Edgar Filing: NATIONAL FUEL GAS CO

94c76e50623f4db

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____ to_____

Commission File Number 1-3880

NATIONAL FUEL GAS COMPANY

(Exact name of registrant as specified in its charter)



New Jersey	13-1086010
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

6363 Main Street
Williamsville, New York	14221
(Address of principal executive offices)	(Zip Code)

(716) 857-7000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

¨(Do not check if a smaller reporting company)

Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Common stock, par value $1.00 per share, outstanding at July 31, 2013: 83,617,599 shares.

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GLOSSARY OF TERMS

Frequently used abbreviations, acronyms, or terms used in this report:

National Fuel Gas Companies




Company		The Registrant, the Registrant and its subsidiaries or the Registrant’s subsidiaries as appropriate in the context of the disclosure
Distribution Corporation		National Fuel Gas Distribution Corporation
Empire		Empire Pipeline, Inc.
ESNE		Energy Systems North East, LLC
Horizon Power		Horizon Power, Inc.
Midstream Corporation		National Fuel Gas Midstream Corporation
National Fuel		National Fuel Gas Company
NFR		National Fuel Resources, Inc.
Registrant		National Fuel Gas Company
Seneca		Seneca Resources Corporation
Supply Corporation		National Fuel Gas Supply Corporation

Regulatory Agencies


CFTC		Commodity Futures Trading Commission
EPA		United States Environmental Protection Agency
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
NYDEC		New York State Department of Environmental Conservation
NYPSC		State of New York Public Service Commission
PaDEP		Pennsylvania Department of Environmental Protection
PaPUC		Pennsylvania Public Utility Commission
SEC		Securities and Exchange Commission

Other



2012 Form 10-K		The Company’s Annual Report on Form 10-K for the year ended September 30, 2012
Bbl		Barrel (of oil)
Bcf		Billion cubic feet (of natural gas)
Bcfe (or Mcfe) – represents Bcf (or Mcf) Equivalent		The total heat value (Btu) of natural gas and oil expressed as a volume of natural gas. The Company uses a conversion formula of 1 barrel of oil = 6 Mcf of natural gas.
Btu		British thermal unit; the amount of heat needed to raise the temperature of one pound of water one degree Fahrenheit
Capital expenditure		Represents additions to property, plant, and equipment, or the amount of money a company spends to buy capital assets or upgrade its existing capital assets.
Cashout revenues		A cash resolution of a gas imbalance whereby a customer pays Supply Corporation and/or Empire for gas the customer receives in excess of amounts delivered into Supply Corporation’s and Empire’s systems by the customer’s shipper.
Degree day		A measure of the coldness of the weather experienced, based on the extent to which the daily average temperature falls below a reference temperature, usually 65 degrees Fahrenheit.
Derivative		A financial instrument or other contract, the terms of which include an underlying variable (a price, interest rate, index rate, exchange rate, or other variable) and a notional amount (number of units, barrels, cubic feet, etc.). The terms also permit for the instrument or contract to be settled net and no initial net investment is required to enter into the financial instrument or contract. Examples include futures contracts, options, no cost collars and swaps.

