Financial Instruments and Related Fair Value

Derivative Assets and Liabilities under Master Netting Arrangements

We maintain brokerage accounts to facilitate transactions that support our gas cost hedging plans with the purchase of call option derivatives. The accounting guidance related to derivatives and hedging requires that we use a gross presentation, based on our election, for the fair value amounts of our gas purchase derivative instruments. We use long position gas purchase options to provide some level of protection for our customers in the event of significant commodity price increases. As of January 31, 2016 and October 31, 2015, we had long gas purchase options providing total coverage of 33.6 million dekatherms and 34.7 million dekatherms, respectively. The long gas purchase options held at January 31, 2016 are for the period from March 2016 through January 2017.

Derivative Assets and Liabilities - Gas Supply Contracts

We enter into forward gas supply contracts to provide diversification, reliability and gas cost benefits to our customers as part of our diversified gas supply portfolio. We evaluate all of our gas supply contracts at inception to determine if they meet the definition of a derivative in accordance with accounting guidance, whether any derivative contracts qualify as "normal purchases and normal sales" and would not be subject to fair value accounting requirements, or if they can be designated for hedge accounting purposes. Effective in the period ended January 31, 2016, we have certain forward gas supply contracts that meet the definition of derivative instruments that should be recorded at fair value. We have included gas supply contracts requiring fair value accounting in "Gas supply derivative liabilities, at fair value" in "Current Liabilities" and "Noncurrent Liabilities" in the Condensed Consolidated Balance Sheets. As these contracts have been entered into for our regulated utility operations, and as commodity costs are recoverable through our purchased gas adjustment (PGA) clauses in the jurisdictions in which we operate, we have recorded the offset to an applicable regulatory asset.

Fair Value Measurements and Quantitative and Qualitative Disclosures

We use purchased call options as financial instruments that are not designated as hedges for accounting purposes to mitigate commodity price risk for our customers. We also have marketable securities that are held in rabbi trusts established for certain deferred compensation plans. Based on our continual evaluation under derivative accounting standards of contracts added to our supply portfolio, we have determined that certain of these contracts that became effective in the period ended January 31, 2016 should be recorded at fair value. We classify fair value balances based on the observance of inputs into the fair value hierarchy levels as set forth in the fair value accounting guidance and fully described in “Fair Value Measurements” in Note 1 to the consolidated financial statements in our Form 10-K for the year ended October 31, 2015. For an updated discussion of our fair value methodology, see "Fair Value Measurements" in Note 1 to the condensed consolidated financial statements in this Form 10-Q.

The following table sets forth, by level of the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of January 31, 2016 and October 31, 2015. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their consideration within the fair value hierarchy levels. We have had no transfers between any level during the three months ended January 31, 2016 and 2015. We present our derivative positions at fair value on a gross basis and have only asset positions for all periods presented for the fair value of purchased call options held for our utility operations. There are no purchased call option derivative contracts in a liability position, and we have posted no cash collateral nor received any cash collateral under our master netting arrangements. Therefore, we have no offsetting disclosures for financial assets or liabilities for our purchased call option derivatives held for utility operations. Our purchased call option derivatives held for utility operations are held with one broker as our counterparty. We have only liability positions for our gas supply derivatives presented at fair value that are held for our utility operations.



Recurring Fair Value Measurements as of January 31, 2016
In thousands	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Effects of Netting and Cash Collateral Receivables / Payables		Total Carrying Value
Assets:
Derivatives - purchased call options held for utility operations	$	1,602	$	—	$	—	$	—	$	1,602
Debt and equity securities held as trading securities:
Money markets	564		—		—		—		564
Mutual funds	4,415		—		—		—		4,415
Total fair value assets	$	6,581	$	—	$	—	$	—	$	6,581

Liabilities:
Derivatives - gas supply contracts held for utility operations	$	—	$	—	$	155,300	$	—	$	155,300



Recurring Fair Value Measurements as of October 31, 2015
In thousands	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Effects of Netting and Cash Collateral Receivables / Payables		Total Carrying Value
Assets:
Derivatives - purchased call options held for utility operations	$	1,343	$	—	$	—	$	—	$	1,343
Debt and equity securities held as trading securities:
Money markets	516		—		—		—		516
Mutual funds	4,386		—		—		—		4,386
Total fair value assets	$	6,245	$	—	$	—	$	—	$	6,245

In our discounted cash flow valuation, our unobservable input was the price of natural gas in future periods past the observable market price, commencing in the middle of the contract terms. The unobservable prices of our derivative gas supply contracts in the mid to later years of contract terms ranged from $2.84 to $4.37 per dekatherm.

