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Financial Instruments
 6 Months Ended
Mar. 31, 2013
Financial Instruments [Abstract]  
Financial Instruments

Note 3 – Financial Instruments

 

Long-Term Debt.  The fair market value of the Company’s debt, as presented in the table below, was determined using a discounted cash flow model, which incorporates the Company’s credit ratings and current market conditions in determining the yield, and subsequently, the fair market value of the debt.  Based on these criteria, the fair market value of long-term debt, including current portion, was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

 

Carrying

 

 

 

 

Carrying

 

 

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

Long-Term Debt

 

$
1,649,000 

 

$
1,871,171 

 

$
1,399,000 

 

$
1,623,847 

 

The fair value amounts are not intended to reflect principal amounts that the Company will ultimately be required to pay. Carrying amounts for other financial instruments recorded on the Company’s Consolidated Balance Sheets approximate fair value. The fair value of long-term debt was calculated using observable inputs (U.S. Treasuries/LIBOR for the risk free component and company specific credit spread information – generally obtained from recent trade activity in the debt).  As such, the Company considers the debt to be Level 2.

 

Temporary cash investments, notes payable to banks and commercial paper are stated at cost. Temporary cash investments are considered Level 1, while notes payable to banks and commercial paper are considered to be Level 2.  Given the short-term nature of the notes payable to banks and commercial paper, the Company believes cost is a reasonable approximation of fair value.

 

Other Investments.  Investments in life insurance are stated at their cash surrender values or net present value as discussed below. Investments in an equity mutual fund and the stock of an insurance company (marketable equity securities), as discussed below, are stated at fair value based on quoted market prices.

 

Other investments include cash surrender values of insurance contracts (net present value in the case of split-dollar collateral assignment arrangements) and marketable equity securities. The values of the insurance contracts amounted to $56.5 million and $57.0 million at March 31, 2013 and September 30, 2012, respectively. The fair value of the equity mutual fund was $30.1 million at March 31, 2013 and $24.8 million at September 30, 2012. The gross unrealized gain on this equity mutual fund was $4.2 million at March 31, 2013 and $2.6 million at September 30, 2012.  The fair value of the stock of an insurance company was $5.8 million at March 31, 2013 and $4.8 million at September 30, 2012. The gross unrealized gain on this stock was $3.4 million at March 31, 2013 and $2.3 million at September 30, 2012. The insurance contracts and marketable equity securities are primarily informal funding mechanisms for various benefit obligations the Company has to certain employees.

 

Derivative Financial Instruments.  The Company uses or has used derivative instruments to manage commodity price risk in the Exploration and Production, Energy Marketing, and Pipeline and Storage segments. The Company enters into futures contracts and over-the-counter swap agreements for natural gas and crude oil to manage the price risk associated with forecasted sales of gas and oil. The Company also enters into futures contracts and swaps to manage the risk associated with forecasted gas purchases, forecasted gas sales, storage of gas, withdrawal of gas from storage to meet customer demand and the potential decline in the value of gas held in storage. The duration of the Company’s hedges does not typically exceed 5 years.

 

The Company has presented its net derivative assets and liabilities as “Fair Value of Derivative Financial Instruments” on its Consolidated Balance Sheets at March 31, 2013 and September 30, 2012.  All of the derivative financial instruments reported on those line items related to commodity contracts as discussed in the paragraph above.

 

Cash flow hedges

 

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the period or periods during which the hedged transaction affects earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. 

 

As of March 31, 2013, the Company’s Exploration and Production segment had the following commodity derivative contracts (swaps) outstanding to hedge forecasted sales (where the Company uses short positions (i.e. positions that pay-off in the event of commodity price decline) to mitigate the risk of decreasing revenues and earnings):

 

 

 

 

 

 

Commodity

Units

Natural Gas

152.3 Bcf (all short positions)

Crude Oil

3,390,000 Bbls (all short positions)

 

As of March 31, 2013, the Company’s Energy Marketing segment had the following commodity derivative contracts (futures contracts and swaps) outstanding to hedge forecasted sales (where the Company uses short positions to mitigate the risk associated with natural gas price decreases and its impact on decreasing revenues and earnings) and, when applicable, purchases (where the Company uses long positions (i.e. positions that pay-off in the event of commodity price increases) to mitigate the risk of increasing natural gas prices, which would lead to increased purchased gas expense and decreased earnings):

