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Financial Instruments | 9 Months Ended
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Jun. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Financial Instruments | Financial Instruments We currently use financial instruments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments and the related accounting for these financial instruments are fully described in Notes 2 and 13 of our Fiscal 2016 Financial Statements. During the nine months ended June 30, 2017, except for the change in the scope of our natural gas marketing commodity risk management activities as a result of the sale of AEM, there were no material 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 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 2016-2017 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 27 percent, or 16.2 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes. Natural Gas Marketing Commodity Risk Management Activities Our natural gas marketing segment was 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. Through December 31, 2016, we managed 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. Effective January 1, 2017, as a result of the sale of AEM, these activities were discontinued. Due to the sale of AEM, we determined that the cash flows associated with our natural gas marketing commodity cash flow hedges were no longer probable of occurring; therefore, we discontinued hedge accounting as of December 31, 2016. As a result, we reclassified the gain in accumulated other comprehensive income associated with the commodity contracts into earnings as a reduction of purchased gas cost and recognized a pre-tax gain of $10.6 million, which is included in income from discontinued operations on the condensed consolidated statement of income for the three months ended December 31, 2016. 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, 2017, we had forward starting interest rate swaps to effectively fix the Treasury yield component associated with the anticipated issuance of $450 million unsecured senior notes in fiscal 2019 at 3.78%, which we designated as a cash flow hedge at the time the swaps were executed. As of June 30, 2017, we had $41.5 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, 2017, 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, 2017, we had 18,833 MMcf of net short commodity contracts outstanding. These contracts have not been designated as hedges. Financial Instruments on the Balance Sheet The following tables present the fair value and balance sheet classification of our financial instruments as of June 30, 2017 and September 30, 2016. 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.
| Balance Sheet Location |  | Assets |  | Liabilities
|  |  | (In thousands)
June 30, 2017 |  |  |  |  |
Designated As Hedges: |  |  |  |  |
Interest rate contracts | Deferred credits and other liabilities |  | — |  |  | (108,860 | )
Total |  |  | — |  |  | (108,860 | )
Not Designated As Hedges: |  |  |  |  |
Commodity contracts | Other current assets / Other current liabilities |  | 2,960 |  |  | (230 | )
Commodity contracts | Deferred charges and other assets / Deferred credits and other liabilities |  | 268 |  |  | (282 | )
Total |  |  | 3,228 |  |  | (512 | )
Gross Financial Instruments |  |  | 3,228 |  |  | (109,372 | )
Gross Amounts Offset on Consolidated Balance Sheet: |  |  |  |  |
Contract netting |  |  | — |  |  | — |
Net Financial Instruments |  |  | 3,228 |  |  | (109,372 | )
Cash collateral |  |  | — |  |  | — |
Net Assets/Liabilities from Risk Management Activities |  |  | $ | 3,228 |  |  | $ | (109,372 | )
| Balance Sheet Location |  | Assets |  | Liabilities
|  |  | (In thousands)
September 30, 2016 |  |  |  |  |
Designated As Hedges: |  |  |  |  |
Commodity contracts | Other current assets / Other current liabilities |  | $ | 6,612 |  |  | $ | (21,903 | )
Interest rate contracts | Other current assets / Other current liabilities |  | — |  |  | (68,481 | )
Commodity contracts | Deferred charges and other assets / Deferred credits and other liabilities |  | 2,178 |  |  | (3,779 | )
Interest rate contracts | Deferred charges and other assets / Deferred credits and other liabilities |  | — |  |  | (198,008 | )
Total |  |  | 8,790 |  |  | (292,171 | )
Not Designated As Hedges: |  |  |  |  |
Commodity contracts | Other current assets / Other current liabilities |  | 21,186 |  |  | (18,812 | )
Commodity contracts | Deferred charges and other assets / Deferred credits and other liabilities |  | 14,165 |  |  | (12,701 | )
Total |  |  | 35,351 |  |  | (31,513 | )
Gross Financial Instruments |  |  | 44,141 |  |  | (323,684 | )
Gross Amounts Offset on Consolidated Balance Sheet: |  |  |  |  |
Contract netting |  |  | (39,290 | ) |  | 39,290 |
Net Financial Instruments |  |  | 4,851 |  |  | (284,394 | )
Cash collateral |  |  | 6,775 |  |  | 43,575 |
Net Assets/Liabilities from Risk Management Activities |  |  | $ | 11,626 |  |  | $ | (240,819 | )
Impact of Financial Instruments on the Income Statement Hedge ineffectiveness for our natural gas marketing segment was recorded as a component of purchased gas cost, which is included in discontinued operations on the condensed consolidated statements of income, and primarily results from differences in the location and timing of the derivative instrument and the hedged item. For the three months ended June 30, 2016, we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $13.6 million. For the nine months ended June 30, 2017 and 2016, we recognized gains arising from fair value and cash flow hedge ineffectiveness of $3.4 million and $18.1 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below. Fair Value Hedges The impact of our natural gas marketing segment commodity contracts designated as fair value hedges and the related hedged item on the results of discontinued operations on our condensed consolidated income statement for the three and nine months ended June 30, 2017 and 2016 is presented below.
