NATIONAL FUEL GAS CO, 10-K filed on 11/18/2016
Annual Report
Document And Entity Information (USD $)
12 Months Ended
Sep. 30, 2016
Oct. 31, 2016
Mar. 31, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
NATIONAL FUEL GAS CO 
 
 
Entity Central Index Key
0000070145 
 
 
Current Fiscal Year End Date
--09-30 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
85,161,752 
 
Entity Public Float
 
 
$ 4,142,887,000 
Entity Current Reporting Status
Yes 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Consolidated Statements Of Income And Earnings Reinvested In The Business (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2014
INCOME
 
 
 
Operating Revenues
$ 1,452,416 
$ 1,760,913 
$ 2,113,081 
Operating Expenses:
 
 
 
Purchased Gas
147,982 
349,984 
605,838 
Property, Franchise and Other Taxes
81,714 
89,564 
90,711 
Depreciation, Depletion and Amortization
249,417 
336,158 
383,781 
Impairment of Oil and Gas Producing Properties
948,307 
1,126,257 
Total Operating Expenses
1,868,934 
2,371,966 
1,543,408 
Operating Income (Loss)
(416,518)
(611,053)
569,673 
Other Income (Expense):
 
 
 
Other Income
9,820 
8,039 
9,461 
Interest Income
4,235 
3,922 
4,170 
Interest Expense on Long-Term Debt
(117,347)
(95,916)
(90,194)
Other Interest Expense
(3,697)
(3,555)
(4,083)
Income (Loss) Before Income Taxes
(523,507)
(698,563)
489,027 
Income Tax Expense (Benefit)
(232,549)
(319,136)
189,614 
Net Income (Loss) Available for Common Stock
(290,958)
(379,427)
299,413 
EARNINGS REINVESTED IN THE BUSINESS
 
 
 
Balance at Beginning of Year
1,103,200 
1,614,361 
1,442,617 
Beginning Retained Earnings Unappropriated And Current Period Net Income Loss
812,242 
1,234,934 
1,742,030 
Dividends on Common Stock
(135,881)
(131,734)
(127,669)
Balance at End of Year
676,361 
1,103,200 
1,614,361 
Earnings Per Common Share, Basic:
 
 
 
Net Income (Loss) Available for Common Stock (in usd per share)
$ (3.43)
$ (4.50)
$ 3.57 
Earnings Per Common Share, Diluted:
 
 
 
Net Income (Loss) Available for Common Stock (in usd per share)
$ (3.43)
$ (4.50)
$ 3.52 
Weighted Average Number of Shares Outstanding:
 
 
 
Used in Basic Calculation
84,847,993 
84,387,755 
83,929,989 
Used in Diluted Calculation
84,847,993 
84,387,755 
84,952,347 
Utility and Energy Marketing [Member]
 
 
 
INCOME
 
 
 
Operating Revenues
624,602 
860,618 
1,103,149 
Operating Expenses:
 
 
 
Operation and Maintenance
192,512 
203,249 
196,534 
Exploration and Production and Other Category [Member]
 
 
 
INCOME
 
 
 
Operating Revenues
611,766 
696,709 
808,595 
Operating Expenses:
 
 
 
Operation and Maintenance
160,201 
184,024 
188,622 
Pipeline and Storage and Gathering [Member]
 
 
 
INCOME
 
 
 
Operating Revenues
216,048 
203,586 
201,337 
Operating Expenses:
 
 
 
Operation and Maintenance
$ 88,801 
$ 82,730 
$ 77,922 
Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net Income (Loss) Available for Common Stock
$ (290,958)
$ (379,427)
$ 299,413 
Other Comprehensive Income (Loss), Before Tax:
 
 
 
Decrease in the Funded Status of the Pension and Other Post-Retirement Benefit Plans
(21,378)
(31,538)
(8,280)
Reclassification Adjustment for Amortization of Prior Year Funded Status of the Pension and Other Post-Retirement Benefit Plans
10,068 
9,217 
9,203 
Unrealized Gain (Loss) on Securities Available for Sale Arising During the Period
1,524 
(3,234)
3,863 
Unrealized Gain on Derivative Financial Instruments Arising During the Period
60,493 
381,018 
5,334 
Reclassification Adjustment for Realized Gains on Securities Available for Sale in Net Income
(1,374)
(591)
(662)
Reclassification Adjustment for Realized (Gains) Losses on Derivative Financial Instruments in Net Income
(220,919)
(184,953)
17,647 
Other Comprehensive Income (Loss), Before Tax
(171,586)
169,919 
27,105 
Income Tax Benefit Related to the Decrease in the Funded Status of the Pension and Other Post-Retirement Benefit Plans
(8,351)
(11,922)
(2,720)
Reclassification Adjustment for Income Tax Benefit Related to the Amortization of the Prior Year Funded Status of the Pension and Other Post-Retirement Benefit Plans
3,723 
3,375 
3,370 
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Securities Available for Sale Arising During the Period
592 
(1,195)
1,398 
Income Tax Expense Related to Unrealized Gain on Derivative Financial Instruments Arising During the Period
18,648 
160,872 
529 
Reclassification Adjustment for Income Tax Expense on Realized Gains from Securities Available for Sale in Net Income
(527)
(217)
(242)
Reclassification Adjustment for Income Tax Benefit (Expense) on Realized Losses (Gains) from Derivative Financial Instruments in Net Income
(86,659)
(78,345)
9,515 
Income Taxes - Net
(72,574)
72,568 
11,850 
Other Comprehensive Income (Loss)
(99,012)
97,351 
15,255 
Comprehensive Income (Loss)
$ (389,970)
$ (282,076)
$ 314,668 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2016
Sep. 30, 2015
ASSETS
 
