-----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, B+26pCOBhrzOvkt+jHhvfbn+iVnMJ5xT+2rPJ/6+ivU+sAsFOMKSIzULPWC6GbeT CNSnIqqLY0klmOAC/mTIZg== 0000950144-99-014174.txt : 19991222 0000950144-99-014174.hdr.sgml : 19991222 ACCESSION NUMBER: 0000950144-99-014174 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991221 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: 99777802 BUSINESS ADDRESS: STREET 1: 605 21ST STREET NORTH CITY: BIRMINGHAM STATE: AL ZIP: 35203-2707 BUSINESS PHONE: 205-326-2742 MAIL ADDRESS: STREET 1: 605 21ST STREET N CITY: BIRNINGHAM STATE: AL ZIP: 35203 FORMER COMPANY: FORMER CONFORMED NAME: ALAGASCO INC DATE OF NAME CHANGE: 19851002 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA GAS CORP CENTRAL INDEX KEY: 0000003146 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 630022000 STATE OF INCORPORATION: AL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-70466 FILM NUMBER: 99777803 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 / ALABAMA GAS 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, 1999 [ ] 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 35203-2707 (205) 326-2700 http://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, 1999: Energen Corporation $502,934,966 Indicate number of shares outstanding of each of the registrant's classes of common stock as of December 10, 1999: Energen Corporation 30,098,383 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, 1999 (Part III, Item 10-13) - - Portions of Energen Corporation 1999 Annual Report to are incorporated by reference into Part II, Items 5, 6, 7, and 8 of this report 2 ENERGEN CORPORATION 1999 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 Results of Operations and Financial Condition..................................................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). FORWARD-LOOKING STATEMENTS AND RISK: Certain statements in this report regarding future plans, objectives and expected performance of the Company and its subsidiaries, are made pursuant to the Safe Habor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions the Company believes are reasonable; however, a variety of events, risks and uncertainties that may be outside the Company's control could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, economic and competitive conditions, inflation rates, 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 the Company 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 the Company makes use of futures, swaps and fixed-price contracts to mitigate risk, fluctuations in oil, gas and natural gas liquids prices may affect the Company's financial position and results of operation. PART I ITEM 1. BUSINESS GENERAL Energen Corporation is a Birmingham-based diversified energy holding company engaged primarily in the purchase, distribution, and sale of natural gas, principally in central and north Alabama, and in the acquisition, development, exploration and production of oil, gas and natural gas liquids in the continental United States. Its two major subsidiaries are Alabama Gas Corporation (Alagasco) and Energen Resources Corporation. 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 17, Industry Segment Information, to the Consolidated Financial Statements of the 1999 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, 3 4 purchase gas directly from producers, marketers or suppliers and arrange for delivery of the gas into the Alagasco distribution system; Alagasco 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 approximately 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 1999, Alagasco served an average of 425,937 residential customers and 35,111 commercial, industrial and transportation customers. The Alagasco distribution system includes approximately 9,180 miles of main and more than 10,650 miles of service lines, odorization and regulation facilities, and customer meters. Alagasco also operates two liquified natural gas (LNG) facilities that 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 established by the APSC in 1983, and 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 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. 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. 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 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 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 variation occurs. Substantially all the customers to whom the temperature adjustment applies are residential, small commercial and small industrial. Alagasco's rate schedules for natural gas distribution charges contain a Gas Supply Adjustment (GSA) rider, established in 1993, which permits the pass-through to customers of changes in the cost of gas supply. The APSC approved an Enhanced Stability Reserve (ESR), beginning fiscal year 1998, to which Alagasco may charge the full amount of: (1) extraordinary O&M expenses resulting from force majeure events such as storms, severe weather, and outages, when one or a combination of two such events results in more than $200,000 of additional O&M expense during a fiscal year; and (2) individual industrial and commercial customer revenue losses that exceed $250,000 during the fiscal year, if such losses cause Alagasco's return on equity to fall below 13.15 percent. The APSC approved the reserve on October 6, 1998, in the amount of $3.9 million; the maximum approved funding level of the ESR is $4 million. Following a year in which a charge against the ESR is made, the APSC provides for accretions to the ESR in an amount of no more than $40,000 monthly until 4 5 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. GAS SUPPLY: Alagasco's distribution system is connected to and has firm transportation contracts with two major interstate pipeline systems ' Southern Natural Gas Company (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 October 31, 2002, provides for 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 300,703 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 752,382 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 102,769 million cubic feet (MMcf) in fiscal 1999. 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 readily are 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 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 1999, approximately 300 of Alagasco's transportation customers utilized the P Rate, and the resulting reduction in core market gas costs totaled approximately $9.2 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 allows the Company to recover the reduction in charges 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. During 1999 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. Alagasco also uses long-term special contracts as a vehicle for retaining large customer load. At the end of fiscal year 1999, 40 of the utility's largest commercial and industrial transportation customers were under special contracts of varying lengths. 5 6 Natural gas service available to Alagasco customers falls into two broad categories: interruptible and firm. Interruptible service contractually is subject to interruption by Alagasco for various reasons; the most common occurrence is curtailment of industrial customers during periods of peak core market heating demand. Interruptible service typically is provided to large commercial and industrial transportation customers that can reduce their gas consumption by adjusting production schedules or by switching to alternate fuels for the duration of the service interruption. More expensive firm service, on the other hand, generally is not subject to interruption and is provided to residential and small commercial and industrial customers; these core market customers depend on natural gas primarily for space heating. GROWTH: Customer growth presents a major challenge for Alagasco, given its mature, slow-growth service area. Alagasco serves approximately 70 percent of the potential customers located along its lines, and it consistently achieves penetration rates over 85 percent in the new single-family housing market. In fiscal year 1999, Alagasco had customer growth of approximately 1 percent. For fiscal year 2000, Alagasco will be working hard to increase gas usage by focusing on conversion prospects and by promoting, in addition to gas furnaces and water heaters, other energy-efficient natural gas products such as fireplace logs, outdoor gaslights, grills, ovens and cooktops. Beyond 2000, Alagasco will assess the potential for distributed generation in its service area and pursue opportunities to invest in revenue-generating or cost-saving projects. 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. Approximately 78 municipal systems remain in Alabama. Although Alagasco has not acquired any new municipal gas systems since 1996, 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 for certain core market customers 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 materially affect the results of its operations or financial condition. OTHER: For a discussion of risks inherent in the Company's businesses, see Management's Discussion and Analysis in the 1999 Annual Report to Shareholders (pages 31 and 32), which is attached, herein, as Part IV, Item 14, Exhibit 13. - - OIL AND GAS OPERATIONS GENERAL: Energen's oil and gas operations focus on increasing production and adding proved reserves through the acquisition and exploitation of oil and gas properties with varying levels of development potential. To a lesser extent, Energen Resources explores for and develops new reservoirs, primarily in areas in which it has an operating presence. Energen Resources also provides operating services in the Black Warrior Basin in Alabama for its partners and third parties. All current oil and gas operations are located in the continental United States. At the end of fiscal year 1999, Energen Resources' inventory of proved oil and gas reserves had reached a major milestone, breaking the 1 trillion cubic feet equivalent mark. Approximately 93 percent of the company's 6 7 1,020 billion cubic feet equivalent (Bcfe) of reserves are located in the San Juan Basin in New Mexico, the Black Warrior Basin in Alabama, the Permian Basin in west Texas, and the north Louisiana/east Texas region. Management believes that Energen Resources' reserve base is conservative in nature, with more than 78 percent of year-end reserves classified as proved developed; in addition, the reserve base is long-lived, with a reserves-to-production ratio of 13 at fiscal yearend. Natural gas represents approximately 73 percent of Energen Resources' reserves, with oil and natural gas liquids comprising the balance. GROWTH STRATEGY: Energen has completed four years under an aggressive strategy to grow its non-regulated oil and gas operations. Since the end of fiscal year 1995, Energen Resources has invested approximately $500 million in property acquisitions, $120 million in related development, and $80 million in exploration and associated development. As a result, its proved reserves have increased 972 percent, and its oil and gas production has increased more than 600 percent to over 77 Bcfe. Over the next five years, Energen Resources plans to spend an estimated $1.1 billion, including $750 million to acquire producing properties, $260 million to exploit existing and newly acquired properties, and $60 million for exploration and associated development. Energen Resources' approach to the oil and gas business calls for the company to pursue onshore North American property acquisitions which offer significant amounts of proved undeveloped (PUD) and/or behind-pipe reserves as well as operational enhancement potential. Energen Resources prefers gas to oil properties, long-lived reserves and operated properties that offer multiple pay-zone exploitation opportunities. While preferring these criteria, Energen Resources does not preclude possible acquisitions of properties that otherwise meet its investment requirements. Energen Resources' most recent property acquisition was the October 1998 purchase of TOTAL Minatome Corporation (TOTAL). Simultaneously upon closing the transaction, Energen Resources sold a 31 percent undivided interest in TOTAL's net assets to Westport Oil and Gas Company, Inc. Energen Resources' net adjusted price totaled approximately $137.5 million, including the assumption of certain legal and financial obligations, and net reserves acquired totaled approximately 200 Bcfe. Following an acquisition, Energen Resources focuses on increasing production and reserves through aggressive exploitation of the properties' PUD and behind-pipe reserve potential. These exploitation activities include development well drilling, behind-pipe recompletions, workovers, secondary recovery and operational enhancements. Energen Resources prefers to operate its properties in order to better control the nature and pace of exploitation activities. Energen Resources' exploitation activities can result in the addition of new reserves as well as serve to reclassify undeveloped reserves as developed ones. In the San Juan Basin, where Energen Resources acquired approximately 319 Bcfe of natural gas and natural gas liquids in 1997, the company's exploitation efforts have added more than 170 Bcfe of reserves. Energen Resources also significantly increased its exploitation prospects with the acquisition of TOTAL's reserves which were approximately 45 percent PUDs and/or behind-pipe. In fiscal year 1999, Energen Resources' exploitation program added approximately 120 Bcfe of proved reserves. The company drilled 88 successful development wells, performed 45 successful well recompletions and conducted other performance-related enhancements such that its exploitation-generated reserves more than replaced the company's production of 77.2 Bcfe. Most of Energen Resources' coalbed methane production generates nonconventional fuels tax credits through December 31, 2002, when the credits expire. In fiscal 1999, Energen Resources' nonconventional fuels tax credits totaled $14.8 million; and, in fiscal year 2002, Energen Resources expects to generate more than $11.5 million of the production credits. These credits have been instrumental in Energen Resources' successful development of large-scale coalbed methane projects in the Black Warrior Basin. As the tax credit expiration date approaches, Energen Resources' goal is to replace the tax credits with long-term, revenue-generating assets in a manner that does not negatively affect corporate earnings in fiscal year 2003 and beyond. 7 8 RISK MANAGEMENT: Energen Resources attempts to lower the risk associated with its oil and gas business. A key component of the company's efforts to manage risk is its acquisition versus exploration orientation and its preference for long-lived reserves. 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 evaluation models the 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 2000, Energen Resources has entered into contracts and swaps for 41.6 Bcf of its flowing gas production at an average contract price (before basis differentials) of $2.45 per Mcf and 1,732 MBbl of its oil production at an average contract price of $17.51 per barrel. In addition, the Company has hedged the basis difference on 12 Bcf of its fiscal 2000 San Juan Basin production. For fiscal 2001, Energen Resources entered into contracts and swaps for 14.6 Bcf of its flowing gas production at an average contract price (before basis differentials) of $2.55 per Mcf. (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 1999 Annual Report to Shareholders (pages 31 and 32) which is attached herein as Part IV, Item 14, Exhibit 13. EMPLOYEES The Company has 1,399 employees; Alagasco employs 1,199; Energen Resources employs 189; and Energen's other subsidiaries employ 11. ITEM 2. PROPERTIES The corporate headquarters of Energen, Alagasco and Energen Resources are located in leased office space in Birmingham, Alabama. In addition to its corporate headquarters in Birmingham, Energen Resources maintains leased offices in Houston and Midland, Texas, and in Farmington, New Mexico. The properties of Alagasco consist primarily of its gas distribution system, which includes more than 9,180 miles of main, more than 10,650 miles of service lines, odorization and regulation facilities, and customer meters. Alagasco also has two liquified natural gas facilities, seven division offices, eight payment centers, five 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 1--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 16, Oil and Gas Producing Activities (unaudited), to the Consolidated Financial Statements which is incorporated by reference from the 1999 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. 8 9 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 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 1999. 9 10 EXECUTIVE OFFICERS OF THE REGISTRANTS ENERGEN CORPORATION
Name Age Position (1) ---- --- ------------ Wm. Michael Warren, Jr. 52 Chairman of the Board President and Chief Executive Officer (2) Geoffrey C. Ketcham 48 Executive Vice President, Chief Financial Officer and Treasurer (3) Gary C. Youngblood 56 President and Chief Operating Officer of Alagasco (4) James T. McManus 41 President and Chief Operating Officer of Energen Resources (5) Dudley C. Reynolds 46 General Counsel and Secretary (6) J. David Woodruff, Jr. 43 Vice President-Legal and Assistant Secretary and Vice President-Corporate Development (7) Grace B. Carr 44 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) Mr. Warren has been employed by the Company in various capacities since 1983. In January 1992 he was elected President and Chief Operating Officer of Energen and all of its subsidiaries, in October 1995 he was elected Chief Executive Officer of Alagasco and Energen Resources, in February 1997 he was elected Chief Executive Officer of Energen, and effective January 1, 1998, he was elected Chairman of the Board of Energen and each of its subsidiaries. Mr. Warren serves as a Director of Energen and each of its subsidiaries. (3) Mr. Ketcham has been employed by the Company in various capacities since 1981. He has served as Executive Vice President, Chief Financial Officer and Treasurer of Energen and each of its subsidiaries since April 1991. (4) Mr. Youngblood has been employed by the Company in various capacities since 1969. He was elected Executive Vice President of Alagasco in October 1993, Chief Operating Officer of Alagasco in October 1995, and President of Alagasco in April 1997. (5) Mr. McManus has been employed by the Company in various capacities since 1986. He was elected Vice President-Finance and Corporate Development of Energen and Vice President-Finance and Planning of Alagasco in April 1991. He was elected Executive Vice President and Chief Operating Officer of Energen Resources in October 1995 and President of Energen Resources in April 1997. (6) Mr. Reynolds has been employed by the Company in various capacities since 1980. He has served as General Counsel and Secretary of Energen and each of its subsidiaries since April 1991.