| Three Months Ended June 30 |  | Nine Months Ended June 30
| 2017 |  | 2016 |  | 2017 |  | 2016
| (In thousands)
Commodity contracts | $ | — |  |  | $ | (22,146 | ) |  | $ | (9,567 | ) |  | $ | (11,808 | )
Fair value adjustment for natural gas inventory designated as the hedged item | — |  |  | 35,630 |  |  | 12,858 |  |  | 29,852 |
Total decrease in purchased gas cost reflected in income from discontinued operations | $ | — |  |  | $ | 13,484 |  |  | $ | 3,291 |  |  | $ | 18,044 |
The decrease in purchased gas cost reflected in income from discontinued operations is comprised of the following: |  |  |  |  |  |  |
Basis ineffectiveness | $ | — |  |  | $ | (684 | ) |  | $ | (597 | ) |  | $ | (1,490 | )
Timing ineffectiveness | — |  |  | 14,168 |  |  | 3,888 |  |  | 19,534 |
| $ | — |  |  | $ | 13,484 |  |  | $ | 3,291 |  |  | $ | 18,044 |
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. Cash Flow Hedges The impact of our interest rate and natural gas marketing segment cash flow hedges on our condensed consolidated income statements for the three and nine months ended June 30, 2017 and 2016 is presented below.
| Three Months Ended June 30 |  | Nine Months Ended June 30
| 2017 |  | 2016 |  | 2017 |  | 2016
| (In thousands) |  |  |  |
Loss reclassified from AOCI for effective portion of natural gas marketing commodity contracts | $ | — |  |  | $ | (12,347 | ) |  | $ | (2,612 | ) |  | $ | (48,015 | )
Gain arising from ineffective portion of natural gas marketing commodity contracts | — |  |  | 66 |  |  | 111 |  |  | 84 |
Gain on discontinuance of cash flow hedging of natural gas marketing commodity contracts reclassified from AOCI | — |  |  | — |  |  | 10,579 |  |  | — |
Total impact on purchased gas cost reflected in income from discontinued operations | — |  |  | (12,281 | ) |  | 8,078 |  |  | (47,931 | )
Net loss on settled interest rate agreements reclassified from AOCI into interest expense | (177 | ) |  | (137 | ) |  | (450 | ) |  | (410 | )
Total Impact from Cash Flow Hedges | $ | (177 | ) |  | $ | (12,418 | ) |  | $ | 7,628 |  |  | $ | (48,341 | )
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, 2017 and 2016. 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
| 2017 |  | 2016 |  | 2017 |  | 2016
| (In thousands)
Increase (decrease) in fair value: |  |  |  |  |  |  |
Interest rate agreements | $ | (18,669 | ) |  | $ | (39,337 | ) |  | $ | 76,602 |  |  | $ | (88,345 | )
Forward commodity contracts | — |  |  | 10,573 |  |  | 9,847 |  |  | (8,612 | )
Recognition of (gains) losses in earnings due to settlements: |  |  |  |  |  |  |
Interest rate agreements | 113 |  |  | 87 |  |  | 286 |  |  | 260 |
Forward commodity contracts | — |  |  | 7,532 |  |  | (4,865 | ) |  | 29,290 |
Total other comprehensive income (loss) from hedging, net of tax(1) | $ | (18,556 | ) |  | $ | (21,145 | ) |  | $ | 81,870 |  |  | $ | (67,407 | )
(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 natural gas marketing segment commodity contracts were 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, 2017. 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
| (In thousands)
Next twelve months | $ | (1,509 | )
Thereafter | (40,001 | )
Total(1) | $ | (41,510 | )
(1) | Utilizing an income tax rate of 37 percent.
Financial Instruments Not Designated as Hedges The impact of the natural gas marketing segment's financial instruments that had not been designated as hedges on our condensed consolidated income statements for the three months ended June 30, 2016 was a decrease in purchased gas cost of $1.9 million, which is included in discontinued operations on the condensed consolidated statements of income. For the nine months ended June 30, 2017 and 2016 purchased gas cost (increased) decreased by $6.8 million and $(2.8) million. As discussed above, financial instruments used in our distribution segment are not designated as hedges. However, there is no earnings impact on our 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.

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