Energen Corporation announced today that its two major subsidiaries have relationships and outstanding contracts with Enron Corporation and numerous other intermediaries. While Energen is prepared to pursue appropriate remedies, in the event that Enron does not fulfill its contractual obligations, the Company estimates that such non-performance by Enron could negatively impact Energen's net income by 20-25 cents per diluted share relative to the Company's previously disclosed earnings guidance for the fiscal year 2002, which began October 1, 2001. The Company also said that, since December 2000, it has significantly reduced its energy trading relationship with Enron.
Energen said that its oil and gas subsidiary, Energen Resources Corporation, has an in-the-money position of approximately $14 million with Enron related to open commodity and basis swaps contracts. Energen Resources also has delivered more than 1 billion cubic feet (Bcf) of natural gas under a physical sales contract for which it is owed approximately $4 million by Enron. In addition, Energen's natural gas utility, Alabama Gas Corporation (Alagasco), owes Enron an estimated $6.8 million for purchases made for its distribution system.
Based on New York Mercantile Exchange futures prices at the close of business on Thursday, November 29, 2001, Enron would owe Energen Resources approximately $13.5 million related to future production of 10.1 Bcf as it occurs over the remaining 10 months of Energen's fiscal year 2002. These open swap contracts cover approximately 27 percent of the Company's estimated natural gas production (excluding acquisitions and exploration) in the last 10 months of the 2002 fiscal year. Also, Energen said Enron would owe approximately $565,000 for 2 months of open swap contracts covering 68,000 barrels of oil, or approximately 17 percent of the Company's estimated oil production for November and December 2001.
In addition to production hedges, Energen Resources has in-the-money open swap contracts with Enron for natural gas and oil basis differentials for which Energen estimates that Enron presently would owe the Company approximately $260,000.
These amounts have not been previously recorded in the Company's operating results, as the swap agreements qualified for deferral under the cash flow hedge provisions of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities."
In addition to the swap contracts, approximately 11.2 Bcf, or about 30 percent, of Energen Resources' production (excluding acquisitions and exploration volumes) in the remaining 10 months of the 2002 fiscal year are covered by physical sales contracts with Enron that feature a 3-way pricing mechanism. On a NYMEX-equivalent basis, these contracts are capped at $4 per thousand cubic feet (Mcf); when market prices are between $2.90 and $4 per Mcf, the contract price equals the market price; when market prices are between $2.40 and $2.90 per Mcf, the contract price is $2.90 per Mcf; when market prices are below $2.40 per Mcf, Energen Resources receives the market price plus a basin-specific premium of 35 cents to 45 cents per Mcf. At today's close, the average NYMEX price for the open contract period was $2.69 per Mcf.
For fiscal year 2003, Energen has similar physical sales contracts for 11.9 Bcf of natural gas production. At today's close, the average NYMEX price for the fiscal year 2003 period was $3.17 per Mcf.
Alagasco has contracts with Enron to purchase gas for its distribution system. The Company said that, regardless of Enron's financial condition, it does not expect these contracts to impact the utility's results of operations or its ability to provide reliable sources of supply to its customers.
Energen Resources' and Alagasco's agreements with Enron provide for various remedies and liquidation rights in the event of a default by Enron. Given the nature of recent developments at Enron, the ultimate disposition on any amounts owed to the Company by Enron or owed to Enron by the Company cannot be predicted at this time.
Energen Corporation is a diversified energy holding company with headquarters in Birmingham, Alabama. Its two lines of business are natural gas distribution in central and north Alabama and the acquisition, exploitation, exploration and production of natural gas, oil and natural gas liquids onshore in North America.