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Development costs		Costs incurred to obtain access to proved oil and gas reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dth		Decatherm; one Dth of natural gas has a heating value of 1,000,000 British thermal units, approximately equal to the heating value of 1 Mcf of natural gas.
Exchange Act		Securities Exchange Act of 1934, as amended
Expenditures for long-lived assets		Includes capital expenditures, stock acquisitions and/or investments in partnerships.
Exploration costs		Costs incurred in identifying areas that may warrant examination, as well as costs incurred in examining specific areas, including drilling exploratory wells.
Firm transportation and/or storage		The transportation and/or storage service that a supplier of such service is obligated by contract to provide and for which the customer is obligated to pay whether or not the service is utilized.
GAAP		Accounting principles generally accepted in the United States of America
Goodwill		An intangible asset representing the difference between the fair value of a company and the price at which a company is purchased.
Hedging		A method of minimizing the impact of price, interest rate, and/or foreign currency exchange rate changes, often times through the use of derivative financial instruments.
Hub		Location where pipelines intersect enabling the trading, transportation, storage, exchange, lending and borrowing of natural gas.
Interruptible transportation and/or storage		The transportation and/or storage service that, in accordance with contractual arrangements, can be interrupted by the supplier of such service, and for which the customer does not pay unless utilized.
LIBOR		London Interbank Offered Rate
LIFO		Last-in, first-out
Marcellus Shale		A Middle Devonian-age geological shale formation that is present nearly a mile or more below the surface in the Appalachian region of the United States, including much of Pennsylvania and southern New York.
Mbbl		Thousand barrels (of oil)
Mcf		Thousand cubic feet (of natural gas)
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
MDth		Thousand decatherms (of natural gas)
MMBtu		Million British thermal units (heating value of one decatherm of natural gas)
MMcf		Million cubic feet (of natural gas)
NGA		The Natural Gas Act of 1938, as amended; the federal law regulating interstate natural gas pipeline and storage companies, among other things, codified beginning at 15 U.S.C. Section 717.
NYMEX		New York Mercantile Exchange. An exchange which maintains a futures market for crude oil and natural gas.
Open Season		A bidding procedure used by pipelines to allocate firm transportation or storage capacity among prospective shippers, in which all bids submitted during a defined time period are evaluated as if they had been submitted simultaneously.
Precedent Agreement		An agreement between a pipeline company and a potential customer to sign a service agreement after specified events (called “conditions precedent”) happen, usually within a specified time.

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Proved developed reserves		Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
Proved undeveloped (PUD) reserves		Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required to make these reserves productive.
Reserves		The unproduced but recoverable oil and/or gas in place in a formation which has been proven by production.
Revenue decoupling mechanism		A rate mechanism which adjusts customer rates to render a utility financially indifferent to throughput decreases resulting from conservation.
S&P		Standard & Poor’s Rating Service
SAR		Stock appreciation right
Service agreement		The binding agreement by which the pipeline company agrees to provide service and the shipper agrees to pay for the service.
Stock acquisitions		Investments in corporations
VEBA		Voluntary Employees’ Beneficiary Association
WNC		Weather normalization clause; a clause in utility rates which adjusts customer rates to allow a utility to recover its normal operating costs calculated at normal temperatures. If temperatures during the measured period are warmer than normal, customer rates are adjusted upward in order to recover projected operating costs. If temperatures during the measured period are colder than normal, customer rates are adjusted downward so that only the projected operating costs will be recovered.

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INDEX

Part I. Financial Information		Page

Item 1. Financial Statements (Unaudited)

a. Consolidated Statements of Income and Earnings Reinvested in the Business - Three and Nine Months Ended June 30, 2013 and 2012		6
b. Consolidated Statements of Comprehensive Income – Three and Nine Months Ended June 30, 2013 and 2012		7
c. Consolidated Balance Sheets – June 30, 2013 and September 30, 2012		8 – 9
d. Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2013 and 2012		10
e. Notes to Condensed Consolidated Financial Statements		11 – 27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		28 – 47
Item 3. Quantitative and Qualitative Disclosures About Market Risk		47
Item 4. Controls and Procedures		47 – 48

Part II. Other Information

Item 1. Legal Proceedings		48
Item 1 A. Risk Factors		48 – 50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 3. Defaults Upon Senior Securities		•
Item 4. Mine Safety Disclosures		•
Item 5. Other Information		•
Item 6. Exhibits		51
Signatures		52

•The Company has nothing to report under this item.

Reference to "the Company" in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company’s fiscal year ended September 30 of that year, unless otherwise noted.

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Part I. Financial Information

Item 1. Financial Statements

National Fuel Gas Company

Consolidated Statements of Income and Earnings

Reinvested in the Business

(Unaudited)



	Three Months Ended					Nine Months Ended
	June 30,				June 30,
(Thousands of Dollars, Except Per Common Share Amounts)	2013		2012		2013		2012
INCOME
Operating Revenues	$	440,008	$	328,861	$	1,490,688	$	1,313,593

