XNYS:EGN Energen Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
OR
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission
File Number
 
Registrant
 
State of
Incorporation
 
IRS
Employer
Identification
Number
1-7810
 
Energen Corporation
 
Alabama
 
63-0757759
2-38960
 
Alabama Gas Corporation
 
Alabama
 
63-0022000
605 Richard Arrington Jr. Boulevard North
Birmingham, Alabama 35203-2707
Telephone Number 205/326-2700
http://www.energen.com
Alabama Gas Corporation, a wholly owned subsidiary of Energen Corporation, meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with reduced disclosure format pursuant to General Instruction H(2).
Indicate by a check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Energen Corporation
 
YES
x
NO
o
Alabama Gas Corporation
 
YES
x
NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Energen Corporation - Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Alabama Gas Corporation - Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Energen Corporation
 
YES
o
NO
x
Alabama Gas Corporation
 
YES
o
NO
x
Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of May 3, 2012.
Energen Corporation
 
 $0.01 par value
 
 72,126,249 shares
Alabama Gas Corporation
 
 $0.01 par value
 
 1,972,052 shares
 
 
 
 
 




ENERGEN CORPORATION AND ALABAMA GAS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
 
 
 
 
 
(b) Consolidated Condensed Statements of Comprehensive Income of Energen Corporation
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
Item 4.
 
Item 2.
 
Item 6.
 









2



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 
 
ENERGEN CORPORATION
 
 
(Unaudited)
 
 
 
Three months ended
 
March 31,
(in thousands, except per share data)
2012
2011
Operating Revenues
 
 
Oil and gas operations
$
223,957

$
216,792

Natural gas distribution
194,487

269,572

Total operating revenues
418,444

486,364

Operating Expenses
 
 
Cost of gas
59,586

131,749

Operations and maintenance
110,561

103,782

Depreciation, depletion and amortization
94,534

61,128

Asset impairment
21,545


Taxes, other than income taxes
26,235

28,175

Accretion expense
1,813

1,649

Total operating expenses
314,274

326,483

Operating Income
104,170

159,881

Other Income (Expense)
 
 
Interest expense
(15,425
)
(9,404
)
Other income
2,032

1,230

Other expense
(113
)
(163
)
Total other expense
(13,506
)
(8,337
)
Income Before Income Taxes
90,664

151,544

Income tax expense
33,258

57,276

Net Income
$
57,406

$
94,268

Diluted Earnings Per Average Common Share
$
0.79

$
1.30

Basic Earnings Per Average Common Share
$
0.80

$
1.31

Dividends Per Common Share
$
0.140

$
0.135

Diluted Average Common Shares Outstanding
72,326

72,240

Basic Average Common Shares Outstanding
72,102

72,001


The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

3



CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 
ENERGEN CORPORATION
 
 
(Unaudited)
 
 
 
Three months ended
 
March 31,
(in thousands)
2012
2011
Net Income
$
57,406

$
94,268

Other comprehensive income (loss):
 
 
Current period change in fair value of commodity derivative instruments, net of tax of ($7,498) and ($59,374)
(12,234
)
(96,873
)
Reclassification adjustment for commodity derivative instruments, net of tax of $302 and ($2,257)
493

(3,683
)
Pension and postretirement plans:


Amortization of net obligation at transition, net of taxes of $25 and $24, respectively
47

44

Amortization of prior service cost, net of taxes of $30 and $26, respectively
55

48

Amortization of net loss, net of taxes of $412 and $318, respectively
766

590

Total pension and postretirement plans
868

682

Current period change in fair value of interest rate swap, net of tax of ($265)
(492
)

Reclassification adjustment for interest rate swap, net of tax of $137
254


Comprehensive Income (Loss)
$
46,295

$
(5,606
)

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.


4



CONSOLIDATED CONDENSED BALANCE SHEETS
 
 
ENERGEN CORPORATION
 
 
(Unaudited)
 
 
 
 
 
(in thousands)
March 31, 2012
December 31, 2011
ASSETS
 
 
Current Assets
 
 
Cash and cash equivalents
$
49,618

$
9,541

Accounts receivable, net of allowance for doubtful accounts of $7,744 at March 31, 2012, and $12,946 at December 31, 2011
203,642

231,925

Inventories
 
 
Storage gas inventory
37,986

44,047

Materials and supplies
30,930

26,420

Liquified natural gas in storage
3,623

3,545

Regulatory asset
54,790

57,143

Income tax receivable
1,491

7,343

Deferred income taxes
39,471

48,818

Prepayments and other
14,952

15,386

Total current assets
436,503

444,168

Property, Plant and Equipment
 
 
Oil and gas properties, successful efforts method
5,491,919

5,166,368

Less accumulated depreciation, depletion and amortization
1,486,756

1,382,526

Oil and gas properties, net
4,005,163

3,783,842

Utility plant
1,369,107

1,358,266

Less accumulated depreciation
550,687

544,838

Utility plant, net
818,420

813,428

Other property, net
23,827

23,506

Total property, plant and equipment, net
4,847,410

4,620,776

Other Assets
 
 
Regulatory asset
91,478

95,633

Long-term derivative instruments
10,608

31,056

Deferred charges and other
46,773

45,783

Total other assets
148,859

172,472

TOTAL ASSETS
$
5,432,772

$
5,237,416


The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
 










5



CONSOLIDATED CONDENSED BALANCE SHEETS
 
 
ENERGEN CORPORATION
 
 
(Unaudited)
 
 
 
 
 
(in thousands, except share and per share data)
March 31, 2012
December 31, 2011
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
Current Liabilities
 
 
Long-term debt due within one year
$
1,000

$
1,000

Notes payable to banks
165,000

15,000

Accounts payable
340,633

302,048

Accrued taxes
34,434

32,359

Customers' deposits
25,174

23,950

Amounts due customers
10,755

21,065

Accrued wages and benefits
18,417

35,258

Regulatory liability
30,049

58,279

Royalty payable
23,606

22,592

Other
24,963

32,328

Total current liabilities
674,031

543,879

Long-term debt
1,153,686

1,153,700

Deferred Credits and Other Liabilities
 
 
Asset retirement obligation
110,209

107,340

Pension and other postretirement liabilities
63,031

62,532

Regulatory liability
74,159

87,234

Long-term derivative instruments
61,066

34,663

Deferred income taxes
813,451

806,127

Other
9,315

9,778

Total deferred credits and other liabilities
1,131,231

1,107,674

Commitments and Contingencies



Shareholders’ Equity
 
 
Preferred stock, cumulative $0.01 par value, 5,000,000 shares authorized


Common shareholders’ equity
 
 
Common stock, $0.01 par value; 150,000,000 shares authorized, 75,039,289 shares issued at March 31, 2012, and 75,007,412 shares issued at December 31, 2011
750

750

Premium on capital stock
488,463

482,918

Capital surplus
2,802

2,802

Retained earnings
2,148,196

2,100,885

Accumulated other comprehensive income (loss), net of tax
 
 
Unrealized gain (loss) on hedges, net
(2,468
)
9,273

Pension and postretirement plans
(37,716
)
(38,584
)
Interest rate swap
(1,179
)
(941
)
Deferred compensation plan
3,715

3,511

Treasury stock, at cost; 3,040,117 shares at March 31, 2012, and 3,036,549 shares at December 31, 2011
(128,739
)
(128,451
)
Total shareholders' equity
2,473,824

2,432,163

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
5,432,772

$
5,237,416

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

6



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
ENERGEN CORPORATION
 
 
(Unaudited)
 
 
 
 
 
Three months ended March 31, (in thousands)
2012
2011
Operating Activities
 
 
Net income
$
57,406

$
94,268

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation, depletion and amortization
94,534

61,128

Asset impairment
21,545


Accretion expense
1,813

1,649

Deferred income taxes
23,182

40,772

Bad debt expense
(258
)
718

Exploratory expense
1,076

291

Change in derivative fair value
47,221

(241
)
(Gain) loss on sale of assets
47

(25
)
Other, net
4,261

3,036

Net change in:
 
 
Accounts receivable
20,063

(30,173
)
Inventories
1,473

4,840

Accounts payable
7,327

34,050

Amounts due customers including gas supply pass-through
(31,926
)
9,032

Income tax receivable
5,852

39,825

Pension and other postretirement benefit contributions
(3,176
)
(3,097
)
Other current assets and liabilities
(19,460
)
6,465

Net cash provided by operating activities
230,980

262,538

Investing Activities
 
 
Additions to property, plant and equipment
(276,791
)
(146,971
)
Acquisitions, net of cash acquired
(68,176
)
(4,303
)
Proceeds from sale of assets
13,766

552

Other, net
(375
)
(25
)
Net cash used in investing activities
(331,576
)
(150,747
)
Financing Activities
 
 
Payment of dividends on common stock
(10,095
)
(9,727
)
Issuance of common stock
604

6,112

Payment of long-term debt
(25
)
(31
)
Net change in short-term debt
150,000

(80,000
)
Tax benefit on stock compensation
227

767

Other
(38
)

Net cash provided by (used in) financing activities
140,673

(82,879
)
Net change in cash and cash equivalents
40,077

28,912

Cash and cash equivalents at beginning of period
9,541

22,659

Cash and Cash Equivalents at End of Period
$
49,618

$
51,571


The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

7



CONDENSED STATEMENTS OF INCOME
 
 
ALABAMA GAS CORPORATION
 
 
(Unaudited)
 
 
 
Three months ended
 
March 31,
(in thousands)
2012
2011
Operating Revenues
$
194,487

$
269,572

Operating Expenses
 
 
Cost of gas
59,586

131,749

Operations and maintenance
34,066

37,322

Depreciation and amortization
10,446

9,780

Income taxes
 
 
Current
25,440

21,571

Deferred
3,198

6,400

Taxes, other than income taxes
11,829

15,662

Total operating expenses
144,565

222,484

Operating Income
49,922

47,088

Other Income (Expense)
 
 
Allowance for funds used during construction
134

158

Other income
986

619

Other expense
(62
)
(73
)
Total other income
1,058

704

Interest Charges
 
 
Interest on long-term debt
3,424

3,042

Other interest expense
638

575

Total interest charges
4,062

3,617

Net Income
$
46,918

$
44,175


The accompanying notes are an integral part of these unaudited condensed financial statements.

8



CONDENSED BALANCE SHEETS
 
 
ALABAMA GAS CORPORATION
 
 
(Unaudited)
 
 
 
 
 
(in thousands)
March 31, 2012
December 31, 2011
ASSETS
 
 
Property, Plant and Equipment
 
 
Utility plant
$
1,369,107

$
1,358,266

Less accumulated depreciation
550,687

544,838

Utility plant, net
818,420

813,428

Other property, net
42

43

Current Assets
 
 
Cash and cash equivalents
39,974

7,817

Accounts receivable
 
 
Gas
56,944

96,812

Other
5,349

6,858

Affiliated companies
3,356

2,841

Allowance for doubtful accounts
(6,900
)
(12,100
)
Inventories
 
 
Storage gas inventory
37,986

44,047

Materials and supplies
4,181

4,183

Liquified natural gas in storage
3,623

3,545

Regulatory asset
54,790

57,143

Income tax receivable
1,388

9,762

Deferred income taxes
21,433

21,986

Prepayments and other
3,716

4,422

Total current assets
225,840

247,316

Other Assets
 
 
Regulatory asset
91,478

95,633

Deferred charges and other
10,357

10,380

Total other assets
101,835

106,013

TOTAL ASSETS
$
1,146,137

$
1,166,800


The accompanying notes are an integral part of these unaudited condensed financial statements.








