FORM 10-Q

|X|

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2003

OR

|  | 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___

Commission

IRS Employer

File

State of

Identification

Number

Registrant

Incorporation

Number

1-7810

Energen Corporation

Alabama

63-0757759

2-38960

Alabama Gas Corporation

Alabama

63-0022000

Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of November 11, 2003

Energen Corporation

$0.01 par value

36,143,645 shares

Alabama Gas Corporation

$0.01 par value

  1,972,052 shares

ENERGEN CORPORATION AND ALABAMA GAS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

Page

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements

(a) Consolidated Condensed Statements of Income of Energen Corporation

 3

(b) Consolidated Condensed Balance Sheets of Energen Corporation

 4

(c) Consolidated Condensed Statements of Cash Flows of Energen Corporation

 6

(d) Condensed Statements of Income of Alabama Gas Corporation

 7

(e) Condensed Balance Sheets of Alabama Gas Corporation

 8

(f) Condensed Statements of Cash Flows of Alabama Gas Corporation

10

(g) Notes to Unaudited Condensed Financial Statements

11

Item 2.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

21

Selected Business Segment Data of Energen Corporation

27

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

Item 4.

Controls and Procedures

29

PART II: OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K

30

SIGNATURES

31

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

ENERGEN CORPORATION

(Unaudited)

Three months ended

Nine months ended

September 30,

September 30,

(in thousands, except per share data)

2003

2002

2003

2002

Operating Revenues

Oil and gas operations

$   87,994

$   64,619

$  266,296

$  171,643

Natural gas distribution

58,147

50,225

373,534

322,458

     Total operating revenues

146,141

114,844

639,830

494,101

Operating Expenses

Cost of gas

24,966

17,897

179,045

144,038

Operations and maintenance

50,227

47,772

149,005

137,686

Depreciation, depletion and amortization

29,203

26,773

87,473

76,501

Taxes, other than income taxes

12,389

9,265

47,824

36,326

     Total operating expenses

116,785

101,707

463,347

394,551

Operating Income

29,356

13,137

176,483

99,550

Other Income (Expense)

Interest expense

(10,153)

(10,987)

(31,709)

(32,828)

Accretion expense

(459)

(480)

(1,419)

(1,331)

Other income

2,289

3,885

7,408

10,583

Other expense

(2,866)

(4,020)

(8,218)

(10,614)

     Total other expense

(11,189)

(11,602)

(33,938)

(34,190)

Accounting Principle

18,167

1,535

142,545

65,360

Income tax expense

6,710

1,438

53,305

13,817

Effect of Change in Accounting Principle

11,457

97

89,240

51,543

Discontinued Operations, net of taxes

Income (loss) from discontinued operations

145

63

966

(43)

Gain (loss) on disposal

294

(33)

(382)

273

Income From Discontinued Operations

439

30

584

230

Principle, net of taxes

-

-

-

(2,220)

Net Income

$    11,896

$      127

$    89,824

$  49,553

Diluted Earnings Per Average Common Share

Continuing operations

$      0.32

$       -

$      2.51

$   1.54

Discontinued operations

0.01

-

0.02

0.01

Cumulative effect of change in accounting principle

-

-

-

(0.07)

Net Income

$        0.33

$     -

$        2.53

$   1.48

Basic Earnings Per Average Common Share

Continuing operations

$      0.32

$       -

$      2.53

$   1.55

Discontinued operations

0.01

-

0.02

0.01

Cumulative effect of change in accounting principle

-

-

-

(0.07)

Net Income

$     0.33

$     -

$     2.55

$  1.49

Dividends Per Common Share

$      0.185

$     0.18

$    0.545

$   0.53

Diluted Average Common Shares Outstanding

36,261

34,731

35,561

33,543

Basic Average Common Shares Outstanding

35,869

34,425

35,208

33,245

CONSOLIDATED CONDENSED BALANCE SHEETS

ENERGEN CORPORATION

(Unaudited)

(in thousands)

September 30, 2003

December 31, 2002

ASSETS

Current Assets

Cash and cash equivalents

$       4,741

$       4,804

Accounts receivable, net of allowance for doubtful
    accounts of $9,720 at September 30, 2003, and
    $8,874 at December 31, 2002

