FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Financial Instruments: The stated value of cash and cash equivalents, short-term investments, trade receivables (net of allowance), and short-term debt approximates fair value due to the short maturity of the instruments. The fair value of Energen’s long-term debt, including the current portion, approximates $1,420.7 million and $1,255.8 million and has a carrying value of $1,403.9 million and $1,154.0 million at December 31, 2013 and 2012, respectively. The fair value of Alagasco’s fixed-rate long-term debt, including the current portion, approximates $258.8 million and $284.7 million and has a carrying value of $249.9 million and $250.0 million at December 31, 2013 and 2012, respectively. The fair values were based on market prices of similar issues having the same remaining maturities, redemption terms and credit rating. Short-term debt is classified as Level 1 fair value and long-term debt is classified as Level 2 fair value.

Alagasco purchases gas as an agent for certain of its large commercial and industrial customers. Alagasco has, in certain instances, provided commodity-related guarantees to counterparties in order to facilitate these agency purchases. Liabilities existing for gas delivered to customers subject to these guarantees are included in the balance sheet. In the event the customer for whom the guarantee was entered fails to take delivery of the gas, Alagasco can sell such gas for the customer, with the customer liable for any resulting loss. Although the substantial majority of purchases under these guarantees are for the customers’ current monthly consumption and are at current market prices, in some instances, the purchases are for an extended term at a fixed price. At December 31, 2013, the fixed price purchases under these guarantees had a maximum term outstanding through October 2014 with an aggregate purchase price of $0.5 million and a market value of $0.6 million.

Finance Receivables: Alagasco finances third-party contractor sales of merchandise including gas furnaces and appliances. At December 31, 2013 and 2012, Alagasco’s finance receivable totaled approximately $10.8 million and $10.7 million, respectively. These finance receivables currently have an average balance of approximately $3,000 and with terms of up to 84 months. Financing is available only to qualified customers who meet creditworthiness thresholds for customer payment history and external agency credit reports. Alagasco relies upon ongoing payments as the primary indicator of credit quality during the term of each contract. The allowance for credit losses is recognized using an estimate of write-off percentages based on historical experience applied to an aging of the finance receivable balance. Delinquent accounts are evaluated on a case-by-case basis and, absent evidence of debt repayment after 90 days, are due in full and assigned to a third-party collection agency. The remaining finance receivable is written off approximately 12 months after being assigned to the third-party collection agency. Alagasco had finance receivables past due 90 days or more of $0.4 million and $0.5 million as of December 31, 2013 and 2012, respectively.

The following table sets forth a summary of changes in the allowance for credit losses as follows:



(in thousands)
Allowance for credit losses as of December 31, 2011	$	421
Provision	49
Allowance for credit losses as of December 31, 2012	470
Provision	(47		)
Allowance for credit losses as of December 31, 2013	$	423

Risk Management: At December 31, 2013, the counterparty agreements under which the Company had active positions did not include collateral posting requirements. The Company is at risk for economic loss based upon the creditworthiness of its counterparties. Energen Resources was in a net gain position with seven of its active counterparties and in a net loss position with the remaining six at December 31, 2013. The two largest counterparty net gain positions at December 31, 2013, Macquarie Bank Limited and J Aron & Company, constituted approximately $8.6 million and $5.3 million of Energen Resources’ total net loss on fair value of derivatives.

The following table details the fair values of commodity contracts by business segment on the balance sheets:



(in thousands)	December 31, 2013
	Oil and Gas Operations			Natural Gas Distribution	Total
Derivative assets or (liabilities) not designated as hedging instruments
Accounts receivable	36,224			—	36,224
Long-term asset derivative instruments	7,992			—	7,992
Total derivative assets	44,216			—	44,216
Accounts receivable	(18,761	)	*	—	(18,761	)
Long-term asset derivative instruments	(2,553	)	*	—	(2,553	)
Accounts payable	(30,302	)		—	(30,302	)
Total derivative liabilities	(51,616	)		—	(51,616	)
Total derivatives not designated	(7,400	)		—	(7,400	)