9



CONDENSED BALANCE SHEETS
 
 
ALABAMA GAS CORPORATION
 
 
(Unaudited)
 
 
 
 
 
(in thousands, except share data)
March 31, 2012
December 31, 2011
LIABILITIES AND CAPITALIZATION
 
 
Capitalization
 
 
Preferred stock, cumulative $0.01 par value, 120,000 shares authorized
$

$

Common shareholder's equity
 
 
Common stock, $0.01 par value; 3,000,000 shares authorized, 1,972,052 shares issued at March 31, 2012 and December 31, 2011
20

20

Premium on capital stock
31,682

31,682

Capital surplus
2,802

2,802

Retained earnings
349,125

310,234

Total common shareholder's equity
383,629

344,738

Long-term debt
250,221

250,246

Total capitalization
633,850

594,984

Current Liabilities
 
 
Notes payable to banks
25,000

15,000

Accounts payable
81,811

110,552

Accrued taxes
43,060

26,861

Customers' deposits
25,174

23,950

Amounts due customers
10,755

21,065

Accrued wages and benefits
5,828

12,971

Regulatory liability
30,049

58,279

Other
9,694

9,250

Total current liabilities
231,371

277,928

Deferred Credits and Other Liabilities
 
 
Deferred income taxes
184,136

181,492

Pension and other postretirement liabilities
21,945

21,383

Regulatory liability
74,159

87,234

Long-term derivative instruments

3,070

Other
676

709

Total deferred credits and other liabilities
280,916

293,888

Commitments and Contingencies




TOTAL LIABILITIES AND CAPITALIZATION
$
1,146,137

$
1,166,800


The accompanying notes are an integral part of these unaudited condensed financial statements.

10



CONDENSED STATEMENTS OF CASH FLOWS
 
 
ALABAMA GAS CORPORATION
 
 
(Unaudited)
 
 
 
 
 
Three months ended March 31, (in thousands)
2012
2011
Operating Activities
 
 
Net income
$
46,918

$
44,175

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
10,446

9,780

Deferred income taxes
3,198

6,400

Bad debt expense
(258
)
705

Other, net
(2,564
)
1,226

Net change in:
 
 
Accounts receivable
14,706

8,085

Inventories
5,985

6,828

Accounts payable
(20,364
)
(8,452
)
Amounts due customers including gas supply pass-through
(31,926
)
9,032

Income tax receivable
8,374

8,968

Pension and other postretirement benefit contributions
(681
)
(703
)
Other current assets and liabilities
11,425

9,415

Net cash provided by operating activities
45,259

95,459

Investing Activities
 
 
Additions to property, plant and equipment
(14,245
)
(13,655
)
Other, net
(767
)
814

Net cash used in investing activities
(15,012
)
(12,841
)
Financing Activities
 
 
Dividends
(8,027
)
(4,994
)
Payment of long-term debt
(25
)
(31
)
Other
(38
)

Net increases in advances from affiliates

1,687

Net change in short-term debt
10,000

(55,000
)
Net cash provided by (used in) financing activities
1,910

(58,338
)
Net change in cash and cash equivalents
32,157

24,280

Cash and cash equivalents at beginning of period
7,817

16,910

Cash and Cash Equivalents at End of Period
$
39,974

$
41,190


The accompanying notes are an integral part of these unaudited condensed financial statements.

11



NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
ENERGEN CORPORATION AND ALABAMA GAS CORPORATION
 
 
 
 
 

1. BASIS OF PRESENTATION

The unaudited condensed financial statements and notes should be read in conjunction with the financial statements and notes thereto for the years ended
December 31, 2011, 2010 and 2009, included in the 2011 Annual Report of Energen Corporation (the Company) and Alabama Gas Corporation (Alagasco) on Form 10-K. Alagasco has a September 30 fiscal year for rate-setting purposes (rate year) and reports on a calendar year for the Securities and Exchange Commission and all other financial accounting reporting purposes. The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required for complete financial statements. The Company's natural gas distribution business is seasonal in character and influenced by weather conditions. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year. All adjustments to the unaudited condensed financial statements that are, in the opinion of management, necessary for a fair statement of the results for the interim periods have been recorded. Such adjustments consist of normal recurring items. Certain reclassifications were made to conform prior years' financial statements to the current-quarter presentation.

2. REGULATORY MATTERS

Alagasco is subject to regulation by the Alabama Public Service Commission (APSC) which established the Rate Stabilization and Equalization (RSE) rate-setting process in 1983. RSE’s current extension is for a seven-year period ended December 31, 2014. RSE will continue after December 31, 2014, unless, after notice to the Company and a hearing, the APSC votes to modify or discontinue the RSE methodology.

Alagasco's allowed range of return on average common equity remains 13.15 percent to 13.65 percent throughout the term of the RSE order. Under RSE, the APSC conducts quarterly reviews to determine whether Alagasco's return on average common equity at the end of the rate year will be within the allowed range of return. Reductions in rates can be made quarterly to bring the projected return within the allowed range; increases, however, are allowed only once each rate year, effective December 1, and cannot exceed 4 percent of prior-year revenues. During the three months ended March 31, 2011, Alagasco had a net $3.3 million pre-tax reduction in revenues to bring the return on average common equity to midpoint within the allowed range of return. Under the provisions of RSE, a $13.0 million annual increase and a $1.3 million annual decrease in revenues became effective December 1, 2011 and 2010, respectively.

RSE limits the utility’s equity upon which a return is permitted to 55 percent of total capitalization, subject to certain adjustments. Under the inflation-based Cost Control Measurement (CCM) established by the APSC, if the percentage change in operations and maintenance (O&M) expense on an aggregate basis falls within a range of 0.75 points above or below the percentage change in the Consumer Price Index For All Urban Consumers (Index Range), no adjustment is required. If the change in O&M expense on an aggregate basis 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. The O&M expense base for measurement purposes will be set at the prior year’s actual O&M expense amount unless the Company exceeds the top of the Index Range in two successive years, in which case the base for the following year will be set at the top of the Index Range. Certain items that fluctuate based on situations demonstrated to be beyond Alagasco’s control may be excluded from the CCM calculation. In the rate year ended September 30, 2010, $2.5 million of extraordinary bad debt expense was excluded from the CCM calculation. Alagasco’s O&M expense fell within the Index Range for the rate years ended September 30, 2011 and 2010.

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. Alagasco's tariff provides a temperature adjustment mechanism, also included in the GSA, that is designed to moderate the impact of departures from normal temperatures on Alagasco’s earnings. The temperature adjustment applies primarily to residential, small commercial and small industrial customers. Other non-temperature weather related conditions that may affect customer usage are not included in the temperature adjustment.

The APSC approved an Enhanced Stability Reserve (ESR) in 1998, which was subsequently modified and expanded in 2010. As currently approved, the ESR provides deferred treatment and recovery for the following: (1) extraordinary O&M expenses related to environmental response costs; (2) extraordinary O&M expenses related to self insurance costs that exceed $1 million per occurrence; (3) extraordinary O&M expenses, other than environmental response costs and self insurance costs, resulting from a single force majeure event or multiple force majeure events greater than $275,000 and $412,500, respectively, during a rate year; and (4) negative individual large commercial and industrial customer budget revenue variances that exceed $350,000 during a rate year.

12




Charges to the ESR are subject to certain limitations which may disallow deferred treatment and which proscribe the timing of recovery. Funding to the ESR is provided as a reduction to the refundable negative salvage balance over its nine year term beginning December 1, 2010. Subsequent to the nine year period and subject to APSC authorization, Alagasco anticipates recovering underfunded ESR balances over a five year period with an annual limitation of $660,000.

3. DERIVATIVE COMMODITY INSTRUMENTS

Energen Resources Corporation, Energen's oil and gas subsidiary, recognizes all derivatives on the balance sheet and measures all derivatives at fair value. If a derivative is designated as a cash flow hedge, the effectiveness of the hedge, or the degree that the gain (loss) for the hedging instrument offsets the loss (gain) on the hedged item, is measured at each reporting period. The effective portion of the gain or loss on the derivative instrument is recognized in other comprehensive income (OCI) as a component of shareholders’ equity and subsequently reclassified as operating revenues when the forecasted transaction affects earnings. The ineffective portion of a derivative's change in fair value is required to be recognized in operating revenues immediately. All derivative transactions are included in operating activities on the consolidated condensed statements of cash flows.

Energen Resources periodically enters into derivative commodity instruments to hedge its exposure to price fluctuations on oil, natural gas and natural gas liquids production. In addition, Alagasco periodically enters into cash flow derivative commodity instruments to hedge its exposure to price fluctuations on its gas supply pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions. Such instruments may include over-the-counter (OTC) swaps and basis hedges with major energy derivative product specialists. The counterparties to the commodity instruments are investment banks and energy-trading firms. The Company is at risk for economic loss based upon the creditworthiness of its counterparties. Energen Resources was in a net loss position with eight of its active counterparties at March 31, 2012. The three largest counterparty net loss positions at March 31, 2012, Morgan Stanley Capital Group, Inc, J Aron & Company and Credit Suisse Energy LLC constituted approximately $73.6 million, $13.9 million and $11.3 million respectively, of Energen Resources’ net loss on fair value of derivatives. Energen Resources was in a net gain position with five of its active counterparties at March 31, 2012. The counterparty net gain positions ranged from $2 million to $6 million at March 31, 2012.

The current policy of the Company is to not enter into agreements that require the posting of collateral. The Company has a few older agreements, none of which have active positions as of March 31, 2012, which include collateral posting requirements based on the amount of exposure and counterparty credit ratings. The majority of the Company’s counterparty agreements include provisions for net settlement of transactions payable on the same date and in the same currency. Most of the agreements include various contractual set-off rights, which may be exercised by the non-defaulting party in the event of an early termination due to a default.

The Company periodically enters into derivative transactions that do not qualify for cash flow hedge accounting but are considered by management to represent valid economic hedges and are accounted for as mark-to-market transactions. These economic hedges may include, but are not limited to, hedges on estimated future production not yet flowing, basis hedges without a corresponding New York Mercantile Exchange (NYMEX) hedge and hedges on non-operated or other properties for which all of the necessary information to qualify for cash flow hedge accounting is either not readily available or subject to change. Derivatives that do not qualify for hedge treatment or are not designated as cash flow hedges are recorded at fair value with gains or losses recognized in operating revenues in the period of change.



