 
Property, Plant and Equipment
$ 9,539,581 
$ 9,261,323 
Less - Accumulated Depreciation, Depletion and Amortization
5,085,099 
3,929,428 
Property, Plant and Equipment, Net, Total
4,454,482 
5,331,895 
Current Assets
 
 
Cash and Temporary Cash Investments
129,972 
113,596 
Hedging Collateral Deposits
1,484 1
11,124 1
Receivables - Net of Allowance for Uncollectible Accounts of $21,109 and $29,029, Respectively
133,201 
105,004 
Unbilled Revenue
18,382 
20,746 
Gas Stored Underground
34,332 
34,252 
Materials and Supplies - at average cost
33,866 
30,414 
Unrecovered Purchased Gas Costs
2,440 
Other Current Assets
59,354 
60,665 
Total Current Assets
413,031 
375,801 
Other Assets
 
 
Recoverable Future Taxes
177,261 
168,214 
Unamortized Debt Expense
1,688 
2,218 
Other Regulatory Assets
320,750 
278,227 
Deferred Charges
20,978 
15,129 
Other Investments
110,664 
92,990 
Goodwill
5,476 
5,476 
Prepaid Post-Retirement Benefit Costs
17,649 
24,459 
Fair Value of Derivative Financial Instruments
113,804 
270,363 
Other
604 
167 
Total Other Assets
768,874 
857,243 
Total Assets
5,636,387 
6,564,939 
Capitalization:
 
 
Common Stock, $1 Par Value Authorized - 200,000,000 Shares; Issued and Outstanding - 85,118,886 Shares and 84,594,383 Shares, Respectively
85,119 
84,594 
Paid In Capital
771,164 
744,274 
Earnings Reinvested in the Business
676,361 
1,103,200 
Accumulated Other Comprehensive Income (Loss)
(5,640)
93,372 
Total Comprehensive Shareholders' Equity
1,527,004 
2,025,440 
Long-term Debt, Net of Unamortized Discount and Debt Issuance Costs
2,086,252 
2,084,009 
Total Capitalization
3,613,256 
4,109,449 
Current and Accrued Liabilities
 
 
Notes Payable to Banks and Commercial Paper
Current Portion of Long-Term Debt
2
2
Accounts Payable
108,056 
180,388 
Amounts Payable to Customers
19,537 
56,778 
Dividends Payable
34,473 
33,415 
Interest Payable on Long-Term Debt
34,900 
36,200 
Customer Advances
14,762 
16,236 
Customer Security Deposits
16,019 
16,490 
Other Accruals and Current Liabilities
74,430 
96,557 
Fair Value of Derivative Financial Instruments
1,560 
10,076 
Total Current and Accrued Liabilities
303,737 
446,140 
Deferred Credits
 
 
Deferred Income Taxes
823,795 
1,137,962 
Taxes Refundable to Customers
93,318 
89,448 
Unamortized Investment Tax Credit
383 
731 
Cost of Removal Regulatory Liability
193,424 
184,907 
Other Regulatory Liabilities
99,789 
108,617 
Pension and Other Post-Retirement Liabilities
277,113 
202,807 
Asset Retirement Obligations
112,330 
156,805 
Other Deferred Credits
119,242 
128,073 
Total Deferred Credits
1,719,394 
2,009,350 
Commitments and Contingencies (Note I)
Total Capitalization and Liabilities
$ 5,636,387 
$ 6,564,939 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2016
Sep. 30, 2015
Statement of Financial Position [Abstract]
 
 
Receivables, Allowance for Uncollectible Accounts
$ 21,109 
$ 29,029 
Common Stock, Par Value
$ 1 
$ 1 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares Issued
85,118,886 
84,594,383 
Common Stock, Shares Outstanding
85,118,886 
84,594,383 
Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2014
Operating Activities
 
 
 
Net Income (Loss) Available for Common Stock
$ (290,958)
$ (379,427)
$ 299,413 
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
 
 
 
Impairment of Oil and Gas Producing Properties
948,307 
1,126,257 
Depreciation, Depletion and Amortization
249,417 
336,158 
383,781 
Deferred Income Taxes
(246,794)
(357,587)
142,415 
Excess Tax Benefits Associated with Stock-Based Compensation Awards
(1,868)
(9,064)
(4,641)
Stock-Based Compensation
5,755 
3,208 
11,763 
Other
12,620 
9,823 
14,063 
Change in:
 
 
 
