<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 1997 fiscal year totaled $29 million,
or $2.31 per share, a significant increase from 1996 earnings of $21.5 million,
or $1.95 per share. Continued financial and operating strength at Energen's
utility, Alabama Gas Corporation (Alagasco), combined with the results of
Energen's diversified growth strategy at Taurus Exploration Inc. (Taurus),
Energen's oil and gas subsidiary, to produce an 18.5 percent increase in
earnings per share. For 1995, Energen reported earnings of $19.3 million, or
$1.77 per share.

1997 VS 1996: Alagasco's earnings were $18.6 million, a 9.5 percent increase
over prior-year earnings of $17 million, and represented record earnings for a
seventh consecutive year. This increase in net income reflects Alagasco's
ability to earn within its allowed range of return on an increased level of
equity representing investment in its utility plant. Alagasco achieved a return
on equity (ROE) of 13.5 percent.

Taurus earned $10 million in 1997, more than doubling prior year earnings of
$4.5 million. The main reasons for the significant increase were a 130 percent
increase in oil and gas production volumes to 37 billion cubic feet equivalent
(Bcfe) and a $3.8 million increase in nonconventional fuels tax credits
primarily resulting from production from coalbed methane property acquisitions
in 1996 and 1997. Partially offsetting these gains were increased
production-related expenses, increased interest expense, and a $1.3 million
after-tax write down of certain offshore oil and gas properties in anticipation
of their sale.

1996 VS 1995: Alagasco's 1996 net income of $17 million increased 8 percent
over 1995 net income of $15.7 million primarily due to the utility earning
within its allowed range of return on an increased level of equity representing
investment in its utility plant. Fiscal 1995 earnings included a one-time
after-tax charge of $503,000 resulting from a voluntary early retirement
program. Taurus's net income increased $1 million to $4.5 million in 1996 on
the strength of increased oil and gas production, higher commodity sales prices
and gains on the sale of reserves; negatively influencing Taurus's earnings
were increases in production-related expenses, primarily depreciation,
depletion and amortization (DD&A), as well as increased interest and
exploration expenses.

OPERATING INCOME
Consolidated operating income in 1997, 1996, and 1995 totaled $52 million,
$38.8 million, and $32 million, respectively. Operating income grew
significantly in 1997, reflecting another successful year under Energen's
diversified growth strategy. Taurus again showed significant improvement over
the prior year, and growth in Alagasco's operating income was consistent with
its increased level of equity upon which it is allowed to earn a return.
Operating income in 1996 also benefited from the implementation of Energen's
growth strategy at Taurus along with the recognition of a gain on the sale of
reserves.

ALAGASCO: Alagasco generates revenues through the sale and transportation of
natural gas. Shifts between transportation and sales gas can cause variations
in natural gas revenues since the transportation rate does not contain an
amount representing the cost of gas. Alagasco's rate structure allows similar
margins on transported and sales gas; therefore, operating income is not
adversely affected. Weather also can cause variations in 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 normal weather.

Alagasco's gross natural gas sales revenues totaled $329.9 million, $326.8
million, and $265.5 million, in 1997, 1996, and 1995, respectively. In the
current year, sales revenues remained relatively stable as higher commodity
cost of gas, which is passed through to customers in rates, was largely offset
by the impact of warmer weather on throughput. In 1996 significantly colder
weather and higher commodity gas costs combined to generate substantially
higher revenues than in the previous year; margins associated with the colder

                                                                             21

<PAGE>   2




weather were removed via the real-time temperature adjustment to customer bills.

Residential sales volumes decreased 19 percent in the current year primarily
due to weather in Alagasco's service territory that was 12 percent warmer than
normal and 22 percent warmer than that of the prior year. Sales and
transportation volumes to commercial and industrial customers totaled 78.2 Bcf
in 1997 and 76.5 Bcf in 1996. While small commercial and industrial customers,
more sensitive to weather, experienced volume decreases similar to residential
customers, Alagasco increased throughput to several large transportation
customers. In 1996, Alagasco's coldest winter in 18 years significantly
increased residential and small commercial and industrial volumes.

Cost of gas remained relatively stable in 1997 as higher commodity gas cost was
offset by a weather-related decrease in purchased volumes. In the prior year,
colder weather had the opposite impact on purchased volumes and, coupled with
higher commodity cost, caused a 36 percent increase in cost of gas.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (dollars in thousands)                            1997               1996                1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>                 <C>
Gross natural gas sales revenues.....................................   $   329,904       $     326,844       $  265,477
Cost of natural gas..................................................      (177,837)           (181,400)        (133,556)
Revenue taxes........................................................       (19,676)            (20,055)         (16,051)
------------------------------------------------------------------------------------------------------------------------
Net natural gas sales margin.........................................       132,391             125,389          115,870
Net natural gas transportation  margin...............................        33,080              30,408           30,490
------------------------------------------------------------------------------------------------------------------------
Net natural gas sales and transportation  margin.....................   $   165,471        $    155,797        $ 146,360
------------------------------------------------------------------------------------------------------------------------
Natural gas sales volumes (MMcf)
   Residential.......................................................        28,357              34,963           27,489
   Commercial and industrial-small...................................        12,554              15,002           12,288
   Commercial and industrial-large...................................            --                  --               29
------------------------------------------------------------------------------------------------------------------------
Total natural gas sales volumes......................................        40,911              49,965           39,806
Natural gas transportation volumes (MMcf)............................        65,622              61,458           61,640
------------------------------------------------------------------------------------------------------------------------
Total deliveries (MMcf)..............................................       106,533             111,423          101,446
------------------------------------------------------------------------------------------------------------------------
</TABLE>

Operations and maintenance (O&M) expense at the utility increased 4 percent in
1997 primarily due to higher labor and related costs and increased marketing
expense; partially offsetting these amounts was a decrease in bad debt expense
created when the utility increased its provision for doubtful accounts in the
prior year to reflect increased exposure from higher commodity gas costs in
accounts receivable. In 1996, distribution expense, which includes labor and
maintenance costs, was higher due to colder-than-normal weather. In addition,
while marketing and bad debt expenses were higher, they were offset by the
inclusion in 1995 of a one-time charge for an early retirement option. In both
1997 and 1996, the increase in O&M on a per customer basis fell within the
inflation-based cap established by the Alabama Public Service Commission (APSC)
as part of the utility's rate-setting mechanism.

22


<PAGE>   3



Consistent with growth in the utility's depreciable base, depreciation expense
rose 10 percent in both 1997 and 1996. 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.

As discussed more fully in Note 2 to the Consolidated Financial Statements,
Alagasco is subject to regulation by the APSC. On October 7, 1996, the APSC
issued an order to extend the Company's rate-setting mechanism 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.

TAURUS: During 1997, Taurus continued its aggressive growth strategy by
acquiring producing oil and gas properties with varying degrees of development
potential. In the second quarter of 1997, Taurus acquired approximately 319
Bcfe of oil and gas reserves in the San Juan Basin for $77 million and plans to
spend an additional $8 million over the next several years to substantially
develop these long-lived reserves. In the third quarter, Taurus spent $8.3
million to purchase approximately 10.2 Bcfe of proved reserves in southwest
Mississippi from Griffin and Griffin Oil Company. Approximately 85 percent of
the estimated proved reserves are gas and almost 60 percent are developed and
producing. Taurus plans to spend an additional $1.2 million to develop the
remaining 4.5 Bcfe of behind-pipe and proved undeveloped reserves. In several
smaller transactions, Taurus acquired 4.8 Bcfe of predominantly natural gas
reserves in Texas and Louisiana for $5.2 million. Approximately 40 percent of
the proved reserves are developed and producing, and the Company expects to
spend an additional $3.2 million to fully develop the remaining behind-pipe and
proved undeveloped reserves. Also in the third quarter, Taurus invested $16
million for a 9 percent interest in a joint venture with Sonat Exploration and
United Meridian Corporation for future exploration of the Cotton Valley
Pinnacle Reef trend. In August, the Company purchased Amoco Corporation's Black
Warrior Basin coalbed methane properties for $72 million; these properties
included over 260 producing wells and estimated net proved reserves of 107 Bcf.
Substantially all of the reserves are classified as proved producing. In
addition, Taurus spent $9.3 million in July 1997 to purchase approximately 10.4
Bcfe of domestic oil and natural gas reserves located in Texas and the Rocky
Mountains from United Meridian Corporation.

Largely as a result of these acquisitions, revenues from oil and gas production
activities continued to grow significantly. Total production volumes rose 130
percent to 37 Bcfe. Natural gas production, including coalbed methane,
increased 138 percent to 29.3 Bcf. Oil volumes increased 22 percent to 775
MBbl. Taurus also acquired high BTU-content natural gas reserves in the San
Juan Basin which yielded 502 MBbl in natural gas liquids by year-end. Taurus
also benefited from higher realized oil and gas prices during 1997. Gas sales
prices rose 4 percent to $2.05 per Mcf and oil sales prices increased 11
percent to $18.08 per barrel. Natural gas liquids sold for $11.45 per barrel.
During 1996, revenues from oil and gas production activities also grew notably.
Total production volumes were 16.1 Bcfe, increasing 60 percent from the prior
year. Gas prices were $1.97 per Mcf, higher by 15 percent, and oil prices were
$16.25 per barrel, up 8 percent.

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 $4.4 million, $3.8 million and $3.4 million
in 1997, 1996 and 1995, respectively. The annual increases resulted primarily
from higher natural gas prices.

Taurus 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 Taurus's technical staff. In 1997 and 1996, Taurus recorded
gains of $1 million and $3.9 million, respectively, on the sale of various
properties. The largest of several property sales occurred in September 1996
when Taurus recorded a $3.2 million gain.

                                                                             23


<PAGE>   4


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (dollars in thousands, except unit price)         1997               1996             1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>               <C>
Revenues
   Natural gas production............................................   $   60,228        $    24,262       $    14,748
   Oil production....................................................       19,753             10,313             3,765
   Operating fees....................................................        4,385              3,846             3,374
   Other.............................................................          880              3,769               726
-------------------------------------------------------------------------------------------------------------------------
Total Revenues.......................................................   $   85,246        $    42,190       $    22,613
-------------------------------------------------------------------------------------------------------------------------
Production volumes
   Natural gas (MMcf)................................................       29,318             12,308             8,597
   Oil (MBbl)........................................................          775                635               250
   Natural gas liquids (MBbl)........................................          502                 --                --
-------------------------------------------------------------------------------------------------------------------------
Average unit sales price
   Natural gas (per Mcf).............................................   $     2.05        $      1.97       $      1.72
   Oil (per Bbl).....................................................   $    18.08        $     16.25       $     15.07
   Natural gas liquids (Bbl).........................................   $    11.45                 --                --
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


Operations expense increased $12.4 million and $4.3 million in 1997 and 1996,
respectively, primarily due to significant growth in production and in
acquisition activity at Taurus. Lease operating expense rose by $10.5 million
in 1997 and $3.4 million in 1996, mainly due to acquisitions. In addition,
exploration expense increased $1.2 million and $2.5 million in 1997 and 1996,
respectively, as a result of Taurus's increased exploratory efforts.

