Fair Value Measurements

The FASB authoritative guidance regarding fair value measurements establishes a fair-value hierarchy and prioritizes the inputs used in valuation techniques that measure fair value. Those inputs are prioritized into three levels. Level 1 inputs are unadjusted quoted prices in active markets for assets or liabilities that the Company can access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly at the measurement date. Level 3 inputs are unobservable inputs for the asset or liability at the measurement date. The Company’s 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 placement within the fair value hierarchy levels.

The following table sets forth, by level within the fair value hierarchy, the Company's financial assets and liabilities (as applicable) that were accounted for at fair value on a recurring basis as of June 30, 2014 and September 30, 2013. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value presentation for over the counter swaps has been changed to combine gas and oil swaps at both June 30, 2014 and September 30, 2013. In the September 30, 2013 Form 10-K, gas swaps were reported separately from oil swaps. This change in presentation was made because a significant number of the counterparties enter into both gas and oil swap agreements with the Company.



Recurring Fair Value Measures	At fair value as of June 30, 2014
(Thousands of Dollars)	Level 1		Level 2		Level 3			Netting Adjustments⁽¹⁾			Total⁽¹⁾
Assets:
Cash Equivalents – Money Market Mutual Funds	$	86,305	$	—	$	—		$	—		$	86,305
Derivative Financial Instruments:
Commodity Futures Contracts – Gas	2,950		—		—			(1,069		)	1,881
Over the Counter Swaps – Gas and Oil	—		56,660		—			(29,762		)	26,898
Other Investments:
Balanced Equity Mutual Fund	35,658		—		—			—			35,658
Common Stock – Financial Services Industry	7,853		—		—			—			7,853
Other Common Stock	341		—		—			—			341
Hedging Collateral Deposits	—		—		—			—			—
Total	$	133,107	$	56,660	$	—		$	(30,831	)	$	158,936

Liabilities:
Derivative Financial Instruments:
Commodity Futures Contracts – Gas	$	1,069	$	—	$	—		$	(1,069	)	$	—
Over the Counter Swaps – Gas and Oil	—		55,590		2,855			(29,762		)	28,683
Total	$	1,069	$	55,590	$	2,855		$	(30,831	)	$	28,683

Total Net Assets/(Liabilities)	$	132,038	$	1,070	$	(2,855	)	$	—		$	130,253



Recurring Fair Value Measures	At fair value as of September 30, 2013
(Thousands of Dollars)	Level 1		Level 2		Level 3			Netting Adjustments⁽¹⁾			Total⁽¹⁾
Assets:
Cash Equivalents – Money Market Mutual Funds	$	51,332	$	—	$	—		$	—		$	51,332
Derivative Financial Instruments:
Commodity Futures Contracts – Gas	2,552		—		—			(1,641		)	911
Over the Counter Swaps – Gas and Oil	—		57,070		—			(9,003		)	48,067
Other Investments:
Balanced Equity Mutual Fund	31,813		—		—			—			31,813
Common Stock – Financial Services Industry	6,544		—		—			—			6,544
Other Common Stock	330		—		—			—			330
Hedging Collateral Deposits	1,094		—		—			—			1,094
Total	$	93,665	$	57,070	$	—		$	(10,644	)	$	140,091

Liabilities:
Derivative Financial Instruments:
Commodity Futures Contracts – Gas	$	1,641	$	—	$	—		$	(1,641	)	$	—
Over the Counter Swaps – Gas and Oil	—		4,452		5,190			(9,003		)	639
Total	$	1,641	$	4,452	$	5,190		$	(10,644	)	$	639

Total Net Assets/(Liabilities)	$	92,024	$	52,618	$	(5,190	)	$	—		$	139,452


⁽¹⁾	Netting Adjustments represent the impact of legally-enforceable master netting arrangements that allow the Company to net gain and loss positions held with the same counterparties. The net asset or net liability for each counterparty is recorded as an asset or liability on the Company’s balance sheet.

Derivative Financial Instruments

At June 30, 2014 and September 30, 2013, the derivative financial instruments reported in Level 1 consist of natural gas NYMEX and ICE futures contracts used in the Company’s Energy Marketing segment. Hedging collateral deposits of $1.1 million at September 30, 2013, which are associated with these futures contracts, have been reported in Level 1 as well. The derivative financial instruments reported in Level 2 at June 30, 2014 and September 30, 2013 consist of natural gas price swap agreements used in the Company’s Exploration and Production and Energy Marketing segments and the majority of the crude oil price swap agreements used in the Company’s Exploration and Production segment. The fair value of the Level 2 price swap agreements is based on an internal, discounted cash flow model that uses observable inputs (i.e. LIBOR based discount rates and basis differential information, if applicable, at active natural gas and crude oil trading markets). The derivative financial instruments reported in Level 3 consist of a portion of the crude oil price swap agreements used in the Company’s Exploration and Production segment at June 30, 2014 and September 30, 2013. The fair value of the Level 3 crude oil price swap agreements is based on an internal, discounted cash flow model that uses both observable (i.e. LIBOR based discount rates) and unobservable inputs (i.e. basis differential information of crude oil trading markets with low trading volume).

