<PAGE>   1
                   
                                                                    EXHIBIT 13
       
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
CONSOLIDATED NET INCOME

Energen Corporation's net income for the 1998 fiscal year totaled $36.2 million,
or $1.25 per share, and represented an 8.7 percent increase in basic earnings
per share (EPS) over prior-year net income of $29 million, or $1.15 per share.
The continued financial and operating strength of Energen's utility subsidiary,
Alabama Gas Corporation (Alagasco), was enhanced by significant growth at
Energen Resources Corporation, Energen's oil and gas subsidiary. In fiscal year
1996, Energen reported earnings of $21.5 million, or $0.98 per share. (As
discussed more fully in Note 1 to the Consolidated Financial Statements, Energen
Resources previously was known as Taurus Exploration Inc.)

1998 VS 1997: Alagasco achieved record earnings for the eighth consecutive year,
with net income increasing $2 million from 1997 to $20.6 million. This growth in
income reflected the utility's ability to earn within its allowed range of
return on an increased level of equity representing investment in utility plant.
Alagasco achieved a return on equity (ROE) of 13.5 percent.

Energen Resources' net income in fiscal 1998 increased 52 percent to $15.3. This
increase was due in large part to a $6.4 million increase in nonconventional
fuels tax credits generated by the prior-year acquisition of coalbed methane
reserves in Alabama's Black Warrior Basin. In addition, Energen Resources' oil
and gas production increased 55 percent to 57.4 billion cubic feet equivalent
(Bcfe) as a result of successful acquisition and exploitation efforts. Partially
offsetting these gains were increased depreciation, depletion and amortization
(DD&A) expense, which included a $3 million after-tax writedown of certain
offshore oil and gas properties under Statement of Financial Accounting
Standards (SFAS) No. 121, increased interest expense associated with property
acquisitions, and a $1.6 million after-tax writedown of a portion of an unproved
leasehold in east Texas.

1997 VS 1996: Alagasco's 1997 net income of $18.6 million increased 9.5 percent
over 1996 earnings of $17 million primarily due to the utility earning within
its allowed range of return on an increased level of equity. Energen Resources
earned $10.1 million in 1997, more than doubling 1996 year-end earnings of $4.5
million. A 130 percent increase in oil and gas production volumes to 37 Bcfe and
a $3.8 million increase in nonconventional fuels tax credits primarily resulting
from coalbed methane property acquisitions in 1996 and 1997 were the major
reasons for the significant increase. Partially offsetting these gains were
increased DD&A and interest expense and a $1.3 million after-tax writedown of
certain offshore oil and gas properties in anticipation of their sale.

OPERATING INCOME

Consolidated operating income in 1998, 1997 and 1996 totaled $61.5 million, $52
million and $38.8 million, respectively. The growth in operating income in 1998
and 1997 was influenced significantly by improved financial performances from
Energen Resources under Energen's diversified growth strategy, implemented in
fiscal 1996. Growth in Alagasco's operating income was consistent with the
increased level of equity upon which it was able to earn a return between 13.15
percent and 13.65 percent.

ALAGASCO: As discussed more fully in Note 2 to the Consolidated Financial
Statements, Alagasco is subject to regulation by the Alabama Public Service
Commission (APSC). On October 7, 1996, the APSC issued an order to extend the
Company's rate-setting mechanism, Rate Stabilization and Equalization (RSE), for
a five-year period through January 1, 2002. Under the terms of the extension,
RSE will continue after January 1, 2002, unless, after notice to the Company and
a hearing, the Commission votes to either modify or discontinue its operation.

Alagasco generates revenues through the sale and transportation of natural gas.
The transportation rate does not contain an amount representing the cost of gas,
and Alagasco's rate structure allows similar margins on transportation and sales
gas. Weather can cause variations in space heating revenues, but operating
margins remain unaffected due to a real-time temperature adjustment which allows
Alagasco to adjust customer bills monthly to reflect changes in usage due to
departures from 



                                    Page 19
<PAGE>   2


normal weather. Substantially all the customers to whom the temperature
adjustment applies are residential, small commercial and small industrial.

Alagasco's natural gas and transportation sales revenues totaled $369.9 million,
$363 million and $357.3 million in 1998, 1997 and 1996, respectively. In the
current fiscal year, weather that was 15.4 percent colder than in the prior year
and increased usage from large transportation customers led to increased sales
revenue which was partially offset by a $3.9 million deferral of revenue under
the Enhanced Stability Reserve (see Note 2) and lower gas prices. Sales revenue
in 1997 reflected a higher commodity cost of gas which was largely offset by the
impact of warmer weather on throughput.

Colder weather in Alagasco's service territory caused a 10 percent increase in
residential sales volumes in the current year. Sales and transportation volumes
to commercial and industrial customers rose 7.8 percent to 84.3 Bcf, primarily
due to increased throughput to several large transportation customers.
Residential sales volumes decreased 19 percent in 1997, primarily due to weather
that was 12 percent warmer than normal and 22 percent warmer than in the prior
year. Sales and transportation volumes to commercial and industrial customers
totaled 78.2 Bcf in 1997 and 76.5 Bcf in 1996.

Cost of gas remained relatively stable in 1998, as increased purchased volumes
related to colder weather were offset by a decrease in the commodity cost of
gas. Warmer weather in 1997 decreased purchased volumes, but a higher commodity
gas cost offset the effect.

Operations and maintenance (O&M) expense at the utility in 1998 increased 2.8
percent primarily due to higher labor and related costs and increases in bad
debt and insurance expense. O&M expense increased 4 percent in 1997 primarily
due to higher labor and related costs and increased marketing expense, partially
offset by a decrease in bad debt expense created when the utility increased its
provision for doubtful accounts in 1996 to reflect increased exposure from
higher commodity gas costs. In 1998 and 1997, the increase in O&M expense on a
per-customer basis fell within the inflation-based cap established by the APSC
as part of the utility's rate-setting mechanism. Under the terms of RSE, Year
2000 costs are excluded from the O&M inflation-based cap calculation.

Consistent with growth in the utility's depreciable base, depreciation expense
rose 7.1 percent in 1998 and 10.4 percent in 1997. Alagasco's expense for taxes
other than income primarily reflects various state and local business taxes as
well as payroll-related taxes. State and local business taxes generally are
based on gross receipts and fluctuate accordingly.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Years ended September 30, (dollars in thousands)      1998            1997            1996
--------------------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>
Natural gas and transportation sales revenues ...  $ 369,940       $ 362,984       $ 357,252
Cost of natural gas .............................   (176,124)       (177,837)       (181,400)
Revenue taxes ...................................    (20,278)        (19,676)        (20,055)
--------------------------------------------------------------------------------------------
Natural gas and transportation sales margin .....  $ 173,538       $ 165,471       $ 155,797
--------------------------------------------------------------------------------------------
Natural gas sales volumes (MMcf)
  Residential ...................................     31,079          28,357          34,963
  Commercial and industrial-small ...............     13,705          12,554          15,002
--------------------------------------------------------------------------------------------
Total natural gas sales volumes .................     44,784          40,911          49,965
Natural gas transportation volumes (MMcf) .......     70,563          65,622          61,458
--------------------------------------------------------------------------------------------
Total deliveries (MMcf) .........................    115,347         106,533         111,423
--------------------------------------------------------------------------------------------
</TABLE>

ENERGEN RESOURCES: During the first quarter of 1998, Energen Resources acquired
approximately 80 Bcfe of proved oil and natural gas reserves in the Permian
Basin of west Texas from B.C. Oil and Gas Ltd. and certain affiliated companies
for $43.3 million and purchased an estimated 4.5 Bcfe of predominantly natural
gas reserves in southwest Mississippi from Oxy USA Inc. for $7.1 million. In the
second quarter, Energen Resources purchased Gulf of Mexico properties from
Chateau Oil and Gas Inc. (Chateau) for $17 million and, in April 1998, sold
approximately 20 percent of its share to a third party. In September 1998,
Energen Resources traded substantially all of its Gulf of Mexico interests
(including the remaining reserves purchased from Chateau) for certain Permian
Basin interests of EEX Corporation. The Company received approximately_58 Bcfe
of oil, natural gas and liquids reserves from EEX in exchange for an estimated
38 Bcf of proved natural gas reserves, with interests in 30 offshore blocks, and
$10.4 million in cash.

                                    Page 20
<PAGE>   3


Revenues from oil and gas production activities continued to grow largely as a
result of these acquisitions and prior-year property acquisitions. Total
production volumes rose 55 percent to 57.4 Bcfe. Natural gas production,
including coalbed methane, increased 49.6 percent to 43.9 Bcf. Oil volumes
increased 85 percent to 1,434 MBbl and high BTU-content natural gas reserves in
the San Juan Basin yielded 817 MBbl in natural gas liquids for the year. Energen
Resources also benefited from higher realized natural gas prices in 1998, while
realized oil prices declined sharply. Realized gas prices rose 7.8 percent to
$2.21 per Mcf, and realized oil prices decreased 17.3 percent to $14.96 per
barrel. Natural gas liquids sold for an average price of $8.65 per barrel.
During 1997, revenues from oil and gas production activities also grew notably.
Total production volumes were 37 Bcfe, increasing 130 percent from the prior
year. Average realized gas prices were $2.05 per Mcf, higher than 1996 prices by
4 percent, and oil prices were $18.08 per barrel, up 11 percent. Natural gas
liquids sold for $11.45 per barrel in 1997.

Coalbed methane operating fees are calculated as a percentage of net proceeds on
certain properties, as defined by the related operating agreements, and vary
with changes in natural gas prices, production volumes and operating expenses.
Revenues from operating fees were $4.3 million, $4.4 million and $3.8 million in
1998, 1997 and 1996, respectively. Yearly variances primarily result from
fluctuations in natural gas prices.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Years ended September 30, (dollars in thousands, except sales price data)     1998       1997       1996
---------------------------------------------------------------------------------------------------------
<S>                                                                         <C>        <C>        <C>
Revenues
  Natural gas production .............................................      $ 97,123   $60,228    $24,262
  Oil production .....................................................        21,452    13,981     10,313
  Natural gas liquids production .....................................         7,061     5,772         --
  Operating fees .....................................................         4,342     4,385      3,846
  Other ..............................................................         2,709       880      3,769
---------------------------------------------------------------------------------------------------------
Total Revenues .......................................................      $132,687   $85,246    $42,190
---------------------------------------------------------------------------------------------------------
Production volumes
  Natural gas (MMcf) .................................................        43,853    29,318     12,308
  Oil (MBbl) .........................................................         1,433       775        635
  Natural gas liquids (MBbl) .........................................           817       502         --
---------------------------------------------------------------------------------------------------------
Average unit sales price
  Natural gas (per Mcf) ..............................................      $   2.21   $  2.05    $  1.97
  Oil (barrel) .......................................................      $  14.96   $ 18.08    $ 16.25
  Natural gas liquids (barrel) .......................................      $   8.65   $ 11.45         --
---------------------------------------------------------------------------------------------------------
</TABLE>

Energen Resources may, in the ordinary course of business, be involved in the
sale of both developed and undeveloped properties. With respect to developed
properties, sales may occur as a result of, but not limited to, disposing of
non-strategic or marginal assets and accepting offers where the buyer gives
greater value to a property than Energen Resources' technical staff. In 1998,
1997 and 1996, Energen Resources recorded pre-tax gains of $2.6 million, $1
million and $3.9 million, respectively, on the sale of various properties. The
largest of several property sales occurred in September 1996 when Energen
Resources recorded a $3.2 million gain after selling its working interest in
reserves associated with PMC Reserve Acquisition Company.

Operations expense increased $18 million and $12.2 million in 1998 and 1997,
respectively, primarily due to significant production growth and acquisition
activity at Energen Resources. Lease operating expense rose by $19.8 million in
1998 and $10.5 million in 1997, mainly due to the acquisition of oil and gas
properties. A decrease in exploration expense of $0.9 million primarily was due
to decreased drilling activity but was offset partially by a $2.5 million
pre-tax writedown of a portion of an unproved leasehold in east Texas.
Exploration expense increased $1.2 million in the prior year as a result of
Energen Resources' increased exploratory efforts.

DD&A expense increased $19.6 million in 1998 largely due to significantly higher
production and additional DD&A expense of $4.7 million recorded in 1998 under
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and For
Long-Lived 

                                    Page 21
<PAGE>   4


Assets to Be Disposed Of (see Note 11). DD&A expense rose $16.4 million in 1997
largely due to significantly higher production. The increase for 1997 was offset
partially by a decrease in the average depletion rate to $0.90 per Mcf from
$1.15 per Mcf in 1996 due to the significant acquisition of long-lived assets in
the San Juan Basin. Also during 1997, Energen Resources recorded additional DD&A
expense of $2.1 million to writedown the value of certain oil and gas
properties.

Energen Resources' expense for taxes other than income primarily reflects
production-related taxes. For 1998, 1997 and 1996, Energen Resources recorded
$9.4 million, $6.3 million and $1.9 million, respectively, in severance taxes.
The annual increases resulted from increased production.

NON-OPERATING ITEMS

CONSOLIDATED: Interest expense increased $7 million in 1998 primarily due to the
use of long-term debt to help finance Energen Resources' property acquisitions.
Influencing the increase in interest expense for the current year is the $85
million of medium-term notes (MTNs) issued in July 1997 and, in part, the $100
million of MTNs issued in February 1998. The average daily outstanding balance
under short-term credit facilities was $81 million for the current year. Fiscal
1997 interest expense increased $9 million primarily due to Energen Resources'
growth. The average daily outstanding balance under short-term credit facilities
was $88 million in 1997 compared with $38 million in 1996. Also influencing
interest expense in 1997 was interest for a full year on $40 million of Energen
MTNs issued in the fourth quarter of 1996 and, to a lesser extent, the $85
million of MTNs issued in July 1997. In addition, Alagasco issued $25 million in
MTNs in the fourth quarter of 1996.

The fluctuation in other income over the three-year period primarily is due to
the inclusion in 1996 of an early call premium associated with the redemption of
debt at Alagasco in 1995.