10 11 (7) Mr. Woodruff has been employed by the Company in various capacities since 1986. He has served as Vice President-Legal and Assistant Secretary of Energen and each of its subsidiaries since April 1991 and as Vice President-Corporate Development of Energen since October 1995. (8) Ms. Carr was employed by the Company in various capacities from January 1985 to April 1989. She was not employed from April 1989 through December 1997. She was 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 1999 Annual Report to Shareholders, page 32, and is included in Part IV, Item 14, Exhibit 13, herein. At December 10, 1999, there were approximately 9,000 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 1999 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 1999 Annual Report to Shareholders, pages 58-59, and is included in Part IV, Item 14, Exhibit 13, herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This information is incorporated by reference from the 1999 Annual Report to Shareholders, pages 25-32, 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, gas and natural gas liquids production. Historically, prices received 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 oil and gas price fluctuations. 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 with a corresponding deferred gain/loss. Realized gains and losses are deferred as current liabilities or assets until the revenues from the related hedged volumes are recognized in the income statement. Cash flows from derivative instruments are recognized as incurred through changes in working capital. The Company had deferred losses of $16.5 million and deferred gains of $0.6 million on the balance sheet at September 30, 1999, and September 30, 1998, 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, 1999, the Company estimates that a 10 percent change in the underlying commodities prices would result in a $12.1 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 and does not include the variance in basis difference or the impact of related taxes on actual cash prices. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item for Energen Corporation and subsidiaries is incorporated by reference from the 1999 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 26, 2000. The proxy statement will be filed on or about December 22, 1999. 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 26, 2000. 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 26, 2000. 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 26, 2000. 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 26, 2000. 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 October 15, 1998, reporting Energen Resources' acquisition of TOTAL Minatome Corporation. (2) Form 8-KA dated October 15, 1998, reporting supplementary financial information related to Energen Resources' acquisition of TOTAL Minatome Corporation. 15 16 SIGNATURE 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 17, 1999 /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 17, 1999 /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 17, 1999 /s/Geoffrey C. Ketcham - ---------------------------- -------------------------------------------- DATE Geoffrey C. Ketcham Executive Vice President, Chief Financial Officer and Treasurer of Energen Corporation and Alabama Gas Corporation December 17, 1999 /s/Grace B. Carr - ---------------------------- -------------------------------------------- DATE Grace B. Carr Controller of Energen Corporation December 17, 1999 /s/Paula H. Rushing - ---------------------------- -------------------------------------------- DATE Paula H. Rushing Vice President-Finance of Alabama Gas Corporation December 17, 1999 /s/J. Mason Davis, Jr. - ---------------------------- -------------------------------------------- DATE J. Mason Davis, Jr. Director December 17, 1999 /s/Julian W. Banton - ---------------------------- -------------------------------------------- DATE Julian W. Banton Director December 17, 1999 /s/James S. M. French - ---------------------------- -------------------------------------------- DATE James S. M. French Director December 17, 1999 /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 -------------- 1999 1999 Annual 10-K Report ---- ------ 1. Financial Statements ENERGEN CORPORATION Report of Independent Certified Public Accountants ............... 57 Consolidated Statements of Income for the years ended September 30, 1999, 1998 and 1997 ................................ 33 Consolidated Balance Sheets as of September 30, 1999 and 1998 .... 34 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1999, 1998 and 1997 .......................... 36 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997 ................................ 37 Notes to Consolidated Financial Statements ....................... 38 ALABAMA GAS CORPORATION Report of Independent Certified Public Accountants ............... 22 Statements of Income for the years ended September 30, 1999, 1998 and 1997 ................................ 23 Balance Sheets as of September 30, 1999 and 1998 ................. 24 Statements of Shareholder's Equity for the years ended September 30, 1999, 1998 and 1997 ................................ 26 Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997 ................................ 27 Notes to Financial Statements .................................... 28
18 19
Reference Page -------------- 1999 1999 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(a) to Energen's Annual Report on Form 10-K for the year ended September 30, 1998 (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 July 22, 1998) which was filed as Exhibit 3(c) to Energen's Annual Report on Form 10-K for the year ended September 30, 1998 (File No. 1-7810) *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 July 22, 1998) which was filed as Exhibit 3(e) to Energen's Annual Report on Form 10-K for the year ended September 30, 1998 (File No. 1-7810) *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)
20 21 *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) *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 it's executive officers 10(d) Form of Severance Compensation Agreement between Energen Corporation and it's executive officers *10(e) Energen Corporation 1988 Stock Option Plan (as amended November 25, 1997) which was filed as Exhibit 10(e) to Energen's Annual Report on Form 10-K for the year ended September 30, 1998 (File No. 1-7810) 10(f) Energen Corporation 1992 Long-Range Performance Share Plan (as amended effective October 1, 1999). 10(g) Energen Corporation 1997 Stock Incentive Plan (as amended effective October 1, 1999) 10(h) Energen Corporation 1997 Deferred Compensation Plan (as amended effective October 1, 1999) *10(i) Energen Corporation 1992 Directors Stock Plan (as amended April 25, 1997) which was filed as Exhibit 10(i) to Energen's Annual Report on Form 10-K for the year ended September 30, 1998 (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 Energen Corporation 1999 Annual Report to Shareholders (pages 25-61) 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)
*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, 1999 and 1998, and the results of its operations and cash flows for each of the three years in the period ended September 30, 1999, 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 27, 1999 22 23 STATEMENTS OF INCOME ALABAMA GAS CORPORATION
===================================================================================== YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 1999 1998 1997 ===================================================================================== OPERATING REVENUES $ 325,554 $ 369,940 $ 362,984 - ------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas 126,264 176,124 177,837 Operations and maintenance 100,478 98,897 96,211 Depreciation 26,730 25,153 23,486 Income taxes Current 15,748 16,801 11,223 Deferred, net (2,137) (4,932) (618) Deferred investment tax credits, net (448) (469) (487) Taxes, other than income taxes 25,517 28,103 26,658 - ------------------------------------------------------------------------------------- Total operating expenses 292,152 339,677 334,310 - ------------------------------------------------------------------------------------- OPERATING INCOME 33,402 30,263 28,674 - ------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Allowance for funds used during construction 374 400 490 Other, net (113) 145 215 - ------------------------------------------------------------------------------------- Total other income 261 545 705 - ------------------------------------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 8,614 8,843 8,843 Other interest expense 1,752 1,378 1,966 - ------------------------------------------------------------------------------------- Total interest charges 10,366 10,221 10,809 - ------------------------------------------------------------------------------------- NET INCOME $ 23,297 $ 20,587 $ 18,570 =====================================================================================
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) 1999 1998 ================================================================================ ASSETS PROPERTY, PLANT AND EQUIPMENT Utility plant $ 645,596 $ 632,165 Less accumulated depreciation 328,775 307,488 - -------------------------------------------------------------------------------- Utility plant, net 316,821 324,677 - -------------------------------------------------------------------------------- Other property, net 298 318 - -------------------------------------------------------------------------------- CURRENT ASSETS Cash 533 1,222 Accounts receivable Gas 37,157 32,191 Merchandise 2,283 2,362 Other 1,966 1,621 Affiliated companies 20,654 -- Allowance for doubtful accounts (4,532) (3,482) Inventories, at average cost Storage gas inventory 24,722 21,237 Materials and supplies 5,024 5,533 Liquified natural gas in storage 3,318 3,381 Deferred gas costs 2,305 1,774 Deferred income taxes 11,621 10,470 Prepayments and other 4,652 2,112 - -------------------------------------------------------------------------------- Total current assets 109,703 78,421 - -------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS 3,833 4,733 - -------------------------------------------------------------------------------- TOTAL ASSETS $ 430,655 $ 408,149 ================================================================================
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) 1999 1998 ================================================================================ CAPITAL AND LIABILITIES CAPITALIZATION Common shareholder's equity Common stock, $0.01 par value; 3,000,000 shares authorized, 1,972,052 shares outstanding at September 30, 1999 and 1998, respectively $ 20 $ 20 Premium on capital stock 31,682 31,682 Capital surplus 2,802 2,802 Retained earnings 143,502 120,205 - -------------------------------------------------------------------------------- Total common shareholder's equity 178,006 154,709 Long-term debt 119,650 119,650 - -------------------------------------------------------------------------------- Total capitalization 297,656 274,359 - -------------------------------------------------------------------------------- CURRENT LIABILITIES Long-term debt due within one year -- 5,350 Notes payable to banks -- 15,000 Accounts payable Trade 36,985 23,217 Affiliated companies -- 2,738 Accrued taxes 18,799 19,428 Customers' deposits 16,301 16,344 Amounts due customers 18,576 12,070 Accrued wages and benefits 9,663 4,217 Other 10,847 11,915 - -------------------------------------------------------------------------------- Total current liabilities 111,171 110,279 - -------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 16,689 17,136 Accumulated deferred investment tax credits 2,213 2,661 Regulatory liability 2,112 2,910 Customer advances for construction and other 814 804 - -------------------------------------------------------------------------------- Total deferred credits and other liabilities 21,828 23,511 - -------------------------------------------------------------------------------- TOTAL CAPITAL AND LIABILITIES $430,655 $408,149 ================================================================================
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, 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 Net income 23,297 - ------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1999 1,972,052 $ 20 $ 31,682 $ 2,802 $ 143,502 =================================================================================================
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) 1999 1998 1997 ====================================================================================================== OPERATING ACTIVITIES Net income $ 23,297 $ 20,587 $ 18,570 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 26,730 25,153 23,486 Deferred income taxes, net (2,137) (4,932) (618) Deferred investment tax credits (448) (469) (487) Net change in: Accounts receivable (4,182) 3,693 (7,686) Inventories (2,913) 4,237 2,071 Deferred gas costs (531) 738 (537) Accounts payable - gas purchases 14,115 (7,466) 5,758 Accounts payable - trade (347) 1,760 (593) Amounts due customers 6,695 4,723 (9,810) Other current assets and liabilities 1,198 9,129 (5,202) Other, net (583) 530 1,124 - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 60,894 57,683 26,076 - ------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Additions to property, plant and equipment (45,390) (53,581) (43,724) Net advances (to) from parent company (23,392) (2,246) 14,054 Proceeds from sale of assets 27,000 -- -- Other, net 549 62 1,091 - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (41,233) (55,765) (28,579) - ------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Payment of dividends on common stock -- (7,276) (6,720) Reduction of long-term debt (5,350) -- -- Net change in short-term debt (15,000) 4,000 11,000 - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (20,350) (3,276) 4,280 - ------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents (689) (1,358) 1,777 Cash and cash equivalents at beginning of period 1,222 2,580 803 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 533 $ 1,222 $ 2,580 ======================================================================================================
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 4.5 percent in 1999 and 4.4 percent in 1998 and 1997. 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. Consolidated federal income taxes are allocated to the appropriate subsidiaries using the separate return method. Alagasco uses the liability method of accounting for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years to which those temporary differences are expected to be recovered or settled. 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 28 29 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 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. In fiscal 1999, the increase in O&M expense per customer was below the index range; as a result the utility benefited by $0.7 million. Under RSE as extended, a $4.5 million and a $6.6 million annual increase in revenue became effective December 1, 1999 and 1998, respectively. An $11.8 million annual increase in revenue became effective December 1, 1997, with a $2.5 million annual decrease in revenue 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; and (2) individual industrial and commercial customer revenue losses that exceed $250,000 during the fiscal year if such losses cause Alagasco's return on equity to fall below 13.15 percent. The APSC approved the reserve on October 6, 1998, in the amount of $3.9 million; the maximum approved funding level of the ESR is $4 million. Following a year in which a charge against the ESR is made, the APSC provides for accretions to the ESR of no more than $40,000 monthly until the maximum funding level is achieved. The APSC will re-evaluate the operation of the ESR following the conclusion of Alagasco's fiscal year 2000. In accordance with APSC-directed regulatory accounting procedures, Alagasco in 1989 began returning to customers excess utility deferred taxes which resulted from a reduction in the federal statutory tax rate from 46 percent to 34 percent using the average rate assumption method. This method provides for the return to ratepayers of excess deferred taxes over the lives of the related assets. In 1993 those excess taxes were reduced as a result of a federal tax rate increase from 34 percent to 35 percent. Remaining excess utility deferred taxes of $1.7 million are being returned to ratepayers over approximately 11 years. At September 30, 1999 and 1998, a regulatory liability related to income taxes of $2.1 million and $2.9 million, respectively, was included in the consolidated financial statements. As of November 1, 1998, the Company offered a Voluntary Early Retirement Program to certain eligible employees. The APSC has allowed these costs to be amortized over a three-year period. At September 30, 1999, a regulatory asset of $2.4 million for costs associated with the early retirement program is included in the financial statements. 29 30 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, 1999 and 1998, the net acquisition adjustment was $14.4 million and $15.4 million, respectively. 3. LONG-TERM DEBT AND NOTES PAYABLE
===================================================================================== Long-term debt of Alagasco consists of the following: - ------------------------------------------------------------------------------------- As of September 30, (in thousands) 1999 1998 - ------------------------------------------------------------------------------------- Medium-term Notes, interest ranging from 5.85% to 7.97%, for notes redeemable December 16, 2000, to September 23, 2026 $119,650 $125,000 Less amounts due within one year - 5,350 - ------------------------------------------------------------------------------------- Total $119,650 $119,650 =====================================================================================
The aggregate maturities of Alagasco long-term debt for the next five years are as follows:
===================================================================================== Years ending September 30, (in thousands) ===================================================================================== 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------- $ - $ 4,650 $ 5,000 $ 5,000 $ 10,000 =====================================================================================
Energen has short-term credit lines and other credit facilities of $249 million available as of September 30, 1999 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) 1999 1998 1997 ===================================================================================== Alagasco outstanding $ -- $ 15,000 $ 11,000 Other Energen outstanding 238,000 138,000 141,000 - ------------------------------------------------------------------------------------- Notes payable to banks 238,000 153,000 152,000 Available for borrowings 11,000 75,000 51,000 - ------------------------------------------------------------------------------------- Total $249,000 $228,000 $203,000 - ------------------------------------------------------------------------------------- Alagasco maximum amount outstanding at any month-end $ 35,000 $ 36,000 $ 41,000 Alagasco average daily amount outstanding $ 9,140 $ 13,225 $ 9,962 Alagasco weighted average interest rates based on: Average daily amount outstanding 5.48% 5.94% 5.83% Amount outstanding at year-end -- 5.75% 5.99% =====================================================================================
Total interest expense for Alagasco in 1999, 1998 and 1997 was $10,366,000, $10,221,000 and $10,809,000, respectively. 4. INCOME TAXES ================================================================================ The components of income taxes consist of the following:
===================================================================================== For the years ended September 30, (in thousands) 1999 1998 1997 ===================================================================================== Taxes estimated to be payable currently: Federal $ 14,331 $ 15,306 $ 10,219 State 1,417 1,495 1,004 - ------------------------------------------------------------------------------------- Total current 15,748 16,801 11,223 - ------------------------------------------------------------------------------------- Taxes deferred: Federal (2,395) (4,962) (1,050) State (190) (439) (55) - ------------------------------------------------------------------------------------- Total deferred (2,585) (5,401) (1,105) - ------------------------------------------------------------------------------------- Total income tax expense $ 13,163 $ 11,400 $ 10,118 =====================================================================================
30 31 Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1999 and 1998 are as follows:
================================================================================================================ As of September 30, (in thousands) 1999 1998 ================================================================================================================ Current Noncurrent Current Noncurrent ------------------------ ------------------------ Deferred tax assets: Deferred investment tax credits $ - $ 683 $ - $ 850 Regulatory liabilities - 784 - 1,081 Enhanced stability reserve 1,452 - 1,452 - Unbilled revenue 1,764 - 1,770 - Gas supply adjustment 124 - 768 - Insurance and accruals 3,146 - 3,320 - Inventories 816 - 574 - Allowance for uncollectible accounts 1,684 - 1,293 - Pension and other costs 1,587 - - - Other, net 1,574 118 2,071 61 - ----------------------------------------------------------------------------------------------------------------- Subtotal 12,147 1,585 11,248 1,992 Valuation allowance - - - - - ----------------------------------------------------------------------------------------------------------------- Total deferred tax assets 12,147 1,585 11,248 1,992 - ----------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation and basis differences - 18,274 - 18,170 Pension and other costs - - 485 - Other, net 526 - 293 958 - ----------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 526 18,274 778 19,128 - ----------------------------------------------------------------------------------------------------------------- Net deferred tax assets (liabilities) $ 11,621 $ (16,689) $ 10,470 $ (17,136) ==================================================================================================================
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) 1999 1998 1997 ================================================================================================================== Income tax expense at statutory federal income tax rate $ 12,761 $ 11,195 $ 10,042 Increase (decrease) resulting from: Deferred investment tax credits (448) (469) (487) State income taxes, net of federal income tax benefit 784 688 617 Other, net 66 (14) (54) - ------------------------------------------------------------------------------------------------------------------ Total income tax expense $ 13,163 $ 11,400 $ 10,118 ==================================================================================================================
There were no tax-related balances due to affiliates at September 30, 1999 or 1998. Alagasco has evaluated its tax position and believes the financial statements properly reflect the income tax matters of the company. 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: Plan A which covers a majority of the employees and Plan B which covers employees under certain labor union agreements. 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. 31 32 The status of the plans was as follows:
================================================================================================================ As of June 30, (in thousands) PLAN A PLAN B ================================================================================================================ 1999 1998 1999 1998 ---------------------- --------------------- Projected benefit obligation: Balance at beginning of year $ 88,281 $ 73,758 $ 18,898 $ 16,866 Service cost 2,653 2,386 299 224 Interest cost 6,193 5,841 1,338 1,261 Plan amendments - 2,944 843 - Actuarial loss (gain) (8,205) 7,066 (1,803) 1,737 Special termination benefits 1,487 - - - Benefits paid (16,568) (3,714) (1,348) (1,190) - ----------------------------------------------------------------------------------------------------------------- Balance at end of year 73,841 88,281 18,227 18,898 - ----------------------------------------------------------------------------------------------------------------- Plan assets: Fair value of plan assets at beginning of year 90,661 84,859 23,081 20,820 Actual return on plan assets 18,482 9,516 2,310 3,451 Benefits paid (16,568) (3,714) (1,348) (1,190) - ----------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 92,575 90,661 24,043 23,081 - ----------------------------------------------------------------------------------------------------------------- Amounts recognized in the Consolidated Balance Sheets: Funded status of plan 18,734 2,380 5,816 4,183 Unrecognized actuarial loss (gain) (23,897) (2,773) (5,621) (2,944) Unrecognized prior service cost 2,790 3,025 1,398 791 Unrecognized net transition obligation (asset) (1,877) (2,686) 170 226 - ----------------------------------------------------------------------------------------------------------------- Accrued pension asset (liability) $ (4,250) $ (54) $ 1,763 $ 2,256 =================================================================================================================
The components of net pension expense were:
================================================================================================================= For the years ended September 30, (in thousands) PLAN A PLAN B ================================================================================================================= 1999 1998 1997 1999 1998 1997 ------------------------ ----------------------- Components of net periodic benefit cost: Service cost $ 2,653 $ 2,386 $ 2,227 $ 299 $ 224 $ 243 Interest cost 6,192 5,842 5,524 1,338 1,261 1,238 Expected return on assets (5,937) (5,709) (5,766) (1,510) (1,346) (1,308) Prior service cost amortization 235 5 5 235 207 207 Actuarial loss (gain) - - 46 - - - Transition amortization (808) (808) (808) 57 57 57 - ----------------------------------------------------------------------------------------------------------------- Net periodic expense $ 2,335 $ 1,716 $ 1,228 $ 419 $ 403 $ 437 =================================================================================================================
- ----------------------------------------------------------------------------------------------------------------- As of September 30, PLAN A PLAN B - ----------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 ------------------- -------------------- Weighted average weight assumptions in pension actuarial calculations: Discount rate 7.75% 7.00% 7.75% 7.00% Expected return on plan assets 8.25% 8.25% 8.25% 8.25% Rate of compensation increase 5.25% 4.50% - - =================================================================================================================
32 33 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 1999, 1998 and 1997 was $(75,000), $(54,000), and $399,000, respectively. At June 30, 1999 and 1998, the accumulated post-retirement benefit obligation related to these agreements was $2,620,000 and $2,901,000, respectively, and the projected benefit obligation was $7,189,000 and $7,088,000, respectively. A prepaid post-retirement benefit asset of $844,000 and $434,000 was recorded at June 30, 1999 and 1998, 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. The projected unit credit actuarial method was used to determine the normal cost and actuarial liability. The status of the post-retirement benefit programs was as follows:
================================================================================================================== As of June 30, (in thousands) SALARIED EMPLOYEES UNION EMPLOYEES ================================================================================================================== 1999 1998 1999 1998 -------------------- ---------------------- Projected post-retirement benefit obligation: Balance at beginning of year $ 29,312 $ 20,020 $ 37,751 $ 33,020 Service cost 1,464 967 2,039 1,314 Interest cost 2,013 2,049 2,599 2,612 Actuarial loss (gain) (2,530) 7,286 (3,709) 2,165 Special termination benefits 338 - - - Benefits paid (1,453) (1,010) (1,257) (1,360) - ------------------------------------------------------------------------------------------------------------------- Balance at end of year 29,144 29,312 37,423 37,751 - ------------------------------------------------------------------------------------------------------------------- Plan assets: Fair value of plan assets at beginning of year 30,476 23,719 23,081 13,363 Actuarial return on plan assets 4,896 6,161 2,468 6,628 Company contribution 1,575 1,606 2,410 4,450 Benefits paid (1,453) (1,010) (1,257) (1,360) - ------------------------------------------------------------------------------------------------------------------- Balance at end of year 35,494 30,476 26,702 23,081 - ------------------------------------------------------------------------------------------------------------------- Amounts recognized in the Consolidated Balance Sheets: Funded status of plan 6,350 1,164 (10,721) (14,670) Unrecognized actuarial loss (gain) (16,468) (12,402) (7,266) (5,714) Unrecognized net transition obligation 10,118 10,841 17,987 19,272 - ------------------------------------------------------------------------------------------------------------------- Accrued post-retirement benefit liability $ - $ (397) $ - $ (1,112) ==================================================================================================================