Operating Expenses
Purchased Gas		95,164		50,160		426,900		390,889
Operation and Maintenance		108,497		93,749		338,533		311,857
Property, Franchise and Other Taxes		21,201		20,432		63,550		70,138
Depreciation, Depletion and Amortization		88,142		74,227		240,503		199,925
		313,004		238,568		1,069,486		972,809
Operating Income		127,004		90,293		421,202		340,784
Other Income (Expense):
Interest Income		317		390		1,844		1,686
Other Income		1,163		1,086		3,666		4,076
Interest Expense on Long-Term Debt		(22,998)		(21,529)		(67,232)		(60,594)
Other Interest Expense		(1,303)		(828)		(2,898)		(2,851)
Income Before Income Taxes		104,183		69,412		356,582		283,101
Income Tax Expense		45,688		26,228		144,423		111,826

Net Income Available for Common Stock		58,495		43,184		212,159		171,275

EARNINGS REINVESTED IN THE BUSINESS
Balance at Beginning of Period		1,398,999		1,275,107		1,306,284		1,206,022
		1,457,494		1,318,291		1,518,443		1,377,297

Dividends on Common Stock		(31,346)		(30,393)		(92,295)		(89,399)
Balance at June 30	$	1,426,148	$	1,287,898	$	1,426,148	$	1,287,898

Earnings Per Common Share:
Basic:
Net Income Available for Common Stock	$	0.70	$	0.52	$	2.54	$	2.06
Diluted:
Net Income Available for Common Stock	$	0.69	$	0.52	$	2.52	$	2.05
Weighted Average Common Shares Outstanding:
Used in Basic Calculation		83,557,968		83,227,602		83,481,849		83,068,083
Used in Diluted Calculation		84,325,465		83,674,823		84,242,128		83,690,436

Dividends Per Common Share:
Dividends Declared	$	0.375	$	0.365	$	1.105	$	1.075

See Notes to Condensed Consolidated Financial Statements

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National Fuel Gas Company

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended					Nine Months Ended
	June 30,					June 30,
(Thousands of Dollars)	2013		2012		2013		2012

Net Income Available for Common Stock	$	58,495	$	43,184	$	212,159	$	171,275
Other Comprehensive Income (Loss), Before Tax:
Unrealized Gain (Loss) on Securities Available for Sale
Arising During the Period		331		(1,870)		3,104		1,959
Unrealized Gain on Derivative Financial Instruments
Arising During the Period		101,866		30,432		89,865		47,085
Reclassification Adjustment for Realized Gains on
Derivative Financial Instruments in Net Income		(1,885)		(21,599)		(23,973)		(49,649)
Other Comprehensive Income (Loss), Before Tax		100,312		6,963		68,996		(605)
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss)
on Securities Available for Sale Arising During the Period		123		(701)		1,160		723
Income Tax Expense Related to Unrealized Gain
on Derivative Financial Instruments Arising During
the Period		42,566		12,688		37,490		14,346
Reclassification Adjustment for Income Tax Expense on
Realized Gains from Derivative Financial Instruments
In Net Income		(791)		(8,973)		(10,065)		(15,433)
Income Taxes – Net		41,898		3,014		28,585		(364)
Other Comprehensive Income (Loss)		58,414		3,949		40,411		(241)
Comprehensive Income	$	116,909	$	47,133	$	252,570	$	171,034

See Notes to Condensed Consolidated Financial Statements

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National Fuel Gas Company

Consolidated Balance Sheets

(Unaudited)



		June 30,		September 30,
		2013		2012

(Thousands of Dollars)

ASSETS
Property, Plant and Equipment	$	7,102,369	$	6,615,813
Less - Accumulated Depreciation, Depletion
and Amortization		2,088,337		1,876,010
		5,014,032		4,739,803
Current Assets
Cash and Temporary Cash Investments		134,582		74,494
Hedging Collateral Deposits		694		364
Receivables – Net of Allowance for Uncollectible Accounts
of $34,887 and $30,317, Respectively		165,047		115,818
Unbilled Utility Revenue		13,643		19,652
Gas Stored Underground		22,180		49,795
Materials and Supplies - at average cost		31,641		28,577
Other Current Assets		46,205		56,121
Deferred Income Taxes		15,148		10,755
		429,140		355,576