The Company's effective tax rates in 1998, 1997 and 1996 were lower than
statutory federal tax rates primarily due to the recognition of nonconventional
fuels tax credits and the amortization of investment tax credits.
Nonconventional fuels tax credits are generated annually and expire effective
December 31, 2002. They are expected to be recognized fully in the financial
statements and effective tax rates are expected to continue to remain lower than
statutory federal rates. Income tax expense decreased in 1998 due to the
recognition of an additional $6.4 million of nonconventional fuels tax credits
which partially was offset by higher consolidated pre-tax earnings. Income tax
expense in 1997 also decreased primarily due to the recognition of an additional
$3.8 million of nonconventional fuels tax credits.

FINANCIAL POSITION AND LIQUIDITY 
--------------------------------------------------------------------------------

The Company's net cash from operating activities totaled $123.6 million, $63.1
million and $43.5 million in 1998, 1997 and 1996, respectively. In the current
year, operating cash flow benefited from significantly higher oil and gas
production volumes related to Energen Resources' current and prior year property
acquisitions. Operating cash flow in 1997 also benefited from higher oil and gas
production volumes as well as higher realized oil and gas prices. Offsetting
these amounts was a $17 million payout in January 1997 of supplier refunds to
customers. Other working capital items, which generally are the result of timing
of payments, combined to create the remaining increases for both years. Colder
weather in 1996 had an impact as reflected in increased accounts receivable and
payable and in Alagasco's need to utilize and replenish its storage gas
inventory. The receipt of amounts from suppliers to be refunded to customers
positively affected cash flows in 1996.

During fiscal 1998, the Company invested $166.3 million as Energen Resources
continued its aggressive growth strategy. Energen Resources invested $121
million in total capital expenditures -- $84.7 million for property
acquisitions, $35.3 million for development and $3.9 million for exploration.
The Company had current-year reserve additions of 168 Bcfe. Energen Resources
sold or traded certain offshore properties along with various other properties
during 1998, resulting in cash proceeds of $7.6 million. Utility expenditures
for the year totaled $54.2 million and primarily represented support facilities
and normal system distribution expansion. Cash used in investing activities was
$279.8 million in 1997 and $152.1 million in 1996. The increase in 1997 also is
largely due to the acquisition of oil and gas properties. Energen Resources
invested $193.7 million for property acquisitions including $16 million to
obtain a small working interest in an exploratory joint venture, adding 464 Bcfe
of proved developed and undeveloped oil and gas reserves. The 1996 investment in
proved property acquisitions with developmental potential totaled $108 million
and added 178 Bcfe of proved reserves. Energen Resources sold its entire working
interest in reserves associated with the PMC acquisition venture in 1996
resulting in cash proceeds of $13.1 million.

                                    Page 22
<PAGE>   5

Cash provided by financing activities totaled $40.5 million in 1998. In February
1998, the Company issued $100 million of long-term debt redeemable February 15,
2028. The 7.125 percent MTNs were priced at 99.416 percent to yield 7.173
percent. The $98.5 million in proceeds were used to repay borrowings under
Energen's short-term credit facilities which were incurred to finance Energen
Resources' growth activity. Financing activities provided a source of $310.8
million in 1997. The Company issued $85 million of MTNs in July 1997. Energen
also issued 3,450,000 shares of common stock in January 1997 which generated net
proceeds of $49.1 million, and 2,400,000 shares in September 1997 which
generated net proceeds of $41.1 million. The proceeds from the debt and equity
offerings were used to repay short-term debt incurred mainly to finance Energen
Resources' property acquisitions. The Company utilized an additional $45 million
in short-term credit facilities primarily for Energen Resources' capital
expenditures. For tax planning purposes, the Company borrowed $100.6 and $98.6
million at September 30, 1998 and 1997, respectively, to invest in short-term
federal obligations. The treasury bills were sold in early October and the
proceeds used to repay the debt. Cash provided by financing activities totaled
$83.2 million in 1996. The Company issued $40 million of MTNs and utilized an
additional $26.7 million in short-term credit facilities to finance Energen
Resources' acquisition strategy. Also included were the proceeds from the
issuance of $25 million in Alagasco MTNs.

CAPITAL EXPENDITURES

NATURAL GAS DISTRIBUTION: During the last three fiscal years, Alagasco invested
$140.6 million for capital projects: $77.9 million was spent on normal expansion
replacements and support of its distribution system; $49 million was spent on
support facilities; $6.8 million was used to develop and implement information
systems; $3.6 million was used to improve gas availability; and $3.3 million was
used to purchase four municipal gas systems.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                  1998          1997         1996
-------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>          <C>
Capital expenditures for:
  Renewals, replacements, system expansion and other .... $25,804      $25,392      $26,737
  Support facilities ....................................  26,289       14,387        8,327
  Additions to improve gas availability .................   1,002          758        1,799
  Municipal gas system acquisitions .....................      --            3        3,305
  Information systems ...................................   1,073        2,737        3,007
-------------------------------------------------------------------------------------------
    Total ............................................... $54,168      $43,277      $43,175
-------------------------------------------------------------------------------------------
</TABLE>

OIL AND GAS ACTIVITIES: Energen Resources spent $500.3 million for capital
projects over the last three fiscal years, $13.3 million of which was charged to
income as exploration expense. Expenditures for property acquisitions were
$388.5 million, exploratory expenditures totaled $27 million, and $81.7 million
was spent in development activities.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Years ended September 30, (in thousands)               1998          1997          1996
-----------------------------------------------------------------------------------------
<S>                                                  <C>           <C>           <C>
Capital and exploration expenditures for:
  Property acquisitions .......................      $ 84,747      $193,729      $110,008
  Exploration .................................         3,885        13,277         9,855
  Development .................................        35,307        36,375        10,040
  Other .......................................         1,117         1,406           583
-----------------------------------------------------------------------------------------
    Total .....................................       125,056       244,787       130,486
Less exploration expenditures charged to income         4,065         5,069         4,169
-----------------------------------------------------------------------------------------
Net capital expenditures ......................      $120,991      $239,718      $126,317
-----------------------------------------------------------------------------------------
</TABLE>

                                    Page 23
<PAGE>   6

FUTURE CAPITAL RESOURCES AND LIQUIDITY
--------------------------------------------------------------------------------

The Company plans to continue to implement its diversified growth strategy which
calls for Energen Resources to invest approximately $1 billion in the
acquisition and development of producing properties and in exploration and
related development over the five-year period ending September 30, 2003. In
fiscal year 1999, Energen Resources plans to spend approximately $209 million,
including $162 million for the TOTAL Minatome Corporation (TOTAL) property
acquisition and its related development. In October 1998, Energen Resources
acquired the stock of TOTAL and, immediately upon closing, sold a 31 percent
interest in TOTAL's assets to Westport Oil and Gas Company Inc. Energen
Resources' net investment totaled $132.6 million, including the assumption of
certain legal and financial obligations. Energen Resources gained an estimated
200 Bcfe of proved domestic oil and natural gas reserves. It should be noted
that Energen Resources' continued ability to invest in property acquisitions
will be influenced significantly by industry trends as the producing property
acquisition market has historically been cyclical. From time to time, Energen
Resources also may be engaged in negotiations to sell, trade or otherwise
dispose of previously acquired property.

To finance Energen Resources' investment program, the Company will continue to
utilize its total available short-term credit facilities to supplement
internally generated cash flow, with long-term debt and equity providing
permanent financing. In December 1997, Energen filed a $400 million shelf
registration for debt and common stock. Under that registration, Energen issued
$100 million of Series B MTNs in February 1998. Energen may issue additional
equity and debt during fiscal 1999 to finance its acquisition activity. During
1998, Energen increased its available short-term credit facilities to $228
million to help accommodate its growth plans.

Utility capital expenditures for normal distribution system renewals and
expansion plus support facilities could approximate $50 million in fiscal 1999.
Alagasco also will maintain an investment in storage working gas which is
expected to average approximately $22 million in 1999. The utility anticipates
funding these capital requirements through internally generated capital and the
utilization of short-term credit facilities. The Company expects to close
negotiations on a sale and leaseback of the new headquarters building facility
in the first fiscal quarter of 1999. The proceeds from the sale are expected to
approximate the investment in the facility.

OUTLOOK
--------------------------------------------------------------------------------

NATURAL GAS DISTRIBUTION: The five-year extension of the RSE in October 1996
gives Alagasco the opportunity to continue earning an allowed return on equity
within a range of 13.15 percent to 13.65 percent through fiscal year 2002. Over
this period, Alagasco has the potential for net income growth as the investment
in additional utility plant and the maintenance of a desired capital structure
effect the level of equity required in the business. The utility continues to
rely on rate flexibility to effectively prevent bypass of its distribution
system. Even though the utility enjoys a market saturation rate much higher than
the national average, customer growth in the service territory is limited.
Alagasco will continue to focus on the acquisition of municipal systems to
supplement normal growth.

OIL AND GAS ACTIVITIES: During fiscal year 1999, Energen Resources plans to
spend approximately $209 million, including $162 million on the TOTAL
acquisition. Production is expected to increase 52 percent to 87 Bcfe, and
proved reserves could reach 875 Bcfe by year end. Production from existing
properties should generate 55 Bcfe of oil and gas during the year, with an
additional 32 Bcfe targeted from the TOTAL acquisition. A significant part of
Energen Resources' earnings in fiscal 1999 will be approximately $14 million of
tax credits expected to be generated by the Company's coalbed methane
production.

Over the five-year period ending September 30, 2003, Energen Resources plans to
spend approximately $1 billion in the acquisition and development of producing
properties and in exploration and related development. With this level of
spending, Energen Resources' annual production could reach 125 Bcfe by the end
of fiscal year 2003, with proved reserves approximating 1.2 trillion cubic feet
equivalent.

Energen Resources' major market risk exposure is in the pricing applicable to
its oil and gas production. Historically, prices received for oil and gas
production have been volatile because of seasonal weather patterns, national
supply and demand factors and general economic conditions. Crude oil prices are
also affected by quality differentials, by worldwide political developments and
by actions of the Organization of Petroleum Exporting Countries. Basis
differentials, like the underlying commodity prices, can be volatile because of
regional supply and demand factors, including seasonal factors and the
availability and price of transportation to consuming areas.

                                     Page 24
<PAGE>   7
Energen Resources enters into derivative commodity instruments to hedge its
exposure to the impact of price fluctuations on oil and gas production. Such
instruments include regulated natural gas and crude oil futures contracts traded
on the New York Mercantile Exchange and over-the-counter swaps and basis hedges
with major energy derivative product specialists. All hedge transactions are
subject to the Company's risk management policy, approved by the Board of
Directors, which does not permit speculative positions. As Energen Resources
begins fiscal 1999, 76 percent of its estimated 1999 gas production and 33
percent of its estimated 1999 oil production is hedged or under contract at
average prices of $2.31 per Mcf and $16.31 per barrel, respectively. In
addition, the Company has hedged the basis difference on 3.6 Bcf of its
remaining 1999 San Juan production. As acquisitions are made, Energen Resources
may use futures, swaps and/or fixed-price contracts to lock in commodity prices
up to 36 months in order to protect targeted returns. The Company has deferred
gains of $0.6 million and deferred losses of $12.9 million on the balance sheet
at September 30, 1998 and 1997, respectively.

The Company has prepared a sensitivity analysis to evaluate the hypothetical
effect that changes in the market value of crude oil and natural gas may have on
the fair value of its derivative instruments. This analysis measures the impact
on the commodity derivative instruments and, thereby, does not consider the
underlying exposure related to the commodity. At September 30, 1998, the Company
estimates that a 10 percent change in the underlying commodities prices would
result in a $13.4 million change in the fair value of open derivative contracts.
However, gains and losses on derivative contracts are expected to be similarly
offset by sales at the spot market price. Due to the short duration of the
contracts, time value of money is ignored. The hypothetical change in fair value
is calculated by multiplying the difference between the hypothetical price and
the contractual price by the contractual volumes.

YEAR 2000 READINESS DISCLOSURE: Year 2000 issues result from computer
applications that use only two-digit representations to refer to a year. Many
computer applications could fail or create erroneous results if Year 2000 issues
are not properly addressed. Energen has evaluated and continues to evaluate its
computer software and hardware to assess the need for modifications for the Year
2000. Over the past three years, the Company has made a substantial investment
in software and computer infrastructure and non-information technology systems
that either comply with Year 2000 requirements or can be upgraded. A full-time
senior management level position was established and a primary contractor was
selected in 1996 to address the Year 2000 issue. The plan of work established
involves the following phases: inventory, assessment, testing, certification and
change control. A number of inventory reviews have been completed and will
continue to be updated in the future. Tools to test, age and evaluate data
software and hardware have been purchased and installed and are being utilized
for Year 2000 compliance. Test plans for items identified as critical systems
either are being deployed or currently developed. A third-party assessment of
Year 2000 readiness is scheduled to be conducted by an outside entity for both
information technology and non-information technology systems during the first
quarter of fiscal 1999.

With respect to material third-party relationships, the Company, in addition to
responding to questions concerning Year 2000 issues from customers and
regulators, is asking of certain vendors and partners for information designed
to determine their ability to continue uninterrupted supply of materials or
services to the Company. This process is scheduled for completion by the end of
calendar year 1998.

As of September 30, 1998, the Company has incurred approximately $510,000 of
Year 2000 related costs to date which are being expensed as incurred. The
Company's Year 2000 remediation is expected to be completed by the end of
calendar year 1999 with an estimated total cost of $1.8 million. 

Specific Year 2000 contingency plans are scheduled to be incorporated into the
previously established Energen Business Resumption Plan during fiscal year 1999.
The Company's contingency plan identifies alternate recovery locations, contact
lists, and other equipment, as well as special resource requirements.

Management expects that Year 2000 issues will be addressed on a schedule and in
a manner that will prevent such issues from having a material effect on the
Company's results of operations, liquidity or financial condition. While the
Company has and will be pursuing Year 2000 compliance, there can be no assurance
that the Company and its vendors will be successful in identifying and
addressing all material Year 2000 issues.

