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)	2013			2012			2013			2012
	Pension						Postretirement Benefits
Accumulated benefit obligation	$	253,030		$	269,101
Benefit obligation:
Balance at beginning of period	$	323,540		$	250,619		$	85,785		$	88,064
Service cost	14,173			10,527			1,694			1,853
Interest cost	11,239			10,801			3,504			4,248
Actuarial (gain) loss	(28,339		)	65,048			(21,681		)	(5,413		)
Curtailment gain	(4,223		)	—			(1,255		)	—
Retiree drug subsidy program	—			—			261			360
Benefits paid	(23,036		)	(13,455		)	(4,726		)	(3,327		)
Balance at end of period	$	293,354		$	323,540		$	63,582		$	85,785
Plan assets:
Fair value of plan assets at beginning of period	$	209,424		$	195,659		$	87,189		$	78,121
Actual return on plan assets	22,977			24,841			14,892			8,778
Employer contributions	10,169			2,379			1,578			3,617
Benefits paid	(23,036		)	(13,455		)	(4,726		)	(3,327		)
Fair value of plan assets at end of period	$	219,534		$	209,424		$	98,933		$	87,189

Funded status of plans	$	(73,820	)	$	(114,116	)	$	35,351		$	1,404

Noncurrent assets	$	—		$	—		$	35,351		$	1,404
Current liabilities	(6,145		)	(3,834		)	—			—
Noncurrent liabilities	(67,675		)	(110,282		)	—			—
Net asset (liability) recognized	$	(73,820	)	$	(114,116	)	$	35,351		$	1,404
Amounts recognized to accumulated other comprehensive income:
Prior service costs, net of taxes	$	323		$	528		$	—		$	—
Net actuarial (gain) loss, net of taxes	37,479			52,472			(5,584		)	(715		)
Transition obligation, net of taxes	—			—			27			222
Total accumulated other comprehensive income (loss)	$	37,802		$	53,000		$	(5,557	)	$	(493	)

Alagasco recognized a regulatory asset of $58.2 million and $89.5 million as of December 31, 2013 and 2012, respectively, for the portion of the pension plan obligation to be recovered through rates in future periods. Alagasco also recognized a regulatory liability of $26.2 million and $1.2 million as of December 31, 2013 and 2012, respectively, 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, 2013
(in thousands)	Level 1		Level 2		Level 3		Total
Insurance contracts	$	—	$	14,805	$	—	$	14,805
United States equities	5,579		—		—		5,579
Global equities	2,338		—		—		2,338
Fixed income	—		11,039		—		11,039
Total	$	7,917	$	25,844	$	—	$	33,761



	December 31, 2012
(in thousands)	Level 1		Level 2		Level 3		Total
Insurance contracts	$	—	$	7,399	$	5,600	$	12,999
United States equities	4,741		—		—		4,741
Global equities	2,109		—		—		2,109
Fixed income	—		10,219		—		10,219
Total	$	6,850	$	17,618	$	5,600	$	30,068

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)	2013			2012		2011
Balance at beginning of period	$	5,600		$	5,332	$	5,069
Unrealized gains relating to instruments held at the reporting date	—			268		263
Transfer out of Level 3	(5,600		)	—		—
Balance at end of period	$	—		$	5,600	$	5,332

Changes in Fair Value Levels: The availability of observable market data is monitored to assess the appropriate classification for financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. For the year ended December 31, 2013, except for the transfer out of Level 3 noted below, there were no significant transfers in or out of Levels 1, 2, or 3.

Transfer of Insurance Contracts: The insurance contracts consist of multiple contracts with two insurance companies and are accounted for at fair value at the contracts’ cash surrender values. During 2013, the Company determined that its insurance contracts meet the requirements to be categorized as a Level 2 fair value measurement.