Net periodic post-retirement benefit expense included the following:
================================================================================================================== For the years ended September 30, (in thousands) SALARIED EMPLOYEES UNION EMPLOYEES ================================================================================================================== 1999 1998 1997 1999 1998 1997 ------------------------- -------------------------- Components of net periodic benefit cost: Service cost $ 1,464 $ 967 $ 979 $ 2,039 $ 1,314 $ 1,198 Interest cost 2,013 2,049 2,204 2,599 2,612 2,542 Expected return on assets (1,448) (1,189) (1,117) (1,156) (737) (821) Actuarial loss (gain) (590) (510) (568) (129) (107) - Transition amortization 723 723 723 1,285 1,285 1,285 - ----------------------------------------------------------------------------------------------------------------- Net periodic post-retirement benefit expense $ 2,162 $ 2,040 $ 2,221 $ 4,638 $ 4,367 $ 4,204 =================================================================================================================
33 34
================================================================================ As of September 30, PLAN A PLAN B ================================================================================ 1999 1998 1999 1998 -------------- ------------- Weighted average weight assumptions in pension actuarial calculations: Discount rate 7.75% 7.00% 7.75% 7.00% Expected return on plan assets 8.25% 8.25% 8.25% 8.25% Rate of compensation increase 5.25% 4.50% - - Health care cost trend rate 7.50% 7.50% 7.50% 7.50%
================================================================================ The weighted average health care cost trend rate used in determining the accumulated post-retirement benefit 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 percentage point would increase the accumulated post-retirement benefit obligation by 2.8 percent and the net periodic post-retirement benefit cost by 2.3 percent. For union employees, increasing the weighted average health care cost trend rate by 1 percentage point would increase the accumulated post-retirement benefit obligation by 7.2 percent and the net periodic post-retirement benefit cost by 7 percent. 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, 1999, 1998, and 1997 was $177,000, $173,000, and $163,000, respectively. 6. CAPITAL STOCK ================================================================================ Alagasco's authorized common stock consists of 3 million, $0.01 par value common shares. At September 30, 1999 and 1998, 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. 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. 34 35 LEASE OBLIGATIONS: In January 1999, Alagasco closed on a sale-leaseback of the Company's new headquarters building. The proceeds from the sale approximated the investment in the facility. The building is being leased from the purchaser over a 25 year lease term and the related lease is accounted for as an operating lease. Total payments related to leases included as operating expense, inclusive of the sale-leaseback, were $2,079,000, $2,292,000 and $2,280,000 in 1999, 1998 and 1997, respectively. Minimum future rental payments required after 1999 under leases with initial or remaining noncancelable lease terms in excess of one year are as follows:
- -------------------------------------------------------------------------------- Years ending September 30, (in thousands) - -------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 2005 AND THEREAFTER - -------------------------------------------------------------------------------- $2,074 $2,014 $1,963 $1,919 $1,781 $ 36,722 ================================================================================
8. SUPPLEMENTAL CASH FLOW INFORMATION ================================================================================ Supplemental information concerning cash flow activities is as follows:
- -------------------------------------------------------------------------------- For the years ended September 30, (in thousands) 1999 1998 1997 ================================================================================ Interest paid, net of amount capitalized $10,539 $11,256 $10,192 Income taxes paid $16,342 $16,253 $13,228 Noncash investing activities: Capitalized depreciation $ 265 $ 187 $ 168 Allowance for funds used during construction $ 374 $ 400 $ 490 - --------------------------------------------------------------------------------
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 $119,650,000, would be $120,755,000 at September 30, 1999. 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. During 1999, 1998 and 1997, Alagasco sold $6,391,000, $8,100,000 and $7,926,000, respectively, of installment receivables. At September 30, 1999 and 1998, the balance of these installment receivables was $15,690,000 and $17,105,000, 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 approximately 470,000 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 1999, the Company adopted 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. The Company also adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pensions and other postretirement benefit plans. This pronouncement relates solely to disclosure provisions and has no effect on the results of operations or financial position of the Company. 35 36 In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments. The Company is required to adopt this statement in fiscal year 2001. The impact on the Company currently is being evaluated. 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 1999 quarters (in thousands) First Second Third Fourth - -------------------------------------------------------------------------------- Operating revenues $71,557 $144,692 $63,296 $46,009 Operating income (loss) $ 5,579 $ 28,158 $ 2,613 $(2,948) Net income (loss) $ 2,855 $ 25,198 $ 507 $(5,263) - -------------------------------------------------------------------------------- Fiscal year 1998 quarters (in thousands) - -------------------------------------------------------------------------------- Operating revenues $95,755 $161,747 $66,327 $46,111 Operating income (loss) $ 4,798 $ 26,393 $ 1,631 $(2,559) Net income (loss) $ 2,183 $ 23,946 $ (586) $(4,956) - --------------------------------------------------------------------------------
12. TRANSACTIONS WITH RELATED PARTIES ================================================================================ Alagasco purchased natural gas from affiliates amounting to $3,232,000, $4,142,000 and $5,165,000, in 1999, 1998 and 1997, respectively. These amounts are included in gas purchased for resale. Alagasco had net receivables from affiliates of $20,654,000 at September 30, 1999 and net payables to affiliates of $2,738,000 at September 30, 1998. 36 37 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF ENERGEN CORPORATION: Our audits of the consolidated financial statements referred to in our report dated October 27, 1999, appearing in the 1999 Annual Report to Shareholders of Energen Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Birmingham, Alabama October 27, 1999 37 38 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ENERGEN CORPORATION AND SUBSIDIARIES
================================================================================ YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 1999 1998 1997 ================================================================================ ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE AT BEGINNING OF YEAR $ 3,547 $ 3,185 $ 3,002 - -------------------------------------------------------------------------------- Additions: Charged to income 6,121 3,472 1,837 Recoveries and adjustments (244) (215) (186) - -------------------------------------------------------------------------------- Net additions 5,877 3,257 1,651 - -------------------------------------------------------------------------------- Less uncollectible accounts written off (3,826) (2,895) (1,468) - -------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 5,598 $ 3,547 $ 3,185 ================================================================================
38 39 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ALABAMA GAS CORPORATION
================================================================================ YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 1999 1998 1997 ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE AT BEGINNING OF YEAR $ 3,482 $ 3,156 $ 2,985 - -------------------------------------------------------------------------------- Additions: Charged to income 5,105 3,430 1,575 Recoveries and adjustments (244) (215) (186) - -------------------------------------------------------------------------------- Net additions 4,861 3,215 1,389 - -------------------------------------------------------------------------------- Less uncollectible accounts written off (3,811) (2,889) (1,218) - -------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 4,532 $ 3,482 $ 3,156 ================================================================================
39 EX-10.(C) 2 FORM OF EXECUTIVE RETIREMENT SUPPLEMENT AGREEMENT 1 EXHIBIT 10(c) THIS EXECUTIVE RETIREMENT SUPPLEMENT AGREEMENT is made and entered into as of the date set for below, by and between Energen Corporation, an Alabama corporation (the "Company"), and the Executive identified below (the "Executive"). Date: , ----------------------- ---------- Executive: ----------------------------- R E C I T A L S 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 Executives 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. 2 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. 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 2 3 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 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 180 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 180. 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 3 4 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. 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 "X" minus "Y" where "X" equals the product of "A" multiplied by the Service Factor and "Y" equals the "Offset". 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. The 4 5 "Offset" shall equal zero ($0) unless Executive has entered into a written split dollar life insurance or other agreement which expressly references this agreement and specifies an "Offset" to the Supplemental Retirement Benefit, in which event the "Offset" shall be as specified in such other agreement. 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. 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. 5 6 (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 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. 6 7 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 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. 4.5 This agreement constitutes a complete amendment and restatement and fully supersedes that certain Executive Retirement Supplement Agreement between the parties dated _________, 19____. 7 8 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: Chairman, President and Chief Executive Officer ------------------------------------------------ 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. 8 9 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: --------------------------------- 9 EX-10.(D) 3 FORM OF SEVERANCE COMPENSATION AGREEMENT 1 EXHIBIT 10(d) SEVERANCE COMPENSATION AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of the date set forth below, by and between ENERGEN CORPORATION, an Alabama corporation ("Energen"), and the Executive identified below ("the Executive"). Date: , --------------------------- ------------ Executive: ----------------------------------- Factor: [150, 200, 300]% ---------------- 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 first to occur of (i) the earliest date that a Change in Control occurs or (ii) Energen shareholder approval of a transaction which upon consummation will constitute a Change in Control, and ending on the first to occur of (iii) the last day of the thirty-sixth calendar month following the calendar month during 2 which such Change in Control occurred or (iv) a determination by the Energen Board of Directors that such Change in Control will not be consummated. 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. (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 October 1, 1999, 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 such date whose election, or nomination for election by Energen's shareholders, was approved by a vote of at least a majority of the directors then 2 3 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 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 Measurement Event, 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 Measurement Event occurs. 3 4 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 that 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: (1) The assignment to Executive by Employer of duties inconsistent with Executive's position, authority, duties, responsibilities and status with Employer immediately prior to the Measurement Event, or a change in Executive's titles or offices as in effect immediately prior to the Measurement Event, 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 the Measurement Event or any other action by Employer that results in such a diminution in Executive's position, authority, duties, responsibilities or status [for CEO, CFO and General Counsel(without limiting the generality of the foregoing, a comparable position with an entity that does not have publicly traded voting equity securities is such a diminution from a comparable position with a publicly-traded entity)], (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 1992 Long-Range Performance Share Plan (or any other short or long-term incentive compensation plan in effect immediately prior to the Measurement Event) 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 the Measurement Event or a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to the 4 5 Measurement Event, is substantially comparable in all material respects to the fringe benefits (taken as a whole) in effect prior to the Measurement Event; (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 the Measurement Event, 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 Measurement Event; (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 that at the time of the Change in Control had been most recently engaged by Energen to render an opinion on Energen's consolidated financial statements, or any other firm of certified public accountants mutually agreeable to Energen and Executive. (l) "Measurement Event" means (i) the Change in Control if the Date of Termination is on or after the date of the Change in Control or (ii) commencement of the Applicable Period if the Date of Termination is prior to the date of the Change in Control. (m) "Notice of Termination" has the meaning set forth in Section 2(a) of this Agreement. (n) "Qualified Termination" shall mean (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) a 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, or (iii) a voluntary termination of Executive's employment by Executive for Good Reason. 5 6 (o) "Subsidiary" means any corporation, the majority of the outstanding voting stock of which is owned directly or indirectly, by Energen. (p) "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 the Executive's Compensation multiplied by the "Factor" specified at the beginning of this Agreement. 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 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 Measurement Event; 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 obligation to provide continued coverage under this Section 4 and the continued benefits described herein shall be secondary to those provided by such other employer. Except as may be otherwise agreed by the Executive, all such coverages shall be provided under insured plans. 6 7 Section 5. Certain Further Payments by the Company. (a) In the event that any amount or benefit paid, distributed or accrued to or by the Executive pursuant to any provision of this Agreement, and/or any amounts or benefits otherwise paid, distributed or accrued to or by the Executive by the Employer or any affiliated company including, without limitation, any distribution, vesting or payment made pursuant to the terms of the Employer's or an affiliated company'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: (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 7 8 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 payment to Executive in an amount equal to (i) such excess Excise Tax, plus (ii) any interest or penalty payable with respect to such excess Excise Tax plus (iii) any Federal, state and local income or employment tax and Excise Tax on all payments made under this Section 5(f), all such that Executive has no adverse economic consequences as a result of such excess Excise Tax determination. Section 6. No Obligation To Seek Further Employment; No Effect on Other Benefits. 8 9 (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 9 10 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 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. Officer/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. 10 11 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: The address for Executive in the Employer's payroll records 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. 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. 11 12 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 ------------------------------------ [Rev 10/99] 12 EX-10.(F) 4 1992 LONG-RANGE PERFORMANCE SHARE PLAN 1 Exhibit 10(f) ENERGEN CORPORATION 1992 LONG-RANGE PERFORMANCE SHARE PLAN (As Amended effective October 1, 1999) 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 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 1 2 (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 October 1, 1999, 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 such date 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 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. 2 3 (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 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 if no such quotations are available, such determination shall be made by a majority of the Incumbent Board. (n) "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 render an opinion on Energen's consolidated financial statements, or any other firm of certified public accountants mutually agreeable to Energen and at least eighty percent of the Participants holding Awards outstanding as of the date of the Change in Control. (o) "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. (p) "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 3 4 who has an officer title with the Corporation. (q) "Participant" means an Employee who is selected by the Committee to receive an Award under the Plan. (r) "Performance Share" means the equivalent of one share of Common Stock. (s) "Qualified Termination" means termination of a Participant's employment with the Corporation under any one of the following circumstances: (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. (v) A voluntary termination by the Participant during 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 occurs. (t) "Subsidiary" means any corporation, the majority of the outstanding voting stock of which is owned, directly or indirectly, by Energen. 4 5 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. 5 6 (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 6 7 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 which become payable to the Participant and which are subject to such deferral election, may at the discretion of the Corporation 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 Corporation, 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. 7 8 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 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 8 9 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 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. 9 10 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 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, 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, provided that the adoption of new procedures or amendment of existing procedures shall be effective with respect to Awards granted prior to such adoption or amendment only to the extent agreed by the affected Participants. The other provisions of the Plan notwithstanding, all Award payments made subsequent to a Change in Control shall be paid in cash except as may be otherwise agreed by the affected Participants. 19. AMENDMENT OF THE PLAN The Board of Directors may amend or suspend the Plan at any time; provided, however, that suspension or amendment of the Plan (or the procedures under Section 18 of the Plan) shall be effective with respect to Awards granted prior to such suspension or amendment only to the extent agreed by the affected Participants. The foregoing notwithstanding, if Energen agrees to a Change in Control transaction for which the parties intend to use the pooling of interests accounting method and, in the opinion of the Independent Auditor (i) the use of such accounting method is precluded by a prior amendment of the Plan or a prior Award grant, (ii) such impediment to use of the pooling of interests method can be removed by modification or nullification of such amendment or Award, and (iii) there will be no other impediments to the use of the pooling of interests method, then, effective contemporaneous with the closing of the Change in Control, the Board of Directors may modify or nullify such prior 10 11 amendment or Award. Any such modification or nullification will be done only to the extent deemed necessary by the Independent Auditor and to the extent possible will be done in a manner which has the least adverse economic effect on Participants. Any Award which has been paid may only be modified or nullified with the consent of the Participant. 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, (ii) amended April 25, 1997 by the Board and (iii) amended October 27, 1999 (effective October 1,1999) by the Board. --------------------------- Assistant Secretary 11 EX-10.(G) 5 1997 STOCK INCENTIVE PLAN 1 EXHIBIT 10(g) ENERGEN CORPORATION 1997 STOCK INCENTIVE PLAN (As Amended Effective October 1, 1999) The purpose of this Plan is to provide a means whereby Energen Corporation may, through the use of stock and stock related compensation, 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. As used in the Plan, the following terms have meanings indicated: "Award" means Incentive Stock Options, Nonqualified Stock Options and/or Restricted Stock granted under the Plan. "Board" means the Board of Directors of Energen. "Cause" means any of the following: (1) The willful and continued failure by a Participant to substantially perform such Participant's duties with Energen or Subsidiary (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 Energen or a Subsidiary monetarily or otherwise; or (3) The conviction of a Participant of a felony. "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 October 1, 1999, 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 1 2 a director subsequent to such date 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 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. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Officers Review Committee of the Board or such other Committee of two or more directors as may be determined by the Board. "Energen" means Energen Corporation and any successor corporation by merger or other reorganization. "Employee" means any employee of one or more of Energen and the Subsidiaries. "Exchange Act" means the Securities Exchange Act of 1934. 2 3 "Exercise Date" means the date on which a notice of option exercise is delivered to Energen pursuant to Section 6.3(c) or a notice of option cancellation is delivered to Energen pursuant to Section 6.3(i). "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 6.3(a). "Fair Market Value" means, 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) or, if there is no trading of the Stock on the relevant date, then the closing price on the most recent trading date preceding the relevant date. With respect to other consideration, the term Fair Market Value 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 422 of the Code. "Nonqualified Stock Options" means options granted under the Plan to purchase Stock which are not Incentive Stock Options. "Participant" means an Employee who is selected by the Committee to receive an Award. "Performance Measures" has the meaning set forth in Section 7.3. "Plan" means this Energen Corporation 1998 Stock Incentive Plan. "Restricted Stock" means Stock granted to a Participant under Section 7 of the Plan with respect to which the applicable Restrictions have not lapsed or been removed. "Restrictions" means the transfer and other restrictions set forth in Section 7.2(a). "Stock" means the common stock, par value $.01 per share, of Energen as such stock may be reclassified, converted or exchanged by reorganization, merger or otherwise. "Subsidiary" means any corporation, the majority of the outstanding voting stock of which is owned, directly or indirectly by Energen Corporation. "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 Energen. 2. SHARES SUBJECT TO THE PLAN. Subject to adjustment in accordance with Section 3, an aggregate of 650,000 shares of Stock are available for issuance (including shares transferred from treasury) under the Plan. Shares of Stock allocable to an Award or portion of an Award that is canceled by forfeiture, expiration or for any other reason (excepting pursuant to a stock appreciation right election under Section 6.3(i)) shall again be available for additional Awards. If any option granted under the Plan shall be canceled as to any shares of Stock pursuant to Section 6.3(i) (stock appreciation rights), then such shares of Stock shall not be available for the grant of another Award. 3 4 3. ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK. In the event of any change in the Stock 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 available for issuance 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 dilution or enlargement of the rights granted to, or available for, Participants in the Plan. If the adjustment would result in fractional shares with respect to an Award, then the Committee may make such further adjustment (including, without limitation, the use of consideration other than Stock or rounding to the nearest whole number of shares) as the Committee shall deem appropriate to avoid the issuance of fractional shares. 4. 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 be Participants in the Plan, to determine the Award to be made to each Participant, and to determine the conditions subject to which Awards will become payable under the Plan. 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. The Committee's interpretation and construction of the Plan and of any conditions applicable to Awards shall be conclusive and binding on all persons, including Energen and all Participants. Any action which can be taken, or authority which can be exercised, by the Committee with respect to the Plan, may also be taken or authorized by the Board. 5. PARTICIPATION. Participants in the Plan shall be selected by the Committee from those Employees who, in the judgment of the Committee, have significantly contributed or can be expected to significantly contribute to Energen's success. 6. OPTIONS 6.1 GRANT OF OPTIONS. Subject to the provisions of the Plan, the Committee may (a) determine and designate from time to time those Participants 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 Options; (c) determine the number of shares subject to each option; (d) determine the time or times when each Option shall become exercisable and the duration of the exercise period; and (e) determine whether and, if applicable, the manner in which each option shall contain stock appreciation rights 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 13 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 by any employee during any calendar year (under all plans of Energen and its Subsidiaries) shall not exceed $100,000. 4 5 6.2 INDIVIDUAL LIMITATION. The aggregate of all Awards received by any individual Participant shall not include options with respect to more than 150,000 shares of Stock (adjusted in accordance with Section 3.). 