(in thousands)	December 31, 2012
	Oil and Gas Operations				Natural Gas Distribution			Total
Derivative assets or (liabilities) designated as hedging instruments
Accounts receivable	$	87,514			$	—		$	87,514
Long-term asset derivative instruments	37,954				—			37,954
Total derivative assets	125,468				—			125,468
Accounts receivable	(37,326		)	*	—			(37,326		)
Long-term asset derivative instruments	(6,810		)	*	—			(6,810		)
Long-term liability derivative instruments	(8,726		)		—			(8,726		)
Total derivative liabilities	(52,862		)		—			(52,862		)
Total derivatives designated	72,606				—			72,606
Derivative assets or (liabilities) not designated as hedging instruments
Accounts receivable	14,604				—			14,604
Long-term asset derivative instruments	9,433				—			9,433
Total derivative assets	24,037				—			24,037
Accounts payable	—				(2,593		)	(2,593		)
Long-term liability derivative instruments	(874		)		—			(874		)
Total derivative liabilities	(874		)		(2,593		)	(3,467		)
Total derivatives not designated	23,163				(2,593		)	20,570
Total derivatives	$	95,769			$	(2,593	)	$	93,176

* Amounts classified in accordance with accounting guidance which permits offsetting fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement.

The Company had a net $8.2 million and a net $28.4 million deferred tax liability included in current and noncurrent deferred income taxes on the consolidated balance sheets related to derivative items included in other comprehensive income as of December 31, 2013 and 2012, respectively.

The following table details the effect of derivative commodity instruments designated as hedging instruments on the financial statements:



Years ended December 31, (in thousands)	Location on Income Statement	2013			2012			2011
Net gain (loss) recognized in OCI on derivative (effective portion), net of tax of ($6,660), $40,720 and $41,399	—	$	(10,866	)	$	66,438		$	67,547
Gain reclassified from accumulated OCI into income (effective portion)	Operating revenues	$	34,293		$	52,694		$	26,326
Gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Operating revenues	$	835		$	(5,340	)	$	(2,767	)

The following table details the effect of open and closed derivative commodity instruments not designated as hedging instruments on the income statement:



Years ended December 31, (in thousands)	Location on Income Statement	2013			2012		2011
Gain (loss) recognized in income on derivative	Operating revenues	$	(73,980	)	$	61,841	$	(37,587	)

As of December 31, 2013, $13.4 million of deferred net gains on derivative instruments recorded in accumulated other comprehensive income, net of tax, are expected to be reclassified and reported in earnings as operating revenues during the next twelve-month period. As of December 31, 2013, the Company had 51.8 billion cubic feet (Bcf) and 6.0 Bcf of natural gas hedges which expire during 2014 and 2015, respectively, that are considered mark-to-market transactions. The Company had 9.8 million barrels (MMBbl) and 5.8 MMBbl of oil hedges which expire during 2014 and 2015, respectively, that are considered mark-to-market transactions. The Company had 1.9 million gallons (MMgal) of natural gas liquid hedges which expire during 2014 that are considered mark-to-market transactions. During 2013, the Company discontinued hedge accounting and reclassified gains of $4.5 million after-tax from other comprehensive income into operating revenues when Energen Resources determined it was probable certain forecasted volumes would not occur due to certain properties being held for sale or sold.

As of December 31, 2013, Energen Resources entered into the following transactions for 2014 and subsequent years:



Production Period	Total Hedged Volumes		Average Contract Price	Description
Natural Gas
2014	10.6	Bcf	$4.55 Mcf	NYMEX Swaps
	31.4	Bcf	$4.60 Mcf	Basin Specific Swaps - San Juan
	9.7	Bcf	$3.81 Mcf	Basin Specific Swaps - Permian
2015	6.0	Bcf	$4.07 Mcf	Basin Specific Swaps - San Juan
Oil
2014	9,796	MBbl	$92.64 Bbl	NYMEX Swaps
2015	5,760	MBbl	$88.85 Bbl	NYMEX Swaps

As of December 31, 2013, the maximum term over which Energen Resources has hedged exposures to the variability of cash flows is through December 31, 2015. Alagasco has not entered into any cash flow derivative transactions on its gas supply since 2010.

