced or removed, the cost of such property is credited to utility plant and, together with the cost of removal less salvage, is charged to the accumulated reserve for depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of utility property at rates established by the Alabama Public Service Commission (APSC). Approved depreciation rates averaged approximately 4.4 percent in 1998 and 1997 and 4.3 percent in 1996. INVENTORIES: Inventories, which consist primarily of gas stored underground, are stated at average cost. OPERATING REVENUE AND GAS COSTS: In accordance with industry practice, Alagasco records natural gas distribution revenues on a monthly- and cycle-billing basis. The commodity cost of purchased gas applicable to gas delivered to customers but not yet billed under the cycle-billing method is deferred as a current asset. REGULATORY ACCOUNTING: Alagasco is subject to the provisions of Statement of Financial Accounting Standard (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. In general, SFAS No. 71 allows utilities to capitalize or defer certain costs or revenues, based upon approvals received from regulatory authorities, to be recovered from or refunded to customers in future periods. C. OIL AND GAS ACTIVITIES PROPERTY AND RELATED DEPLETION: Energen Resources follows the successful efforts method of accounting for costs incurred in the exploration and development of oil and gas reserves. Lease acquisition costs are capitalized initially, and unproved properties are reviewed periodically to determine if there has been impairment of the carrying value, with any such impairment charged to exploration expense currently. Exploratory drilling costs are capitalized pending determination of proved reserves. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploration costs, including geological and geophysical costs, are expensed as incurred. All development costs are capitalized. Depreciation, depletion and amortization is determined on a field-by-field basis using the unit-of-production method based on proved reserves. A provision for anticipated abandonment and restoration costs at the end of a property's useful life is made through depreciation expense. OPERATING REVENUE: Energen Resources utilizes the sales method of accounting to recognize oil and gas production revenue. Under the sales method, revenue is recognized for the Company's total takes of oil and gas production, and over-production liabilities are established only when it is estimated that a property's over-produced volumes exceed the net share of remaining Page 32 15 reserves for such property. Energen Resources has no material production imbalances at September 30, 1998. Gains and losses on the sale of property in the ordinary course of business are classified as operating revenue. Derivative Commodity Instruments: Energen Resources periodically 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. 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. 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 and current relationships between the derivative instruments and the sales prices of the hedged volumes to ensure that a high level of correlation exists. D. Income Taxes The Company's deferred income taxes reflect the impact of temporary differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. E. Cash Equivalents The Company includes highly liquid marketable securities and debt instruments purchased with a maturity of three months or less in cash equivalents. F. Earnings Per Share In accordance with SFAS No. 128, Earnings Per Share, the Company's basic earnings per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted earnings per share amounts reflect the assumed issuance of common shares for all potentially dilutive securities (see Note 16). G. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserves and the related present value of estimated future net revenues therefrom (see Note 14). 2. REGULATORY MATTERS - -------------------------------------------------------------------------------- As an Alabama utility, 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, and a $2.5 million annual decrease became effective July 1, 1998. Page 33 16 Alagasco calculates a temperature adjustment to customers' monthly bills to remove the effect of departures from normal temperatures on Alagasco's 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, including Gas Supply Realignment (GSR) surcharges imposed by Alagasco's suppliers resulting from changes in gas supply purchases related to the implementation of Federal Energy Regulatory Commission (FERC) Order 636. The APSC on October 7, 1996, issued an order providing for the refund to customers prior to January 31, 1997, of approximately $17 million of supplier refunds, including interest. The Company refunded these amounts to customers during January 1997. The refunds were collected from a variety of sources and most relate to the settlement of rate case and FERC Order 636 proceedings of Southern Natural Gas Company. 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 September 30, 1998 and 1997, a regulatory liability related to income taxes of $2.9 million and $3.7 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. The APSC has allowed the Company to amortize over a three-year period the cost associated with this early retirement program. The excess of total acquisition costs over book value of net assets of acquired municipal gas distribution systems is included in utility plant and is being amortized on a straight-line basis over approximately 23 years. At September 30, 1998 and 1997, the net acquisition adjustment was $15.4 million and $16.4 million, respectively. 3. LONG-TERM DEBT AND NOTES PAYABLE
- ------------------------------------------------------------------------------------------------------------------------- Long-term debt consists of the following: - ------------------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Energen Corporation: Medium-term Notes, interest ranging from 6.6% to 8.09%, for notes redeemable September 20, 2001, to February 15, 2028.................................... $ 225,000 $ 125,000 8% Debentures, due up to $1,000,000 annually to February 1, 2007........................ 18,689 18,704 Series 1993 Notes, interest ranging from 5.75% to 7.25%, due annually in payments ranging from $859,000 to $1,584,000 from March 1, 1999, to March 1, 2008....................................................................... 11,883 12,753 Alabama Gas Corporation: Medium-term Notes, interest ranging from 5.4% to 7.97%, for notes redeemable December 1, 1998, to September 23, 2026..................................... 125,000 125,000 - ------------------------------------------------------------------------------------------------------------------------- Total..................................................................................... 380,572 281,457 Less amounts due within one year.......................................................... 7,209 1,855 Less unamortized debt discount............................................................ 581 -- - ------------------------------------------------------------------------------------------------------------------------- Total..................................................................................... $ 372,782 $ 279,602 - -------------------------------------------------------------------------------------------------------------------------
Page 34 17 The aggregate maturities of long-term debt for the next five years are as follows:
- ----------------------------------------------------------------------------------------------------- Years ending September 30, (in thousands) - ----------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 - ----------------------------------------------------------------------------------------------------- $ 7,209 $ 1,955 $ 18,648 $ 17,077 $ 12,139 - -----------------------------------------------------------------------------------------------------
The Company is subject to various restrictions on the payment of dividends. Under its 8 percent debentures, the most restrictive provision states that dividends or other distributions with respect to common stock may not be made unless the Company maintains a minimum consolidated tangible net worth of $80 million; at September 30, 1998, Energen had a tangible net worth of $329 million. Energen and Alagasco had short-term credit lines and other credit facilities of $228 million available as of September 30, 1998 to either entity for working capital needs. At September 30, 1998 and 1997, the Company had $100.6 million and $98.6 million, respectively, of borrowings to purchase Treasury securities for tax planning purposes. The securities matured in early October and the proceeds were used to repay such borrowings. The securities were pledged as collateral on the debt. The following is a summary of information relating to notes payable to banks:
- --------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------- Amount outstanding ........................ $153,000 $152,000 $ 59,000 Amount outstanding under separate agreement -- 50,000 -- - --------------------------------------------------------------------------------------- Notes payable to banks .................... $153,000 $202,000 $ 59,000 Available for borrowings .................. 75,000 51,000 97,000 - --------------------------------------------------------------------------------------- Total ................................... $228,000 $253,000 $156,000 - --------------------------------------------------------------------------------------- Maximum amount outstanding at any month-end $180,000 $202,000 $ 95,000 Average daily amount outstanding .......... $ 81,008 $ 87,648 $ 37,960 Weighted average interest rates based on: Average daily amount outstanding ......... 5.92% 5.87% 5.68% Amount outstanding at year-end ........... 5.77% 5.96% 5.62% - ---------------------------------------------------------------------------------------
Total interest expense for Energen in 1998, 1997 and 1996 was $30,001,000, $22,906,000, and $13,920,000, respectively. 4. SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- 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 retroactively 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. During fiscal year 1998, the Company adopted Emerging Issues Task Force (EITF) Issue 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. In accordance with EITF Issue 97-14, amounts earned under the Deferred Compensation Plan and invested in common stock of the Company have been recorded as treasury stock, along with the related deferred compensation obligation in the Consolidated Statements of Shareholders' Equity. Page 35 18 5. INCOME TAXES