 

 

 

 

 

 

 

Commodity

Units

Natural Gas

7.6 Bcf (4.5 Bcf short positions (mostly forecasted storage withdrawals) and 3.1 Bcf long positions (mostly forecasted storage injections))

 

As of March 31, 2013, the Company’s Exploration and Production segment had $36.5 million ($21.2 million after tax) of net hedging losses included in the accumulated other comprehensive income (loss) balance. It is expected that $12.2 million ($7.1 million after tax) of such unrealized losses will be reclassified into the Consolidated Statement of Income within the next 12 months as the expected sales of the underlying commodities occur.  

 

As of March 31, 2013, the Company’s Energy Marketing segment had $0.2 million ($0.1 million after tax) of net hedging losses included in the accumulated other comprehensive income (loss) balance. It is expected that $0.3 million ($0.2 million after tax) of such unrealized losses will be reclassified into the Consolidated Statement of Income (Loss) within the next 12 months as the expected sales of the underlying commodity occurs. It is expected that unrealized gains will be reclassified into the Consolidated Statement of Income in subsequent periods as the expected sales of the underlying commodities occur.

 

Refer to Note 1, under Accumulated Other Comprehensive Income (Loss), for the after-tax gain (loss) pertaining to derivative financial instruments for the Exploration and Production and Energy Marketing segments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Effect of Derivative Financial Instruments on the Statement of Financial Performance for the

Three Months Ended March 31, 2013 and 2012 (Thousands of Dollars)

 

 

 

 

 

 

 

Location of

 

 

Amount of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Gain

 

 

Derivative Gain or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

or (Loss)

 

 

(Loss)

Location of

 

 

Derivative Gain

 

 

 

Amount of

Reclassified

 

 

Reclassified from

Derivative

 

 

or (Loss)

 

 

 

Derivative Gain or

from

 

 

Accumulated

Gain or

 

 

Recognized in

 

 

 

(Loss)

Accumulated

 

 

Other

(Loss)

 

 

the

 

 

 

Recognized in

Other

 

 

Comprehensive

Recognized

 

 

Consolidated

 

 

 

Other

Comprehensive

 

 

Income (Loss) on

in the

 

 

Statement of

 

 

 

Comprehensive

Income (Loss)

 

 

the Consolidated

Consolidated

 

 

Income

 

 

 

Income (Loss) on

on the

 

 

Balance Sheet

Statement of

 

 

(Ineffective

 

 

 

the Consolidated

Consolidated

 

 

into the

Income

 

 

Portion and

 

 

 

Statement of

Balance Sheet

 

 

Consolidated

(Ineffective

 

 

Amount

 

 

 

Comprehensive

into the

 

 

Statement of

Portion and

 

 

Excluded from

 

 

 

Income (Loss)

Consolidated

 

 

Income (Effective

Amount

 

 

Effectiveness

Derivatives in

 

 

(Effective Portion)

Statement of

 

 

Portion) for the

Excluded

 

 

Testing) for the

Cash Flow

 

 

for the Three

Income

 

 

Three Months

from

 

 

Three Months

Hedging

 

 

Months Ended

(Effective

 

 

Ended

Effectiveness

 

 

Ended

Relationships

 

 

March 31,

Portion)

 

 

March 31,

Testing)

 

 

March 31,

 

 

 

2013

 

 

2012

 

 

 

2013

 

 

2012

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

 

 

 

 

Operating

 

 

 

 

 

 

Operating

 

 

 

 

 

 

segment

 

$
(47,364)

 

$
13,463 

Revenue

 

$
11,741 

 

$
12,569 

Revenue

 

$
(456)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

Not

 

 

 

 

 

 

segment

 

$
14 

 

$
459 

Purchased Gas

 

$
(782)

 

$
3,040 

Applicable

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pipeline &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Storage

 

 

 

 

 

 

Operating

 

 

 

 

 

 

Not

 

 

 

 

 

 

segment(1)

 

$

 -

 

$
576 

Revenue

 

$

 -

 

$
576 

Applicable

 

$

 -

 

