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):


	June 30, 2012		September 30, 2011
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Long-Term Debt	$1,399,000	$1,595,554	$1,049,000	$1,198,585

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 $56.3 million and $54.8 million at June 30, 2012 and September 30, 2011, respectively. The fair value of the equity mutual fund was $23.6 million at June 30, 2012 and $19.9 million at September 30, 2011. The gross unrealized gain on this equity mutual fund was $1.4 million at June 30, 2012. The gross unrealized loss on the equity mutual fund was $0.7 million at September 30, 2011. The fair value of the stock of an insurance company was $4.3 million at June 30, 2012 and $4.5 million at September 30, 2011. The gross unrealized gain on this stock was $1.9 million at June 30, 2012 and $2.1 million at September 30, 2011. 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 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 June 30, 2012 and September 30, 2011. 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 June 30, 2012, 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	138.9 Bcf (all short positions)
Crude Oil	2,529,000 Bbls (all short positions)

As of June 30, 2012, 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 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	6.9 Bcf (5.6 Bcf short positions (mostly forecasted storage withdrawals) and 1.3 Bcf long positions (mostly forecasted storage injections))

As of June 30, 2012, the Company’s Pipeline and Storage segment has the following commodity derivative contracts (futures contracts) 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):


Commodity	Units
Natural Gas	2.3 Bcf (all short positions)

As of June 30, 2012, the Company’s Exploration and Production segment had $69.7 million ($40.6 million after tax) of net hedging gains included in the accumulated other comprehensive income (loss) balance. It is expected that $60.1 million ($35.1 million after tax) of these gains will be reclassified into the Consolidated Statement of Income within the next 12 months as the expected sales of the underlying commodities occur. See Note 1, under Accumulated Other Comprehensive Income (Loss), for the after-tax gain (loss) pertaining to derivative financial instruments for the Exploration and Production, Energy Marketing and Pipeline and Storage segments.

As of June 30, 2012, the Company’s Energy Marketing segment had $1.2 million ($0.7 million after tax) of net hedging losses included in the accumulated other comprehensive income (loss) balance. It is expected that the full amount will be reclassified into the Consolidated Statement of Income (Loss) within the next 12 months as the expected sales of the underlying commodity occurs. See Note 1, under Accumulated Other Comprehensive Income (Loss), for the after-tax gain (loss) pertaining to derivative financial instruments for the Exploration and Production, Energy Marketing and Pipeline and Storage segments.

As of June 30, 2012, the Company’s Pipeline and Storage segment had $0.7 million ($0.4 million after tax) of net hedging losses included in the accumulated other comprehensive income (loss) balance. It is expected that the full amount will be reclassified into the Consolidated Statement of Income (Loss) within the next 12 months as the expected sales of the underlying commodity occurs. See Note 1, under Accumulated Other Comprehensive Income (Loss), for the after-tax gain (loss) pertaining to derivative financial instruments for the Exploration and Production, Energy Marketing and Pipeline and Storage segments.



The Effect of Derivative Financial Instruments on the Statement of Financial Performance for the Three Months Ended June 30, 2012 and 2011 (Thousands of Dollars)
Derivatives in Cash Flow Hedging Relationships	Amount of Derivative Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on the Consolidated Statement of Comprehensive Income (Loss) (Effective Portion) for the Three Months Ended June 30,		Location of Derivative Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheet into the Consolidated Statement of Income (Effective Portion)	Amount of Derivative Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheet into the Consolidated Statement of Income (Effective Portion) for the Three Months Ended June 30,		Location of Derivative Gain or (Loss) Recognized in the Consolidated Statement of Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Derivative Gain or (Loss) Recognized in the Consolidated Statement of Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) for the Three Months Ended June 30,
	2012	2011		2012	2011		2012	2011
Commodity Contracts – Exploration & Production segment	$31,358	$25,399	Operating Revenue	$ 20,643	$ (5,548)	Operating Revenue	$ -	$ 570
Commodity Contracts – Energy Marketing segment	$ (201)	$ 737	Purchased Gas	$ 956	$ 1,793	Operating Revenue	$ -	$ -
Commodity Contracts – Pipeline & Storage segment	$ (725)	$ 242	Operating Revenue	$ -	$ -	Operating Revenue	$ -	$ -
Total	$30,432	$26,378		$21,599	$ (3,755)		$ -	$ 570