- --------------------------------------------------------------------------------------------------------------------------- The components of income taxes consist of the following: - --------------------------------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Taxes estimated to be payable currently: Federal................................................................. $ 11,828 $ 4,976 $ 5,218 State................................................................... 1,827 1,254 989 - --------------------------------------------------------------------------------------------------------------------------- Total current.......................................................... 13,655 6,230 6,207 - --------------------------------------------------------------------------------------------------------------------------- Taxes deferred: Federal................................................................. (15,342) (3,123) (1,221) State................................................................... (534) (10) 62 - --------------------------------------------------------------------------------------------------------------------------- Total deferred......................................................... (15,876) (3,133) (1,159) - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense (benefit)........................................ $ (2,221) $ 3,097 $ 5,048 - ---------------------------------------------------------------------------------------------------------------------------
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1998 and 1997 are as follows:
- ------------------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Current Noncurrent Current Noncurrent - ------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Minimum tax credit........................................ $ -- $ 30,288 $ -- $ 20,541 Insurance and accruals.................................... 2,566 -- 2,410 -- Unbilled revenue.......................................... 1,770 -- 1,699 -- Gas supply adjustment..................................... 768 -- -- -- Other, net................................................ 8,308 2,305 5,559 2,926 - ------------------------------------------------------------------------------------------------------------------------- Subtotal................................................. 13,412 32,593 9,668 23,467 Valuation allowance...................................... -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets............................... 13,412 32,593 9,668 23,467 - ------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation and basis differences........................ -- 20,393 -- 20,893 Gas supply adjustment..................................... -- -- 1,308 -- Other, net................................................ 843 1,258 922 1,430 - ------------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities.......................... 843 21,651 2,230 22,323 - ------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets..................................... $ 12,569 $ 10,942 $ 7,438 $ 1,144 - -------------------------------------------------------------------------------------------------------------------------
No valuation allowance with respect to deferred taxes is deemed necessary, as the Company anticipates generating adequate future taxable income to realize the benefits of all deferred tax assets on the consolidated balance sheets. As of September 30, 1998, the amount of minimum tax credit which can be carried forward indefinitely to reduce future regular tax liability is $30.3 million. Total income tax expense (benefit) differs from the amount which would be provided by applying the statutory federal income tax rate to earnings before taxes as illustrated below:
- ---------------------------------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Income tax expense at statutory federal income tax rate................... $ 11,910 $ 11,233 $ 9,306 Increase (decrease) resulting from: Nonconventional fuels credits.......................................... (14,453) (8,058) (4,221) Deferred investment tax credits........................................ (469) (487) (487) State income taxes, net of federal income tax benefit.................. 894 813 681 Other, net............................................................. (103) (404) (231) - ---------------------------------------------------------------------------------------------------------------------------- Total income tax expense (benefit)........................................ $ (2,221) $ 3,097 $ 5,048 - ----------------------------------------------------------------------------------------------------------------------------
Page 36 19 6. EMPLOYEE BENEFIT PLANS - -------------------------------------------------------------------------------- The Company has two defined benefit non-contributory pension plans which cover a majority of the employees. Benefits are based on years of service and final earnings. The Company's policy is to use "the projected unit credit" actuarial method for funding and financial reporting purposes. The expense for the plan covering the majority of employees (Plan A) for the years ended September 30, 1998, 1997 and 1996, was $1,716,000, $1,228,000, and $412,000, respectively. The expense for the plan covering employees under certain labor union agreements (Plan B) for 1998, 1997 and 1996 was $403,000, $437,000 and $197,000, respectively.
The funded status of the plans is as follows: - -------------------------------------------------------------------------------------------------------------------------- As of June 30, (in thousands) PLAN A PLAN B - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Vested benefits............................................. $ (67,476) $ (57,617) $ (16,467) $ (14,610) Nonvested benefits.......................................... (5,268) (4,739) (2,431) (2,256) - -------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation.............................. (72,744) (62,356) (18,898) (16,866) Effects of salary progression............................... (15,537) (11,402) -- -- - -------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation................................ (88,281) (73,758) (18,898) (16,866) Fair value of plan assets, primarily equity and fixed income securities................................... 90,661 84,859 23,081 20,820 Unrecognized net (gain) loss................................ (2,773) (6,477) (2,944) (2,747) Unrecognized prior service cost............................. 3,025 29 791 998 Unrecognized net transition obligation (asset).............. (2,686) (3,494) 226 282 - -------------------------------------------------------------------------------------------------------------------------- Accrued pension asset (liability)........................... $ (54) $ 1,159 $ 2,256 $ 2,487 - --------------------------------------------------------------------------------------------------------------------------
At September 30, 1998 and 1997, the discount rate used to measure the projected benefit obligation for both plans was 7 percent and 7.75 percent, respectively, and the expected long-term rate of return on plan assets was 8.25 percent. The annual rate of salary increase for the salaried plan was 5.25 percent in 1998 and 5.75 percent in 1997.
The components of net pension expense for 1998, 1997 and 1996 were: - --------------------------------------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) PLAN A PLAN B - --------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Service cost .................................. $ 2,386 $ 2,227 $ 2,147 $ 224 $ 243 $ 255 Interest cost on projected benefit obligation . 5,842 5,524 4,617 1,261 1,238 1,166 Actual return on plan assets .................. (9,516) (12,629) (15,280) (3,450) (3,803) (2,971) Net amortization and deferral ................. 3,004 6,106 8,928 2,368 2,759 1,747 - --------------------------------------------------------------------------------------------------------------------------------- Net pension expense ........................... $ 1,716 $ 1,228 $ 412 $ 403 $ 437 $ 197 - ---------------------------------------------------------------------------------------------------------------------------------
The Company has deferred compensation plan agreements with certain key executives providing for payments on retirement, termination, death or disability. Expense under these agreements for 1998, 1997 and 1996 was ($54,000), $399,000 and $1,002,000, respectively. At June 30, 1998 and 1997, the accumulated post-retirement benefit obligation related to these agreements was $2,901,000 and $5,961,000, respectively, and the projected benefit obligation was $7,088,000 and $9,839,000, respectively. A prepaid post-retirement benefit asset of $434,000 and $499,000 was recorded at June 30, 1998 and 1997, respectively. In addition to providing pension benefits, the Company provides certain post-retirement health care and life insurance benefits. Substantially all of the Company's employees may become eligible for such benefits if they reach normal retirement age while working for the Company. While the Company has not adopted a formal funding policy, all of its accrued post-retirement liability was funded at year-end. The expense for salaried employees for the years ended September 30, 1998, 1997 and 1996 was $2,040,000, $2,221,000 and $1,984,000, respectively. The expense for union employees was $4,367,000, $4,204,000 and $4,076,000 during 1998, 1997 and 1996, respectively. The "projected unit credit" actuarial method was used to determine the normal cost and actuarial liability. Page 37 20
A reconciliation of the estimated status of the obligation is as follows: - -------------------------------------------------------------------------------------------------------------------------- As of June 30, (in thousands) SALARIED EMPLOYEES UNION EMPLOYEES - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 ------------------------------------------------------------ Retirees.................................................... $ (13,916) $ (9,590) $ (15,162) $ (14,529) Active, fully-eligible...................................... (3,107) (2,121) (4,957) (4,340) Other active................................................ (12,289) (8,309) (17,632) (14,151) - -------------------------------------------------------------------------------------------------------------------------- Accumulated post-retirement benefit obligation.............. (29,312) (20,020) (37,751) (33,020) Fair value of plan assets, primarily equity and fixed income securities................................... 30,476 23,719 23,081 13,363 Unamortized amounts......................................... (1,561) (4,686) 13,558 17,405 - -------------------------------------------------------------------------------------------------------------------------- Accrued post-retirement benefit liability................... $ (397) $ (987) $ (1,112) $ (2,252) - --------------------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit expense for the years ended September 30, 1998, 1997 and 1996, included the following: - --------------------------------------------------------------------------------------------------------------------------- For the years ended September 30,(in thousands) SALARIED EMPLOYEES UNION EMPLOYEES - --------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 -------------------------------------------------------------------------- Service cost................................... $ 967 $ 979 $ 516 $ 1,314 $ 1,198 $ 876 Interest cost on accumulated post-retirement benefit obligation........................... 2,049 2,204 1,679 2,612 2,542 2,195 Amortization of transition obligation.......... 723 723 723 1,285 1,285 1,285 Amortization of actuarial gains and losses..... (510) (568) (277) (107) -- -- Deferred asset gain (loss)..................... 4,972 3,682 658 5,891 2,006 177 Gain or (loss) on plan assets.................. (6,161) (4,799) (1,315) (6,628) (2,827) (457) - --------------------------------------------------------------------------------------------------------------------------- Net periodic post-retirement benefit expense... $ 2,040 $ 2,221 $ 1,984 $ 4,367 $ 4,204 $ 4,076 - ---------------------------------------------------------------------------------------------------------------------------
