3. Financial Instruments

6 Months Ended

Mar. 31, 2012

Financial Instruments [Abstract]

3. Financial Instruments

3. Financial Instruments

We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically utilize financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses. The accounting for these financial instruments is fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the six months ended March 31, 2012 there were no changes in our objectives, strategies and accounting for these financial instruments. Currently, we utilize financial instruments in our natural gas distribution and nonregulated segments. We currently do not manage commodity price risk with financial instruments in our regulated transmission and storage segment.

Our financial instruments do not contain any credit-risk-related or other contingent features that could cause payments to be accelerated when our financial instruments are in net liability positions.

Regulated Commodity Risk Management Activities

Although our purchased gas cost adjustment mechanisms essentially insulate our natural gas distribution segment from commodity price risk, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.

Our natural gas distribution gas supply department is responsible for executing this segment's commodity risk management activities in conformity with regulatory requirements. In jurisdictions where we are permitted to mitigate commodity price risk through financial instruments, the relevant regulatory authorities may establish the level of heating season gas purchases that can be hedged. Historically, if the regulatory authority does not establish this level, we seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2011-2012 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 25 percent, or 25.7 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges.

The costs associated with and the gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas cost adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with applicable authoritative accounting guidance. Accordingly, there is no earnings impact on our natural gas distribution segment as a result of the use of financial instruments.

Nonregulated Commodity Risk Management Activities

The primary business in our nonregulated operations is to aggregate and purchase gas supply, arrange transportation and/or storage logistics and ultimately deliver gas to our customers at competitive prices. We utilize proprietary and customer-owned transportation and storage assets to serve these customers, and will seek to maximize the value of this storage capacity through the arbitrage of pricing differences that occur over time by selling financial instruments at advantageous prices to lock in a gross profit margin to enhance our gross profit by maximizing the economic value associated with the storage and transportation capacity we own or control.

As a result of these activities, our nonregulated segment is exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange traded options and swap contracts with counterparties. Future contracts provide the right, but not the requirement, to buy or sell the commodity at a fixed price. Swap contracts require receipt of payment for the commodity based on the difference between a fixed price and the market price on the settlement date.

We use financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, to mitigate the commodity price risk in our nonregulated operations associated with deliveries under fixed-priced forward contracts to deliver gas to customers. These financial instruments have maturity dates ranging from one to 56 months. We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our asset optimization activities in our nonregulated segment.

Also, in our nonregulated operations, we use storage swaps and futures to capture additional storage arbitrage opportunities that arise subsequent to the execution of the original fair value hedge associated with our physical natural gas inventory, basis swaps to insulate and protect the economic value of our fixed price and storage books and various over-the-counter and exchange-traded options. These financial instruments have not been designated as hedges.

Interest Rate Risk Management Activities

We periodically manage interest rate risk by entering into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings.

As of March 31, 2012, we had three Treasury lock agreements outstanding to fix the Treasury yield component of 30-year unsecured notes, which we plan to issue to refinance our $250 million unsecured 5.125% Senior Notes that mature in January 2013.

In prior years, we entered into Treasury lock agreements to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes. The gains and losses realized upon settlement of these Treasury locks were recorded as a component of accumulated other comprehensive income (loss) when they were settled and are being recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for the settled Treasury locks extend through fiscal 2041.

Quantitative Disclosures Related to Financial Instruments

The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.

As of March 31, 2012, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of March 31, 2012, we had net long/(short) commodity contracts outstanding in the following quantities:

		Natural
	Hedge	Gas
Contract Type	Designation	Distribution	Nonregulated
		Quantity (MMcf)
Commodity contracts	Fair Value	-	(38,340)
	Cash Flow	-	49,098
	Not designated	6,033	28,190
		6,033	38,948

Financial Instruments on the Balance Sheet

The following tables present the fair value and balance sheet classification of our financial instruments by operating segment as of March 31, 2012 and September 30, 2011. As required by authoritative accounting literature, the fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Further, the amounts below do not include $5.7 million and $28.8 million of cash held on deposit in margin accounts as of March 31, 2012 and September 30, 2011 to collateralize certain financial instruments. Therefore, these gross balances are not indicative of either our actual credit exposure or net economic exposure. Additionally, the amounts below will not be equal to the amounts presented on our condensed consolidated balance sheet, nor will they be equal to the fair value information presented for our financial instruments in Note 4.