6.3 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 Energen 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. Each option shall be exercisable in whole or part on such date or dates and during such period and for such number of shares as shall be set forth in the applicable option agreement. An optionee electing to exercise an option shall give written notice to Energen of such election and of the number of shares the optionee has elected to purchase and shall at the time of exercise tender the full purchase price of the shares the optionee has elected to purchase plus any required withholding taxes in accordance with Sections 6.3(d) and 8. (d) Payment of Purchase Price upon Exercise. The purchase price of the shares as to which an option shall be exercised shall be paid to Energen at the time of exercise (i) in cash, (ii) in Stock already owned by the optionee having a total Fair Market Value equal to the purchase price and not subject to any lien, encumbrance or restriction on transfer other than pursuant to federal or state securities laws, (iii) by election to have Energen withhold (from the Stock to be delivered to the optionee upon such exercise) shares of Stock having a Fair Market Value equal to the purchase price or (iv) by any combination of such consideration having a total Fair Market Value equal to the purchase price; provided that the use of consideration described in clauses (ii), (iii) and (iv) shall be subject to approval by the Committee. In addition the Committee in its discretion may accept such other consideration 5 6 or combination of consideration as the Committee shall deem to be appropriate and to have a total Fair Market Value equal to the purchase price. In each case, Fair Market Value shall be determined as of the Exercise Date. (e) Exercise in the Event of Death or Termination of Employment. If an optionee's employment by Energen and all Subsidiaries shall terminate because of the optionee's (i) death, (ii) disability, or (iii) retirement in accordance with the terms of Energen'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. If an optionee's employment by Energen and all Subsidiaries shall terminate for any reason other than (i) those set forth in the preceding sentence, or (ii) termination for Cause, then all unexercised options under the Plan held by the optionee (vested or unvested) shall terminate ninety days following the date of termination of employment, provided that the Committee shall have the authority to extend such option termination date. Without limiting the generality of Section 5(c), the Committee shall have full authority to accelerate 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. Upon termination for Cause, all unexercised options held by the terminated Employee shall immediately terminate and may not be exercised. (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 (and, except as may be otherwise agreed by the Committee, will remain during the option period) 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. To the extent reasonably necessary to assure compliance with all applicable securities laws, upon demand by the Committee for such a representation, the optionee 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 6 7 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) 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 Committee may determine to be necessary or desirable in order to qualify such option as an "incentive stock option" within the meaning of Section 422 of the Code, or any amendment thereof or substitute therefor. Energen, in its discretion, may retain possession of any certificates for Stock delivered in connection with the exercise of an Incentive Stock Option or appropriately legend such certificates during the period that a disposition of such Stock would disqualify the exercised option from treatment as an incentive stock option under Section 422 of the Code (a "422 Option"). Subject to the other provisions of the Plan, Energen shall cooperate with the optionee should the optionee desire to make a disqualifying disposition. Any Incentive Stock Option which is disqualified from treatment as a 422 Option for whatever reason, shall automatically become a Nonqualified Stock Option. No party has any obligation or responsibility to maintain an Incentive Stock Option?s status as a 422 Option. The optionee shall, however, immediately notify Energen of any disposition of Stock which would cause an Incentive Stock Option to be disqualified as a 422 Option. (i) Stock Appreciation Right. Each option agreement may provide that the optionee may from time to time elect, by written notice to Energen, to cancel all or any portion of the option then subject to exercise, in which event Energen's obligation in respect of such option shall be discharged by payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value as of the Exercise Date of the shares subject to the option or the portion thereof so canceled 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 as of the Exercise Date equal to any such excess, or (ii) a combination of cash and shares of Stock with a combined value as of the Exercise Date equal to any such excess. (j) 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(i), 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 of Alabama (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, by the issuance of Stock or a combination of cash and shares of Stock having 7 8 an aggregate Fair Market Value as of the applicable Expiration or Exercise Date, equal to any such excess. (k) 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. (l) Delivery of Certificates. Subject to Section 6.3(h), as soon as reasonably practicable after receipt of an exercise notice and full payment, Energen shall deliver to the optionee, registered in the optionee's name, certificates for the appropriate number of shares of Stock. 7. RESTRICTED STOCK 7.1 GRANT OF RESTRICTED STOCK. The Committee may make grants of Restricted Stock to Participants. Each restricted Stock Award shall be evidence by an agreement in a form approved by the Committee, setting forth the number of shares of Restricted Stock granted and the terms and conditions to which the Restricted Stock is subject. Restricted Stock may be awarded by the Committee in its discretion with or without cash consideration. 7.2 TERMS AND CONDITIONS OF RESTRICTED STOCK. (a) Restrictions. No shares of Restricted Stock may be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered or disposed of (the "Restrictions") until the Restrictions on such shares have lapsed or been removed. (b) Lapse. The Committee shall establish as to each Award of Restricted Stock the terms and conditions upon which the Restrictions shall lapse, which terms and conditions may include, without limitation, a required period of service, Performance Measures, or any other individual or corporate performance conditions. (c) Termination of Employment. Except as may be otherwise expressly provided in the applicable Restricted Stock Award agreement, should the Participant's employment with Energen and all Subsidiaries terminate for any reason including, without limitation, termination because of the Participant's death, disability, or retirement in accordance with Energen's tax-qualified retirement plans, any shares of Stock which remain subject to Restrictions, shall be forfeited and returned to Energen unless the Committee decides, in its discretion, to accelerate the time at which any remaining Restrictions lapse or to remove any or all such Restrictions entirely (subject to Section 7.2(d)). Upon the termination of the Participant's employment for any reason, the Committee is not required to act and, absent some action by the Committee, all shares of Stock remaining subject to Restriction will be forfeited and returned to Energen. (d) Lapse at Discretion of Committee. The Committee may at any time, in its sole discretion, accelerate the time at which any or all Restrictions on a Restricted Stock Award will lapse or remove any and all such Restrictions; provided that the Committee may 8 9 not accelerate the lapse of or remove Restrictions which require the attainment of a Performance Measure except as may be permitted by the performance-based exception to Section 162(m) of the Code. (e) Rights with respect to Restricted Stock. Upon the acceptance by a Participant of an award of Restricted Stock, such Participant shall, subject to the restrictions set forth in paragraph (b) above, have all the rights of a shareholder with respect to such shares of Restricted Stock, including, but not limited to, the right to vote such shares of Restricted Stock and the right to receive all dividends and other distributions paid thereon. Certificates representing Restricted Stock may be held by Energen until the restrictions lapse and shall bear such restrictive legends as Energen shall deem appropriate. (f) No Section 83(b) Election. Unless otherwise expressly agreed in writing by Energen, a Participant shall not make an election under Section 83(b) of the Code with respect to a Restricted Stock Award and upon the making of any such election, all shares of Restricted Stock subject to the election shall be forfeited and returned to Energen. 7.3 PERFORMANCE MEASURES. At its discretion, the Committee may make the lapsing of Restrictions subject to the attainment of one or more Performance Measures designed to qualify for the performance-based exceptions from Section 162(m) of the Code. Unless and until Energen's shareholders approve a change in the Performance Measures set forth in this Section 7.3, the Performance Measures to be used for purposes of such Awards shall be chosen from among the following alternatives, as measured with respect to Energen and/or any one or more of the Subsidiaries, with or without comparison to a peer group: (a) return on shareholder's equity; (b) return on assets; (c) net income; (d) earnings per common share; (e) total shareholder return; (f) oil and/or gas reserve additions; (g) utility customer number, volume and/or revenue growth; and (h) such other criteria as may be established by the Committee in writing and which meets the requirements of the performance-based exception to Section 162(m) of the Code. In the event that the performance-based exception to Section 162(m) or its successor is amended such that the performance-based exception permits the employer to alter the governing performance 9 10 measures without obtaining shareholder approval of such changes, the Committee shall have discretion to make such changes without obtaining shareholder approval. 8. WITHHOLDING. Each Participant shall, no later than the date as of which the value of an Award first becomes includible in the gross income of the Participant for Federal income tax purposes, pay to Energen and Subsidiaries, or make arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, any Federal, FICA, state, or local taxes of any kind required by law to be withheld with respect to the Award. The obligations of Energen under the Plan shall be conditional on such payment or arrangements. Energen and, where applicable, its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes owed hereunder by a Participant from any payment of any kind otherwise due to said Participant. The Committee may permit Participants to elect to satisfy their Federal, and where applicable, FICA, state and local tax withholding obligations with respect to all Awards by the reduction, in an amount necessary to pay all said withholding tax obligations, of the number of shares of Stock or amount of cash otherwise issuable or payable to said Participants in respect of an Award. 9. NO RIGHTS TO CONTINUED EMPLOYMENT. The Plan and any Award granted under the Plan shall not confer upon any Participant any right with respect to continuance of employment by Energen or any Subsidiary or any right to further Awards under the Plan, nor shall they interfere in any way with the right of Energen or any Subsidiary by which a Participant is employed to terminate the Participant's employment at any time. 10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and fulfillment of Awards thereunder, and the obligations of Energen to sell, issue, release and/or deliver shares of Stock 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. Energen 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 Energen shall, in its sole discretion, determine to be necessary or advisable. 11. CHANGE IN CONTROL. Except as may be otherwise expressly provided in the applicable Award agreement, upon the occurrence of a Change in Control all outstanding Incentive Stock Options and Nonqualified Stock Options shall be immediately and fully vested and exercisable and all restrictions on all outstanding Restricted Stock shall immediately lapse. Except as may be otherwise expressly provided in the applicable Award Agreement, if a Participant's employment by Energen and all subsidiaries is terminated during a Pre-Closing Period (defined below) (i) involuntarily by Energen other than for Cause, or (ii) voluntarily by the Participant for Good Reason (defined below), then all of the Participant's outstanding Incentive Stock Options and Nonqualified Stock Options shall be immediately and fully vested and exercisable and all restrictions on all of the Participant's outstanding Restricted Stock shall immediately lapse. A "Pre-Closing Period" commences upon Energen shareholder approval of a transaction which upon consummation will constitute a Change in Control and ends upon the first to occur of (i) the closing of such transaction or (ii) a determination by the Board that such Change in Control will not be consummated. "Good Reason" means with respect to a Participant (i) a reduction in Participant's aggregate rate of monthly base pay from Energen and all subsidiaries or (ii) the termination or materially adverse modification 10 11 of the Energen Annual Incentive Compensation Plan without substitution of new short-term incentives providing comparable compensation for the Participant. 12. AMENDMENT AND DISCONTINUANCE. The Board of Directors of Energen may from time to time amend, suspend or discontinue the Plan. Without the written consent of a Participant, no amendment or suspension of the Plan shall alter or impair any Award previously granted to a Participant under the Plan. The foregoing notwithstanding, if Energen agrees to a Change in Control transaction for which the parties intend to use the pooling of interests accounting method and, in the opinion of the Independent Auditor (defined below), (i) the use of such accounting method is precluded by a prior amendment of the Plan or a prior Award grant, (ii) such impediment to use of the pooling of interests method can be removed by modification or nullification of such amendment or Award, and (iii) there will be no other impediments to the use of the pooling of interests method, then, effective contemporaneous with the closing of the Change in Control, the Board may modify or nullify such prior amendment or Award. Any such modification or nullification will be done only to the extent deemed necessary by the Independent Auditor and to the extent possible will be done in a manner which has the least adverse economic effect on Participants. Any Award which has been exercised or had its restrictions lapse, may only be modified or nullified with the consent of the Participant. "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 render an opinion on Energen's consolidated financial statements, or any other firm of certified public accountants mutually agreeable to Energen and at least eighty percent of the Participants holding Awards outstanding as of the date of the Change in Control. 13. EFFECTIVE DATE OF THE PLAN. The effective date of the Plan shall be November 25, 1997, the date of its adoption by the Board, subject to approval by shareholders of Energen holding not less than a majority of the shares present and voting at its January 1998 Annual Meeting. Awards may be granted under the Plan by the Committee as provided herein prior but subject to such subsequent shareholder approval of the Plan. 14. NAME. The Plan shall be known as the "Energen Corporation 1997 Stock Incentive Plan." 15. 1997 DEFERRED COMPENSATION PLAN. If and to the extent permitted under the Energen Corporation 1997 Deferred Compensation Plan (the "Deferred Compensation Plan"), a Participant may elect, pursuant to the Deferred Compensation Plan, to defer receipt of part or all of any shares of Stock or other consideration deliverable under an Award and upon such deferral shall have no further right with respect to such deferred Award 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 Energen be delivered to the Trustee under 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 of Stock 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. 11 12 As approved by the Energen Corporation Board of Directors on November 25, 1997, and amended by the Board on October 27,1999 (effective as of October 1,1999). ---------------------------------- Assistant Secretary 12 EX-10.(H) 6 1997 DEFERRED COMPENSATION PLAN 1 Exhibit 10(h) ENERGEN CORPORATION 1997 DEFERRED COMPENSATION PLAN (As amended October 1, 1999) 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 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 October 1, 1999, 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 such date 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 2 3 Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting 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. (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 3 4 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. (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. 4 5 (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. (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; 5 6 (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. (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. 6 7 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 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 7 8 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. 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. 8 9 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 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). 9 10 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; (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 10 11 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 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 11 12 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. 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; 12 13 (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. 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 Company Stock Account shall be adjusted to reflect any change in the outstanding Common Stock by reason of any stock dividend or split, 13 14 recapitalization, merger, consolidation, combination, Change in Control, exchange of shares, exchange for cash or other consideration, 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 as of such time. Upon such crediting of the Investment Account, 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). 14 15 (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). 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 payments under the Plan are described below. For claims procedures purposes, the "Claims 16 17 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. 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 18 19 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 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. 19 20 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. As adopted April 25, 1997 by Energen Corporation, Alabama Gas Corporation, Taurus Exploration, Inc., Taurus Exploration U.S.A., Inc., EGN Services Inc., Basin Pipeline Corp., Midtown NGV, Inc. and American Heat Tech, Inc., amended November 25, 1997, further amended September 23, 1998, and further amended October 27, 1999 (effective as of October 1, 1999). ---------------------------- Assistant Secretary 20 EX-13 7 1999 ANNUAL REPORT TO SHAREHOLDERS 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 1999 fiscal year totaled $41.4 million, or $1.38 per diluted share, and represented a 12 percent increase in earnings per share over prior-year net income of $36.2 million, or $1.23 per diluted share. The continued financial and operating strength of Energen's utility subsidiary, Alabama Gas Corporation (Alagasco), combined with significant growth at Energen Resources Corporation, Energen's oil and gas subsidiary, resulted in both lines of business contributing record earnings to consolidated net income. In fiscal year 1997, Energen reported earnings of $29 million, or $1.14 per diluted share. 1999 VS 1998: Alagasco's earnings were $23.3 million, a 13 percent increase over prior-year earnings of $20.6 million. This growth in income primarily reflects the utility's ability to earn within its allowed range of return on an increased level of equity representing investment in utility plant. Alagasco achieved a return on equity (ROE) of 13.55 percent. Energen Resources' net income rose $2 million to $17.3 million in fiscal 1999, primarily due to increased production-related income resulting from 35 percent growth in production volumes to 77.2 billion cubic feet equivalent (Bcfe). Energen Resources also benefited from a net $1 million increase in property sales gains during the year, including the disposition of certain offshore Gulf of Mexico properties. Partially offsetting these gains were a 20 percent decrease in realized oil prices and increased interest expense associated with current- and prior-year property acquisitions. In addition, Energen Resources' 1998 results were affected negatively by a $3 million after-tax writedown of certain offshore oil and gas properties under Statement of Financial Accounting Standards (SFAS) No. 121. 1998 VS 1997: Alagasco's 1998 net income of $20.6 million increased 11 percent over 1997 earnings of $18.6 million, reflecting the utility's ability to earn within its allowed range of return on an increased level of equity. Energen Resources' net income increased 52 percent to $15.3 million in 1998. A $6.4 million increase in nonconventional fuels tax credits generated by a prior-year acquisition of coalbed methane reserves and a 55 percent increase in oil and gas production volumes to 57.4 Bcfe were the major reasons for the significant increase. Partially offsetting these gains were increased depreciation, depletion and amortization (DD&A) expense, which included the $3 million after-tax property writedown discussed above, and increased interest expense associated with property acquisitions. Operating Income Consolidated operating income in 1999, 1998 and 1997 totaled $77.4 million, $61.5 million and $52 million, respectively. This significant growth in operating income primarily was due to the continued acquisition and exploitation strategy of Energen Resources, implemented in fiscal 1996. Alagasco also has contributed to this growth in operating income consistent with the increase in the level of equity upon which it has been 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 Alagasco's rate-setting mechanism, Rate Stabilization and Equalization (RSE), for a five-year period through January 1, 2002. Under terms of the extension, RSE will continue after January 1, 2002, unless, after notice to the company and a hearing, the APSC 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 essentially remain unaffected due to a real-time temperature adjustment mechanism which allows Alagasco to adjust customer bills monthly to reflect changes in usage due to departures from normal weather. Substantially all the customers to whom the temperature adjustment applies are residential, small commercial and small industrial. 25 2 Alagasco's natural gas and transportation sales revenues totaled $325.6 million, $369.9 million and $363 million in 1999, 1998 and 1997, respectively. Weather that was 27.3 percent warmer than in the prior year and lower commodity gas costs contributed to the decrease in sales revenue in the current fiscal year. Sales revenue in 1998 rose due to weather that was 15.4 percent colder than in fiscal 1997 and to increased usage by large transportation customers, partially offset by a $3.9 million deferral of revenue under the Enhanced Stability Reserve and by lower gas prices. In the current year, residential sales volumes decreased 20.4 percent primarily due to the impact of warmer weather on through-put. Small commercial and industrial volumes, also sensitive to weather, decreased 14.9 percent. Variance in electric peaking demand was the primary reason for a 6 percent decrease in transportation volumes. In fiscal 1998, colder weather in Alagasco's service territory caused a 9.6 percent increase in residential sales volumes. Sales and transportation volumes to commercial and industrial customers rose 7.8 percent to 84.3 Bcf, primarily due to increased throughput to large transportation customers. Decreased purchased volumes and lower commodity cost of gas resulting from warmer weather in fiscal 1999 generated a 28.3 percent decrease in cost of gas. 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. Operations and maintenance (O&M) expense at the utility increased 1.6 percent in 1999 primarily due to increased Year 2000-related costs and increased bad debt expense resulting from colder weather in 1998 and increased exposure from a large industrial customer. Partially offsetting these increases were reduced insurance costs resulting from prior-year increases in reserves to reflect changes in self-insurance retention levels. In 1998 O&M expense at the utility increased 2.8 percent primarily due to higher labor and related costs and increases in bad debt and insurance expense. In 1999, the increase in O&M expense per customer was below the inflation-based Cost Control Measurement (CCM) provision established by the APSC as part of the utility's rate-setting mechanism. As a result, the utility benefited by $0.7 million pre-tax, or one-half the difference, in future rate adjustments (see Note 2). The increase in O&M expense per customer in 1998 fell within the CCM provision. Under the terms of RSE, Year 2000 costs were excluded from the O&M inflation-based cap calculation in 1999 and 1998. Consistent with growth in the utility's depreciable base, depreciation expense rose 6.3 percent in 1999 and 7.1 percent in 1998. 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) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Natural gas and transportation sales revenues $ 325,554 $ 369,940 $ 362,984 Cost of natural gas (126,264) (176,124) (177,837) Revenue taxes (17,714) (20,278) (19,676) - ------------------------------------------------------------------------------------------------------------------------ Natural gas and transportation sales margin $ 181,576 $ 173,538 $ 165,471 - ------------------------------------------------------------------------------------------------------------------------ Natural gas sales volumes (MMcf) Residential 24,751 31,079 28,357 Commercial and industrial-small 11,662 13,705 12,554 - ------------------------------------------------------------------------------------------------------------------------ Total natural gas sales volumes 36,413 44,784 40,911 Natural gas transportation volumes (MMcf) 66,356 70,563 65,622 - ------------------------------------------------------------------------------------------------------------------------ Total deliveries (MMcf) 102,769 115,347 106,533 - ------------------------------------------------------------------------------------------------------------------------
ENERGEN RESOURCES: In October 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 net assets to Westport Oil and Gas Company Inc. Energen Resources' net adjusted price totaled approximately $137.5 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. 26 3 As a result of this acquisition and prior-year property acquisitions, revenues from oil and gas operations continued to increase significantly. Total production volumes rose 34.5 percent to 77.2 Bcfe. Natural gas production increased 22.8 percent to 53.9 Bcf. Oil volumes more than doubled to 3,122 MBbl, while high BTU-content natural gas reserves in the San Juan Basin yielded 762 MBbl in natural gas liquids for the year, a decrease from 1998 of 6.7 percent. Lower realized oil prices and stable gas prices partially offset the impact of higher production at Energen Resources in the current year. Realized gas prices remained constant at $2.21 per Mcf, while realized oil prices declined 20.3 percent to $11.92 per barrel. Natural gas liquids prices increased 10.8 percent to an average price of $9.58 per barrel. During 1998 revenues from oil and gas production activities also grew notably. Total production volumes were 57.4 Bcfe, increasing 55 percent from fiscal year 1997. Average realized gas prices were $2.21 per Mcf, higher than 1997 prices by 7.8 percent, and oil prices were $14.96 per barrel, down 17.3 percent from the prior year. Natural gas liquids prices declined 24.5 percent to $8.65 per barrel in 1998. 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 $3.9 million, $4.3 million and $4.4 million in 1999, 1998 and 1997, respectively. Energen Resources may, in the ordinary course of business, be involved in the sale of 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 does Energen Resources. In 1999, 1998 and 1997, Energen Resources recorded in operating revenues net pre-tax gains of $4.2 million, $2.6 million and $1 million, respectively, on the sale of various properties. The largest of these property sales occurred in June 1999 when Energen Resources recorded a $3.2 million pre-tax gain on the sale of offshore Gulf of Mexico properties.