DD&A expense rose $16.5 million in 1997 largely due to significantly higher
production (37 Bcf in 1997 compared to 16.1 Bcf in 1996). The increase was
partially offset by a decrease in the average depletion rate to $0.90 per Mcf
due to the significant addition of long-lived assets. Also during 1997, the
Company adopted Statement of Financial Accounting Standard (SFAS) 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of (see Note 10). Under SFAS 121, Taurus recorded additional DD&A
expense of $2.1 million to write down the value of certain oil and gas
properties that are held for sale. The properties have 9.7 Bcf of proved
undeveloped reserves. During 1996, DD&A expense increased $9.6 million also
largely due to increased production (10.1 Bcf in 1995). In addition, the
average depletion rate of $1.15 per Mcf increased from $0.88 per Mcf in 1995 as
a result of reserve revisions and property write-downs.

Taurus's expense for taxes other than income primarily reflects
production-related taxes. For 1997, 1996, and 1995, Taurus recorded $6.3
million, $1.9 million and $0.8 million, respectively, in severance taxes.

NON-OPERATING ITEMS
CONSOLIDATED: Fiscal 1997 interest expense increased $9 million primarily due
to the financing of Taurus's acquisitions under its growth strategy with both
short-term and long-term debt. The average daily outstanding balance under
short-term credit facilities was $88 million compared to $38 million in the
prior year. Also influencing the current year was interest for a full year on
$40 million in Energen medium-term notes (MTNs) issued in the fourth quarter of
1996 and, to a lesser extent, the issuance of an additional $85 million of MTNs
in July 1997. In addition, Alagasco issued $25 million in MTNs in the fourth
quarter of 1996 to repay short-term debt used to fund customer refunds, gas
storage inventory replacement and facilities upgrade and acquisition. Interest
expense increased $2.2 million in 1996 also due primarily to Taurus's growth
strategy. The average daily outstanding balance under short-term credit
facilities was significantly higher than in 1995 and interest was recorded for
a full year on $50 million of MTNs issued in mid-1995. Also contributing to
increased interest expense was the fourth quarter 1996 issuance of MTNs at both
Energen and Alagasco.

24


<PAGE>   5

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

The Company's effective tax rates in 1997, 1996, and 1995 were lower than
statutory federal tax rates primarily due to the recognition of nonconventional
fuels tax credits and the amortization of investment tax credits. The Company's
effective tax rates are expected to remain lower than statutory federal rates
through December 31, 2002, as tax credits generated each year are expected to
be fully recognized in the financial statements. Income tax expense decreased
in 1997 from 1996 primarily due to the recognition of an additional $3.8
million of nonconventional fuels tax credits. An increase in income tax expense
in 1996 resulted primarily from increased pre-tax income.

Like many companies, Energen is in the process of evaluating its computer
software to determine whether modifications will be required for it to function
properly in the year 2000. Costs associated with evaluation and testing are
being expensed as incurred. The Company has not yet fully determined the total
cost of the project but does not anticipate any material impact on the
consolidated financial statements.

FINANCIAL POSITION AND LIQUIDITY
The Company's net cash from operating activities totaled $66.8 million, $46.7
million, and $60.9 million in 1997, 1996 and 1995, respectively. In the current
year, operating cash flow benefited from increased net income caused by
significantly higher oil and gas production volumes and higher realized oil and
gas prices. Offsetting these amounts was the $17 million payout in January 1997
of supplier refunds to customers. Other working capital items, which are
generally the result of timing of payments, combined to create the remaining
increase. Operating activities contributed $60.9 million in 1995. Colder
weather in 1996 had an impact through its effect on gas supply costs 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 1997, the Company invested a total of $279.8 million primarily in the
acquisition of oil and gas properties. In the current year, Taurus invested
$239.7 million in total capital expenditures--$193.7 million for property
acquisitions including $16 million to obtain a small working interest in an
exploratory joint venture, $36.4 million for development, and $13.3 million for
exploration ($5.1 million of which was charged to income). Current-year reserve
additions totaled 464 Bcfe. Utility expenditures for the year totaled $43.3
million and represented primarily normal system distribution expansion. Cash
used in investing activities was $152.1 million in 1996 and $67.6 million in
1995. The increase in 1996 was also largely due to the implementation of
Energen's growth strategy. Taurus invested $108 million in proved property
acquisitions with development potential, adding 178 Bcfe of proved developed
and undeveloped oil and gas reserves. Prior-year acquisitions include the $61
million purchase of 105 Bcf of coalbed methane reserves in Alabama. The 1995
acquisitions totaled $16.9 million and added 26.8 Bcfe to proved reserves.
Taurus sold its working interest in reserves associated with the PMC
acquisition venture in 1996 resulting in cash proceeds of $13.1 million.

Financing activities provided a source of $307.2 million in 1997. The Company
issued $85 million of MTNs redeemable July 15, 2002, to July 28, 2027, with
interest rates ranging from 6.6 percent to 7.6 percent. In addition, Energen
issued 1,725,000 shares of common stock in January generating net proceeds of
$49.1 million, and 1,200,000 shares in September generating 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 Taurus's acquisition and
development strategy. In addition, the Company utilized $45 million in
short-term credit facilities primarily for Taurus's capital expenditures. For
shares tax planning purposes, the Company borrowed $98.6 million to invest in
short-term federal obligations. The Treasuries matured in early October and the
proceeds were used to repay the debt. The cash provided by financing activities
totaled $80 million in 1996. The Company issued $40 million of MTNs and
utilized an additional $26.7 million in short-term credit facilities to finance
Taurus's acquisition strategy in the prior year. Also included were the
proceeds from the issuance of $25 million in Alagasco MTNs used for customer
refunds, gas storage inventory replacement, and facilities upgrade and
acquisition. Cash provided by financing activities in 1995 was $15.9 million
and included the issuance of $50 million in Alagasco MTNs used to refinance
other long-term debt.

                                                                             25


<PAGE>   6




CAPITAL EXPENDITURES
NATURAL GAS DISTRIBUTION: During the last three fiscal years, Alagasco has
invested $129.2 million for capital projects: $105.5 million was spent on
normal expansion replacements and support of its distribution system; $8.2
million was used in connection with the development of a new customer
information system which was completed in April 1996; $5.6 million was used to
improve gas availability; $7.3 million was used to purchase four municipal gas
systems; and $2.7 million was used in connection with the development of a new
payroll/human resource information system.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                                    1997               1996             1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>               <C>
Capital expenditures for:
   Renewals, replacements, system expansion and other................   $   39,779        $    35,064       $    30,611
   Additions to improve gas availability.............................          758              1,799             3,024
   Municipal gas system acquisitions.................................            3              3,305             3,972
   Payroll/human resource information system.........................        2,737                 --                --
   Customer information system.......................................           --              3,007             5,173
-------------------------------------------------------------------------------------------------------------------------
   Total.............................................................   $   43,277        $    43,175       $    42,780
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

EXPLORATION AND PRODUCTION: Taurus has spent $403.8 million for capital
projects over the last three fiscal years, $11.3 million of which was charged
to income as exploration expense. Expenditures for property acquisitions were
$321.7 million, exploratory expenditures totaled $26.9 million, and $52.5
million was spent in development activities.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                                    1997               1996             1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>               <C>
Capital and exploration expenditures for:
   Property acquisitions.............................................   $  193,729        $   110,008       $    17,939
   Exploration.......................................................       13,277              9,855             3,794
   Development.......................................................       36,375             10,040             6,044
   Other.............................................................        1,406                583               716
-------------------------------------------------------------------------------------------------------------------------
       Total.........................................................      244,787            130,486            28,493
Less exploration expenditures charged to income......................        5,069              4,169             2,064
-------------------------------------------------------------------------------------------------------------------------
Net capital expenditures.............................................   $  239,718        $   126,317       $    26,429
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


FUTURE CAPITAL RESOURCES AND LIQUIDITY
The Company will continue to implement its diversified growth strategy over the
next three years. That strategy calls for Taurus to invest $500 million to $650
million to acquire and develop producing properties and to participate in
exploration and related development during the three-year period. In fiscal
year 1998, Taurus plans to spend approximately $165 million, including $100
million for property acquisitions. It should be noted that Taurus's 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, Taurus also may be engaged in negotiations to
sell, trade or otherwise dispose of previously acquired property.

To finance Taurus's investment program, the Company will continue to utilize
its available short-term credit facilities to supplement internally generated
cash flow, with long-term debt and equity providing permanent financing. During
1997, Energen has increased its available short-term credit facilities to $203
million to accommodate the Taurus strategy.

26


<PAGE>   7


Utility capital expenditures for normal distribution system renewal and
expansion and support facilities could approximate $60 million in fiscal 1998.
Alagasco also will maintain an investment in storage working gas which is
expected to average approximately $24 million in 1998. The utility anticipates
funding these capital requirements through internally generated capital and the
utilization of short-term credit facilities.

OUTLOOK
NATURAL GAS DISTRIBUTION: The October 1996 extension of the utility's
rate-setting mechanism until January 1, 2002, 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 2002. Over this period, Alagasco's earnings should
grow 3 percent to 5 percent annually as the service territory requires the
investment of additional utility plant. The utility continues to rely on rate
flexibility to effectively prevent bypass of our 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 gas systems to
supplement normal growth.

EXPLORATION AND PRODUCTION: During fiscal year 1998, Taurus plans to spend
approximately $165 million, including $100 million for property acquisitions.
Amounts invested could vary depending on the available opportunities.
Production is expected to increase almost 50 percent to 55 Bcfe, and proved
reserves could reach 750 Bcfe by year end. Production from existing properties
should generate 52 Bcfe of oil and gas during the year, with an additional 3
Bcfe from as yet unidentified acquisitions. As Taurus begins fiscal 1998, 83
percent of its estimated gas production and 39 percent of its estimated oil
production is hedged or under contract at average prices of $2.26 per Mcf and
$20.29 per barrel, respectively. As acquisitions are made, Taurus will use
futures, swaps and/or fixed-price contracts to lock in commodity prices for up
to 36 months in order to protect targeted returns. A significant part of
Taurus's earnings in fiscal 1998 will be the more than $14 million of tax
credits expected to be generated by the Company's coalbed methane production.

