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. 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 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 July 31, 2014 and October 31, 2013, we had long gas purchase options providing total coverage of 10.8 million dekatherms and 25.4 million dekatherms, respectively. The long gas purchase options held at July 31, 2014 are for the period from September 2014 through July 2015.

Fair Value Measurements

We use 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 of our deferred compensation plans. In developing our fair value measurements of these financial instruments, we utilize market data or assumptions about risk and the risks inherent in the inputs to the valuation technique. Fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the entity transacts. We classify fair value balances based on the observance of those 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, 2013.

The following table sets forth, by level of the fair value hierarchy, our financial assets that were accounted for at fair value on a recurring basis as of July 31, 2014 and October 31, 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. 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 July 31, 2014 and 2013. 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 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 derivatives held for utility operations. Our derivatives held for utility operations are held with one broker as our counterparty.

Recurring Fair Measurements as of July 31, 2014

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 held for utility operations	$	1,023	$	—	$	—	$	—	$	1,023
Debt and equity securities held as trading securities:
Money markets	474		—		—		—		474
Mutual funds	3,476		—		—		—		3,476
Total fair value assets	$	4,973	$	—	$	—	$	—	$	4,973

Recurring Fair Measurements as of October 31, 2013

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 held for utility operations	$	1,834	$	—	$	—	$	—	$	1,834
Debt and equity securities held as trading securities:
Money markets	380		—		—		—		380
Mutual funds	2,814		—		—		—		2,814
Total fair value assets	$	5,028	$	—	$	—	$	—	$	5,028

Our utility segment 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 1 to the condensed consolidated financial statements. 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.

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 recorded at unamortized 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 carrying amount and fair value of our long-term debt, including the current portion, which is classified within Level 2, are shown below.



In thousands	Carrying Amount *		Fair Value
As of July 31, 2014	$	1,175,000	$	1,327,019
As of October 31, 2013	1,275,000		1,409,892

* Excludes discount on issuance of notes of $139 and $143 as of July 31, 2014 and October 31, 2013, respectively.

Quantitative and Qualitative Disclosures

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 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 for natural gas as of July 31, 2014 and October 31, 2013.

Fair Value of Derivative Instruments

	July 31,		October 31,
In thousands	2014		2013
Derivatives Not Designated as Hedging Instruments under Derivative Accounting Standards:
Asset Financial Instruments:
Current Assets – Gas purchase derivative assets (September 2014-July 2015)	$	1,023
Current Assets – Gas purchase derivative assets (December 2013-October 2014)			$	1,834

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 on 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 1 to the condensed consolidated financial statements and recognized in the Condensed Consolidated Statements of Operations and 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 financial instruments not designated as hedging instruments under derivative accounting standards would have had on the Condensed Consolidated Statements of Operations and Comprehensive Income for the three months and nine months ended July 31, 2014 and 2013, absent the regulatory treatment under our approved PGA procedures.



In thousands	Amount of Gain (Loss) Recognized on Derivatives and Deferred Under PGA Procedures											Location of Gain (Loss) Recognized through PGA Procedures
	Three Months Ended July 31						Nine Months Ended July 31
	2014			2013			2014		2013
Gas purchase options	$	(515	)	$	(829	)	$	7,311	$	(5,120	)	Cost of Gas

In Tennessee, the cost of gas purchase 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 approved by the TRA. In South Carolina, the costs of gas purchase options are subject to and approved for recovery under the terms and conditions of our gas hedging plan 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.

Credit and Counterparty Risk

We are exposed to credit risk as a result of transactions for the purchase and sale of natural gas and related products and services and management agreements of our transportation capacity, storage capacity and supply contracts with major companies in the energy industry and within our utility operations serving industrial, commercial, power generation, residential and municipal energy consumers. These transactions principally occur in the eastern, gulf coast and mid-west regions of the United States. We believe that this geographic concentration does not contribute significantly to our overall exposure to credit risk. Credit risk associated with trade accounts receivable for the natural gas distribution segment is mitigated by the large number of individual customers and diversity in our customer base.

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 $2.8 million, or approximately 4%, of our gross trade accounts receivable at July 31, 2014. 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.

We also enter into contracts with third parties to manage some of our supply and capacity assets for the purpose of maximizing their value. These arrangements include a counterparty credit evaluation according to our policy described above prior to contract execution and typically have durations of one year or less. In the event that a party is unable to perform under these arrangements, we have exposure to satisfy our underlying supply or demand contractual obligations that were incurred while under the management of this third party. We believe, based on our credit policies as of July 31, 2014, that our financial position, results of operations and cash flows will not be materially affected as a result of nonperformance by any single counterparty.

Natural gas distribution operating revenues and related trade accounts receivable are generated from state-regulated utility natural gas sales and transportation to over one million residential, commercial and industrial customers, including power generation and municipal customers, located in North Carolina, South Carolina and Tennessee. A change in economic conditions may affect the ability of customers to meet their obligations. We have mitigated our exposure to the risk of non-payment of utility bills by our customers. Gas costs related to uncollectible accounts are recovered through PGA procedures in all jurisdictions. To manage the non-gas cost customer credit risk, we evaluate credit quality and payment history and may require cash deposits from our high risk customers that do not satisfy our predetermined credit standards until a satisfactory payment history has been established. Significant increases in the price of natural gas and colder-than-normal weather can slow our collection efforts as customers experience increased difficulty in paying their gas bills, leading to higher than normal trade accounts receivable; however, we believe that our provision for possible losses on uncollectible trade accounts receivable is adequate for our credit loss exposure.

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 an Enterprise Risk Management program, which is overseen by the Finance and Enterprise Risk Committee of our Board of Directors. In addition, we have an Energy Price Risk Management Committee that monitors compliance with our hedging programs, policies and procedures.