Years ended September 30, (dollars in thousands, except sales price data) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Revenues Natural gas production $ 117,136 $ 97,123 $ 60,228 Oil production 37,227 21,452 13,981 Natural gas liquids production 7,296 7,061 5,772 Operating fees 3,932 4,342 4,385 Other 6,372 2,709 880 - -------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 171,963 $ 132,687 $ 85,246 - -------------------------------------------------------------------------------------------------------------------------- Production volumes Natural gas (MMcf) 53,855 43,853 29,318 Oil (MBbl) 3,122 1,433 775 Natural gas liquids (MBbl) 762 817 502 - -------------------------------------------------------------------------------------------------------------------------- Average unit sales price Natural gas (per Mcf) $ 2.21 $ 2.21 $ 2.05 Oil (per barrel) $ 11.92 $ 14.96 $ 18.08 Natural gas liquids (per barrel) $ 9.58 $ 8.65 $ 11.45 - --------------------------------------------------------------------------------------------------------------------------
Operations expense increased $20.9 million and $18 million in 1999 and 1998, respectively, almost entirely due to higher lease operating expense related to increased production from acquisitions. In the current fiscal year, administrative expense increased $2.8 million, largely due to the acquisition of TOTAL, and decreased $0.6 million in the prior year. Exploration expense decreased $0.8 million in 1999 and $0.9 million in 1998, primarily due to decreased exploratory efforts partially offset by a $3.3 million and a $2.5 million pre-tax writedown of a portion of unproved leasehold in 1999 and 1998, respectively. Energen Resources' significantly higher production volumes generated the majority of the $6 million increase in DD&A expense in 1999. DD&A increased $19.6 million in 1998 largely due to higher production and additional pre-tax DD&A expense of $4.7 million recorded under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to 27 4 Be Disposed Of (see Note 11). The increase in 1999 partially was offset by a decrease in the average depletion rate (excluding the effect of the prior-year writedown) to $0.79 per Mcf from $0.87 per Mcf in 1998, primarily due to the fourth quarter fiscal 1998 trade of certain offshore properties for onshore properties which had lower depletion rates. Energen Resources' expense for taxes other than income primarily reflects production-related taxes. For 1999, 1998 and 1997, Energen Resources recorded severance taxes of $11.3 million, $9.4 million and $6.3 million, respectively, as a result of increased production. Non-Operating Items CONSOLIDATED: Fiscal 1999 interest expense increased $7.2 million primarily due to the increased use of short-term credit facilities to finance Energen Resources' acquisition of TOTAL. The average daily outstanding balance under short-term credit facilities was $155 million for the current year. Also influencing interest expense in 1999 was interest for a full year on $100 million of medium-term notes (MTNs) issued in February 1998. 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 in 1998 was the $85 million of MTNs issued in July 1997 and, in part, the $100 million of MTNs discussed above. The average daily outstanding balance under short-term credit facilities was $81 million in 1998 compared with $88 million in 1997. The Company's effective tax rates in 1999, 1998 and 1997 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 on qualified production through 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 in the near future. Income tax expense increased in the current year primarily due to higher pre-tax income. In 1998 income tax expense decreased from 1997 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. FINANCIAL POSITION AND LIQUIDITY The Company's net cash from operating activities totaled $130.6 million, $123.6 million and $63.1 million in 1999, 1998 and 1997, respectively. In fiscal 1999 and 1998, 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, offset by a $17 million payout in January 1997 of supplier refunds to customers. Other working capital items, which generally are the result of changes in throughput and the timing of payments, combined to create the remaining increases for all years. During fiscal 1999, the Company made net investments of $188.1 million as Energen Resources continued to successfully implement its acquisition and exploitation strategy. Energen Resources invested $144 million for property acquisitions, including $137.5 million for TOTAL, $55.5 million for development on proved properties and $1.7 million for exploration. Energen Resources' current-year acquisitions added approximately 200 Bcfe of proved reserves while its 88 successful development wells and other exploitation activities added approximately 120 Bcfe of reserves. Utility expenditures for the year totaled $46 million and primarily represented support facilities and normal system distribution expansion. The Company had cash proceeds of $56.9 million resulting from the sale-leaseback of the headquarters building and the sale of certain offshore and onshore properties during 1999. Cash used in investing activities was $166.3 million in 1998 and $279.8 million in 1997. Energen Resources invested $84.7 million for proved property acquisitions, $35.3 million for development and $3.9 million for exploration, adding 168 Bcfe to proved reserves in 1998. 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 in 1998 totaled $54.2 million. 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. Cash provided by financing activities totaled $99.6 million in 1999 and $40.5 million in 1998. The Company utilized an additional $74.7 million in short-term credit facilities to finance Energen Resources' acquisition strategy. For tax planning purposes, the 28 5 Company borrowed $140.9 and $100.6 million at September 30, 1999 and 1998, respectively, to invest in short-term federal obligations. The treasury bills were sold in early October and the proceeds used to repay the debt. In 1999 the Company reduced long-term debt by $6.2 million. In February 1998, the Company issued $100 million of long-term debt redeemable February 15, 2028. The $98.5 million in proceeds were used to repay borrowings under Energen's short-term credit facilities that 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 issued 3,450,000 shares of common stock in January 1997 that generated net proceeds of $49.1 million, and 2,400,000 shares in September 1997 that generated net proceeds of $41.1 million. At September 30, 1997, the Company borrowed $98.6 million to invest in short-term federal obligations for tax planning purposes. For each of the years, net cash used in financing activities reflected dividends paid to common stockholders and the issuance of common stock through the dividend reinvestment plan, direct stock purchase plan and employee savings plans. Capital Expenditures NATURAL GAS DISTRIBUTION: During the last three fiscal years, Alagasco invested $143.5 million for capital projects: $79.1 million on normal expansion replacements and support of its distribution system and $64.4 million on support facilities and development and implementation of information systems.
Years ended September 30, (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Capital expenditures for: Renewals, replacements, system expansion and other $ 26,095 $ 26,806 $ 26,153 Support facilities 19,934 27,362 17,124 - --------------------------------------------------------------------------------------------------------- Total $ 46,029 $ 54,168 $ 43,277 - ---------------------------------------------------------------------------------------------------------
OIL AND GAS OPERATIONS: Energen Resources spent $573.1 million for capital projects over the last three fiscal years, $13.9 million of which was charged to income as exploration expense. Expenditures for property acquisitions were $422.4 million; $127.2 million was spent in development activities, and exploratory expenditures totaled $18.9 million.
Years ended September 30, (in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- Capital and exploration expenditures for: Property acquisitions $ 143,959 $ 84,747 $ 193,729 Exploration 1,697 3,885 13,277 Development 55,487 35,307 36,375 Other 2,150 1,117 1,406 - ---------------------------------------------------------------------------------------------------------- Total 203,293 125,056 244,787 Less exploration expenditures charged to income 4,716 4,065 5,069 - ---------------------------------------------------------------------------------------------------------- Net capital expenditures $ 198,577 $ 120,991 $ 239,718 - ----------------------------------------------------------------------------------------------------------
FUTURE CAPITAL RESOURCES AND LIQUIDITY The Company plans to continue to implement its diversified growth strategy that calls for Energen Resources to invest approximately $1.1 billion in the acquisition and development of producing properties and in exploration and related development over the five-year period ending September 30, 2004. In fiscal year 2000, Energen Resources plans to spend approximately $155 million, including $100 million in property acquisitions and their related development. Energen Resources' continued ability to invest in property acquisitions will be influenced significantly by industry trends, as the producing property acquisition market historically has been cyclical. From time to time, Energen Resources also may be engaged in negotiations to sell, trade or otherwise dispose of properties. 29 6 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. Energen plans to issue additional equity during fiscal 2000 to refinance the short-term debt incurred for the acquisition of TOTAL. During 1999, Energen increased its available short-term credit facilities to $249 million to help accommodate its growth plans. During fiscal year 2000, Alagasco plans to invest approximately $65 million in utility capital expenditures for normal distribution and support systems and to replace liquifaction equipment at its liquified natural gas facility. Alagasco also maintains an investment in storage gas which is expected to average approximately $22 million in 2000. The utility anticipates funding these capital requirements through internally generated capital and the utilization of short-term credit facilities. OUTLOOK NATURAL GAS DISTRIBUTION: The five-year extension of RSE in October 1996 provides Alagasco the opportunity to continue earning an allowed ROE between 13.15 percent and 13.65 percent through January 1, 2002. Over this period, Alagasco has the potential for net income growth as the investment in additional utility plant affects 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. In the year 2000, Alagasco will focus on enhancing customer growth by aggressively pursuing conversion opportunities. OIL AND GAS OPERATIONS: Energen Resources plans to continue to implement its acquisition and exploitation program. Following an equity offering expected to occur by mid-year fiscal 2000, Energen Resources plans to invest approximately $100 million in property acquisitions, depending on available opportunities. Over the course of the year, approximately $55 million is planned to further develop existing properties. Production is expected to decrease slightly to 71.3 Bcfe due to the loss of production from recent property sales and the anticipated timing of the next property acquisition during the latter half of fiscal 2000. A significant part of Energen Resources' earnings in fiscal 2000 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, 2004, Energen Resources plans to spend approximately $1.1 billion in the acquisition and development of producing properties and in exploration and related development. With this level of spending, Energen Resources expects to replace expiring tax credits with revenue-generating property acquisitions and related development. 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 also are affected by quality differentials, by worldwide political developments and by actions of the Organization of Petroleum Exporting Countries. Basis differentials, like the underlying commodity prices, can be volatile because of regional supply and demand factors, including seasonal variations and the availability and price of transportation to consuming areas. Energen Resources enters into derivative commodity instruments to hedge its exposure to oil and gas price fluctuations. 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 2000, 85 percent of its estimated 2000 gas production and 72 percent of its estimated 2000 oil production is hedged or under contract at average prices of $2.45 per Mcf and $17.51 per barrel, respectively. In addition, the Company has hedged the basis difference on 12 Bcf of its fiscal 2000 San Juan Basin production. Contracts and swaps also are in place for 14.6 Bcf of fiscal year 2001 gas production at an average price of $2.55. As acquisitions are made, Energen Resources may use futures, swaps and/or fixed-price contracts to lock in commodity prices for up to 36 months in order to protect targeted returns. The Company had deferred losses of $16.5 million and deferred gains of $0.6 million on the balance sheet at September 30, 1999 and 1998, respectively. 30 7 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, 1999, the Company estimates that a 10 percent change in the underlying commodities prices would result in a $12.1 million change in the fair value of open derivative contracts; however, gains and losses on derivative contracts are expected to be similarly off-set by sales at the spot market price. Due to the short duration of the contracts, the 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 and does not include the variance in basis difference or the impact of related taxes on actual cash prices. 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 four 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 have been 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 involved the following phases: inventory, assessment, testing certification and change control. Tools to test, age and evaluate data software and hardware were purchased and installed and utilized for Year 2000 compliance. Testing for items identified as critical systems and devices was completed by September 30, 1999. A third-party assessment of Year 2000 readiness was conducted by an outside entity for both information technology and non-information technology systems as of December 1, 1998, and indicated that mission-critical functions, including the flow of gas into homes and commercial accounts, are not likely to be impacted by the Year 2000 changeover. In response to the independent assessment, several program changes were implemented. A steering committee of the Company's executive management has and will continue to review the millennium project progress on a regular basis. With respect to material third-party relationships, the Company, in addition to responding to questions concerning Year 2000 issues from customers and regulators, has obtained information from certain vendors and partners designed to determine their ability to continue uninterrupted supply of materials or services to the Company. All vendors and contractors were contacted by September 30, 1999. Some final contact and refinements will be made prior to December 31, 1999. As of September 30, 1999, the Company has incurred approximately $2 million of Year 2000-related costs to date, all of which are being expensed as incurred. The Company expects to incur total Year 2000 remediation costs, of approximately $2.3 million by December 31, 1999. The Company has developed Year 2000 readiness procedures to minimize the risks identified to date, including what it believes are worst-case scenarios of reduced gas deliverability into the Alagasco distribution system, production failures on Energen Resources' properties, or failures of gathering and pipeline systems to accept Energen Resources' production. Specific Year 2000 contingency plans were incorporated into the previously established Energen Business Resumption Plan by the end of fiscal year 1999. The Company's contingency plan identifies alternate recovery locations and contact lists as well as special resource requirements. The Company's goal is that Year 2000 issues will be addressed on a schedule and in a manner that will prevent such issues from having a material effect on the Company's results of operations, liquidity or financial condition. While the Company has and will be pursuing Year 2000 compliance, there can be no assurance that the Company and its vendors will be successful in identifying and addressing all material Year 2000 issues. This document contains Year 2000 Readiness Disclosures as defined in the Year 2000 Information and Readiness Disclosure Act, P.L.105-271 (October 19, 1998). Accordingly, this disclosure, in whole or in part, is not, to the extent provided in the act, admissible in any state or federal civil action to prove the accuracy or truth of any Year 2000 statements contained herein. FORWARD-LOOKING STATEMENTS AND 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 31 8 materially from those anticipated. Some of these include, but are not limited to, economic and competitive conditions, 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 1999, the Company adopted 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. The Company also adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pensions and other postretirement benefit plans. This pronouncement relates solely to disclosure provisions and has no effect on the results of operations or financial position of the Company. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments. The Company is required to adopt this statement in fiscal year 2001. The impact on the Company currently is 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 - -------------------------------------------------------------------------------------- December 31, 1998 19 1/2 17 7/16 19 1/2 .160 March 31, 1999 19 3/4 13 1/8 14 15/16 .160 June 30, 1999 19 15/16 14 1/2 18 5/8 .160 September 30, 1999 20 3/8 17 1/2 20 1/4 .165 - --------------------------------------------------------------------------------------
* Share prices reflect a 2-for-1 stock split effective March 2, 1998. 32 9 CONSOLIDATED STATEMENTS OF INCOME Energen Corporation
Years ended September 30, (in thousands, except share data) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- OPERATING REVENUES Natural gas distribution $ 325,554 $ 369,940 $ 362,984 Oil and gas operations 171,963 132,687 85,246 - ----------------------------------------------------------------------------------------------------------- Total operating revenues 497,517 502,627 448,230 - ----------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas 124,379 174,051 175,514 Operations and maintenance 169,874 148,376 127,998 Depreciation, depletion and amortization 88,615 80,999 59,688 Taxes, other than income taxes 37,266 37,716 33,044 - ----------------------------------------------------------------------------------------------------------- Total operating expenses 420,134 441,142 396,244 - ----------------------------------------------------------------------------------------------------------- OPERATING INCOME 77,383 61,485 51,986 - ----------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense, net of amounts capitalized (37,173) (30,001) (22,906) Other, net 1,335 2,544 3,014 - ----------------------------------------------------------------------------------------------------------- Total other expense (35,838) (27,457) (19,892) - ----------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 41,545 34,028 32,094 Income tax (benefit) expense 135 (2,221) 3,097 - ----------------------------------------------------------------------------------------------------------- NET INCOME $ 41,410 $ 36,249 $ 28,997 - ----------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER AVERAGE COMMON SHARE . $ 1.40 $ 1.25 $ 1.15 - ----------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER AVERAGE COMMON SHARE $ 1.38 $ 1.23 $ 1.14 - ----------------------------------------------------------------------------------------------------------- BASIC AVERAGE COMMON SHARES OUTSTANDING 29,643,610 29,083,855 25,126,192 - ----------------------------------------------------------------------------------------------------------- DILUTED AVERAGE COMMON SHARES OUTSTANDING 29,920,681 29,437,987 25,383,897 - -----------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 33 10 CONSOLIDATED BALANCE SHEETS Energen Corporation
As of September 30, (in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 145,390 $ 103,231 Accounts receivable, net of allowance for doubtful accounts of $5,598 in 1999 and $3,547 in 1998 74,505 64,173 Inventories, at average cost Storage gas inventory 24,722 21,237 Materials and supplies 8,287 8,670 Liquified natural gas in storage 3,318 3,381 Deferred income taxes 14,691 12,569 Prepayments and other 24,834 5,192 - ----------------------------------------------------------------------------------------------------------- Total current assets 295,747 218,453 - ----------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Oil and gas properties, successful efforts method 669,985 516,040 Less accumulated depreciation, depletion and amortization 129,839 88,306 Oil and gas properties, net 540,146 427,734 Utility plant 645,596 632,165 Less accumulated depreciation 328,775 307,488 Utility plant, net. 316,821 324,677 Other property, net. 4,140 3,933 - ----------------------------------------------------------------------------------------------------------- Total property, plant and equipment, net 861,107 756,344 - ----------------------------------------------------------------------------------------------------------- OTHER ASSETS Deferred income taxes 21,055 10,942 Deferred charges and other 6,986 7,716 - ----------------------------------------------------------------------------------------------------------- Total other assets 28,041 18,658 - ----------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,184,895 $ 993,455 - -----------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 34 11
