FORM 10-Q

|X|

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

EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2004

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 August 3, 2004

Energen Corporation

$0.01 par value

36,383,542 shares

Alabama Gas Corporation

$0.01 par value

  1,972,052 shares

ENERGEN CORPORATION AND ALABAMA GAS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004

TABLE OF CONTENTS

Page

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

(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

20

Selected Business Segment Data of Energen Corporation

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

Item 4.

Controls and Procedures

28

PART II: OTHER INFORMATION

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

29

Item 6.

Exhibits and Reports on Form 8-K

29

SIGNATURES

30

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

ENERGEN CORPORATION

(Unaudited)

Three months ended

Six months ended

June 30,

June 30,

(in thousands, except per share data)

2004

2003

2004

2003

Operating Revenues

Oil and gas operations

$   95,433

$   89,782

$  191,660

$  178,301

Natural gas distribution

92,744

94,248

347,946

315,387

     Total operating revenues

188,177

184,030

539,606

493,688

Operating Expenses

Cost of gas

40,291

42,107

179,029

154,079

Operations and maintenance

56,244

47,711

109,391

98,528

Depreciation, depletion and amortization

28,927

29,535

57,663

58,270

Taxes, other than income taxes

16,047

14,165

40,325

35,685

Accretion expense

532

466

1,022

960

     Total operating expenses

142,041

133,984

387,430

347,522

Operating Income

46,136

50,046

152,176

146,166

Other Income (Expense)

Interest expense

(10,694)

(10,734)

(21,012)

(21,556)

Other income

633

1,999

1,495

5,119

Other expense

(670)

(2,263)

(1,695)

(5,352)

     Total other expense

(10,731)

(10,998)

(21,212)

(21,789)

Income From Continuing Operations Before Income Taxes

35,405

39,048

130,964

124,377

Income tax expense

13,137

14,589

48,499

46,595

Income From Continuing Operations

22,268

24,459

82,465

77,782

Discontinued Operations, net of taxes

Income from discontinued operations

2

149

3

822

Loss on disposal

-

(1,261)

(13)

(676)

Income (Loss) From Discontinued Operations

2

(1,112)

(10)

146

Net Income

$    22,270

$   23,347

$    82,455

$  77,928

Diluted Earnings Per Average Common Share

Continuing operations

$      0.61

$       0.69

$      2.25

$   2.21

Discontinued operations

-

(0.03)

-

-

Net Income

$        0.61

$  0.66

$        2.25

$   2.21

Basic Earnings Per Average Common Share

Continuing operations

$      0.61

$       0.70

$      2.28

$   2.23

Discontinued operations

-

(0.03)

-

-

Net Income

$     0.61

$  0.67

$     2.28

$  2.23

Dividends Per Common Share

$      0.185

$    0.18

$    0.370

$   0.36

Diluted Average Common Shares Outstanding

36,625

35,349

36,600

35,193

Basic Average Common Shares Outstanding

36,230

35,000

36,202

34,868

CONSOLIDATED CONDENSED BALANCE SHEETS

ENERGEN CORPORATION

(Unaudited)

(in thousands)

June 30, 2004

December 31, 2003

ASSETS

Current Assets

Cash and cash equivalents

$      62,962

$       2,127

Accounts receivable, net of allowance for doubtful
    accounts of $11,435 at June 30, 2004, and
    $9,852 at December 31, 2003

107,004

172,915

Inventories, at average cost

    Storage gas inventory

29,556

40,654

    Materials and supplies

8,462

7,677

    Liquified natural gas in storage

3,528

3,475

Deferred income taxes

49,599

38,145

Prepayments and other

43,891

25,073

    Total current assets

305,002

290,066

Property, Plant and Equipment

Oil and gas properties, successful efforts method

1,263,895

1,197,340

Less accumulated depreciation, depletion and amortization

343,601

310,368

    Oil and gas properties, net

920,294

886,972

Utility plant

913,221

883,225

Less accumulated depreciation

357,275

341,787

    Utility plant, net

555,946

541,438

Other property, net

5,016

5,041

    Total property, plant and equipment, net

1,481,256

1,433,451

Other Assets

Regulatory asset

18,082

18,082

Deferred charges and other

30,839 

39,833

    Total other assets

48,921 

57,915

TOTAL ASSETS

$   1,835,179 

$   1,781,432

CONSOLIDATED CONDENSED BALANCE SHEETS

ENERGEN CORPORATION

(Unaudited)