The components of net periodic benefit cost were as follows:



Years ended December 31, (in thousands)	2013			2012			2011
Pension Plans
Components of net periodic benefit cost:
Service cost	$	14,173		$	10,527		$	9,173
Interest cost	11,239			10,801			10,960
Expected long-term return on assets	(14,731		)	(14,093		)	(15,471		)
Prior service cost amortization	490			517			496
Actuarial loss amortization	13,979			8,603			6,435
Termination benefit charge	—			—			414
Settlement charge	1,373			—			—
Net periodic expense	$	26,523		$	16,355		$	12,007
Postretirement Benefit Plans
Components of net periodic benefit cost:
Service cost	$	1,694		$	1,853		$	1,769
Interest cost	3,504			4,248			4,443
Expected long-term return on assets	(5,024		)	(4,438		)	(4,418		)
Actuarial (gain) loss amortization	(120		)	37			—
Transition obligation amortization	1,296			1,917			1,917
Curtailment gain	(1,229		)	—			—
Net periodic expense	$	121		$	3,617		$	3,711

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



Years ended December 31, (in thousands)	2013			2012			2011
Pension Plans
Net actuarial (gain) loss experienced during the year	$	(14,138	)	$	28,748		$	14,312
Net actuarial loss recognized as expense	(8,934		)	(4,908		)	(3,755		)
Prior service cost recognized as expense	(311		)	(340		)	(298		)
Total recognized in other comprehensive income (loss)	(23,383		)	23,500			10,259
Postretirement Benefit Plans
Net actuarial (gain) loss experienced during the year	$	(8,057	)	$	(1,787	)	$	2,111
Net actuarial gain recognized as expense	550			—			—
Transition obligation recognized as expense	(283		)	(294		)	(286		)
Total recognized in other comprehensive income (loss)	$	(7,790	)	$	(2,081	)	$	1,825

Net retirement expense for Alagasco was $12.1 million, $7.8 million and $5.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. In conjunction with the sale of its Black Warrior Basin coalbed methane properties in Alabama, the Company recognized a curtailment gain of $1.2 million in the fourth quarter of 2013. In the first quarter of 2013, the Company incurred a settlement charge of $0.5 million for the payment of lump sums from the nonqualified supplemental retirement plans, of which $0.1 million was expensed and $0.4 million was recognized as a pension and postretirement asset in regulatory assets at Alagasco. In the third quarter of 2013, the Company incurred a settlement charge of $64,000 for the payment of lump sums from the nonqualified supplemental retirement plans, of which $18,000 was expensed and $46,000 was recognized as a pension and postretirement asset in regulatory assets at Alagasco. In the fourth quarter of 2013, the Company incurred a settlement charge of $0.8 million for the payment of lump sums from a defined benefit pension plan. In the first quarter of 2011, the Company recognized a termination benefit charge of $0.4 million to provide for early retirement of certain non-highly compensated employees. Net periodic postretirement benefit cost for Alagasco was $0.8 million, $2.7 million and $2.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Estimated amounts to be amortized from accumulated other comprehensive income into pension cost during 2014 are as follows:



(in thousands)
Amortization of prior service cost	$	314
Amortization of net actuarial loss	$	5,422

Estimated amounts to be amortized from accumulated other comprehensive income into postretirement benefit cost during 2014 are as follows:



(in thousands)
Amortization of net transition obligation	$	42
Amortization of net actuarial gain	$	(593	)

The Company has a long-term disability plan covering most employees. The Company had expense for the years ended December 31, 2013, 2012 and 2011 of $0.6 million, $0.7 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,	2013		2012		2011
Pension Plans
Discount rate	3.63	%	4.52	%	4.89	%
Expected long-term return on plan assets	7.00	%	7.00	%	7.25	%
Rate of compensation increase for pay-related plans	3.71	%	3.59	%	3.75	%
Postretirement Benefit Plans
Discount rate	4.26	%	4.95	%	5.45	%
Expected long-term return on plan assets	7.00	%	7.00	%	7.25	%
Rate of compensation increase	3.70	%	3.55	%	3.61	%