The fair value of our derivative gas supply contracts is sensitive to the pricing differential of various natural gas indexes relevant to those particular contracts. An increased market price spread between the indexes would increase the fair value of the derivative and result in an unrealized loss, while conversely, a decreased market price spread would decrease the fair value of the derivative and result in an unrealized gain.

The following is a reconciliation of the gas supply derivative liabilities that are classified as Level 3 in the fair value hierarchy.



In thousands
Balance, October 31, 2015	$	—
Realized and unrealized gains (losses):
Recorded to regulatory assets	(155,300		)
Purchases, sales and settlements (net)	—
Transfer in/out of Level 3	—
Balance, January 31, 2016	$	(155,300	)

Our regulated utility segment purchased call option derivative instruments are used in accordance with programs filed with or approved by the NCUC, the PSCSC and the TRA to hedge the impact of market fluctuations in natural gas prices. These derivative instruments are accounted for at fair value each reporting period. In accordance with regulatory requirements, the net gains and losses related to these derivatives are reflected in purchased gas costs and ultimately passed through to customers through our PGA procedures. In accordance with accounting provisions for rate-regulated activities, the unrecovered amounts related to these instruments are reflected as a regulatory asset or liability, as appropriate, in “Amounts due from customers” or “Amounts due to customers” in Note 3 to the condensed consolidated financial statements in this Form 10-Q. These derivative instruments are exchange-traded derivative contracts. Exchange-traded contracts are generally based on unadjusted quoted prices in active markets and are classified within Level 1.

Our gas supply derivatives are generally based on unobservable inputs and are classified within Level 3. In accordance with regulatory provisions for rate-regulated activities, any gains and losses associated with these derivatives are reflected as a regulatory asset or liability, as appropriate, in "Derivatives - gas supply contracts held for utility operations" in Note 3 to the condensed consolidated financial statements in this Form 10-Q.

Trading securities include assets in rabbi trusts established for our deferred compensation plans and are included in “Marketable securities, at fair value” in “Noncurrent Assets” in the Condensed Consolidated Balance Sheets. Securities classified within Level 1 include funds held in money market and mutual funds which are highly liquid and are actively traded on the exchanges.

Our long-term debt is presented at net cost. In developing the fair value of our long-term debt, we use a discounted cash flow technique, consistently applied, that incorporates a developed discount rate using long-term debt similarly rated by credit rating agencies combined with the U.S. Treasury benchmark with consideration given to maturities, redemption terms and credit ratings similar to our debt issuances. The principal and fair value of our long-term debt, including the current portion, which is classified within Level 2, are shown below.



In thousands	Principal		Fair Value
As of January 31, 2016	$	1,575,000	$	1,734,319
As of October 31, 2015	1,575,000		1,720,586

The costs of our financial price hedging options for natural gas and all other costs related to hedging activities of our regulated gas costs are recorded in accordance with our regulatory tariffs approved by our state regulatory commissions, and thus are not accounted for as designated hedging instruments under derivative accounting standards. As required by the accounting guidance, the fair value of our financial options is presented on a gross basis with only asset positions for all periods presented. There are no purchased call option derivative contracts in a liability position, and we have posted no cash collateral nor received any cash collateral under our master netting arrangements; therefore, we have no offsetting disclosures for financial assets or liabilities for our financial option derivatives.

The following table presents the fair value and balance sheet classification of our financial options and gas supply contracts for natural gas as of January 31, 2016 and October 31, 2015.