(in thousands, except share data)

June 30, 2004

December 31, 2003

CAPITAL AND LIABILITIES

Current Liabilities

Long-term debt due within one year

$      10,000

$      10,000

Notes payable to banks

-

11,000

Accounts payable

142,205

135,319

Accrued taxes

43,514

28,551

Customers' deposits

17,683

17,884

Amounts due customers

139

8,571

Accrued wages and benefits

23,699

24,957

Regulatory liability

44,729

54,146

Other

36,121

37,303

    Total current liabilities

318,090

327,731

Deferred Credits and Other Liabilities

Asset retirement obligation

33,196

26,515

Minimum pension liability

21,170

17,911

Regulatory liability

108,625

113,427

Deferred income taxes

61,917

33,200

Other

15,663

10,774

    Total deferred credits and other liabilities

240,571

201,827

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, 36,384,593 shares outstanding at June 30, 2004, and 36,223,531 shares outstanding at December 31, 2003

364

362

    Premium on capital stock

375,222

367,765

    Capital surplus

2,802

2,802

    Retained earnings

429,013

360,001

    Accumulated other comprehensive loss, net of tax

Unrealized loss on hedges

(40,832)

(21,714)

Minimum pension liability

(8,881)

(8,881)

Deferred compensation on restricted stock

(3,103)

(1,258)

Deferred compensation plan

22,141

17,063

Treasury stock, at cost (483,254 shares at June 30, 2004,
    and 415,869 shares at December 31, 2003)

(23,082)

(17,108)

    Total common shareholders' equity

753,644

699,032

Long-term debt

522,874

552,842

    Total capitalization

1,276,518

1,251,874

TOTAL CAPITAL AND LIABILITIES

$   1,835,179

$   1,781,432

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

ENERGEN CORPORATION

(Unaudited)

Six months ended June 30, (in thousands)

2004

2003

Operating Activities

Net income

$     82,455

$     77,928

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

    Depreciation, depletion and amortization

57,663

59,190

    Deferred income taxes

28,257

27,268

    Deferred investment tax credits

(224)

(224)

    Change in derivative fair value

3,881

1,406

    (Gain) loss on sale of assets

(255)

(9,679)

    Loss on properties held-for-sale

-

10,404

Net change in:

     Accounts receivable

44,376

22,483

     Inventories

10,260

(17,082)

     Accounts payable

(21,384)

(6,072)

     Amounts due customers

(14,560)

(3,282)

     Other current assets and liabilities

10,859

318

Other, net

10,857

(4,847)

    Net cash provided by operating activities

212,185 

157,811 

Investing Activities

Additions to property, plant and equipment

(100,925)

(109,271)

Proceeds from sale of assets

282

20,716

Other, net

(60)

239

    Net cash used in investing activities

(100,703)

(88,316)

Financing Activities

Payment of dividends on common stock

(13,443)

(12,573)

Issuance of common stock

4,213

28,833

Purchase of treasury stock

(384)

(339)

Reduction of long-term debt

(30,033)

-

Net change in short-term debt

(11,000)

(83,000)

    Net cash used in financing activities

(50,647) 

(67,079) 

Net change in cash and cash equivalents

60,835

2,416 

Cash and cash equivalents at beginning of period

2,127

4,804 

Cash and Cash Equivalents at End of Period

$      62,962

$      7,220 

CONDENSED STATEMENTS OF INCOME

ALABAMA GAS CORPORATION

(Unaudited)

Three months ended

Six months ended

June 30,

June 30,

(in thousands)

2004

2003

2004

2003

Operating Revenues

$ 92,744

$ 94,248

$ 347,946

$ 315,387

Operating Expenses

Cost of gas

40,677

42,730

179,883

155,294

Operations and maintenance

30,262

28,103

58,859

56,551

Depreciation

9,858

9,222

19,468

18,147

Income taxes

    Current

(1,388)

373

19,414

19,876

    Deferred, net

1,620

800

3,078

1,843

    Deferred investment tax credits, net

(112)

