XML 27 R16.htm IDEA: XBRL DOCUMENT v3.5.0.2
Financial Instruments
 9 Months Ended
Jun. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments
Financial Instruments
We currently use financial instruments in our regulated distribution and nonregulated segments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments, which have been tailored to our regulated distribution and nonregulated segments, and the related accounting for these financial instruments are fully described in Notes 2 and 12 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. During the nine months ended June 30, 2016 there were no changes in our objectives, strategies and accounting for using financial instruments. 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. The following summarizes those objectives and strategies.

Regulated Commodity Risk Management Activities
Our purchased gas cost adjustment mechanisms essentially insulate our regulated distribution segment from commodity price risk; however, 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.
We typically seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2015-2016 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 33 percent, or 23.0 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.

Nonregulated Commodity Risk Management Activities
Our nonregulated segment is exposed to risks associated with changes in the market price of natural gas through the purchase, sale and delivery of natural gas to its customers at competitive prices. 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. Specifically, these operations use financial instruments in the following ways:
•
Gas delivery and related services - Certain financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, are used to mitigate the commodity price risk associated with deliveries under fixed-priced forward contracts to either deliver gas to customers or purchase gas from suppliers. These financial instruments have maturity dates ranging from one to 54 months.
•
Transportation and storage services - Our nonregulated operations 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 for accounting purposes.
•
Aggregating and purchasing gas supply - Certain financial instruments, designated as fair value hedges, are used to hedge our natural gas inventory used in asset optimization activities.

Interest Rate Risk Management Activities
We periodically manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
As of June 30, 2016, we had forward starting interest rate swaps to effectively fix the Treasury yield component associated with the anticipated issuance of $250 million and $450 million unsecured senior notes in fiscal 2017 and fiscal 2019, at 3.37% and 3.78%, which we designated as cash flow hedges at the time the swaps were executed. As of June 30, 2016, we had $18.4 million of net realized losses in accumulated other comprehensive income (AOCI) associated with the settlement of financial instruments used to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes, which will be recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2045.
 
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 June 30, 2016, 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 June 30, 2016, we had net long/(short) commodity contracts outstanding in the following quantities:
Contract Type
 
Hedge Designation
 
Regulated
Distribution
 
Nonregulated
 
 
 
 
Quantity (MMcf)
Commodity contracts
 
Fair Value
 
—

 
(35,118
)
 
 
Cash Flow
 
—

 
45,325

 
 
Not designated
 
10,002

 
51,128

 
 
 
 
10,002

 
61,335


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 June 30, 2016 and September 30, 2015. The gross amounts of recognized assets and liabilities are netted within our unaudited Condensed Consolidated Balance Sheets to the extent that we have netting arrangements with the counterparties.
 
 
 
Regulated Distribution
 
Nonregulated
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
 
 (In thousands)
June 30, 2016
 
 
 
 
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
$
—

 
$
—

 
$
10,149

 
$
(35,680
)
Interest rate contracts
Other current assets /
Other current liabilities
 
—

 
(65,533
)
 
—

 
—

Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
—

 
—

 
3,911

 
(3,831
)
Interest rate contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
—

 
(184,131
)
 
—

 
—

Total
 
 
—

 
(249,664
)
 
14,060

 
(39,511
)
Not Designated As Hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
3,651

 
(40
)
 
27,247

 
(20,407
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
750

 
—

 
10,812

 
(9,983
)
Total
 
 
4,401

 
(40
)
 
38,059

 
(30,390
)
Gross Financial Instruments
 
 
4,401

 
(249,704
)
 
52,119

 
(69,901
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Contract netting
 
 
—

 
—

 
(51,210
)
 
51,210

Net Financial Instruments
 
 
4,401

 
(249,704
)
 
909

 
(18,691
)
Cash collateral
 
 
—

 
16,330

 
4,046

 
18,691

Net Assets/Liabilities from Risk Management Activities
 
 
$
4,401

 
$
(233,374
)
 
$
4,955

 
$
—


 
 
 
 
 
Regulated Distribution
 
Nonregulated
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
 
 (In thousands)
September 30, 2015
 
 
 
 
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
$
—

 
$
—

 
$
11,680

 
$
(36,067
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
—

 
—

 
126

 
(9,918
)
Interest rate contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
—

 
(110,539
)
 
—

 
—

Total
 
 
—

 
(110,539
)
 
11,806

 
(45,985
)
Not Designated As Hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
378

 
(9,568
)
 
65,239

 
(65,780
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
368

 
—

 
14,318

 
(14,218
)
Total
 
 
746

 
(9,568
)
 
79,557

 
(79,998
)
Gross Financial Instruments
 
 
746

 
(120,107
)
 
91,363

 
(125,983
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Contract netting
 
 
—

 
—

 
(91,363
)
 
91,363

Net Financial Instruments
 
 
746

 
(120,107
)
 
—

 
(34,620
)
Cash collateral
 
 
—

 
—

 
8,854

 
34,620

Net Assets/Liabilities from Risk Management Activities
 
 
$
746

 
$
(120,107
)
 
$
8,854

 
$
—


 
Impact of Financial Instruments on the Income Statement
Hedge ineffectiveness for our nonregulated segment is recorded as a component of purchased gas cost 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 June 30, 2016 and 2015 we recognized gains arising from fair value and cash flow hedge ineffectiveness of $13.6 million and $3.6 million. For the nine months ended June 30, 2016 and 2015 we recognized a gain (loss) arising from fair value and cash flow hedge ineffectiveness of $18.1 million and $(0.9) 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 nine months ended June 30, 2016 and 2015 is presented below.
 