FORWARD-LOOKING STATEMENTS AND RISK: Certain statements in this report,
including statements of the future plans, objectives and expected performance of
the Company and its subsidiaries, are forward-looking statements that are
dependent on certain events, risks and uncertainties that may be outside the
Company's control and which could cause actual results to differ materially from
those anticipated. Some of these include, but are not limited to, economic and
competitive conditions,

                                    Page 25
<PAGE>   8

inflation rates, regulatory changes, financial market conditions, future
business decisions, Year 2000 issues and other uncertainties, all of which are
difficult to predict. There are numerous uncertainties inherent in estimating
quantities of proved oil and gas reserves and in projecting future rates of
production and timing of development expenditures. The total amount or timing of
actual future production may vary significantly from reserves and production
estimates. In the event Energen Resources is unable to fully invest its planned
acquisition, development and exploratory expenditures, future operating
revenues, production, and proved reserves could be negatively affected. The
drilling of development and exploratory wells can involve significant risk
including that related to timing, success rates and cost overruns. These risks
can be impacted by lease and rig availability, complex geology and other
factors. Results of operations and cash flows also could be affected by future
oil and gas prices. Although Energen Resources makes use of futures, swaps and
fixed-price contracts to mitigate risk, fluctuations in oil and gas prices may
affect the Company's financial position and results of operation.

RECENT PRONOUNCEMENTS OF THE FASB
--------------------------------------------------------------------------------

In fiscal 1998, the Company adopted SFAS No. 128, Earnings Per Share, which
specifies computation, presentation and disclosure requirements for EPS. SFAS
No. 128 requires dual presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to that of the diluted computation.

The Company also adopted during fiscal 1998, SFAS No. 129, Disclosures of
Information about Capital Structure, which establishes standards for disclosing
information about an entity's capital structure. It contains no change in
disclosure requirements for public entities that were previously subject to the
requirements of Accounting Principles Board No. 10 and No. 15 and SFAS No. 47.
As a result, SFAS 129 had no impact on the Company's consolidated financial
statements.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
required, was issued in June 1997. SFAS No. 131 relates solely to disclosure
provisions, and therefore does not have any effect on the results of operations
or financial position of the Company. The Company has chosen to early adopt this
pronouncement as of September 30, 1998.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements. There are currently no
differences between the Company's net income and comprehensive income. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which revises employers' disclosures
about pension and other postretirement benefit plans. This pronouncement relates
solely to disclosure provisions, and therefore will have no effect on the
results of operations or financial position of the Company. The Company is
required to adopt these statements in fiscal year 1999. 

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments. The Company is required to adopt this
statement in fiscal year 2000. The impact on the Company is currently being
evaluated.

QUARTERLY MARKET PRICES AND DIVIDENDS PAID PER SHARE *

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Quarter ended (in dollars)                                 HIGH         LOW        CLOSE          DIVIDENDS PAID
----------------------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>        <C>             <C>
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
----------------------------------------------------------------------------------------------------------------
</TABLE>

*Share prices reflect a 2-for-1 stock split effective March 2, 1998.



                                    Page 26
<PAGE>   9



CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Energen Corporation
----------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands, except share data)              1998           1997            1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>             <C>         
OPERATING REVENUES
Natural gas distribution ........................................    $    369,940   $    362,984    $    357,252
Oil and gas production activities ...............................         132,687         85,246          42,190
----------------------------------------------------------------------------------------------------------------
   Total operating revenues .....................................         502,627        448,230         399,442
----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas .....................................................         174,051        175,514         178,810
Operations and maintenance ......................................         148,376        127,998         111,900
Depreciation, depletion and amortization ........................          80,999         59,688          41,118
Taxes, other than income taxes ..................................          37,716         33,044          28,817
----------------------------------------------------------------------------------------------------------------
   Total operating expenses .....................................         441,142        396,244         360,645
----------------------------------------------------------------------------------------------------------------
OPERATING INCOME ................................................          61,485         51,986          38,797
----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense, net of amounts capitalized ....................         (30,001)       (22,906)        (13,920)
Other, net ......................................................           2,544          3,014           1,712
----------------------------------------------------------------------------------------------------------------
   Total other income (expense) .................................         (27,457)       (19,892)        (12,208)
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ......................................          34,028         32,094          26,589
Income taxes ....................................................          (2,221)         3,097           5,048
----------------------------------------------------------------------------------------------------------------
NET INCOME ......................................................    $     36,249   $     28,997    $     21,541
----------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER AVERAGE COMMON SHARE* ........................    $       1.25   $       1.15    $       0.98
----------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER AVERAGE COMMON SHARE* ......................    $       1.23   $       1.14    $       0.97
----------------------------------------------------------------------------------------------------------------
BASIC AVERAGE COMMON SHARES OUTSTANDING* ........................      29,083,855     25,126,192      22,046,868
----------------------------------------------------------------------------------------------------------------
</TABLE>

*Share amounts reflect a 2-for-1 stock split effective March 2, 1998

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                    Page 27
<PAGE>   10

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
Energen Corporation
---------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                                                 1998              1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>               <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents....................................................................  $   103,231       $  105,402
Accounts receivable, net of allowance for doubtful accounts of
   $3,547 in 1998 and $3,185 in 1997.........................................................       64,173           70,676
Inventories, at average cost
   Storage gas inventory.....................................................................       21,237           25,367
   Materials and supplies....................................................................        8,670            7,281
   Liquified natural gas in storage..........................................................        3,381            3,630
Deferred income taxes........................................................................       12,569            7,438
Prepayments and other........................................................................        5,192           22,371
---------------------------------------------------------------------------------------------------------------------------
   Total current assets......................................................................      218,453          242,165
---------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, successful efforts method............................................      516,040          454,210
Less accumulated depreciation, depletion and amortization....................................       88,306           87,554
---------------------------------------------------------------------------------------------------------------------------
Oil and gas properties, net..................................................................      427,734          366,656
---------------------------------------------------------------------------------------------------------------------------
Utility plant................................................................................      632,165          583,630
Less accumulated depreciation................................................................      307,488          287,749
---------------------------------------------------------------------------------------------------------------------------
   Utility plant, net........................................................................      324,677          295,881
---------------------------------------------------------------------------------------------------------------------------
Other property, net..........................................................................        3,933            4,466
---------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment, net.....................................................      756,344          667,003
---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Deferred income taxes........................................................................       10,942            1,144
Deferred charges and other...................................................................        7,716            9,485
---------------------------------------------------------------------------------------------------------------------------
   Total other assets........................................................................       18,658           10,629
---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS.................................................................................  $   993,455       $  919,797
---------------------------------------------------------------------------------------------------------------------------
</TABLE>




The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                    Page 28
<PAGE>   11


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands, except share data)                                1998                1997
---------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                 <C>
CAPITAL AND LIABILITIES

CURRENT LIABILITIES
Long-term debt due within one year ......................................          $   7,209           $  1,855
Notes payable to banks ..................................................            153,000            202,000
Accounts payable ........................................................             33,533             49,196
Accrued taxes ...........................................................             21,255             18,300
Customers' deposits .....................................................             16,344             16,399
Amounts due customers ...................................................             12,070              7,347
Accrued wages and benefits ..............................................             15,299             13,719
Other ...................................................................             25,531             21,935
---------------------------------------------------------------------------------------------------------------
   Total current liabilities ............................................            284,241            330,751
---------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Other ...................................................................              7,183              8,301
---------------------------------------------------------------------------------------------------------------
   Total deferred credits and other liabilities .........................              7,183              8,301
---------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES ...........................................                 --                 --
---------------------------------------------------------------------------------------------------------------
CAPITALIZATION
Preferred stock, cumulative, $0.01 par value, 5,000,000 shares
  authorized                                                                              --                 --
   Common shareholders' equity*
     Common stock, $0.01 par value; 75,000,000 shares authorized,
      29,326,597 shares outstanding in 1998 and 28,796,218
      shares outstanding in 1997 ........................................                293                288
     Premium on capital stock ...........................................            195,874            185,841
     Capital surplus ....................................................              2,802              2,802
     Retained earnings ..................................................            130,280            112,212
Deferred compensation plan ..............................................                873                 --
Treasury stock, at cost (49,096 shares in 1998) .........................               (873)                --
---------------------------------------------------------------------------------------------------------------
   Total common shareholders' equity ....................................            329,249            301,143
Long-term debt ..........................................................            372,782            279,602
---------------------------------------------------------------------------------------------------------------
   Total capitalization .................................................            702,031            580,745
---------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL AND LIABILITIES ...........................................          $ 993,455           $919,797
---------------------------------------------------------------------------------------------------------------
</TABLE>

*Share amounts reflect a 2-for-1 stock split effective March 2, 1998




                                    Page 29
<PAGE>   12



CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Energen Corporation
--------------------------------------------------------------------------------
(In thousands, except share amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                        Common Stock    
                                     -------------------                                               Deferred
                                      Number of    Par      Premium on     Capital      Retained     Compensation  Treasury
                                       Shares     Value    Capital Stock   Surplus      Earnings         Plan        Stock
----------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>         <C>       <C>            <C>         <C>            <C>
BALANCE AT SEPTEMBER 30, 1995        21,843,466  $   218    $   81,278    $   2,802   $    89,876      $    --     $   (250)
Net income                                                                                 21,541
Purchase of treasury shares                                                                                          (1,985)
Shares issued for:
  Dividend reinvestment plan            161,058        2         1,826                                                1,511
  Employee benefit plans                320,744        3         3,762                                                  724
Cash dividends - $0.585 per share                                                         (12,903)
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996        22,325,268      223        86,866        2,802        98,514           --           --
Net income                                                                                 28,997
Shares issued for:
  Stock Offerings                     5,850,000       59        89,837
  Dividend reinvestment plan            241,604        2         3,610
  Employee benefit plans                379,346        4         5,528
Cash dividends - $0.605 per share                                                         (15,299)
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997        28,796,218      288       185,841        2,802       112,212           --           --
Net income                                                                                 36,249
Purchase of treasury shares                                                                                            (406)
Shares issued for:
  Dividend reinvestment plan            172,612        2         3,369
  Employee benefit plans                357,767        3         6,664                                                  406
Deferred compensation obligation                                                                           873         (873)
Cash dividends - $0.625 per share                                                         (18,181)
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998        29,326,597  $   293    $  195,874    $   2,802   $   130,280      $   873     $   (873)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


*Share amounts reflect a 2-for-1 stock split effective March 2, 1998





The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.






                                    Page 30
<PAGE>   13



CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Energen Corporation
-----------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                 1998            1997            1996
-----------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>             <C>          
OPERATING ACTIVITIES
Net income .........................................  $  36,249       $  28,997       $  21,541
Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
   Depreciation, depletion and amortization ........     80,999          59,688          41,118
   Deferred income taxes, net ......................    (15,407)         (2,646)           (672)
   Deferred investment tax credits, net ............       (469)           (487)           (487)
   Gain on sale of assets ..........................     (2,789)         (1,081)         (3,954)
   Net change in:
     Accounts receivable ...........................      7,131         (22,550)        (17,313)
     Inventories ...................................      2,990           2,057          (6,809)
     Accounts payable-gas purchases ................     (7,466)          5,758          (1,614)
     Accounts payable-trade ........................      4,719            (131)          2,031
     Amounts due customers .........................      4,723          (9,810)         13,942
     Other current assets and liabilities ..........     11,711           3,377          (2,821)
   Other, net ......................................      1,232             (73)         (1,461)
-----------------------------------------------------------------------------------------------
   Net cash provided by operating activities .......    123,623          63,099          43,501
-----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment .........   (174,578)       (283,274)       (168,414)
Proceeds from sale of assets .......................      7,636           1,871          13,134
Payments on notes receivable .......................        730             527           1,557
Other, net .........................................        (96)          1,030           1,627
-----------------------------------------------------------------------------------------------
   Net cash used in investing activities ...........   (166,308)       (279,846)       (152,096)
-----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of dividends on common stock ...............    (18,181)        (15,299)        (12,903)
Issuance of common stock ...........................     10,444          99,040           7,828
Purchase of treasury stock .........................       (406)             --          (1,985)
Reduction of long-term debt ........................       (885)           (943)         (1,025)
Proceeds from issuance of long-term debt ...........     98,541          84,416          64,586
Net change in short-term debt issued to purchase
        U.S. Treasury securities ...................      1,935          98,636              --
Net change in short-term debt ......................    (50,934)         44,998          26,700
-----------------------------------------------------------------------------------------------
   Net cash provided by financing activities .......     40,514         310,848          83,201
-----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents ............     (2,171)         94,101         (25,394)
Cash and cash equivalents at beginning of period ...    105,402          11,301          36,695
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period .........  $ 103,231       $ 105,402       $  11,301
-----------------------------------------------------------------------------------------------
</TABLE>


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.




                                    Page 31
<PAGE>   14



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Energen Corporation

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------------
Energen Corporation (the Company) is a diversified energy holding company
engaged primarily in the purchase, distribution, and sale of natural gas
principally in central and north Alabama (natural gas distribution), and in the
acquisition, development, exploration and production of oil and gas in the
continental United States (oil and gas activities).

Following the close of business on September 30, 1998, Taurus Exploration, Inc.
(Taurus), Energen's wholly owned oil and gas subsidiary, merged with its wholly
owned subsidiary Taurus Exploration U.S.A., Inc. (Taurus U.S.A.). Taurus
U.S.A.was the surviving corporation of the merger and at the time of the merger,
Taurus U.S.A. changed its name to Energen Resources Corporation. References in
this document to Energen Resources refer to Taurus and Taurus U.S.A.,
collectively. The following is a description of the Company's significant
accounting policies and practices.

A.       PRINCIPLES OF CONSOLIDATION

         The accompanying financial statements include the accounts of the
         Company and its subsidiaries, principally Alabama Gas Corporation
         (Alagasco) and Energen Resources, after elimination of all significant
         intercompany transactions in consolidation. Certain reclassifications
         have been made to conform the prior years' financial statements to the
         current-year presentation.