The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7 percent in 1998 and 7.75 percent in 1997. The expected long-term rate of return on assets is 8.25 percent for both years, and the tax rate on investment income is assumed to be 40 percent. The weighted average health care cost trend rate used in determining the accumulated post-retirement benefit obligation was 7.5 percent and 8.25 percent in 1998 and 1997, respectively. That assumption has a significant effect on the amounts reported. For example, with respect to salaried employees, increasing the weighted average health care cost trend rate by 1 percent would increase the accumulated post-retirement benefit obligation by 2.7 percent and the net periodic post-retirement benefit cost by 2.4 percent. For union employees, increasing the weighted average health care cost trend rate by 1 percent would increase the accumulated post-retirement benefit obligation by 7.3 percent and the net periodic post-retirement benefit cost by 7.1 percent. For pay-related life insurance benefits, the salary scale averages 5.25 percent and 5.75 percent in 1998 and 1997, respectively. For both defined benefit plans and other post-retirement plans, certain financial assumptions are used in determining the Company's projected benefit obligation. These assumptions are examined periodically by the Company, and any required changes are reflected in the subsequent determination of projected benefit obligations. The Company has a long-term disability plan covering most salaried employees. Expense for the years ended September 30, 1998, 1997 and 1996, was $173,000, $163,000 and $370,000, respectively. Page 38 21 7. COMMON STOCK PLANS - ------------------------------------------------------------------------------- A majority of Company employees are eligible to participate in the Energen Employee Savings Plan (ESP) by investing a portion of their compensation in the Plan, with the Company matching a part of the employee investment by contributing Company common stock (new issue or treasury shares) or funds for the purchase of Company common stock. The ESP also contains employee stock ownership plan provisions. At September 30, 1998, 1,116,927 common shares were reserved for issuance under the ESP. Expense associated with Company contributions to the ESP was $3,168,000, $3,083,000 and $2,902,000 for 1998, 1997 and 1996, respectively. In 1992 the Company adopted the Energen Corporation 1992 Long-Range Performance Plan which provides for the award of up to 1,000,000 performance units, with each unit equal to the market value of one share of common stock, to eligible employees based on predetermined performance criteria at the end of a four-year award period. Under the Plan, a portion of the performance units is payable with Company common stock; accordingly, 700,000 shares have been reserved for issuance. Under the Plan, 97,545, 120,660, and 125,260 performance units were awarded in 1998, 1997 and 1996, respectively, leaving 279,245 performance units available for award as of September 30, 1998. The Company recorded expense of $2,815,000, $2,632,000 and $1,223,000 for 1998, 1997 and 1996, respectively, under the Plan. In 1996 the Company amended its Dividend Reinvestment and Common Stock Purchase Plan to include a direct stock purchase feature which allows purchases by non-shareholders. Accordingly, 1,500,000 shares were added to the Plan. As of September 30, 1998, 1,247,600 common shares were reserved under this Plan. On November 27, 1997, the Company adopted the Energen Corporation 1997 Stock Option Plan. The 1997 Stock Option Plan along with the Energen Corporation 1988 Stock Option Plan provides for the grant of incentive stock options, non-qualified stock options, or a combination thereof to officers and key employees. Options granted under the Plans provide for purchase of the Company's common stock at not less than the fair market value on the date the option is granted. Under the 1988 Stock Option Plan, 540,000 shares of the Company's common stock which were reserved for issuance have been granted. Under the 1997 Stock Option Plan, 1,300,000 shares of the Company's common stock have been reserved for issuance. Options were granted in 1996 with dividend equivalents. All outstanding options are non-qualified and expire 10 years from the date of grant. Transactions under the Plans are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------- 1997 STOCK For the years ended September 30, (in thousands) OPTION PLAN 1988 STOCK OPTION PLAN - ------------------------------------------------------------------------------------------------------------------------- 1998 1998 1997 1996 ---------------------------------------------------------- Outstanding at beginning of year ($8.375 - $15.00).......... -- 423,112 324,112 304,112 Granted (at $8.375 - $18.25)................................ 256,320 80,680 106,000 20,000 Exercised (at $8.375 - $9.188).............................. -- (6,000) (7,000) -- - ------------------------------------------------------------------------------------------------------------------------- Outstanding at year-end..................................... 256,320 497,792 423,112 324,112 - ------------------------------------------------------------------------------------------------------------------------- Exercisable at year-end..................................... -- 333,112 317,112 324,112 - ------------------------------------------------------------------------------------------------------------------------- Remaining reserved for issuance at year-end................. 1,043,680 -- 80,696 186,696 - -------------------------------------------------------------------------------------------------------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation expense has been recognized for its non-qualified stock options. Had compensation cost for those options been determined in accordance with SFAS No. 123, the Company's net income and basic earnings per share would have been $35.8 million, or $1.23 per share, in 1998 and $28.9 million, or $1.15 per share, in 1997. In 1992 the Company adopted the Energen Corporation 1992 Directors Stock Plan to pay part of the compensation of its non-employee directors in shares of the Company's common stock. Under the Plan, 6,813, 6,124 and 8,644 shares were issued in 1998, 1997 and 1996, respectively, leaving 157,607 shares reserved for issuance as of September 30, 1998. In 1988 the Company adopted a Shareholders Rights Plan (the 1988 Plan) designed to protect shareholders from coercive or unfair takeover tactics. The 1988 Plan expired on July 27, 1998. On June 24, 1998, the Company adopted a new Shareholders Rights Plan (the 1998 Plan) to replace the 1988 Plan upon its expiration. Under certain circumstances, the 1998 plan provides shareholders with the right to acquire the Company's Series 1998 Junior Participating Preferred Stock (or, in certain cases, securities of an acquiring person) at a significant discount. Terms and conditions are set forth in a Rights Agreement between Page 39 22 the Company and its Rights Agent. Under the 1998 plan, one right is associated with each outstanding share of Common Stock. Rights outstanding under the Shareholder Rights Plan at September 30, 1998, were convertible into 293,266 shares of Series 1998 Junior Participating Preferred Stock (1/100 share of preferred stock for each full right) subject to adjustment upon occurrence of certain take-over related events. No rights were exercised or exercisable during the period. The price at which the rights would be exercised is $70 per right, subject to adjustment upon occurrence of certain take-over related events. In general, absent certain take-over related events as described in the Plan, the rights may be redeemed prior to the July 27, 2008, expiration for $0.01 per right. 8. COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------- CONTRACTS AND AGREEMENTS: The Company has various firm gas supply and firm gas transportation contracts which expire at various dates through the year 2008. These contracts typically contain minimum demand charge obligations on the part of the Company. Energen Resources has an agreement with Sonat Exploration Company under which it has the option to acquire an interest in any properties purchased by that company under its reserve acquisition program. No significant Sonat joint venture acquisitions were made in fiscal 1998. The agreement will expire at the end of calendar year 1998. ENVIRONMENTAL MATTERS: Alagasco is in the chain of title of eight former manufactured gas plant sites, of which it still owns four, and five manufactured gas distribution sites, of which it still owns one. A preliminary investigation of the sites does not indicate the present need for remediation activities. Management expects that, should remediation of any such sites be required in the future, Alagasco's share, if any, of such costs will not materially affect the results of operations or financial condition of Alagasco. Energen Resources is subject to various environmental regulations. Management believes that Energen Resources is in compliance with the currently applicable standards of the environmental agencies to which it is subject and that potential environmental liabilities, if any, are minimal. Also, to the extent Energen Resources has operating agreements with various joint venture partners, environmental costs, if any, would be shared proportionately. LEGAL MATTERS: Energen and its affiliates are, from time to time, parties to various pending or threatened legal proceedings. Certain of these lawsuits include claims for punitive damages in addition to other specified relief. Based upon information presently available, and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the respective financial positions of Energen and its affiliates. It should be noted, however, that Energen and its affiliates conduct business in Alabama and other jurisdictions in which the magnitude and frequency of punitive damage awards may bear little or no relation to culpability or actual damages thus making it increasingly difficult to predict litigation results. Various legal proceedings arising in the normal course of business are currently in progress, and the Company has accrued a provision for estimated costs. LEASE OBLIGATIONS: Total payments related to leases included as operating expense were $5,271,000, $3,987,000 and $3,050,000 in 1998, 1997 and 1996, respectively. Minimum future rental payments (in thousands) required after 1998 under leases with initial or remaining noncancelable lease terms in excess of one year are as follows:
- ------------------------------------------------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 2004 and thereafter - ------------------------------------------------------------------------------------------------------------------------ $ 3,854 $ 3,123 $ 2,717 $ 2,175 $ 2,133 $ 4,223 - ------------------------------------------------------------------------------------------------------------------------
The Company expects to close negotiations on a sale and leaseback of the new building headquarters in the first quarter of 1999. Page 40 23 9. SUPPLEMENTAL CASH FLOW INFORMATION - -------------------------------------------------------------------------------
Supplemental information concerning cash flow activities is as follows: - ------------------------------------------------------------------------------------------------------------------------- For the years ended September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Interest paid........................................................... $ 28,442 $ 18,385 $ 13,261 Income taxes paid....................................................... $ 12,764 $ 6,308 $ 5,486 Noncash investing activities Capitalized depreciation.............................................. $ 187 $ 168 $ 166 Allowance for funds used during construction.......................... $ 400 $ 490 $ 972 Noncash financing activities (debt issuance costs)...................... $ 875 $ 585 $ 414 - -------------------------------------------------------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - ------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS: The fair value of cash and cash equivalents, trade receivables (net of allowance), and short-term debt approximates fair value due to the short maturity of the instruments. The fair value of fixed-rate long-term debt, including the current portion, with a carrying value of $380,572,000, would be $389,027,000 at September 30, 1998. The fair value was based on the market value of debt with similar maturities and with interest rates currently trading in the marketplace. The Company has entered into an agreement with a financial institution whereby it can sell on an ongoing basis, with recourse, certain installment receivables related to its merchandising program up to a maximum of $20 million. During 1998, 1997 and 1996, the Company sold $8,100,000, $7,926,000 and $8,831,000, respectively, of installment receivables. At September 30, 1998 and 1997, the balance of these installment receivables was $17,105,000 and $17,160,000, respectively. Receivables sold under this agreement are considered financial instruments with off-balance sheet risk. The Company's exposure to credit loss in the event of non-performance by customers is represented by the balance of installment receivables. PRICE RISK: 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 $0.6 million and deferred losses of $12.9 million on the balance sheet at September 30, 1998 and 1997, respectively. At September 30, 1998, Energen Resources has entered into contracts and swaps for 48.9 Bcf of its 1999 flowing gas production at an average contract price of $2.31 per Mcf and 1,080 MBbl of its oil production at an average contract price of $16.31 per barrel. The program has been extended into fiscal years 2000 and 2001 with contracts and swaps in place for 5.2 Bcf of flowing gas production at an average contract price of $2.22 per Mcf and 180 MBbl of oil production at an average contract price of $17.31. Realized prices are anticipated to be lower than hedged prices due to basis difference and other factors. To help mitigate this variance, the Company has hedged the basis difference on 3.6 Bcf of its 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 and current relationships between the derivative instruments and the sales prices of the hedged volumes to ensure that a high level of correlation exists. Page 41 24 CONCENTRATION OF CREDIT RISK: Natural gas distribution operating revenues and related accounts receivable are generated from state-regulated utility natural gas sales and transportation to more than 468,000 residential, commercial and industrial customers located in central and north Alabama. A change in economic conditions may affect the ability of customers to meet their obligations; however, the Company believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. Revenues and related accounts receivable from exploration and production operations are generated primarily from the sale of produced natural gas and oil. This industry concentration has the potential to impact the Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic, industry, or other conditions. The Company is not aware of any significant credit risks which have not been recognized in the provision for doubtful accounts. 11. ACCOUNTING FOR LONG-LIVED ASSETS - ------------------------------------------------------------------------------- During fiscal year 1997, the Company adopted SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Statement 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 fourth quarter of 1997, the Company recorded a pre-tax writedown of $2.1 million on certain oil and gas properties that were being held for sale. The properties had 9.7 Bcf of proved undeveloped reserves. The expense was recorded as additional depreciation, depletion and amortization. During fiscal year 1998 these properties were sold for a gain of $365,000. 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. 12. RECENT PRONOUNCEMENTS OF THE FASB - ------------------------------------------------------------------------------- In fiscal 1998, the Company adopted SFAS No. 128, Earnings Per Share (EPS), which specifies computation, presentation, and disclosure requirements for EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and the denominator of the basic EPS computation to that of the diluted computation. The Company also adopted during fiscal 1998, SFAS No. 129, Disclosures of Information about Capital Structure. It contains no change in disclosure requirements for public entities that were previously subject to the requirements of Accounting Principles Board No. 10 and No. 15 and SFAS No. 47. As a result, SFAS No. 129 had no impact on the Company's consolidated financial statements. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be required, was issued in June 1997. SFAS No. 131 relates solely to disclosure provisions, and therefore does not have any effect on the results of operations or financial position of the Company. The Company has chosen to early adopt this pronouncement as of September 30, 1998. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, 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 pensions, 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 is currently being evaluated. Page 42 25 13. SUMMARIZED QUARTERLY FINANCIAL DATA (Unaudited) - ------------------------------------------------------------------------------- The following data summarize quarterly operating results. The Company's business is seasonal in character and strongly influenced by weather conditions. - -------------------------------------------------------------------------------
1998 Fiscal Quarters -------------------- (In thousands, except per share amounts) First Second Third Fourth - -------------------------------------------------------------------------------------------------------------------------- Operating revenues............................................ $ 125,888 $ 197,973 $ 100,712 $ 78,054 Operating income (loss)....................................... $ 13,142 $ 44,426 $ 6,806 $ (2,889) Net income (loss)............................................. $ 6,127 $ 40,292 $ (85) $ (10,085) Basic earnings (loss) per average common share................ $ 0.21 $ 1.39 $ 0.00 $ (0.34) - -------------------------------------------------------------------------------------------------------------------------- 1997 Fiscal Quarters -------------------- (In thousands, except per share amounts) First Second Third Fourth - -------------------------------------------------------------------------------------------------------------------------- Operating revenues............................................ $ 97,002 $ 182,942 $ 90,879 $ 77,407 Operating income (loss)....................................... $ 7,955 $ 41,598 $ 8,244 $ (5,811) Net income (loss)............................................. $ 3,177 $ 30,531 $ 3,007 $ (7,718) Basic earnings (loss) per average common share................ $ 0.14 $ 1.21 $ 0.11 $ (0.29) - --------------------------------------------------------------------------------------------------------------------------
14. OIL AND GAS PRODUCING ACTIVITIES (Unaudited) - ------------------------------------------------------------------------------- The following schedules detail historical financial data of the Company's oil and gas producing activities. Certain terms appearing in the schedules are prescribed by the Securities and Exchange Commission (SEC) and are briefly described as follows: LEASE ACQUISITION COSTS are costs incurred to lease or otherwise acquire a property. EXPLORATION EXPENSES are primarily costs associated with drilling unsuccessful exploratory wells in undeveloped properties, exploratory geological and geophysical activities, and costs of impaired leaseholds. DEVELOPMENT COSTS include costs necessary to gain access to, prepare and equip development wells in areas of proved reserves. PRODUCTION (LIFTING) COSTS include costs incurred to operate and maintain wells. GRPSS REVENUES are reported after deduction of royalty interest payments. GROSS WELL OR ACRE is a well or acre in which a working interest is owned. NET WELL OR ACRE is deemed to exist when the sum of fractional ownership working interests in gross wells or acres equals one. DRY WELL is an exploratory or a development well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well. PRODUCTIVE WELL is an exploratory or a development well that is not a dry well.
