EMPLOYEE BENEFIT PLANS

Benefit Obligations: The following table sets forth the combined funded status of the defined qualified and nonqualified supplemental benefit plans along with the postretirement health care and life insurance benefit plans and their reconciliation with the related amounts in the Company’s consolidated financial statements:



As of December 31, (in thousands)	2011			2010			2011			2010
	Pension						Postretirement Benefits
Accumulated benefit obligation	$	211,896		$	196,421
Projected benefit obligation:
Balance at beginning of period	$	233,772		$	213,920		$	83,748		$	84,085
Service cost	9,173			8,574			1,769			2,064
Interest cost	10,960			11,365			4,443			4,833
Actuarial (gain) loss	17,024			12,961			1,858			(3,062		)
Plan amendments	(169		)	—			—			—
Termination benefit charge	414			—			—			—
Retiree drug subsidy program	—			—			302			—
Benefits paid	(20,555		)	(13,048		)	(4,056		)	(4,172		)
Balance at end of period	$	250,619		$	233,772		$	88,064		$	83,748
Plan assets:
Fair value of plan assets at beginning of period	$	212,454		$	167,653		$	80,118		$	72,227
Actual return (loss) on plan assets	1,485			20,443			(1,653		)	7,580
Employer contributions	2,275			37,406			3,712			4,483
Benefits paid	(20,555		)	(13,048		)	(4,056		)	(4,172		)
Fair value of plan assets at end of period	$	195,659		$	212,454		$	78,121		$	80,118

Funded status of plan	$	(54,960	)	$	(21,318	)	$	(9,943	)	$	(3,630	)

Noncurrent assets	$	—		$	12,804		$	—		$	1,103
Current liabilities	(2,371		)	(2,304		)	—			—
Noncurrent liabilities	(52,589		)	(31,818		)	(9,943		)	(4,733		)
Net liability recognized	$	(54,960	)	$	(21,318	)	$	(9,943	)	$	(3,630	)
Amounts recognized to accumulated other comprehensive income:
Prior service costs, net of taxes	$	749		$	945		$	—		$	—
Net actuarial (gain) loss, net of taxes	36,976			30,112			451			(915		)
Transition obligation, net of taxes	—			—			408			580
Total accumulated other comprehensive income (loss)	$	37,725		$	31,057		$	859		$	(335	)

Alagasco recognized a regulatory asset of $67.8 million and $54.2 million as of December 31, 2011 and 2010, respectively, for the portion of the pension plan obligation to be recovered through rates in future periods. Alagasco recognized a regulatory asset of $8.4 million and $5.0 million as of December 31, 2011 and 2010, respectively, for the portion of the postretirement health care and life insurance benefit obligation to be recovered through rates in future periods. Alagasco also recognized a regulatory liability of $0.8 million as of December 31, 2010 for the portion of the postretirement health care and life insurance benefit obligation to be refunded through rates in future periods.

Other investment assets designated for payment of the nonqualified supplemental retirement plans were as follows:



	December 31, 2011
(in thousands)	Level 1		Level 2		Level 3		Total
Insurance contracts	$	—	$	6,620	$	5,332	$	11,952
United States equities	4,546		—		—		4,546
Global equities	1,798		—		—		1,798
Fixed income	—		9,454		—		9,454
Total	$	6,344	$	16,074	$	5,332	$	27,750



	December 31, 2010
(in thousands)	Level 1		Level 2		Level 3		Total
Insurance contracts	$	—	$	6,700	$	5,069	$	11,769
United States equities	4,738		—		—		4,738
Global equities	1,955		—		—		1,955
Fixed income	—		9,372		—		9,372
Total	$	6,693	$	16,072	$	5,069	$	27,834

While intended for payment of the nonqualified supplemental retirement plan benefits, these assets remain subject to the claims of the Company’s creditors and are not recognized in the funded status of the plan. These assets are recorded at fair value and included in Deferred Charges and Other in the Consolidated Balance Sheets.

The following is a reconciliation of insurance contracts in Level 3 of the fair value hierarchy:



Years ended December 31, (in thousands)	2011		2010
Balance at beginning of period	$	5,069	$	4,824
Unrealized gains relating to instruments held at the reporting date	263		245
Balance at end of period	$	5,332	$	5,069

The components of net periodic benefit cost were:



Years ended December 31, (in thousands)	2011			2010			2009
Pension Plans
Components of net periodic benefit cost:
Service cost	$	9,173		$	8,574		$	7,340
Interest cost	10,960			11,365			12,064
Expected long-term return on assets	(15,471		)	(12,915		)	(14,002		)
Prior service cost amortization	496			496			579
Actuarial loss	6,435			5,773			3,987
Termination benefit charge	414			—			145
Net periodic expense	$	12,007		$	13,293		$	10,113
Postretirement Benefit Plans
Components of net periodic benefit cost:
Service cost	$	1,769		$	2,064		$	1,813
Interest cost	4,443			4,833			4,849
Expected long-term return on assets	(4,418		)	(3,986		)	(3,542		)
Actuarial loss	—			—			228
Transition amortization	1,917			1,917			1,917
Net periodic expense	$	3,711		$	4,828		$	5,265