B.       NATURAL GAS DISTRIBUTION

         UTILITY PLANT AND DEPRECIATION: Property, plant and equipment is stated
         at cost. The cost of utility plant includes an allowance for funds used
         during construction. Maintenance is charged for the cost of normal
         repairs and the renewal or replacement of an item of property which is
         less than a retirement unit. When property which represents a
         retirement unit is replaced or removed, the cost of such property is
         credited to utility plant and, together with the cost of removal less
         salvage, is charged to the accumulated reserve for depreciation.
         Depreciation is provided on the straight-line method over the estimated
         useful lives of utility property at rates established by the Alabama
         Public Service Commission (APSC). Approved depreciation rates averaged
         approximately 4.4 percent in 1998 and 1997 and 4.3 percent in 1996.

         INVENTORIES: Inventories, which consist primarily of gas stored
         underground, are stated at average cost.

         OPERATING REVENUE AND GAS COSTS: In accordance with industry practice,
         Alagasco records natural gas distribution revenues on a monthly- and
         cycle-billing basis. The commodity cost of purchased gas applicable to
         gas delivered to customers but not yet billed under the cycle-billing
         method is deferred as a current asset.

         REGULATORY ACCOUNTING: Alagasco is subject to the provisions of
         Statement of Financial Accounting Standard (SFAS) No. 71, Accounting
         for the Effects of Certain Types of Regulation. In general, SFAS No. 71
         allows utilities to capitalize or defer certain costs or revenues,
         based upon approvals received from regulatory authorities, to be
         recovered from or refunded to customers in future periods.

C.       OIL AND GAS ACTIVITIES

         PROPERTY AND RELATED DEPLETION: Energen Resources follows the
         successful efforts method of accounting for costs incurred in the
         exploration and development of oil and gas reserves. Lease acquisition
         costs are capitalized initially, and unproved properties are reviewed
         periodically to determine if there has been impairment of the carrying
         value, with any such impairment charged to exploration expense
         currently. Exploratory drilling costs are capitalized pending
         determination of proved reserves. If proved reserves are not
         discovered, the exploratory drilling costs are expensed. Other
         exploration costs, including geological and geophysical costs, are
         expensed as incurred. All development costs are capitalized.
         Depreciation, depletion and amortization is determined on a
         field-by-field basis using the unit-of-production method based on
         proved reserves. A provision for anticipated abandonment and
         restoration costs at the end of a property's useful life is made
         through depreciation expense.

         OPERATING REVENUE: Energen Resources utilizes the sales method of
         accounting to recognize oil and gas production revenue. Under the sales
         method, revenue is recognized for the Company's total takes of oil and
         gas production, and over-production liabilities are established only
         when it is estimated that a property's over-produced volumes exceed the
         net share of remaining


                                    Page 32
<PAGE>   15

         reserves for such property. Energen Resources has no material
         production imbalances at September 30, 1998. Gains and losses on the
         sale of property in the ordinary course of business are classified as
         operating revenue.

         Derivative Commodity Instruments: Energen Resources periodically enters
         into derivative commodity instruments to hedge its exposure to the
         impact of price fluctuations on oil and gas production. Such
         instruments include regulated natural gas and crude oil futures
         contracts traded on the New York Mercantile Exchange and
         over-the-counter swaps and basis hedges with major energy derivative
         product specialists. These transactions are accounted for under the
         hedge method of accounting. Under this method, any unrealized gains and
         losses are recorded as a current receivable/payable and a deferred
         gain/loss. Realized gains and losses are deferred as current
         liabilities or assets until the revenues from the related hedged
         volumes are recognized in the income statement. Cash flows from
         derivative instruments are recognized as incurred through changes in
         working capital. All hedge transactions are subject to the Company's
         risk management policy, approved by the Board of Directors, which does
         not permit speculative positions. To apply the hedge method of
         accounting, management must demonstrate that a high correlation exists
         between the value of the derivative commodity instrument and the value
         of the item hedged. Management uses the historic and current
         relationships between the derivative instruments and the sales prices
         of the hedged volumes to ensure that a high level of correlation
         exists.

D.       Income Taxes

         The Company's deferred income taxes reflect the impact of temporary
         differences between the tax basis of assets and liabilities and their
         carrying amounts for financial reporting purposes.

E.       Cash Equivalents

         The Company includes highly liquid marketable securities and debt
         instruments purchased with a maturity of three months or less in cash
         equivalents.

F.       Earnings Per Share

         In accordance with SFAS No. 128, Earnings Per Share, the Company's
         basic earnings per share amounts have been computed based on the
         weighted-average number of common shares outstanding. Diluted earnings
         per share amounts reflect the assumed issuance of common shares for all
         potentially dilutive securities (see Note 16).

G.       Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities at the date of the financial statements and the reported
         amount of revenues and expenses during the reporting period. Actual
         results could differ from those estimates. Significant estimates with
         regard to these financial statements include the estimate of proved oil
         and gas reserves and the related present value of estimated future net
         revenues therefrom (see Note 14).

2. REGULATORY MATTERS
--------------------------------------------------------------------------------
As an Alabama utility, Alagasco is subject to regulation by the Alabama Public
Service Commission (APSC) which, in 1983, established the Rate Stabilization and
Equalization (RSE) rate-setting process. RSE was extended with modifications in
1985, 1987 and 1990. On October 7, 1996, RSE was extended, without change, for a
five-year period through January 1, 2002. Under the terms of that extension, RSE
will continue after January 1, 2002, unless, after notice to the Company and a
hearing, the Commission votes to either modify or discontinue its operation.

Under RSE as extended, the APSC conducts quarterly reviews to determine, based
on Alagasco's projections and fiscal year-to-date performance, whether
Alagasco's return on equity for the fiscal year will be within the allowed range
of 13.15 percent to 13.65 percent. Reductions in rates can be made quarterly to
bring the projected return within the allowed range; increases, however, are
allowed only once each fiscal year, effective December 1, and cannot exceed 4
percent of prior-year revenues. RSE limits the utility's equity upon which a
return is permitted to 60 percent of total capitalization and provides for
certain cost control measures designed to monitor Alagasco's operations and
maintenance (O&M) expense. If the change in O&M expense per customer falls
within 1.25 percentage points above or below the Consumer Price Index For All
Urban Customers (index range), no adjustment is required. If, however, the
change in O&M expense per customer exceeds the index range, three-quarters of
the difference is returned to customers. To the extent the change is less than
the index range, the utility benefits by one-half of the difference through
future rate adjustments. Under RSE as extended, an $11.8 million annual increase
in revenue became effective December 1, 1997, and a $2.5 million annual decrease
became effective July 1, 1998.

                                    Page 33
<PAGE>   16

Alagasco calculates a temperature adjustment to customers' monthly bills to
remove the effect of departures from normal temperatures on Alagasco's earnings.
The calculation is performed monthly, and the adjustments to customers' bills
are made in the same billing cycle in which the weather variation occurs.
Substantially all the customers to whom the temperature adjustment applies are
residential, small commercial and small industrial. Alagasco's rate schedules
for natural gas distribution charges contain a Gas Supply Adjustment (GSA)
rider, established in 1993, which permits the pass-through to customers of
changes in the cost of gas supply, including Gas Supply Realignment (GSR)
surcharges imposed by Alagasco's suppliers resulting from changes in gas supply
purchases related to the implementation of Federal Energy Regulatory Commission
(FERC) Order 636. The APSC on October 7, 1996, issued an order providing for the
refund to customers prior to January 31, 1997, of approximately $17 million of
supplier refunds, including interest. The Company refunded these amounts to
customers during January 1997. The refunds were collected from a variety of
sources and most relate to the settlement of rate case and FERC Order 636
proceedings of Southern Natural Gas Company.

The APSC approved an Enhanced Stability Reserve (ESR), beginning fiscal year
1998, to which Alagasco may charge the full amount of: (1) extraordinary O&M
expenses resulting from force majeure events such as storms, severe weather, and
outages, when one or a combination of two such events results in more than
$200,000 of additional O&M expense during a fiscal year; or (2) individual
industrial and commercial customer revenue losses that exceed $250,000 during
the fiscal year if such losses cause Alagasco's return on equity to fall below
13.15 percent. The APSC approved the reserve on October 6, 1998, in the amount
of $3.9 million; the maximum approved funding level of the ESR is $4 million.
The APSC provides for accretions to the ESR in an amount of no more than $40,000
monthly following a year in which a charge against the ESR is made until the
maximum funding level is achieved. The APSC will re-evaluate the operation of
the ESR following the conclusion of Alagasco's fiscal year 2000.

In accordance with APSC-directed regulatory accounting procedures, Alagasco in
1989 began returning to customers excess utility deferred taxes which resulted
from a reduction in the federal statutory tax rate from 46 percent to 34 percent
using the average rate assumption method. This method provides for the return to
ratepayers of excess deferred taxes over the lives of the related assets. In
1993 those excess taxes were reduced as a result of a federal tax rate increase
from 34 percent to 35 percent. Remaining excess utility deferred taxes of $1.9
million are being returned to ratepayers over approximately 12 years. At
September 30, 1998 and 1997, a regulatory liability related to income taxes of
$2.9 million and $3.7 million, respectively, was included in the consolidated
financial statements.

As of November 1, 1998, the Company offered a Voluntary Early Retirement Program
to certain eligible employees. The APSC has allowed the Company to amortize over
a three-year period the cost associated with this early retirement program.

The excess of total acquisition costs over book value of net assets of acquired
municipal gas distribution systems is included in utility plant and is being
amortized on a straight-line basis over approximately 23 years. At September 30,
1998 and 1997, the net acquisition adjustment was $15.4 million and $16.4
million, respectively. 

3. LONG-TERM DEBT AND NOTES PAYABLE 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Long-term debt consists of the following:
-------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                                                1998              1997
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>              <C>  
Energen Corporation:
  Medium-term Notes, interest ranging from 6.6% to 8.09%, for notes
   redeemable September 20, 2001, to February 15, 2028....................................   $   225,000      $   125,000
  8% Debentures, due up to $1,000,000 annually to February 1, 2007........................        18,689           18,704
  Series 1993 Notes, interest ranging from 5.75% to 7.25%, due annually in
   payments ranging from $859,000 to $1,584,000 from March 1, 1999,
   to March 1, 2008.......................................................................        11,883           12,753
Alabama Gas Corporation:
  Medium-term Notes, interest ranging from 5.4% to 7.97%, for notes
   redeemable December 1, 1998, to September 23, 2026.....................................       125,000          125,000
-------------------------------------------------------------------------------------------------------------------------
Total.....................................................................................       380,572          281,457
Less amounts due within one year..........................................................         7,209            1,855
Less unamortized debt discount............................................................           581               --
-------------------------------------------------------------------------------------------------------------------------
Total.....................................................................................   $   372,782      $   279,602
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                    Page 34
<PAGE>   17

The aggregate maturities of long-term debt for the next five years are as
follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                               Years ending September 30, (in thousands)
-----------------------------------------------------------------------------------------------------
   1999                   2000                   2001                   2002                   2003
-----------------------------------------------------------------------------------------------------
<S>                    <C>                    <C>                    <C>                   <C>
$    7,209             $   1,955              $  18,648              $  17,077             $   12,139
-----------------------------------------------------------------------------------------------------
</TABLE>

The Company is subject to various restrictions on the payment of dividends.
Under its 8 percent debentures, the most restrictive provision states that
dividends or other distributions with respect to common stock may not be made
unless the Company maintains a minimum consolidated tangible net worth of $80
million; at September 30, 1998, Energen had a tangible net worth of $329
million.

Energen and Alagasco had short-term credit lines and other credit facilities of
$228 million available as of September 30, 1998 to either entity for working
capital needs. At September 30, 1998 and 1997, the Company had $100.6 million
and $98.6 million, respectively, of borrowings to purchase Treasury securities
for tax planning purposes. The securities matured in early October and the
proceeds were used to repay such borrowings. The securities were pledged as
collateral on the debt. The following is a summary of information relating to
notes payable to banks:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
 As of September 30, (in thousands)                1998           1997           1996
---------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>
Amount outstanding ........................      $153,000       $152,000       $ 59,000
Amount outstanding under separate agreement            --         50,000             --
---------------------------------------------------------------------------------------
Notes payable to banks ....................      $153,000       $202,000       $ 59,000
Available for borrowings ..................        75,000         51,000         97,000
---------------------------------------------------------------------------------------
  Total ...................................      $228,000       $253,000       $156,000
---------------------------------------------------------------------------------------
Maximum amount outstanding at any month-end      $180,000       $202,000       $ 95,000
Average daily amount outstanding ..........      $ 81,008       $ 87,648       $ 37,960
Weighted average interest rates based on:
 Average daily amount outstanding .........          5.92%          5.87%          5.68%
 Amount outstanding at year-end ...........          5.77%          5.96%          5.62%
---------------------------------------------------------------------------------------
</TABLE>

Total interest expense for Energen in 1998, 1997 and 1996 was $30,001,000,
$22,906,000, and $13,920,000, respectively.

4. SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
On January 28, 1998, Energen announced a 2-for-1 split of the Company's common
stock. The split was in the form of a 100 percent stock dividend and was payable
on March 2, 1998, to shareholders of record on February 13, 1998. All per-share
amounts and the number of shares of capital stock outstanding have been
retroactively adjusted to reflect the stock split. Effective January 30, 1998,
the Restated Certificate of Incorporation of Energen Corporation was amended to
increase Energen's authorized common stock, par value $0.01 per share, from
30,000,000 shares to 75,000,000 shares.

During fiscal year 1998, the Company adopted Emerging Issues Task Force (EITF)
Issue 97-14, Accounting for Deferred Compensation Arrangements Where Amounts
Earned Are Held in a Rabbi Trust and Invested. In accordance with EITF Issue
97-14, amounts earned under the Deferred Compensation Plan and invested in
common stock of the Company have been recorded as treasury stock, along with the
related deferred compensation obligation in the Consolidated Statements of
Shareholders' Equity.