85,191

139,356

Inventories, at average cost

    Storage gas inventory

57,849

23,668

    Materials and supplies

9,125

8,335

    Liquified natural gas in storage

3,256

3,671

Deferred income taxes

33,605

33,941

Prepaid pension

19,192

-

Regulatory asset

10,536

-

Prepayments and other

5,427

20,367

228,922

    Total current assets

234,142

Property, Plant and Equipment

Oil and gas properties, successful efforts method

1,148,057

1,103,472

Less accumulated depreciation, depletion and amortization

291,558

269,616

    Oil and gas properties, net

856,499

833,856

Utility plant

867,769

825,421

Less accumulated depreciation

436,628

408,165

    Utility plant, net

431,141

417,256

Other property, net

5,084

5,691

    Total property, plant and equipment, net

1,292,724

1,256,803

Other Assets

Deferred income taxes

- 

16,333

Regulatory asset

18,313

14,744

Deferred charges and other

28,029 

26,239

    Total other assets

46,342 

57,316

TOTAL ASSETS

$   1,567,988 

$   1,548,261

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

ENERGEN CORPORATION

(Unaudited)

Nine months ended September 30, (in thousands)

2003

2002

Operating Activities

Net income

$     89,824

$     49,553

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

    Depreciation, depletion and amortization

88,400

83,180

    Deferred income taxes

40,804

8,397

    Deferred investment tax credits

(336)

(336)

    Change in derivative fair value

748

(7,807)

    Gain on sale of assets

(10,059)

(3,373)

    Loss on properties held-for-sale

10,404

-

net of taxes

-

2,220

Net change in:

     Accounts receivable

41,558

23,066

     Inventories

(34,556)

12,623

     Accounts payable

(25,146)

(7,467)

     Amounts due customers

1,026

(1,613)

     Other current assets and liabilities

(16,661)

(591)

Other, net

3,090

260

    Net cash provided by operating activities

189,096 

158,112

Investing Activities

Additions to property, plant and equipment

(153,960)

(108,118)

Acquisition

-

(117,043)

Proceeds from sale of assets

29,092

14,335

Other, net

636

(600)

    Net cash used in investing activities

(124,232)

(211,426)

Financing Activities

Payment of dividends on common stock

(19,236)

(17,690)

Issuance of common stock

41,648

7,556

Purchase of treasury stock

(339)

-

Reduction of long-term debt

(13,000)

(21,204)

Net change in short-term debt

(74,000)

82,928

    Net cash provided by (used in) financing activities

(64,927) 

51,590

Net change in cash and cash equivalents

(63) 

(1,724)

Cash and cash equivalents at beginning of period

4,804 

6,482

Cash and Cash Equivalents at End of Period

$      4,741

$       4,758

CONDENSED STATEMENTS OF INCOME

ALABAMA GAS CORPORATION

(Unaudited)

Three months ended

Nine months ended

September 30,

September 30,

(in thousands)

2003

2002

2003

2002

Operating Revenues

$ 58,147

$ 50,225

$ 373,534

$ 322,458

Operating Expenses

Cost of gas

25,534

18,307

180,828

145,231

Operations and maintenance

27,657

28,053

84,208

80,641

Depreciation

9,385

8,492

27,532

25,035

Income taxes

    Current

(10,164)

(9,735)

9,712

7,666

    Deferred, net

5,331

4,905

7,174

6,795

    Deferred investment tax credits, net

(112)

(112)

(336)

(336)

Taxes, other than income taxes

5,146

4,280

26,353

22,926

     Total operating expenses

62,777

54,190

335,471

287,958

Operating Income (Loss)

(4,630)

(3,965)

38,063

34,500

Other Income (Expense)

Allowance for funds used during construction

80

312

573

837

Other income

897

1,135

3,090

3,832

Other expense

(1,032)

(1,623)

(3,642)

(4,493)

     Total other income (expense)

(55)

(176)

21

176

Interest Charges

Interest on long-term debt

3,222

3,265

9,697

9,917

Other interest expense (income)

(126)

294

586

953

    Total interest charges

3,096

3,559

10,283

10,870

Net Income (Loss)

$ (7,781)

$ (7,700)

$ 27,801

$ 23,806

CONDENSED BALANCE SHEETS

ALABAMA GAS CORPORATION

(Unaudited)

(in thousands)