As of September 30, (in thousands, except share data) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ CAPITAL AND LIABILITIES CURRENT LIABILITIES Long-term debt due within one year $ 1,955 $ 7,209 Notes payable to banks 268,000 153,000 Accounts payable 61,418 33,533 Accrued taxes 22,247 21,255 Customers' deposits 16,301 16,344 Amounts due customers 18,576 12,070 Accrued wages and benefits 19,404 15,299 Other 37,381 25,531 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 445,282 284,241 - --------------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Other 6,285 7,183 - --------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 6,285 7,183 - --------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES -- -- - --------------------------------------------------------------------------------------------------------------------- CAPITALIZATION Preferred stock, cumulative, $0.01 par value, 5,000,000 shares authorized -- -- Common shareholders' equity Common stock, $0.01 par value; 75,000,000 shares authorized, 29,903,964 shares outstanding at September 30, 1999, and 29,326,597 shares outstanding at September 30, 1998 299 293 Premium on capital stock. 205,831 195,874 Capital surplus 2,802 2,802 Retained earnings 152,572 130,280 Deferred compensation plan 2,054 873 Treasury stock, at cost; 101,431 shares and 49,096 shares at September 30, 1999 and 1998, respectively (2,054) (873) - --------------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 361,504 329,249 Long-term debt 371,824 372,782 - --------------------------------------------------------------------------------------------------------------------- Total capitalization 733,328 702,031 - --------------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL AND LIABILITIES $1,184,895 $ 993,455 - ---------------------------------------------------------------------------------------------------------------------
35 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, 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 28,997 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) Net income 41,410 Purchase of treasury shares (442) Shares issued for: Dividend reinvestment plan 187,738 2 3,319 Employee benefit plans 389,629 4 6,638 442 Deferred compensation obligation 1,181 (1,181) Cash dividends - $0.645 per share (19,118) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1999 29,903,964 $ 299 $205,831 $ 2,802 $ 152,572 $ 2,054 $(2,054) - --------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 36 13 CONSOLIDATED STATEMENTS OF CASH FLOWS Energen Corporation
Years ended September 30, (in thousands) 1999 1998 1997 OPERATING ACTIVITIES Net income $ 41,410 $ 36,249 $ 28,997 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 88,615 80,999 59,688 Deferred income taxes, net (12,774) (15,407) (2,646) Deferred investment tax credits, net (448) (469) (487) Gain on sale of assets (4,180) (2,789) (1,081) Net change in: Accounts receivable (10,960) 7,131 (22,550) Inventories (3,039) 2,990 2,057 Accounts payable-gas purchases 14,115 (7,466) 5,758 Accounts payable-trade (2,747) 4,719 (131) Amounts due customers 6,506 4,723 (9,810) Other current assets and liabilities 14,938 11,711 3,377 Other, net (816) 1,232 (73) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 130,620 123,623 63,099 - --------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to property, plant and equipment (120,204) (174,578) (283,274) Acquisition, net of cash acquired (123,816) -- -- Proceeds from sale of assets 56,884 7,636 1,871 Other, net (951) 634 1,557 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (188,087) (166,308) (279,846) - --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Payment of dividends on common stock (19,118) (18,181) (15,299) Issuance of common stock 10,405 10,444 99,040 Purchase of treasury stock (442) (406) -- Reduction of long-term debt (6,219) (885) (943) Proceeds from issuance of long-term debt -- 98,541 84,416 Net change in short-term debt issued to purchase U.S. Treasury securities 40,346 1,935 98,636 Net change in short-term debt 74,654 (50,934) 44,998 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 99,626 40,514 310,848 Net change in cash and cash equivalents 42,159 (2,171) 94,101 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 103,231 105,402 11,301 Cash and cash equivalents at end of period $ 145,390 $ 103,231 $ 105,402 - ---------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 37 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 operations). 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 Corporation, 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 4.5 percent in 1999 and 4.4 percent in 1998 and 1997. 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 OPERATIONS 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 reserves for such property. Energen Resources has no material production imbalances at September 30, 1999. 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 oil and gas price fluctuations. 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 38 15 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 with a corresponding 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. In doing so, management uses the historic and current relationships between the derivative instruments and the sales prices of the hedged volumes. D. INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences as well as tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of the change. 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 14). 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 16). 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 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 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. In fiscal 1999, the increase in O&M expense per customer was below the index range; as a result the utility benefited by $0.7 million. Under RSE as extended, a $6.6 million annual increase in revenue became effective December 1, 1998, an $11.8 million annual increase in revenue became effective December 1, 1997, and a $2.5 million annual decrease in revenue became effective July 1, 1998. Alagasco calculates a temperature adjustment to customers' 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 39 16 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. Following a year in which a charge against the ESR is made, the APSC provides for accretions to the ESR of no more than $40,000 monthly until the maximum funding level is achieved. The APSC will re-evaluate the operation of the ESR following the conclusion of Alagasco's fiscal year 2000. In accordance with APSC-directed regulatory accounting procedures, Alagasco in 1989 began returning to customers excess utility deferred taxes which resulted from a reduction in the federal statutory tax rate from 46 percent to 34 percent using the average rate assumption method. This method provides for the return to ratepayers of excess deferred taxes over the lives of the related assets. In 1993 those excess taxes were reduced as a result of a federal tax rate increase from 34 percent to 35 percent. Remaining excess utility deferred taxes of $1.7 million are being returned to ratepayers over approximately 11 years. At September 30, 1999 and 1998, a regulatory liability related to income taxes of $2.1 million and $2.9 million, respectively, was included in the consolidated financial statements. As of November 1, 1998, the Company offered a Voluntary Early Retirement Program to certain eligible employees. The APSC has allowed these costs to be amortized over a three-year period. At September 30, 1999, a regulatory asset of $2.4 million for costs associated with this early retirement program is included in the consolidated financial statements. 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 through Alagasco's rate-setting mechanism on a straight-line basis over approximately 23 years. At September 30, 1999 and 1998, the net acquisition adjustment was $14.4 million and $15.4 million, respectively. 3. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following: As of September 30, (in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- 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 $ 225,000 8% Debentures, due up to $1,000,000 annually to February 1, 2007 18,679 18,689 Series 1993 Notes, interest ranging from 6.10% to 7.25%, due annually in payments ranging from $955,000 to $1,584,000 from March 1, 2000, to March 1, 2008 11,024 11,883 Alabama Gas Corporation: Medium-term Notes, interest ranging from 5.85% to 7.97%, for notes redeemable December 16, 2000, to September 23, 2026 119,650 125,000 - --------------------------------------------------------------------------------------------------------------------------- Total 374,353 380,572 Less amounts due within one year 1,955 7,209 Less unamortized debt discount 574 581 - --------------------------------------------------------------------------------------------------------------------------- Total $ 371,824 $ 372,782 - ---------------------------------------------------------------------------------------------------------------------------
40 17 The aggregate maturities of long-term debt for the next five years are as follows:
Years ending September 30, (in thousands) - --------------------------------------------------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 - --------------------------------------------------------------------------------------------------------------------------- $ 1,955 $ 18,648 $ 17,077 $ 15,139 $ 12,155 - ---------------------------------------------------------------------------------------------------------------------------
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, 1999, Energen had a tangible net worth of $361 million. Energen and Alagasco had short-term credit lines and other credit facilities of $249 million available as of September 30, 1999 to either entity for working capital needs. At September 30, 1999, the Company borrowed $30 million under a separate agreement to purchase U.S. Treasury securities for tax planning purposes, and the securities were pledged as collateral on the debt. In total, at September 30, 1999 and 1998, the Company had $140.9 million and $100.6 million, respectively, of borrowings to purchase U.S. Treasury securities for tax planning. These securities matured in early October, and the proceeds were used to repay such borrowings. The following is a summary of information relating to notes payable to banks:
As of September 30, (in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Amount outstanding $ 238,000 $ 153,000 $ 152,000 Amount outstanding under separate agreement 30,000 -- 50,000 - -------------------------------------------------------------------------------------------------------------------------- Notes payable to banks $ 268,000 $ 153,000 $ 202,000 Available for borrowings 11,000 75,000 51,000 - -------------------------------------------------------------------------------------------------------------------------- Total $ 279,000 $ 228,000 $ 253,000 - -------------------------------------------------------------------------------------------------------------------------- Maximum amount outstanding at any month-end $ 268,000 $ 180,000 $ 202,000 Average daily amount outstanding $ 154,427 $ 81,008 $ 87,648 Weighted average interest rates based on: Average daily amount outstanding 5.40% 5.92% 5.87% Amount outstanding at year-end 5.70% 5.77% 5.96% - ---------------------------------------------------------------------------------------------------------------------------
Total interest expense for Energen in 1999, 1998 and 1997 was $37,173,000, $30,001,000, and $22,906,000, 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. In accordance with Emerging Issues Task Force Issue 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, 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. 41 18 5. INCOME TAXES The components of income taxes consist of the following:
For the years ended September 30, (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Taxes estimated to be payable currently: Federal $ 11,639 $ 11,828 $ 4,976 State 1,718 1,827 1,254 - --------------------------------------------------------------------------------------------------------------------------- Total current 13,357 13,655 6,230 - --------------------------------------------------------------------------------------------------------------------------- Taxes deferred: Federal (13,062) (15,342) (3,123) State (160) (534) (10) - ---------------------------------------------------------------------------------------------------------------------------- Total deferred (13,222) (15,876) (3,133) - ---------------------------------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ 135 $ (2,221) $ 3,097 - ---------------------------------------------------------------------------------------------------------------------------
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1999 and 1998 are as follows:
As of September 30, (in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Current Noncurrent Current Noncurrent - --------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Minimum tax credit $ -- $ 39,068 $ -- $ 30,288 Insurance and accruals 2,395 -- 2,566 -- Pension and other costs 3,137 -- 1,770 -- Other, net 9,868 1,881 9,076 2,305 - --------------------------------------------------------------------------------------------------------------------------- Subtotal 15,400 40,949 13,412 32,593 Valuation allowance -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 15,400 40,949 13,412 32,593 - --------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation and basis differences -- 19,891 -- 21,153 Other, net 709 3 843 498 - --------------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 709 19,894 843 21,651 - --------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 14,691 $ 21,055 $ 12,569 $ 10,942 - ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) differs from the amount which would be provided by applying the statutory federal income tax rate of 35 percent to earnings before taxes as illustrated below:
For the years ended September 30, (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Income tax expense at statutory federal income tax rate $ 14,541 $ 11,910 $ 11,233 Increase (decrease) resulting from: Nonconventional fuels credits (14,839) (14,453) (8,058) Enhanced oil recovery credits (185) -- -- Deferred investment tax credits (448) (469) (487) State income taxes, net of federal income tax benefit 1,087 894 813 Other, net (21) (103) (404) - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ 135 $ (2,221) $ 3,097 - --------------------------------------------------------------------------------------------------------------------------- Effective income tax rate (%) 0.32 (6.53) 9.65 - ---------------------------------------------------------------------------------------------------------------------------
42 19 The Company files a consolidated federal income tax return with all of its subsidiaries. As of September 30, 1999, the amount of minimum tax credit which can be carried forward indefinitely to reduce future regular tax liability is $39.1 million. 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. The Company has evaluated its tax position and believes the financial statements properly reflect the income tax matters of the Company. 6. EMPLOYEE BENEFIT PLANS The Company has two defined benefit non-contributory pension plans: Plan A which covers a majority of the employees and Plan B which covers employees under certain labor union agreements. 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 status of the plans was as follows:
As of June 30, (in thousands) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- PLAN A PLAN B - --------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation: Balance at beginning of year $ 88,281 $ 73,758 $ 18,898 $ 16,866 Service cost 2,653 2,386 299 224 Interest cost 6,193 5,841 1,338 1,261 Plan amendments -- 2,944 843 -- Actuarial loss (gain) (8,205) 7,066 (1,803) 1,737 Special termination benefits 1,487 -- -- -- Benefits paid (16,568) (3,714) (1,348) (1,190) - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year 73,841 88,281 18,227 18,898 - --------------------------------------------------------------------------------------------------------------------------- Plan assets: Fair value of plan assets at beginning of year 90,661 84,859 23,081 20,820 Actual return on plan assets 18,482 9,516 2,310 3,451 Benefits paid (16,568) (3,714) (1,348) (1,190) - ---------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 92,575 90,661 24,043 23,081 - --------------------------------------------------------------------------------------------------------------------------- Amounts recognized in the Consolidated Balance Sheets: Funded status of plan 18,734 2,380 5,816 4,183 Unrecognized actuarial loss (gain) (23,897) (2,773) (5,621) (2,944) Unrecognized prior service cost 2,790 3,025 1,398 791 Unrecognized net transition obligation (asset) (1,877) (2,686) 170 226 - --------------------------------------------------------------------------------------------------------------------------- Accrued pension asset (liability) $ (4,250) $ (54) $ 1,763 $ 2,256 - ---------------------------------------------------------------------------------------------------------------------------
The components of net pension expense were: For the years ended September 30, (in thousands)
1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- PLAN A PLAN B - --------------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 2,653 $ 2,386 $ 2,227 $ 299 $ 224 $ 243 Interest cost 6,192 5,842 5,524 1,338 1,261 1,238 Expected return on assets (5,937) (5,709) (5,766) (1,510) (1,346) (1,308) Prior service cost amortization 235 5 5 235 207 207 Actuarial loss (gain) -- -- 46 -- -- -- Transition amortization (808) (808) (808) 57 57 57 - --------------------------------------------------------------------------------------------------------------------------- Net periodic expense $ 2,335 $ 1,716 $ 1,228 $ 419 $ 403 $ 437 - ---------------------------------------------------------------------------------------------------------------------------
43 20
As of September 30, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- PLAN A PLAN B - ------------------------------------------------------------------------------------------------------------------------- Weighted average rate assumptions in pension actuarial calculations: Discount rate 7.75% 7.00% 7.75% 7.00% Expected return on plan assets 8.25% 8.25% 8.25% 8.25% Rate of compensation increase 5.25% 4.50% -- -- - -------------------------------------------------------------------------------------------------------------------------
The Company has supplemental retirement plans with certain key executives providing payments on retirement, termination, death or disability. Expense under these agreements for 1999, 1998 and 1997 was $(75,000), $(54,000) and $399,000, respectively. At June 30, 1999 and 1998, the accumulated post-retirement benefit obligation related to these agreements was $2,620,000 and $2,901,000, respectively, and the projected benefit obligation was $7,189,000 and $7,088,000, respectively. A prepaid post-retirement benefit asset of $844,000 and $434,000 was recorded at June 30, 1999 and 1998, 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 certain benefits if they reach normal retirement age while working for the Company. The projected unit credit actuarial method was used to determine the normal cost and actuarial liability. The status of the post-retirement benefit programs was as follows:
As of June 30, (in thousands) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- SALARIED EMPLOYEES UNION EMPLOYEES - --------------------------------------------------------------------------------------------------------------------------- Projected post-retirement benefit obligation: Balance at beginning of year $ 29,312 $ 20,020 $ 37,751 $ 33,020 Service cost 1,464 967 2,039 1,314 Interest cost 2,013 2,049 2,599 2,612 Actuarial loss (gain) (2,530) 7,286 (3,709) 2,165 Special termination benefits 338 -- -- -- Benefits paid (1,453) (1,010) (1,257) (1,360) - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year 29,144 29,312 37,423 37,751 - --------------------------------------------------------------------------------------------------------------------------- Plan assets: Fair value of plan assets at beginning of year 30,476 23,719 23,081 13,363 Actual return on plan assets 4,896 6,161 2,468 6,628 Company contribution 1,575 1,606 2,410 4,450 Benefits paid (1,453) (1,010) (1,257) (1,360) - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year 35,494 30,476 26,702 23,081 - --------------------------------------------------------------------------------------------------------------------------- Amounts recognized in the Consolidated Balance Sheets: Funded status of plan 6,350 1,164 (10,721) (14,670) Unrecognized actuarial loss (gain) (16,468) (12,402) (7,266) (5,714) Unrecognized net transition obligation 10,118 10,841 17,987 19,272 - --------------------------------------------------------------------------------------------------------------------------- Accrued post-retirement asset (liability) $ -- $ (397) $ -- $ (1,112) - ----------------------------------------------------------------------------------------------------------------------------