Fair Value of Derivative Instruments

	January 31,		October 31,
In thousands	2016		2015
Derivatives Not Designated as Hedging Instruments under Derivative Accounting Standards:
Asset Financial Instruments:
Current Assets – Gas purchase derivative assets (March 2016 - January 2017)	$	1,602
Current Assets – Gas purchase derivative assets (December 2015 - October 2016)			$	1,343
Liability Financial Instruments:
Current Liabilities – Gas supply derivative liabilities	$	28,300
Noncurrent Liabilities – Gas supply derivative liabilities	127,000

We purchase natural gas for our regulated operations for resale under tariffs approved by state regulatory commissions. We recover the cost of gas purchased for regulated operations through PGA procedures. Our risk management policies allow us to use financial instruments to hedge commodity price risks, but not for speculative trading. The strategy and objective of our hedging programs are to use these financial instruments to reduce gas cost volatility for our customers. Accordingly, the operation of the hedging programs of the regulated utility segment as a result of the use of these financial derivatives is initially deferred as amounts due from customers included as “Regulatory Assets” or amounts due to customers included as “Regulatory Liabilities” in Note 3 to the condensed consolidated financial statements in this Form 10-Q and recognized in the Condensed Consolidated Statements of Comprehensive Income as a component of “Cost of Gas” when the related costs are recovered through our rates.

The following table presents the impact that our gas purchase option financial instruments not designated as hedging instruments under derivative accounting standards would have had on the Condensed Consolidated Statements of Comprehensive Income for the three months ended January 31, 2016 and 2015, absent the regulatory treatment under our approved PGA procedures.



	Amount of Loss Recognized on Derivative Instruments and Deferred Under PGA Procedures						Location of Loss Recognized through PGA Procedures
	Three Months Ended January 31
In thousands	2016			2015
Purchased call options	$	(1,901	)	$	(558	)	Cost of Gas

In Tennessee, the cost of purchased call options and all other costs related to hedging activities up to 1% of total annual gas costs are approved for recovery under the terms and conditions of our TIP as approved by the TRA. In South Carolina, the costs of purchased call options are subject to and are approved for recovery under the terms and conditions of our gas hedging plan as approved by the PSCSC. In North Carolina, the costs associated with our hedging program are treated as gas costs subject to an annual cost review proceeding by the NCUC.

We would have recorded an unrealized loss of $155.3 million related to our gas supply derivatives in the Condensed Consolidated Statements of Comprehensive Income for the three months ended January 31, 2016, absent regulatory provisions for rate-regulated activities. We recognize the actual costs of our gas supply derivatives in the Condensed Consolidated Statements of Comprehensive Income as a component of "Cost of Gas" in the month purchased.

Credit and Counterparty Risk

Information regarding our credit and counterparty risk is set forth in Note 8 to the consolidated financial statements in our Form 10-K for the year ended October 31, 2015. During the three months ended January 31, 2016, there were no material changes in our credit and counterparty risk.

We enter into contracts with third parties to buy and sell natural gas. A significant portion of these transactions are with, or are associated with, energy producers, utility companies, off-system municipalities and natural gas marketers. The amount included in “Trade accounts receivable” in “Current Assets” in the Condensed Consolidated Balance Sheets attributable to these entities amounted to $18.6 million, or approximately 11%, of our gross trade accounts receivable as of January 31, 2016. Our policy requires counterparties to have an investment-grade credit rating at the time of the contract, or in situations where counterparties do not have investment-grade or functionally equivalent credit ratings, our policy requires credit enhancements that include letters of credit or parental guaranties. In either circumstance, our policy specifies limits on the contract amount and duration based on the counterparty’s credit rating and/or credit support. In order to minimize our exposure, we continually re-evaluate third-party creditworthiness and market conditions and modify our requirements accordingly.

Risk Management

Our financial derivative instruments do not contain material credit-risk-related or other contingent features that could require us to make accelerated payments.

We seek to identify, assess, monitor and manage risk in accordance with defined policies and procedures under the direction of the Treasurer and Chief Risk Officer and our Enterprise Risk Management program, including our Energy Price Risk Management Committee. Risk management is guided by senior management with Board of Directors oversight, and senior management takes an active role in the development of policies and procedures.