(112)

(224)

(224)

Taxes, other than income taxes

7,372

7,205

23,147

21,207

     Total operating expenses

88,289

88,321

303,625

272,694

Operating Income (Loss)

4,455

5,927

44,321

42,693

Other Income (Expense)

Allowance for funds used during construction

361

170

661

493

Other income

397

952

1,101

2,193

Other expense

(670)

(1,287)

(1,686)

(2,610)

     Total other income (expense)

88

(165)

76

76

Interest Charges

Interest on long-term debt

2,763

3,237

5,750

6,475

Other interest expense

1,221

390

1,769

712

    Total interest charges

3,984

3,627

7,519

7,187

Net Income

$ 559

$ 2,135

$ 36,878

$ 35,582

CONDENSED BALANCE SHEETS

ALABAMA GAS CORPORATION

(Unaudited)

(in thousands)

June 30, 2004

December 31, 2003

ASSETS

Property, Plant and Equipment

Utility plant

$   913,221

$   883,225

Less accumulated depreciation

357,275

341,787

    Utility plant, net

555,946

541,438

Other property, net

328

331

Current Assets

Cash and cash equivalents

2,804

1,440

Accounts receivable

    Gas

62,595

134,376

    Merchandise

1,596

1,210

    Other

2,207

1,018

    Allowance for doubtful accounts

(10,500)

(9,100)

Inventories, at average cost

    Storage gas inventory

29,556

40,654

    Materials and supplies

4,525

5,527

    Liquified natural gas in storage

3,528

3,475

Deferred income taxes

18,732

17,650

Regulatory asset

-

251

Prepayments and other

40,178

22,056

    Total current assets

155,221

218,557

Other Assets

Regulatory asset

18,082

18,082

Deferred charges and other

10,170

19,285

    Total other assets

28,252

37,367

TOTAL ASSETS

$   739,747

$   797,693

CONDENSED BALANCE SHEETS

ALABAMA GAS CORPORATION

(Unaudited)

(in thousands, except share data)

June 30, 2004

December 31, 2003

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
       June 30, 2004, and December 31, 2003

           20

         20

    Premium on capital stock

31,682

31,682

    Capital surplus

2,802

2,802

    Retained earnings

239,324

215,869

    Total common shareholder's equity

273,828

250,373

Long-term debt

139,500

169,533

    Total capitalization

413,328

419,906

Current Liabilities

Notes payable to banks

-

11,000

Accounts payable

51,814

56,020

Amounts due to affiliates

999

37,290

Accrued taxes

39,637

22,145

Customers' deposits

17,683

17,884

Amounts due customers

139

8,571

Accrued wages and benefits

5,312

6,247

Regulatory liability

44,729

54,146

Other

8,695

9,039

    Total current liabilities

169,008

222,342

Deferred Credits and Other Liabilities

Deferred income taxes

36,489

32,178

Minimum pension liability

9,522

6,988

Regulatory liability

108,625

113,427

Other

2,775

2,852

     Total deferred credits and other liabilities

157,411

155,445

Commitments and Contingencies

-

-

TOTAL CAPITAL AND LIABILITIES

$   739,747

$   797,693

CONDENSED STATEMENTS OF CASH FLOWS

ALABAMA GAS CORPORATION

(Unaudited)

Six months ended June 30, (in thousands)

2004

2003

Operating Activities

Net income

$     36,878

$     35,582

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

    Depreciation and amortization

19,468

18,147

    Deferred income taxes, net

3,078

1,843

    Deferred investment tax credits

(224)

(224)

Net change in:

    Accounts receivable

50,071

26,623

    Inventories

12,047

(15,836)

    Accounts payable

(3,955)

2,538

    Amounts due customers

(14,560)

(3,282)

    Other current assets and liabilities

16,136

9,642

Other, net

2,700

(1,635)

    Net cash provided by operating activities

121,639

73,398

Investing Activities

Additions to property, plant and equipment

(29,517)

(28,249)

Other, net

(11)

219

    Net cash used in investing activities

(29,528)

(28,030)

Financing Activities

Dividends

(13,423)

-

Reduction of long-term debt

(30,033)

-

Net advances to affiliates

(36,291)

(31,778)