44 21 Net periodic post-retirement benefit expense included the following:
For the years ended September 30, (in thousands) 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- SALARIED EMPLOYEES UNION EMPLOYEES - --------------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 1,464 $ 967 $ 979 $ 2,039 $ 1,314 $ 1,198 Interest cost 2,013 2,049 2,204 2,599 2,612 2,542 Expected return on assets (1,448) (1,189) (1,117) (1,156) (737) (821) Actuarial loss (gain) (590) (510) (568) (129) (107) -- Transition amortization 723 723 723 1,285 1,285 1,285 - --------------------------------------------------------------------------------------------------------------------------- Net periodic expense $ 2,162 $ 2,040 $ 2,221 $ 4,638 $ 4,367 $ 4,204 - ---------------------------------------------------------------------------------------------------------------------------
As of September 30, 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- SALARIED EMPLOYEES UNION EMPLOYEES - --------------------------------------------------------------------------------------------------------------------------- Weighted average rate assumptions in post-retirement actuarial calculations: Discount rate 7.75% 7.00% 7.75% 7.00% Expected return on plan assets 8.25% 8.25% 8.25% 8.25% Rate of compensation increase 5.25% 4.50% -- -- Health care cost trend rate 7.50% 7.50% 7.50% 7.50% - ---------------------------------------------------------------------------------------------------------------------------
The weighted average health care cost trend rate used in determining the accumulated post-retirement benefit obligation 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 percentage point would increase the accumulated post-retirement benefit obligation by 2.8 percent and the net periodic post-retirement benefit cost by 2.3 percent. For union employees, increasing the weighted average health care cost trend rate by 1 percentage point would increase the accumulated post-retirement benefit obligation by 7.2 percent and the net periodic post-retirement benefit cost by 7 percent. 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, 1999, 1998 and 1997, was $177,000, $173,000 and $163,000, respectively. 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 ESP, 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, 1999, 841,313 common shares were reserved for issuance under the ESP. Expense associated with Company contributions to the ESP was $3,421,000, $3,168,000 and $3,083,000 for 1999, 1998 and 1997, 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, 100,110, 97,545, and 120,660 performance units were awarded in 1999, 1998 and 1997, respectively, leaving 181,533 performance units available for award as of September 30, 1999. The Company recorded expense of $1,530,000, $2,815,000 and $2,632,000 for 1999, 1998 and 1997, respectively, under the Plan. 45 22 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, 1999, 1,059,862 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. In addition, the 1997 Option Plan provides for the grant of restricted stock with 5,500 shares being awarded in 1999. The sale or transfer of the shares is limited during the restricted period. The Company recorded expense of $30,670 in 1999 related to the restricted stock. 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. All out-standing options are non-qualified, vest over three years from date of grant, and expire 10 years from the date of grant. Transactions under the Plans are summarized as follows:
1997 STOCK OPTION PLAN 1988 STOCK OPTION PLAN - ----------------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at September 30, 1996 -- $ -- 324,112 $ 9.08 Granted -- -- 106,000 15.00 Exercised -- -- (7,000) 9.19 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at September 30, 1997 -- -- 423,112 10.56 Granted 256,320 18.25 80,680 18.25 Exercised -- -- (6,000) 8.38 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at September 30, 1998 256,320 18.25 497,792 11.83 Granted 78,950 18.25 -- -- Exercised -- -- (73,716) 9.05 Forfeited -- -- (2,000) 18.25 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at September 30, 1999 335,270 $18.25 422,076 $12.29 - ----------------------------------------------------------------------------------------------------------------------------- Exercisable at September 30, 1997 -- $ -- 317,112 $ 9.08 Exercisable at September 30, 1998 -- $ -- 333,112 $ 9.48 Exercisable at September 30, 1999 85,430 $18.25 320,280 $10.90 Remaining reserved for issuance at September 30, 1999 959,230 -- -- -- - -----------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about options outstanding as of September 30, 1999:
1997 STOCK OPTION PLAN 1988 STOCK OPTION PLAN - ------------------------------------------------------------------------------------------------------------------------ Weighted Average Weighted Average Range of Remaining Range of Remaining Exercise Prices Shares Contractual Life Exercise Prices Shares Contractual Life - ------------------------------------------------------------------------------------------------------------------------ $18.25 335,270 8.40 years $8.38-$11.06 217,396 2.30 years $15.00-$18.25 204,680 7.67 years - ------------------------------------------------------------------------------------------------------------------------ $18.25 335,270 8.40 years $8.38-$18.25 422,076 4.90 years - ------------------------------------------------------------------------------------------------------------------------
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 these options been determined in accordance with SFAS No. 123, the Company's net income and diluted earnings per share would have been $40.9 million, or $1.37 per share, in 1999, $35.8 million, or $1.22 per share, in 1998, and $28.9 million, or $1.14 per share, in 1997. 46 23 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, 4,914, 6,813 and 6,124 shares were issued in 1999, 1998 and 1997, respectively, leaving 152,693 shares reserved for issuance as of September 30, 1999. On June 24, 1998, the Company adopted a Shareholder Rights Plan (the 1998 Plan) designed to protect shareholders from coercive or unfair takeover tactics. 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 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 1998 Plan at September 30, 1999, were convertible into 299,040 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. 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 in progress currently, and the Company has accrued a provision for estimated costs. LEASE OBLIGATIONS: In January 1999 Alagasco closed on a sale-leaseback of the Company's headquarters building. The proceeds from the sale approximated the investment in the facility. The building is being leased back from the purchaser over a 25 year lease term and the related lease is accounted for as an operating lease. Total lease payments related to leases included as operating lease expense, inclusive of the sale-leaseback, were $5,665,000, $5,271,000 and $3,987,000 in 1999, 1998 and 1997, respectively. Minimum future rental payments required after 1999 under leases with initial or remaining noncancelable lease terms in excess of one year are as follows:
Years ending September 30, (in thousands) - --------------------------------------------------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 2005 and thereafter - --------------------------------------------------------------------------------------------------------------------------- $ 3,580 $ 3,187 $ 2,649 $ 2,605 $ 2,503 $51,713 - ---------------------------------------------------------------------------------------------------------------------------
47 24 9. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental information concerning cash flow activities is as follows:
For the years ended September 30, (in thousands) 1999 1998 1997 Interest paid $ 36,646 $ 28,442 $ 18,385 Income taxes paid $ 12,925 $ 12,764 $ 6,308 Noncash investing activities Capitalized depreciation $ 265 $ 187 $ 168 Allowance for funds used during construction $ 374 $ 400 $ 490 Noncash financing activities (debt issuance costs) $ -- $ 875 $ 585
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 $374,353,000, would be $372,972,000 at September 30, 1999. The fair value was based on the market value of debt with similar maturities and current interest rates. 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 1999, 1998 and 1997, the Company sold $6,391,000, $8,100,000 and $7,926,000, respectively, of installment receivables. At September 30, 1999 and 1998, the balance of these installment receivables was $15,690,000 and $17,105,000, 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 oil and gas price fluctuations. 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 with a corresponding deferred gain/loss. Realized gains and losses are deferred as current liabilities or assets until the revenues from the related hedged volumes are recognized in the income statement. Cash flows from derivative instruments are recognized as incurred through changes in working capital. The Company had deferred losses of $16.5 million and deferred gains of $0.6 million on the balance sheet at September 30, 1999 and 1998, respectively. At September 30, 1999, Energen Resources has entered into contracts and swaps for 41.6 Bcf of its fiscal year 2000 flowing gas production at an average contract price of $2.45 per Mcf and 1,732 MBbl of its oil production at an average contract price of $17.51 per barrel. The program has been extended into fiscal year 2001, with contracts and swaps in place for 14.6 Bcf of flowing gas production at an average contract price of $2.55 per Mcf. 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 12.0 Bcf of its fiscal year 2000 San Juan Basin 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. In doing so, management uses the historic and current relationships between the derivative instruments and the sales prices of the hedged volumes. 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 approximately 470,000 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 primarily are generated from the sale of produced natural gas and oil. This industry concentration has the potential to affect the Company's overall exposure to credit risk, 48 25 either positively or negatively, in that the customers may be affected similarly 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 SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, requires that an impairment loss be recognized when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flow of the asset. The Statement also provides that all long-lived assets to be disposed of be reported at the lower of the carrying amount or fair value. Accordingly, during the 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 as additional depreciation, depletion and amortization 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. 12. RECENT PRONOUNCEMENTS OF THE FASB In fiscal 1999, the Company adopted SFAS No. 130, Reporting Comprehensive Income, which requires the reporting and display of comprehensive income and its components in an entity's financial statements. Currently there are no differences between the Company's net income and comprehensive income. The Company also adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pensions and other postretirement benefit plans. This pronouncement relates solely to disclosure provisions and has no effect on the results of operations or financial position of the Company. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments. The Company is required to adopt this statement in fiscal year 2001. The impact of this pronouncement on the Company currently is being evaluated. 13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) The following data summarizes quarterly operating results. The Company's business is seasonal in character and strongly influenced by weather conditions.
1999 Fiscal Quarters ---------------------- (In thousands, except per share amounts) First Second Third Fourth - -------------------------------------------------------------------------------------------------------------------------- Operating revenues $ 113,968 $ 188,390 $ 108,520 $ 86,639 Operating income $ 12,961 $ 50,779 $ 13,402 $ 241 Net income (loss) $ 3,842 $ 42,369 $ 3,513 $ (8,314) Basic earnings (loss) per average common share $ 0.13 $ 1.43 $ 0.12 $ (0.28) Diluted earnings (loss) per average common share $ 0.13 $ 1.42 $ 0.12 $ (0.28) - -------------------------------------------------------------------------------------------------------------------------- 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) Diluted earnings (loss) per average common share $ 0.21 $ 1.37 $ 0.00 $ (0.34) - ---------------------------------------------------------------------------------------------------------------------------
49 26 14. RECONCILIATION OF EARNINGS PER SHARE Years ended September 30, (in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- PER SHARE Per Share Per Share INCOME SHARES AMOUNT Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------- BASIC EPS $ 41,410 29,644 $ 1.40 $ 36,249 29,084 $ 1.25 $ 28,997 25,126 $ 1.15 Effect of Dilutive Securities Long-range performance shares 160 167 137 Non-qualified stock options 117 187 121 - ------------------------------------------------------------------------------------------------------------------------------- DILUTED EPS $ 41,410 29,921 $ 1.38 $ 36,249 29,438 $ 1.23 $ 28,997 25,384 $ 1.14 - -------------------------------------------------------------------------------------------------------------------------------
15. ACQUISITION On October 15, 1998, Energen Resources purchased the stock of the TOTAL Minatome Corporation (TOTAL), a Houston-based unit of TOTAL American Holding Inc. Immediately upon closing the transaction, Energen Resources sold a 31 percent undivided interest in TOTAL's net assets to Westport Oil and Gas Company Inc. Energen Resources' net adjusted price totaled approximately $137.5 million, including the assumption of certain legal and financial obligations. Energen Resources gained an estimated 200 Bcf equivalent of proved domestic oil and natural gas reserves. The acquisition was accounted for as a purchase, and the results of operations since the acquisition date are included in the consolidated financial statements. A summary of net assets acquired follows:
(in thousands) - --------------------------------------------------------------------------------------------------------------------------- Oil and gas properties $ 137,533 Less liabilities assumed (13,288) Less cash acquired (429) - --------------------------------------------------------------------------------------------------------------------------- Acquisition cost, net of cash acquired $ 123,816 - ---------------------------------------------------------------------------------------------------------------------------
Summarized below are the consolidated results of operations for the years ended September 30, 1999 and 1998, on an unaudited pro forma basis, as if the TOTAL acquisition had been made on October 1, 1997. The pro forma financial information is based on the Company's consolidated results of operations for the years ended September 30, 1999 and 1998, and on data provided by TOTAL after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transactions occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.
(Unaudited) Years ended September 30, (in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Operating revenues $ 497,517 $ 573,233 Net income $ 41,410 $ 35,217 Basic Earnings Per Average Common Share $ 1.40 $ 1.21 Diluted Earnings Per Average Common Share $ 1.38 $ 1.19 - ----------------------------------------------------------------------------------------------------------------------------
50 27 16. OIL AND GAS OPERATIONS (UNAUDITED) The following schedules detail historical financial data of the Company's oil and gas operations. 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 and expired 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. GROSS 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) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Proved $ 659,522 $ 502,025 $ 432,095 Unproved 10,463 14,015 22,115 - --------------------------------------------------------------------------------------------------------------------------- Total capitalized costs 669,985 516,040 454,210 Accumulated depreciation, depletion and amortization 129,839 88,306 87,554 - --------------------------------------------------------------------------------------------------------------------------- Capitalized costs, net $ 540,146 $ 427,734 $ 366,656 - ---------------------------------------------------------------------------------------------------------------------------
COSTS INCURRED The following table sets forth costs incurred in property acquisition, exploration and development activities and includes both capitalized costs and costs charged to expense during the year:
As of September 30, (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Property acquisition: Proved $ 143,693 $ 82,814 $ 171,701 Unproved 266 1,933 22,028 Exploration 1,919 5,593 14,847 Development 55,487 35,307 36,375 - --------------------------------------------------------------------------------------------------------------------------- Total costs incurred $ 201,365 $ 125,647 $ 244,951 - ---------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS The following table sets forth results of the Company's oil and gas operations: Years ended September 30, (in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Gross revenues $ 167,476 $ 129,978 $ 84,366 Production (lifting) costs 70,230 48,388 25,486 Exploration expense* 4,938 5,773 6,636 Depreciation, depletion and amortization** 60,891 54,411 35,393 Income tax benefit (3,045) (5,870) (2,299) - -------------------------------------------------------------------------------------------------------------------------- Results of operations from producing activities $ 34,462 $ 27,276 $ 19,150 - --------------------------------------------------------------------------------------------------------------------------
* Includes a $3.3 million and a $2.5 million writedown of a portion of an unproved leasehold in 1999 and 1998, respectively ** Includes a writedown of $4.7 million and $2.1 million in 1998 and 1997, respectively, under SFAS 121 (see Note 11) 51 28 AVERAGE SALES PRICE, PRODUCTION COST AND DEPRECIATION RATE
Years ended September 30, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Average sales price: Gas (per Mcf). $ 2.21 $ 2.21 $ 2.05 Oil (per barrel). $ 11.92 $ 14.96 $ 18.08 Natural gas liquids (per barrel). $ 9.58 $ 8.65 $ 11.45 Average production (lifting) cost (per Mcf equivalent) $ 0.91 $ 0.84 $ 0.69 Average depreciation rate (per Mcf equivalent) $ 0.79 $ 0.87 $ 0.90 - --------------------------------------------------------------------------------------------------------------------------
DRILLING ACTIVITY The following table sets forth the total number of net productive and dry exploratory and development wells drilled:
Years ended September 30, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Exploratory: Productive 0.9 0.7 1.6 Dry 1.3 1.0 1.2 - --------------------------------------------------------------------------------------------------------------------------- Total 2.2 1.7 2.8 - --------------------------------------------------------------------------------------------------------------------------- Development: Productive 62.4 19.5 17.7 Dry 2.3 2.9 0.7 - --------------------------------------------------------------------------------------------------------------------------- Total 64.7 22.4 18.4 - ---------------------------------------------------------------------------------------------------------------------------
As of September 30, 1999, the Company was participating in the drilling of 4 gross development wells, with the Company's interest equivalent to 1.93 wells. PRODUCTIVE WELLS AND ACREAGE The following table sets forth the total gross and net productive gas and oil wells as of September 30, 1999, and developed and undeveloped acreage as of the latest practicable date prior to yearend:
Gross Net - --------------------------------------------------------------------------------------------------------------------------- Gas Wells 3,669 1,525 Oil Wells 3,288 487 - --------------------------------------------------------------------------------------------------------------------------- Developed Acreage 1,031,772 525,157 Undeveloped Acreage 403,672 69,975 - ---------------------------------------------------------------------------------------------------------------------------
There were 295 wells with multiple completions with the Company's interest being an equivalent of 122.8 wells. All wells and acreage are located onshore in the United States, with the majority of the net undeveloped acreage located in the Permian Basin. 52 29 OIL AND GAS OPERATIONS 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 realizable prices and costs. Changes to 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. The proved reserves are located in the United States. Until the 1999 disposition of offshore properties, reserves were located both onshore and offshore.