13



The following tables detail the fair values of commodity contracts by business segment on the balance sheets:

(in thousands)
March 31, 2012
 
Oil and Gas Operations
 
Natural Gas Distribution

Total
Derivative assets or (liabilities) designated as hedging instruments
 
 
 
 
Accounts receivable
$
90,764

 
$

$
90,764

Long-term asset derivative instruments
94,764

 

94,764

Total derivative assets
185,528

 

185,528

Accounts receivable
(65,461
)
*

(65,461
)
Long-term asset derivative instruments
(64,621
)
*

(64,621
)
Accounts payable
(36,536
)
 

(36,536
)
Long-term liability derivative instruments
(33,774
)
 

(33,774
)
Total derivative liabilities
(200,392
)
 

(200,392
)
Total derivatives designated
(14,864
)
 

(14,864
)
Derivative assets or (liabilities) not designated as hedging instruments
 
 
 
 
Accounts receivable
(3,624
)
*

(3,624
)
Long-term asset derivative instruments
(19,535
)
*

(19,535
)
Total derivative assets
(23,159
)
 

(23,159
)
Accounts payable
(28,916
)
 
(47,885
)
(76,801
)
Long-term liability derivative instruments
(26,939
)
 

(26,939
)
Total derivative liabilities
(55,855
)
 
(47,885
)
(103,740
)
Total derivatives not designated
(79,014
)
 
(47,885
)
(126,899
)
Total derivatives
$
(93,878
)
 
$
(47,885
)
$
(141,763
)

(in thousands)
December 31, 2011
 
Oil and Gas Operations
 
Natural Gas Distribution

Total
Derivative assets or (liabilities) designated as hedging instruments
 
 
 
 
Accounts receivable
$
73,636

 
$

$
73,636

Long-term asset derivative instruments
75,982

 

75,982

Total derivative assets
149,618

 

149,618

Accounts receivable
(48,174
)
*

(48,174
)
Long-term asset derivative instruments
(36,341
)
*

(36,341
)
Accounts payable
(37,070
)
 

(37,070
)
Long-term liability derivative instruments
(20,386
)
 

(20,386
)
Total derivative liabilities
(141,971
)
 

(141,971
)
Total derivatives designated
7,647

 

7,647

Derivative assets or (liabilities) not designated as hedging instruments
 
 
 
 
Accounts receivable
(3,670
)
*

(3,670
)
Long-term asset derivative instruments
(8,585
)
*

(8,585
)
Total derivative assets
(12,255
)
 

(12,255
)
Accounts payable
(13,416
)
 
(56,804
)
(70,220
)
Long-term liability derivative instruments
(10,922
)
 
(3,070
)
(13,992
)
Total derivative liabilities
(24,338
)
 
(59,874
)
(84,212
)
Total derivatives not designated
(36,593
)
 
(59,874
)
(96,467
)
Total derivatives
$
(28,946
)
 
$
(59,874
)
$
(88,820
)


14



* 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 $1.5 million deferred tax asset and a net $5.7 million deferred tax liability included in current and noncurrent deferred income taxes on the consolidated condensed balance sheets related to derivative items included in OCI as of March 31, 2012, and December 31, 2011, respectively.

Alagasco recognizes all derivatives at fair value as either assets or liabilities on the balance sheet. Any gains or losses are passed through to customers using the mechanisms of the GSA in compliance with Alagasco’s APSC-approved tariff and are recognized as a regulatory asset or regulatory liability.

The following table details the effect of derivative commodity instruments in cash flow hedging relationships on the financial statements:

(in thousands)
Location on Income Statement
Three months
ended
March 31, 2012
Three months
ended
March 31, 2011
Loss recognized in OCI on derivative (effective portion), net of tax of ($7.5) million and ($59.4) million
$
(12,234
)
$
(96,873
)
Gain reclassified from accumulated OCI into income (effective portion)
Operating revenues
$
1,872

$
7,591

Loss recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Operating revenues
$
(2,666
)
$
(1,651
)

The following table details the effect of derivative commodity instruments not designated as hedging instruments on the income statements:

(in thousands)
Location on Income Statement
Three months
ended
March 31, 2012
Three months
ended
March 31, 2011
Loss recognized in income on derivative
Operating revenues
$
(44,005
)
$
(1
)

As of March 31, 2012, $0.2 million, net of tax, of deferred net losses on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified and reported in earnings as operating revenues during the next twelve-month period. The actual amount that will be reclassified to earnings over the next year could vary materially from this amount due to changes in market conditions. As of March 31, 2012, the Company had 840 thousand cubic feet (MMcf) of natural gas hedges which expire during 2013 that did not meet the definition of a cash flow hedge but are considered by the Company to be economic hedges. The Company had 3.3 million, 6.1 million and 3.9 million barrels (MBbl) of oil and oil basis hedges which expire during 2012, 2013 and 2014, respectively, that did not meet the definition of a cash flow hedge but are considered by the Company to be economic hedges. The Company had 11.3 million and 1.6 million gallons (MMgal) of natural gas liquid hedges which expire during 2012 and 2013, respectively, that did not meet the definition of a cash flow hedge but are considered by the Company to be economic hedges. During 2011, the Company had a discontinuance of hedge accounting when Energen Resources determined it was probable certain forecasted volumes would not occur, which resulted in $0.1 million after-tax being recognized into operating revenues during the three months ended March 31, 2012.













15



Energen Resources entered into the following transactions for the remainder of 2012 and subsequent years:

Production Period
Total Hedged Volumes
Average Contract
Price

Description
Natural Gas
 
 
 
2012
7.9
 Bcf
$5.07 Mcf
NYMEX Swaps
 
21.1
 Bcf
$4.60 Mcf
Basin Specific Swaps - San Juan
2013
11.2
 Bcf
$4.98 Mcf
NYMEX Swaps
 
27.7
 Bcf
$4.76 Mcf
Basin Specific Swaps - San Juan
2014
7.8
 Bcf
$4.76 Mcf
NYMEX Swaps
 
22.0
 Bcf
$4.88 Mcf
Basin Specific Swaps - San Juan
Oil
 
 
 
2012
5,307
 MBbl
$88.57 Bbl
NYMEX Swaps
2013
8,098
 MBbl
$90.65 Bbl
NYMEX Swaps
2014
7,892
 MBbl
$92.70 Bbl
NYMEX Swaps
Oil Basis Differential
 
 
 
2012
2,312
 MBbl
$(2.95) Bbl
WTS/WTI Basis Swaps*
2013
2,768
 MBbl
$(3.40) Bbl
WTS/WTI Basis Swaps*
Natural Gas Liquids
 
 
 
2012
44.2
 MMGal
$0.98 Gal
Liquids Swaps
2013
44.5
 MMGal
$1.02 Gal
Liquids Swaps
*WTS - West Texas Sour/Midland, WTI -West Texas Intermediate/Cushing

Alagasco entered into the following natural gas transactions for the remainder of 2012 and subsequent years:

Production Period
Total Hedged Volumes
 
Description
2012
10.8
 Bcf
 
NYMEX Swaps
2013
1.5
 Bcf
 
NYMEX Swaps

As of March 31, 2012, the maximum term over which Energen Resources and Alagasco have hedged exposures to the variability of cash flows is through December 31, 2014, and March 31, 2013, respectively. Alagasco has not entered into any new cash flow derivative transactions on its gas supply since early 2010. 

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). All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. 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 fair value hierarchy that prioritizes the inputs used to measure fair value is 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 assumption that market value 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.

Derivative commodity instruments are over-the-counter (OTC) derivatives valued using market transactions and other market evidence whenever possible, including market-based inputs to models and broker or dealer quotations. These OTC derivative contracts trade in less liquid markets with limited pricing information as compared to markets with actively traded, unadjusted quoted prices;

16



accordingly, the determination of fair value is inherently more difficult. OTC derivatives for which the Company is 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 natural gas and oil futures. 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 liquids swaps. The Company considers frequency of pricing and variability in pricing between sources in determining whether a market is considered active. While the Company does not have access to the specific assumptions used in its counterparties' valuation models, the Company maintains communications with its counterparties and discusses pricing practices. Further, the Company corroborates the fair value of its transactions by comparison of market-based price sources.

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

 
March 31, 2012
(in thousands)
Level 2*
Level 3*
Total
Current assets
$
(33,849
)
$
55,528

$
21,679

Noncurrent assets
(40,635
)
51,243

10,608

Current liabilities
(111,489
)
(1,848
)
(113,337
)
Noncurrent liabilities
(60,713
)

(60,713
)
Net derivative asset (liability)
$
(246,686
)
$
104,923

$
(141,763
)

 
December 31, 2011
(in thousands)
Level 2*
Level 3*
Total
Current assets
$
(14,843
)
$
36,635

$
21,792

Noncurrent assets
(8,382
)
39,438

31,056

Current liabilities
(98,468
)
(8,822
)
(107,290
)
Noncurrent liabilities
(32,928
)
(1,450
)
(34,378
)
Net derivative asset (liability)
$
(154,621
)
$
65,801

$
(88,820
)

* 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.

As of March 31, 2012, Alagasco had $47.9 million of derivative instruments which are classified as Level 2 fair values and are included in the above table as current liabilities. As of December 31, 2011, Alagasco had $56.8 million and $3.1 million of derivative instruments which are classified as Level 2 fair values and are included in the above table as current and noncurrent liabilities, respectively. Alagasco had no derivative instruments classified as Level 3 fair values as of March 31, 2012, and December 31, 2011.

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 $29 million change in the fair value of open Level 3 derivative contracts. The resulting impact upon the results of operations would be an approximate $0.4 million associated with open Level 3 mark-to-market derivative contracts. Cash flow 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 tables below set forth a summary of changes in the fair value of the Company’s Level 3 derivative commodity instruments as follows:

 
Three months ended
Three months ended
(in thousands)
March 31, 2012
March 31, 2011
Balance at beginning of period
$
65,801

$
42,755

Realized losses
(1,291
)
(702
)
Unrealized gains (losses) relating to instruments held at the reporting date
54,239

(9,870
)
Settlements during period
(13,826
)
(15,256
)
Balance at end of period
$
104,923

$
16,927


17



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 March 31, 2012
Valuation Technique*
Unobservable Input*
Range
Natural Gas Basis - San Juan
 
 
 
 
2012
$
47,977

Discounted Cash Flow
Forward Basis
($0.16 - $0.17) Mcf
2013
$
40,323

Discounted Cash Flow
Forward Basis
($0.19 - $0.21) Mcf
2014
$
23,314

Discounted Cash Flow
Forward Basis
($0.19 - $0.21) Mcf
Oil Basis - WTS/WTI
 
 
 
 
2012
$
493

Discounted Cash Flow
Forward Basis
($3.17 - $3.25) Bbl
2013
$
(2,392
)
Discounted Cash Flow
Forward Basis
($2.50 - $2.85) Bbl
Natural Gas Liquids
 
 
 
 
2012
$
(5,339
)
Discounted Cash Flow
Forward Price
 $1.00 - $1.18 Gal
2013
$
547

Discounted Cash Flow
Forward Price
 $0.96 - $1.05 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.

4. RECONCILIATION OF EARNINGS PER SHARE (EPS)

 
Three months ended
Three months ended
(in thousands, except per share amounts)
March 31, 2012
March 31, 2011
 
Net
 
Per Share
Net
 
Per Share
 
Income
Shares
Amount
Income
Shares
Amount
Basic EPS
$
57,406

72,102

$
0.80

$
94,268

72,001

$
1.31

Effect of dilutive securities
 
 
 
 
 
 
Stock options
 
216

 
 
233

 
Non-vested restricted stock
 
8

 
 
6

 
Diluted EPS
$
57,406

72,326

$
0.79

$
94,268

72,240

$
1.30


For the three months ended March 31, 2012 and 2011, the Company had 849,583 and 293,978, respectively, options that were excluded from the computation of diluted EPS, as their effect was non-dilutive. For the three months ended March 31, 2012 and 2011, the Company had no shares of non-vested restricted stock that were excluded from the computation of diluted EPS.





















18




5. SEGMENT INFORMATION
 
The Company principally is engaged in two business segments: the development, acquisition, exploration and production of oil and gas in the continental United States (oil and gas operations) and the purchase, distribution and sale of natural gas in central and north Alabama (natural gas distribution).