Taurus plans to spend $500 million to $650 million in the acquisition and
development of producing properties and in exploration and related development
over the next three years. With this level of spending, Taurus's production
levels could reach 85 Bcfe to 95 Bcfe by the end of fiscal year 2000, with
proved reserves of up to 1 trillion cubic feet equivalent.

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 their
control which could cause actual results to differ materially from those
anticipated. Some of these include, but are not limited to, economic and
competitive conditions, inflation rates, legislative and regulatory changes,
financial market conditions, future business decisions, 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 Taurus is
unable to invest fully its planned acquisition expenditures, future operating
revenues and proved reserves could be negatively affected. The drilling of
exploratory wells can involve significant risks including those related to
timing, success rates and cost overruns. These risks can be affected 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
Taurus 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 operations.

RECENT PRONOUNCEMENTS OF THE FASB
In fiscal 1997, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method of accounting for
employee stock options. The Statement allows companies to continue to follow
the accounting treatment prescribed by APB Opinion 25 with proper disclosure.
The Company has adopted the disclosure-only provisions of SFAS 123 (see Note
6).

                                                                             27


<PAGE>   8


In 1997, the Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, which provides
accounting and reporting standards for such transactions. The adoption did not
have a material impact on the consolidated financial statements.

In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
specifies computation, presentation, and disclosure requirements for EPS, and
SFAS No. 129, Disclosures of Information about Capital Structure, which
establishes standards for disclosing information about an entity's capital
structure. The Company is required to adopt these statements in its 1998 fiscal
year. 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, and 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. The Company is
required to adopt these statements in fiscal year 1999.

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, 1995....................................  25 1/8          21 3/8         24 1/8               .29
March 31, 1996.......................................  25 3/8          21 3/4         21 7/8               .29
June 30, 1996........................................  24 1/4          21 7/8         22 1/8               .29
September 30, 1996...................................  25              22             24                   .30
-------------------------------------------------------------------------------------------------------------------
December 31, 1996....................................  31 1/4          23 3/4         30 1/4               .30
March 31, 1997.......................................  31 3/8          29             29 7/8               .30
June 30, 1997........................................  35 1/8          29 1/8         33 11/16             .30
September 30, 1997...................................  37 3/4          33 1/4         35 9/16              .31
-------------------------------------------------------------------------------------------------------------------
</TABLE>




28


<PAGE>   9


CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Energen Corporation
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands, except share data)                 1997               1996             1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>               <C>
OPERATING REVENUES
Natural gas distribution.............................................  $   362,984        $   357,252       $   295,967
Oil and gas production activities....................................       85,246             42,190            22,613
-----------------------------------------------------------------------------------------------------------------------
   Total operating revenues..........................................      448,230            399,442           318,580
-----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas..........................................................      175,514            178,810           130,220
Operations...........................................................      116,886            100,822            93,293
Maintenance..........................................................       11,112             11,078             9,849
Depreciation, depletion and amortization.............................       59,688             41,118            29,556
Taxes, other than income taxes.......................................       33,044             28,817            23,629
-----------------------------------------------------------------------------------------------------------------------
   Total operating expenses..........................................      396,244            360,645           286,547
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME.....................................................       51,986             38,797            32,033
-----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense, net of amounts capitalized.........................      (22,906)           (13,920)          (11,693)
Other, net...........................................................        3,014              1,712             2,649
-----------------------------------------------------------------------------------------------------------------------
   Total other income (expense)......................................      (19,892)           (12,208)           (9,044)
-----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES...........................................       32,094             26,589            22,989
Income taxes.........................................................        3,097              5,048             3,681
-----------------------------------------------------------------------------------------------------------------------
NET INCOME...........................................................  $    28,997        $    21,541       $    19,308
-----------------------------------------------------------------------------------------------------------------------
EARNINGS PER AVERAGE COMMON SHARE....................................  $      2.31        $      1.95       $      1.77
-----------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING....................................   12,563,096         11,023,434        10,906,315
-----------------------------------------------------------------------------------------------------------------------
</TABLE>




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

                                                                             29


<PAGE>   10


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
Energen Corporation
--------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                                  1997             1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>               <C>
ASSETS

CURRENT ASSETS

Cash and cash equivalents............................................          $   105,402       $    11,301
Accounts receivable, net of allowance for doubtful accounts of
   $3,185 in 1997 and $3,002 in 1996.................................               70,676            48,126
Inventories, at average cost
   Storage gas inventory.............................................               25,367            28,214
   Materials and supplies............................................                7,281             7,704
   Liquified natural gas in storage..................................                3,630             2,417
Deferred income taxes................................................                7,438             7,995
Prepayments and other................................................               22,371             8,949
------------------------------------------------------------------------------------------------------------
     Total current assets............................................              242,165           114,706
------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, successful efforts method....................              454,210           224,469
Less accumulated depreciation, depletion and amortization                           87,554            60,152
------------------------------------------------------------------------------------------------------------
Oil and gas properties, net..........................................              366,656           164,317
------------------------------------------------------------------------------------------------------------
Utility plant........................................................              583,630           544,643
Less accumulated depreciation........................................              287,749           268,110
------------------------------------------------------------------------------------------------------------
   Utility plant, net................................................              295,881           276,533
------------------------------------------------------------------------------------------------------------
Other property, net..................................................                4,466             4,066
------------------------------------------------------------------------------------------------------------
Total property, plant and equipment, net.............................              667,003           444,916
------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Deferred income taxes................................................                1,144              (972)
Deferred charges and other...........................................                9,485            10,760
------------------------------------------------------------------------------------------------------------
   Total other assets................................................               10,629             9,788
------------------------------------------------------------------------------------------------------------
TOTAL ASSETS.........................................................          $   919,797       $   569,410
------------------------------------------------------------------------------------------------------------
</TABLE>





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

30


<PAGE>   11





<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                                             1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>
CAPITAL AND LIABILITIES

CURRENT LIABILITIES

Long-term debt due within one year...................................                     $     1,855       $     1,805
Notes payable to banks...............................................                         202,000            59,000
Accounts payable.....................................................                          49,196            32,659
Accrued taxes........................................................                          18,300            17,567
Customers deposits...................................................                          16,399            17,364
Amounts due customers................................................                           7,347            17,157
Accrued wages and benefits...........................................                          13,719            11,584
Other................................................................                          21,935            18,049
-------------------------------------------------------------------------------------------------------------------------
   Total current liabilities.........................................                         330,751           175,185
-------------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Other................................................................                           8,301            10,275
-------------------------------------------------------------------------------------------------------------------------
   Total deferred credits and other liabilities......................                           8,301            10,275
-------------------------------------------------------------------------------------------------------------------------
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; 30,000,000 shares authorized, 14,398,109
       shares outstanding in 1997 and 11,162,634
       shares outstanding in 1996....................................                             144               112
     Premium on capital stock........................................                         185,841            86,833
     Capital surplus.................................................                           2,802             2,802
     Retained earnings...............................................                         112,356            98,658
-------------------------------------------------------------------------------------------------------------------------
   Total common shareholders equity..................................                         301,143           188,405
Long-term debt.......................................................                         279,602           195,545
-------------------------------------------------------------------------------------------------------------------------
   Total capitalization..............................................                         580,745           383,950
-------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL AND LIABILITIES........................................                     $   919,797       $   569,410
-------------------------------------------------------------------------------------------------------------------------
</TABLE>





                                                                             31


<PAGE>   12


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

<TABLE>
<CAPTION>
Energen Corporation
-----------------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts)
-----------------------------------------------------------------------------------------------------------------------------
                                   Common Stock                                                     Treasury Stock
                                    Number of       Par      Premium on       Capital     Retained    Number of
                                     Shares        Value    Capital Stock     Surplus     Earnings      Shares         Cost
-----------------------------------------------------------------------------------------------------------------------------
<S>                                <C>           <C>        <C>           <C>         <C>           <C>
BALANCE AT SEPTEMBER 30, 1994        10,917,904  $   109    $   81,073    $  2,802    $    83,042           --     $     --
Net income                                                                                 19,308
Purchase of treasury shares                                                                           (128,900)      (2,721)
Shares issued for:
   Dividend reinvestment plan                                       14                                  19,035          394
   Employee benefit plans                 3,829                    156                                  98,238        2,077
Cash dividends - $1.13 per share                                                          (12,330)
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995        10,921,733      109        81,243       2,802         90,020      (11,627)        (250)
Net income                                                                                 21,541
Purchase of treasury shares                                                                            (86,900)      (1,985)
Shares issued for:
   Dividend reinvestment plan            80,529        1         1,827                                  66,552        1,511
   Employee benefit plans               160,372        2         3,763                                  31,975          724
Cash dividends - $1.17 per share                                                          (12,903)
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996        11,162,634      112        86,833       2,802         98,658           --           --
Net income                                                                                 28,997
Shares issued for:
   Stock Offerings                    2,925,000       29        89,867
   Dividend reinvestment plan           120,802        1         3,611
   Employee benefit plans               189,673        2         5,530
Cash dividends - $1.21 per share                                                          (15,299)
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997        14,398,109  $   144    $  185,841    $  2,802    $   112,356           --     $     --
----------------------------------------------------------------------------------------------------------------------------
</TABLE>