						Natural
						Gas
				Balance Sheet Location		Distribution		Nonregulated		Total
March 31, 2012						(In thousands)
Designated As Hedges:
	Asset Financial Instruments
		Current commodity contracts		Other current assets		$	-	$	77,441	$	77,441
		Noncurrent commodity		Deferred charges and
			contracts		other assets		-		-		-
	Liability Financial Instruments
		Current commodity contracts		Other current liabilities			(45,818)		(59,301)		(105,119)
		Noncurrent commodity		Deferred credits and
			contracts		other liabilities		-		(10,914)		(10,914)
	Total						(45,818)		7,226		(38,592)
Not Designated As Hedges:
	Asset Financial Instruments
		Current commodity contracts		Other current assets			502		137,934		138,436
		Noncurrent commodity		Deferred charges and
			contracts		other assets		-		85,951		85,951
	Liability Financial Instruments
		Current commodity contracts		Other current liabilities(1)			(2,215)		(164,189)		(166,404)
		Noncurrent commodity		Deferred credits and
			contracts		other liabilities		(1)		(69,496)		(69,497)
	Total						(1,714)		(9,800)		(11,514)
Total Financial Instruments						$	(47,532)	$	(2,574)	$	(50,106)

(1) Other current liabilities not designated as hedges in our natural gas distribution segment include $0.8 million related to risk management liabilities that were classified as assets held for sale at March 31, 2012.

						Natural
						Gas
				Balance Sheet Location		Distribution		Nonregulated		Total
September 30, 2011						(In thousands)
Designated As Hedges:
	Asset Financial Instruments
		Current commodity contracts		Other current assets		$	-	$	22,396	$	22,396
		Noncurrent commodity		Deferred charges and
			contracts		other assets		-		174		174
	Liability Financial Instruments
		Current commodity contracts		Other current liabilities			-		(31,064)		(31,064)
		Noncurrent commodity		Deferred credits and
			contracts		other liabilities		(67,527)		(7,709)		(75,236)
	Total						(67,527)		(16,203)		(83,730)
Not Designated As Hedges:
	Asset Financial Instruments
		Current commodity contracts		Other current assets			843		67,710		68,553
		Noncurrent commodity		Deferred charges and
			contracts		other assets		998		22,379		23,377
	Liability Financial Instruments
		Current commodity contracts		Other current liabilities(1)			(13,256)		(73,865)		(87,121)
		Noncurrent commodity		Deferred credits and
			contracts		other liabilities		(335)		(25,071)		(25,406)
	Total						(11,750)		(8,847)		(20,597)
Total Financial Instruments						$	(79,277)	$	(25,050)	$	(104,327)

(1) Other current liabilities not designated as hedges in our natural gas distribution segment include $1.3million related to risk management liabilities that were classified as assets held for sale at September 30, 2011.

Impact of Financial Instruments on the Income Statement

Hedge ineffectiveness for our nonregulated segment is recorded as a component of unrealized gross profit and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the three months ended March 31, 2012 and 2011 we recognized a gain (loss)arising from fair value and cash flow hedge ineffectiveness of $ (6.2) million and $ 4.1 million. For the six months ended March 31, 2012 and 2011 we recognized gains arising from fair value and cash flow hedge ineffectiveness of $ 2.2 million and $ 17.5 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

Fair Value Hedges

The impact of our nonregulated commodity contracts designated as fair value hedges and the related hedged item on our condensed consolidated income statement for the three and six months ended March 31, 2012 and 2011 is presented below.

		Three Months Ended March 31
		2012		2011
		(In thousands)
Commodity contracts		$	29,090	$	(1,279)
Fair value adjustment for natural gas
	inventory designated as the hedged item		(35,087)		5,586
Total impact on revenue		$	(5,997)	$	4,307
The impact on revenue is comprised of
the following:
	Basis ineffectiveness	$	(739)	$	(509)
	Timing ineffectiveness		(5,258)		4,816
		$	(5,997)	$	4,307
		Six Months Ended March 31
		2012		2011
			(In thousands)
Commodity contracts		$	53,153	$	(3,003)
Fair value adjustment for natural gas
	inventory designated as the hedged item		(50,335)		21,211
Total impact on revenue		$	2,818	$	18,208
The impact on revenue is comprised of
the following:
	Basis ineffectiveness	$	102	$	412
	Timing ineffectiveness		2,716		17,796
		$	2,818	$	18,208

Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on revenue.

To the extent that the Company's natural gas inventory does not qualify as a hedged item in a fair-value hedge, or has not been designated as such, the natural gas inventory is valued at the lower of cost or market. During the six months ended March 31, 2012, we recorded a $1.7 million charge to write down nonqualifying natural gas inventory to market. We did not record a writedown for nonqualifying natural gas inventory for the six months ended March 31, 2011.

Cash Flow Hedges

The impact of cash flow hedges on our condensed consolidated income statements for the three and six months ended March 31, 2012 and 2011 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transaction. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.