Hedging Collateral Deposits
9,640 
(8,390)
(1,640)
Receivables and Unbilled Revenue
(6,408)
51,638 
(22,781)
Gas Stored Underground and Materials and Supplies
(3,532)
3,438 
13,285 
Unrecovered Purchased Gas Costs
(2,440)
12,408 
Other Current Assets
3,179 
3,150 
(3,630)
Accounts Payable
(40,664)
34,687 
15,149 
Amounts Payable to Customers
(37,241)
23,033 
20,917 
Customer Advances
(1,474)
(2,769)
(2,954)
Customer Security Deposits
(471)
729 
(422)
Other Accruals and Current Liabilities
3,453 
(7,173)
6,872 
Other Assets
1,941 
2,696 
18,513 
Other Liabilities
(13,483)
23,173 
6,879 
Net Cash Provided by Operating Activities
588,979 
853,580 
909,390 
Investing Activities
 
 
 
Capital Expenditures
(581,576)
(1,018,179)
(914,417)
Net Proceeds from Sale of Oil and Gas Producing Properties
137,316 
Other
(9,236)
(6,611)
5,982 
Net Cash Used in Investing Activities
(453,496)
(1,024,790)
(908,435)
Financing Activities
 
 
 
Change in Notes Payable to Banks and Commercial Paper
(85,600)
85,600 
Excess Tax Benefits Associated with Stock-Based Compensation Awards
1,868 
9,064 
4,641 
Net Proceeds from Issuance of Long-Term Debt
444,635 
Net Proceeds from Issuance of Common Stock
13,849 
10,540 
7,474 
Dividends Paid on Common Stock
(134,824)
(130,719)
(126,642)
Net Cash Provided By (Used in) Financing Activities
(119,107)
247,920 
(28,927)
Net Increase (Decrease) in Cash and Temporary Cash Investments
16,376 
76,710 
(27,972)
Cash and Temporary Cash Investments At Beginning of Year
113,596 
36,886 
64,858 
Cash and Temporary Cash Investments At End of Year
129,972 
113,596 
36,886 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash Paid for Interest
119,563 
90,747 
91,927 
Cash Paid for Income Taxes
34,240 
18,657 
40,944 
Supplemental Disclosure of Cash Flow Information, Non-Cash Investing Activities
 
 
 