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

32


<PAGE>   13


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Energen Corporation
-------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                                    1997               1996             1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>               <C>
OPERATING ACTIVITIES
Net income...........................................................   $    28,997        $    21,541       $    19,308
Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation, depletion and amortization..........................        59,688             41,118            29,556
   Deferred income taxes, net........................................        (2,646)              (672)           (2,082)
   Deferred investment tax credits, net..............................          (487)              (487)             (487)
   Gain on sale of assets............................................        (1,081)            (3,954)               --
   Net change in:
     Accounts receivable.............................................       (22,550)           (17,313)            3,332
     Inventories.....................................................         2,057             (6,809)            3,775
     Deferred gas cost...............................................          (537)              (549)               34
     Accounts payable gas purchases...................................        5,758             (1,614)            9,882
     Accounts payable trade...........................................       10,779              2,031            (5,120)
     Amounts due customers...........................................        (9,810)            13,942             2,483
     Other current assets and liabilities............................        (6,996)            (2,272)           (3,290)
   Other, net........................................................         3,610              1,722             3,478
------------------------------------------------------------------------------------------------------------------------
     Net cash provided by operating activities.......................        66,782             46,684            60,869
------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment...........................      (283,274)          (168,414)          (68,940)
Proceeds from sale of assets.........................................         1,871             13,134                --
Payments on notes receivable.........................................           527              1,557               816
Other, net...........................................................         1,030              1,627               501
------------------------------------------------------------------------------------------------------------------------
     Net cash used in investing activities...........................      (279,846)          (152,096)          (67,623)
------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of dividends on common stock.................................       (15,299)           (12,903)          (12,330)
Issuance of common stock.............................................        95,357              4,645                84
Purchase of treasury stock...........................................            --             (1,985)           (2,721)
Reduction of long-term debt..........................................          (943)            (1,025)          (45,070)
Proceeds from issuance of long-term debt.............................        84,416             64,586            49,660
Note payable issued to purchase U.S. Treasury securities.............        98,636                 --                --
Net change in short-term debt........................................        44,998             26,700            26,300
------------------------------------------------------------------------------------------------------------------------
     Net cash provided by financing activities.......................       307,165             80,018            15,923
------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents..............................        94,101            (25,394)            9,169
Cash and cash equivalents at beginning of period.....................        11,301             36,695            27,526
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period...........................   $   105,402        $    11,301       $    36,695
------------------------------------------------------------------------------------------------------------------------
</TABLE>



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

                                                                             33


<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
exploration, production, acquisition and development of oil and gas in the
continental United States (oil and gas exploration and production). 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
   Taurus Exploration Inc. (Taurus), 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 1997 and 4.3
   percent in 1996 and 1995.

   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 orders received
   from regulatory authorities, to be recovered from or refunded to customers
   in future periods.

C.OIL AND GAS EXPLORATION AND PRODUCTION
   PROPERTY AND RELATED DEPLETION: Taurus 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: Taurus 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
   overproduction liabilities are established only when it is estimated that a
   property's overproduced volumes exceed the net share of remaining reserves
   for such property. The Company has no significant production imbalances at
   September 30, 1997. Gains and losses on the sale of property in the ordinary
   course of business are classified as operating revenue.

   DERIVATIVE COMMODITY INSTRUMENTS: Taurus 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 until the revenues from the related hedged volumes are
   recognized in the income statement. These realized deferred gains and losses
   are reflected in current liabilities or current assets, respectively. Cash
   flows from derivative instruments are recognized as

34


<PAGE>   15



  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 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.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 reserve volumes and the related
   present value of estimated future net revenues therefrom (see Note 13).


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, a $1.3
million annual decrease in revenue became effective October 1, 1996, a $7.7
million annual increase became effective December 1, 1996, and a $1.5 million
annual decrease became effective April 1, 1997.

Alagasco calculates a temperature adjustment to customers' monthly bills to
remove the effect of departures from normal temperature on Alagasco's earnings.
The calculation is performed monthly, and the adjustments to customers bills
are made in the same billing cycle the weather variation occurs. 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 (Southern)
as described herein.

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 $2.1 million are being returned to ratepayers over approximately 13
years. At September 30, 1997 and 1996, a regulatory liability related to income
taxes of $3.7 million and $5 million, respectively, was included in the
consolidated financial statements.

                                                                             35


<PAGE>   16




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, 1997 and 1996, the net acquisition adjustment was $16.4 million and $16.7
million, respectively.

FERC REGULATION: In 1995 Southern filed a comprehensive settlement with the
FERC in the form of a Stipulation and Agreement (the Settlement) to resolve all
issues in Southern's six then-pending rate cases as well as to resolve all GSR
and transition cost issues resulting from the implementation of FERC Order 636.
Alagasco was a supporting party to the Settlement. The Settlement, as approved
by the FERC, resolves all issues relating to GSR and other transition costs
with respect to supporting parties. Alagasco estimates that it has a remaining
GSR liability of approximately $0.1 million to be paid through December 1998
and approximately $0.7 million in other transition costs to be paid through
June 1998. Because these costs will be recovered in full from its customers,
Alagasco recorded a regulatory asset of $0.8 million and $2.2 million at
September 30, 1997 and 1996, respectively.

3. LONG-TERM DEBT AND NOTES PAYABLE

<TABLE>
<CAPTION>
Long-term debt consists of the following:
-------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                                             1997             1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>
Energen Corporation:
   Medium-term Notes, interest ranging from 6.6% to 8.09%, for notes
     redeemable September 20, 2001, to July 28, 2027.................                     $   125,000       $    40,000
   8% Debentures, due up to $1,000,000 annually to February 1, 2007                            18,704            18,714
   Series 1993 Notes, interest ranging from 5.6% to 7.25%, due annually in
     payments ranging from $855,000 to $1,584,000 from March 1, 1998,
     to March 1, 2008................................................                          12,753            13,636
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................................................................                         281,457           197,350
Less amounts due within one year.....................................                           1,855             1,805
-------------------------------------------------------------------------------------------------------------------------
   Total.............................................................                     $   279,602       $   195,545
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                           Years ending September 30, (in thousands)
-------------------------------------------------------------------------------------------------------------------------
       <S>                      <C>                   <C>                          <C>                    <C>      
            1998                     1999                   2000                       2001                   2002
-------------------------------------------------------------------------------------------------------------------------
       $    1,855               $    7,209            $    1,955                   $   18,648             $   17,077
-------------------------------------------------------------------------------------------------------------------------
</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, 1997, Energen had a tangible net worth of $300.9
million.

Energen and Alagasco have short-term credit lines and other credit facilities
of $203 million available to either entity for working capital needs. At
September 30, 1997, the Company borrowed $50 million under separate agreement
to purchase U.S. Treasury securities for Alabama shares tax planning purposes.
The securities were pledged as collateral on the debt. In total, at year-end,
the Company had $98.6 million of borrowings to purchase Treasury securities.
The securities matured in early October and the proceeds were used to repay
such borrowings. The following is a summary of information relating to notes
payable to banks:

36


<PAGE>   17


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                                1997              1996             1995
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>               <C>
Amount outstanding...................................                        $   152,000       $    59,000       $   32,300
Amount outstanding under separate agreement..........                             50,000                --               --
---------------------------------------------------------------------------------------------------------------------------
Notes payable to banks...............................                        $   202,000       $    59,000       $   32,300
Available for borrowings.............................                             51,000            97,000           77,700
---------------------------------------------------------------------------------------------------------------------------
   Total.............................................                        $   253,000       $   156,000       $  110,000
---------------------------------------------------------------------------------------------------------------------------
Maximum amount outstanding at any month-end                                  $   202,000       $    95,000       $   32,300
Average daily amount outstanding.....................                        $    87,648       $    37,960       $      917
Weighted average interest rates based on:
   Average daily amount outstanding..................                               5.87%             5.68%            5.76%
   Amount outstanding at year-end....................                               5.96%             5.62%            5.96%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Total interest expense for Energen in 1997, 1996 and 1995 was $22,906,000,
$13,920,000, and $11,693,000, respectively.

4. INCOME TAXES
The components of income taxes consist of the following:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, (in thousands)                                  1997             1996              1995
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>               <C>
Taxes estimated to be payable currently:
   Federal...........................................                        $     4,976       $     5,218       $    5,377
   State.............................................                              1,254               989              873
---------------------------------------------------------------------------------------------------------------------------
     Total current...................................                              6,230             6,207            6,250
---------------------------------------------------------------------------------------------------------------------------
Taxes deferred:
   Federal...........................................                             (3,123)           (1,221)          (2,580)
   State.............................................                                (10)               62               11
---------------------------------------------------------------------------------------------------------------------------
   Total deferred....................................                             (3,133)           (1,159)          (2,569)
---------------------------------------------------------------------------------------------------------------------------
Total income tax expense.............................                        $     3,097       $     5,048       $    3,681
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                       1997                               1996
----------------------------------------------------------------------------------------------------------------------------
                                                               Current        Noncurrent          Current        Noncurrent
                                                               -------        ----------          -------        ----------
<S>                                                         <C>              <C>               <C>               <C>
Deferred tax assets:
   Regulatory liabilities............................       $        --      $     1,356       $        --       $    1,872
   Minimum tax credit................................                --           20,541                --           16,379
   Insurance and accruals............................             2,410               --             2,487               --
   Unbilled revenue..................................             1,699               --             1,658               --
   Other, net........................................             5,559            1,570             5,812            1,952
---------------------------------------------------------------------------------------------------------------------------
      Subtotal.......................................             9,668           23,467             9,957           20,203
      Valuation allowance............................                --               --                --               --
---------------------------------------------------------------------------------------------------------------------------
        Total deferred tax assets....................             9,668           23,467             9,957           20,203
---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
   Depreciation and basis differences................                --           20,893                --           20,187
   Gas supply adjustment.............................             1,308               --               500               --
   Other, net........................................               922            1,430             1,462              988
---------------------------------------------------------------------------------------------------------------------------
        Total deferred tax liabilities...............             2,230           22,323             1,962           21,175
---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities)................       $     7,438      $     1,144       $     7,995       $     (972)
---------------------------------------------------------------------------------------------------------------------------
</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 sheet. As
of September 30, 1997, the amount of minimum tax credit which can be carried
forward indefinitely to reduce future regular tax liability is $20.5 million.

                                                                             37


<PAGE>   18



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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, (in thousands)                                  1997             1996              1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>               <C>
Income tax expense at statutory federal income tax rate                      $    11,233       $     9,306       $     8,046
   Increase (decrease) resulting from:
   Nonconventional fuels credits.....................                             (8,058)           (4,221)           (4,122)
   Deferred investment tax credits ..................                               (487)             (487)             (487)
   State income taxes, net of federal income tax benefit                             813               681               625
   Other, net........................................                               (404)             (231)             (381)
------------------------------------------------------------------------------------------------------------ ---------------
      Total income tax expense.......................                        $     3,097       $     5,048       $     3,681
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


5. 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,
1997, 1996 and 1995 was $1,228,000, $412,000, and $1,158,000, respectively. The
expense for the second plan covering employees under certain labor union
agreements (Plan B) for 1997, 1996 and 1995 was $437,000, $197,000, and
$339,000, respectively.