Other Assets
Recoverable Future Taxes		152,122		150,941
Unamortized Debt Expense		17,227		13,409
Other Regulatory Assets		556,449		546,851
Deferred Charges		8,051		7,591
Other Investments		93,749		86,774
Goodwill		5,476		5,476
Fair Value of Derivative Financial Instruments		65,170		27,616
Other		2,524		1,105
		900,768		839,763

Total Assets	$	6,343,940	$	5,935,142

See Notes to Condensed Consolidated Financial Statements

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National Fuel Gas Company

Consolidated Balance Sheets

(Unaudited)



		June 30,		September 30,
		2013		2012
(Thousands of Dollars)

CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders’ Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
And Outstanding – 83,587,858 Shares and
83,330,140 Shares, Respectively	$	83,588	$	83,330
Paid in Capital		686,038		669,501
Earnings Reinvested in the Business		1,426,148		1,306,284
Accumulated Other Comprehensive Loss		(58,609)		(99,020)
Total Comprehensive Shareholders’ Equity		2,137,165		1,960,095
Long-Term Debt, Net of Current Portion		1,649,000		1,149,000
Total Capitalization		3,786,165		3,109,095

Current and Accrued Liabilities
Notes Payable to Banks and Commercial Paper		-		171,000
Current Portion of Long-Term Debt		-		250,000
Accounts Payable		77,466		87,985
Amounts Payable to Customers		12,386		19,964
Dividends Payable		31,346		30,416
Interest Payable on Long-Term Debt		18,976		29,491
Customer Advances		246		24,055
Customer Security Deposits		16,830		17,942
Other Accruals and Current Liabilities		109,933		79,099
Fair Value of Derivative Financial Instruments		2,217		24,527
		269,400		734,479

Deferred Credits
Deferred Income Taxes		1,237,727		1,065,757
Taxes Refundable to Customers		65,069		66,392
Unamortized Investment Tax Credit		1,685		2,005
Cost of Removal Regulatory Liability		151,846		139,611
Other Regulatory Liabilities		33,247		21,014
Pension and Other Post-Retirement Liabilities		511,516		516,197
Asset Retirement Obligations		126,879		119,246
Other Deferred Credits		160,406		161,346
		2,288,375		2,091,568
Commitments and Contingencies		-		-

Total Capitalization and Liabilities	$	6,343,940	$	5,935,142

See Notes to Condensed Consolidated Financial Statements

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National Fuel Gas Company

Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended
	June 30,
(Thousands of Dollars)	2013		2012

OPERATING ACTIVITIES
Net Income Available for Common Stock	$	212,159	$	171,275
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization		240,503		199,925
Deferred Income Taxes		141,007		104,948
Excess Tax Benefits Associated with Stock-Based
Compensation Awards		(4,314)		(1,511)
Other		19,744		6,618
Change in:
Hedging Collateral Deposits		(330)		16,309
Receivables and Unbilled Utility Revenue		(43,138)		23,008
Gas Stored Underground and Materials and Supplies		24,551		30,853
Unrecovered Purchased Gas Costs		-		(2,100)
Other Current Assets		14,228		18,190
Accounts Payable		11,241		(5,825)
Amounts Payable to Customers		(7,578)		2,242
Customer Advances		(23,809)		(19,328)
Customer Security Deposits		(1,112)		(474)
Other Accruals and Current Liabilities		3,534		17,083
Other Assets		(5,010)		(1,538)
Other Liabilities		5,557		14,080
Net Cash Provided by Operating Activities		587,233		573,755

INVESTING ACTIVITIES
Capital Expenditures		(513,399)		(809,661)
Other		(3,885)		(1,267)
Net Cash Used in Investing Activities		(517,284)		(810,928)

FINANCING ACTIVITIES
Changes in Notes Payable to Banks and Commercial Paper		(171,000)		30,200
Excess Tax Benefits Associated with Stock-Based
Compensation Awards		4,314		1,511
Net Proceeds from Issuance of Long-Term Debt		495,415		496,085
Reduction of Long-Term Debt		(250,000)		(150,000)
Dividends Paid on Common Stock		(91,364)		(88,404)
Net Proceeds from Issuance of Common Stock		2,774		8,168
Net Cash Provided by (Used in) Financing Activities		(9,861)		297,560

Net Increase in Cash and Temporary Cash Investments		60,088		60,387

Cash and Temporary Cash Investments at October 1		74,494		80,428

Cash and Temporary Cash Investments at June 30	$	134,582	$	140,815

See Notes to Condensed Consolidated Financial Statements

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National Fuel Gas Company

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

Principles of Consolidation. The Company consolidates all entities in which it has a controlling financial interest. All significant intercompany balances and transactions are eliminated.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications and Revisions. Certain prior year amounts have been reclassified to conform with current year presentation.