Non-Cash Capital Expenditures
60,434 
118,959 
136,628 
Receivable from Sale of Oil and Gas Producing Properties
$ 19,543 
$ 0 
$ 0 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies
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 Company uses proportionate consolidation when accounting for drilling arrangements related to oil and gas producing properties accounted for under the full cost method of accounting.
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.
Reclassification
Due to the adoption of the authoritative guidance regarding the presentation of deferred income taxes, certain prior year amounts have been reclassified to conform with current year presentation. The Company reclassified Deferred Income Taxes of $137.2 million previously shown as Current Assets in the Company's 2015 Form 10-K to Deferred Income Taxes shown as Deferred Credits on the Consolidated Balance Sheet at September 30, 2015.
Regulation
The Company is subject to regulation by certain state and federal authorities. The Company has accounting policies which conform to GAAP, as applied to regulated enterprises, and are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities. Reference is made to Note C — Regulatory Matters for further discussion.
Revenue Recognition
The Company’s Exploration and Production segment records revenue based on entitlement, which means that revenue is recorded based on the actual amount of gas or oil that is delivered to a pipeline and the Company’s ownership interest in the producing well. If a production imbalance occurs between what was supposed to be delivered to a pipeline and what was actually produced and delivered, the Company accrues the difference as an imbalance.
The Company’s Pipeline and Storage segment records revenue for natural gas transportation and storage services. Revenue from reservation charges on firm contracted capacity is recognized through equal monthly charges over the contract period regardless of the amount of gas that is transported or stored. Commodity charges on firm contracted capacity and interruptible contracts are recognized as revenue when physical deliveries of natural gas are made at the agreed upon delivery point or when gas is injected or withdrawn from the storage field. The point of delivery into the pipeline or injection or withdrawal from storage is the point at which ownership and risk of loss transfers to the buyer of such transportation and storage services.
In the Company’s Gathering segment, revenue is recorded at the point at which gathered volumes are delivered into interstate pipelines.
The Company’s Utility segment records revenue for gas sales and transportation in the period that gas is delivered to customers. This includes the recording of receivables for gas delivered but not yet billed to customers based on the Company's estimate of the amount of gas delivered between the last meter reading date and the end of the accounting period. Such receivables are a component of Unbilled Revenue on the Consolidated Balance Sheets.
The Company’s Energy Marketing segment records revenue for gas sales in the period that gas is delivered to customers. This includes the recording of receivables for gas delivered but not yet billed to customers based on the Company's estimate of the amount of gas delivered between the last meter reading date and the end of the accounting period. Such receivables are a component of Unbilled Revenue on the Consolidated Balance Sheets.
Allowance for Uncollectible Accounts
The allowance for uncollectible accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is determined based on historical experience, the age and other specific information about customer accounts. Account balances are charged off against the allowance twelve months after the account is final billed or when it is anticipated that the receivable will not be recovered.
Regulatory Mechanisms
The Company’s rate schedules in the Utility segment contain clauses that permit adjustment of revenues to reflect price changes from the cost of purchased gas included in base rates. Differences between amounts currently recoverable and actual adjustment clause revenues, as well as other price changes and pipeline and storage company refunds not yet includable in adjustment clause rates, are deferred and accounted for as either unrecovered purchased gas costs or amounts payable to customers. Such amounts are generally recovered from (or passed back to) customers during the following fiscal year.
Estimated refund liabilities to ratepayers represent management’s current estimate of such refunds. Reference is made to Note C — Regulatory Matters for further discussion.
The impact of weather on revenues in the Utility segment’s New York rate jurisdiction is tempered by a WNC, which covers the eight-month period from October through May. The WNC is designed to adjust the rates of retail customers to reflect the impact of deviations from normal weather. Weather that is warmer than normal results in a surcharge being added to customers’ current bills, while weather that is colder than normal results in a refund being credited to customers’ current bills. Since the Utility segment’s Pennsylvania rate jurisdiction does not have a WNC, weather variations have a direct impact on the Pennsylvania rate jurisdiction’s revenues.
The impact of weather normalized usage per customer account in the Utility segment’s New York rate jurisdiction is tempered by a revenue decoupling mechanism. The effect of the revenue decoupling mechanism is to render the Company financially indifferent to throughput decreases resulting from conservation. Weather normalized usage per account that exceeds the average weather normalized usage per customer account results in a refund being credited to customers’ bills. Weather normalized usage per account that is below the average weather normalized usage per account results in a surcharge being added to customers’ bills. The surcharge or credit is calculated over a twelve-month period ending December 31st, and applied to customer bills annually, beginning March 1st.
In the Pipeline and Storage segment, the allowed rates that Supply Corporation and Empire bill their customers are based on a straight fixed-variable rate design, which allows recovery of all fixed costs, including return on equity and income taxes, through fixed monthly reservation charges. Because of this rate design, changes in throughput due to weather variations do not have a significant impact on the revenues of Supply Corporation or Empire.
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. For further discussion of capitalized costs, refer to Note M — Supplementary Information for Oil and Gas Producing Activities.
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. The book value of the oil and gas properties exceeded the ceiling at September 30, 2016 as well as at June 30, 2016, March 31, 2016 and December 31, 2015. As such, the Company recognized pre-tax impairment charges of $948.3 million for the year ended September 30, 2016. Deferred income tax benefits of $398.3 million related to the impairment charges were also recognized for the year ended September 30, 2016. In adjusting estimated future net cash flows for hedging under the ceiling test at September 30, 2016, 2015, and 2014, estimated future net cash flows were increased by $215.3 million, increased by $194.5 million and decreased by $33.6 million, respectively.
On December 1, 2015, Seneca and IOG - CRV Marcellus, LLC (IOG), an affiliate of IOG Capital, LP, and funds managed by affiliates of Fortress Investment Group, LLC, executed a joint development agreement that allows IOG to participate in the development of certain oil and gas interests owned by Seneca in Elk, McKean and Cameron Counties, Pennsylvania. On June 13, 2016, Seneca and IOG executed an extension of the joint development agreement. Under the terms of the extended agreement, Seneca and IOG will jointly participate in a program to develop up to 75 Marcellus wells, with Seneca serving as program operator. The extended joint development agreement gives IOG the option to participate in an additional 7-well Marcellus pad that is expected to be completed before December 31, 2017, which, if exercised, would increase the maximum number of joint development wells to 82. Under the original joint development agreement, IOG had committed to develop 42 Marcellus wells. IOG will hold an 80% working interest in all of the joint development wells. In total, IOG is expected to fund approximately $325 million for its 80% working interest in the 75 joint development wells. As of September 30, 2016, Seneca had received $137.3 million of cash and had recorded a $19.6 million receivable in recognition of IOG funding that is due to Seneca for costs previously incurred to develop a portion of the first 75 joint development wells. The cash proceeds and receivable were recorded by Seneca as a $156.9 million reduction of property, plant and equipment. As the fee-owner of the property’s mineral rights, Seneca retains a 7.5% royalty interest and the remaining 20% working interest (26% net revenue interest) in 56 of the joint development wells. In the remaining 19 wells, Seneca retains a 20% working and net revenue interest. Seneca’s working interest under the agreement will increase to 85% after IOG achieves a 15% internal rate of return.
The principal assets of the Utility and Pipeline and Storage segments, consisting primarily of gas plant in service, are recorded at the historical cost when originally devoted to service.
Maintenance and repairs of property and replacements of minor items of property are charged directly to maintenance expense. The original cost of the regulated subsidiaries’ property, plant and equipment retired, and the cost of removal less salvage, are charged to accumulated depreciation.
 Depreciation, Depletion and Amortization
For oil and gas properties, depreciation, depletion and amortization is computed based on quantities produced in relation to proved reserves using the units of production method. The cost of unproved oil and gas properties is excluded from this computation. In the All Other category, for timber properties, depletion, determined on a property by property basis, is charged to operations based on the actual amount of timber cut in relation to the total amount of recoverable timber. For all other property, plant and equipment, depreciation and amortization is computed using the straight-line method in amounts sufficient to recover costs over the estimated service lives of property in service. The following is a summary of depreciable plant by segment:
 
