FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, we use various valuation approaches and classify all assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect our own assumptions about the assumptions other market participants would use in pricing the asset or liability based on the best information available in the circumstances. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The hierarchy is broken down into three levels based on the observability of inputs as follows:


Level 1 -	Unadjusted quoted prices in active markets for identical assets or liabilities;


Level 2 -	Pricing inputs other than quoted prices in active markets included within Level 1, which are either directly or indirectly observable through correlation with market data as of the reporting date;


Level 3 -	Pricing that requires inputs that are both significant and unobservable to the calculation of the fair value measure. The fair value measure represents estimates of the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

No transfers between fair value hierarchy levels occurred during the three months or six months ended June 30, 2014 or 2013.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Energen classifies the fair value of multiple derivative instruments executed under master netting arrangements as net derivative assets and liabilities. The following fair value hierarchy tables present information about Energen’s assets and liabilities measured at fair value on a recurring basis:



	June 30, 2014
(in thousands)	Level 2			Level 3			Total
Assets:
Derivative instruments	$	(2,992	)	$	3,516		$	524
Noncurrent derivative instruments	—			623			623
Total assets	(2,992		)	4,139			1,147
Liabilities:
Derivative instruments	(95,999		)	(214		)	(96,213		)
Noncurrent derivative instruments	(22,987		)	1,282			(21,705		)
Total liabilities	(118,986		)	1,068			(117,918		)
Net derivative asset (liability)	$	(121,978	)	$	5,207		$	(116,771	)



	December 31, 2013
(in thousands)	Level 2			Level 3			Total
Assets:
Derivative instruments	$	(1,658	)	$	19,121		$	17,463
Noncurrent derivative instruments	4,383			1,056			5,439
Total assets	2,725			20,177			22,902
Liabilities:
Derivative instruments	(28,414		)	(1,888		)	(30,302		)
Total liabilities	(28,414		)	(1,888		)	(30,302		)
Net derivative asset (liability)	$	(25,689	)	$	18,289		$	(7,400	)

Derivative Instruments: The fair value of Energen’s derivative commodity instruments is determined using market transactions and other market evidence whenever possible, including market-based inputs to models and broker or dealer quotations. Our OTC derivative contracts trade in less liquid markets with limited pricing information as compared to markets with actively traded, unadjusted quoted prices; accordingly, the determination of fair value is inherently more difficult. OTC derivatives for which we are able to substantiate fair value through directly observable market prices are classified within Level 2 of the fair value hierarchy. These Level 2 fair values consist of swaps priced in reference to NYMEX oil and natural gas prices. OTC derivatives valued using unobservable market prices have been classified within Level 3 of the fair value hierarchy. These Level 3 fair values include basin specific, basis and natural gas liquids swaps. We consider the frequency of pricing and variability in pricing between sources in determining whether a market is considered active. While Energen does not have access to the specific assumptions used in its counterparties’ valuation models, Energen maintains communications with its counterparties and discusses pricing practices. Further, we corroborate the fair value of our transactions by comparison of market-based price sources.

Energen utilizes a discounted cash flow model in valuing its interest rate derivatives, which are comprised of interest rate swap agreements. The fair value attributable to Energen's interest rate derivative contracts is based on (i) the contracted notional amounts, (ii) active market-quoted London Interbank Offered Rate (LIBOR) yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve.

At June 30, 2014, Energen had interest rate swap agreements with a notional of $190 million. The interest rate swaps exchange a variable interest rate for a fixed interest rate of 2.6675 percent. The fair value of our interest rate swaps was a $1.4 million and a $1.8 million liability at June 30, 2014 and December 31, 2013, respectively, and are classified as a Level 2 fair value liability. The fair value of our interest rate swaps are recognized on a gross basis in accounts payable on the balance sheets.

Level 3 Fair Value Instruments: Energen 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 Level 3 instruments. We estimate that a 10 percent increase or decrease in commodity prices would result in an approximate $23 million change in the fair value of open Level 3 derivative contracts. The resulting impact upon the results of operations would be an approximate $23 million associated with open Level 3 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 physical sales at the spot market price.

The tables below set forth a summary of changes in the fair value of Energen’s Level 3 derivative commodity instruments as follows:



	Three months ended			Three months ended
(in thousands)	June 30, 2014			June 30, 2013
Balance at beginning of period	$	1,378		$	26,459
Realized gains	785			6,183
Unrealized gains relating to instruments held at the reporting date*	3,800			23,404
Settlements during period	(756		)	(4,915		)
Balance at end of period	$	5,207		$	51,131



	Six months ended			Six months ended
(in thousands)	June 30, 2014			June 30, 2013
Balance at beginning of period	$	18,289		$	89,019
Realized gains (losses)	(2,158		)	32,368
Unrealized losses relating to instruments held at the reporting date*	(13,111		)	(39,156		)
Settlements during period	2,187			(31,100		)
Balance at end of period	$	5,207		$	51,131

*Includes $5.2 million in mark-to-market gains and $4.2 million in mark-to-market losses for the three months and six months ended June 30, 2014, respectively. Includes $8.5 million and $2.7 million in mark-to-market gains for the three months and six months ended June 30, 2013, respectively.

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



(in thousands, except price data)	Fair Value as of June 30, 2014			Valuation Technique*	Unobservable Input*	Range
Oil Basis - WTS/WTI
2014	$	1,119		Discounted Cash Flow	Forward Basis	($5.01) Bbl
Oil Basis - WTI/WTI
2014	$	3,072		Discounted Cash Flow	Forward Basis	($5.42 - $5.57) Bbl
Natural Gas Liquids
2014	$	91		Discounted Cash Flow	Forward Price	$0.74 - $0.97 Gal
Natural Gas Basis - San Juan
2014	$	2,817		Discounted Cash Flow	Forward Basis	($0.03 - $0.07) Mcf
2015	$	579		Discounted Cash Flow	Forward Basis	($0.11 - $0.12) Mcf
Natural Gas Basis - Permian
2014	$	(3,073	)	Discounted Cash Flow	Forward Basis	($0.06 - $0.07) Mcf
2015	$	602		Discounted Cash Flow	Forward Basis	($0.13) Mcf

*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.

Financial Instruments not Carried at Fair Value

The stated value of cash and cash equivalents, short-term investments, accounts receivable (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, was approximately $1,148.7 million and $1,161.9 million and had a carrying value of $1,124.0 million and $1,154.0 million at June 30, 2014 and December 31, 2013, respectively. The fair value of Alagasco’s fixed-rate long-term debt, including the current portion, was approximately $266.6 million and $258.8 million and had a carrying value of $249.8 million and $249.9 million at June 30, 2014 and December 31, 2013, respectively. The fair values are based on market prices of similar debt 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.