Revisions were made on the Consolidated Statement of Cash Flows for the nine months ended June 30, 2012 to reflect non-cash investing activities embedded in Accounts Payable on the Consolidated Balance Sheets at June 30, 2012 and September 30, 2011. These revisions increased the operating cash flows related to the change in Accounts Payable for the nine months ended June 30, 2012 by $32.8 million and decreased investing cash flows related to Capital Expenditures by the same amounts.

In the subsequent period, revisions will be made on the Consolidated Statement of Cash Flows for the fiscal years ended September 30, 2012 and September 30, 2011 to reflect non-cash investing activities embedded in Accounts Payable on the Consolidated Balance Sheets for the respective periods. The revisions for the fiscal years ended September 30, 2012 and September 30, 2011 will decrease operating cash flows by $1.8 million and $6.6 million, respectively, and increase investing cash flows related to Capital Expenditures by the same amounts. The revisions in the Consolidated Statement of Cash Flows noted above represent errors that are not deemed material, individually or in the aggregate, to the prior period consolidated financial statements.

Earnings for Interim Periods. The Company, in its opinion, has included all adjustments (which consist of only normally recurring adjustments, unless otherwise disclosed in this Form 10-Q) that are necessary for a fair statement of the results of operations for the reported periods. The consolidated financial statements and notes thereto, included herein, should be read in conjunction with the financial statements and notes for the years ended September 30, 2012, 2011 and 2010 that are included in the Company's 2012 Form 10-K. The consolidated financial statements for the year ended September 30, 2013 will be audited by the Company's independent registered public accounting firm after the end of the fiscal year.

The earnings for the nine months ended June 30, 2013 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2013. Most of the business of the Utility and Energy Marketing segments is seasonal in nature and is influenced by weather conditions. Due to the seasonal nature of the heating business in the Utility and Energy Marketing segments, earnings during the winter months normally represent a substantial part of the earnings that those segments are expected to achieve for the entire fiscal year. The Company’s business segments are discussed more fully in Note 7 – Business Segment Information.

Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of generally three months or less to be cash equivalents.

The Company has accounts payable and accrued liabilities recorded on its Consolidated Balance Sheets that are related to capital expenditures. These amounts represent non-cash investing activities at the balance sheet date. Accordingly, they are excluded from the Consolidated Statement of Cash Flows when they are recorded as liabilities and included in the Consolidated Statement of Cash Flows when they are paid in the subsequent period. The following table summarizes the Company’s non-cash capital expenditures recorded as Accounts Payable and Other Accruals and Current Liabilities on the Consolidated Balance Sheet:



	At June 30,				At September 30,
	2013		2012		2012		2011
		(Thousands)
Non-cash Capital Expenditures	$	58,632	$	118,624	$	67,503	$	125,115

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Hedging Collateral Deposits. This is an account title for cash held in margin accounts funded by the Company to serve as collateral for hedging positions. The Company had hedging collateral deposits of $0.7 million and $0.4 million related to its exchange-traded futures contracts at June 30, 2013 and September 30, 2012, respectively. In accordance with its accounting policy, the Company does not offset hedging collateral deposits paid or received against related derivative financial instruments liability or asset balances.

Gas Stored Underground - Current. In the Utility segment, gas stored underground – current is carried at lower of cost or market, on a LIFO method. Gas stored underground – current normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. In the Utility segment, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets under the caption “Other Accruals and Current Liabilities.” Such reserve, which amounted to $22.0 million at June 30, 2013, is reduced to zero by September 30 of each year as the inventory is replenished.