$

 -

Total

 

$
(47,350)

 

$
14,498 

 

 

$
10,959 

 

$
16,185 

 

 

$
(456)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Effect of Derivative Financial Instruments on the Statement of Financial Performance for the

Six Months Ended March 31, 2013 and 2012 (Thousands of Dollars)

 

 

 

 

 

 

 

Location of

 

 

Amount of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Gain

 

 

Derivative Gain or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

or (Loss)

 

 

(Loss)

Location of

 

 

Derivative Gain

 

 

 

Amount of

Reclassified

 

 

Reclassified from

Derivative

 

 

or (Loss)

 

 

 

Derivative Gain or

from

 

 

Accumulated

Gain or

 

 

Recognized in

 

 

 

(Loss)

Accumulated

 

 

Other

(Loss)

 

 

the

 

 

 

Recognized in

Other

 

 

Comprehensive

Recognized

 

 

Consolidated

 

 

 

Other

Comprehensive

 

 

Income (Loss) on

in the

 

 

Statement of

 

 

 

Comprehensive

Income (Loss)

 

 

the Consolidated

Consolidated

 

 

Income

 

 

 

Income (Loss) on

on the

 

 

Balance Sheet

Statement of

 

 

(Ineffective

 

 

 

the Consolidated

Consolidated

 

 

into the

Income

 

 

Portion and

 

 

 

Statement of

Balance Sheet

 

 

Consolidated

(Ineffective

 

 

Amount

 

 

 

Comprehensive

into the

 

 

Statement of

Portion and

 

 

Excluded from

 

 

 

Income (Loss)

Consolidated

 

 

Income (Effective

Amount

 

 

Effectiveness

Derivatives in

 

 

(Effective Portion)

Statement of

 

 

Portion) for the

Excluded

 

 

Testing) for the

Cash Flow

 

 

for the Six

Income

 

 

Six Months

from

 

 

Six Months

Hedging

 

 

Months Ended

(Effective

 

 

Ended

Effectiveness

 

 

Ended

Relationships

 

 

March 31,

Portion)

 

 

March 31,

Testing)

 

 

March 31,

 

 

 

2013

 

 

2012

 

 

 

2013

 

 

2012

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

 

 

 

 

Operating

 

 

 

 

 

 

Operating

 

 

 

 

 

 

segment

 

$
(13,750)

 

$
9,539 

Revenue

 

$
24,046 

 

$
17,990 

Revenue

 

$
(456)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

Not

 

 

 

 

 

 

segment

 

$
1,749 

 

$
6,538 

Purchased Gas

 

$
(830)

 

$
9,484 

Applicable

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracts –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pipeline &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Storage

 

 

 

 

 

 

Operating

 

 

 

 

 

 

Not

 

 

 

 

 

 

segment(1)

 

$

 -

 

$
576 

Revenue

 

$
(672)

 

$
576 

Applicable

 

$

 -

 

$

 -

Total

 

$
(12,001)

 

$
16,653 

 

 

$
22,544 

 

$
28,050 

 

 

$
(456)

 

$

 -

 

 

(1)  There were no open hedging positions at March 31, 2013.

 

Fair value hedges

 

The Company’s Energy Marketing segment utilizes fair value hedges to mitigate risk associated with fixed price sales commitments, fixed price purchase commitments, and the decline in the value of certain natural gas held in storage. With respect to fixed price sales commitments, the Company enters into long positions to mitigate the risk of price increases for natural gas supplies that could occur after the Company enters into fixed price sales agreements with its customers. With respect to fixed price purchase commitments, the Company enters into short positions to mitigate the risk of price decreases that could occur after the Company locks into fixed price purchase deals with its suppliers. With respect to storage hedges, the Company enters into short positions to mitigate the risk of price decreases that could result in a lower of cost or market writedown of the value of natural gas in storage that is recorded in the Company’s financial statements. As of March 31, 2013, the Company’s Energy Marketing segment had fair value hedges covering approximately 6.8 Bcf (5.4 Bcf of fixed price sales commitments (mostly long positions) and 1.4 Bcf of fixed price purchase commitments (mostly short positions)). For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk completely offset each other in current earnings, as shown below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of

 

 

 

Amount of Gain

 