The funded status of the plans is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
As of June 30, (in thousands)                                            Plan A                            Plan B
-----------------------------------------------------------------------------------------------------------------------------
                                                                1997             1996              1997              1996
                                                                ----             ----              ----              ----
<S>                                                         <C>              <C>               <C>
Vested benefits......................................       $   (57,617)     $   (56,828)      $   (14,610)      $  (14,210)
Nonvested benefits...................................            (4,739)          (4,323)           (2,256)          (2,336)
---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation.......................           (62,356)         (61,151)          (16,866)         (16,546)
Effects of salary progression........................           (11,402)         (12,607)               --               --
---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation.........................           (73,758)         (73,758)          (16,866)         (16,546)
Fair value of plan assets, primarily equity and
   fixed income securities...........................            84,859           80,750            20,820           18,358
Unrecognized net (gain) loss.........................            (6,477)            (337)           (2,747)            (433)
Unrecognized prior service cost......................                29               35               998            1,205
Unrecognized net transition obligation (asset).......            (3,494)          (4,303)              282              340
---------------------------------------------------------------------------------------------------------------------------
Accrued pension asset................................       $     1,159      $     2,387       $     2,487       $    2,924
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


At September 30, 1997 and 1996, for both plans the discount rate used to
measure the projected benefit obligation was 7.75 percent, 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 5.75 percent in both years.

38


<PAGE>   19



The components of net pension expense for 1997, 1996 and 1995 were:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, (in thousands)               Plan A                                  Plan B
-----------------------------------------------------------------------------------------------------------------------------
                                                   1997          1996         1995         1997         1996         1995
                                                   ----          ----         ----         ----         ----         ----
<S>                                              <C>          <C>          <C>          <C>          <C>           <C>
Service cost                                     $   2,227    $   2,147    $   2,052    $     243    $     255     $    224
Interest cost on projected benefit obligation        5,524        4,617        4,728        1,238        1,166        1,095
Actual (return) on plan assets                     (12,629)     (15,280)      (8,787)      (3,803)      (2,971)      (2,172)
Net amortization and deferral                        6,106        8,928        2,106        2,759        1,747        1,192
Loss due to special termination benefits                --           --        1,489           --           --           --
Settlement gain                                         --           --         (430)          --           --           --
---------------------------------------------------------------------------------------------------------------------------
Net pension expense                              $   1,228    $     412    $   1,158    $     437    $     197     $    339
---------------------------------------------------------------------------------------------------------------------------
</TABLE>



In 1995 the Company recognized a loss for special termination benefits of
$1,489,000 and a settlement gain of $430,000 pursuant to a voluntary early
retirement option offered to all salaried, non-officer employees of at least 58
years of age with a minimum of 5 years service. Of the 55 eligible employees,
41 accepted.

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 1997, 1996 and 1995 was
$399,000, $1,002,000, and $808,000, respectively. At June 30, 1997 and 1996,
the accumulated post-retirement benefit obligation related to these agreements
was $5,961,000 and $6,206,000, respectively, and the projected benefit
obligation was $9,839,000 and $9,442,000, respectively. A prepaid
post-retirement benefit asset of $499,000 was recorded at June 30, 1997, and an
accrued post-retirement benefit liability of $464,000 was recorded at June 30,
1996.

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, 1997, 1996, and 1995 was $2,221,000, $1,984,000, and $2,271,000,
respectively. The expense for union employees was $4,204,000, $4,076,000, and
$3,613,000 during 1997, 1996 and 1995, respectively. The "projected unit credit"
actuarial method was used to determine the normal cost and actuarial liability.

A reconciliation of the estimated status of the obligation is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
As of June 30, (in thousands)                                        Salaried Employees   Union Employees
-----------------------------------------------------------------------------------------------------------------------------
                                                                1997             1996              1997              1996
                                                                ----             ----              ----              ----
<S>                                                         <C>              <C>               <C>               <C>   
Retirees.............................................       $    (9,590)     $   (10,344)      $   (14,529)      $   (14,982)
Active, fully eligible...............................            (2,121)          (1,574)           (4,340)           (4,011)
Other active.........................................            (8,309)          (7,989)          (14,151)          (14,415)
------------------------------------------------------------------------------------------ ---------------------------------
Accumulated post-retirement benefit obligation.......           (20,020)         (19,907)          (33,020)          (33,408)
Fair value of plan assets, primarily equity and
   fixed income securities...........................            23,719           17,519            13,363             8,399
Unamortized amounts..................................            (4,686)           1,210            17,405            23,394
----------------------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit liability............       $      (987)     $    (1,178)     $     (2,252)      $    (1,615)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>









                                                                             39


<PAGE>   20




Net periodic post-retirement benefit expense for the years ended September 30,
1997, 1996, and 1995 included the following:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
For the years ended September 30, (in thousands)          Salaried Employees                       Union Employees
-----------------------------------------------------------------------------------------------------------------------------
                                                   1997          1996         1995         1997         1996         1995
                                                   ----          ----         ----         ----         ----         ----
<S>                                              <C>          <C>          <C>          <C>          <C>           <C>
Service cost                                     $     979    $     516    $     512    $   1,198    $     876     $    807
Interest cost on accumulated post-retirement
   benefit obligation                                2,204        1,679        1,696        2,542        2,195        1,793
Amortization of transition obligation                  723          723          723        1,285        1,285        1,285
Amortization of actuarial gains and losses            (568)        (277)          --           --           --           --
Deferred asset (gain) loss                           3,682          658          539        2,006          177          424
Actual (return) on plan assets                      (4,799)      (1,315)      (1,199)      (2,827)        (457)        (696)
---------------------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit expense     $   2,221    $   1,984    $   2,271    $   4,204    $   4,076     $  3,613
---------------------------------------------------------------------------------------------------------------------------
</TABLE>



The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.75 percent in 1997 and 1996. 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 8.25 percent and 8 percent in 1997 and
1996, 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 2.4 percent and the net
periodic post-retirement benefit cost by 2.2 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 7.5 percent and
the net periodic post-retirement benefit cost by 7.2 percent. For pay-related
life insurance benefits, the salary scale averages 5.75 percent and 5 percent
in 1997 and 1996, 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, 1997, 1996, and 1995 was $163,000,
$370,000, and $155,000, respectively.

6. 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, 1997, 198,227 common shares were
reserved for issuance under the ESP. Expense associated with Company
contributions to the ESP was $3,083,000, $2,902,000, and $2,944,000 for 1997,
1996 and 1995, respectively.

In 1992 the Company adopted the Energen Corporation 1992 Long-Range Performance
Plan which provides for the award of up to 500,000 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, 350,000 shares have been reserved for
issuance. Under the Plan, 60,330, 62,630, and 56,430 performance units were
awarded in 1997, 1996 and 1995, respectively, leaving 188,395 performance units
available for award at September 30, 1997. The Company recorded expense of
$2,632,200, $1,223,000, and $1,628,000 for 1997,1996, and 1995, 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, 750,000 shares were added to the Plan. As of
September 30, 1997, 710,106 common shares were reserved under this Plan.

40


<PAGE>   21

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 Plan 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 Plan, 270,000 shares of the
Company's common stock have been reserved for issuance. Options were granted in
1996 and 1995 with dividend equivalents. All outstanding options are
non-qualified and expire 10 years from the date of grant. Transactions under
the Plan are summarized as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
As of September 30,                                                       1997        1996        1995
---------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>         <C>
Outstanding at beginning of year ($16.75 - $22.125)                     162,056     152,056     141,556
Granted (at $20.125 - $30)...........................                    53,000      10,000      10,500
Exercised (at $18.375)...............................                    (3,500)         --          --
-------------------------------------------------------------------------------------------------------
Outstanding at year-end..............................                   211,556     162,056     152,056
-------------------------------------------------------------------------------------------------------
Exercisable at year-end..............................                   211,556     162,056     152,056
-------------------------------------------------------------------------------------------------------
Remaining reserved for issuance at year-end..........                    40,348      93,348     103,348
-------------------------------------------------------------------------------------------------------
</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 nonqualified stock options. Had compensation cost
for those options been determined in accordance with SFAS No. 123, the
Company's net income and earnings per share would have been $28.9 million, or
$2.30 per share, in 1997 and $21.5 million, or $1.95 per share, in 1996. 

In 1992 the Company adopted the Energen Corporation 1992 Directors Stock Plan
to enable the Company to pay part of the compensation of its non-employee
directors in shares of the Company's common stock. Under the Plan, 3,062,
4,322, and 3,829 shares were issued in 1997, 1996 and 1995, respectively,
leaving 82,210 shares reserved for issuance at September 30, 1997.

The Company has adopted a Shareholder Rights Plan intended to protect
shareholders from coercive or unfair takeover tactics. Under certain
circumstances, shareholders have the right to acquire the Company's Series A
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 (dated July 27, 1988, and amended February 28, 1990)
between the Company and its Rights Agent. Under the plan, two-thirds of a right
is associated with each outstanding share of Common Stock. Rights outstanding
under the Shareholder Rights Plan at September 30, 1997 and 1996, were
convertible into 95,987 and 74,418 shares, respectively, of Series A 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 at either period. The price at
which the rights would be exercised is $80 per right, subject to adjustment
upon occurrence of certain take-over related events. In general, absent certain
takeover- related events as described in the Plan, the rights may be redeemed
prior to the July 27, 1998, expiration for $0.02 per right.

7. 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.

During 1996, Taurus entered into a sales contract providing for variable and
fixed prices with a fixed price of $2.02 per Mcf for certain of its 1998
production. Taurus's net production of approximately 4 Bcf is subject to the
fixed price. Taurus 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 1997. 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.