                                    Page 35
<PAGE>   18

5. INCOME TAXES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
The components of income taxes consist of the following:
---------------------------------------------------------------------------------------------------------------------------
 For the years ended September 30, (in thousands)                                 1998             1997              1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>              <C>
 Taxes estimated to be payable currently:
   Federal.................................................................  $    11,828       $     4,976      $     5,218
   State...................................................................        1,827             1,254              989
---------------------------------------------------------------------------------------------------------------------------
    Total current..........................................................       13,655             6,230            6,207
---------------------------------------------------------------------------------------------------------------------------
 Taxes deferred:
   Federal.................................................................      (15,342)           (3,123)          (1,221)
   State...................................................................         (534)              (10)              62
---------------------------------------------------------------------------------------------------------------------------
    Total deferred.........................................................      (15,876)           (3,133)          (1,159)
---------------------------------------------------------------------------------------------------------------------------
 Total income tax expense (benefit)........................................  $    (2,221)      $     3,097      $     5,048
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities for 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                       1998                            1997
-------------------------------------------------------------------------------------------------------------------------
                                                                  Current     Noncurrent          Current      Noncurrent
-------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>               <C>            <C>
Deferred tax assets:
  Minimum tax credit........................................  $        --    $    30,288       $        --    $    20,541
  Insurance and accruals....................................        2,566             --             2,410             --
  Unbilled revenue..........................................        1,770             --             1,699             --
  Gas supply adjustment.....................................          768             --                --             --
  Other, net................................................        8,308          2,305             5,559          2,926
-------------------------------------------------------------------------------------------------------------------------
   Subtotal.................................................       13,412         32,593             9,668         23,467
   Valuation allowance......................................           --             --                --             --
-------------------------------------------------------------------------------------------------------------------------
    Total deferred tax assets...............................       13,412         32,593             9,668         23,467
-------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
  Depreciation and basis differences........................           --         20,393                --         20,893
  Gas supply adjustment.....................................           --             --             1,308             --
  Other, net................................................          843          1,258               922          1,430
-------------------------------------------------------------------------------------------------------------------------
    Total deferred tax liabilities..........................          843         21,651             2,230         22,323
-------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets.....................................  $    12,569    $    10,942       $     7,438    $     1,144
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

No valuation allowance with respect to deferred taxes is deemed necessary, as
the Company anticipates generating adequate future taxable income to realize the
benefits of all deferred tax assets on the consolidated balance sheets. As of
September 30, 1998, the amount of minimum tax credit which can be carried
forward indefinitely to reduce future regular tax liability is $30.3 million.

Total income tax expense (benefit) differs from the amount which would be
provided by applying the statutory federal income tax rate to earnings before
taxes as illustrated below:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
 For the years ended September 30, (in thousands)                               1998              1997              1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>              <C>
 Income tax expense at statutory federal income tax rate...................  $    11,910       $    11,233      $     9,306
   Increase (decrease) resulting from:
    Nonconventional fuels credits..........................................      (14,453)           (8,058)          (4,221)
    Deferred investment tax credits........................................         (469)             (487)            (487)
    State income taxes, net of federal income tax benefit..................          894               813              681
    Other, net.............................................................         (103)             (404)            (231)
----------------------------------------------------------------------------------------------------------------------------
 Total income tax expense (benefit)........................................  $    (2,221)      $     3,097      $     5,048
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                    Page 36
<PAGE>   19

6. EMPLOYEE BENEFIT PLANS
--------------------------------------------------------------------------------

The Company has two defined benefit non-contributory pension plans which cover a
majority of the employees. Benefits are based on years of service and final
earnings. The Company's policy is to use "the projected unit credit" actuarial
method for funding and financial reporting purposes. The expense for the plan
covering the majority of employees (Plan A) for the years ended September 30,
1998, 1997 and 1996, was $1,716,000, $1,228,000, and $412,000, respectively. The
expense for the plan covering employees under certain labor union agreements
(Plan B) for 1998, 1997 and 1996 was $403,000, $437,000 and $197,000,
respectively.

<TABLE>
<CAPTION>
The funded status of the plans is as follows:
--------------------------------------------------------------------------------------------------------------------------
As of June 30, (in thousands)                                           PLAN A                          PLAN B
--------------------------------------------------------------------------------------------------------------------------
                                                                   1998          1997              1998           1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>               <C>            <C>  
Vested benefits.............................................  $   (67,476)   $   (57,617)      $   (16,467)   $   (14,610)
Nonvested benefits..........................................       (5,268)        (4,739)           (2,431)        (2,256)
--------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation..............................      (72,744)       (62,356)          (18,898)       (16,866)
Effects of salary progression...............................      (15,537)       (11,402)               --             --
--------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation................................      (88,281)       (73,758)          (18,898)       (16,866)
Fair value of plan assets, primarily equity and
  fixed income securities...................................       90,661         84,859            23,081         20,820
Unrecognized net (gain) loss................................       (2,773)        (6,477)           (2,944)        (2,747)
Unrecognized prior service cost.............................        3,025             29               791            998
Unrecognized net transition obligation (asset)..............       (2,686)        (3,494)              226            282
--------------------------------------------------------------------------------------------------------------------------
Accrued pension asset (liability)...........................  $       (54)   $     1,159       $     2,256    $     2,487
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

At September 30, 1998 and 1997, the discount rate used to measure the projected
benefit obligation for both plans was 7 percent and 7.75 percent, respectively,
and the expected long-term rate of return on plan assets was 8.25 percent. The
annual rate of salary increase for the salaried plan was 5.25 percent in 1998
and 5.75 percent in 1997.

<TABLE>
<CAPTION>
The components of net pension expense for 1998, 1997 and 1996 were:
---------------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, (in thousands)                 PLAN A                                     PLAN B
---------------------------------------------------------------------------------------------------------------------------------
                                                    1998          1997           1996          1998           1997         1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>            <C>            <C>           <C>           <C>
Service cost ..................................   $ 2,386       $  2,227       $  2,147       $   224       $   243       $   255
Interest cost on projected benefit obligation .     5,842          5,524          4,617         1,261         1,238         1,166
Actual return on plan assets ..................    (9,516)       (12,629)       (15,280)       (3,450)       (3,803)       (2,971)
Net amortization and deferral .................     3,004          6,106          8,928         2,368         2,759         1,747
---------------------------------------------------------------------------------------------------------------------------------
Net pension expense ...........................   $ 1,716       $  1,228       $    412       $   403       $   437       $   197
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Company has deferred compensation plan agreements with certain key
executives providing for payments on retirement, termination, death or
disability. Expense under these agreements for 1998, 1997 and 1996 was
($54,000), $399,000 and $1,002,000, respectively. At June 30, 1998 and 1997, the
accumulated post-retirement benefit obligation related to these agreements was
$2,901,000 and $5,961,000, respectively, and the projected benefit obligation
was $7,088,000 and $9,839,000, respectively. A prepaid post-retirement benefit
asset of $434,000 and $499,000 was recorded at June 30, 1998 and 1997,
respectively.

In addition to providing pension benefits, the Company provides certain
post-retirement health care and life insurance benefits. Substantially all of
the Company's employees may become eligible for such benefits if they reach
normal retirement age while working for the Company. While the Company has not
adopted a formal funding policy, all of its accrued post-retirement liability
was funded at year-end. The expense for salaried employees for the years ended
September 30, 1998, 1997 and 1996 was $2,040,000, $2,221,000 and $1,984,000,
respectively. The expense for union employees was $4,367,000, $4,204,000 and
$4,076,000 during 1998, 1997 and 1996, respectively. The "projected unit credit"
actuarial method was used to determine the normal cost and actuarial liability.


                                    Page 37
<PAGE>   20
<TABLE>
<CAPTION>
A reconciliation of the estimated status of the obligation is as follows:
--------------------------------------------------------------------------------------------------------------------------
As of June 30, (in thousands)                                     SALARIED EMPLOYEES                UNION EMPLOYEES
--------------------------------------------------------------------------------------------------------------------------
                                                                   1998          1997              1998           1997
                                                              ------------------------------------------------------------
<S>                                                           <C>            <C>               <C>            <C>
Retirees....................................................  $   (13,916)   $    (9,590)      $   (15,162)   $   (14,529)
Active, fully-eligible......................................       (3,107)        (2,121)           (4,957)        (4,340)
Other active................................................      (12,289)        (8,309)          (17,632)       (14,151)
--------------------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation..............      (29,312)       (20,020)          (37,751)       (33,020)
Fair value of plan assets, primarily equity and
  fixed income securities...................................       30,476         23,719            23,081         13,363
Unamortized amounts.........................................       (1,561)        (4,686)           13,558         17,405
--------------------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit liability...................  $      (397)   $      (987)      $    (1,112)   $    (2,252)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Net periodic post-retirement benefit expense for the years ended September 30, 1998, 1997 and 1996, included the following:
---------------------------------------------------------------------------------------------------------------------------
For the years ended September 30,(in thousands)            SALARIED EMPLOYEES                        UNION EMPLOYEES
---------------------------------------------------------------------------------------------------------------------------
                                                    1998         1997         1996         1998         1997          1996
                                                 --------------------------------------------------------------------------
<S>                                               <C>         <C>          <C>          <C>          <C>            <C>
Service cost...................................   $    967    $     979    $     516    $   1,314    $   1,198      $   876
Interest cost on accumulated post-retirement
  benefit obligation...........................      2,049        2,204        1,679        2,612        2,542        2,195
Amortization of transition obligation..........        723          723          723        1,285        1,285        1,285
Amortization of actuarial gains and losses.....       (510)        (568)        (277)        (107)          --           --
Deferred asset gain (loss).....................      4,972        3,682          658        5,891        2,006          177
Gain or (loss) on plan assets..................     (6,161)      (4,799)      (1,315)      (6,628)      (2,827)        (457)
---------------------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit expense...   $  2,040    $   2,221    $   1,984    $   4,367    $   4,204      $ 4,076
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7 percent in 1998 and 7.75 percent in
1997. The expected long-term rate of return on assets is 8.25 percent for both
years, and the tax rate on investment income is assumed to be 40 percent. The
weighted average health care cost trend rate used in determining the
accumulated post-retirement benefit obligation was 7.5 percent and 8.25 percent
in 1998 and 1997, respectively. That assumption has a significant effect on the
amounts reported. For example, with respect to salaried employees, increasing
the weighted average health care cost trend rate by 1 percent would increase
the accumulated post-retirement benefit obligation by 2.7 percent and the net
periodic post-retirement benefit cost by 2.4 percent. For union employees,
increasing the weighted average health care cost trend rate by 1 percent would
increase the accumulated post-retirement benefit obligation by 7.3 percent and
the net periodic post-retirement benefit cost by 7.1 percent. For pay-related
life insurance benefits, the salary scale averages 5.25 percent and 5.75
percent in 1998 and 1997, respectively.

For both defined benefit plans and other post-retirement plans, certain
financial assumptions are used in determining the Company's projected benefit
obligation. These assumptions are examined periodically by the Company, and any
required changes are reflected in the subsequent determination of projected
benefit obligations.

The Company has a long-term disability plan covering most salaried employees.
Expense for the years ended September 30, 1998, 1997 and 1996, was $173,000,
$163,000 and $370,000, respectively.



                                    Page 38
<PAGE>   21

7. COMMON STOCK PLANS
-------------------------------------------------------------------------------
A majority of Company employees are eligible to participate in the Energen
Employee Savings Plan (ESP) by investing a portion of their compensation in the
Plan, with the Company matching a part of the employee investment by
contributing Company common stock (new issue or treasury shares) or funds for
the purchase of Company common stock. The ESP also contains employee stock
ownership plan provisions. At September 30, 1998, 1,116,927 common shares were
reserved for issuance under the ESP. Expense associated with Company
contributions to the ESP was $3,168,000, $3,083,000 and $2,902,000 for 1998,
1997 and 1996, respectively.

In 1992 the Company adopted the Energen Corporation 1992 Long-Range Performance
Plan which provides for the award of up to 1,000,000 performance units, with
each unit equal to the market value of one share of common stock, to eligible
employees based on predetermined performance criteria at the end of a four-year
award period. Under the Plan, a portion of the performance units is payable
with Company common stock; accordingly, 700,000 shares have been reserved for
issuance. Under the Plan, 97,545, 120,660, and 125,260 performance units were
awarded in 1998, 1997 and 1996, respectively, leaving 279,245 performance units
available for award as of September 30, 1998. The Company recorded expense of
$2,815,000, $2,632,000 and $1,223,000 for 1998, 1997 and 1996, respectively,
under the Plan.

In 1996 the Company amended its Dividend Reinvestment and Common Stock Purchase
Plan to include a direct stock purchase feature which allows purchases by
non-shareholders. Accordingly, 1,500,000 shares were added to the Plan. As of
September 30, 1998, 1,247,600 common shares were reserved under this Plan.

