Edgar Filing: NATIONAL FUEL GAS CO

79eba6dc04b5471

Table of Contents

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 December 31, 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 ☑ 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 ☑ 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 ☑

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 January 31, 2014: 83,771,511 shares.

Table of Contents

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.
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



2013 Form 10-K		The Company’s Annual Report on Form 10-K for the year ended September 30, 2013
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.

Table of Contents

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.
FERC 7(c) application		An application to the FERC under Section 7(c) of the federal Natural Gas Act for authority to construct, operate (and provide services through) facilities to transport or store natural gas in interstate commerce.
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.
ICE		Intercontinental Exchange. An exchange which maintains a futures market for crude oil and 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.
LDC		Local distribution company
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.

Table of Contents

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.
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.

Table of Contents

INDEX

Part I. Financial Information		Page

Item 1. Financial Statements (Unaudited)

a. Consolidated Statements of Income and Earnings Reinvested in the Business - Three Months Ended December 31, 2013 and 2012		6
b. Consolidated Statements of Comprehensive Income – Three Months Ended December 31, 2013 and 2012		7
c. Consolidated Balance Sheets – December 31, 2013 and September 30, 2013		8 – 9
d. Consolidated Statements of Cash Flows – Three Months Ended December 31, 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		27 – 45
Item 3. Quantitative and Qualitative Disclosures About Market Risk		46
Item 4. Controls and Procedures		46

Part II. Other Information

Item 1. Legal Proceedings		46
Item 1 A. Risk Factors		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3. Defaults Upon Senior Securities		•
Item 4. Mine Safety Disclosures		•
Item 5. Other Information		•
Item 6. Exhibits		47 – 48
Signatures		49

•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.

Table of Contents

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
	December 31,
(Thousands of Dollars, Except Per Common Share Amounts)	2013		2012
INCOME
Operating Revenues	$	550,072	$	452,854

Operating Expenses
Purchased Gas		167,605		121,919
Operation and Maintenance		107,846		107,732
Property, Franchise and Other Taxes		20,926		19,664
Depreciation, Depletion and Amortization		93,114		72,331
		389,491		321,646
Operating Income		160,581		131,208
Other Income (Expense):
Interest Income		702		1,386
Other Income		228		1,415
Interest Expense on Long-Term Debt		(22,885)		(21,448)
Other Interest Expense		(949)		(1,068)
Income Before Income Taxes		137,677		111,493
Income Tax Expense		55,425		43,549

Net Income Available for Common Stock		82,252		67,944

EARNINGS REINVESTED IN THE BUSINESS
Balance at Beginning of Period		1,442,617		1,306,284
		1,524,869		1,374,228

Dividends on Common Stock		(31,403)		(30,463)
Balance at December 31	$	1,493,466	$	1,343,765

Earnings Per Common Share:
Basic:
Net Income Available for Common Stock	$	0.98	$	0.81
Diluted:
Net Income Available for Common Stock	$	0.97	$	0.81
Weighted Average Common Shares Outstanding:
Used in Basic Calculation		83,707,687		83,390,278
Used in Diluted Calculation		84,659,001		84,006,050

Dividends Per Common Share:
Dividends Declared	$	0.375	$	0.365

See Notes to Condensed Consolidated Financial Statements

Table of Contents

National Fuel Gas Company

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended
	December 31,
(Thousands of Dollars)	2013		2012

Net Income Available for Common Stock	$	82,252	$	67,944
Other Comprehensive Income (Loss), Before Tax:
Unrealized Gain on Securities Available for Sale
Arising During the Period		2,498		789
Unrealized Gain on Derivative Financial Instruments
Arising During the Period		2,778		35,350
Reclassification Adjustment for Realized Gains on
Derivative Financial Instruments in Net Income		(10,183)		(11,584)
Other Comprehensive Income (Loss), Before Tax		(4,907)		24,555
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale Arising During the Period		925		295
Income Tax Expense Related to Unrealized Gain
on Derivative Financial Instruments Arising During
the Period		1,271		14,738
Reclassification Adjustment for Income Tax Expense on
Realized Gains from Derivative Financial Instruments
in Net Income		(4,299)		(4,854)
Income Taxes – Net		(2,103)		10,179
Other Comprehensive Income (Loss)		(2,804)		14,376
Comprehensive Income	$	79,448	$	82,320

See Notes to Condensed Consolidated Financial Statements

Table of Contents

National Fuel Gas Company

Consolidated Balance Sheets

(Unaudited)



		December 31,		September 30,
		2013		2013

(Thousands of Dollars)