As of September 30
 
2016
 
2015
 
(Thousands)
Exploration and Production
$
4,645,226

 
$
4,556,096

Pipeline and Storage
1,956,708

 
1,710,947

Gathering
454,343

 
307,274

Utility
1,998,605

 
1,888,489

Energy Marketing
3,528

 
3,494

All Other and Corporate
109,455

 
109,193

 
$
9,167,865

 
$
8,575,493


Average depreciation, depletion and amortization rates are as follows:
 
Year Ended September 30
 
2016
 
2015
 
2014
Exploration and Production, per Mcfe(1)
$
0.87

 
$
1.52

 
$
1.85

Pipeline and Storage
2.4
%
 
2.4
%
 
2.4
%
Gathering
4.0
%
 
4.0
%
 
3.3
%
Utility
2.7
%
 
2.6
%
 
2.6
%
Energy Marketing
7.9
%
 
6.1
%
 
5.8
%
All Other and Corporate
1.8
%
 
1.4
%
 
0.9
%
 
(1)
Amounts include depletion of oil and gas producing properties as well as depreciation of fixed assets. As disclosed in Note M — Supplementary Information for Oil and Gas Producing Activities, depletion of oil and gas producing properties amounted to $0.85, $1.49 and $1.82 per Mcfe of production in 2016, 2015 and 2014, respectively.
Goodwill
The Company has recognized goodwill of $5.5 million as of September 30, 2016 and 2015 on its Consolidated Balance Sheets related to the Company’s acquisition of Empire in 2003. The Company accounts for goodwill in accordance with the current authoritative guidance, which requires the Company to test goodwill for impairment annually. At September 30, 2016, 2015 and 2014, the fair value of Empire was greater than its book value. As such, the goodwill was not considered impaired at those dates. Going back to the origination of the goodwill in 2003, the Company has never recorded an impairment of its goodwill balance.
Financial Instruments
Unrealized gains or losses from the Company’s investments in an equity mutual fund, a fixed income mutual fund and the stock of an insurance company (securities available for sale) are recorded as a component of accumulated other comprehensive income (loss). Reference is made to Note G — Financial Instruments for further discussion.
The Company uses a variety of derivative financial instruments to manage a portion of the market risk associated with fluctuations in the price of natural gas and crude oil and to manage a portion of the risk of currency fluctuations associated with transportation costs denominated in Canadian currency. These instruments include price swap agreements and futures contracts. The Company accounts for these instruments as either cash flow hedges or fair value hedges. In both cases, the fair value of the instrument is recognized on the Consolidated Balance Sheets as either an asset or a liability labeled Fair Value of Derivative Financial Instruments. Reference is made to Note F — Fair Value Measurements for further discussion concerning the fair value of derivative financial instruments.
For effective cash flow hedges, the offset to the asset or liability that is recorded is a gain or loss recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. The gain or loss recorded in accumulated other comprehensive income (loss) remains there until the hedged transaction occurs, at which point the gains or losses are reclassified to operating revenues, purchased gas expense or operation and maintenance expense on the Consolidated Statements of Income. Reference is made to Note G - Financial Instruments for further discussion concerning cash flow hedges.
For fair value hedges, the offset to the asset or liability that is recorded is a gain or loss recorded to operating revenues or purchased gas expense on the Consolidated Statements of Income. However, in the case of fair value hedges, the Company also records an asset or liability on the Consolidated Balance Sheets representing the change in fair value of the asset or firm commitment that is being hedged (see Other Current Assets section in this footnote). The offset to this asset or liability is a gain or loss recorded to operating revenues or purchased gas expense on the Consolidated Statements of Income as well. If the fair value hedge is effective, the gain or loss from the derivative financial instrument is offset by the gain or loss that arises from the change in fair value of the asset or firm commitment that is being hedged. Reference is made to Note G - Financial Instruments for further discussion concerning fair value hedges.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) and changes for the year ended September 30, 2016, net of related tax effect, are as follows (amounts in parentheses indicate debits) (in thousands):
 
Gains and Losses on Derivative Financial Instruments
 
Gains and Losses on Securities Available for Sale
 
Funded Status of the Pension and Other Post-Retirement Benefit Plans
 
Total
Year Ended September 30, 2016
 
 
 
 
 
 
 
Balance at October 1, 2015
$
157,197

 
$
5,969

 
$
(69,794
)
 
$
93,372

Other Comprehensive Gains and Losses Before Reclassifications
41,845

 
932

 
(13,027
)
 
29,750

Amounts Reclassified From Other Comprehensive Loss
(134,260
)
 
(847
)
 
6,345

 
(128,762
)
Balance at September 30, 2016
$
64,782

 
$
6,054

 
$
(76,476
)
 
$
(5,640
)
 
 
 
 
 
 
 
 
Year Ended September 30, 2015
 
 
 
 
 
 
 
Balance at October 1, 2014
$
43,659

 
$
8,382

 
$
(56,020
)
 
$
(3,979
)
Other Comprehensive Gains and Losses Before Reclassifications
220,146

 
(2,039
)
 
(19,616
)
 