 
Three months ended
 
March 31,
(in thousands)
2012
2011
Operating revenues
 
 
Oil and gas operations
$
223,957

$
216,792

Natural gas distribution
194,487

269,572

Total
$
418,444

$
486,364

Operating income (loss)
 
 
Oil and gas operations
$
26,005

$
85,059

Natural gas distribution
78,560

75,059

Eliminations and corporate expenses
(395
)
(237
)
Total
$
104,170

$
159,881

Other income (expense)
 
 
Oil and gas operations
$
(10,558
)
$
(5,447
)
Natural gas distribution
(3,004
)
(2,913
)
Eliminations and other
56

23

Total
$
(13,506
)
$
(8,337
)
Income before income taxes
$
90,664

$
151,544


(in thousands)
March 31, 2012
December 31, 2011

Identifiable assets
 
 
Oil and gas operations
$
4,249,943

$
4,046,242

Natural gas distribution
1,142,781

1,163,959

Eliminations and other
40,048

27,215

Total
$
5,432,772

$
5,237,416


6. STOCK COMPENSATION

Stock Incentive Plan
The Stock Incentive 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 Stock Incentive Plan provide for the purchase of Company common stock at not less than the fair market value on the date the option is granted. The sale or transfer of the shares is limited during certain periods. All outstanding options vest within three years from date of grant and expire 10 years from the grant date. The Company granted 371,040 non-qualified option shares during the first quarter of 2012 with a grant-date fair value of $18.79.

Petrotech Incentive Plan
The Energen Resources’ Petrotech Incentive Plan provides for the grant of stock equivalent units. These awards are liability awards which settle in cash and are re-measured each reporting period until settlement. During 2012, Energen Resources awarded 96,480, 3,768 and 40,822 Petrotech units with a three-year, two-year and 18 month vesting period, respectively. These awards have a fair value of $47.64, $48.19 and $48.46 per unit, respectively, as of March 31, 2012.

1997 Deferred Compensation Plan
During the three months ended March 31, 2012, the Company had noncash purchases of approximately $84,000 of Company common stock in conjunction with tax withholdings on its non-qualified deferred compensation plan and other stock compensation. The Company utilized internally generated cash flows in payment of the related tax withholdings.


19




7. EMPLOYEE BENEFIT PLANS

The components of net pension expense for the Company’s two defined benefit non-contributory pension plans and certain nonqualified supplemental pension plans were:



Three months ended
March 31,
(in thousands)
2012
2011
Components of net periodic benefit cost:
 
 
Service cost
$
2,632

$
2,293

Interest cost
2,700

2,740

Expected long-term return on assets
(3,563
)
(3,868
)
Actuarial loss
2,099

1,609

Prior service cost amortization
129

124

Net periodic expense
$
3,997

$
2,898


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. For the three months ending March 31, 2012, the Company made benefit payments aggregating $2.3 million to retirees from the nonqualified supplemental retirement plans and expects to make additional benefit payments of approximately $0.1 million through the remainder of 2012.

The components of net periodic postretirement benefit expense for the Company’s postretirement benefit plans were:



Three months ended
March 31,
(in thousands)
2012
2011
Components of net periodic benefit cost:
 
 
Service cost
$
463

$
442

Interest cost
1,062

1,111

Expected long-term return on assets
(1,109
)
(1,104
)
Actuarial loss
9


Transition amortization
479

479

Net periodic expense
$
904

$
928


For the three months ended March 31, 2012, the Company made contributions aggregating $0.9 million to the postretirement benefit plan. The Company expects to make additional discretionary contributions of approximately $2.7 million to the postretirement benefit plan through the remainder of 2012.

8. COMMITMENTS AND CONTINGENCIES    

Commitments and Agreements: Certain of Alagasco's long-term contracts associated with the delivery and storage of natural gas include fixed charges of approximately $88 million through September 2024. During the three months ending March 31, 2012 and 2011, Alagasco recognized approximately $14.3 million of long-term commitments through expense and its regulatory accounts in the accompanying financial statements. Alagasco also is committed to purchase minimum quantities of gas at market-related prices or to pay certain costs in the event the minimum quantities are not taken. These purchase commitments are approximately 190 Bcf through August 2020.

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 the counterparties in order to facilitate these agency purchases. Liabilities existing for

20



gas delivered to customers subject to these guarantees are included in the balance sheets. 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 March 31, 2012, the fixed price purchases under these guarantees had a maximum term outstanding through March 2013 and an aggregate purchase price of $3.8 million with a market value of $2.8 million.

Energen Resources entered into three agreements which commenced at various dates from November 15, 2011 to January 15, 2012 and expire at various dates through January 2015 to secure drilling rigs necessary to execute a portion of its drilling plans. In the unlikely event that Energen Resources discontinues use of these drilling rigs, Energen Resources' total resulting exposure could be as much as $27 million depending on the contractor's ability to remarket the drilling rig.

Income Taxes: The Company and Alagasco have on-going tax examinations under various U.S. and state tax jurisdictions. Accordingly, it is reasonably possible that significant changes to the reserve for uncertain tax benefits may occur as a result of the completion of various audits and the expiration of statute of limitations. Although the timing and outcome of these tax examinations is highly uncertain, the Company does not expect the change in the unrecognized tax benefit within the next 12 months would have a material impact to the financial statements.

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 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 jurisdictions in which the magnitude and frequency of punitive and other damage awards may bear little or no relation to culpability or actual damages, thus making it difficult to predict litigation results.

Various pending or threatened legal proceedings are in progress currently, and the Company has accrued a provision for estimated liability. This provision was increased by $1.3 million during the three months ended March 31, 2012.

Environmental Matters: Various environmental laws and regulations apply to the operations of Energen Resources and Alagasco. Historically, the cost of environmental compliance has not materially affected the Company's financial position, results of operations or cash flows. New regulations, enforcement policies, claims for damages or other events could result in significant unanticipated costs.

Alagasco is in the chain of title of nine former manufactured gas plant sites (four of which it still owns), and five manufactured gas distribution sites (one of which it still owns). The following paragraph discusses the recent completion of a removal action at the Huntsville, Alabama manufactured gas plant site. An investigation of the sites does not indicate the present need for other remediation activities and 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 financial position of Alagasco.

In June 2009, Alagasco received a General Notice Letter from the United States Environmental Protection Agency identifying Alagasco as a responsible party for a former manufactured gas plant (MGP) site located in Huntsville, Alabama, and inviting Alagasco to enter an Administrative Settlement Agreement and Order on Consent to perform a removal action at that site. The Huntsville MGP, along with the Huntsville gas distribution system, was sold by Alagasco to the City of Huntsville in 1949. While Alagasco no longer owns the Huntsville site, the Company and the current site owner entered into a Consent Order, and developed and completed during 2011 an action plan for the site. Alagasco has incurred costs associated with the site of approximately $4.9 million. As of March 31, 2012, the expected remaining costs are not expected to be material to the Company. Alagasco has recorded a corresponding amount to its Enhanced Stability Reserve regulatory asset account of which a debit balance of $4.8 million was cleared as of September 30, 2011 and allocated, subject to APSC review guidelines, against the refundable negative salvage costs being refunded to customers.

New Mexico Audits: During the third quarter of 2010, Energen Resources received preliminary findings from the Taxation and Revenue Department (the Department) of the State of New Mexico relating to its audit, conducted on behalf of the Office of Natural Resources Revenue (ONRR), of federal oil and gas leases in New Mexico. The audit covered periods from January 2004 through December 2008 and included a review of the computation and payment of royalties due on minerals removed from specified U.S. federal leases. The ONRR has proposed certain changes in the method of determining allowable deductions of transportation, fuel and processing costs from royalties due under the terms of the related leases.

As a result of the audit, Energen Resources has been ordered by the ONRR to pay additional royalties on the specified U.S. federal leases in the amount of $142,000 and restructure its accounting for all federal leases in two counties in New Mexico from March 1, 2004, forward. The Company preliminarily estimates that application of the Order to all of the Company's New Mexico federal leases

21



would result in ONRR claims for up to approximately $22 million of additional royalties plus interest and penalties for the period from March 1, 2004, forward. The preliminary findings and subsequent Order (issued April 25, 2011) are contrary to deductions allowed under previous audits, retroactive in application and inconsistent with the Company’s understanding of industry practice. The Company is vigorously contesting the Order and has requested additional information from the ONRR and the Department to assist the Company in evaluating the ONRR Order and the Department's findings. Management is unable, at this time, to determine a range of reasonably possible losses as a result of this Order, and no amount has been accrued as of March 31, 2012.

Capital Lease Obligations: During the quarter, the Company entered into certain capital leases related to certain equipment. The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2012:

(in thousands)
 
2012
$
1,307

2013
1,743

2014
1,743

2015
145

Total minimum lease payments
4,938

Less amount representing interest
141

Total present value of minimum lease payments
$
4,797


9. 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 $1,202.8 million and has a carrying value of $1,155.2 million at March 31, 2012. The fair value of Alagasco's fixed-rate long-term debt, including the current portion, approximates $271.4 million and has a carrying value of $250.2 million at March 31, 2012. The fair values were 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.

In December 2011, the Company entered into interest rate swap agreements for $200 million of the Senior Term Loans. The swap agreements exchange a variable interest rate for a fixed interest rate of 2.4175 percent on $200 million of the principal amount outstanding. The fair value of the Company's interest rate swap was a $1.8 million liability at March 31, 2012 and is classified as a Level 1 fair value.

Finance Receivables: Alagasco finances third-party contractor sales of merchandise including gas furnaces and appliances. At March 31, 2012, and December 31, 2011, Alagasco’s finance receivable totaled $10.2 million and $10.5 million, respectively. These finance receivables currently have an average balance of approximately $3,000 and with terms of up to 60 months. Financing is available only to qualified customers who meet credit worthiness 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 $363,000 as of March 31, 2012.

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
(66
)
Allowance for credit losses as of March 31, 2012
$
355






22



10. REGULATORY ASSETS AND LIABILITIES    

The following table details regulatory assets and liabilities on the balance sheets:
(in thousands)
March 31, 2012
December 31, 2011
 
Current
Noncurrent
Current
Noncurrent
Regulatory assets:
 
 
 
 
Pension and postretirement assets
$
170

$
76,165

$
170

$
77,587

Accretion and depreciation for asset retirement obligation

14,282


13,981

Risk management activities
47,885


56,804

3,070

Asset removal costs, net

698


994

Gas supply adjustment
6,615

333



Other
120


169

1

Total regulatory assets
$
54,790

$
91,478

$
57,143

$
95,633

Regulatory liabilities:
 
 
 
 
RSE adjustment
$
507

$

$
2,931

$

Unbilled service margin
7,595


22,419


Gas supply adjustment


12,626


Refundable negative salvage
21,914

52,333

20,269

65,646

Asset retirement obligation

21,031


20,785

Other
33

795

34

803

Total regulatory liabilities
$
30,049

$
74,159

$
58,279

$
87,234


11. ASSET RETIREMENT OBLIGATIONS

The Company recognizes a liability for the fair value of asset retirement obligations (ARO) in the periods incurred. Subsequent to initial measurement, liabilities are accreted to their present value and capitalized costs are depreciated over the estimated useful life of the related assets. Upon settlement of the liability, the Company may recognize a gain or loss for differences between estimated and actual settlement costs. The ARO fair value liability is recognized on a discounted basis incorporating an estimate of performance risk specific to the Company.

During the three months ended March 31, 2012, Energen Resources recognized amounts representing expected future costs associated with site reclamation, facilities dismantlement, and plug and abandonment of wells as follows:

(in thousands)
 
Balance of ARO as of December 31, 2011
$
107,340

Liabilities incurred
1,260

Liabilities settled
(204
)
Accretion expense
1,813

Balance of ARO as of March 31, 2012
$
110,209


The Company recognizes conditional obligations if such obligations can be reasonably estimated and a legal requirement to perform an asset retirement activity exists. Alagasco recorded a conditional asset retirement obligation, on a discounted basis of $21.0 million and $20.8 million to purge and cap its gas pipelines upon abandonment, as a regulatory liability as of March 31, 2012, and December 31, 2011, respectively. The costs associated with asset retirement obligations are currently either being recovered in rates or are probable of recovery in future rates.
  
