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. 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 accelerated payments when our financial instruments are in net liability positions.

As discussed in Note 2, we report our financial instruments as risk management assets and liabilities, each of which is classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instrument. The following table shows the fair values of our risk management assets and liabilities by segment at September 30, 2011 and 2010:


		Natural Gas Distribution		Nonregulated		Total
		(In thousands)
September 30, 2011⁽³⁾

Assets from risk management activities, current ⁽¹⁾	$	843	$	17,501	$	18,344
Assets from risk management activities, noncurrent		998		-		998
Liabilities from risk management activities, current ⁽¹⁾		(11,916)		(3,537)		(15,453)
Liabilities from risk management activities, noncurrent		(67,862)		(10,227)		(78,089)
Net assets (liabilities)	$	(77,937)	$	3,737	$	(74,200)

September 30, 2010

Assets from risk management activities, current ⁽²⁾	$	2,219	$	18,356	$	20,575
Assets from risk management activities, noncurrent		47		890		937
Liabilities from risk management activities, current ⁽²⁾		(48,942)		(731)		(49,673)
Liabilities from risk management activities, noncurrent		(2,924)		(6,000)		(8,924)
Net assets (liabilities)	$	(49,600)	$	12,515	$	(37,085)

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 2010-2011 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 35 percent, or 31.7 Bcf of the winter flowing gas requirements at a weighted average cost of approximately $5.81 per Mcf. 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.

In our nonregulated operations, we aggregate and purchase gas supply, arrange transportation and/or storage logistics and ultimately deliver gas to our customers at competitive prices. To facilitate this process, we utilize proprietary and customer-owned transportation and storage assets to provide the various services our customers' request.

We also perform asset optimization activities in our nonregulated segment. Through asset optimization activities, we seek to enhance our gross profit by maximizing the economic value associated with the storage and transportation capacity we own or control. We attempt to meet this objective by engaging in natural gas storage transactions in which we seek to find and profit from the pricing differences that occur over time. We purchase physical natural gas and then sell financial instruments at advantageous prices to lock in a gross profit margin. Through the use of transportation and storage services and financial instruments, we also seek to capture gross profit margin through the arbitrage of pricing differences that exist in various locations and by recognizing pricing differences that occur over time. Over time, gains and losses on the sale of storage gas inventory should be offset by gains and losses on the financial instruments, resulting in the realization of the economic gross profit margin we anticipated at the time we structured the original transaction.

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 to buy or sell the commodity at a fixed price in the future. Option 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 62 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 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.

Our nonregulated risk management activities are controlled through various risk management policies and procedures. Our Audit Committee has oversight responsibility for our nonregulated risk management limits and policies. A risk committee, comprised of corporate and business unit officers, is responsible for establishing and enforcing our nonregulated risk management policies and procedures.

Under our risk management policies, we seek to match our financial instrument positions to our physical storage positions as well as our expected current and future sales and purchase obligations in order to maintain no open positions at the end of each trading day. The determination of our net open position as of any day, however, requires us to make assumptions as to future circumstances, including the use of gas by our customers in relation to our anticipated storage and market positions. Because the price risk associated with any net open position at the end of each day may increase if the assumptions are not realized, we review these assumptions as part of our daily monitoring activities. Our operations can also be affected by intraday fluctuations of gas prices, since the price of natural gas purchased or sold for future delivery earlier in the day may not be hedged until later in the day. At times, limited net open positions related to our existing and anticipated commitments may occur. At the close of business on September 30, 2011, our nonregulated segment had net open positions (including existing storage and related financial contracts) of 0.1 Bcf.

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.

We intend to refinance our $250 million unsecured 5.125% Senior Notes that mature in January 2013 through the issuance of $350 million 30-year unsecured notes. In August 2011, we entered into three Treasury lock agreements to fix the Treasury yield component of the interest cost associated with the anticipated issuances of these senior notes. We designated all of these Treasury locks as cash flow hedges.

In September 2010, we entered into three Treasury lock agreements to fix the Treasury yield component of the interest cost associated with $300 million of a total $400 million of senior notes that were issued in June 2011. This offering is discussed in Note 7. We designated these Treasury locks as cash flow hedges. The Treasury locks were settled on June 7, 2011 with the receipt of $20.1 million from the counterparties due to an increase in the 30-year Treasury lock rates between inception of the Treasury locks and settlement. Because the Treasury locks were effective, the net $12.6 million unrealized gain was recorded as a component of accumulated other comprehensive income and will be recognized as a component of interest expense over the 30-year life of the senior notes.

Additionally, our original fiscal 2011 financing plans included the issuance of $250 million of 30-year unsecured notes in November 2011 to fund our capital expenditure program. In September 2010, we entered into two Treasury lock agreements to fix the Treasury yield component of the interest cost associated with the anticipated issuance of these senior notes, which were designated as cash flow hedges. Due primarily to stronger than anticipated cash flows primarily resulting from the extension of the Bush tax cuts that allow the continued use of bonus depreciation on qualifying expenditures through December 31, 2011, the need to issue $250 million of debt in November was eliminated and the related Treasury lock agreements were unwound in March 2011. As a result of unwinding these Treasury locks, we recognized a pre-tax cash gain of $27.8 million during the second quarter of fiscal 2011.

In prior years, we entered into several Treasury lock agreements to fix the Treasury yield component of the interest cost of financing for 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 extends through fiscal 2041.

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

As of September 30, 2011, 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 September 30, 2011, we had net long/(short) commodity contracts outstanding in the following quantities:

The following tables present the fair value and balance sheet classification of our financial instruments by operating segment as of September 30, 2011 and 2010. 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 $28.8 million and $24.9 million of cash held on deposit in margin accounts as of September 30, 2011 and 2010 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 consolidated balance sheet, nor will they be equal to the fair value information presented for our financial instruments in Note 5.