Year ended September 30, 1999 Gas MMcf Oil MBbl NGL MBbl - --------------------------------------------------------------------------------------------------------------------------- Proved reserves at beginning of year 542,039 19,845 17,292 Revisions of previous estimates 66,522 2,575 2,546 Purchases 149,158 8,870 -- Discoveries and other additions 57,452 1,851 2,869 Production (53,855) (3,122) (762) Sales (21,315) (5,300) (8) - ---------------------------------------------------------------------------------------------------------------------------- Proved reserves at end of year 740,001 24,719 21,937 - --------------------------------------------------------------------------------------------------------------------------- Proved developed reserves at end of year 598,888 16,588 17,192 - --------------------------------------------------------------------------------------------------------------------------- Year ended September 30, 1998 Gas MMcf Oil MBbl NGL MBbl - --------------------------------------------------------------------------------------------------------------------------- Proved reserves at beginning of year 544,283 9,128 12,378 Revisions of previous estimates (13,006) (1,402) 2,211 Purchases 21,590 13,284 441 Discoveries and other additions 44,347 278 3,079 Production (43,853) (1,433) (817) Sales (11,322) (10) -- - --------------------------------------------------------------------------------------------------------------------------- Proved reserves at end of year 542,039 19,845 17,292 - --------------------------------------------------------------------------------------------------------------------------- Proved developed reserves at end of year 493,770 14,053 14,214 - --------------------------------------------------------------------------------------------------------------------------- Years ended September 30, 1997 Gas MMcf Oil MBbl NGL MBbl - --------------------------------------------------------------------------------------------------------------------------- Proved reserves at beginning of year 212,977 6,315 -- Revisions of previous estimates (2,910) (110) -- Purchases 352,373 3,650 12,880 Discoveries and other additions 11,946 83 -- Production (29,318) (775) (502) Sales (785) (35) -- - --------------------------------------------------------------------------------------------------------------------------- Proved reserves at end of year 544,283 9,128 12,378 - --------------------------------------------------------------------------------------------------------------------------- Proved developed reserves at end of year 511,864 8,140 12,378 - ---------------------------------------------------------------------------------------------------------------------------
During the year, Energen Resources invested approximately $144 million in proved property acquisitions. Energen Resources also sold approximately 53 Bcfe of proved reserves and recorded net pre-tax gains of $4.2 million. 53 30 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) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Future gross revenues $ 2,272,586 $1,109,829 $1,553,333 Future production costs 801,640 476,589 571,732 Future development costs 102,651 67,459 74,396 - --------------------------------------------------------------------------------------------------------------------------- Future net cash flows before income taxes 1,368,295 565,781 907,205 Future income tax expense (benefit) including tax credits 288,227 12,917 162,172 - --------------------------------------------------------------------------------------------------------------------------- Future net cash flows after income taxes 1,080,068 552,864 745,033 Discount at 10% per annum 466,214 195,606 305,679 - --------------------------------------------------------------------------------------------------------------------------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 613,854 $ 357,258 $ 439,354 - ---------------------------------------------------------------------------------------------------------------------------
The following are the principal sources of changes in the standardized measure of discounted future net cash flows:
Years ended September 30, (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 357,258 $ 439,354 $ 170,839 - --------------------------------------------------------------------------------------------------------------------------- Revisions to reserves proved in prior years: Net changes in prices, production costs and future development costs 165,092 (175,156) 44,913 Net changes due to revisions in quantity estimates 55,993 (4,993) (7,378) Development costs incurred, previously estimated 24,529 13,722 16,743 Accretion of discount. 35,725 43,935 17,084 Other (12,976) (22,329) (1,599) - ---------------------------------------------------------------------------------------------------------------------------- Total Revisions 268,363 (144,821) 69,763 New field discoveries and extensions, net of future production and development costs 40,105 9,989 8,947 Sales of oil and gas produced, net of production costs (93,314) (69,732) (53,848) Purchases 157,437 50,010 259,918 Sales (18,843) (12,713) (625) Net change in income taxes (97,152) 85,171 (15,640) - ---------------------------------------------------------------------------------------------------------------------------- Net change in standardized measure of discounted future net cash flows 256,596 (82,096) 268,515 - --------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 613,854 $ 357,258 $ 439,354 - ---------------------------------------------------------------------------------------------------------------------------
54 31 COALBED METHANE ACTIVITIES Energen Resources is actively engaged in the production of pipeline-quality natural gas from coal seams (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, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Proved reserves at beginning of year (MMcf) 222,481 230,323 130,387 Revisions of previous estimates 55,120 6,960 1,959 Purchases -- -- 107,228 Production. (14,761) (14,802) (9,251) - ---------------------------------------------------------------------------------------------------------------------------- Proved reserves at end of year (MMcf) 262,840 222,481 230,323 - --------------------------------------------------------------------------------------------------------------------------- Estimated proved reserves qualifying for tax credits (MMcf) 35,602 45,309 55,776 - --------------------------------------------------------------------------------------------------------------------------- Net capitalized costs (in thousands) $ 133,773 $ 139,001 $ 145,686 - --------------------------------------------------------------------------------------------------------------------------- Gross wells in which the company has working and/or revenue interests 871 886 863 - --------------------------------------------------------------------------------------------------------------------------- Net productive wells 534.6 549.6 548.4 - ---------------------------------------------------------------------------------------------------------------------------
Section 29 of the Internal Revenue Code of 1986, as amended, provides an income tax credit against regular federal income tax liability for sales of certain fuels produced from nonconventional sources (including natural gas from coal seams). Fuels qualifying for these credits must be produced from wells drilled after December 31, 1979, and before January 1, 1993, and must be sold before January 1, 2003. The credit for natural gas from coal seams is adjusted for inflation, and the Company estimates that it will approximate $1.08 per Mcf of qualifying production for calendar year 1999. Accordingly, a significant portion of the value of proved coalbed methane reserves is associated with this tax credit. 55 32 17. INDUSTRY SEGMENT INFORMATION The Company is principally engaged in two business segments: the purchase, distribution and sale of natural gas in central and north Alabama (natural gas distribution) and the acquisition, development, exploration and production of oil and gas in the continental United States (oil and gas operations). 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's financial statements to the current year presentation.
As of September 30, (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Operating revenues Natural gas distribution $ 325,554 $ 369,940 $ 362,984 Oil and gas operations 171,963 132,687 85,246 - --------------------------------------------------------------------------------------------------------------------------- Total $ 497,517 $ 502,627 $ 448,230 - --------------------------------------------------------------------------------------------------------------------------- Operating income (loss) Natural gas distribution $ 46,565 $ 41,663 $ 38,792 Oil and gas operations 31,015 20,992 14,723 Eliminations and corporate expenses (197) (1,170) (1,529) - ---------------------------------------------------------------------------------------------------------------------------- Total $ 77,383 $ 61,485 $ 51,986 - --------------------------------------------------------------------------------------------------------------------------- Depreciation, depletion and amortization expense Natural gas distribution $ 26,730 $ 25,153 $ 23,486 Oil and gas operations 61,885 55,846 36,202 - --------------------------------------------------------------------------------------------------------------------------- Total $ 88,615 $ 80,999 $ 59,688 - --------------------------------------------------------------------------------------------------------------------------- Interest expense Natural gas distribution $ 10,366 $ 10,221 $ 10,809 Oil and gas operations 27,758 20,130 12,705 Eliminations and other (951) (350) (608) - --------------------------------------------------------------------------------------------------------------------------- Total $ 37,173 $ 30,001 $ 22,906 - --------------------------------------------------------------------------------------------------------------------------- Income tax expense (benefit) Natural gas distribution $ 13,163 $ 11,400 $ 10,117 Oil and gas operations (13,472) (13,896) (7,341) Other. 444 275 321 - --------------------------------------------------------------------------------------------------------------------------- Total $ 135 $ (2,221) $ 3,097 - --------------------------------------------------------------------------------------------------------------------------- Capital expenditures Natural gas distribution $ 46,029 $ 54,168 $ 43,277 Oil and gas operations 198,577 120,991 239,718 Other 53 6 15 - --------------------------------------------------------------------------------------------------------------------------- Total $ 244,659 $ 175,165 $ 283,010 - --------------------------------------------------------------------------------------------------------------------------- Identifiable assets Natural gas distribution $ 410,001 $ 408,149 $ 390,381 Oil and gas operations. 604,857 464,214 416,119 Eliminations and other. 170,037 121,092 113,297 - --------------------------------------------------------------------------------------------------------------------------- Total $ 1,184,895 $ 993,455 $ 919,797 - --------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net Natural gas distribution. $ 317,119 $ 324,995 $ 296,228 Oil and gas operations 543,888 431,275 370,677 Other 100 74 98 - --------------------------------------------------------------------------------------------------------------------------- Total $ 861,107 $ 756,344 $ 667,003 - ---------------------------------------------------------------------------------------------------------------------------
56 33 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 this 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, 1999, 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 three 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. /s/ Geoffrey C. Ketcham -------------------------------------- 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, 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. /s/ PricewaterhouseCoopers LLP -------------------------------------- PricewaterhouseCoopers LLP Birmingham, Alabama October 27, 1999 34 SELECTED FINANCIAL AND COMMON STOCK DATA Energen Corporation
Years ended September 30, (dollars in thousands, except per share amounts) 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Operating revenues $ 497,517 $ 502,627 $ 448,230 $ 399,442 Income before cumulative effect of change in accounting principle $ 41,410 $ 36,249 $ 28,997 $ 21,541 Net income $ 41,410 $ 36,249 $ 28,997 $ 21,541 Basic earnings per share before cumulative effect $ 1.40 $ 1.25 $ 1.15 $ 0.98 Basic earnings per average common share $ 1.40 $ 1.25 $ 1.15 $ 0.98 Diluted earnings per average common share $ 1.38 $ 1.23 $ 1.14 $ 0.97 - --------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET Capitalization at year-end: Common shareholders' equity $ 361,504 $ 329,249 $ 301,143 $ 188,405 Preferred stock -- -- -- -- Long-term debt 371,824 372,782 279,602 195,545 - --------------------------------------------------------------------------------------------------------------------------- Total capitalization $ 733,328 $ 702,031 $ 580,745 $ 383,950 ------------------------------------------------------------------------------------------------------------------------ Total assets $1,184,895 $ 993,455 $ 919,797 $ 569,410 - --------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net $ 861,107 $ 756,344 $ 667,003 $ 444,916 - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA Annual dividend rate at year-end $ 0.66 $ 0.64 $ 0.62 $ 0.60 Cash dividends paid per common share $ 0.645 $ 0.625 $ 0.605 $ 0.585 Book value per common share $ 12.09 $ 11.23 $ 10.46 $ 8.44 Market-to-book ratio at year-end (%) 167 169 170 142 Yield at year-end (%) 3.3 3.4 3.5 5.0 Return on average common equity (%) 11.7 11.1 11.9 11.6 Price-to-earnings (diluted) ratio at year-end 14.7 15.4 15.6 12.4 Shares outstanding at year-end (000) 29,904 29,327 28,796 22,325 Price Range: High $ 20 3/8 $ 22 1/2 $18 7/8 $12 11/16 Low $ 13 1/8 $ 15 1/8 $11 7/8 $10 11/16 Close $ 20 1/4 $ 19 $17 25/32 $12 - ---------------------------------------------------------------------------------------------------------------------------
Note: 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. 58 35
1995 1994 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------- $ 318,580 $ 374,503 $ 355,878 $ 331,065 $ 324,902 $ 324,022 $ 308,604 $ 19,308 $ 23,751 $ 18,081 $ 15,687 $ 14,112 $ 11,267 $ 6,422 $ 19,308 $ 23,751 $ 18,081 $ 16,628 $ 14,112 $ 11,267 $ 6,422 $ 0.89 $ 1.10 $ 0.88 $ 0.77 $ 0.71 $ 0.58 $ 0.34 $ 0.89 $ 1.10 $ 0.88 $ 0.82 $ 0.71 $ 0.58 $ 0.34 $ 0.88 $ 1.09 $ 0.88 $ 0.82 $ 0.71 $ 0.58 $ 0.34 - --------------------------------------------------------------------------------------- $ 173,924 $ 167,026 $ 140,313 $ 129,858 $ 121,995 $ 113,316 $ 107,950 -- -- -- 1,800 1,800 1,800 2,450 131,600 118,302 85,852 90,609 77,677 82,835 86,188 - --------------------------------------------------------------------------------------- $ 305,524 $ 285,328 $ 226,165 $ 222,267 $ 201,472 $ 197,951 $ 196,588 - --------------------------------------------------------------------------------------- $ 459,084 $ 411,314 $ 370,685 $ 342,119 $ 337,516 $ 326,350 $ 294,614 - --------------------------------------------------------------------------------------- $ 327,264 $ 287,182 $ 273,097 $ 254,630 $ 273,539 $ 250,983 $ 238,329 - --------------------------------------------------------------------------------------- $ 0.58 $ 0.56 $ 0.54 $ 0.52 $ 0.50 $ 0.47 $ 0.44 $ 0.565 $ 0.545 $ 0.525 $ 0.505 $ 0.478 $ 0.448 $ 0.422 $ 7.97 $ 7.65 $ 6.80 $ 6.38 $ 6.04 $ 5.74 $ 5.57 136 147 182 142 150 157 190 5.3 5.0 4.4 5.7 5.5 5.2 4.2 11.0 14.6 13.0 13.0 11.6 10.0 6.0 12.4 10.3 14.1 11.1 12.8 15.5 31.1 21,820 21,836 20,641 20,365 20,209 19,745 19,389 $ 11 3/4 $ 13 5/16 $13 3/8 $ 9 7/16 $ 10 $ 10 3/4 $12 3/16 $ 9 7/8 $ 9 5/8 $ 8 13/16 $ 7 1/2 $ 8 $ 8 $ 7 11/16 $ 10 7/8 $ 11 1/4 $12 3/8 $ 9 1/16 $ 9 1/16 $ 9 $10 9/16 - ---------------------------------------------------------------------------------------
59 36 SELECTED BUSINESS SEGMENT DATA Energen Corporation
Years ended September 30, (dollars in thousands) 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- NATURAL GAS DISTRIBUTION Operating revenues Residential $ 209,263 $ 241,964 $ 237,022 $ 236,583 Commercial and industrial-small 77,254 89,361 87,477 87,912 Commercial and industrial-large -- -- -- -- Transportation 34,541 35,246 33,080 30,408 Other 4,496 3,369 5,405 2,349 - --------------------------------------------------------------------------------------------------------------- Total $ 325,554 $ 369,940 $ 362,984 $ 357,252 - --------------------------------------------------------------------------------------------------------------- Gas delivery volumes (MMcf) Residential 24,751 31,079 28,357 34,963 Commercial and industrial-small 11,662 13,705 12,554 15,002 Commercial and industrial-large -- -- -- -- Transportation 66,356 70,563 65,622 61,458 - --------------------------------------------------------------------------------------------------------------- Total 102,769 115,347 106,533 111,423 - --------------------------------------------------------------------------------------------------------------- Average number of customers Residential 425,937 423,602 422,878 418,486 Commercial, industrial and transportation 35,111 34,782 34,485 34,082 - --------------------------------------------------------------------------------------------------------------- Total 461,048 458,384 457,363 452,568 - --------------------------------------------------------------------------------------------------------------- Other data Depreciation & amortization $ 26,730 $ 25,153 $ 23,486 $ 21,269 Capital expenditures $ 46,029 $ 54,168 $ 43,277 $ 43,175 Operating income $ 46,565 $ 41,663 $ 38,792 $ 35,270 - --------------------------------------------------------------------------------------------------------------- OIL AND GAS OPERATIONS Operating revenues Natural gas $ 117,136 $ 97,123 $ 60,228 $ 24,262 Oil 37,227 21,452 13,981 10,313 Natural gas liquids 7,296 7,061 5,772 -- Other 10,304 7,051 5,265 7,615 - --------------------------------------------------------------------------------------------------------------- Total $ 171,963 $ 132,687 $ 85,246 $ 42,190 - --------------------------------------------------------------------------------------------------------------- Production volumes Natural gas (MMcf) 53,855 43,853 29,318 12,308 Oil (MBbl) 3,122 1,433 775 635 Natural gas liquids (MBbl) 762 817 502 -- - --------------------------------------------------------------------------------------------------------------- Proved reserves Natural gas (MMcf) 740,001 542,039 544,283 212,977 Oil (MBbl) 24,719 19,845 9,128 6,315 Natural gas liquids (MBbl) 21,937 17,292 12,378 -- - ---------------------------------------------------------------------------------------------------------------
60 37
1995 1994 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------- $ 194,089 $ 229,019 $ 216,587 $ 198,676 $ 195,250 $ 188,168 $ 170,302 68,409 84,443 83,069 78,799 84,260 85,588 85,477 290 790 1,223 6,501 8,916 13,596 25,000 30,490 29,321 27,382 25,089 22,890 22,734 19,574 2,687 1,064 2,299 1,661 (2,188) 873 731 - --------------------------------------------------------------------------------------- $ 295,965 $ 344,637 $ 330,560 $ 310,726 $ 309,128 $ 310,959 $ 301,084 - --------------------------------------------------------------------------------------- 27,489 31,254 30,957 29,119 26,262 28,653 27,210 12,289 13,536 13,853 13,860 14,837 16,581 17,946 29 106 282 2,654 3,411 4,786 9,494 61,640 52,635 49,346 46,235 41,447 39,117 34,447 - --------------------------------------------------------------------------------------- 101,447 97,531 94,438 91,868 85,957 89,137 89,097 - --------------------------------------------------------------------------------------- 410,515 402,531 395,057 387,871 382,747 379,362 365,572 33,163 32,606 32,315 31,773 31,471 31,607 30,534 - --------------------------------------------------------------------------------------- 443,678 435,137 427,372 419,644 414,218 410,969 396,106 - --------------------------------------------------------------------------------------- $ 19,368 $ 17,941 $ 17,206 $ 17,154 $ 17,126 $ 16,131 $ 14,657 $ 42,780 $ 38,473 $ 22,107 $ 20,228 $ 19,565 $ 19,565 $ 39,156 $ 32,513 $ 30,017 $ 26,381 $ 25,915 $ 25,209 $ 21,080 $ 18,548 - --------------------------------------------------------------------------------------- $ 14,748 $ 17,292 $ 11,449 $ 10,364 $ 9,889 $ 11,121 $ 11,735 3,765 2,725 3,484 2,559 1,839 1,411 1,468 -- -- -- -- -- -- -- 4,100 3,546 2,753 (44) (3,203) (5,927) (8,286) - --------------------------------------------------------------------------------------- $ 22,613 $ 23,563 $ 17,686 $ 12,879 $ 8,525 $ 6,605 $ 4,917 - --------------------------------------------------------------------------------------- 8,597 9,169 6,245 6,415 5,927 4,954 4,964 250 191 204 145 88 80 95 -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------- 71,267 60,057 67,298 51,329 73,279 57,532 29,860 3,986 1,485 1,289 338 402 330 264 -- -- -- -- -- -- -- - ---------------------------------------------------------------------------------------
61 EX-21 8 SUBSIDIARIES OF ENERGEN CORPORATION 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. Midtown NGV, Inc. EX-23 9 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby 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 27, 1999 relating to the consolidated financial statements, which appear in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated October 27, 1999 relating to the financial statement schedule of Energen Corporation, which appears in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Birmingham, Alabama December 17, 1999 EX-27.1 10 FINANCIAL DATA SCHEDULE / ENERGEN CORPORATION
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000277595 ENERGEN CORPORATION 1,000 YEAR SEP-30-1999 SEP-30-1999 PER-BOOK 316,821 544,286 295,747 6,986 21,055 1,184,895 299 208,633 152,572 361,504 0 0 371,824 268,000 0 0 1,955 0 0 0 181,612 1,184,895 497,517 135 420,134 420,269 77,248 1,335 78,583 37,173 41,410 0 41,410 19,118 27,298 130,620 1.4 1.38
EX-27.2 11 FINANCIAL DATA SCHEDULE / ALABAMA GAS CORPORATION
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000003146 ALABAMA GAS CORPORATION 1,000 YEAR SEP-30-1999 SEP-30-1999 PER-BOOK 316,821 298 109,703 3,833 0 430,655 20 34,484 143,502 178,006 0 0 119,650 0 0 0 0 0 0 0 132,999 430,655 325,554 13,163 278,989 292,152 33,402 261 33,663 10,366 23,297 0 23,297 0 8,614 60,894 0 0 EARNINGS PER SHARE IS CALCULATED FOR ENERGEN CORPORATION (PARENT COMPANY OF ALABAMA GAS CORPORATION) AND IS NOT CALCULATED FOR ALABAMA GAS CORPORATION AS AMOUNT WOULD NOT BE MEANINGFUL
-----END PRIVACY-ENHANCED MESSAGE-----