ASSETS
Property, Plant and Equipment	$	7,468,200	$	7,313,203
Less - Accumulated Depreciation, Depletion
and Amortization		2,242,521		2,161,477
		5,225,679		5,151,726
Current Assets
Cash and Temporary Cash Investments		23,880		64,858
Hedging Collateral Deposits		-		1,094
Receivables – Net of Allowance for Uncollectible Accounts
of $31,445 and $27,144 Respectively		164,074		133,182
Unbilled Revenue		80,828		19,483
Gas Stored Underground		36,047		51,484
Materials and Supplies - at average cost		27,364		29,904
Unrecovered Purchased Gas Costs		9,001		12,408
Other Current Assets		45,197		56,905
Deferred Income Taxes		23,127		79,359
		409,518		448,677

Other Assets
Recoverable Future Taxes		162,296		163,355
Unamortized Debt Expense		16,065		16,645
Other Regulatory Assets		257,697		252,568
Deferred Charges		9,818		9,382
Other Investments		99,433		96,308
Goodwill		5,476		5,476
Prepaid Post-Retirement Benefit Costs		24,865		22,774
Fair Value of Derivative Financial Instruments		53,678		48,989
Other		459		2,447
		629,787		617,944

Total Assets	$	6,264,984	$	6,218,347

See Notes to Condensed Consolidated Financial Statements

Table of Contents

National Fuel Gas Company

Consolidated Balance Sheets

(Unaudited)



		December 31,		September 30,
		2013		2013
(Thousands of Dollars)

CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders’ Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
And Outstanding – 83,741,402 Shares and
83,661,969 Shares, Respectively	$	83,741	$	83,662
Paid in Capital		695,571		687,684
Earnings Reinvested in the Business		1,493,466		1,442,617
Accumulated Other Comprehensive Loss		(22,038)		(19,234)
Total Comprehensive Shareholders’ Equity		2,250,740		2,194,729
Long-Term Debt, Net of Current Portion		1,649,000		1,649,000
Total Capitalization		3,899,740		3,843,729

Current and Accrued Liabilities
Notes Payable to Banks and Commercial Paper		-		-
Current Portion of Long-Term Debt		-		-
Accounts Payable		121,615		105,283
Amounts Payable to Customers		8,884		12,828
Dividends Payable		31,403		31,373
Interest Payable on Long-Term Debt		18,195		29,960
Customer Advances		18,678		21,959
Customer Security Deposits		15,690		16,183
Other Accruals and Current Liabilities		102,709		83,946
Fair Value of Derivative Financial Instruments		7,161		639
		324,335		302,171

Deferred Credits
Deferred Income Taxes		1,318,577		1,347,007
Taxes Refundable to Customers		84,781		85,655
Unamortized Investment Tax Credit		1,470		1,579
Cost of Removal Regulatory Liability		163,238		157,622
Other Regulatory Liabilities		69,897		61,549
Pension and Other Post-Retirement Liabilities		139,664		158,014
Asset Retirement Obligations		120,122		119,511
Other Deferred Credits		143,160		141,510
		2,040,909		2,072,447
Commitments and Contingencies		-		-

Total Capitalization and Liabilities	$	6,264,984	$	6,218,347

See Notes to Condensed Consolidated Financial Statements

Table of Contents

National Fuel Gas Company

Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended
	December 31,
(Thousands of Dollars)	2013		2012

OPERATING ACTIVITIES
Net Income Available for Common Stock	$	82,252	$	67,944
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization		93,114		72,331
Deferred Income Taxes		30,093		41,000
Excess Tax Benefits Associated with Stock-Based
Compensation Awards		(3,149)		-
Stock-Based Compensation		2,960		3,302
Other		(2,095)		4,621
Change in:
Hedging Collateral Deposits		1,094		364
Receivables and Unbilled Revenue		(92,261)		(55,261)
Gas Stored Underground and Materials and Supplies		17,977		3,941
Unrecovered Purchased Gas Costs		3,407		-
Other Current Assets		12,764		7,013
Accounts Payable		39,382		6,163
Amounts Payable to Customers		(3,944)		(4,686)
Customer Advances		(3,281)		(1,987)
Customer Security Deposits		(493)		984
Other Accruals and Current Liabilities		12,347		(5,667)
Other Assets		(6,268)		(597)
Other Liabilities		(7,205)		6,495
Net Cash Provided by Operating Activities		176,694		145,960

INVESTING ACTIVITIES
Capital Expenditures		(194,920)		(162,981)
Other		3,615		(3,533)
Net Cash Used in Investing Activities		(191,305)		(166,514)