198,491

Amounts Reclassified From Other Comprehensive Income
(106,608
)
 
(374
)
 
5,842

 
(101,140
)
Balance at September 30, 2015
$
157,197

 
$
5,969

 
$
(69,794
)
 
$
93,372


The amounts included in accumulated other comprehensive income (loss) related to the funded status of the Company’s pension and other post-retirement benefit plans consist of prior service costs and accumulated losses. The total amount for prior service cost was $1.3 million and $1.5 million at September 30, 2016 and 2015, respectively. The total amount for accumulated losses was $75.2 million and $68.3 million at September 30, 2016 and 2015, respectively.
Reclassifications Out of Accumulated Other Comprehensive Income (Loss) 
The details about the reclassification adjustments out of accumulated other comprehensive income (loss) for the year ended September 30, 2016 are as follows (amounts in parentheses indicate debits to the income statement) (in thousands):
Details About Accumulated Other
Comprehensive Income (Loss) Components
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) for the
Year Ended
September 30,
 
Affected Line Item in the Statement Where Net Income (Loss) is Presented
 
 
2016
 
2015
 
 
Gains (Losses) on Derivative Financial Instrument Cash Flow Hedges:
 
 
 
 
 
 
Commodity Contracts
 

$216,823

 

$180,069

 
Operating Revenues
Commodity Contracts
 
4,520

 
4,884

 
Purchased Gas
Foreign Currency Contracts
 
(424
)
 

 
Operation and Maintenance Expense
Gains (Losses) on Securities Available for Sale
 
1,374

 
591

 
Other Income
Amortization of Prior Year Funded Status of the Pension and Other Post-Retirement Benefit Plans:
 
 
 
 
 
 
Prior Service Credit
 
(333
)
 
109

 
(1)
Net Actuarial Loss
 
(9,735
)
 
(9,326
)
 
(1)
 
 
212,225

 
176,327

 
Total Before Income Tax
 
 
(83,463
)
 
(75,187
)
 
Income Tax Expense
 
 

$128,762

 

$101,140

 
Net of Tax
 
(1)
These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note H — Retirement Plan and Other Post-Retirement Benefits for additional details.
Gas Stored Underground 
In the Utility segment, gas stored underground in the amount of $27.6 million is carried at lower of cost or market, on a LIFO method. Based upon the average price of spot market gas purchased in September 2016, including transportation costs, the current cost of replacing this inventory of gas stored underground exceeded the amount stated on a LIFO basis by approximately $7.0 million at September 30, 2016. All other gas stored underground, which is in the Energy Marketing segment, is carried at an average cost method, subject to lower of cost or market adjustments.
Unamortized Debt Expense
Costs associated with the reacquisition of debt related to rate-regulated subsidiaries are deferred and amortized over the remaining life of the issue or the life of the replacement debt in order to match regulatory treatment. At September 30, 2016, the remaining weighted average amortization period for such costs was approximately 3 years.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. State tax returns are filed on a combined or separate basis depending on the applicable laws in the jurisdictions where tax returns are filed. The investment tax credit, prior to its repeal in 1986, was deferred and is being amortized over the estimated useful lives of the related property, as required by regulatory authorities having jurisdiction.
The Company follows the asset and liability approach in accounting for income taxes, which requires the recognition of deferred income taxes for the expected future tax consequences of net operating losses, credits and temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance is provided on deferred tax assets if it is determined, within each taxing jurisdiction, that it is more likely than not that the asset will not be realized.
The Company reports a liability or a reduction of deferred tax assets for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. When applicable, the Company recognizes interest relating to uncertain tax positions in Other Interest Expense and penalties in Other Income.
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. In accordance with its accounting policy, the Company does not offset hedging collateral deposits paid or received against related derivative financial instrument liability or asset balances.
Other Current Assets
The components of the Company’s Other Current Assets are as follows: 
 
Year Ended September 30
 
2016
 
2015
 
(Thousands)
Prepayments
$
10,919

 
$
10,743

Prepaid Property and Other Taxes
13,138

 
13,709

Federal Income Taxes Receivable
11,758

 

State Income Taxes Receivable
3,961

 

Fair Values of Firm Commitments
3,962

 
15,775

Regulatory Assets
15,616

 
20,438

 
$
59,354

 
$
60,665


Other Accruals and Current Liabilities
The components of the Company’s Other Accruals and Current Liabilities are as follows:
 