Alagasco accrues removal costs on certain gas distribution assets over the useful lives of its property, plant and equipment through depreciation expense in accordance with rates approved by the APSC. Regulatory assets for accumulated asset removal costs of $0.7 million and $1 million as of March 31, 2012 and December 31, 2011, respectively, are included as regulatory assets in noncurrent assets on the balance sheets. As of March 31, 2012 and December 31, 2011, the Company recognized $21.9 million and $20.3 million, respectively, of refundable negative salvage as regulatory liabilities in current liabilities on the balance sheet in response to the June 28, 2010, APSC order. As of March 31, 2012 and December 31, 2011, the Company recognized $52.3 million and $65.6 million,

23



respectively, of refundable negative salvage as regulatory liabilities in deferred credit and other liabilities on the balance sheet in response to the June 28, 2010, APSC order.

12. ACQUISITION AND DISPOSITION OF OIL AND GAS PROPERTIES

During the first quarter of 2012, Energen Resources recognized a noncash impairment writedown on certain properties in East Texas of $21.5 million pre-tax to adjust the carrying amount of these properties to their fair value based on expected future discounted cash flows. Significant assumptions in valuing the proved reserves included the reserve quantities, anticipated operating costs, anticipated production taxes, future expected natural gas prices and basis differentials, anticipated production declines, and a discount rate of 10 percent commensurate with the risk of the underlying cash flow estimates. The impairment was caused by the impact of lower future natural gas prices. During the first quarter of 2012, future natural gas price curves shifted significantly lower, especially in the next 5 years. This nonrecurring impairment writedown is classified as Level 3 fair value.

On February 21, 2012, Energen Resources entered into a definitive agreement with BHP Billiton (BHP) to buy a 50 percent undivided interest in three existing wells in Reeves County, Texas, from Energen Resources for approximately $18 million. As a result of purchasing the wells, and subject to initiating horizontal completions of two of the wells, BHP will own a 50 percent undivided interest in 4,829 net acres. BHP will carry Energen Resources in completion operations of the two wells. The agreement also included the option for BHP to purchase from Energen Resources a 50 percent undivided interest in 51,720 net acres in the Permian Basin. On May 1, 2012, BHP elected not to exercise the option.
 
On February 14, 2012, Energen completed the purchase of certain properties in the Permian Basin for a cash purchase price of $63 million (subject to closing adjustments). This purchase had an effective date of December 1, 2011. Energen acquired total proved reserves of approximately 8.1 million barrels of oil equivalent (MMBOE). Of the proved reserves acquired, an estimated 81 percent are undeveloped. Approximately 64 percent of the proved reserves are oil, 22 percent are natural gas liquids and natural gas comprises the remaining 14 percent. Energen Resources used its credit facilities and internally generated cash flows to finance the acquisition. Pro forma financial information for this acquisition is not presented because it would not be materially different from the information presented in the consolidated statements of income.

The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized as of February 14, 2012. The purchase price allocation is preliminary and subject to adjustment as the final closing statement is not complete.

(in thousands)
 
Consideration given
 
    Cash (net)
$
63,294

Recognized amounts of identifiable assets acquired and liabilities assumed
 
    Proved properties
$
62,565

    Unproved leasehold properties
911

    Accounts receivable
44

    Accounts payable
(16
)
    Asset retirement obligation
(210
)
     Total identifiable net assets
$
63,294


Included in the Company’s consolidated results of operations for the three months ended March 31, 2012, were $1.7 million of operating revenues and $1.0 million in operating income resulting from the operation of the properties acquired above.

On December 27, 2011, Energen completed the purchase of certain properties in the Permian Basin for a cash purchase price of $56 million (subject to closing adjustments). This purchase had an effective date of July 1, 2011. Energen acquired total proved reserves of approximately 3.4 MMBOE. Of the proved reserves acquired, an estimated 77 percent are undeveloped. Approximately 61 percent of the proved reserves are oil, 24 percent are natural gas liquids and natural gas comprises the remaining 15 percent. Energen Resources used its credit facilities and internally generated cash flows to finance the acquisition. Pro forma financial information for this acquisition is not presented because it would not be materially different from the information presented in the consolidated statements of income.



24



The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized as of December 27, 2011. The purchase price allocation is preliminary and subject to adjustment as the final closing statement is not complete.

(in thousands)
 
Consideration given
 
    Cash (net)
$
55,994

Recognized amounts of identifiable assets acquired and liabilities assumed
 
    Proved properties
$
32,045

    Unproved leasehold properties
23,686

    Accounts receivable
680

    Accounts payable
(244
)
    Asset retirement obligation
(173
)
     Total identifiable net assets
$
55,994


The impact to operating revenues and operating income from this acquisition was not material for the year ended December 31, 2011.

On November 16, 2011, Energen completed the purchase of certain liquids-rich properties in the Permian Basin for a cash purchase price of $162 million . This purchase had an effective date of August 1, 2011. Energen acquired total proved reserves of approximately 13.6 million MMBOE. Of the proved reserves acquired, an estimated 76 percent are undeveloped. Approximately 59 percent of the proved reserves are oil, 25 percent are natural gas liquids and natural gas comprises the remaining 16 percent. Energen Resources used its credit facilities and internally generated cash flows to finance the acquisition. Pro forma financial information for this acquisition is not presented because it would not be materially different from the information presented in the consolidated statements of income.

The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized as of November 16, 2011, (including the effects of closing adjustments).

(in thousands)
 
Consideration given
 
    Cash (net)
$
161,967

Recognized amounts of identifiable assets acquired and liabilities assumed
 
    Proved properties
$
151,544

    Unproved leasehold properties
7,883

    Accounts receivable
3,070

    Accounts payable
(388
)
    Asset retirement obligation
(142
)
     Total identifiable net assets
$
161,967


The impact to operating revenues and operating income from this acquisition was not material for the year ended December 31, 2011.

In July 2011, Energen completed the purchase of liquids-rich properties in the Permian Basin for a cash purchase price of approximately $20 million. In April 2011, Energen completed the purchase of unproved leasehold properties for a cash purchase price of approximately $37 million covering an estimated 11,000 net acres in the Permian Basin.







25



13. RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2011, the FASB issued Accounting Standard Update (ASU) No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the impact of the ASU.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This update requires entities to present the components of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which deferred the requirements to include reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The amendments in these updates are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of these updates has not had a material impact on the consolidated condensed financial statements or results of operations. The Company does not expect the portions of these updates that have been deferred to have a material impact on its consolidated condensed financial statements or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and International Financial Reporting Standards (IFRSs). The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The amendments are effective during interim and annual periods beginning after December 15, 2011. This standard did not have a material impact on the consolidated condensed financial statements of the Company. The additional fair value disclosures are included in Note 3, Derivative Commodity Instruments.


26



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

RESULTS OF OPERATIONS

Energen's net income totaled $57.4 million ($0.79 per diluted share) for the three months ended March 31, 2012 compared with net income of $94.3 million ($1.30 per diluted share) for the same period in the prior year. Energen Resources Corporation, Energen's oil and gas subsidiary, had net income for the three months ended March 31, 2012, of $9.5 million as compared with $49.7 million in the same quarter in the previous year. This decrease in net income was primarily the result of an after-tax $25.3 million non-cash mark-to-market loss on derivatives, lower natural gas and natural gas liquids commodity prices (approximately $19 million after-tax), higher depreciation, depletion and amortization (DD&A) expense (approximately $20 million after-tax), a noncash impairment on certain natural gas properties in East Texas of approximately $13.4 million after-tax, increased lease operating expense excluding production taxes (approximately $6 million after-tax) and increased production taxes (approximately $1 million after-tax). Positively affecting net income was the impact of significantly higher production volumes (approximately $37 million after-tax) and increased oil commodity prices (approximately $11 million after-tax). Energen's natural gas utility, Alagasco, reported net income of $46.9 million in the first quarter of 2012 compared to net income of $44.2 million in the same period last year. This increase largely reflects the utility’s ability to earn on a higher level of equity in support of Alagasco's investment in its distribution system and support facilities devoted to public service partially offset by the timing of rate recovery under Alagasco’s rate-setting mechanisms.

Oil and Gas Operations
Revenues from oil and gas operations rose 3.3 percent to $224.0 million for the three months ended March 31, 2012 primarily as a result of higher production volumes and increased realized oil commodity prices partially offset by decreased realized natural gas and natural gas liquids commodity prices. During the current quarter, revenue per unit of production for natural gas decreased 28.6 percent to $3.94 per thousand cubic feet (Mcf), while oil revenue per unit of production rose 12.4 percent to $85.12 per barrel. Natural gas liquids revenue per unit of production fell 2.2 percent to an average price of $0.87 per gallon. Revenues per unit of production for the current quarter and year-to-date reflect realized prices and derivative gains and losses including effects of designated cash flow hedges.

Production for the current quarter increased largely due to higher volumes related to increased field development in certain Permian Basin liquids-rich properties partially offset by normal production declines. Natural gas production in the first quarter rose 10.1 percent to 19.1 billion cubic feet (Bcf), oil volumes increased 43.2 percent to 1,953 thousand barrels (MBbl) and natural gas liquids production rose 32 percent to 26 million gallons (MMgal). Natural gas comprised approximately 55 percent of Energen Resources' production for the current quarter.

Energen Resources may, in the ordinary course of business, be involved in the sale of developed or undeveloped properties. The Company includes gains and losses on the disposition of these assets in operating revenues. Energen Resources recorded no property sales in the first quarter of 2012. Energen Resources recorded a pre-tax gain of $42,000 on the sale of various properties in the first quarter of 2011.

Operations and maintenance (O&M) expense increased $9.9 million for the quarter. Lease operating expense (excluding production taxes) generally reflects year over year increases in the number of active wells resulting from Energen Resources' ongoing development, exploratory and acquisition activities. Lease operating expense (excluding production taxes) increased $9.7 million for the quarter largely due to additional workover and repair expense (approximately $2.3 million), increased labor costs (approximately $1.7 million), higher marketing and transportation costs (approximately $1.4 million), increased nonoperated costs (approximately $1.4 million), increased water disposal costs (approximately $0.9 million), the acquisitions of Permian Basin liquids-rich properties (approximately $0.7 million), higher chemical and treatment costs (approximately $0.4 million) and additional ad valorem taxes (approximately $0.3 million). On a per unit basis, the average lease operating expense (excluding production taxes) for the current quarter was $9.84 per barrel of oil equivalent (BOE) as compared to $9.94 per BOE in the same period a year ago. Administrative expense decreased $1 million for the three months ended March 31, 2012 largely due to lower labor costs (approximately $1.3 million) and decreased costs from the Company’s performance-based compensation plans (approximately $1 million) partially offset by increased legal expenses (approximately $1.3 million). Exploration expense rose $1.2 million in the first quarter of 2012.

Energen Resources' DD&A expense for the quarter rose $54.3 million which includes an impairment writedown on certain properties in East Texas of $21.5 million pre-tax to adjust the carrying amount of certain properties to their fair value based on expected future discounted cash flows. The average depletion rate, excluding the asset impairment, for the current quarter was $14.44 per BOE as compared to $10.67 per BOE in the same period a year ago. The increase in the current quarter per unit DD&A rate, which contributed

27



approximately $20.1 million to the increase in DD&A expense, was largely due to higher rates resulting from the acquisition of liquids-rich properties and an increase in development costs. Higher production volumes contributed approximately $12.3 million to the increase in DD&A expense for the quarter.