Net change in short-term debt

(11,000)

(13,000)

    Net cash used in financing activities

(90,747)

(44,778)

Net change in cash and cash equivalents

1,364

590

Cash and cash equivalents at beginning of period

1,440

2,818

Cash and Cash Equivalents at End of Period

$        2,804

$        3,408

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 years ended December 31, 2003 and 2002, the three months ended December 31, 2001, and the year ended September 30, 2001, included in the 2003 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 Ameri ca 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 year-end consolidated condensed balance sheet data included in the interim report was derived from audited financial statements, but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. 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 application of Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." 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 associated 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, "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. The cost related to stock-based employee compensation included in the determination of net income for the three months and six months ended June 30, 2004 and 2003, approximates 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 and basic earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:

June 30,

June 30,

(in thousands)

2004

2003

2004

2003

Net income

As reported

$ 22,270

$ 23,347

$ 82,455

$ 77,928

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

1,499

691

2,544

1,374

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

(1,133)

(774)

(2,051)

(1,627)

Pro forma

$ 22,636

$ 23,264

$ 82,948

$ 77,675

Diluted earnings per average common share

As reported

$ 0.61

$ 0.66

$ 2.25

$ 2.21

Pro forma

$ 0.62

$ 0.66

$ 2.27

$ 2.21

Basic earnings per average common share

As reported

$ 0.61

$ 0.67

$ 2.28

$ 2.23

Pro forma

$ 0.62

$ 0.66

$ 2.29

$ 2.23

All of Alagasco's utility operations are conducted in the state of Alabama. Alagasco is subject to regulation by the Alabama Public Service Commission (APSC) which established the Rate Stabilization and Equalization (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, RSE, 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 projections 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 poi nts above or below the percentage change in the Consumer Price Index For All Urban 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 returned to customers $0.1 million pre-tax through rate adjustments under the provisions of RSE. An $11.2 million and a $12.7 million annual increase in revenues became effective December 1, 2003 and 2002, respectively, under RSE.

Alagasco calculates a temperature adjustment to customers' monthly bills to substantially remove the effect of departures from normal temperatures on Alagasco's earnings. Adjustments to customers' bills are made in the same billing cycle in which the weather variation occurs. The temperature adjustment applies primarily to residential, small commercial and small industrial customers. 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.

Energen Resources Corporation, Energen's oil and gas subsidiary, periodically enters into derivative commodity instruments that qualify as cash flow hedges under SFAS No. 133 to hedge its exposure to price fluctuations on oil, natural gas and natural gas liquids production. In addition, Alagasco periodically enters into cash flow derivative commodity instruments to hedge its exposure to price fluctuations on its gas supply. Such instruments typically include over-the-counter swaps, collars and basis hedges with major energy derivative product specialists. The counterparties to the commodity instruments are investment banks and energy-trading firms. In some contracts, the amount of credit allowed before collateral must be posted for out-of-the-money hedges varies depending on the credit rating of the Company.

Energen Resources applies SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivatives to be recognized on the balance sheet and measured at fair value. If a derivative is designated as a cash flow hedge, the effectiveness of the hedge, or the degree that the gain (loss) for the hedging instrument offsets the loss (gain) on the hedged item, is measured at each reporting period. The effective portion of the gain or loss on the derivative instrument is recognized in other comprehensive income (OCI) as a component of equity and subsequently reclassified into earnings as operating revenues when the forecasted transaction affects earnings. The ineffective portion of a derivative's change in fair value is required to be recognized in earnings immediately. Derivatives that do not qualify for hedge treatment under SFAS No. 133 must be recorded at fair value with gains or losses recognized in earnings in the period of change.

As of June 30, 2004, $35.6 million, net of tax, of deferred net losses on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified to operating revenues in earnings during the next 12-month period. The actual amounts that will be reclassified to earnings over the next year could vary materially from this amount due to changes in market conditions. Gains and losses on derivative instruments that are not accounted for as cash flow hedges as well as the ineffective portion of the change in fair value of derivatives accounted for as cash flow hedges, are included in operating revenues in the consolidated financial statements. For the ineffective portion of the change in fair value of derivatives accounted for as cash flow hedges, the Company recorded a $332,000 after-tax loss for th