Taurus is subject to various environmental regulations. Management believes
that Taurus 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 Taurus 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

                                                                             41
<PAGE>   22
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 bearing little or no relation
to culpability or actual damages continue to rise 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 $3,987,000, $3,050,000, and $3,035,000 in 1997, 1996 and 1995,
respectively. Minimum future rental payments (in thousands) required after 1997
under leases with initial or remaining noncancelable lease terms in excess of
one year are as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
           1998                1999              2000               2001                 2002             2003 and thereafter
-----------------------------------------------------------------------------------------------------------------------------
        <S>                 <C>               <C>                 <C>                 <C>                 <C>
        $   3,531           $   1,567         $   1,117           $    672            $      94             $     25
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


8. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information concerning cash flow activities is as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
For the years ended September 30, (in thousands)                   1997             1996              1995
--------------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>               <C>
Interest paid........................................         $    18,385       $    13,261       $   13,994
Income taxes paid....................................         $     6,308       $     5,486       $    6,234
Noncash investing activities
   Capitalized depreciation..........................         $       168       $       166       $      166
   Allowance for funds used during construction......         $       490       $       972       $    1,054
Noncash financing activities (debt issuance costs)            $       585       $       414       $      340
--------------------------------------------------------------------------------------------------------------
</TABLE>



9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FINANCIAL INSTRUMENTS: The fair value of cash and cash equivalents, trade
receivables (net of allowance), and short-term debt approximates fair value due
to the short maturity of the instruments. The fair value of fixed-rate
long-term debt, including the current portion, with a carrying value of
$281,457,000, would be $287,121,000 at September 30, 1997. 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
1997, 1996 and 1995 , the Company sold $7,926,000, $8,831,000 and $8,454,000 ,
respectively, of installment receivables. At September 30, 1997 and 1996, the
balance of these installment receivables was $17,160,000 and $16,964,000,
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: Taurus 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 until the revenues
from the related hedged volumes are recognized in the income statement. These
realized deferred gains and losses are reflected in current liabilities or
current assets, respectively. Cash flows from derivative instruments are
recognized as incurred through changes in working capital. At September 30,
1997, the Company had deferred losses on the balance sheet of $12.9 million.

At September 30, 1997, Taurus has entered into contracts and swaps for 36.3 Bcf
of its 1998 flowing gas production at an average contract price of $2.26 per
Mcf and 453 MBbl of its oil production at an average contract price of $20.29
per barrel. The program has been extended into fiscal year 1999 with contracts
and swaps in place for 5.7 Bcf of flowing gas production primarily in the
spring and summer months at an average contract price of $2.16 per Mcf.
Realized prices are anticipated to be lower than hedged prices due to basis
difference and other factors. 

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
relationships between

42

<PAGE>   23



the derivative instruments and the sales prices of the hedged volumes to ensure
that a high level of correlation exists.

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 465,000 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.

10. 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
write down of $2.1 million on certain oil and gas properties that are being
held for sale. The properties have 9.7 Bcf of proved undeveloped reserves. The
expense was recorded as additional depreciation, depletion and amortization.

11. RECENT PRONOUNCEMENTS OF THE FASB
In fiscal 1997, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method of accounting for
employee stock options. The Statement allows companies to continue to follow
the accounting treatment prescribed by APB Opinion 25 with proper disclosure.
The Company has adopted the disclosure-only provisions of SFAS 123 (see Note
6).

In 1997, the Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, which provides
accounting and reporting standards for such transactions. The adoption did not
have a material impact on the consolidated financial statements.

In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
specifies computation, presentation, and disclosure requirements for EPS, and
SFAS No. 129, Disclosures of Information about Capital Structure, which
establishes standards for disclosing information about an entity's capital
structure. The Company is required to adopt these Statements in its 1998 fiscal
year. 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, and 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. The Company is
required to adopt these Statements in fiscal year 1999. The impact of these
pronouncements on the Company is currently being evaluated.

                                                                             43


<PAGE>   24



12. 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>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                  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)
Earnings (loss) per average common share.............       $      0.28      $      2.41       $      0.23       $    (0.58)
---------------------------------------------------------------------------------------------------------------------------
                                                                                  1996 Fiscal Quarters
                                                                First            Second            Third            Fourth
-----------------------------------------------------------------------------------------------------------------------------
Operating revenues...................................       $    78,823      $   170,987       $    87,130       $   62,502
Operating income (loss)..............................       $     4,773      $    33,643       $     4,011       $   (3,630)
Net income (loss)....................................       $     2,278      $    23,430       $     1,071       $   (5,238)
Earnings (loss) per average common share.............       $      0.21      $      2.13       $      0.10       $    (0.47)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>



13. 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.

GROSS REVENUES are reported after deduction of royalty interest payments.

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

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

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

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

CAPITALIZED COSTS

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                               1997             1996              1995
-------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>               <C>
Proved...............................................       $   432,095       $   222,428       $  115,720
Unproved.............................................            22,115             2,041            1,619
-------------------------------------------------------------------------------------------------------------
   Total capitalized costs...........................           454,210           224,469          117,339
Accumulated depreciation, depletion and amortization             87,554            60,152           51,170
-------------------------------------------------------------------------------------------------------------
Capitalized costs, net...............................       $   366,656       $   164,317       $   66,169
-------------------------------------------------------------------------------------------------------------
</TABLE>





44


<PAGE>   25



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)                            1997         1996         1995
-----------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>          <C>
Property acquisition:
   Proved............................................    $   171,701  $   108,315  $   16,950
   Unproved..........................................         22,028        1,693         989
Exploration..........................................         14,847       11,124       4,666
Development..........................................         36,375       10,040       6,044
-----------------------------------------------------------------------------------------------
Total costs incurred.................................    $   244,951  $   131,172  $   28,649
-----------------------------------------------------------------------------------------------
</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)                     1997          1996        1995
------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>          <C> 
Gross revenues.......................................   $    84,366   $    38,421  $   22,656
Production (lifting) costs...........................        25,486        10,573       5,995
Exploration expense..................................         6,636         5,439       2,933
Depreciation, depletion and amortization*............        35,393        18,583       8,847
Income tax benefit...................................        (2,299)       (3,004)     (2,410)
------------------------------------------------------------------------------------------------
Results of operations from producing activities......   $    19,150   $     6,830  $    7,291
------------------------------------------------------------------------------------------------
</TABLE>

*  Includes a write down in 1997 of $2.1 million under SFAS 121 (see Note 10)


AVERAGE SALES PRICE, PRODUCTION COST AND DEPRECIATION RATE

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Years ended September 30,                                 1997          1996          1995
----------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>           <C>
Average sales price:
   Gas (per Mcf).....................................    $  2.05      $  1.97       $  1.72
   Oil (per barrel)..................................    $ 18.08      $ 16.25       $ 15.07
   Natural gas liquids (per barrel)..................    $ 11.45      $    --       $    --
Average production (lifting) cost (per Mcf equivalent)   $  0.69      $  0.66       $  0.59
Average depreciation rate (per Mcf equivalent).......    $  0.90      $  1.15       $  0.88
--------------------------------------------------------------------------------------------
</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,                                    1997      1996      1995
-----------------------------------------------------------------------------------------
<S>                                                          <C>       <C>       <C>
Exploratory:
   Productive........................................            1.6     1.1        0.9
   Dry...............................................            1.2     1.5        1.0
-----------------------------------------------------------------------------------------
   Total.............................................            2.8     2.6        1.9
-----------------------------------------------------------------------------------------
Development:
   Productive........................................           17.7     2.4        1.0
   Dry...............................................            0.7      --        0.1
-----------------------------------------------------------------------------------------
   Total.............................................           18.4     2.4        1.1
-----------------------------------------------------------------------------------------
</TABLE>


As of September 30, 1997, the Company was participating in the drilling of 7
gross wells, with the Company's interest equivalent to 1.3 wells.

                                                                             45


<PAGE>   26



PRODUCTIVE WELLS AND ACREAGE The following table sets forth the total gross and
net productive gas and oil wells as of September 30, 1997, and developed and
undeveloped acreage as of the latest practicable date prior to year-end:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                            Gross             Net
-------------------------------------------------------------------------------------
<S>                                                       <C>              <C>
Gas Wells............................................       3,376            1,575
Oil Wells............................................       1,589              199
-------------------------------------------------------------------------------------
Developed Acreage....................................     946,850          559,566
Undeveloped Acreage..................................     354,110           34,013
-------------------------------------------------------------------------------------
</TABLE>


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

OIL AND GAS PRODUCING ACTIVITIES The calculation of proved reserves are 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 learned. Accordingly, the amount of actual future production may vary
significantly from the amount of reserves disclosed. See Note 9 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,                                1997                           1996                   1995
-----------------------------------------------------------------------------------------------------------------------------
                                              Gas         Oil          NGL         Gas         Oil         Gas        Oil
                                             MMcf        MBbl         MBbl        MMcf        MBbl        MMcf       MBbl
                                             ----        ----         ----        ----        ----        ----       ----
<S>                                         <C>          <C>         <C>        <C>
Proved reserves at beginning of year        212,977      6,315           --      71,267       3,986      60,057      1,485
Revisions of previous estimates              (2,910)      (110)          --         502         369      (1,462)       142
Purchase of minerals in place               352,373      3,650       12,880     155,647       3,805      11,919      2,472
Discoveries and other additions              11,946         83           --       5,113          49       9,350        137
Production                                  (29,318)      (775)        (502)    (12,308)       (635)     (8,597)      (250)
Sales of minerals in place                     (785)       (35)          --      (7,244)     (1,259)         --         --
--------------------------------------------------------------------------------------------------------------------------
Proved reserves at end of year              544,283      9,128       12,378     212,977       6,315      71,267      3,986
--------------------------------------------------------------------------------------------------------------------------
Proved developed reserves at end of year    511,864      8,140       12,378     175,124       5,012      50,657      3,380
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


During the year, Taurus invested $172 million in property acquisitions and
added 452 Bcfe of proved reserves. Additional development expenditures are
required. Also, Taurus sold approximately 1 Bcfe and recorded a pre-tax gain of
$1 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)                                         1997              1996              1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>               <C>
Future gross revenues................................                        $ 1,553,333       $   502,607       $  156,367
Future production costs..............................                            571,732           216,755           63,311
Future development costs.............................                             74,396            40,665           19,029
---------------------------------------------------------------------------------------------------------------------------
Future net cash flows before income taxes............                            907,205           245,187           74,027
Future income tax expense (benefit) including tax credits                        162,172             3,707          (10,533)
---------------------------------------------------------------------------------------------------------------------------
Future net cash flows after income taxes.............                            745,033           241,480           84,560
Discount at 10% per annum............................                            305,679            70,641           21,001
---------------------------------------------------------------------------------------------------------------------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves..............                        $   439,354       $   170,839       $   63,559
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