Property, Plant and Equipment. In the Company’s Exploration and Production segment, oil and gas property acquisition, exploration and development costs are capitalized under the full cost method of accounting. Under this methodology, all costs associated with property acquisition, exploration and development activities are capitalized, including internal costs directly identified with acquisition, exploration and development activities. The internal costs that are capitalized do not include any costs related to production, general corporate overhead, or similar activities. The Company does not recognize any gain or loss on the sale or other disposition of oil and gas properties unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center.

Capitalized costs include costs related to unproved properties, which are excluded from amortization until proved reserves are found or it is determined that the unproved properties are impaired. Such costs amounted to $143.8 million and $146.1 million at June 30, 2013 and September 30, 2012, respectively. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the pool of capitalized costs being amortized.

Capitalized costs are subject to the SEC full cost ceiling test. The ceiling test, which is performed each quarter, determines a limit, or ceiling, on the amount of property acquisition, exploration and development costs that can be capitalized. The ceiling under this test represents (a) the present value of estimated future net cash flows, excluding future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, using a discount factor of 10%, which is computed by applying prices of oil and gas (as adjusted for hedging) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet, less estimated future expenditures, plus (b) the cost of unevaluated properties not being depleted, less (c) income tax effects related to the differences between the book and tax basis of the properties. The natural gas and oil prices used to calculate the full cost ceiling are based on an unweighted arithmetic average of the first day of the month oil and gas prices for each month within the twelve-month period prior to the end of the reporting period. If capitalized costs, net of accumulated depreciation, depletion and amortization and related deferred income taxes, exceed the ceiling at the end of any quarter, a permanent impairment is required to be charged to earnings in that quarter. At June 30, 2013, the ceiling exceeded the book value of the oil and gas properties by approximately $199.1 million.

Accumulated Other Comprehensive Loss. The components of Accumulated Other Comprehensive Loss, net of related tax effect, are as follows (in thousands):



	At June 30, 2013		At September 30, 2012
Funded Status of the Pension and Other Post-Retirement
Benefit Plans	$	(100,561)	$	(100,561)
Net Unrealized Gain (Loss) on Derivative Financial Instruments		36,865		(1,602)
Net Unrealized Gain on Securities Available for Sale		5,087		3,143
Accumulated Other Comprehensive Loss	$	(58,609)	$	(99,020)

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Other Current Assets. The components of the Company’s Other Current Assets are as follows (in thousands):



	At June 30, 2013		At September 30, 2012

Prepayments	$	10,472	$	8,316
Prepaid Property and Other Taxes		10,461		14,455
Federal Income Taxes Receivable		-		268
State Income Taxes Receivable		1,058		2,065
Fair Values of Firm Commitments		1,384		1,291
Regulatory Assets		22,830		29,726
	$	46,205	$	56,121

Other Accruals and Current Liabilities. The components of the Company’s Other Accruals and Current Liabilities are as follows (in thousands):



	At June 30, 2013		At September 30, 2012

Accrued Capital Expenditures	$	49,348	$	36,460
Regulatory Liabilities		13,318		18,289
Reserve for Gas Replacement		22,032		-
Other		25,235		24,350
	$	109,933	$	79,099

Earnings Per Common Share. Basic earnings per common share is computed by dividing net income available for common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of determining earnings per common share, the only potentially dilutive securities the Company has outstanding are stock options, SARs and restricted stock units. The diluted weighted average shares outstanding shown on the Consolidated Statements of Income reflects the potential dilution as a result of these securities as determined using the Treasury Stock Method. Stock options, SARs and restricted stock units that are antidilutive are excluded from the calculation of diluted earnings per common share. There were 180,552 and 196,121 securities excluded as being antidilutive for the quarter and nine months ended June 30, 2013, respectively. There were 976,870 and 833,170 securities excluded as being antidilutive for the quarter and nine months ended June 30, 2012, respectively.

Stock-Based Compensation. During the nine months ended June 30, 2013, the Company granted 412,970 SARs having a weighted average exercise price of $53.05 per share. The weighted average grant date fair value of these SARs was $10.66 per share. These SARs may be settled in cash, in shares of common stock of the Company, or in a combination of cash and shares of common stock of the Company, as determined by the Company. These SARs are considered equity awards under the current authoritative guidance for stock-based compensation. The accounting for those SARs is the same as the accounting for stock options. The SARs granted during the nine months ended June 30, 2013 vest and become exercisable annually in one-third increments. The weighted average grant date fair value of these SARs granted during the nine months ended June 30, 2013 was estimated on the date of grant using the same accounting treatment that is applied for stock options. There were no stock options granted during the nine months ended June 30, 2013.