On November 27, 1997, the Company adopted the Energen Corporation 1997 Stock
Option Plan. The 1997 Stock Option Plan along with the Energen Corporation 1988
Stock Option Plan provides for the grant of incentive stock options,
non-qualified stock options, or a combination thereof to officers and key
employees. Options granted under the Plans provide for purchase of the
Company's common stock at not less than the fair market value on the date the
option is granted. Under the 1988 Stock Option Plan, 540,000 shares of the
Company's common stock which were reserved for issuance have been granted.
Under the 1997 Stock Option Plan, 1,300,000 shares of the Company's common
stock have been reserved for issuance. Options were granted in 1996 with
dividend equivalents. All outstanding options are non-qualified and expire 10
years from the date of grant. Transactions under the Plans are summarized as 
follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                               1997 STOCK
For the years ended September 30, (in thousands)               OPTION PLAN                 1988 STOCK OPTION PLAN
-------------------------------------------------------------------------------------------------------------------------
                                                                  1998               1998           1997           1996
                                                               ----------------------------------------------------------
<S>                                                             <C>                  <C>           <C>            <C>
Outstanding at beginning of year ($8.375 - $15.00)..........           --            423,112       324,112        304,112
Granted (at $8.375 - $18.25)................................      256,320             80,680       106,000         20,000
Exercised (at $8.375 - $9.188)..............................           --             (6,000)       (7,000)            --
-------------------------------------------------------------------------------------------------------------------------
Outstanding at year-end.....................................      256,320            497,792       423,112        324,112
-------------------------------------------------------------------------------------------------------------------------
Exercisable at year-end.....................................           --            333,112       317,112        324,112
-------------------------------------------------------------------------------------------------------------------------
Remaining reserved for issuance at year-end.................    1,043,680                 --        80,696        186,696
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense
has been recognized for its non-qualified stock options. Had compensation cost
for those options been determined in accordance with SFAS No. 123, the
Company's net income and basic earnings per share would have been $35.8
million, or $1.23 per share, in 1998 and $28.9 million, or $1.15 per share, in
1997.

In 1992 the Company adopted the Energen Corporation 1992 Directors Stock Plan
to pay part of the compensation of its non-employee directors in shares of the
Company's common stock. Under the Plan, 6,813, 6,124 and 8,644 shares were
issued in 1998, 1997 and 1996, respectively, leaving 157,607 shares reserved
for issuance as of September 30, 1998.

In 1988 the Company adopted a Shareholders Rights Plan (the 1988 Plan) designed
to protect shareholders from coercive or unfair takeover tactics. The 1988 Plan
expired on July 27, 1998. On June 24, 1998, the Company adopted a new
Shareholders Rights Plan (the 1998 Plan) to replace the 1988 Plan upon its
expiration. Under certain circumstances, the 1998 plan provides shareholders
with the right to acquire the Company's Series 1998 Junior Participating
Preferred Stock (or, in certain cases, securities of an acquiring person) at a
significant discount. Terms and conditions are set forth in a Rights Agreement
between 



                                    Page 39
<PAGE>   22

the Company and its Rights Agent. Under the 1998 plan, one right is associated
with each outstanding share of Common Stock. Rights outstanding under the
Shareholder Rights Plan at September 30, 1998, were convertible into 293,266
shares of Series 1998 Junior Participating Preferred Stock (1/100 share of
preferred stock for each full right) subject to adjustment upon occurrence of
certain take-over related events. No rights were exercised or exercisable
during the period. The price at which the rights would be exercised is $70 per
right, subject to adjustment upon occurrence of certain take-over related
events. In general, absent certain take-over related events as described in the
Plan, the rights may be redeemed prior to the July 27, 2008, expiration for
$0.01 per right.

8. COMMITMENTS AND CONTINGENCIES
-------------------------------------------------------------------------------
CONTRACTS AND AGREEMENTS: The Company has various firm gas supply and firm gas
transportation contracts which expire at various dates through the year 2008.
These contracts typically contain minimum demand charge obligations on the part
of the Company.

Energen Resources has an agreement with Sonat Exploration Company under which
it has the option to acquire an interest in any properties purchased by that
company under its reserve acquisition program. No significant Sonat joint
venture acquisitions were made in fiscal 1998. The agreement will expire at the
end of calendar year 1998.

ENVIRONMENTAL MATTERS: Alagasco is in the chain of title of eight former
manufactured gas plant sites, of which it still owns four, and five
manufactured gas distribution sites, of which it still owns one. A preliminary
investigation of the sites does not indicate the present need for remediation
activities. Management expects that, should remediation of any such sites be
required in the future, Alagasco's share, if any, of such costs will not
materially affect the results of operations or financial condition of Alagasco.

Energen Resources is subject to various environmental regulations. Management
believes that Energen Resources is in compliance with the currently applicable
standards of the environmental agencies to which it is subject and that
potential environmental liabilities, if any, are minimal. Also, to the extent
Energen Resources has operating agreements with various joint venture partners,
environmental costs, if any, would be shared proportionately.

LEGAL MATTERS: Energen and its affiliates are, from time to time, parties to
various pending or threatened legal proceedings. Certain of these lawsuits
include claims for punitive damages in addition to other specified relief.
Based upon information presently available, and in light of available legal and
other defenses, contingent liabilities arising from threatened and pending
litigation are not considered material in relation to the respective financial
positions of Energen and its affiliates. It should be noted, however, that
Energen and its affiliates conduct business in Alabama and other jurisdictions
in which the magnitude and frequency of punitive damage awards may bear little
or no relation to culpability or actual damages thus making it increasingly
difficult to predict litigation results. Various legal proceedings arising in
the normal course of business are currently in progress, and the Company has
accrued a provision for estimated costs.

LEASE OBLIGATIONS: Total payments related to leases included as operating
expense were $5,271,000, $3,987,000 and $3,050,000 in 1998, 1997 and 1996,
respectively. Minimum future rental payments (in thousands) required after 1998
under leases with initial or remaining noncancelable lease terms in excess of
one year are as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
         1999               2000               2001             2002              2003               2004 and thereafter
------------------------------------------------------------------------------------------------------------------------
       <S>               <C>                <C>               <C>               <C>                  <C>
       $  3,854          $  3,123           $   2,717         $   2,175         $  2,133                $  4,223
------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Company expects to close negotiations on a sale and leaseback of the new
building headquarters in the first quarter of 1999.



                                    Page 40
<PAGE>   23

9. SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Supplemental information concerning cash flow activities is as follows:
-------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, (in thousands)                               1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Interest paid...........................................................   $    28,442       $    18,385      $    13,261
Income taxes paid.......................................................   $    12,764       $     6,308      $     5,486
Noncash investing activities
  Capitalized depreciation..............................................   $       187       $       168      $       166
  Allowance for funds used during construction..........................   $       400       $       490      $       972
Noncash financing activities (debt issuance costs)......................   $       875       $       585      $       414
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
-------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS: The fair value of cash and cash equivalents, trade
receivables (net of allowance), and short-term debt approximates fair value due
to the short maturity of the instruments. The fair value of fixed-rate
long-term debt, including the current portion, with a carrying value of
$380,572,000, would be $389,027,000 at September 30, 1998. The fair value was
based on the market value of debt with similar maturities and with interest
rates currently trading in the marketplace.

The Company has entered into an agreement with a financial institution whereby
it can sell on an ongoing basis, with recourse, certain installment receivables
related to its merchandising program up to a maximum of $20 million. During
1998, 1997 and 1996, the Company sold $8,100,000, $7,926,000 and $8,831,000,
respectively, of installment receivables. At September 30, 1998 and 1997, the
balance of these installment receivables was $17,105,000 and $17,160,000,
respectively. Receivables sold under this agreement are considered financial
instruments with off-balance sheet risk. The Company's exposure to credit loss
in the event of non-performance by customers is represented by the balance of
installment receivables.

PRICE RISK: Energen Resources periodically enters into derivative commodity
instruments to hedge its exposure to price fluctuations on oil and gas
production. Such instruments include regulated natural gas and crude oil
futures contracts traded on the New York Mercantile Exchange and
over-the-counter swaps and basis hedges with major energy derivative product
specialists. These transactions are accounted for under the hedge method of
accounting. Under this method, any unrealized gains and losses are recorded as
a current receivable/payable and a deferred gain/loss. Realized gains and
losses are deferred as current liabilities or assets until the revenues from
the related hedged volumes are recognized in the income statement. Cash flows
from derivative instruments are recognized as incurred through changes in
working capital. The Company had deferred gains of $0.6 million and deferred
losses of $12.9 million on the balance sheet at September 30, 1998 and 1997,
respectively.

At September 30, 1998, Energen Resources has entered into contracts and swaps
for 48.9 Bcf of its 1999 flowing gas production at an average contract price of
$2.31 per Mcf and 1,080 MBbl of its oil production at an average contract price
of $16.31 per barrel. The program has been extended into fiscal years 2000 and
2001 with contracts and swaps in place for 5.2 Bcf of flowing gas production at
an average contract price of $2.22 per Mcf and 180 MBbl of oil production at an
average contract price of $17.31. Realized prices are anticipated to be lower
than hedged prices due to basis difference and other factors. To help mitigate
this variance, the Company has hedged the basis difference on 3.6 Bcf of its
1999 San Juan production.

All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors, which does not permit speculative
positions. To apply the hedge method of accounting, management must demonstrate
that a high correlation exists between the value of the derivative commodity
instrument and the value of the item hedged. Management uses the historic and
current relationships between the derivative instruments and the sales prices
of the hedged volumes to ensure that a high level of correlation exists.



                                    Page 41
<PAGE>   24

CONCENTRATION OF CREDIT RISK: Natural gas distribution operating revenues and
related accounts receivable are generated from state-regulated utility natural
gas sales and transportation to more than 468,000 residential, commercial and
industrial customers located in central and north Alabama. A change in economic
conditions may affect the ability of customers to meet their obligations;
however, the Company believes that its provision for possible losses on
uncollectible accounts receivable is adequate for its credit loss exposure.

Revenues and related accounts receivable from exploration and production
operations are generated primarily from the sale of produced natural gas and
oil. This industry concentration has the potential to impact the Company's
overall exposure to credit risk, either positively or negatively, in that the
customers may be similarly affected by changes in economic, industry, or other
conditions. The Company is not aware of any significant credit risks which have
not been recognized in the provision for doubtful accounts.

11. ACCOUNTING FOR LONG-LIVED ASSETS
-------------------------------------------------------------------------------
During fiscal year 1997, the Company adopted SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The Statement requires that an impairment loss be recognized when the carrying
amount of an asset exceeds the sum of the undiscounted estimated future cash
flow of the asset. The Statement also provides that all long-lived assets to be
disposed of be reported at the lower of the carrying amount or fair value.
Accordingly, during the fourth quarter of 1997, the Company recorded a pre-tax
writedown of $2.1 million on certain oil and gas properties that were being
held for sale. The properties had 9.7 Bcf of proved undeveloped reserves. The
expense was recorded as additional depreciation, depletion and amortization.
During fiscal year 1998 these properties were sold for a gain of $365,000.

During the second fiscal quarter of 1998, Energen Resources recorded a pre-tax
writedown of $4.7 million on certain oil and gas properties, adjusting the
carrying amount of the properties to their fair value based upon expected
future discounted cash flows. This writedown primarily reflected the impact of
a decline in crude oil prices. The expense was recorded as additional
depreciation, depletion and amortization.

12. RECENT PRONOUNCEMENTS OF THE FASB
-------------------------------------------------------------------------------
In fiscal 1998, the Company adopted SFAS No. 128, Earnings Per Share (EPS),
which specifies computation, presentation, and disclosure requirements for EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to that of the diluted computation.

The Company also adopted during fiscal 1998, SFAS No. 129, Disclosures of
Information about Capital Structure. It contains no change in disclosure
requirements for public entities that were previously subject to the
requirements of Accounting Principles Board No. 10 and No. 15 and SFAS No. 47.
As a result, SFAS No. 129 had no impact on the Company's consolidated financial
statements.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
required, was issued in June 1997. SFAS No. 131 relates solely to disclosure
provisions, and therefore does not have any effect on the results of operations
or financial position of the Company. The Company has chosen to early adopt
this pronouncement as of September 30, 1998.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements. There currently are no
differences between the Company's net income and comprehensive income. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which revises employers'
disclosures about pension and other postretirement benefit plans. This
pronouncement relates solely to disclosure pensions, and therefore will have no
effect on the results of operations or financial position of the Company. The
Company is required to adopt these statements in fiscal year 1999.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments. The Company is required to adopt this
statement in fiscal year 2000. The impact of this pronouncement on the Company
is currently being evaluated.



                                    Page 42
<PAGE>   25

13. SUMMARIZED QUARTERLY FINANCIAL DATA (Unaudited)
-------------------------------------------------------------------------------
The following data summarize quarterly operating results. The Company's
business is seasonal in character and strongly influenced by weather
conditions.
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   1998 Fiscal Quarters
                                                                                   --------------------
(In thousands, except per share amounts)                             First         Second         Third           Fourth
--------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>            <C>            <C>
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)
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                   1997 Fiscal Quarters
                                                                                   --------------------
(In thousands, except per share amounts)                             First         Second          Third           Fourth
--------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>            <C>            <C>
Operating revenues............................................  $    97,002     $  182,942     $    90,879    $    77,407
Operating income (loss).......................................  $     7,955     $   41,598     $     8,244    $    (5,811)
Net income (loss).............................................  $     3,177     $   30,531     $     3,007    $    (7,718)
Basic earnings (loss) per average common share................  $      0.14     $     1.21     $      0.11    $     (0.29)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


14. OIL AND GAS PRODUCING ACTIVITIES (Unaudited)
-------------------------------------------------------------------------------
The following schedules detail historical financial data of the Company's oil
and gas producing activities. Certain terms appearing in the schedules are
prescribed by the Securities and Exchange Commission (SEC) and are briefly
described as follows:

LEASE ACQUISITION COSTS are costs incurred to lease or otherwise acquire a
property. 

EXPLORATION EXPENSES are primarily costs associated with drilling
unsuccessful exploratory wells in undeveloped properties, exploratory
geological and geophysical activities, and costs of impaired leaseholds.

DEVELOPMENT COSTS include costs necessary to gain access to, prepare and equip
development wells in areas of proved reserves. 

PRODUCTION (LIFTING) COSTS include costs incurred to operate and maintain 
wells.

GRPSS REVENUES are reported after deduction of royalty interest payments. 

GROSS WELL OR ACRE is a well or acre in which a working interest is owned. 

NET WELL OR ACRE is deemed to exist when the sum of fractional ownership 
working interests in gross wells or acres equals one. 

DRY WELL is an exploratory or a development well found to be incapable of 
producing either oil or gas in sufficient quantities to justify
completion as an oil or gas well. 

PRODUCTIVE WELL is an exploratory or a development well that is not a dry well.