September 30, 2003

December 31, 2002

ASSETS

Property, Plant and Equipment

Utility plant

$   867,769

$   825,421

Less accumulated depreciation

436,628

408,165

    Utility plant, net

431,141

417,256

Other property, net

332

842

Current Assets

Cash and cash equivalents

3,873

2,818

Accounts receivable

    Gas

55,296

108,630

    Merchandise

1,049

1,748

    Other

3,108

656

    Allowance for doubtful accounts

(9,100)

(8,200)

Inventories, at average cost

    Storage gas inventory

57,849

23,668

    Materials and supplies

6,232

5,049

    Liquified natural gas in storage

3,256

3,671

Deferred income taxes

18,550

20,093

Regulatory asset

10,536

-

Prepaid pension

15,658

-

Prepayments and other

2,867

18,314

    Total current assets

169,174

176,447

Other Assets

Regulatory asset

18,313

14,744

Deferred charges and other

10,642

11,290

    Total other assets

28,955

26,034

TOTAL ASSETS

$   629,602

$   620,579

CONDENSED BALANCE SHEETS

ALABAMA GAS CORPORATION

(Unaudited)

(in thousands, except share data)

September 30, 2003

December 31, 2002

CAPITAL AND LIABILITIES

Capitalization

Preferred stock, cumulative $0.01 par value, 120,000 shares
    authorized, issuable in series-$4.70 Series

$              -

$           -

Common shareholder's equity

    Common stock, $0.01 par value; 3,000,000 shares
       authorized, 1,972,052 shares outstanding at
       September 30, 2003, and December 31, 2002

           20

         20

    Premium on capital stock

31,682

31,682

    Capital surplus

2,802

2,802

    Retained earnings

210,654

182,852

    Total common shareholder's equity

245,158

217,356

Long-term debt

169,533

169,533

    Total capitalization

414,691

386,889

Current Liabilities

Long-term debt due within one year

10,000

15,000

Notes payable to banks

-

13,000

Accounts payable

50,535

55,720

Amounts due to affiliates

20,225

1,432

Accrued taxes

28,256

24,044

Customers' deposits

16,138

17,404

Amounts due customers

4,912

8,458

Accrued wages and benefits

5,532

5,710

Regulatory liability

16,399

41,184

Other

10,626

8,947

    Total current liabilities

162,623

190,899 

Deferred Credits and Other Liabilities

Deferred income taxes

26,630

20,747

Minimum pension liability

21,635

18,661

Accumulated deferred investment tax credits

420

756

Regulatory liability

1,955

1,468

Customer advances for construction and other

1,648

1,159

     Total deferred credits and other liabilities

52,288

42,791

Commitments and Contingencies

TOTAL CAPITAL AND LIABILITIES

$   629,602

$   620,579

CONDENSED STATEMENTS OF CASH FLOWS

ALABAMA GAS CORPORATION

(Unaudited)

Nine months ended September 30, (in thousands)

2003

2002

Operating Activities

Net income

$     27,801

$     23,806

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

    Depreciation and amortization

27,532

25,035

    Deferred income taxes, net

7,174

6,795

    Deferred investment tax credits

(336)

(336)

Net change in:

    Accounts receivable

39,873

29,410

    Inventories

(34,950)

12,887

    Accounts payable

(14,900)

15,997

    Amounts due customers

1,026

(1,613)

    Other current assets and liabilities

(12,422)

(20,924)

Other, net

123

(764)

    Net cash provided by operating activities

40,921

90,293

Investing Activities

Additions to property, plant and equipment

(40,966)

(49,803)

Other, net

307

424

    Net cash used in investing activities

(40,659)

(49,379)

Financing Activities

Dividends

-

(11,159)

Net advances from (to) affiliates

18,793

(6,182)

Reduction of long-term debt

(5,000)

(5,467)

Net change in short-term debt

(13,000)

(19,000)

    Net cash used in financing activities

793

(41,808)

Net change in cash and cash equivalents

1,055

(894)

Cash and cash equivalents at beginning of period

2,818

3,372

Cash and Cash Equivalents at End of Period

$        3,873

$      2,478

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
ENERGEN CORPORATION AND ALABAMA GAS CORPORATION

The unaudited financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2002, the three months ended December 31, 2001, and the years ended September 30, 2001 and 2000, included in the 2002 Annual Report of Energen Corporation (the Company) and Alabama Gas Corporation (Alagasco) on Form 10-K. On December 5, 2001, the Board of Directors of the Company approved a change in the Company's fiscal year end from September 30 to December 31, effective January 1, 2002. A transition report was filed on Form 10-Q for the period October 1, 2001, to December 31, 2001. Alagasco is on a September 30 fiscal year for rate-setting purposes (rate year) and reports on a calendar year for the Securities and Exchange Commission and all other financial accounting reporting purposes. The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of Amer ica for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required for complete financial statements. The Company's natural gas distribution business is seasonal in character and influenced by weather conditions. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year.