The following sets forth derivative assets and liabilities that were measured at fair value on a recurring basis:



	December 31, 2013
(in thousands)	Level 2*			Level 3*			Total
Current assets	$	(1,658	)	$	19,121		$	17,463
Noncurrent assets	4,383			1,056			5,439
Current liabilities	(28,414		)	(1,888		)	(30,302		)
Net derivative asset (liability)	$	(25,689	)	$	18,289		$	(7,400	)



	December 31, 2012
(in thousands)	Level 2*			Level 3*			Total
Current assets	$	(3,629	)	$	68,421		$	64,792
Noncurrent assets	18,899			21,678			40,577
Current liabilities	(2,593		)	—			(2,593		)
Noncurrent liabilities	(8,520		)	(1,080		)	(9,600		)
Net derivative asset	$	4,157		$	89,019		$	93,176

As of December 31, 2013, Alagasco had no derivative instruments. As of December 31, 2012, Alagasco had $2.6 million of derivative instruments which were classified as Level 2 fair values and are included in the above table as current liabilities, respectively. Alagasco had no derivative instruments classified as Level 3 fair values as of December 31, 2013 and 2012.

The Company has prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the prices used to estimate fair value would have on the fair value of its derivative instruments. The Company estimates that a 10 percent increase or decrease in commodity prices would result in an approximate $19 million change in the fair value of open Level 3 derivative contracts. The resulting impact upon the results of operations would be an approximate $19 million associated with open Level 3 mark-to-market derivative contracts. Liquidity requirements to meet the obligation would not be significantly impacted as gains and losses on the derivative contracts would be similarly offset by sales at the spot market price.

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 derivative commodity instruments as follows:



Years ended December 31, (in thousands)	2013			2012			2011
Balance at beginning of period	$	89,019		$	65,801		$	42,755
Realized gains	55,210			63,720			52,716
Unrealized gains (losses) relating to instruments held at the reporting date*	(71,367		)	22,160			23,980
Settlements during period	(54,573		)	(62,662		)	(53,650		)
Balance at end of period	$	18,289		$	89,019		$	65,801

*Includes $7.6 million in mark-to-market losses, $19.9 million in mark-to-market gains and $5.2 million in mark-to-market losses for the years ended December 31, 2013, 2012 and 2011, respectively.

The tables below set forth quantitative information about the Company’s Level 3 fair value measurements of derivative commodity instruments as follows:



(in thousands)	Fair Value as of December 31, 2013			Valuation Technique*	Unobservable Input*	Range
Natural Gas Basis - San Juan
2014	$	18,159		Discounted Cash Flow	Forward Basis	($0.17 - $0.20) Mcf
2015	$	1,056		Discounted Cash Flow	Forward Basis	($0.26) Mcf
Natural Gas Basis - Permian
2014	$	(1,948	)	Discounted Cash Flow	Forward Basis	($0.18 - $0.20) Mcf
Natural Gas Liquids
2014	$	1,022		Discounted Cash Flow	Forward Price	$0.80 - $0.81 Gal

*Discounted cash flow represents an income approach in calculating fair value including the referenced unobservable input and a discount reflecting credit quality of the counterparty.

The tables below set forth information about the offsetting of derivative assets and liabilities as follows:



	December 31, 2013
								Gross Amounts Not Offset in the Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheets			Net Amount Presented in the Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
Derivative assets	$	44,215	$	(21,313	)	$	22,902	$	—	$	—	$	22,902
Derivative liabilities	$	51,615	$	(21,313	)	$	30,302	$	—	$	—	$	30,302



	December 31, 2012
								Gross Amounts Not Offset in the Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheets			Net Amount Presented in the Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
Derivative assets	$	149,504	$	(44,135	)	$	105,369	$	—	$	—	$	105,369
Derivative liabilities	$	56,328	$	(44,135	)	$	12,193	$	—	$	—	$	12,193

Concentration of Credit Risk: Revenues and related accounts receivable from oil and gas operations primarily are generated from the sale of produced oil and natural gas to energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to the energy marketing industry has the potential to affect the Company’s overall exposure to credit risk, either positively or negatively, in that the Company’s oil and gas purchasers may be affected similarly by changes in economic, industry or other conditions. Energen Resources considers the credit quality of its purchasers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee. The two largest oil and gas purchasers accounted for approximately 35 percent and 12 percent of Energen Resources’ accounts receivable for commodity sales as of December 31, 2013. Energen Resources’ other purchasers each accounted for less than 9 percent of these accounts receivable as of December 31, 2013. During the year ended December 31, 2013, Plains Marketing, LP, accounted for approximately 25 percent of consolidated total operating revenues. All other oil and gas purchasers each accounted for less than 10 percent of consolidated total operating revenues for the year ended December 31, 2013.

Natural gas distribution operating revenues and related accounts receivable are generated from state-regulated utility natural gas sales and transportation to approximately 422,000 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.