<TABLE>
<CAPTION>
CAPITALIZED COSTS
-------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                             1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Proved..................................................................   $   502,025       $   432,095      $   222,428
Unproved................................................................        14,015            22,115            2,041
-------------------------------------------------------------------------------------------------------------------------
  Total capitalized costs...............................................       516,040           454,210          224,469
Accumulated depreciation, depletion and amortization....................        88,306            87,554           60,152
-------------------------------------------------------------------------------------------------------------------------
Capitalized costs, net..................................................   $   427,734       $   366,656      $   164,317
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                    Page 43
<PAGE>   26

COSTS INCURRED The following table sets forth costs incurred in property
acquisition and exploration and development activities and includes both
capitalized costs and costs charged to expense during the year: 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------

As of September 30, (in thousands)                                               1998              1997             1996 
------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Property acquisition:
  Proved................................................................   $    82,814       $   171,701      $   108,315
  Unproved..............................................................         1,933            22,028            1,693
Exploration.............................................................         5,593            14,847           11,124
Development.............................................................        35,307            36,375           10,040
-------------------------------------------------------------------------------------------------------------------------
Total costs incurred....................................................   $   125,647       $   244,951      $   131,172
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

RESULTS OF OPERATIONS The following table sets forth results of the Company's 
oil and gas producing activities:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                                       1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Gross revenues..........................................................   $   129,978       $    84,366      $    38,421
Production (lifting) costs..............................................        48,388            25,486           10,573
Exploration expense*....................................................         5,773             6,636            5,439
Depreciation, depletion and amortization**..............................        54,411            35,393           18,583
Income tax benefit......................................................        (5,870)           (2,299)          (3,004)
-------------------------------------------------------------------------------------------------------------------------
Results of operations from producing activities.........................   $    27,276       $    19,150      $     6,830
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

 * Includes a $2.5 million writedown of a portion of an unproved leasehold 
   in 1998
** Includes a writedown of $4.7 million and $2.1 million in 1998 and 1997,
   respectively, under SFAS 121 (see Note 11)

<TABLE>
<CAPTION>
AVERAGE SALES PRICE, PRODUCTION COST AND DEPRECIATION RATE
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30,                                                      1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Average sales price:
  Gas (per Mcf).........................................................   $      2.21       $      2.05      $      1.97
  Oil (per barrel)......................................................   $     14.96       $     18.08      $     16.25
  Natural gas liquids (per barrel)......................................   $      8.65       $     11.45      $        --
Average production (lifting) cost (per Mcf equivalent)..................   $      0.84       $      0.69      $      0.66
Average depreciation rate (per Mcf equivalent)..........................   $      0.87       $      0.90      $      1.15
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

DRILLING ACTIVITY  The following table sets forth the total number of net 
productive and dry exploratory and development wells drilled:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------

Years ended September 30,                                                      1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>               <C>              <C>
Exploratory:
  Productive............................................................           0.7               1.6              1.1
  Dry...................................................................           1.0               1.2              1.5
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................           1.7               2.8              2.6
-------------------------------------------------------------------------------------------------------------------------
Development:
  Productive............................................................          19.5              17.7              2.4
  Dry...................................................................           2.9               0.7               --
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................          22.4              18.4              2.4
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

As of September 30, 1998, the Company was participating in the drilling of 2
gross wells, with the Company's interest equivalent to .35 wells.



                                    Page 44

<PAGE>   27

PRODUCTIVE WELLS AND ACREAGE The following table sets forth the total gross and
net productive gas and oil wells as of September 30, 1998, and developed and
undeveloped acreage as of the latest practicable date prior to year end:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                                                 Gross             Net
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>              <C>
Gas Wells.................................................................................         3,180            1,501
Oil Wells.................................................................................         2,668              470
-------------------------------------------------------------------------------------------------------------------------
Developed Acreage.........................................................................       849,860          551,560
Undeveloped Acreage.......................................................................       134,230           47,621
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

All wells and acreage are located onshore in the United States, with the
majority of the net undeveloped acreage located in the Gulf Coast region.

OIL AND GAS PRODUCING ACTIVITIES The calculation of proved reserves is made
pursuant to rules prescribed by the SEC. Such rules, in part, require that only
proved categories of reserves be disclosed and that reserves and associated
values be calculated using current prices and costs. Changes to current prices
and costs might have a significant effect on the disclosed amount of reserves
and their associated values. In addition, the estimation of reserves inherently
requires the use of geologic and engineering estimates which are subject to
revision as reservoirs are produced and developed and as additional information
is available. Accordingly, the amount of actual future production may vary
significantly from the amount of reserves disclosed. See Note 10 for pricing
information regarding the hedging activities of the Company. Prior to 1997,
natural gas liquid quantities were insignificant and were included in oil
quantities. The proved reserves are located in the United States, both onshore
and offshore, and are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Years ended September 30,                                 1998                           1997                 1996
--------------------------------------------------------------------------------------------------------------------------
                                             Gas        Oil      NGL       Gas       Oil       NGL       Gas       Oil
                                             MMcf       MBbl     MBbl      MMcf      MBbl      MBbl      MMcf      MBbl
--------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>       <C>       <C>        <C>      <C>       <C>       <C>
Proved reserves at beginning of year ....  544,283     9,128    12,378    212,977    6,315        --     71,267    3,986
Revisions of previous estimates .........  (13,006)   (1,402)    2,211     (2,910)    (110)       --        502      369
Purchase of minerals in place ...........   21,590    13,284       441    352,373    3,650    12,880    155,647    3,805
Discoveries and other additions .........   44,347       278     3,079     11,946       83        --      5,113       49
Production ..............................  (43,853)   (1,433)     (817)   (29,318)    (775)     (502)   (12,308)    (635)
Sales of minerals in place ..............  (11,322)      (10)       --       (785)     (35)       --     (7,244)  (1,259)
--------------------------------------------------------------------------------------------------------------------------
Proved reserves at end of year ..........  542,039    19,845    17,292    544,283    9,128    12,378    212,977    6,315
--------------------------------------------------------------------------------------------------------------------------
Proved developed reserves at end of year.  493,770    14,053    14,214    511,864    8,140    12,378    175,124    5,012
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

During the year, Energen Resources invested $83 million in proved property
acquisitions. Energen Resources also sold approximately 11 Bcfe and recorded a
pre-tax gain of $1.6 million.

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES The standardized measure of discounted future net cash flows
is not intended, nor should it be interpreted, to present the fair market value
of the Company's crude oil and natural gas reserves. An estimate of fair market
value would take into consideration factors such as, but not limited to, the
recovery of reserves not presently classified as proved reserves, anticipated
future changes in prices and costs, and a discount factor more representative
of the time value of money and the risks inherent in reserve estimates.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                                       1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Future gross revenues...................................................   $ 1,109,829       $ 1,553,333      $   502,607
Future production costs.................................................       476,589           571,732          216,755
Future development costs................................................        67,459            74,396           40,665
-------------------------------------------------------------------------------------------------------------------------
Future net cash flows before income taxes...............................       565,781           907,205          245,187
Future income tax expense (benefit) including tax credits...............        12,917           162,172            3,707
-------------------------------------------------------------------------------------------------------------------------
Future net cash flows after income taxes................................       552,864           745,033          241,480
Discount at 10% per annum...............................................       195,606           305,679           70,641
-------------------------------------------------------------------------------------------------------------------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves.................................   $   357,258       $   439,354      $   170,839
-------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                    Page 45
<PAGE>   28

The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                                       1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Balance at beginning of year............................................   $   439,354       $   170,839      $    63,559
-------------------------------------------------------------------------------------------------------------------------
Revisions to reserves proved in prior years:
  Net changes in prices, production costs and future
    development costs...................................................      (175,156)           44,913           15,051
  Net changes due to revisions in quantity estimates....................        (4,993)           (7,378)             552
  Development costs incurred, previously estimated......................        13,722            16,743            6,713
  Accretion of discount.................................................        43,935            17,084            6,356
  Other.................................................................       (22,329)           (1,599)           1,215
-------------------------------------------------------------------------------------------------------------------------
Total Revisions.........................................................      (144,821)           69,763           29,887
New field discoveries and extensions, net of future
  production and development costs......................................         9,989             8,947            4,705
Sales of oil and gas produced, net of production costs..................       (69,732)          (53,848)         (24,002)
Purchases of minerals in place..........................................        50,010           259,918           94,728
Sales of minerals in place..............................................       (12,713)             (625)         (10,597)
Net change in income taxes..............................................        85,171           (15,640)          12,559
-------------------------------------------------------------------------------------------------------------------------
Net change in standardized measure of discounted future
  net cash flows........................................................       (82,096)          268,515          107,280
-------------------------------------------------------------------------------------------------------------------------
Balance at end of year..................................................   $   357,258       $   439,354      $   170,839
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

COALBED METHANE ACTIVITIES Energen Resources is actively engaged in the
production of pipeline-quality natural gas from coal (coalbed methane). The
results of coalbed methane activities have been included in the oil and gas
disclosures shown previously. Because of the significance of coalbed methane to
Energen Resources, certain data are separately disclosed below.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30,                                                      1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Proved reserves at beginning of year (MMcf).............................       230,323           130,387           25,004
Revisions of previous estimates.........................................         6,960             1,959            4,231
Purchases of minerals in place..........................................            --           107,228          105,762
Production..............................................................       (14,802)           (9,251)          (4,610)
-------------------------------------------------------------------------------------------------------------------------
Proved reserves at end of year (MMcf)...................................       222,481           230,323          130,387
-------------------------------------------------------------------------------------------------------------------------
Estimated proved reserves qualifying for tax credits (MMcf).............        45,309            55,776           30,142
-------------------------------------------------------------------------------------------------------------------------
Net capitalized costs (in thousands)....................................   $   139,001       $   145,686      $    77,708
-------------------------------------------------------------------------------------------------------------------------
Gross wells in which the company has working
and/or revenue interests................................................           886               863              825
-------------------------------------------------------------------------------------------------------------------------
Net productive wells....................................................         549.6             548.4            279.1
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


Production of coalbed methane from wells drilled prior to January 1, 1993,
qualifies through December 31, 2002, for nonconventional fuels income tax
credits under Section 29 of the Internal Revenue Code of 1986, as amended. The
tax credit currently approximates $1.07 per Mcf of qualifying production.
Accordingly, a significant portion of the value of proved coalbed methane
reserves is associated with this tax credit.



                                    Page 46
<PAGE>   29

15. INDUSTRY SEGMENT INFORMATION
-------------------------------------------------------------------------------
Effective September 30, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The Company is
principally engaged in two business segments: the purchase, distribution and
sale of natural gas in central and north Alabama (natural gas distribution) and
the acquisition, development, exploration and production of oil and gas in the
continental United States (oil and gas activities). The accounting policies of
the segments are the same as those described in Note 1. Certain
reclassifications have been made to conform the prior year to the current year
presentation.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                             1998              1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>              <C>
Operating revenues
  Natural gas distribution..............................................   $   369,940       $   362,984      $   357,252
  Oil and gas activities................................................       132,687            85,246           42,190
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................   $   502,627       $   448,230      $   399,442
-------------------------------------------------------------------------------------------------------------------------
Operating income (loss)
  Natural gas distribution..............................................   $    41,663       $    38,792      $    35,270
  Oil and gas activities................................................        20,992            14,723            4,779
  Eliminations and corporate expenses...................................        (1,170)           (1,529)          (1,252)
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................   $    61,485       $    51,986      $    38,797
-------------------------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortization expense
  Natural gas distribution..............................................   $    25,153       $    23,486      $    21,269
  Oil and gas activities................................................        55,846            36,202           19,849
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................   $    80,999       $    59,688      $    41,118
-------------------------------------------------------------------------------------------------------------------------
Interest expense
  Natural gas distribution..............................................   $    10,221       $    10,809      $     9,585
  Oil and gas activities................................................        20,130            12,705            4,896
  Eliminations and other................................................          (350)             (608)            (561)
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................   $    30,001       $    22,906      $    13,920
-------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit)
  Natural gas distribution..............................................   $    11,400       $    10,117      $     9,047
  Oil and gas activities................................................       (13,896)           (7,341)          (4,040)
  Other.................................................................           275               321               41
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................   $    (2,221)      $     3,097      $     5,048
-------------------------------------------------------------------------------------------------------------------------
Capital expenditures
  Natural gas distribution..............................................   $    54,168       $    43,277      $    43,175
  Oil and gas activities................................................       120,991           239,718          126,317
  Other.................................................................             6                15               60
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................   $   175,165       $   283,010      $   169,552
-------------------------------------------------------------------------------------------------------------------------
Identifiable assets
  Natural gas distribution..............................................   $   408,149       $   390,381      $   373,817
  Oil and gas activities................................................       497,264           440,158          217,700
  Eliminations and other................................................        88,042            89,258          (22,107)
-------------------------------------------------------------------------------------------------------------------------
   Total................................................................   $   993,455       $   919,797      $   569,410
-------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net
  Natural gas distribution..............................................   $   324,995       $   296,228      $   276,927
  Oil and gas activities................................................       431,275           370,677          167,859
  Other.................................................................            74                98              130
-------------------------------------------------------------------------------------------------------------------------
    Total...............................................................   $   756,344       $   667,003      $   444,916
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                    Page 47
<PAGE>   30


16. RECONCILIATION OF EARNINGS PER SHARE
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Years ended September 30,
(in thousands, except per share amounts)      1998                                1997                          1996
--------------------------------------------------------------------------------------------------------------------------------
                                                          PER SHARE                       Per Share                    Per Share
                                   INCOME      SHARES       AMOUNT     Income     Shares    Amount   Income     Shares   Amount
--------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>           <C>       <C>         <C>          <C>    <C>       <C>          <C>     <C>   
BASIC EPS......................  $   36,249    29,084    $    1.25   $  28,997    25,126 $    1.15 $  21,541    22,047  $   0.98
Effect of Dilutive Securities
  Long-range performance shares                   167                                137                           142
  Non-qualified stock options                     187                                121                            63
--------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS....................  $   36,249    29,438    $    1.23   $  28,997    25,384 $    1.14 $  21,541    22,252  $   0.97
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

17. SUBSEQUENT EVENT
-------------------------------------------------------------------------------
On October 15, 1998, Energen Resources purchased the stock of TOTAL Minatome
Corporation (TOTAL), a Houston-based unit of TOTAL American Holding Inc.
Immediately upon closing the transaction, Energen Resources sold a 31 percent
undivided interest in TOTAL's assets to Westport Oil and Gas Company Inc., a
private Denver-based exploration, acquisition and development company. Energen
Resources' net investment totaled $132.6 million, including the assumption of
certain legal and financial obligations. Energen Resources gained an estimated
200 billion cubic feet equivalent of proved domestic oil and natural gas
reserves.