FINANCING ACTIVITIES
Changes in Notes Payable to Banks and Commercial Paper		-		67,000
Excess Tax Benefits Associated with Stock-Based
Compensation Awards		3,149		-
Dividends Paid on Common Stock		(31,373)		(60,879)
Net Proceeds from Issuance of Common Stock		1,857		956
Net Cash Provided by (Used in) Financing Activities		(26,367)		7,077

Net Decrease in Cash and Temporary Cash Investments		(40,978)		(13,477)

Cash and Temporary Cash Investments at October 1		64,858		74,494

Cash and Temporary Cash Investments at December 31	$	23,880	$	61,017

Supplemental Disclosure of Cash Flow Information
Non-Cash Investing Activities:
Non-Cash Capital Expenditures	$	52,738	$	86,144

See Notes to Condensed Consolidated Financial Statements

Table of Contents

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

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, 2013, 2012 and 2011 that are included in the Company's 2013 Form 10-K. The consolidated financial statements for the year ended September 30, 2014 will be audited by the Company's independent registered public accounting firm after the end of the fiscal year.

The earnings for the three months ended December 31, 2013 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2014. 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.

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. At December 31, 2013, the Company did not have any hedging collateral deposits. At September 30, 2013, the Company had hedging collateral deposits of $1.1 million related to its exchange-traded futures contracts. 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 $7.0 million at December 31, 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 $130.3 million and $106.1 million at December 31, 2013 and September 30, 2013, respectively. All costs related to unproved properties

Table of Contents

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 December 31, 2013, the ceiling exceeded the book value of the oil and gas properties by approximately $166.9 million.

Accumulated Other Comprehensive Loss. The components of Accumulated Other Comprehensive Loss and changes for the three months ended December 31, 2013, net of related tax effect, are as follows (amounts in parentheses indicate debits) (in thousands):



Three Months Ended December 31, 2013
					Funded Status of
	Gains and Losses				the Pension and
	on Derivative		Gains and Losses		Other Post-
	Financial		on Securities		Retirement Benefit
	Instruments		Available for Sale		Plans		Total
Balance at October 1, 2013	$	30,722	$	6,337	$	(56,293)	$	(19,234)

Other Comprehensive Gain
Before Reclassifications		1,507		1,573		-		3,080

Amounts Reclassified From
Other Comprehensive Loss		(5,884)		-		-		(5,884)

Balance at December 31, 2013	$	26,345	$	7,910	$	(56,293)	$	(22,038)

Reclassifications Out of Accumulated Other Comprehensive Loss. The details about the reclassification adjustments out of accumulated other comprehensive loss for the three months ended December 31, 2013 are as follows (amounts in parentheses indicate debits to the income statement) (in thousands):



Three Months Ended December 31, 2013

Details About Accumulated		Amount of Gain or (Loss)	Affected Line Item in the
Other Comprehensive		Reclassified from Accumulated	Statement Where Net Income
Loss Components		Other Comprehensive Loss	is Presented
Gains (Losses) on Derivative Financial
Instrument Cash Flow Hedges:

Commodity Contracts	$	9,787	Operating Revenues
Commodity Contracts		396	Purchased Gas
		10,183	Total Before Income Tax
		(4,299)	Income Tax Expense
	$	5,884	Net of Tax

Table of Contents

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



	At December 31, 2013		At September 30, 2013

Prepayments	$	6,142	$	10,605
Prepaid Property and Other Taxes		16,106		13,079
Federal Income Taxes Receivable		-		1,122
State Income Taxes Receivable		-		3,275
Fair Values of Firm Commitments		-		1,829
Regulatory Assets		22,949		26,995
	$	45,197	$	56,905

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



	At December 31, 2013		At September 30, 2013

Accrued Capital Expenditures	$	35,749	$	41,100
Regulatory Liabilities		17,597		20,013
Reserve for Gas Replacement		7,003		-
Federal Income Taxes Payable		14,563		-
State Income Taxes Payable		1,902		-
Other		25,895		22,833
	$	102,709	$	83,946

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 potentially dilutive securities the Company has outstanding are stock options, SARs, restricted stock units and performance shares. 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, restricted stock units and performance shares that are antidilutive are excluded from the calculation of diluted earnings per common share. There were 272 and 422,681 securities excluded as being antidilutive for the quarters ended December 31, 2013 and 2012, respectively.