Energen Resources' expense for taxes other than income taxes was $1.9 million higher in the three months ended March 31, 2012, largely due to production-related taxes. In the current quarter, higher natural gas, oil and natural gas liquid production volumes contributed approximately $2.7 million to the increase in production-related taxes. Production-related taxes decreased by approximately $0.8 million for the quarter primarily due to lower natural gas and natural gas liquid commodity market prices partially offset by higher oil commodity market prices. Commodity market prices exclude the effects of derivative instruments for purposes of determining severance taxes.

Natural Gas Distribution
Natural gas distribution revenues decreased $75.1 million for the quarter largely due to a decline in customer usage and lower gas costs partially offset by adjustments from the utility’s rate setting mechanisms. During the first quarter of 2011, Alagasco had a $3.3 million pre-tax reduction in revenues to bring the return on average common equity to midpoint within the allowed range of return. For the first quarter, weather that was 32.7 percent warmer than in the same quarter last year contributed to a 34.6 percent decrease in residential sales volumes and a 31.2 percent fall in commercial and industrial customer sales volumes. Transportation volumes decreased 7.2 percent in period comparisons. A significant decrease in gas purchase volumes along with decreased gas costs resulted in a 54.8 percent decrease in cost of gas for the quarter. Utility gas costs include commodity cost, risk management gains and losses and the provisions of the Gas Supply Adjustment (GSA) rider. The GSA rider in Alagasco's rate schedule provides for a pass-through of gas price fluctuations to customers without markup. Alagasco's tariff provides a temperature adjustment mechanism, also included in the GSA, that is designed to moderate the impact of departures from normal temperatures on Alagasco’s earnings. The temperature adjustment applies primarily to residential, small commercial and small industrial customers.

O&M expense decreased 8.7 percent in the current quarter primarily due to decreased labor-related costs (approximately $1.3 million), lower bad debt expense (approximately $1 million) and decreased distribution operation expenses (approximately $0.7 million).

A 6.8 percent increase in depreciation expense in the current quarter was primarily due to the extension and replacement of the utility's distribution system and replacement of its support systems. Taxes other than income taxes primarily reflected 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.

Non-Operating Items
Interest expense for the Company rose $6 million in the first quarter of 2012 largely due to the August 2011 issuance of $400 million of Senior Notes by Energen with an interest rate of 4.625 percent, the December 2011 issuance of $50 million of Senior Notes by Alagasco with an interest rate of 3.86 percent and the December 2011 issuance of $300 million of Senior Term Loans. The $300 million issuance includes $100 million with a floating rate of LIBOR plus 1.375 percent, currently 1.62 percent at March 31, 2012 and $200 million swapped to a fixed rate at 2.4175 percent. These increases were partially offset by decreased short-term borrowings. Income tax expense for the Company decreased $24 million in the current quarter largely due to lower pre-tax income.

FINANCIAL POSITION AND LIQUIDITY
 
 
 
 
 

Cash flows from operations for the year-to-date were $231.0 million as compared to $262.5 million in the prior period. Net income decreased during period comparisons primarily due to lower realized natural gas and natural gas liquids commodity prices partially offset by increased production volumes and higher realized oil commodity prices at Energen Resources. Deferred income taxes decreased in the current year due to the tax effect of reduced bonus depreciation in 2012. The Company’s working capital needs were also influenced by accrued taxes, commodity prices and the timing of payments. During the first quarter of 2011, the income tax receivable decreased approximately $39.8 million primarily from an income tax refund associated with the 2010 impact of bonus depreciation and the write-off of Alabama shale leasehold. Working capital needs at Alagasco were additionally affected by lower gas costs and changes to storage gas inventory compared to the prior period.

The Company had a net outflow of cash from investing activities of $331.6 million for the three months ended March 31, 2012 primarily due to additions of property, plant and equipment of $345 million. Energen Resources incurred on a cash basis $330.7 million in capital expenditures primarily related to the acquisition and development of oil and gas properties. In February 2012, Energen Resources completed the purchase of certain properties located in the Permian Basin for a cash price of approximately $63 million. Utility capital expenditures on a cash basis totaled $14.2 million year-to-date and primarily represented expansion and replacement of its distribution system and replacement of its support facilities.

28



The Company provided net cash of $140.7 million from financing activities in the year-to-date primarily due to an increase in short-term borrowings partially offset by the payment of dividends to common shareholders.

Oil and Gas Operations
The Company plans to continue investing significant capital in Energen Resources’ oil and gas production operations. For 2012, the Company expects its oil and gas capital spending to total approximately $1 billion, including $67 million for certain property acquisitions in the Permian Basin and $951 million for existing properties, including exploration to date of $103 million. On an annual basis, the development and exploration expenditures cannot be reasonably segregated as drilling and development throughout the course of the year may change the classification of locations currently identified as exploratory. In February 2012, Energen completed the purchase of certain properties in the Permian Basin for a cash purchase price of $63 million (subject to closing adjustments). This purchase had an effective date of December 1, 2011. Energen acquired total proved reserves of approximately 8.1 MMBOE. Of the proved reserves acquired, an estimated 81 percent are undeveloped. Approximately 64 percent of the proved reserves are oil, 22 percent are natural gas liquids and natural gas comprises the remaining 14 percent. Energen Resources used its credit facilities and internally generated cash flows to finance the acquisition.

The Company also may allocate additional capital for other oil and gas activities such as property acquisitions and additional development of existing properties. Energen Resources may evaluate acquisition opportunities which arise in the marketplace and from time to time will pursue acquisitions that meet Energen’s acquisition criteria. Energen Resources’ ability to invest in property acquisitions is subject to market conditions and industry trends. Property acquisitions, except as disclosed above, are not included in the aforementioned estimate of oil and gas investments and could result in capital expenditures different from those outlined above. To finance capital spending at Energen Resources, the Company expects to use internally generated cash flow supplemented by its credit facilities. The Company also may issue long-term debt and equity periodically to replace short-term obligations, enhance liquidity and provide for permanent financing. The Company currently has no plans for the issuance of equity.

Impairment
During the first quarter of 2012, Energen Resources recognized a noncash impairment writedown on certain properties in East Texas of $21.5 million pre-tax to adjust the carrying amount of these properties to their fair value based on expected future discounted cash flows. Significant assumptions in valuing the proved reserves included the reserve quantities, anticipated operating costs, anticipated production taxes, future expected natural gas prices and basis differentials, anticipated production declines, and a discount rate of 10 percent commensurate with the risk of the underlying cash flow estimates. The impairment was caused by the impact of lower future natural gas prices. During the first quarter of 2012, future natural gas price curves shifted significantly lower, especially in the next 5 years. This nonrecurring impairment writedown is classified as Level 3 fair value.

Natural Gas Distribution
Alagasco is subject to regulation by the Alabama Public Service Commission (APSC) and is allowed to earn a range of return on average equity of 13.15 percent to 13.65 percent. RSE limits the utility’s equity upon which a return is permitted to 55 percent of total capitalization, subject to certain adjustments. Given existing economic conditions, Alagasco expects only modest growth in equity as annual dividends are typically paid by the utility.

On June 28, 2010, the APSC approved a reduction in depreciation rates, effective June 1, 2010, for Alagasco with the revised prospective composite depreciation rate approximating 3.1 percent. Related to the lower depreciation rates, Alagasco refunded to eligible customers approximately $25.6 million of refundable negative salvage costs through a one-time bill credit in July 2010. Refunds of negative salvage costs to customers through lower tariff rates were $11.7 million, $22.2 million and $2.7 million for the periods January through March 2012, January through December 2011 and in December 2010, respectively. Alagasco anticipates refunding approximately $21.9 million of refundable negative salvage costs through lower tariff rates over the next twelve months. An additional estimated $52.3 million of refundable negative salvage costs will be refunded to eligible customers on a declining basis through lower tariff rates over a seven year period beginning January 1, 2013. The total amount refundable to customers is subject to adjustments over the entire nine year period for charges made to the Enhanced Stability Reserve (ESR) and other commission-approved charges. On November 1, 2010, the APSC specifically approved adjustments to the total amount refundable to include items originally approved in the APSC's 1998 order establishing the ESR, extraordinary O&M expenses related to environmental response costs, and extraordinary O&M expenses related to self insurance costs that exceed $1 million per occurrence. As of the rate year ended September 30, 2011, an adjustment for environmental response costs of $4.8 million from the ESR was made to reduce the total refundable amount. The refunds as of December 2011 and the remaining amount refundable over the entire nine year period are due to a re-estimation of future removal costs provided for through the prior depreciation rates. The re-estimation was primarily the result of Alagasco’s actual removal cost experience, combined with technology improvements and Alagasco’s system efficiency improvements, during the five years prior to the approval of the reduction in depreciation rates.

Alagasco is a mature utility operating in a slow-growth service area. Over the last five years, Alagasco's customer count has declined at a rate of approximately 1 percent. Enhanced credit and collection processes implemented in 2011 to reduce bad debt expense

29



combined with the impact of severe weather on April 27, 2011, including a number of deadly tornados causing significant damage to several communities in Alabama served by Alagasco, contributed to the decline in customers from the prior year.  To increase its customer base, the utility is capitalizing on opportunities to expand its distribution lines to areas with potential for economic growth and appliance conversions. Alagasco monitors the bad debt reserve and makes adjustments as required based on its evaluation of receivables which are impacted by natural gas prices and the underlying current and future economic conditions facing the utility's customer base. During the first quarter 2012, Alagasco reduced accounts receivable and the bad debt reserve by approximately $5.2 million related to certain aged receivables that have been currently transitioned to the utility's long-term collections.

Another aspect of growth is usage per customer. Throughout the country, customer use of natural gas has declined over the years in large part due to energy-efficiencies in home construction and appliances and conservation. Alagasco’s marketing emphasis in this area is directed toward retention and increasing end-use applications by existing customers.

Alagasco maintains an investment in storage gas that is expected to average approximately $40 million in 2012 but will vary depending upon the price of natural gas. During 2012, Alagasco plans to invest an estimated $70 million in utility capital expenditures for normal distribution and support systems and technology-related projects designed to improve customer service. The utility anticipates funding these capital requirements through internally generated capital and the utilization of its credit facilities. Alagasco also may issue long-term debt periodically to replace short-term obligations, enhance liquidity and provide for permanent financing.

Derivative Commodity Instruments
Energen Resources periodically enters into derivative commodity instruments to hedge its price exposure to its estimated oil, natural gas and natural gas liquids production. Such instruments may include over-the-counter (OTC) swaps, collars and basis hedges with major energy derivative product specialists. The counterparties to the commodity instruments are investment and commercial banks and energy-trading firms. At March 31, 2012, the counterparty agreements under which the Company had active positions did not include collateral posting requirements. Energen Resources was in a net loss position with eight of its active counterparties and in a net gain position with the remaining five at March 31, 2012. The Company is at risk for economic loss based upon the creditworthiness of its counterparties. Hedge transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions.

Alagasco periodically enters into cash flow derivative commodity instruments to hedge its exposure to price fluctuations on its gas supply pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions. Alagasco recognizes all derivatives at fair value as either assets or liabilities on the balance sheet. Any gains or losses are passed through to customers using the mechanisms of the GSA in compliance with Alagasco’s APSC-approved tariff and are recognized as a regulatory asset or regulatory liability.



