                                    Page 48
<PAGE>   31
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements and related notes of Energen 
Corporation were prepared by management, which has the primary responsibility 
for the integrity of the financial information therein. The statements were 
prepared in conformity with generally accepted accounting principles appropriate
in the circumstances and include amounts which are based necessarily on 
management's best estimates and judgments. Financial information presented 
elsewhere in the report is consistent with the information in the financial 
statements.

Management maintains a comprehensive system of internal accounting controls and 
relies on the system to discharge its responsibility for the integrity of the 
financial statements. This system provides reasonable assurance that corporate 
assets are safeguarded and that transactions are recorded in such a manner as 
to permit the preparation of materially reliable financial information. 
Reasonable assurance recognizes that the cost of a system of internal accounting
controls should not exceed the related benefits. This system of internal 
accounting controls is augmented by written policies and procedures, internal 
auditing, and the careful selection and training of qualified personnel. As of 
September 30, 1998, management was aware of no material weaknesses in Energen's 
system of internal accounting controls.

The consolidated financial statements have been audited by the Company's 
independent certified public accountants, whose opinion is expressed elsewhere 
on this page. Their audit was conducted in accordance with generally accepted 
auditing standards; and, in connection therewith, they obtained an 
understanding of the Company's system of internal accounting controls and 
conducted such tests and related procedures as they deemed necessary to arrive 
at an opinion on the fairness of presentation of the consolidated financial 
statements.

The functioning of the accounting system and related internal accounting 
controls is under the general oversight of the Audit Committee of the Board of 
Directors, which is comprised of four outside Directors. The Audit Committee 
meets regularly with the independent public accountants and representatives of 
management to discuss matters regarding internal accounting controls, auditing 
and financial reporting.


Geoffrey C. Ketcham
Executive Vice President
Chief Financial Officer and Treasurer



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders of Energen:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Energen
Corporation and Subsidiaries at September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.


PricewaterhouseCoopers LLP
Birmingham, Alabama
October 28, 1998

                                    Page 49
<PAGE>   32
SELECTED FINANCIAL AND COMMON STOCK DATA

<TABLE>
<CAPTION>
Energen Corporation
---------------------------------------------------------------------------------------------------------------------------------
Years ended September 30,
(dollars in thousands, except per share amounts)                 1998            1997              1996              1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>               <C>                <C>        

INCOME STATEMENT
Operating revenues........................................  $   502,627      $   448,230       $   399,442        $   318,580
Income before cumulative effect of change
  in accounting principle.................................  $    36,249      $    28,997       $    21,541        $    19,308
Net income................................................  $    36,249           28,997       $    21,541        $    19,308
Basic earnings per share before cumulative effect.........  $      1.25      $      1.15       $      0.98        $      0.89
Basic earnings per average common share...................  $      1.25      $      1.15       $      0.98        $      0.89
Diluted earnings per average common share.................  $      1.23      $      1.14       $      0.97        $      0.88
---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
Capitalization at year-end:
  Common shareholders equity..............................  $   329,249      $   301,143       $   188,405        $   173,924
  Preferred stock.........................................           --               --                --                 --
  Long-term debt..........................................      372,782          279,602           195,545            131,600
---------------------------------------------------------------------------------------------------------------------------------
  Total capitalization....................................  $   702,031      $   580,745       $   383,950        $   305,524
---------------------------------------------------------------------------------------------------------------------------------
Total assets..............................................  $   993,455      $   919,797       $   569,410        $   459,084
---------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net........................  $   756,344      $   667,003       $   444,916        $   327,264
---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA
Annual dividend rate at year-end..........................  $      0.64      $      0.62       $      0.60        $      0.58
Cash dividends paid per common share......................  $     0.625      $     0.605       $     0.585        $     0.565
Book value per common share...............................  $     11.23      $     10.46       $      8.44        $      7.97
Market-to-book ratio at year-end (%)......................          169              170               142                136
Yield at year-end (%).....................................          3.4              3.5               5.0                5.3
Return on average common equity (%).......................         11.1             11.9              11.6               11.0
Price-to-earnings ratio at year-end.......................         15.2             15.5              12.2               12.2
Basic shares outstanding at year-end (000)................       29,327           28,796            22,325             21,820
Price Range:
  High....................................................  $        22 1/2  $        18   7/8 $        12 11/16  $        11 3/4
  Low.....................................................  $        15 1/8  $        11   7/8 $        10 11/16  $         9 7/8
  Close...................................................  $        19      $        17 25/32 $        12        $        10 7/8
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


Note:     All information prior to 1989 has been adjusted for the effects of a
          three-for-two common stock split
          All information prior to 1990 includes the effects of discontinued
          operations.
          All information has been adjusted to reflect the 2-for-1 stock split
          effective March 2, 1998.


                                    Page 50
<PAGE>   33








<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
     1994           1993             1992           1991            1990           1989              1988
-----------------------------------------------------------------------------------------------------------------

   <S>            <C>              <C>            <C>             <C>            <C>               <C>     
   $374,503       $355,878         $331,065       $324,902        $324,022       $308,604          $353,135

   $ 23,751       $ 18,081         $ 15,687       $ 14,112        $ 11,267       $  6,422          $ 11,667
   $ 23,751       $ 18,081         $ 16,628       $ 14,112        $ 11,267       $  6,422          $ 11,667
   $   1.10       $   0.88         $   0.77       $   0.71        $   0.58       $   0.34          $   0.76
   $   1.10       $   0.88         $   0.82       $   0.71        $   0.58       $   0.34          $   0.76
   $   1.09       $   0.88         $   0.82       $   0.71        $   0.58       $   0.34          $   0.76
-----------------------------------------------------------------------------------------------------------------


   $167,026       $140,313         $129,858       $121,995        $113,316       $107,950          $ 86,256
         --             --            1,800          1,800           1,800          2,450             2,450
    118,302         85,852           90,609         77,677          82,835         86,188            53,203
-----------------------------------------------------------------------------------------------------------------
   $285,328       $226,165         $222,267       $201,472        $197,951       $196,588          $141,909
-----------------------------------------------------------------------------------------------------------------
   $411,314       $370,685         $342,119       $337,516        $326,350       $294,614          $260,560
-----------------------------------------------------------------------------------------------------------------
   $287,182       $273,097         $254,630       $273,539        $250,983       $238,329          $206,230
-----------------------------------------------------------------------------------------------------------------

   $    .56       $    .54         $    .52       $    .50        $    .47       $    .44          $   .414
   $   .545       $   .525         $   .505       $   .478        $   .448       $   .422          $   .389
   $   7.65       $   6.80         $   6.38       $   6.04        $   5.74       $   5.57          $   5.40
        147            182              142            150             157            190               147
        5.0            4.4              5.7            5.5             5.2            4.2               5.2
       14.6           13.0             13.0           11.6            10.0            6.0              15.6
       10.2           14.1             11.1           12.8            15.5           31.1              10.4
     21,836         20,641           20,365         20,209          19,745         19,389            15,979

   $     13 5/16   $    13    3/8  $      9 7/16  $     10        $     10 3/4   $     12   3/16   $      8   1/8
   $      9  5/8   $     8  13/16  $      7  1/2  $      8        $      8       $      7  11/16   $      5 11/16
   $     11  1/4   $    12    3/8  $      9 1/16  $      9 1/16   $      9       $     10   9/16   $      7 15/16
-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                    Page 51




<PAGE>   34


SELECTED BUSINESS SEGMENT DATA

<TABLE>
<CAPTION>
Energen Corporation
---------------------------------------------------------------------------------------------------------------------------
Years ended September 30,
(dollars in thousands)                                         1998              1997              1996              1995
---------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>               <C>              <C>        
NATURAL GAS DISTRIBUTION
Operating revenues
  Residential.............................................  $   241,964      $   237,022       $   236,583      $   194,089
  Commercial and industrial-small.........................       89,361           87,477            87,912           68,409
  Commercial and industrial-large.........................           --               --                --              290
  Transportation..........................................       35,246           33,080            30,408           30,490
  Other...................................................        3,369            5,405             2,349            2,687
---------------------------------------------------------------------------------------------------------------------------
   Total..................................................  $   369,940      $   362,984       $   357,252      $   295,965
---------------------------------------------------------------------------------------------------------------------------
Gas delivery volumes (MMcf)
  Residential.............................................       31,079           28,357            34,963           27,489
  Commercial and industrial-small.........................       13,705           12,554            15,002           12,289
  Commercial and industrial-large.........................           --               --                --               29
  Transportation..........................................       70,563           65,622            61,458           61,640
---------------------------------------------------------------------------------------------------------------------------
   Total..................................................      115,347          106,533           111,423          101,447
---------------------------------------------------------------------------------------------------------------------------
Average number of customers
  Residential.............................................      423,602          422,878           418,486          410,515
  Commercial and industrial-small.........................       34,733           34,430            34,028           33,115
  Commercial and industrial-large.........................           49               55                54               48
---------------------------------------------------------------------------------------------------------------------------
   Total..................................................      458,384          457,363           452,568          443,678
---------------------------------------------------------------------------------------------------------------------------
Other data
  Depreciation & amortization.............................  $    25,153      $    23,486       $    21,269      $    19,368
  Capital expenditures....................................  $    54,168      $    43,277       $    43,175      $    42,780
  Operating income........................................  $    41,663      $    38,792       $    35,270      $    32,513
---------------------------------------------------------------------------------------------------------------------------
OIL AND GAS ACTIVITIES
Operating revenues
  Natural gas.............................................  $    97,123      $    60,228       $    24,262      $    14,748
  Oil.....................................................       21,452           13,981            10,313            3,765
  Natural gas liquids.....................................        7,061            5,772                --               --
  Other...................................................        7,051            5,265             7,615            4,100
---------------------------------------------------------------------------------------------------------------------------
   Total..................................................  $   132,687      $    85,246       $    42,190      $    22,613
---------------------------------------------------------------------------------------------------------------------------
Production volumes
  Natural gas (Mcf).......................................       43,853           29,318            12,308            8,597
  Oil (MBbl)..............................................        1,433              775               635              250
  Natural gas liquids (MBbl)..............................          817              502                --               --
---------------------------------------------------------------------------------------------------------------------------
Proved reserves
  Natural gas (MMcf)......................................      542,039          544,283           212,977           71,267
  Oil (MBbl)..............................................       19,845            9,128             6,315            3,986
  Natural gas liquids (MBbl)..............................       17,292           12,378                --               --
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                    Page 52

<PAGE>   35


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
            1994              1993              1992             1991              1990             1989             1988
---------------------------------------------------------------------------------------------------------------------------

       <S>               <C>              <C>               <C>              <C>               <C>              <C>        
       $   229,019       $   216,587      $   198,676       $   195,250      $   188,168       $   170,302      $   190,836
            84,443            83,069           78,799            84,260           85,588            85,477          104,420
               790             1,223            6,501             8,916           13,596            25,000           37,923
            29,321            27,382           25,089            22,890           22,734            19,574           15,158
             1,064             2,299            1,661            (2,188)             873               731              689
---------------------------------------------------------------------------------------------------------------------------
       $   344,637       $   330,560      $   310,726       $   309,128      $   310,959       $   301,084      $   349,026
---------------------------------------------------------------------------------------------------------------------------

            31,254            30,957           29,119            26,262           28,653            27,210           28,636
            13,536            13,853           13,860            14,837           16,581            17,946           21,806
               106               282            2,654             3,411            4,786             9,494           13,026
            52,635            49,346           46,235            41,447           39,117            34,447           28,730
---------------------------------------------------------------------------------------------------------------------------
            97,531            94,438           91,868            85,957           89,137            89,097           92,198
---------------------------------------------------------------------------------------------------------------------------

           402,531           395,057          387,871           382,747          379,362           365,572          358,872
            32,563            32,269           31,732            31,432           31,565            30,492           29,717
                43                46               41                39               42                42               37
---------------------------------------------------------------------------------------------------------------------------
           435,137           427,372          419,644           414,218          410,969           396,106          388,626
---------------------------------------------------------------------------------------------------------------------------

       $    17,941       $    17,206      $    17,154       $    17,126      $    16,131       $    14,657      $    13,642
       $    38,473       $    22,107      $    20,228       $    19,565      $    19,565       $    39,156      $    25,614
       $    30,017       $    26,381      $    25,915       $    25,209      $    21,080       $    18,548      $    19,666
---------------------------------------------------------------------------------------------------------------------------


       $    17,292       $    11,449      $    10,364       $     9,889      $    11,121       $    11,735      $    11,344
             2,725             3,484            2,559             1,839            1,411             1,468            1,458
                --                --               --                --               --                --               --
             3,546             2,753              (44)           (3,203)          (5,927)           (8,286)          (8,693)
---------------------------------------------------------------------------------------------------------------------------
       $    23,563       $    17,686      $    12,879       $     8,525      $     6,605       $     4,917      $     4,109
---------------------------------------------------------------------------------------------------------------------------

             9,169             6,245            6,415             5,927            4,954             4,964            4,976
               191               204              145                88               80                95               94
                --                --               --                --               --                --               --
---------------------------------------------------------------------------------------------------------------------------

            60,057            67,298           51,329            73,279           57,532            29,860           14,803
             1,485             1,289              338               402              330               264              292
                --                --               --                --               --                --               --
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                    Page 53