46


<PAGE>   27


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Years ended September 30, (in thousands)                                          1997              1996             1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>               <C>
Balance at beginning of year.........................                        $   170,839       $    63,559       $   51,654
-----------------------------------------------------------------------------------------------------------------------------
Revisions to reserves proved in prior years:
   Net changes in prices, production costs and future
   development costs.................................                             44,913            15,051            (1,984)
   Net changes due to revisions in quantity estimates                             (7,378)              552            (2,474)
   Development costs incurred, previously estimated                               16,743             6,713             3,207
   Accretion of discount.............................                             17,084             6,356             5,166
   Other.............................................                             (1,599)            1,215               (37)
----------------------------------------------------------------------------------------------------------------------------
Total Revisions......................................                             69,763            29,887             3,878
New field discoveries and extensions, net of future
   production and development costs..................                              8,947             4,705             6,021
Sales of oil and gas produced, net of production costs                           (53,848)          (24,002)          (12,518)
Purchases of minerals in place.......................                            259,918            94,728            13,894
Sales of minerals in place...........................                               (625)          (10,597)               --
Net change in income taxes...........................                            (15,640)           12,559               630
----------------------------------------------------------------------------------------------------------------------------
Net change in standardized measure of discounted future
   net cash flows....................................                            268,515           107,280            11,905
----------------------------------------------------------------------------------------------------------------------------
Balance at end of year...............................                        $   439,354       $   170,839       $    63,559
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

COALBED METHANE ACTIVITIES Taurus 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 Taurus,
certain data are separately disclosed below.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Years ended September 30,                                                                   1997          1996       1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>           <C>       <C>  
Proved reserves at beginning of year (MMcf)..........                                      130,387       25,004    26,712
Revisions of previous estimates......................                                        1,959        4,231     1,842
Purchases of minerals in place.......................                                      107,228      105,762        --
Discoveries and other additions......................                                           --           --       159
Production...........................................                                       (9,251)      (4,610)   (3,709)
--------------------------------------------------------------------------------------------------------------------------
Proved reserves at end of year.......................                                      230,323      130,387    25,004
--------------------------------------------------------------------------------------------------------------------------
Estimated proved reserves qualifying for tax credits (MMcf)                                 55,776       30,142    15,837
--------------------------------------------------------------------------------------------------------------------------
Net capitalized costs (in thousands).................                                    $ 145,686     $ 77,708  $ 19,370
--------------------------------------------------------------------------------------------------------------------------
Gross wells in which Taurus has working and/or revenue interest                                863          825       634
--------------------------------------------------------------------------------------------------------------------------
Net productive wells.................................                                        548.4        279.1     154.4
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


Production of coalbed methane from wells drilled prior to January 1, 1993,
qualifies through December 31, 2002, for federal income tax credits under
Section 29 of the Internal Revenue Code of 1986, as amended. The tax credit
currently approximates $1.05 per Mcf of qualifying production. Accordingly, a
significant portion of the value of proved coalbed methane reserves is
associated with this tax credit.

                                                                            47


<PAGE>   28



14. SUPPLEMENTAL FULL COST ACCOUNTING INFORMATION (UNAUDITED)
There are two methods of financial accounting for oil and gas exploration and
production activities-successful efforts and full cost. As described in Note 1,
the Company uses the successful efforts method which is preferred by the
Financial Accounting Standards Board and is the more conservative method for
companies engaging in exploration activities. However, the full cost method
continues to be used by many companies with exploration activities including a
number of the Company's peers. In response to requests from the investment
community, the Company is providing the following supplemental proforma full
cost information to facilitate making comparisons between the Company and its
full cost peers. The supplemental information is not audited and includes
certain assumptions, described in the following paragraphs, which should be
read in conjunction with the information contained in the table below.

Under the full cost method of accounting, all costs directly incurred in the
acquisition, exploration, and development of oil and gas properties are
capitalized. Such capitalized costs are amortized on a unit-of-production
method based on total proved reserves. The unamortized costs (net of related
deferred income taxes) are subject to a ceiling test in which the excess, if
any, of the amount of the cost center over the value of the ceiling is charged
against income. The cost center ceiling s defined as 1) the present value (10%
discount rate) of estimated future net revenues from proved reserves with such
net revenues based on current prices and current costs, plus 2) the cost of
properties not currently being amortized, minus 3) the income tax effects
related to the difference between items 1 and 2 and the tax basis of the
related assets. Because of the ceiling test, full cost entities are not subject
to the impairment test provisions of SFAS 121 (see Note 10). The SEC has an
informal interpretation that the full cost ceiling test is to be applied
quarterly. Information required to perform such tests as of the end of the
interim periods was unavailable. In the proforma full cost disclosure below,
therefore, the full cost ceiling test was applied on an annual basis.

The Company's oil and gas properties include large amounts of coalbed methane
reserves, a significant portion of the value of which are derived from
nonconventional fuels tax credits (see Note 13). Under SFAS 109, Accounting for
Income Taxes, the full amount of historical tax credits and other tax benefits
has been recognized in the financial statements as it is "more likely than not"
that such benefits will reduce future income taxes. Even though the Company
expects that future tax benefits will continue as assets under the "more likely
than not" criteria of SFAS 109, the full cost ceiling test, which was developed
prior to the issuance of SFAS 109, limits the utilization of future tax
benefits. Therefore, the full cost method would have required write downs
pursuant to the ceiling test rules in some years that otherwise would have been
avoided if the ceiling test rules were consistent with the financial statement
treatment of such tax benefits. Accordingly, the Company is responding to the
requests of certain users of the financial statements by also disclosing
supplemental information referred to as Modified Full Cost to reflect the
proforma inclusion of the value of tax benefits in the full cost ceiling test.
This presentation will provide comparable results to full cost peers while also
giving value to tax attributes of coalbed methane consistent with the treatment
such attributes receive in the basic financial statements prepared under
generally accepted accounting principles. In the following proforma Modified
Full Cost disclosure, the ceiling test was applied on an annual basis, as
described above, and tax credits were discounted using a 10% discount rate on
an as-produced basis.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)           1997                           1996                             1995
---------------------------------------------------------------------------------------------------------------------------------
                                           Full     Modified                  Full      Modified               Full     Modified
                             Successful    Cost     Full Cost Successful      Cost      Full Cost Successful   Cost     Full Cost
                               Efforts  (proforma) (proforma)   Efforts    (proforma)  (proforma)   Efforts (proforma) (proforma)
---------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>        <C>          <C>        <C>        <C>        <C>        <C>
Income Statement:
   Net income                  $  28,997  $  42,531  $  41,217  $  21,541  $  17,909  $  25,971  $  19,308  $  14,554  $  14,460
   Earnings per share               2.31       3.39       3.28       1.95       1.62       2.36       1.77       1.33       1.33
   Depreciation, depletion and
   amortization                   57,628     42,142     44,164     41,118     34,230     35,787     29,556     27,724     30,211
   Impairment under SFAS 121       2,060         --         --         --         --         --         --         --         --
   Full cost write down               --         --         --         --     13,961         --         --     12,079      9,736
Balance Sheet:
   Oil and gas properties, net   366,656    352,532    388,710    164,317    129,169    167,370     66,169     36,644     62,441
   Shareholders equity           301,143    314,677    313,363    188,405    184,773    192,835    173,924    169,170    169,076
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>



48


<PAGE>   29



15. INDUSTRY SEGMENT INFORMATION
The Company is principally engaged in the purchase, distribution and sale of
natural gas in central and north Alabama (natural gas distribution) and the
exploration, production, acquisition and development of oil and gas in the
continental United States (oil and gas exploration and production). Certain
reclassifications have been made to conform the prior year to the current year
presentation.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
As of September 30, (in thousands)                                1997              1996             1995
-----------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>               <C>
Operating revenues
   Natural gas distribution..........................        $   362,984       $   357,252       $  295,967
   Oil and gas exploration and production............             85,246            42,190           22,613
-----------------------------------------------------------------------------------------------------------
     Total...........................................        $   448,230       $   399,442       $  318,580
-----------------------------------------------------------------------------------------------------------
Operating income (loss)
   Natural gas distribution..........................        $    38,792       $    35,270       $   32,513
   Oil and gas exploration and production............             14,704             4,779              719
   Eliminations and corporate expenses...............             (1,510)           (1,252)          (1,199)
-----------------------------------------------------------------------------------------------------------
     Total...........................................        $    51,986       $    38,797       $   32,033
-----------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortization expense
   Natural gas distribution..........................        $    23,486       $    21,269       $   19,370
   Oil and gas exploration and production............             36,202            19,849           10,186
-----------------------------------------------------------------------------------------------------------
     Total...........................................        $    59,688       $    41,118       $   29,556
-----------------------------------------------------------------------------------------------------------
Capital expenditures
   Natural gas distribution..........................        $    43,277       $    43,175       $   42,780
   Oil and gas exploration and production............            239,718           126,317           27,352
   Other.............................................                 15                60               28
-----------------------------------------------------------------------------------------------------------
     Total...........................................        $   283,010       $   169,552       $   70,160
-----------------------------------------------------------------------------------------------------------
Identifiable assets
   Natural gas distribution..........................        $   390,381       $   373,817       $  335,267
   Oil and gas exploration and production............            440,158           217,700          132,720
   Eliminations and other............................             89,258           (22,107)          (8,903)
-----------------------------------------------------------------------------------------------------------
   Total.............................................        $   919,797       $   569,410       $  459,084
-----------------------------------------------------------------------------------------------------------
Property, plant and equipment, net
   Natural gas distribution..........................        $   296,228       $   276,927       $  256,638
   Oil and gas exploration and production............            370,677           167,859           70,518
   Other.............................................                 98               130              108
-----------------------------------------------------------------------------------------------------------
   Total.............................................        $   667,003       $   444,916       $  327,264
-----------------------------------------------------------------------------------------------------------
</TABLE>






                                                                             49


<PAGE>   30




MANAGEMENTS 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
managements best estimates and judgments. Financial information presented
elsewhere in this report is consistent with the information in the financial
statements.

Management maintains a comprehensive system of internal accounting controls and
relies on the system to discharge its responsibility for the integrity of the
financial statements. This system provides reasonable assurance that corporate
assets are safeguarded and that transactions are recorded in such a manner as
to permit the preparation of 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, 1997, 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: We have audited the accompanying consolidated
balance sheets of Energen Corporation and Subsidiaries as of September 30, 1997
and 1996, and the related consolidated statements of income, shareholders
equity and cash flows for each of the three years in the period ended September
30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Energen
Corporation and Subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.