CAPITALIZED COSTS - ------------------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Proved.................................................................. $ 502,025 $ 432,095 $ 222,428 Unproved................................................................ 14,015 22,115 2,041 - ------------------------------------------------------------------------------------------------------------------------- Total capitalized costs............................................... 516,040 454,210 224,469 Accumulated depreciation, depletion and amortization.................... 88,306 87,554 60,152 - ------------------------------------------------------------------------------------------------------------------------- Capitalized costs, net.................................................. $ 427,734 $ 366,656 $ 164,317 - -------------------------------------------------------------------------------------------------------------------------
Page 43 26 COSTS INCURRED The following table sets forth costs incurred in property acquisition and exploration and development activities and includes both capitalized costs and costs charged to expense during the year:
- ------------------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Property acquisition: Proved................................................................ $ 82,814 $ 171,701 $ 108,315 Unproved.............................................................. 1,933 22,028 1,693 Exploration............................................................. 5,593 14,847 11,124 Development............................................................. 35,307 36,375 10,040 - ------------------------------------------------------------------------------------------------------------------------- Total costs incurred.................................................... $ 125,647 $ 244,951 $ 131,172 - -------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS The following table sets forth results of the Company's oil and gas producing activities:
- ------------------------------------------------------------------------------------------------------------------------- Years ended September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Gross revenues.......................................................... $ 129,978 $ 84,366 $ 38,421 Production (lifting) costs.............................................. 48,388 25,486 10,573 Exploration expense*.................................................... 5,773 6,636 5,439 Depreciation, depletion and amortization**.............................. 54,411 35,393 18,583 Income tax benefit...................................................... (5,870) (2,299) (3,004) - ------------------------------------------------------------------------------------------------------------------------- Results of operations from producing activities......................... $ 27,276 $ 19,150 $ 6,830 - -------------------------------------------------------------------------------------------------------------------------
* Includes a $2.5 million writedown of a portion of an unproved leasehold in 1998 ** Includes a writedown of $4.7 million and $2.1 million in 1998 and 1997, respectively, under SFAS 121 (see Note 11)
AVERAGE SALES PRICE, PRODUCTION COST AND DEPRECIATION RATE - ------------------------------------------------------------------------------------------------------------------------- Years ended September 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Average sales price: Gas (per Mcf)......................................................... $ 2.21 $ 2.05 $ 1.97 Oil (per barrel)...................................................... $ 14.96 $ 18.08 $ 16.25 Natural gas liquids (per barrel)...................................... $ 8.65 $ 11.45 $ -- Average production (lifting) cost (per Mcf equivalent).................. $ 0.84 $ 0.69 $ 0.66 Average depreciation rate (per Mcf equivalent).......................... $ 0.87 $ 0.90 $ 1.15 - -------------------------------------------------------------------------------------------------------------------------
DRILLING ACTIVITY The following table sets forth the total number of net productive and dry exploratory and development wells drilled:
- ------------------------------------------------------------------------------------------------------------------------- Years ended September 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Exploratory: Productive............................................................ 0.7 1.6 1.1 Dry................................................................... 1.0 1.2 1.5 - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ 1.7 2.8 2.6 - ------------------------------------------------------------------------------------------------------------------------- Development: Productive............................................................ 19.5 17.7 2.4 Dry................................................................... 2.9 0.7 -- - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ 22.4 18.4 2.4 - -------------------------------------------------------------------------------------------------------------------------
As of September 30, 1998, the Company was participating in the drilling of 2 gross wells, with the Company's interest equivalent to .35 wells. Page 44 27 PRODUCTIVE WELLS AND ACREAGE The following table sets forth the total gross and net productive gas and oil wells as of September 30, 1998, and developed and undeveloped acreage as of the latest practicable date prior to year end:
- ------------------------------------------------------------------------------------------------------------------------- Gross Net - ------------------------------------------------------------------------------------------------------------------------- Gas Wells................................................................................. 3,180 1,501 Oil Wells................................................................................. 2,668 470 - ------------------------------------------------------------------------------------------------------------------------- Developed Acreage......................................................................... 849,860 551,560 Undeveloped Acreage....................................................................... 134,230 47,621 - -------------------------------------------------------------------------------------------------------------------------
All wells and acreage are located onshore in the United States, with the majority of the net undeveloped acreage located in the Gulf Coast region. OIL AND GAS PRODUCING ACTIVITIES The calculation of proved reserves is made pursuant to rules prescribed by the SEC. Such rules, in part, require that only proved categories of reserves be disclosed and that reserves and associated values be calculated using current prices and costs. Changes to current prices and costs might have a significant effect on the disclosed amount of reserves and their associated values. In addition, the estimation of reserves inherently requires the use of geologic and engineering estimates which are subject to revision as reservoirs are produced and developed and as additional information is available. Accordingly, the amount of actual future production may vary significantly from the amount of reserves disclosed. See Note 10 for pricing information regarding the hedging activities of the Company. Prior to 1997, natural gas liquid quantities were insignificant and were included in oil quantities. The proved reserves are located in the United States, both onshore and offshore, and are as follows:
- -------------------------------------------------------------------------------------------------------------------------- Years ended September 30, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Gas Oil NGL Gas Oil NGL Gas Oil MMcf MBbl MBbl MMcf MBbl MBbl MMcf MBbl - -------------------------------------------------------------------------------------------------------------------------- Proved reserves at beginning of year .... 544,283 9,128 12,378 212,977 6,315 -- 71,267 3,986 Revisions of previous estimates ......... (13,006) (1,402) 2,211 (2,910) (110) -- 502 369 Purchase of minerals in place ........... 21,590 13,284 441 352,373 3,650 12,880 155,647 3,805 Discoveries and other additions ......... 44,347 278 3,079 11,946 83 -- 5,113 49 Production .............................. (43,853) (1,433) (817) (29,318) (775) (502) (12,308) (635) Sales of minerals in place .............. (11,322) (10) -- (785) (35) -- (7,244) (1,259) - -------------------------------------------------------------------------------------------------------------------------- Proved reserves at end of year .......... 542,039 19,845 17,292 544,283 9,128 12,378 212,977 6,315 - -------------------------------------------------------------------------------------------------------------------------- Proved developed reserves at end of year. 493,770 14,053 14,214 511,864 8,140 12,378 175,124 5,012 - --------------------------------------------------------------------------------------------------------------------------
During the year, Energen Resources invested $83 million in proved property acquisitions. Energen Resources also sold approximately 11 Bcfe and recorded a pre-tax gain of $1.6 million. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES The standardized measure of discounted future net cash flows is not intended, nor should it be interpreted, to present the fair market value of the Company's crude oil and natural gas reserves. An estimate of fair market value would take into consideration factors such as, but not limited to, the recovery of reserves not presently classified as proved reserves, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.