Stock-Based Compensation. The Company granted 116,090 performance shares during the quarter ended December 31, 2013. The weighted average fair value of such performance shares was $67.16 per share for the quarter ended December 31, 2013. Performance shares represent an award constituting units denominated in common stock of the Company (or the equivalent value in cash, as determined by the Company), the number of which such units may be adjusted over a performance cycle based upon the extent to which performance goals have been satisfied. The performance shares do not entitle the participant to receive dividends during the vesting period.

Half of the performance shares granted during the quarter ended December 31, 2013 must meet a performance goal related to relative return on capital over the performance cycle of October 1, 2013 to September 30, 2016. The performance goal over the performance cycle is the Company’s total return on capital relative to the total return on capital of other companies in a group selected by the Compensation Committee (“Report Group”). Total return on capital for a given company means the average of the Report Group companies’ returns on capital for each twelve month period corresponding to each of the Company’s fiscal years during the performance cycle, based on data reported for the Report Group companies in the Bloomberg database. The number of these performance shares that will vest and be paid 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 fair value of these performance shares is calculated by multiplying the expected number of shares that will be issued by the average market price of Company common stock on the date of grant reduced by the present value of forgone dividends over the vesting term of the award. The fair value is recorded as compensation expense over the vesting term of the award. The other half of the performance shares granted during the quarter ended December 31, 2013 must meet a performance goal related to total shareholder return over the performance cycle of October 1, 2013 to September 30, 2016. The performance goal over the performance cycle is the Company’s three-year total shareholder return relative to the three-year total shareholder return of the other companies in the Report Group. Three-year

Table of Contents

shareholder return for a given company will be based on the data reported for that company (with the starting and ending stock prices over the performance cycle calculated as the average closing stock price for the prior calendar month and with dividends reinvested in that company’s securities at each ex-dividend date) in the Bloomberg database. The number of these performance shares that will vest and be paid 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 fair value price at the date of grant for these performance shares is determined using a Monte Carlo simulation technique, which includes a reduction in value for the present value of forgone dividends over the vesting term of the award. This price is multiplied by the number of performance shares awarded, the result of which is recorded as compensation expense over the vesting term of the award.

The Company granted 80,951 non-performance based restricted stock units during the quarter ended December 31, 2013. The weighted average fair value of such non-performance based restricted stock units was $65.23 per share for the quarter ended December 31, 2013. Restricted stock units 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. These non-performance based restricted stock units do not entitle the participant to receive dividends during the vesting period. The accounting for 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.

The Company did not grant any stock options, SARs or restricted share awards during the quarter ended December 31, 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 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 became effective for the quarter ended December 31, 2013 and there was no impact to the Company’s consolidated financial statements and disclosures.

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 became effective for the quarter ended December 31, 2013. The Company has updated its financial statements to reflect the new guidance.

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 December 31, 2013 and September 30, 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. The fair value presentation for over the counter swaps has been changed to combine gas and oil swaps at both December 31, 2013 and September 30, 2013. In the September 30, 2013 Form 10-K, gas swaps were reported separately from oil swaps. This change in presentation was made because a significant number of the counterparties enter both gas and oil swap agreements with the Company.

Table of Contents

Recurring Fair Value Measures	At fair value as of December 31, 2013
							Netting
(Thousands of Dollars)	Level 1		Level 2		Level 3		Adjustments(1)		Total(1)
Assets:
Cash Equivalents – Money Market Mutual Funds	$	16,798	$	-	$	-	$	-	$	16,798
Derivative Financial Instruments:
Commodity Futures Contracts – Gas		2,928		-		-		(979)		1,949
Over the Counter Swaps – Gas and Oil		-		76,581		-		(24,852)		51,729
Other Investments:
Balanced Equity Mutual Fund		33,674		-		-		-		33,674
Common Stock – Financial Services Industry		7,797		-		-		-		7,797
Other Common Stock		327		-		-		-		327
Hedging Collateral Deposits		-		-		-		-		-
Total	$	61,524	$	76,581	$	-	$	(25,831)	$	112,274

Liabilities:
Derivative Financial Instruments:
Commodity Futures Contracts – Gas	$	979	$	-	$	-	$	(979)	$	-
Over the Counter Swaps – Gas and Oil		-		30,171		1,842		(24,852)		7,161
Total	$	979	$	30,171	$	1,842	$	(25,831)	$	7,161

Total Net Assets/(Liabilities)	$	60,545	$	46,410	$	(1,842)	$	-	$	105,113

Recurring Fair Value Measures

At fair value as of September 30, 2013

Netting

(Thousands of Dollars)

Level 1

Level 2

Level 3

Adjustments(1)

Total(1)

Assets:

Cash Equivalents – Money Market Mutual Funds

51,332