Coopers & Lybrand L.L.P.
Birmingham, Alabama
October 23, 1997

50


<PAGE>   31



SELECTED FINANCIAL AND COMMON STOCK DATA

<TABLE>
<CAPTION>
Energen Corporation
-----------------------------------------------------------------------------------------------------------------------------
Years ended September 30,
(dollars in thousands, except per share amounts)                1997             1996              1995              1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>               <C>               <C>
INCOME STATEMENT
Operating revenues...................................       $ 448,230      $  399,442       $ 318,580       $ 374,503
Income before cumulative effect of change
   in accounting principle...........................       $  28,997      $   21,541       $  19,308       $  23,751
Net income...........................................       $  28,997      $   21,541       $  19,308       $  23,751
Earnings per share before cumulative effect..........       $   2.31       $     1.95       $   1.77        $   2.19
Earnings per average common share....................       $   2.31       $     1.95       $   1.77        $   2.19
-----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET Capitalization at year-end:
   Common shareholders equity........................       $ 301,143      $  188,405       $ 173,924       $ 167,026
   Preferred stock...................................              --             --              --              --
   Long-term debt....................................         279,602         195,545         131,600         118,302
-----------------------------------------------------------------------------------------------------------------------------
   Total capitalization..............................       $ 580,745      $  383,950       $ 305,524       $ 285,328
-----------------------------------------------------------------------------------------------------------------------------
Total assets.........................................       $ 919,797      $  569,410       $ 459,084       $ 411,314
-----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net...................       $ 667,003      $  444,916       $ 327,264       $ 287,182
-----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA
Annual dividend rate at year-end.....................       $    1.24      $     1.20       $    1.16       $    1.12
Cash dividends paid per common share.................       $    1.21      $     1.17       $    1.13       $    1.09
Book value per common share..........................       $   20.92      $    16.88       $   15.94       $   15.30
Market-to-book ratio at year-end (%).................             170             142             136             147
Yield at year-end (%)................................             3.5             5.0             5.3             5.0
Return on average common equity (%)..................            11.9            11.6            11.0            14.6
Price-to-earnings ratio at year-end..................           15.40            12.3            12.3            10.3
Shares outstanding at year-end (000).................          14,398          11,163          10,910          10,918
Price Range:
   High..............................................       $      37 3/4  $       25 3/8   $      23 1/2   $      26 5/8
   Low...............................................       $      23 3/4  $       21 3/8   $      19 3/4   $      19 1/4
   Close.............................................       $      35 9/16 $       24       $      21 3/4   $      22 1/2
-----------------------------------------------------------------------------------------------------------------------------
</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.


<PAGE>   32




<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
         1993           1992          1991           1990          1989          1988             1987
-------------------------------------------------------------------------------------------------------------
       <S>            <C>           <C>            <C>           <C>            <C>            <C>


       $355,878       $331,065      $324,902       $324,022      $308,604       $353,135       $  332,590

       $ 18,081       $ 15,687      $ 14,112       $ 11,267      $  6,422       $ 11,667       $    8,950
       $ 18,081       $ 16,628      $ 14,112       $ 11,267      $  6,422       $ 11,667       $    8,950
       $   1.77       $   1.54      $   1.42       $  1.15       $    .69       $   1.53       $     1.38
       $   1.77       $   1.64      $   1.42       $  1.15       $    .69       $   1.53       $     1.38
-------------------------------------------------------------------------------------------------------------


       $140,313       $129,858      $121,995       $113,316      $107,950       $ 86,256       $   63,687
                         1,800         1,800          1,800         2,450          2,450            2,850
         85,852         90,609        77,677         82,835        86,188         53,203           54,589
-------------------------------------------------------------------------------------------------------------
       $226,165       $222,267      $201,472       $197,951      $196,588       $141,909       $  121,126
-------------------------------------------------------------------------------------------------------------
       $370,685       $342,119      $337,516       $326,350      $294,614       $260,560       $  237,445
-------------------------------------------------------------------------------------------------------------
       $273,097       $254,630      $273,539       $250,983      $238,329       $206,230       $  191,099
-------------------------------------------------------------------------------------------------------------

       $   1.08       $   1.04      $   1.00       $    .94      $    .88       $   .827       $      .76
       $   1.05       $   1.01      $   .955       $   .895      $   .843       $   .777       $      .73
       $  13.60       $  12.75      $  12.07       $  11.48      $  11.13       $  10.80       $     9.73
            182            142           150            157           190            147              163
            4.4            5.7           5.5            5.2           4.2            5.2              4.8
           13.0           13.0          11.6           10.0           6.0           15.6             14.7
           14.0           11.1          12.8           15.7          30.6           10.4             11.5
         10,320         10,183        10,104          9,872         9,695          7,989            6,544
       $     26 3/4   $     18 7/8  $     20       $     21 1/2  $     24 3/8   $     16 1/4   $       16 1/2
       $     17 5/8   $     15      $     16       $     16      $     15 3/8   $     11 3/8   $       12 1/2
       $     24 3/4   $     18 1/8  $     18 1/8   $     18      $     21 1/8   $     15 3/8   $       15 7/8
-------------------------------------------------------------------------------------------------------------
</TABLE>








<PAGE>   33



SELECTED BUSINESS SEGMENT DATA

<TABLE>
<CAPTION>
Energen Corporation
-----------------------------------------------------------------------------------------------------------------------------
Years ended September 30,
( dollars in thousands)                                         1997             1996              1995              1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>               <C>               <C>
NATURAL GAS DISTRIBUTION
Operating revenues
   Residential.......................................       $   237,022      $   236,583       $   194,089       $  229,019
   Commercial and industrialsmall....................            87,477           87,912            68,409           84,443
   Commercial and industriallarge....................                --               --               290              790
   Transportation....................................            33,080           30,408            30,490           29,321
   Other.............................................             5,405            2,349             2,687            1,064
-----------------------------------------------------------------------------------------------------------------------------
     Total...........................................       $   362,984      $   357,252       $   295,965       $  344,637
-----------------------------------------------------------------------------------------------------------------------------
Gas delivery volumes
   Residential.......................................            28,357           34,963            27,489           31,254
   Commercial and industrialsmall....................            12,554           15,002            12,289           13,536
   Commercial and industriallarge....................                --               --                29              106
   Transportation....................................            65,622           61,458            61,640           52,635
-----------------------------------------------------------------------------------------------------------------------------
     Total...........................................           106,533          111,423           101,447           97,531
-----------------------------------------------------------------------------------------------------------------------------
Average number of customers
   Residential.......................................           422,878          418,486           410,515          402,531
   Commercial and industrialsmall....................            34,430           34,028            33,115           32,563
   Commercial and industriallarge....................                55               54                48               43
-----------------------------------------------------------------------------------------------------------------------------
     Total...........................................           457,363          452,568           443,678          435,137
-----------------------------------------------------------------------------------------------------------------------------
Other data
   Depreciation & amortization.......................       $    23,486      $    21,269       $    19,368       $   17,941
   Capital expenditures..............................       $    43,277      $    43,175       $    42,780       $   38,473
   Operating income..................................       $    38,792      $    35,270       $    32,513       $   30,017
-----------------------------------------------------------------------------------------------------------------------------
OIL AND GAS EXPLORATION & PRODUCTION
Operating revenues
   Natural gas.......................................       $    60,228      $    24,262       $    14,748       $   17,292
   Oil...............................................            19,753           10,313             3,765            2,725
   Other.............................................             5,265            7,615             4,100            3,546
-----------------------------------------------------------------------------------------------------------------------------
   Total.............................................       $    85,246      $    42,190       $    22,613       $   23,563
-----------------------------------------------------------------------------------------------------------------------------
Production volumes
   Natural gas (Mcf).................................            29,318           12,308             8,597            9,169
   Oil (MBbl)........................................               775              635               250              191
   Natural gas liquids (MBbl)........................               502               --                --               --
-----------------------------------------------------------------------------------------------------------------------------
Proved reserves
   Natural gas (MMcf)................................           544,283          212,977            71,267           60,057
   Oil (MMBbl).......................................             9,128            6,315             3,986            1,485
   Natural gas liquids (MMBbl).......................            12,378               --                --               --
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>




<PAGE>   34




<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
           1993              1992              1991             1990              1989             1988              1987
-----------------------------------------------------------------------------------------------------------------------------
       <S>               <C>              <C>               <C>              <C>               <C>               <C>     



       $   216,587       $   198,676      $   195,250       $   188,168      $   170,302       $   190,836       $  181,007
            83,069            78,799           84,260            85,588           85,477           104,420           93,242
             1,223             6,501            8,916            13,596           25,000            37,923           24,982
            27,382            25,089           22,890            22,734           19,574            15,158           17,871
             2,299             1,661           (2,188)              873              731               689              679
---------------------------------------------------------------------------------------------------------------------------
       $   330,560       $   310,726      $   309,128       $   310,959      $   301,084       $   349,026       $  317,781
---------------------------------------------------------------------------------------------------------------------------

            30,957            29,119           26,262            28,653           27,210            28,636           27,365
            13,853            13,860           14,837            16,581           17,946            21,806           18,482
               282             2,654            3,411             4,786            9,494            13,026            8,902
            49,346            46,235           41,447            39,117           34,447            28,730           26,895
---------------------------------------------------------------------------------------------------------------------------
            94,438            91,868           85,957            89,137           89,097            92,198           81,644
---------------------------------------------------------------------------------------------------------------------------


           395,057           387,871          382,747           379,362          365,572           358,872          350,712
            32,269            31,732           31,432            31,565           30,492            29,717           29,007
                46                41               39                42               42                37               34
---------------------------------------------------------------------------------------------------------------------------
           427,372           419,644          414,218           410,969          396,106           388,626          379,753
---------------------------------------------------------------------------------------------------------------------------


       $    17,206       $    17,154      $    17,126       $    16,131      $    14,657       $    13,642       $   12,135
       $    22,107       $    20,228      $    19,565       $    19,565      $    39,156       $    25,614       $   30,833
       $    26,381       $    25,915      $    25,209       $    21,080      $    18,548       $    19,666       $   16,838
---------------------------------------------------------------------------------------------------------------------------


       $    11,449       $    10,364      $     9,889       $    11,121      $    11,735       $    11,344       $    7,274
             3,484             2,559            1,839             1,411            1,468             1,458            1,948
             2,753               (44)          (3,203)           (5,927)          (8,286)           (8,693)          (3,413)
---------------------------------------------------------------------------------------------------------------------------
       $    17,686       $    12,879      $     8,525       $     6,605      $     4,917       $     4,109       $    5,809
---------------------------------------------------------------------------------------------------------------------------


             6,245             6,415            5,927             4,954            4,964             4,976            3,207
               204               145               88                80               95                94              128
                --                --               --                --               --                 --              --
---------------------------------------------------------------------------------------------------------------------------


            67,298            51,329           73,279            57,532           29,860            14,803           16,497
             1,289               338              402               330              264               292              323
                --                --               --                --                --              --                --
---------------------------------------------------------------------------------------------------------------------------
</TABLE>