						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 $1.3 million related to risk management liabilities that were classified as assets held for sale at September 30, 2011.

							Natural
							Gas
				Balance Sheet Location			Distribution		Nonregulated		Total
September 30, 2010						(In thousands)

Designated As Hedges:
	Asset Financial Instruments
		Current commodity contracts		Other current assets			$	-	$	40,030	$	40,030
		Noncurrent commodity		Deferred charges and
			contracts		other assets			-		2,461		2,461
	Liability Financial Instruments
		Current commodity contracts		Other current liabilities				-		(56,575)		(56,575)
		Noncurrent commodity		Deferred credits and
			contracts		other liabilities			-		(9,222)		(9,222)
	Total							-		(23,306)		(23,306)

Not Designated As Hedges:
	Asset Financial Instruments
		Current commodity contracts		Other current assets				2,219		16,459		18,678
		Noncurrent commodity		Deferred charges and
			contracts		other assets			47		2,056		2,103
	Liability Financial Instruments
		Current commodity contracts		Other current liabilities				(48,942)		(7,178)		(56,120)
		Noncurrent commodity		Deferred credits and
			contracts		other liabilities			(2,924)		(405)		(3,329)
	Total							(49,600)		10,932		(38,668)
Total Financial Instruments							$	(49,600)	$	(12,374)	$	(61,974)

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 years ended September 30, 2011, 2010 and 2009 we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $24.8 million, $51.8 million and $6.4 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

The impact of our nonregulated commodity contracts designated as fair value hedges and the related hedged item on our consolidated income statement for the years ended September 30, 2011, 2010 and 2009 is presented below.

			Fiscal Year Ended September 30
		2011		2010		2009
			(In thousands)

Commodity contracts		$	16,552	$	34,650	$	45,120
Fair value adjustment for natural gas
	inventory designated as the hedged item		9,824		19,867		(28,831)
Total impact on revenue		$	26,376	$	54,517	$	16,289

The impact on revenue is comprised of
the following:
	Basis ineffectiveness	$	803	$	(1,272)	$	5,958
	Timing ineffectiveness		25,573		55,789		10,331
		$	26,376	$	54,517	$	16,289

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.

The impact of cash flow hedges on our consolidated income statements for the years ended September 30, 2011, 2010 and 2009 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.

		Fiscal Year Ended September 30, 2011
		Natural		Regulated
		Gas		Transmission
		Distribution		and Storage		Nonregulated		Consolidated
		(In thousands)

Loss reclassified from AOCI into revenue for
	effective portion of commodity contracts	$	-	$	-	$	(28,430)	$	(28,430)
Loss arising from ineffective portion of
	commodity contracts		-		-		(1,585)		(1,585)
Total impact on revenue			-		-		(30,015)		(30,015)

Net loss on settled Treasury lock agreements
	reclassified from AOCI into interest expense		(2,455)		-		-		(2,455)
Gain on unwinding of Treasury lock reclassified
	from AOCI into miscellaneous income		21,803		6,000		-		27,803
Total impact from cash flow hedges		$	19,348	$	6,000	$	(30,015)	$	(4,667)

		Fiscal Year Ended September 30, 2010
		Natural		Regulated
		Gas		Transmission
		Distribution		and Storage		Nonregulated		Consolidated
		(In thousands)

Loss reclassified from AOCI into revenue for
	effective portion of commodity contracts	$	-	$	-	$	(44,809)	$	(44,809)
Loss arising from ineffective portion of
	commodity contracts		-		-		(2,717)		(2,717)
Total impact on revenue			-		-		(47,526)		(47,526)

Net loss on settled Treasury lock agreements
	reclassified from AOCI into interest expense		(2,678)		-		-		(2,678)
Total impact from cash flow hedges		$	(2,678)	$	-	$	(47,526)	$	(50,204)

		Fiscal Year Ended September 30, 2009
		Natural		Regulated
		Gas		Transmission
		Distribution		and Storage		Nonregulated		Consolidated
		(In thousands)

Loss reclassified from AOCI into revenue for
	effective portion of commodity contracts	$	-	$	-	$	(136,540)	$	(136,540)
Loss arising from ineffective portion of
	commodity contracts		-		-		(9,888)		(9,888)
Total impact on revenue			-		-		(146,428)		(146,428)

Net loss on settled Treasury lock agreements
	reclassified from AOCI into interest expense		(4,070)		-		-		(4,070)
Total impact from cash flow hedges		$	(4,070)	$	-	$	(146,428)	$	(150,498)

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 years ended September 30, 2011 and 2010. The amounts included in the table below exclude gains and losses arising from ineffectiveness because these amounts are immediately recognized in the income statement as incurred.

		Fiscal Year Ended September 30
		2011		2010
		(In thousands)
Increase (decrease) in fair value:
	Treasury lock agreements	$	(12,720)	$	343
	Forward commodity contracts		(12,096)		(34,296)

Recognition of (gains) losses in earnings due to settlements:
	Treasury lock agreements		(15,969)		1,687
	Forward commodity contracts		17,344		27,333
Total other comprehensive loss from
	hedging, net of tax ⁽¹⁾	$	(23,441)	$	(4,933)

Deferred gains (losses) recorded in AOCI associated with our Treasury lock agreements are recognized in earnings as they are amortized, 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 September 30, 2011. However, the table below does not include the expected recognition in earnings of the Treasury lock agreements entered into in August 2011 as those financial instruments have not yet settled.

The impact of financial instruments that have not been designated as hedges on our consolidated income statements for the years ended September 30, 2011, 2010 and 2009 was an increase (decrease) in revenue of $(1.4) million, $15.4 million and $36.9 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.