Other changes in plan assets and projected benefit obligations recognized in other comprehensive income were as follows:



Years ended December 31, (in thousands)	2011			2010			2009
Pension Plans
Net actuarial loss experienced during the year	$	14,312		$	4,332		$	5,683
Net actuarial loss recognized as expense	(3,755		)	(3,290		)	(2,559		)
Prior service cost recognized as expense	(298		)	(298		)	(298		)
Total recognized in other comprehensive income	10,259			744			2,826
Postretirement Benefit Plans
Net actuarial (gain) loss experienced during the year	$	2,111		$	(2,094	)	$	(1,363	)
Amortization of net actuarial loss	—			—			(46		)
Amortization of transition asset	(286		)	(280		)	(280		)
Total recognized in other comprehensive income (loss)	$	1,825		$	(2,374	)	$	(1,689	)

Net retirement expense for Alagasco was $5.2 million, $6.3 million and $4.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. In the first quarter of 2011 and in the second quarter of 2009, the Company recognized a termination benefit charge of $0.4 million and $0.1 million, respectively, to provide for early retirement of certain non-highly compensated employees. Net periodic postretirement benefit expense for Alagasco was $2.8 million, $3.6 million and $4.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Estimated amounts to be amortized from accumulated other comprehensive income into pension cost during 2012 are as follows:



(in thousands)
Amortization of prior service cost	$	341
Amortization of net actuarial loss	$	4,721

Estimated amounts to be amortized from accumulated other comprehensive income into benefit cost during 2012 are as follows:



(in thousands)
Amortization of transition obligation	$	286
Amortization of net actuarial gain	$	—

The Company has a long-term disability plan covering most employees. The Company had expense for the years ended December 31, 2011, 2010 and 2009 of $0.5 million, $0.4 million and $0.5 million, respectively.

Assumptions:

The weighted average rate assumptions to determine net periodic benefit costs were as follows:



Years ended December 31,	2011		2010		2009
Pension Plans
Discount rate	4.89	%	5.49	%	6.50	%
Expected long-term return on plan assets	7.25	%	7.25	%	8.25	%
Rate of compensation increase for pay-related plans	3.75	%	3.95	%	3.90	%
Postretirement Benefit Plans
Discount rate	5.45	%	5.90	%	6.50	%
Expected long-term return on plan assets	7.25	%	7.25	%	8.25	%
Rate of compensation increase	3.61	%	3.69	%	3.55	%

The weighted average rate assumptions used to determine the projected benefit obligations at the measurement date were as follows:



Years ended December 31,	2011		2010
Pension Plans
Discount rate	4.52	%	4.89	%
Rate of compensation increase for pay-related plans	3.59	%	3.75	%
Postretirement Benefit Plans
Discount rate	4.95	%	5.45	%
Rate of compensation increase for pay-related plans	3.55	%	3.61	%

The assumed post-65 health care cost trend rates used to determine the postretirement benefit obligation at the measurement date were as follows:



As of December 31,	2011		2010
Health care cost trend rate assumed for next year	7.00	%	8.50	%
Rate to which the cost trend rate is assumed to decline	5.00	%	5.50	%
Year that rate reaches ultimate rate	2020		2017

Assumed health care cost trend rates used in determining the accumulated postretirement benefit obligation have an effect on the amounts reported. For example, revising the weighted average health care cost trend rate by 1 percentage point would have the following effects:



(in thousands)
	1-Percentage Point Decrease			1-Percentage Point Increase
Effect on total of service and interest cost	$	(414	)	$	504
Effect on net postretirement benefit obligation	$	(4,503	)	$	5,313

Investment Strategy: The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets with a prudent level of risk. Risk tolerance is established through consideration of plan liabilities, plan funded status, corporate financial condition, and market conditions.

The Company has developed an investment strategy that focuses on asset allocation, diversification and quality guidelines. The investment goals of the Company are to obtain an adequate level of return to meet future obligations of the plan by providing above average risk-adjusted returns with a risk exposure in the mid-range of comparable funds. Investment managers are retained by the Company to manage separate pools of assets. Funds are allocated to such managers in order to achieve an appropriate, diversified, and balanced asset mix. Comparative market and peer group benchmarks are utilized to ensure that investment managers are performing satisfactorily.

The Company seeks to maintain an appropriate level of diversification to minimize the risk of large losses in a single asset class. Accordingly, plan assets for the pension plans and the postretirement health care and life insurance benefit plan do not have a concentration of assets in a single entity, industry, country, commodity or class of investment fund.

The Company’s weighted-average plan asset allocations by asset category were as follows:



	Pension						Postretirement Benefits
As of December 31,	Target		2011		2010		Target		2011		2010
Asset category:
Equity securities	41	%	39	%	43	%	60	%	60	%	60	%
Debt securities	38	%	40	%	33	%	40	%	40	%	40	%
Other	21	%	21	%	24	%	—	%	—	%	—	%
Total	100	%	100	%	100	%	100	%	100	%	100	%

Equity securities for pension and postretirement benefits do not include the Company’s common stock.