Year Ended September 30
 
2016
 
2015
 
(Thousands)
Accrued Capital Expenditures
$
26,796

 
$
53,652

Regulatory Liabilities
14,725

 
5,346

Federal Income Taxes Payable

 
5,686

State Income Taxes Payable

 
1,170

Other
32,909

 
30,703

 
$
74,430

 
$
96,557


Customer Advances
The Company’s Utility and Energy Marketing segments have balanced billing programs whereby customers pay their estimated annual usage in equal installments over a twelve-month period. Monthly payments under the balanced billing programs are typically higher than current month usage during the summer months. During the winter months, monthly payments under the balanced billing programs are typically lower than current month usage. At September 30, 2016 and 2015, customers in the balanced billing programs had advanced excess funds of $14.8 million and $16.2 million, respectively.
Customer Security Deposits
The Company, in its Utility, Pipeline and Storage, and Energy Marketing segments, often times requires security deposits from marketers, producers, pipeline companies, and commercial and industrial customers before providing services to such customers. At September 30, 2016 and 2015, the Company had received customer security deposits amounting to $16.0 million and $16.5 million, respectively.
Earnings Per Common Share
Basic earnings per common share is computed by dividing income or loss 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. As the Company recognized net losses for the years ended September 30, 2016 and 2015, the aforementioned securities, amounting to 431,408 shares and 709,063 shares, respectively, were not recognized in the diluted earnings per share calculation for 2016 and 2015. For the year ended September 30, 2014, 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 1,007 shares excluded as being antidilutive for the year ended September 30, 2014.
Stock-Based Compensation
The Company has various stock option and stock award plans which provide or provided for the issuance of one or more of the following to key employees: incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, performance units or performance shares. The Company follows authoritative guidance which requires the measurement and recognition of compensation cost at fair value for all share-based payments. Stock options and SARs under all plans have exercise prices equal to the average market price of Company common stock on the date of grant, and generally no stock option or SAR is exercisable less than one year or more than ten years after the date of each grant. The Company has chosen the Black-Scholes-Merton closed form model to calculate the compensation expense associated with stock options and SARs.
Restricted stock is subject to restrictions on vesting and transferability. Restricted stock awards entitle the participants to full dividend and voting rights. The market value of restricted stock on the date of the award is recorded as compensation expense over the vesting period. Certificates for shares of restricted stock awarded under the Company’s stock option and stock award plans are held by the Company during the periods in which the restrictions on vesting are effective. Restrictions on restricted stock awards generally lapse ratably over a period of not more than ten years after the date of each grant. Restricted stock units also are subject to restrictions on vesting and transferability. Restricted stock units, both performance 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 participants to dividend and voting rights. 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 (represented by the market value of Company common stock on the date of the award) must be reduced by the present value of forgone dividends over the vesting term of the award. The fair value of restricted stock units on the date of award is recorded as compensation expense over the vesting period.
Performance shares are an award constituting units denominated in common stock of the Company, the number of which may be adjusted over a performance cycle based upon the extent to which performance goals have been satisfied. Earned performance shares may be distributed in the form of shares of common stock of the Company, an equivalent value in cash or a combination of cash and shares of common stock of the Company, as determined by the Company. The performance shares do not entitle the participant to receive dividends during the vesting period. For performance shares based on a return on capital goal, the fair value at the date of grant of the performance shares is determined by multiplying the expected number of performance shares to be issued by the market value of Company common stock on the date of grant reduced by the present value of forgone dividends. For performance shares based on a total shareholder return goal, the Company uses the Monte Carlo simulation technique to estimate the fair value price at the date of grant.
Refer to Note E — Capitalization and Short-Term Borrowings under the heading “Stock Option and Stock Award Plans” for additional disclosures related to stock-based compensation awards for all plans.
New Authoritative Accounting and Financial Reporting Guidance
In May 2014, the FASB issued authoritative guidance regarding revenue recognition. The authoritative guidance provides a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The original effective date of this authoritative guidance was as of the Company's first quarter of fiscal 2018. However, the FASB has delayed the effective date of the new revenue standard by one year, and the guidance will now be effective as of the Company's first quarter of fiscal 2019. Working towards this implementation date, the Company is currently evaluating the guidance and the various issues identified by industry based revenue recognition task forces and intends to begin analyzing its contractual arrangements with customers in the second half of fiscal 2017.
In November 2015, the FASB issued authoritative guidance simplifying the presentation of deferred income taxes. The authoritative guidance requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The Company early adopted this guidance at December 31, 2015 on a retrospective basis.
In January 2016, the FASB issued authoritative guidance regarding the recognition and measurement of financial assets and liabilities. The authoritative guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities will be measured at fair value through earnings rather than through other comprehensive income. This authoritative guidance will be effective as of the Company's first quarter of fiscal 2019. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued authoritative guidance requiring organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, regardless of whether they are considered to be capital leases or operating leases. The FASB’s previous authoritative guidance required organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by capital leases while excluding operating leases from balance sheet recognition. The new authoritative guidance will be effective as of the Company’s first quarter of fiscal 2020, with early adoption permitted. The Company does not anticipate early adoption and is currently evaluating the provisions of the revised guidance.
In March 2016, the FASB issued authoritative guidance simplifying several aspects of the accounting for stock-based compensation. Among other things, the revised guidance specifies that the difference between the compensation recognized for financial reporting purposes and the deduction allowed for tax purposes (excess tax benefit or deficiency) shall be recognized as income tax expense or benefit in the income statement, as opposed to the current treatment where this difference is recognized as additional paid-in capital in the balance sheet. For statement of cash flows purposes, the revised guidance specifies that the excess tax benefit shall be classified along with other income tax cash flows as an item impacting cash flow from operating activities. The current guidance separates the excess tax benefit from other income tax cash flows and classifies the excess tax benefit as an item impacting cash flow from financing activities. The new authoritative guidance will be effective as of the Company’s first quarter of fiscal 2018, with early adoption permitted. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements.
Asset Retirement Obligations
Asset Retirement Obligations
Asset Retirement Obligations
The Company accounts for asset retirement obligations in accordance with the authoritative guidance that requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. An asset retirement obligation is defined as a legal obligation associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement may or may not be conditional on a future event that may or may not be within the control of the Company. When the liability is initially recorded, the entity capitalizes the estimated cost of retiring the asset as part of the carrying amount of the related long-lived asset. Over time, the liability is adjusted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. The Company estimates the fair value of its asset retirement obligations based on the discounting of expected cash flows using various estimates, assumptions and judgments regarding certain factors such as the existence of a legal obligation for an asset retirement obligation; estimated amounts and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates. Asset retirement obligations incurred in the current period were Level 3 fair value measurements as the inputs used to measure the fair value are unobservable.
The Company has recorded an asset retirement obligation representing plugging and abandonment costs associated with the Exploration and Production segment’s crude oil and natural gas wells and has capitalized such costs in property, plant and equipment (i.e. the full cost pool).
In addition to the asset retirement obligation recorded in the Exploration and Production segment, the Company has recorded future asset retirement obligations associated with the plugging and abandonment of natural gas storage wells in the Pipeline and Storage segment and the removal of asbestos and asbestos-containing material in various facilities in the Utility and Pipeline and Storage segments. The Company has also recorded asset retirement obligations for certain costs connected with the retirement of the distribution mains and services components of the pipeline system in the Utility segment, the transmission mains and other components in the pipeline system in the Pipeline and Storage segment, and the gathering lines and other components in the Gathering segment. The retirement costs within the distribution, transmission and gathering systems are primarily for the capping and purging of pipe, which are generally abandoned in place when retired, as well as for the clean-up of PCB contamination associated with the removal of certain pipe.
On June 30, 2016, Seneca sold the majority of its Upper Devonian wells in Pennsylvania. While the proceeds from the sale were not significant, it did result in a $58.4 million reduction of its Asset Retirement Obligation at September 30, 2016, which is reflected in Liabilities Settled in the table below. The following is a reconciliation of the change in the Company’s asset retirement obligations:
 