- ------------------------------------------------------------------------------------------------------------------------- Years ended September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Future gross revenues................................................... $ 1,109,829 $ 1,553,333 $ 502,607 Future production costs................................................. 476,589 571,732 216,755 Future development costs................................................ 67,459 74,396 40,665 - ------------------------------------------------------------------------------------------------------------------------- Future net cash flows before income taxes............................... 565,781 907,205 245,187 Future income tax expense (benefit) including tax credits............... 12,917 162,172 3,707 - ------------------------------------------------------------------------------------------------------------------------- Future net cash flows after income taxes................................ 552,864 745,033 241,480 Discount at 10% per annum............................................... 195,606 305,679 70,641 - ------------------------------------------------------------------------------------------------------------------------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves................................. $ 357,258 $ 439,354 $ 170,839 - -------------------------------------------------------------------------------------------------------------------------
Page 45 28 The following are the principal sources of changes in the standardized measure of discounted future net cash flows:
- ------------------------------------------------------------------------------------------------------------------------- Years ended September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year............................................ $ 439,354 $ 170,839 $ 63,559 - ------------------------------------------------------------------------------------------------------------------------- Revisions to reserves proved in prior years: Net changes in prices, production costs and future development costs................................................... (175,156) 44,913 15,051 Net changes due to revisions in quantity estimates.................... (4,993) (7,378) 552 Development costs incurred, previously estimated...................... 13,722 16,743 6,713 Accretion of discount................................................. 43,935 17,084 6,356 Other................................................................. (22,329) (1,599) 1,215 - ------------------------------------------------------------------------------------------------------------------------- Total Revisions......................................................... (144,821) 69,763 29,887 New field discoveries and extensions, net of future production and development costs...................................... 9,989 8,947 4,705 Sales of oil and gas produced, net of production costs.................. (69,732) (53,848) (24,002) Purchases of minerals in place.......................................... 50,010 259,918 94,728 Sales of minerals in place.............................................. (12,713) (625) (10,597) Net change in income taxes.............................................. 85,171 (15,640) 12,559 - ------------------------------------------------------------------------------------------------------------------------- Net change in standardized measure of discounted future net cash flows........................................................ (82,096) 268,515 107,280 - ------------------------------------------------------------------------------------------------------------------------- Balance at end of year.................................................. $ 357,258 $ 439,354 $ 170,839 - -------------------------------------------------------------------------------------------------------------------------
COALBED METHANE ACTIVITIES Energen Resources is actively engaged in the production of pipeline-quality natural gas from coal (coalbed methane). The results of coalbed methane activities have been included in the oil and gas disclosures shown previously. Because of the significance of coalbed methane to Energen Resources, certain data are separately disclosed below.
- ------------------------------------------------------------------------------------------------------------------------- Years ended September 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Proved reserves at beginning of year (MMcf)............................. 230,323 130,387 25,004 Revisions of previous estimates......................................... 6,960 1,959 4,231 Purchases of minerals in place.......................................... -- 107,228 105,762 Production.............................................................. (14,802) (9,251) (4,610) - ------------------------------------------------------------------------------------------------------------------------- Proved reserves at end of year (MMcf)................................... 222,481 230,323 130,387 - ------------------------------------------------------------------------------------------------------------------------- Estimated proved reserves qualifying for tax credits (MMcf)............. 45,309 55,776 30,142 - ------------------------------------------------------------------------------------------------------------------------- Net capitalized costs (in thousands).................................... $ 139,001 $ 145,686 $ 77,708 - ------------------------------------------------------------------------------------------------------------------------- Gross wells in which the company has working and/or revenue interests................................................ 886 863 825 - ------------------------------------------------------------------------------------------------------------------------- Net productive wells.................................................... 549.6 548.4 279.1 - -------------------------------------------------------------------------------------------------------------------------
Production of coalbed methane from wells drilled prior to January 1, 1993, qualifies through December 31, 2002, for nonconventional fuels income tax credits under Section 29 of the Internal Revenue Code of 1986, as amended. The tax credit currently approximates $1.07 per Mcf of qualifying production. Accordingly, a significant portion of the value of proved coalbed methane reserves is associated with this tax credit. Page 46 29 15. INDUSTRY SEGMENT INFORMATION - ------------------------------------------------------------------------------- Effective September 30, 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company is principally engaged in two business segments: the purchase, distribution and sale of natural gas in central and north Alabama (natural gas distribution) and the acquisition, development, exploration and production of oil and gas in the continental United States (oil and gas activities). The accounting policies of the segments are the same as those described in Note 1. Certain reclassifications have been made to conform the prior year to the current year presentation.
- ------------------------------------------------------------------------------------------------------------------------- As of September 30, (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Operating revenues Natural gas distribution.............................................. $ 369,940 $ 362,984 $ 357,252 Oil and gas activities................................................ 132,687 85,246 42,190 - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ $ 502,627 $ 448,230 $ 399,442 - ------------------------------------------------------------------------------------------------------------------------- Operating income (loss) Natural gas distribution.............................................. $ 41,663 $ 38,792 $ 35,270 Oil and gas activities................................................ 20,992 14,723 4,779 Eliminations and corporate expenses................................... (1,170) (1,529) (1,252) - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ $ 61,485 $ 51,986 $ 38,797 - ------------------------------------------------------------------------------------------------------------------------- Depreciation, depletion and amortization expense Natural gas distribution.............................................. $ 25,153 $ 23,486 $ 21,269 Oil and gas activities................................................ 55,846 36,202 19,849 - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ $ 80,999 $ 59,688 $ 41,118 - ------------------------------------------------------------------------------------------------------------------------- Interest expense Natural gas distribution.............................................. $ 10,221 $ 10,809 $ 9,585 Oil and gas activities................................................ 20,130 12,705 4,896 Eliminations and other................................................ (350) (608) (561) - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ $ 30,001 $ 22,906 $ 13,920 - ------------------------------------------------------------------------------------------------------------------------- Income tax expense (benefit) Natural gas distribution.............................................. $ 11,400 $ 10,117 $ 9,047 Oil and gas activities................................................ (13,896) (7,341) (4,040) Other................................................................. 275 321 41 - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ $ (2,221) $ 3,097 $ 5,048 - ------------------------------------------------------------------------------------------------------------------------- Capital expenditures Natural gas distribution.............................................. $ 54,168 $ 43,277 $ 43,175 Oil and gas activities................................................ 120,991 239,718 126,317 Other................................................................. 6 15 60 - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ $ 175,165 $ 283,010 $ 169,552 - ------------------------------------------------------------------------------------------------------------------------- Identifiable assets Natural gas distribution.............................................. $ 408,149 $ 390,381 $ 373,817 Oil and gas activities................................................ 497,264 440,158 217,700 Eliminations and other................................................ 88,042 89,258 (22,107) - ------------------------------------------------------------------------------------------------------------------------- Total................................................................ $ 993,455 $ 919,797 $ 569,410 - ------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net Natural gas distribution.............................................. $ 324,995 $ 296,228 $ 276,927 Oil and gas activities................................................ 431,275 370,677 167,859 Other................................................................. 74 98 130 - ------------------------------------------------------------------------------------------------------------------------- Total............................................................... $ 756,344 $ 667,003 $ 444,916 - -------------------------------------------------------------------------------------------------------------------------