The significant unobservable input used in the fair value measurement of a portion of the Company’s over-the-counter crude oil swaps is the basis differential between Midway Sunset oil and NYMEX contracts. Significant changes in the assumed basis differential could result in a significant change in value of the derivative financial instruments. At June 30, 2014, it was assumed that Midway Sunset oil was 98.6% of NYMEX. This is based on a historical twelve month average of Midway Sunset oil sales verses NYMEX settlements. During this twelve-month period, the price of Midway Sunset oil ranged from 96.2% to 100.6% of NYMEX. If the price of Midway Sunset oil relative to NYMEX used in the fair value measurement calculation had been 10 percentage points higher, the fair value of the Level 3 crude oil price swap agreements liability would have been approximately $4.5 million higher at June 30, 2014. If the price of Midway Sunset oil relative to NYMEX used in the fair value measurement had been 10 percentage points lower, the fair value measurement of the Level 3 crude oil price swap agreements liability would have changed from a net liability of $2.9 million to a net asset of $1.7 million at June 30, 2014. These calculated amounts are based solely on basis differential changes and do not take into account any other changes to the fair value measurement calculation.

The accounting rules for fair value measurements and disclosures require consideration of the impact of nonperformance risk (including credit risk) from a market participant perspective in the measurement of the fair value of assets and liabilities. At June 30, 2014, the Company determined that nonperformance risk would have no material impact on its financial position or results of operation. To assess nonperformance risk, the Company considered information such as any applicable collateral posted, master netting arrangements, and applied a market-based method by using the counterparty (for an asset) or the Company’s (for a liability) credit default swaps rates.

The tables listed below provide reconciliations of the beginning and ending net balances for assets and liabilities measured at fair value and classified as Level 3 for the quarters and nine months ended June 30, 2014 and 2013, respectively. For the quarters and nine months ended June 30, 2014 and June 30, 2013, no transfers in or out of Level 1 or Level 2 occurred. There were no purchases or sales of derivative financial instruments during the periods presented in the tables below. All settlements of the derivative financial instruments are reflected in the Gains/Losses Realized and Included in Earnings column of the tables below (amounts in parentheses indicate credits in the derivative asset/liability accounts).



Fair Value Measurements Using Unobservable Inputs (Level 3)
(Thousands of Dollars)				Total Gains/Losses
	April 1, 2014			Gains/Losses Realized and Included in Earnings			Gains/Losses Unrealized and Included in Other Comprehensive Income (Loss)			Transfer In/Out of Level 3		June 30, 2014
Derivative Financial Instruments⁽²⁾	$	(1,371	)	$	1,242	⁽¹⁾	$	(2,726	)	$	—	$	(2,855	)


⁽¹⁾	Amounts are reported in Operating Revenues in the Consolidated Statement of Income for the three months ended June 30, 2014.


⁽²⁾	Derivative Financial Instruments are shown on a net basis.



Fair Value Measurements Using Unobservable Inputs (Level 3)
(Thousands of Dollars)				Total Gains/Losses
	October 1, 2013			Gains/Losses Realized and Included in Earnings			Gains/Losses Unrealized and Included in Other Comprehensive Income (Loss)		Transfer In/Out of Level 3		June 30, 2014
Derivative Financial Instruments⁽²⁾	$	(5,190	)	$	2,286	⁽¹⁾	$	49	$	—	$	(2,855	)


⁽¹⁾	Amounts are reported in Operating Revenues in the Consolidated Statement of Income for the nine months ended June 30, 2014.


⁽²⁾	Derivative Financial Instruments are shown on a net basis.



Fair Value Measurements Using Unobservable Inputs (Level 3)
(Thousands of Dollars)				Total Gains/Losses
	April 1, 2013			Gains/Losses Realized and Included in Earnings			Gains/Losses Unrealized and Included in Other Comprehensive Income (Loss)		Transfer In/Out of Level 3		June 30, 2013
Derivative Financial Instruments⁽²⁾	$	(16,606	)	$	2,471	⁽¹⁾	$	6,208	$	—	$	(7,927	)


⁽¹⁾	Amounts are reported in Operating Revenues in the Consolidated Statement of Income for the three months ended June 30, 2013.


⁽²⁾	Derivative Financial Instruments are shown on a net basis.



Fair Value Measurements Using Unobservable Inputs (Level 3)
(Thousands of Dollars)				Total Gains/Losses
	October 1, 2012			Gains/Losses Realized and Included in Earnings			Gains/Losses Unrealized and Included in Other Comprehensive Income (Loss)		Transfer In/Out of Level 3		June 30, 2013
Derivative Financial Instruments⁽²⁾	$	(19,664	)	$	9,271	⁽¹⁾	$	2,466	$	—	$	(7,927	)


⁽¹⁾	Amounts are reported in Operating Revenues in the Consolidated Statement of Income for the nine months ended June 30, 2013.


⁽²⁾	Derivative Financial Instruments are shown on a net basis.