Plan assets included in the funded status of the pension plans were as follows:



	December 31, 2011
(in thousands)	Level 1		Level 2		Level 3		Total
United States equities	$	37,009	$	8,916	$	—	$	45,925
Global equities	20,064		4,914		4,352		29,330
Fixed income	—		78,443		—		78,443
Alternative investments	—		26,070		13,047		39,117
Cash and cash equivalents	—		2,844		—		2,844
Total	$	57,073	$	121,187	$	17,399	$	195,659

	December 31, 2010
(in thousands)	Level 1		Level 2		Level 3		Total
United States equities	$	44,566	$	10,360	$	—	$	54,926
Global equities	24,785		5,560		5,087		35,432
Fixed income	—		69,878		—		69,878
Alternative investments	—		26,688		21,754		48,442
Cash and cash equivalents	—		3,776		—		3,776
Total	$	69,351	$	116,262	$	26,841	$	212,454

United States equities consist of mutual and commingled funds with varying strategies. Such strategies include stock investments across market capitalizations and investment styles. Global equities consist of mutual funds and a limited partnership that invest in United States and non-United States securities broadly diversified across mostly developed markets but with some tactical exposure to emerging markets. Fixed income securities consist of mutual funds and separate accounts. Fixed income securities are well diversified with allocations to investment grade and non-investment grade issues and issues that provide both intermediate and longer duration exposure. Alternative asset investments consist of limited partnerships and commingled and mutual funds with varying investment strategies. Alternative assets are meant to serve as a risk reducer at the total portfolio level as they provide asset class exposures not found elsewhere in the portfolio.

The following is a reconciliation of plan assets in Level 3 of the fair value hierarchy:



Years ended December 31, (in thousands)	2011			2010
Balance at beginning of period	$	26,841		$	21,808
Unrealized losses	(752		)	—
Unrealized gains relating to instruments held at the reporting date	635			1,242
Settlements	(9,604		)	—
Purchases	279			3,791
Balance at end of period	$	17,399		$	26,841

Plan assets included in the funded status of the postretirement benefit plans were as follows:



	December 31, 2011
(in thousands)	Level 1		Level 2		Total
United States equities	$	33,649	$	—	$	33,649
Global equities	13,088		—		13,088
Fixed income	—		31,384		31,384
Total	$	46,737	$	31,384	$	78,121



	December 31, 2010
(in thousands)	Level 1		Level 2		Total
United States equities	$	34,387	$	—	$	34,387
Global equities	13,603		—		13,603
Fixed income	—		32,128		32,128
Total	$	47,990	$	32,128	$	80,118

The Company had no Level 3 postretirement benefit plan assets. United States equities consisted of mutual funds with varying strategies. These funds invest largely in medium to large capitalized companies with exposure blending growth, market-oriented and value styles. Additional fund investments include small capitalization companies, and certain of these funds utilize tax-sensitive management approaches. Global equities are mutual funds that invest in non-United States securities broadly diversified across most developed markets with exposure blending growth, market-oriented and value styles. Fixed income securities are high-quality short-duration securities including investment-grade market sectors with tactical investments in non-investment grade sectors.

Cash Flows: The Company anticipates required contributions of approximately $12.8 million during 2012 to the qualified pension plans. The Company expects sufficient funding credits, as established under Internal Revenue Code Section 430(f), exist to meet the required funding. It is not anticipated that the funded status of the qualified pension plans will fall below statutory thresholds requiring accelerated funding or constraints on benefit levels or plan administration. No additional discretionary contributions are currently expected to be made to the pension plans by the Company during 2012. The Company expects to make benefit payments of approximately $2.4 million during 2012 to retirees with respect to the nonqualified supplemental retirement plans. The Company expects to make discretionary contributions of $3.5 million to the postretirement health care and life insurance benefit plan during 2012.

The following benefit payments, which reflect expected future service, as appropriate, are anticipated to be paid as follows. In addition, the following benefits reflect the expected prescription drug subsidy related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act). The Act includes a prescription drug benefit under Medicare Part D as well as a federal subsidy which began in 2007:



(in thousands)	Pension Benefits	Postretirement Benefits	Postretirement Benefits – Prescription Drug Subsidy
2012	$23,191	$4,821	$(278)
2013	$16,450	$5,090	$(284)
2014	$17,937	$5,264	$(289)
2015	$19,153	$5,465	$(294)
2016	$20,525	$5,689	$(299)
2017-2021	$138,746	$32,332	$(1,535)

In March 2010, The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, Health Care Reform) was signed into law. The impact of the legislation has been estimated and is first reflected in the December 31, 2010 measurement of the post retirement benefit obligation. Energen has applied and been approved for the Early Retiree Reinsurance Program (ERRP). Energen is currently evaluating the application of the ERRP receipts and, therefore, the post retirement benefit obligations have not been reduced to reflect actual or expected receipts under the program.