Page 47 30 16. RECONCILIATION OF EARNINGS PER SHARE - -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------- Years ended September 30, (in thousands, except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- PER SHARE Per Share Per Share INCOME SHARES AMOUNT Income Shares Amount Income Shares Amount - -------------------------------------------------------------------------------------------------------------------------------- BASIC EPS...................... $ 36,249 29,084 $ 1.25 $ 28,997 25,126 $ 1.15 $ 21,541 22,047 $ 0.98 Effect of Dilutive Securities Long-range performance shares 167 137 142 Non-qualified stock options 187 121 63 - -------------------------------------------------------------------------------------------------------------------------------- DILUTED EPS.................... $ 36,249 29,438 $ 1.23 $ 28,997 25,384 $ 1.14 $ 21,541 22,252 $ 0.97 - --------------------------------------------------------------------------------------------------------------------------------
17. SUBSEQUENT EVENT - ------------------------------------------------------------------------------- On October 15, 1998, Energen Resources purchased the stock of 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., a private Denver-based exploration, acquisition and development company. Energen Resources' net investment totaled $132.6 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. Page 48 31 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements and related notes of Energen Corporation were prepared by management, which has the primary responsibility for the integrity of the financial information therein. The statements were prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts which are based necessarily on management's best estimates and judgments. Financial information presented elsewhere in the report is consistent with the information in the financial statements. Management maintains a comprehensive system of internal accounting controls and relies on the system to discharge its responsibility for the integrity of the financial statements. This system provides reasonable assurance that corporate assets are safeguarded and that transactions are recorded in such a manner as to permit the preparation of materially reliable financial information. Reasonable assurance recognizes that the cost of a system of internal accounting controls should not exceed the related benefits. This system of internal accounting controls is augmented by written policies and procedures, internal auditing, and the careful selection and training of qualified personnel. As of September 30, 1998, management was aware of no material weaknesses in Energen's system of internal accounting controls. The consolidated financial statements have been audited by the Company's independent certified public accountants, whose opinion is expressed elsewhere on this page. Their audit was conducted in accordance with generally accepted auditing standards; and, in connection therewith, they obtained an understanding of the Company's system of internal accounting controls and conducted such tests and related procedures as they deemed necessary to arrive at an opinion on the fairness of presentation of the consolidated financial statements. The functioning of the accounting system and related internal accounting controls is under the general oversight of the Audit Committee of the Board of Directors, which is comprised of four outside Directors. The Audit Committee meets regularly with the independent public accountants and representatives of management to discuss matters regarding internal accounting controls, auditing and financial reporting. Geoffrey C. Ketcham Executive Vice President Chief Financial Officer and Treasurer REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders of Energen: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Energen Corporation and Subsidiaries at September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Birmingham, Alabama October 28, 1998 Page 49 32 SELECTED FINANCIAL AND COMMON STOCK DATA
Energen Corporation - --------------------------------------------------------------------------------------------------------------------------------- Years ended September 30, (dollars in thousands, except per share amounts) 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Operating revenues........................................ $ 502,627 $ 448,230 $ 399,442 $ 318,580 Income before cumulative effect of change in accounting principle................................. $ 36,249 $ 28,997 $ 21,541 $ 19,308 Net income................................................ $ 36,249 28,997 $ 21,541 $ 19,308 Basic earnings per share before cumulative effect......... $ 1.25 $ 1.15 $ 0.98 $ 0.89 Basic earnings per average common share................... $ 1.25 $ 1.15 $ 0.98 $ 0.89 Diluted earnings per average common share................. $ 1.23 $ 1.14 $ 0.97 $ 0.88 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET Capitalization at year-end: Common shareholders equity.............................. $ 329,249 $ 301,143 $ 188,405 $ 173,924 Preferred stock......................................... -- -- -- -- Long-term debt.......................................... 372,782 279,602 195,545 131,600 - --------------------------------------------------------------------------------------------------------------------------------- Total capitalization.................................... $ 702,031 $ 580,745 $ 383,950 $ 305,524 - --------------------------------------------------------------------------------------------------------------------------------- Total assets.............................................. $ 993,455 $ 919,797 $ 569,410 $ 459,084 - --------------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net........................ $ 756,344 $ 667,003 $ 444,916 $ 327,264 - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA Annual dividend rate at year-end.......................... $ 0.64 $ 0.62 $ 0.60 $ 0.58 Cash dividends paid per common share...................... $ 0.625 $ 0.605 $ 0.585 $ 0.565 Book value per common share............................... $ 11.23 $ 10.46 $ 8.44 $ 7.97 Market-to-book ratio at year-end (%)...................... 169 170 142 136 Yield at year-end (%)..................................... 3.4 3.5 5.0 5.3 Return on average common equity (%)....................... 11.1 11.9 11.6 11.0 Price-to-earnings ratio at year-end....................... 15.2 15.5 12.2 12.2 Basic shares outstanding at year-end (000)................ 29,327 28,796 22,325 21,820 Price Range: High.................................................... $ 22 1/2 $ 18 7/8 $ 12 11/16 $ 11 3/4 Low..................................................... $ 15 1/8 $ 11 7/8 $ 10 11/16 $ 9 7/8 Close................................................... $ 19 $ 17 25/32 $ 12 $ 10 7/8 - ---------------------------------------------------------------------------------------------------------------------------------
Note: All information prior to 1989 has been adjusted for the effects of a three-for-two common stock split All information prior to 1990 includes the effects of discontinued operations. All information has been adjusted to reflect the 2-for-1 stock split effective March 2, 1998. Page 50 33
- ----------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------------------- $374,503 $355,878 $331,065 $324,902 $324,022 $308,604 $353,135 $ 23,751 $ 18,081 $ 15,687 $ 14,112 $ 11,267 $ 6,422 $ 11,667 $ 23,751 $ 18,081 $ 16,628 $ 14,112 $ 11,267 $ 6,422 $ 11,667 $ 1.10 $ 0.88 $ 0.77 $ 0.71 $ 0.58 $ 0.34 $ 0.76 $ 1.10 $ 0.88 $ 0.82 $ 0.71 $ 0.58 $ 0.34 $ 0.76 $ 1.09 $ 0.88 $ 0.82 $ 0.71 $ 0.58 $ 0.34 $ 0.76 - ----------------------------------------------------------------------------------------------------------------- $167,026 $140,313 $129,858 $121,995 $113,316 $107,950 $ 86,256 -- -- 1,800 1,800 1,800 2,450 2,450 118,302 85,852 90,609 77,677 82,835 86,188 53,203 - ----------------------------------------------------------------------------------------------------------------- $285,328 $226,165 $222,267 $201,472 $197,951 $196,588 $141,909 - ----------------------------------------------------------------------------------------------------------------- $411,314 $370,685 $342,119 $337,516 $326,350 $294,614 $260,560 - ----------------------------------------------------------------------------------------------------------------- $287,182 $273,097 $254,630 $273,539 $250,983 $238,329 $206,230 - ----------------------------------------------------------------------------------------------------------------- $ .56 $ .54 $ .52 $ .50 $ .47 $ .44 $ .414 $ .545 $ .525 $ .505 $ .478 $ .448 $ .422 $ .389 $ 7.65 $ 6.80 $ 6.38 $ 6.04 $ 5.74 $ 5.57 $ 5.40 147 182 142 150 157 190 147 5.0 4.4 5.7 5.5 5.2 4.2 5.2 14.6 13.0 13.0 11.6 10.0 6.0 15.6 10.2 14.1 11.1 12.8 15.5 31.1 10.4 21,836 20,641 20,365 20,209 19,745 19,389 15,979 $ 13 5/16 $ 13 3/8 $ 9 7/16 $ 10 $ 10 3/4 $ 12 3/16 $ 8 1/8 $ 9 5/8 $ 8 13/16 $ 7 1/2 $ 8 $ 8 $ 7 11/16 $ 5 11/16 $ 11 1/4 $ 12 3/8 $ 9 1/16 $ 9 1/16 $ 9 $ 10 9/16 $ 7 15/16 - -----------------------------------------------------------------------------------------------------------------