Three Months Ended 
 June 30
 
2016
 
2015
 
(In thousands)
Commodity contracts
$
(22,146
)
 
$
(1,715
)
Fair value adjustment for natural gas inventory designated as the hedged item
35,630

 
5,350

Total decrease in purchased gas cost
$
13,484

 
$
3,635

The decrease in purchased gas cost is comprised of the following:
 
 
 
Basis ineffectiveness
$
(684
)
 
$
599

Timing ineffectiveness
14,168

 
3,036

 
$
13,484

 
$
3,635

 
 
 
 
 
 
 
 
 
Nine Months Ended 
 June 30
 
2016
 
2015
 
(In thousands)
Commodity contracts
$
(11,808
)
 
$
5,754

Fair value adjustment for natural gas inventory designated as the hedged item
29,852

 
(6,291
)
Total (increase) decrease in purchased gas cost
$
18,044

 
$
(537
)
The (increase) decrease in purchased gas cost is comprised of the following:
 
 
 
Basis ineffectiveness
$
(1,490
)
 
$
908

Timing ineffectiveness
19,534

 
(1,445
)
 
$
18,044

 
$
(537
)

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 purchased gas cost. 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.

Cash Flow Hedges
The impact of cash flow hedges on our condensed consolidated income statements for the three and nine months ended June 30, 2016 and 2015 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 June 30, 2016
 
Regulated Distribution
 
Nonregulated
 
Consolidated
 
(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts
$
—

 
$
(12,347
)
 
$
(12,347
)
Gain arising from ineffective portion of commodity contracts
—

 
66

 
66

Total impact on purchased gas cost
—

 
(12,281
)
 
(12,281
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(137
)
 
—

 
(137
)
Total Impact from Cash Flow Hedges
$
(137
)
 
$
(12,281
)
 
$
(12,418
)
 
Three Months Ended June 30, 2015
 
Regulated Distribution
 
Nonregulated
 
Consolidated
 
(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts
$
—

 
$
(16,488
)
 
$
(16,488
)
Gain arising from ineffective portion of commodity contracts
—

 
11

 
11

Total impact on purchased gas cost
—

 
(16,477
)
 
(16,477
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(137
)
 
—

 
(137
)
Total Impact from Cash Flow Hedges
$
(137
)
 
$
(16,477
)
 
$
(16,614
)
 
Nine Months Ended June 30, 2016
 
Regulated Distribution
 
Nonregulated
 
Consolidated
 
(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts
$
—

 
$
(48,015
)
 
$
(48,015
)
Gain arising from ineffective portion of commodity contracts
—

 
84

 
84

Total impact on purchased gas cost
—

 
(47,931
)
 
(47,931
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(410
)
 
—

 
(410
)
Total Impact from Cash Flow Hedges
$
(410
)
 
$
(47,931
)
 
$
(48,341
)
 
Nine Months Ended June 30, 2015
 
Regulated Distribution
 
Nonregulated
 
Consolidated
 
(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts
$
—

 
$
(29,222
)
 
$
(29,222
)
Loss arising from ineffective portion of commodity contracts
—

 
(316
)
 
(316
)
Total impact on purchased gas cost
—

 
(29,538
)
 
(29,538
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(717
)
 
—

 
(717
)
Total Impact from Cash Flow Hedges
$
(717
)
 
$
(29,538
)
 
$
(30,255
)

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 nine months ended June 30, 2016 and 2015. 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 
 June 30
 
Nine Months Ended 
 June 30
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Increase (decrease) in fair value:
 
 
 
 
 
 
 
Interest rate agreements
$
(39,337
)
 
$
54,388

 
$
(88,345
)
 
$
(30,436
)
Forward commodity contracts
10,573

 
1,505

 
(8,612
)
 
(37,397
)
Recognition of (gains) losses in earnings due to settlements:
 
 
 
 
 
 
 
Interest rate agreements
87

 
87

 
260

 
455

Forward commodity contracts
7,532

 
10,058

 
29,290

 
17,826

Total other comprehensive income (loss) from hedging, net of tax(1)
$
(21,145
)
 
$
66,038

 
$
(67,407
)
 
$
(49,552
)

 
(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 AOCI associated with our interest rate agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments, while deferred gains (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 losses recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of June 30, 2016. However, the table below does not include the expected recognition in earnings of our outstanding interest rate agreements as those instruments have not yet settled.
 
Interest Rate
Agreements
 
Commodity
Contracts
 
Total
 
(In thousands)
Next twelve months
$
(372
)
 
$
(4,992
)
 
$
(5,364
)
Thereafter
(18,018
)
 
233

 
(17,785
)
Total(1) 
$
(18,390
)
 
$
(4,759
)
 
$
(23,149
)

 
(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 June 30, 2016 and 2015 was a decrease in purchased gas cost of $1.9 million and $3.7 million. For the nine months ended June 30, 2016 and 2015 purchased gas cost (increased) decreased by $(2.8) million and $13.2 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 regulated distribution segment are not designated as hedges. However, there is no earnings impact on our regulated 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.