		Three Months Ended March 31, 2012
		Natural		Regulated
		Gas		Transmission
		Distribution		and Storage		Nonregulated		Consolidated
		(In thousands)
Loss reclassified from AOCI into revenue
	for effective portion of commodity contracts	$	-	$	-	$	(21,181)	$	(21,181)
Loss arising from ineffective portion of
	commodity contracts		-		-		(238)		(238)
Total impact on revenue			-		-		(21,419)		(21,419)
Loss on settled Treasury lock agreements
	reclassified from AOCI into interest expense		(502)		-		-		(502)
Total Impact from Cash Flow Hedges		$	(502)	$	-	$	(21,419)	$	(21,921)
		Three Months Ended March 31, 2011
		Natural		Regulated
		Gas		Transmission
		Distribution		and Storage		Nonregulated		Consolidated
		(In thousands)
Loss reclassified from AOCI into revenue
	for effective portion of commodity contracts	$	-	$	-	$	(7,328)	$	(7,328)
Loss arising from ineffective portion of
	commodity contracts		-		-		(233)		(233)
Total impact on revenue			-		-		(7,561)		(7,561)
Loss on settled Treasury lock agreements
	reclassified from AOCI into interest expense		(669)		-		-		(669)
Gain on unwinding of Treasury lock reclassified
	from AOCI into miscellaneous income		21,803		6,000		-		27,803
Total Impact from Cash Flow Hedges		$	21,134	$	6,000	$	(7,561)	$	19,573
		Six Months Ended March 31, 2012
		Natural		Regulated
		Gas		Transmission
		Distribution		and Storage		Nonregulated		Consolidated
		(In thousands)
Loss reclassified from AOCI into revenue
	for effective portion of commodity contracts	$	-	$	-	$	(32,823)	$	(32,823)
Loss arising from ineffective portion of
	commodity contracts		-		-		(668)		(668)
Total impact on revenue			-		-		(33,491)		(33,491)
Loss on settled Treasury lock agreements
	reclassified from AOCI into interest expense		(1,004)		-		-		(1,004)
Total Impact from Cash Flow Hedges		$	(1,004)	$	-	$	(33,491)	$	(34,495)
		Six Months Ended March 31, 2011
		Natural		Regulated
		Gas		Transmission
		Distribution		and Storage		Nonregulated		Consolidated
		(In thousands)
Loss reclassified from AOCI into revenue
	for effective portion of commodity contracts	$	-	$	-	$	(21,581)	$	(21,581)
Loss arising from ineffective portion of
	commodity contracts		-		-		(677)		(677)
Total impact on revenue			-		-		(22,258)		(22,258)
Loss on settled Treasury lock agreements
	reclassified from AOCI into interest expense		(1,339)		-		-		(1,339)
Gain on unwinding of Treasury lock reclassified
	from AOCI into miscellaneous income		21,803		6,000		-		27,803
Total Impact from Cash Flow Hedges		$	20,464	$	6,000	$	(22,258)	$	4,206

The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three and six months ended March 31, 2012 and 2011.The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the income statement as incurred.

		Three Months Ended				Six Months Ended
		March 31				March 31
		2012		2011		2012		2011
		(In thousands)
Increase (decrease) in fair value:
	Treasury lock agreements	$	15,079	$	6,667	$	13,676	$	38,092
	Forward commodity contracts		(18,234)		(446)		(41,912)		1,211
Recognition of (gains) losses in earnings due to
	settlements:
	Treasury lock agreements		317		(17,094)		633		(16,672)
	Forward commodity contracts		12,919		4,471		20,022		13,164
Total other comprehensive income (loss) from
	hedging, net of tax(1)	$	10,081	$	(6,402)	$	(7,581)	$	35,795

(1)Utilizing an income tax rate ranging from 37 percent to 39 percent based on the effective rates in each taxing jurisdiction.

Deferred gains (losses) recorded in accumulated other comprehensive income (AOCI) associated with our treasury lock agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments, while deferred losses associated with commodity contracts are recognized in earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred gains (losses) recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of March 31, 2012. However, the table below does not include the expected recognition in earnings of our outstanding Treasury lock agreements as these instruments have not yet settled.

	Treasury
	Lock		Commodity
	Agreements		Contracts		Total
	(In thousands)
Next twelve months	$	(1,266)	$	(32,130)	$	(33,396)
Thereafter		10,284		(6,621)		3,663
Total(1)	$	9,018	$	(38,751)	$	(29,733)

(1)Utilizing an income tax rate ranging from 37 percent to 39 percent based on the effective rates in each taxing jurisdiction.

Financial Instruments Not Designated as Hedges

The impact of financial instruments that have not been designated as hedges on our condensed consolidated income statements for the three months ended March 31, 2012 and 2011 was an increase (decrease) in revenue of $(12.8) million and $4.0 million. For the six months ended March 31, 2012 and 2011 revenue increased (decreased) $(15.0) million and $8.2 million. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.

As discussed above, financial instruments used in our natural gas distribution segment are not designated as hedges. However, there is no earnings impact on our natural gas distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.