Page 51 34 SELECTED BUSINESS SEGMENT DATA
Energen Corporation - --------------------------------------------------------------------------------------------------------------------------- Years ended September 30, (dollars in thousands) 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- NATURAL GAS DISTRIBUTION Operating revenues Residential............................................. $ 241,964 $ 237,022 $ 236,583 $ 194,089 Commercial and industrial-small......................... 89,361 87,477 87,912 68,409 Commercial and industrial-large......................... -- -- -- 290 Transportation.......................................... 35,246 33,080 30,408 30,490 Other................................................... 3,369 5,405 2,349 2,687 - --------------------------------------------------------------------------------------------------------------------------- Total.................................................. $ 369,940 $ 362,984 $ 357,252 $ 295,965 - --------------------------------------------------------------------------------------------------------------------------- Gas delivery volumes (MMcf) Residential............................................. 31,079 28,357 34,963 27,489 Commercial and industrial-small......................... 13,705 12,554 15,002 12,289 Commercial and industrial-large......................... -- -- -- 29 Transportation.......................................... 70,563 65,622 61,458 61,640 - --------------------------------------------------------------------------------------------------------------------------- Total.................................................. 115,347 106,533 111,423 101,447 - --------------------------------------------------------------------------------------------------------------------------- Average number of customers Residential............................................. 423,602 422,878 418,486 410,515 Commercial and industrial-small......................... 34,733 34,430 34,028 33,115 Commercial and industrial-large......................... 49 55 54 48 - --------------------------------------------------------------------------------------------------------------------------- Total.................................................. 458,384 457,363 452,568 443,678 - --------------------------------------------------------------------------------------------------------------------------- Other data Depreciation & amortization............................. $ 25,153 $ 23,486 $ 21,269 $ 19,368 Capital expenditures.................................... $ 54,168 $ 43,277 $ 43,175 $ 42,780 Operating income........................................ $ 41,663 $ 38,792 $ 35,270 $ 32,513 - --------------------------------------------------------------------------------------------------------------------------- OIL AND GAS ACTIVITIES Operating revenues Natural gas............................................. $ 97,123 $ 60,228 $ 24,262 $ 14,748 Oil..................................................... 21,452 13,981 10,313 3,765 Natural gas liquids..................................... 7,061 5,772 -- -- Other................................................... 7,051 5,265 7,615 4,100 - --------------------------------------------------------------------------------------------------------------------------- Total.................................................. $ 132,687 $ 85,246 $ 42,190 $ 22,613 - --------------------------------------------------------------------------------------------------------------------------- Production volumes Natural gas (Mcf)....................................... 43,853 29,318 12,308 8,597 Oil (MBbl).............................................. 1,433 775 635 250 Natural gas liquids (MBbl).............................. 817 502 -- -- - --------------------------------------------------------------------------------------------------------------------------- Proved reserves Natural gas (MMcf)...................................... 542,039 544,283 212,977 71,267 Oil (MBbl).............................................. 19,845 9,128 6,315 3,986 Natural gas liquids (MBbl).............................. 17,292 12,378 -- -- - ---------------------------------------------------------------------------------------------------------------------------
Page 52 35
- --------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 - --------------------------------------------------------------------------------------------------------------------------- $ 229,019 $ 216,587 $ 198,676 $ 195,250 $ 188,168 $ 170,302 $ 190,836 84,443 83,069 78,799 84,260 85,588 85,477 104,420 790 1,223 6,501 8,916 13,596 25,000 37,923 29,321 27,382 25,089 22,890 22,734 19,574 15,158 1,064 2,299 1,661 (2,188) 873 731 689 - --------------------------------------------------------------------------------------------------------------------------- $ 344,637 $ 330,560 $ 310,726 $ 309,128 $ 310,959 $ 301,084 $ 349,026 - --------------------------------------------------------------------------------------------------------------------------- 31,254 30,957 29,119 26,262 28,653 27,210 28,636 13,536 13,853 13,860 14,837 16,581 17,946 21,806 106 282 2,654 3,411 4,786 9,494 13,026 52,635 49,346 46,235 41,447 39,117 34,447 28,730 - --------------------------------------------------------------------------------------------------------------------------- 97,531 94,438 91,868 85,957 89,137 89,097 92,198 - --------------------------------------------------------------------------------------------------------------------------- 402,531 395,057 387,871 382,747 379,362 365,572 358,872 32,563 32,269 31,732 31,432 31,565 30,492 29,717 43 46 41 39 42 42 37 - --------------------------------------------------------------------------------------------------------------------------- 435,137 427,372 419,644 414,218 410,969 396,106 388,626 - --------------------------------------------------------------------------------------------------------------------------- $ 17,941 $ 17,206 $ 17,154 $ 17,126 $ 16,131 $ 14,657 $ 13,642 $ 38,473 $ 22,107 $ 20,228 $ 19,565 $ 19,565 $ 39,156 $ 25,614 $ 30,017 $ 26,381 $ 25,915 $ 25,209 $ 21,080 $ 18,548 $ 19,666 - --------------------------------------------------------------------------------------------------------------------------- $ 17,292 $ 11,449 $ 10,364 $ 9,889 $ 11,121 $ 11,735 $ 11,344 2,725 3,484 2,559 1,839 1,411 1,468 1,458 -- -- -- -- -- -- -- 3,546 2,753 (44) (3,203) (5,927) (8,286) (8,693) - --------------------------------------------------------------------------------------------------------------------------- $ 23,563 $ 17,686 $ 12,879 $ 8,525 $ 6,605 $ 4,917 $ 4,109 - --------------------------------------------------------------------------------------------------------------------------- 9,169 6,245 6,415 5,927 4,954 4,964 4,976 191 204 145 88 80 95 94 -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- 60,057 67,298 51,329 73,279 57,532 29,860 14,803 1,485 1,289 338 402 330 264 292 -- -- -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------
Page 53 EX-21 12 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF ENERGEN CORPORATION Alabama Gas Corporation Energen Resources Corporation Energen Resources TEAM, Inc. Energen Resources MAQ, Inc. American Heat Tech, Inc. Basin Pipeline Corp. EGN Services, Inc. Horse Creek Trading & Compression Company Midtown NGV, Inc. EX-23 13 CONSENT OF ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Energen Corporation on Form S-3 (File No. 333-00395), Form S-3 (File No. 333-43245) and Forms S-8 (File No. 33-27869, File No. 33-46641, File No. 33-48504, File No. 33-48505, File No. 33-26111, and File No. 33-45107) of our report, dated October 28, 1998, on our audits of the consolidated financial statements and financial statement schedule of Energen Corporation as of September 30, 1998 and 1997, and for the years ended September 30, 1998, 1997, and 1996, which report is incorporated by reference in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Birmingham, Alabama December 21, 1998 EX-27.1 14 FINANCIAL DATA SCHEDULE OF ENERGEN CORP
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000277595 ENERGEN CORPORATION 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 PER-BOOK 324,677 431,667 218,453 7,716 10,942 993,455 293 198,676 130,280 329,249 0 0 372,782 153,000 0 0 7,209 0 0 0 131,215 993,455 502,627 (2,221) 441,142 438,921 63,706 2,544 66,250 30,001 36,249 0 36,249 18,181 15,811 123,623 1.25 1.23
EX-27.2 15 FINANCIAL DATA SCHEDULE OF ALABAMA GAS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000003146 ALABAMA GAS CORPORATION 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 PER-BOOK 324,677 318 78,421 4,733 0 408,149 20 34,484 120,205 154,709 0 0 119,650 15,000 0 0 5,350 0 0 0 113,440 408,149 369,940 11,400 328,277 339,677 30,263 545 30,808 10,221 20,587 0 20,587 7,276 8,843 57,683 0 0 EARNINGS PER SHARE IS CALCULATED FOR ENERGEN CORPORATION (PARENT COMPANY OF ALABAMA GAS CORPORATION) AND IS NOT CALCULATED FOR ALABAMA GAS CORPORATION SEPARATELY AS AMOUNT WOULD NOT BE MEANINGFUL.
EX-27.3 16 RESTATED FINANCIAL DATA SCHEDULE/ENERGEN 9/30/97
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FOR SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000277595 ENERGEN CORPORATION 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 PER-BOOK 295,881 371,122 242,165 0 10,629 919,797 288 188,643 112,212 301,143 0 0 279,602 202,000 0 0 1,855 0 0 0 135,197 919,797 448,230 3,097 396,244 399,341 48,889 3,014 51,903 22,906 28,997 0 28,997 15,299 14,250 63,099 1.15 1.14
EX-27.4 17 RESTATED FINANCIAL DATA SCHEDULE/ENERGEN 9/30/96
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FOR SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000277595 ENERGEN CORPORATION 1,000 YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 PER-BOOK 276,533 168,383 114,706 9,788 0 569,410 224 89,635 98,546 188,405 0 0 195,545 59,000 0 0 1,805 0 0 0 124,655 569,410 399,442 5,048 360,645 365,693 33,749 1,712 35,461 13,920 21,541 0 21,541 12,903 9,890 43,501 .98 .97
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