Gain or (Loss)

 

 

 

or (Loss) on

 

on the Hedged

 

 

 

Derivative

 

Item

 

Location of

 

Recognized in

 

Recognized in

 

Gain or (Loss)

 

the

 

the

 

on Derivative

 

Consolidated

 

Consolidated

 

and Hedged

 

Statement of

 

Statement of

 

Item

 

Income for the

 

Income for the

 

Recognized

 

Six Months

 

Six Months

 

in the

 

Ended

 

Ended

Derivatives in Fair Value

Consolidated

 

March 31,

 

March 31,

Hedging Relationships –

Statement of

 

2013

 

2013

Energy Marketing segment

Income

 

(In Thousands)

 

(In Thousands)

 

 

 

 

 

 

 

 

Commodity Contracts – Hedge of fixed price sales

Operating

 

 

 

 

 

 

commitments of natural gas

Revenues

 

$
1,499 

 

$
(1,499)

 

 

 

 

 

 

 

 

Commodity Contracts – Hedge of fixed price

Purchased

 

 

 

 

 

 

purchase commitments of natural gas

Gas

 

$
(633)

 

$
633 

 

 

 

 

 

 

 

 

Commodity Contracts – Hedge of natural gas held in

Purchased

 

 

 

 

 

 

storage

Gas

 

$
(25)

 

$
25 

 

 

 

$
841 

 

$
(841)

 

The Company may be exposed to credit risk on any of the derivative financial instruments that are in a gain position. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. To mitigate such credit risk, management performs a credit check, and then on a quarterly basis monitors counterparty credit exposure. The majority of the Company’s counterparties are financial institutions and energy traders. The Company has over-the-counter swap positions with eleven counterparties of which three are in a net gain position.   On average, the Company had $1.5 million of credit exposure per counterparty in a gain position at March 31, 2013. The maximum credit exposure per counterparty in a gain position at March 31, 2013 was $2.4 million. As of March 31, 2013, the Company had not received any collateral from the counterparties.  The Company’s gain position on such derivative financial instruments had not exceeded the established thresholds at which the counterparties would be required to post collateral, nor had the counterparties’ credit ratings declined to levels at which the counterparties were required to post collateral.

 

As of March 31, 2013, nine of the eleven counterparties to the Company’s outstanding derivative instrument contracts (specifically the over-the-counter swaps) had a common credit-risk related contingency feature. In the event the Company’s credit rating increases or falls below a certain threshold (applicable debt ratings), the available credit extended to the Company would either increase or decrease. A decline in the Company’s credit rating, in and of itself, would not cause the Company to be required to increase the level of its hedging collateral deposits (in the form of cash deposits, letters of credit or treasury debt instruments). If the Company’s outstanding derivative instrument contracts were in a liability position (or if the current liability were larger) and/or the Company’s credit rating declined, then additional hedging collateral deposits may be required.  At March 31,  2013, the fair market value of the derivative financial instrument assets with a credit-risk related contingency feature was $2.7 million according to the Company’s internal model (discussed in Note 2 — Fair Value Measurements).  At March 31, 2013, the fair market value of the derivative financial instrument liabilities with a credit-risk related contingency feature was $38.7 million according to the Company’s internal model  (discussed in Note 2 — Fair Value Measurements).  For its over-the-counter swap agreements, the Company was required to post $0.8 million in hedging collateral deposits at March 31, 2013.    

 

For its exchange traded futures contracts, which are in an asset position, the Company was not required to post any hedging collateral deposits as of March 31, 2013.   As these are exchange traded futures contracts, there are no specific credit-risk related contingency features. The Company posts hedging collateral based on open positions and margin requirements it has with its counterparties.

 

            The Company’s requirement to post hedging collateral deposits is based on the fair value determined by the Company’s counterparties, which may differ from the Company’s assessment of fair value. Hedging collateral deposits may also include closed derivative positions in which the broker has not cleared the cash from the account to offset the derivative liability. The Company records liabilities related to closed derivative positions in Other Accruals and Current Liabilities on the Consolidated Balance Sheet. These liabilities are relieved when the broker clears the cash from the hedging collateral deposit account. This is discussed in Note 1 under Hedging Collateral Deposits.