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

Nine Months Ended June 30, 2012 and 2011 (Thousands of Dollars)

Derivatives in Cash Flow Hedging Relationships

Amount of Derivative Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on the Consolidated Statement of Comprehensive Income (Loss) (Effective Portion) for the Nine Months Ended June 30,

Location of Derivative Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheet into the Consolidated Statement of Income (Effective Portion)

Amount of Derivative Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheet into the Consolidated Statement of Income (Effective Portion) for the Nine Months Ended June 30,

Location of Derivative Gain or (Loss) Recognized in the Consolidated Statement of Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Derivative Gain or (Loss) Recognized in the Consolidated Statement of Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) for the Nine Months Ended

June 30,

2012

2011

2012

2011

2012

2011

Commodity Contracts – Exploration & Production segment

$40,897

$(42,969)

Operating Revenue

$38,633

$5,415

Operating Revenue

$ -

$ 570

Commodity Contracts – Energy Marketing segment

$ 6,337

$ 1,340

Purchased Gas

$10,440

$ 7,095

Operating Revenue

$ -

Commodity Contracts – Pipeline & Storage segment

$ (149)

$ 27

Operating Revenue

$ 576

$ -

Operating Revenue

$ -

Total

$47,085

$(41,602)

$49,649

$12,510

$ -

$ 570

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 June 30, 2012, the Company’s Energy Marketing segment had fair value hedges covering approximately 10.5 Bcf (8.8 Bcf of fixed price sales commitments (all long positions), 1.4 Bcf of fixed price purchase commitments (all short positions) and 0.3 Bcf of commitments related to the withdrawal of storage gas (all 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.


Consolidated Statement of Income	Gain/(Loss) on Derivative	Gain/(Loss) on Commitment
Operating Revenues	$ 4,304,103	$ (4,304,103)
Purchased Gas	$ (196,930)	$ 196,930


Derivatives in Fair Value Hedging Relationships – Energy Marketing segment	Location of Derivative Gain or (Loss) Recognized in the Consolidated Statement of Income	Amount of Derivative Gain or (Loss) Recognized in the Consolidated Statement of Income for the Nine Months Ended June 30, 2012 (In Thousands)
Commodity Contracts – Hedge of fixed price sales commitments of natural gas	Operating Revenues	$ 4,304
Commodity Contracts – Hedge of fixed price purchase commitments of natural gas	Purchased Gas	$ (320)
Commodity Contracts – Hedge of natural gas held in storage	Purchased Gas	$ 123
		$ 4,107

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 twelve counterparties of which eleven are in a net gain position. On average, the Company had $7.8 million of credit exposure per counterparty in a gain position at June 30, 2012. The maximum credit exposure per counterparty in a gain position at June 30, 2012 was $17.1 million. As of June 30, 2012, the Company had not received any collateral from the counterparties having credit-risk related contingency features in their derivative instrument contracts. 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 June 30, 2012, ten of the twelve 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 June 30, 2012, the fair market value of the derivative financial instrument assets with a credit-risk related contingency feature was $60.6 million according to the Company’s internal model (discussed in Note 2 — Fair Value Measurements). At June 30, 2012, the fair market value of the derivative financial instrument liabilities with a credit-risk related contingency feature was $15.0 million according to the Company’s internal model (discussed in Note 2 — Fair Value Measurements). For its over-the-counter crude oil swap agreements, which were in a liability position, the Company was not required to post any hedging collateral deposits at June 30, 2012.

For its exchange traded futures contracts, which are in a liability position, the Company had posted $3.4 million in hedging collateral deposits as of June 30, 2012. 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.