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



Years ended December 31,	2013		2012
Pension Plans
Discount rate	4.31	%	3.47	%
Rate of compensation increase for pay-related plans	3.63	%	3.71	%
Postretirement Benefit Plans
Discount rate	4.95	%	4.15	%
Rate of compensation increase for pay-related plans	3.60	%	3.70	%

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,	2013		2012
Health care cost trend rate assumed for next year	6.50	%	6.75	%
Rate to which the cost trend rate is assumed to decline	5.00	%	5.00	%
Year that rate reaches ultimate rate	2020		2020

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	$	(280	)	$	336
Effect on net postretirement benefit obligation	$	(764	)	$	759

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		2013		2012		Target		2013		2012
Asset category:
Equity securities	41	%	34	%	41	%	60	%	61	%	60	%
Debt securities	38	%	28	%	38	%	40	%	39	%	40	%
Other	21	%	38	%	21	%	—	%	—	%	—	%
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, 2013
(in thousands)	Level 1		Level 2		Level 3		Total
United States equities	$	34,117	$	8,080	$	—	$	42,197
Global equities	20,153		13,256		—		33,409
Fixed income	—		61,121		—		61,121
Alternative investments	—		37,292		—		37,292
Cash and cash equivalents	5,970		39,545		—		45,515
Total	$	60,240	$	159,294	$	—	$	219,534

	December 31, 2012
(in thousands)	Level 1		Level 2		Level 3		Total
United States equities	$	41,907	$	9,072	$	—	$	50,979
Global equities	23,782		10,697		—		34,479
Fixed income	—		78,806		—		78,806
Alternative investments	—		27,659		14,500		42,159
Cash and cash equivalents	—		3,001		—		3,001
Total	$	65,689	$	129,235	$	14,500	$	209,424

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 investments consist of limited partnerships and commingled and mutual funds with varying investment strategies. Alternative investments 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)	2013			2012			2011
Balance at beginning of period	$	14,500		$	17,399		$	26,841
Unrealized gains (losses)	—			992			(752		)
Unrealized gains relating to instruments held at the reporting date	—			242			635
Settlements	—			(4,948		)	(9,604		)
Purchases	—			815			279
Transfer out of Level 3	(14,500		)	—			—
Balance at end of period	$	—		$	14,500		$	17,399

Changes in Fair Value Levels: The availability of observable market data is monitored to assess the appropriate classification for financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the cumulative reporting period. For the year ended December 31, 2013, except for the transfers out of Level 3 noted below, there were no significant transfers in or out of Levels 1, 2, or 3.

Transfer of Alternative Investments: The alternative investments consist of three investments that are measured at net asset value (NAV). NAV per share serves as an estimate for the fair value of an investment as long as certain requirements are met. During 2013, the Company determined that its alternative investments meet those requirements.

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



	December 31, 2013
(in thousands)	Level 1		Level 2		Total
United States equities	$	43,054	$	—	$	43,054
Global equities	17,048		—		17,048
Fixed income	—		38,831		38,831
Total	$	60,102	$	38,831	$	98,933



	December 31, 2012
(in thousands)	Level 1		Level 2		Total
United States equities	$	37,482	$	—	$	37,482
Global equities	15,049		—		15,049
Fixed income	—		34,658		34,658
Total	$	52,531	$	34,658	$	87,189

The Company had no Level 3 postretirement benefit plan assets. United States equities consists 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: There are no required contributions to the qualified pension plans during 2014. Additionally, 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. The Company made a discretionary contribution of $3 million to the qualified pension plans in January 2014. During 2014, the Company may make additional discretionary contributions to the qualified pension plans depending on the amount and timing of employee retirements and market conditions. The Company expects to make benefit payments of approximately $6.1 million during 2014 to retirees with respect to the nonqualified supplemental retirement plans.

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
2014	$66,816	$4,156	$(212)
2015	$16,572	$4,219	$(218)
2016	$18,174	$4,286	$(224)
2017	$22,167	$4,362	$(227)
2018	$28,374	$4,426	$(231)
2019-2023	$134,584	$22,319	$(1,202)

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, 2011 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.