The Company granted 255,604 performance based restricted stock units during the nine months ended June 30, 2013. The weighted average fair value of such performance based restricted stock units was $49.51 per share for the nine months ended June 30, 2013. The performance based restricted stock units granted during the nine months ended June 30, 2013 must meet a performance condition over the performance cycle of October 1, 2012 to September 30, 2015. The performance condition over the performance cycle, generally stated, is the Company’s total return on capital as compared to the same metric for companies in the Natural Gas Distribution and Integrated Natural Gas Companies group as calculated and reported in the Monthly Utility Reports of AUS, Inc., a leading industry consultant. The number of performance based restricted stock units that will vest will depend upon the Company’s performance relative to the report group and not upon the absolute level of return achieved by the Company. The Company also granted 39,700 non-performance based restricted stock units during the nine months ended June 30, 2013. The weighted average fair value of such non-performance based restricted stock units was $50.13 per share for the nine months ended June 30, 2013.

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Restricted stock units, both performance based and non-performance based, represent the right to receive shares of common stock of the Company (or the equivalent value in cash or a combination of cash and shares of common stock of the Company, as determined by the Company) at the end of a specified time period. The performance based and non-performance based restricted stock units do not entitle the participant to receive dividends during the vesting period. The accounting for performance based and non-performance based restricted stock units is the same as the accounting for restricted share awards, except that the fair value at the date of grant of the restricted stock units must be reduced by the present value of forgone dividends over the vesting term of the award. There were no restricted share awards granted during the nine months ended June 30, 2013.

New Authoritative Accounting and Financial Reporting Guidance. In December 2011, the FASB issued authoritative guidance requiring enhanced disclosures regarding offsetting assets and liabilities. Companies are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This authoritative guidance will be effective as of the Company’s first quarter of fiscal 2014 and is not expected to have a significant impact on the Company’s financial statements.

In February 2013, the FASB issued authoritative guidance requiring enhanced disclosures regarding the reporting of amounts reclassified out of accumulated other comprehensive income. The authoritative guidance requires parenthetical disclosure on the face of the financial statements or a single footnote that would provide more detail about the components of reclassification adjustments that are reclassified in their entirety to net income. If a component of a reclassification adjustment is not reclassified in its entirety to net income, a cross reference would be made to the footnote disclosure that provides a more thorough discussion of the component involved in that reclassification adjustment. This authoritative guidance will be effective as of the Company’s first quarter of fiscal 2014. The Company does not expect this guidance to have a material impact.

Note 2 – 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, 2013 and September 30, 2012. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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Recurring Fair Value Measures	At fair value as of June 30, 2013
							Netting
(Thousands of Dollars)	Level 1		Level 2		Level 3		Adjustments⁽¹⁾		Total⁽¹⁾
Assets:
Cash Equivalents – Money Market Mutual Funds	$	122,024	$	-	$	-	$	-	$	122,024
Derivative Financial Instruments:
Commodity Futures Contracts – Gas		2,252		-		-		(1,806)		446
Over the Counter Swaps – Gas		-		63,255		-		(5,093)		58,162
Over the Counter Swaps – Oil		-		9,078		17		(3,260)		5,835
Other Investments:
Balanced Equity Mutual Fund		30,125		-		-		-		30,125
Common Stock – Financial Services Industry		6,331		-		-		-		6,331
Other Common Stock		295		-		-		-		295
Hedging Collateral Deposits		694		-		-		-		694
Total	$	161,721	$	72,333	$	17	$	(10,159)	$	223,912

Liabilities:
Derivative Financial Instruments:
Commodity Futures Contracts – Gas	$	1,806	$	-	$	-	$	(1,806)	$	-
Over the Counter Swaps – Gas		-		2,626		-		(5,093)		(2,467)
Over the Counter Swaps – Oil		-		-		7,944		(3,260)		4,684
Total	$	1,806	$