30



Energen Resources entered into the following transactions for the remainder of 2012 and subsequent years:

Production Period
Total Hedged Volumes
Average Contract
Price

Description
Natural Gas
 
 
 
2012
7.9
 Bcf
$5.07 Mcf
NYMEX Swaps
 
21.1
 Bcf
$4.60 Mcf
Basin Specific Swaps - San Juan
2013
11.2
 Bcf
$4.98 Mcf
NYMEX Swaps
 
27.7
 Bcf
$4.76 Mcf
Basin Specific Swaps - San Juan
2014
7.8
 Bcf
$4.76 Mcf
NYMEX Swaps
 
22.0
 Bcf
$4.88 Mcf
Basin Specific Swaps - San Juan
Oil
 
 
 
2012
5,307
 MBbl
$88.57 Bbl
NYMEX Swaps
2013
8,098
 MBbl
$90.65 Bbl
NYMEX Swaps
2014
7,892
 MBbl
$92.70 Bbl
NYMEX Swaps
Oil Basis Differential
 
 
 
2012
2,312
 MBbl
$(2.95) Bbl
WTS/WTI Basis Swaps*
2013
2,768
 MBbl
$(3.40) Bbl
WTS/WTI Basis Swaps*
Natural Gas Liquids
 
 
 
2012
44.2
 MMGal
$0.98 Gal
Liquids Swaps
2013
44.5
 MMGal
$1.02 Gal
Liquids Swaps
*WTS - West Texas Sour/Midland, WTI -West Texas Intermediate/Cushing

Alagasco entered into the following natural gas transactions for the remainder of 2012 and subsequent years:

Production Period
 Total Hedged Volumes
 
Description
2012
10.8
 Bcf
 
NYMEX Swaps
2013
1.5
 Bcf
 
NYMEX Swaps

Alagasco has not entered into any new cash flow derivative transactions on its gas supply since early 2010. 

Realized prices are anticipated to be lower than New York Mercantile Exchange (NYMEX) prices primarily due to basis differences and other factors.

See Note 3, Derivative Commodity Instruments, in the Notes to Unaudited Condensed Financial Statements for information regarding the Company’s policies on fair value measurement.

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

 
March 31, 2012
(in thousands)
Level 2*
Level 3*
Total
Current assets
$
(33,849
)
$
55,528

$
21,679

Noncurrent assets
(40,635
)
51,243

10,608

Current liabilities
(111,489
)
(1,848
)
(113,337
)
Noncurrent liabilities
(60,713
)

(60,713
)
Net derivative asset (liability)
$
(246,686
)
$
104,923

$
(141,763
)


31



 
December 31, 2011
(in thousands)
Level 2*
Level 3*
Total
Current assets
$
(14,843
)
$
36,635

$
21,792

Noncurrent assets
(8,382
)
39,438

31,056

Current liabilities
(98,468
)
(8,822
)
(107,290
)
Noncurrent liabilities
(32,928
)
(1,450
)
(34,378
)
Net derivative asset (liability)
$
(154,621
)
$
65,801

$
(88,820
)

* 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.

As of March 31, 2012, Alagasco had $47.9 million of derivative instruments which are classified as Level 2 fair values and are included in the above table as current liabilities. As of December 31, 2011, Alagasco has $56.8 million and $3.1 million of derivative instruments which are classified as Level 2 fair values and are included in the table as current and noncurrent liabilities, respectively. Alagasco had no derivative instruments classified as Level 3 fair values as of March 31, 2012 and December 31, 2011.

Level 3 assets and liabilities as of March 31, 2012, represent approximately 2 percent of total assets and an immaterial amount of liabilities, respectively. Changes in fair value primarily result from price changes in the underlying commodity. 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 $29 million change in the fair value of open Level 3 derivative contracts. The resulting impact upon the results of operations would be an approximate $0.4 million associated with open Level 3 mark-to-market derivative contracts. Cash flow 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.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. Title VII of the Dodd-Frank Act establishes federal oversight and regulation of the over-the-counter derivatives markets and participants in such markets. The Dodd-Frank Act requires the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to promulgate rules and regulations implementing the new legislation; however, many of these rules and regulations have not been finalized and are not yet effective. The Dodd-Frank Act requires certain entities to comply with margin requirements and certain clearing and trade execution requirements. Certain counterparties may also be required to spin off some of their derivatives activities to separate and potentially less creditworthy entities. On April 18, 2012, the CFTC and the SEC jointly adopted interim final rules defining “swap dealer,” “major swap participant,” and “eligible contract participant.” The interim final rules appear to allow for a Company exemption from the definition of “swap dealer” and “major swap participant,” which would in turn exempt the Company and Alagasco from the margin requirements and other limits on swap transactions set forth in the Dodd-Frank Act. The Company and Alagasco are currently reviewing the text of the interim final rules in order to estimate their potential impact on the Company and Alagasco's financial position, results of operations and cash flows.

Stock Repurchases
Energen periodically considers stock repurchases as a capital investment. Energen may buy shares on the open market or in negotiated purchases. The timing and amounts of any repurchases are subject to changes in market conditions. The Company did not repurchase shares of common stock for this program during the three months ended March 31, 2012. The Company expects any future stock repurchases to be funded through internally generated cash flow or through the utilization of its credit facilities. During the three months ended March 31, 2012, the Company had noncash purchases of approximately $0.1 million of Company common stock in conjunction with tax withholdings on its non-qualified deferred compensation plan and other stock compensation plans. The Company utilized internally generated cash flows in payment of the related tax withholdings.

Credit Facilities and Working Capital
On October 29, 2010, Energen and Alagasco entered into an $850 million and a $150 million, respectively, three-year syndicated unsecured credit facility (syndicated credit facilities) with domestic and foreign lenders. Energen obligations under the $850 million syndicated credit facility are unconditionally guaranteed by Energen Resources. There are certain restrictive covenants including a financial covenant with a maximum consolidated debt to capitalization ratio of no more than 65 percent for each of the Company and Alagasco. The Company currently has available credit facilities as follows:


32



 (in thousands)
Current Term
Energen
Alagasco
Total
Syndicated Credit Facility
10/29/2013
$
850,000

$
150,000

$
1,000,000

Bryant Bank
10/31/2012
-

9,000

9,000

BancorpSouth Bank
5/23/2012
-

10,000

10,000

   Total
 
$
850,000

$
169,000

$
1,019,000


Energen and Alagasco rely upon internally generated cash flows supplemented by the syndicated credit facilities and the short-term credit facilities to fund working capital needs. The Company may also issue long-term debt and equity periodically to replace obligations under the credit facilities, enhance liquidity and provide for permanent financing.
Working capital requirements for Energen and Alagasco are influenced by short-term borrowings to finance recent acquisitions, the fair value of the Company's derivative financial instruments associated with future production, the recovery and pass-through of regulatory items and the seasonality of Alagasco's business. Energen's accounts receivable and accounts payable at March 31, 2012 include $21.7 million and $113.3 million, respectively, associated with its derivative financial instruments. Working capital at Alagasco reflects an expected pass-through to rate payers of $21.9 million in refundable negative salvage costs representing a reduction in future revenues through lower tariff rates.
Dividends
Energen expects to pay annual cash dividends of $0.56 per share on the Company’s common stock in 2012. The amount and timing of all dividend payments is subject to the discretion of the Board of Directors and is based upon business conditions, results of operations, financial conditions and other factors.

Contractual Cash Obligations
In the course of ordinary business activities, Energen enters into a variety of contractual cash obligations and other commitments. Except as discussed below, there have been no material changes to the contractual cash obligations of the Company since December 31, 2011.

During the quarter, the Company entered into certain capital leases related to certain equipment. The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2012:

(in thousands)
 
2012
$
1,307

2013
1,743

2014
1,743

2015
145

Total minimum lease payments
4,938

Less amount representing interest
141

Total present value of minimum lease payments
$
4,797


Other Commitments
During the third quarter of 2010, Energen Resources received preliminary findings from the Taxation and Revenue Department (the Department) of the State of New Mexico relating to its audit, conducted on behalf of the Office of Natural Resources Revenue (ONRR), of federal oil and gas leases in New Mexico. The audit covered periods from January 2004 through December 2008 and included a review of the computation and payment of royalties due on minerals removed from specified U.S. federal leases. The ONRR has proposed certain changes in the method of determining allowable deductions of transportation, fuel and processing costs from royalties due under the terms of the related leases.

As a result of the audit, Energen Resources has been ordered by the ONRR to pay additional royalties on the specified U.S. federal leases in the amount of $142,000 and restructure its accounting for all federal leases in two counties in New Mexico from March 1, 2004 forward. The Company preliminarily estimates that application of the Order to all of the Company's New Mexico federal leases would result in ONRR claims for up to approximately $22 million of additional royalties plus interest and penalties for the period from March 1, 2004 forward. The preliminary findings and subsequent Order (issued April 25, 2011) are contrary to deductions allowed under previous audits, retroactive in application and inconsistent with the Company’s understanding of industry practice. The Company is vigorously contesting the Order and has requested additional information from the ONRR and the Department to

33



assist the Company in evaluating the ONRR Order and the Department's findings. Management is unable, at this time, to determine a range of reasonably possible losses as a result of this Order, and no amount has been accrued as of March 31, 2012.

Recent Accounting Standards Updates
See Note 13, Recently Issued Accounting Standards, in the Notes to Unaudited Condensed Financial Statements for information regarding recently issued accounting standards.

FORWARD LOOKING STATEMENTS AND RISK FACTORS
 
 
 
 
 

The disclosure and analysis in this report contains forward-looking statements that express management’s expectations of future plans, objectives and performance of the Company and its subsidiaries. Such statements constitute forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act, as amended, and are noted in the Company’s disclosure as permitted by the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address the Company’s future business and financial performance and financial condition, and often contain words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “seek”, “see”, “project”, “will”, “estimate”, “may”, and other words of similar meaning.

All statements based on future expectations rather than on historical facts are forward-looking statements that are dependent on certain events, risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, economic and competitive conditions, production levels, reserve levels, energy markets, supply and demand for and the price of energy commodities including oil, gas and natural gas liquids, fluctuations in the weather, drilling risks, costs associated with compliance with environmental obligations, inflation rates, legislative and regulatory changes, financial market conditions, the Company’s ability to access the capital markets, future business decisions, utility customer growth and retention and usage per customer, litigation results and other factors and uncertainties discussed elsewhere in this report and in the Company’s other public filings and press releases, all of which are difficult to predict. While it is not possible to predict or identify all the factors that could cause the Company’s actual results to differ materially from expected or historical results, the Company has identified certain risk factors which may affect the Company’s future business and financial performance.
 
Commodity Prices: The Company and Alagasco are significantly influenced by commodity prices. Historical markets for natural gas, oil and natural gas liquids have been volatile. Energen Resources’ revenues, operating results, profitability and cash flows depend primarily upon the prices realized for its oil, gas and natural gas liquid production. Additionally, downward commodity price trends may impact expected cash flows from future production and potentially reduce the carrying value of Company-owned oil and natural gas properties. Alagasco’s competitive position and customer demand is significantly influenced by prices for natural gas which are passed-through to customers.

Access to Credit Markets: The Company and its subsidiaries rely on access to credit markets. The availability and cost of credit market access is significantly influenced by market events and rating agency evaluations for both lenders and the Company. Market volatility and credit market disruption may severely limit credit availability and issuer credit ratings can change rapidly. Events negatively affecting credit ratings and credit market liquidity could increase borrowing costs or limit availability of funds to the Company.