The quarterly information reflects the adoption in 2002 of Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." Upon adoption of SFAS No. 143, the Company was required to recognize a liability for the present value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as the cost of the asset as of January 1, 2002. Upon initial application of the Statement, a cumulative effect of a change in accounting principle of $2.2 million after-tax was required in order to recognize a liability for any existing asset retirement obligations. The Company adopted SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," on January 1, 2002. SFAS No. 144 requires that gains and losses from the sale of certain oil and gas properties and write-downs of certain properties held-for-sale be reported as discontinued operations, with income or loss from operations of the associat ed properties reported as income or loss from discontinued operations in the current and prior periods. All other adjustments to the unaudited financial statements that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods have been recorded. Such adjustments consisted of normal recurring items. Certain reclassifications were made to conform prior years' financial statements to the current-quarter presentation.

2. STOCK-BASED COMPENSATION

The Company adopted the fair value recognition provisions of SFAS No. 123 (as amended), "Accounting for Stock-Based Compensation," prospectively for all stock-based employee compensation effective as of January 1, 2003. Awards under the Company's plan vest over periods ranging from one to four years; therefore, the cost related to stock-based employee compensation included in the determination of net income for the three months and nine months ended September 30, 2003 and 2002, is less than that which would have been recognized if the fair value method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net income and diluted earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:

September 30,

September 30,

(in thousands)

2003

2002

2003

2002

Net income

As reported

$ 11,896

$ 127

$ 89,824

$ 49,553

Stock-based compensation expense included in reported net income, net of tax

857

296

2,216

1,441

Stock-based compensation expense determined under fair value based method, net of tax

(960)

(486)

(2,336)

(1,481)

Pro forma

$ 11,793

$ (63)

$ 89,704

$ 49,513

Diluted earnings per average common share

As reported

$ 0.33

$ -

$ 2.53

$      1.48

Pro forma

$ 0.33

$ -

$ 2.52

$      1.48

Basic earnings per average common share

As reported

$ 0.33

$ -

$ 2.55

$      1.49

Pro forma

$ 0.33

$ -

$ 2.55

$      1.49

All of Alagasco's utility operations are conducted in the state of Alabama. Alagasco is subject to regulation by the APSC which established the RSE rate-setting process in 1983. RSE was extended with modifications in 2002, 1996, 1990, 1987 and 1985. On June 10, 2002, the APSC extended Alagasco's rate-setting methodology without change, for a six-year period through January 1, 2008. Under the terms of that extension, RSE will continue after January 1, 2008, unless, after notice to the Company and a hearing, the Commission votes to either modify or discontinue its operation. Alagasco's allowed range of return on average equity remains 13.15 percent to 13.65 percent throughout the term of the order, subject to change in the event that the Commission, following a generic rate of return hearing, adjusts the equity returns of all major energy utilities operating under a similar methodology. Under RSE as extended, the APSC conducts quarterly reviews to determine, based on Alagasco's projectio ns and year-to-date performance, whether Alagasco's return on average equity at the end of the rate 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 rate year, effective December 1, and cannot exceed 4 percent of prior-year revenues. As of September 30, 2003, Alagasco had a $3 million reduction in revenues to bring the return on average equity within the allowed range of return. 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. Under the inflation-based cost control measurement established by the APSC, if the percentage change in O&M expense per customer falls within a range of 1.25 points above or below the percentage change in the Consumer Price Index For All Urb an Consumers (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. The increase in O&M expense per customer was slightly above the index range for the rate year ended September 30, 2003; as a result, the utility had a $102,000 reduction to revenues under the provisions of RSE. A $12.4 million and $16.3 million annual increase in revenues became effective December 1, 2002 and 2001, respectively, under RSE.

Alagasco calculates a tempe