Energen Resources’ Hedging: Although Energen Resources makes use of futures, swaps, options, collars and fixed-price contracts to mitigate price risk, fluctuations in future oil, gas and natural gas liquids prices could materially affect the Company's financial position, results of operations and cash flows; furthermore, such risk mitigation activities may cause the Company's financial position and results of operations to be materially different from results that would have been obtained had such risk mitigation activities not occurred. The effectiveness of such risk mitigation assumes that counterparties maintain satisfactory credit quality. The effectiveness of such risk mitigation also assumes that actual sales volumes will generally meet or exceed the volumes subject to the futures, swaps, options, collars and fixed-price contracts. A substantial failure to meet sales volume targets, whether caused by miscalculations, weather events, natural disaster, accident, mechanical failure, criminal act or otherwise, could leave Energen Resources financially exposed to its counterparties and result in material adverse financial consequences to Energen Resources and the Company. The adverse effect could be increased if the adverse event was widespread enough to move market prices against Energen Resources' position. In addition, various existing and pending financial reform rules and regulations could have an adverse effect on the ability of Energen Resources to use derivative instruments which could have a material adverse effect on our financial position, results of operations and cash flows.

Alagasco’s Hedging: Similarly, although Alagasco has made use of cash flow derivative commodity instruments to mitigate gas supply cost risk, fluctuations in future gas supply costs could materially affect its financial position and rates to customers. The effectiveness of Alagasco's risk mitigation assumes that its counterparties in such activities maintain satisfactory credit quality. The

34



effectiveness of such risk mitigation also assumes that Alagasco's actual gas supply needs will generally meet or exceed the volumes subject to the cash flow derivative commodity instruments. A substantial failure to experience projected gas supply needs, whether caused by miscalculations, weather events, natural disaster, accident, mechanical failure, criminal act or otherwise, could leave Alagasco financially exposed to its counterparties and result in material adverse financial consequences to Alagasco and the Company. The adverse effect could be increased if the adverse event was widespread enough to move market prices against Alagasco's position. In addition, various existing and pending financial reform rules and regulations could have an adverse effect on the ability of Alagasco to use derivative instruments which could have a material adverse effect on our financial position, results of operations and cash flows.

Energen Resources Customer Concentration: Revenues and related accounts receivable from oil and gas operations primarily are generated from the sale of produced oil, natural gas and natural gas liquids to a small number of 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 a limited number of customers in the energy marketing industry has the potential to affect the Company's overall exposure to credit risk, either positively or negatively, based on changes in economic, industry or other conditions specific to a single customer or to the energy marketing industry generally. Energen Resources considers the credit quality of its customers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee.

Third Party Facilities: Energen Resources delivers to and Alagasco is served by third party facilities. These facilities include third party oil and gas gathering, transportation, processing and storage facilities. Energen Resources relies upon such facilities for access to markets for its production. Alagasco relies upon such facilities for access to natural gas supplies. Such facilities are typically limited in number and geographically concentrated. An extended interruption of access to or service from these facilities, whether caused by weather events, natural disaster, accident, mechanical failure, criminal act or otherwise could result in material adverse financial consequences to Energen Resources, Alagasco and the Company.

Energen Resources’ Production and Drilling: 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 reserve and production estimates. In the event Energen Resources is unable to fully invest its planned development, acquisition and exploratory expenditures, future operating revenues, production, and proved reserves could be negatively affected. The drilling of development and exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns, and these risks can be affected by lease and rig availability, complex geology and other factors. Anticipated drilling plans and capital expenditures may also change due to weather, manpower and equipment availability, changing emphasis by management and a variety of other factors which could result in actual drilling and capital expenditures being substantially different than currently planned.

Operations: Inherent in the gas distribution activities of Alagasco and the oil and gas production activities of Energen Resources are a variety of hazards and operation risks, such as leaks, explosions and mechanical problems that could cause substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution, impairment of operations and substantial losses to the Company. In accordance with customary industry practices, the Company maintains insurance against some, but not all, of these risks and losses. Further, the Company’s insurance retention levels are such that significant events could adversely affect Energen Resources’, Alagasco's and the Company's financial position, results of operations and cash flows. The location of pipeline and storage facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks. The occurrence of any of these events could adversely affect Alagasco's, Energen Resources’ and the Company's financial position, results of operations and cash flows.
 
Alagasco Service Territory: Alagasco’s utility customers are geographically concentrated in central and north Alabama. Significant economic, weather, natural disaster, criminal act or other events that adversely affect this region could adversely affect Alagasco and the Company.

Federal, State and Local Laws and Regulations: Energen and Alagasco are subject to extensive federal, state and local regulation which significantly influences operations. Although the Company believes that operations generally comply with applicable laws and regulations, failure to comply could result in the suspension or termination of operations and subject the Company to administrative, civil and criminal penalties. Federal, state and local legislative bodies and agencies frequently exercise their respective authority to adopt new laws and regulations and to amend, modify and interpret existing laws and regulations.  Such changes can subject the Company to significant tax or cost increases and can impose significant restrictions and limitations on the Company's operations.


35



SELECTED BUSINESS SEGMENT DATA
 
ENERGEN CORPORATION
 
(Unaudited)
 
 
Three months ended
 
March 31,
(in thousands, except sales price data)
2012
2011
Oil and Gas Operations
 
 
Operating revenues
 
 
Natural gas
$
75,580

$
95,599

Oil
124,314

103,256

Natural gas liquids
23,712

17,533

Other
351

404

Total
$
223,957

$
216,792

Production volumes
 
 
Natural gas (MMcf)
19,092

17,334

Oil (MBbl)
1,953

1,364

Natural gas liquids (MMgal)
26.0

19.7

Total production volumes (MMcfe)
34,530

28,338

Total production volumes (MBOE)
5,755

4,723

Revenue per unit of production including effects of all derivative instruments
Natural gas (Mcf)
$
3.96

$
5.52

Oil (barrel)
$
63.65

$
75.70

Natural gas liquids (gallon)
$
0.91

$
0.89

Revenue per unit of production including effects of designated cash flow hedges
Natural gas (Mcf)
$
3.94

$
5.52

Oil (barrel)
$
85.12

$
75.70

Natural gas liquids (gallon)
$
0.87

$
0.89

Revenue per unit of production excluding effects of all derivative instruments
Natural gas (Mcf)
$
2.67

$
4.01

Oil (barrel)
$
98.58

$
88.67

Natural gas liquids (gallon)
$
0.95

$
1.01

Other data
 
 
Lease operating expense (LOE)
 
 
LOE and other
$
56,612

$
46,945

Production taxes
14,162

12,283

Total
$
70,774

$
59,228

Depreciation, depletion and amortization
$
84,088

$
51,348

Asset impairment
$
21,545

$

Capital expenditures
$
340,967

$
140,323

Exploration expenditures
$
1,789

$
614

Operating income
$
26,005

$
85,059

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

36



Natural Gas Distribution
 
 
Operating revenues
 
 
Residential
$
130,509

$
187,674

Commercial and industrial
46,756

66,906

Transportation
15,598

16,493

Other
1,624

(1,501
)
Total
$
194,487

$
269,572

Gas delivery volumes (MMcf)
 
 
Residential
8,238

12,591

Commercial and industrial
3,442

5,000

Transportation
12,036

12,970

Total
23,716

30,561

Other data
 
 
Depreciation and amortization
$
10,446

$
9,780

Capital expenditures
$
14,943

$
13,540

Operating income
$
78,560

$
75,059



37



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
 
 

Energen Resources' major market risk exposure is in the pricing applicable to its oil and gas production. Historically, prices received for oil and gas production have been volatile because of seasonal weather patterns, world and national supply-and-demand factors and general economic conditions. Crude oil prices also are affected by quality differentials, by worldwide political developments and by actions of the Organization of Petroleum Exporting Countries. Basis differentials, like the underlying commodity prices, can be volatile because of regional supply-and-demand factors, including seasonal factors and the availability and price of transportation to consuming areas.

Energen Resources periodically enters into derivative commodity instruments to hedge its exposure to price fluctuations to its estimated oil, natural gas and natural gas liquids production. In addition, Alagasco periodically enters into cash flow derivative commodity instruments to hedge its gas supply exposure. Such instruments may include over-the-counter swaps, collars and basis hedges with major energy derivative product specialists. The counterparties to the commodity instruments are investment banks and energy-trading firms and are believed to be creditworthy by the Company. The Company is at risk for economic loss based upon the creditworthiness of its counterparties. All hedge transactions are subject to the Company's risk management policy, approved by the Board of Directors, which does not permit speculative positions. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge. As of March 31, 2012, the maximum term over which Energen Resources and Alagasco have hedged exposures to the variability of cash flows is through December 31, 2014 and March 31, 2013, respectively

A failure to meet sales volume targets at Energen Resources or gas supply targets at Alagasco due to miscalculations, weather events, natural disasters, accidents, mechanical failure, criminal act or otherwise could leave the Company or Alagasco exposed to its counterparties in commodity hedging contracts and result in material adverse financial losses.

See Note 3, Derivative Commodity Instruments, in the Notes to Unaudited Condensed Financial Statements for details related to the Company's hedging activities.

The Company’s interest rate exposure as of March 31, 2012, primarily relates to its syndicated credit facilities with variable interest rates. The weighted average interest rate for amounts outstanding at March 31, 2012 was 1.89 percent. The Company's interest rate exposure as of March 31, 2012, was minimal since approximately 91 percent of long-term debt obligations were at fixed rates.


38


ITEM 4. CONTROLS AND PROCEDURES
 
 
 
 
 

Energen Corporation
(a)
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are designed to provide reasonable assurance of achieving their objectives and, as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level.

(b)
Our chief executive officer and chief financial officer of Energen Corporation have concluded that during the most recent fiscal quarter covered by this report there were no changes in our internal control over financial reporting that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Alabama Gas Corporation
(a)
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are designed to provide reasonable assurance of achieving their objectives and, as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level.

(b)
Our chief executive officer and chief financial officer of Alabama Gas Corporation have concluded that during the most recent fiscal quarter covered by this report there were no changes in our internal control over financial reporting that materially affected or are reasonably likely to materially affect our internal control over financial reporting.


39


PART II: OTHER INFORMATION
 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS






Period
Total Number of Shares Purchased
 

 

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans
or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs**
January 1, 2012 through January 31, 2012

 


8,992,700

February 1, 2012 through February 29, 2012

 


8,992,700

March 1, 2012 through March 31, 2012
1,556

*
$
53.69


8,992,700

Total
1,556

 
$
53.69


8,992,700


* Acquired in connection with tax withholdings and payment of exercise price on stock compensation plans.
** By resolution adopted May 24, 1994, and supplemented by resolutions adopted April 26, 2000 and June 24, 2006, the Board of Directors authorized the Company to repurchase up to 12,564,400 shares of the Company's common stock. The resolutions do not have an expiration date.

ITEM 6. EXHIBITS

31(a)
-
Section 302 Energen Corporation Certification required by Rule 13a-14(a) or Rule 15d-14(a)
31(b)
-
Section 302 Energen Corporation Certification required by Rule 13a-14(a) or Rule 15d-14(a)
31(c)
-
Section 302 Alabama Gas Corporation Certification required by Rule 13a-14(a) or Rule 15d-14(a)
31(d)
-
Section 302 Alabama Gas Corporation Certification required by Rule 13a-14(a) or Rule 15d-14(a)
32(a)
-
Section 906 Energen Corporation Certification pursuant to 18 U.S.C. Section 1350
32(b)
-
Section 906 Alabama Gas Corporation Certification pursuant to 18 U.S.C. Section 1350
101
-
The financial statements and notes thereto from Energen Corporation's Quarterly Report on Form 10-Q for the quarter
 
 
ended March 31, 2012 are formatted in XBRL