Year Ended September 30
 
2016
 
2015
 
2014
 
(Thousands)
Balance at Beginning of Year
$
156,805

 
$
117,713

 
$
119,511

Liabilities Incurred
2,719

 
4,433

 
5,390

Revisions of Estimates
16,721

 
33,717

 
(7,886
)
Liabilities Settled
(72,215
)
 
(6,825
)
 
(6,955
)
Accretion Expense
8,300

 
7,767

 
7,653

Balance at End of Year
$
112,330

 
$
156,805

 
$
117,713

Regulatory Matters
Regulatory Matters
Regulatory Matters
Regulatory Assets and Liabilities
The Company has recorded the following regulatory assets and liabilities:
 
At September 30
 
2016
 
2015
 
(Thousands)
Regulatory Assets(1):
 
 
 
Pension Costs(2) (Note H)
$
203,755

 
$
202,781

Post-Retirement Benefit Costs(2) (Note H)
74,802

 
34,217

Recoverable Future Taxes (Note D)
177,261

 
168,214

Environmental Site Remediation Costs(2) (Note I)
23,392

 
24,606

NYPSC Assessment(3)
5,804

 
13,916

Asset Retirement Obligations(2) (Note B)
12,490

 
12,250

Unamortized Debt Expense (Note A)
1,688

 
2,218

Other(4)
16,123

 
10,895

Total Regulatory Assets
515,315

 
469,097

Less: Amounts Included in Other Current Assets
(15,616
)
 
(20,438
)
Total Long-Term Regulatory Assets
$
499,699

 
$
448,659

 
 
At September 30
 
2016
 
2015
 
(Thousands)
Regulatory Liabilities:
 
 
 
Cost of Removal Regulatory Liability
$
193,424

 
$
184,907

Taxes Refundable to Customers (Note D)
93,318

 
89,448

Post-Retirement Benefit Costs (Note H)
67,204

 
60,013

Amounts Payable to Customers (See Regulatory Mechanisms in Note A)
19,537

 
56,778

Off-System Sales and Capacity Release Credits
15,930

 
21,027

Other(5)
31,380

 
32,923

Total Regulatory Liabilities
420,793

 
445,096

Less: Amounts included in Current and Accrued Liabilities
(34,262
)
 
(62,124
)
Total Long-Term Regulatory Liabilities
$
386,531

 
$
382,972

 
(1)
The Company recovers the cost of its regulatory assets but generally does not earn a return on them. There are a few exceptions to this rule. For example, the Company does earn a return on Unrecovered Purchased Gas Costs and, in the New York jurisdiction of its Utility segment, earns a return, within certain parameters, on the excess of cumulative funding to the pension plan over the cumulative amount collected in rates.
(2)
Included in Other Regulatory Assets on the Consolidated Balance Sheets.
(3)
Amounts are included in Other Current Assets on the Consolidated Balance Sheets at September 30, 2016 and September 30, 2015 since such amounts are expected to be recovered from ratepayers in the next 12 months.
(4)
$9,812 and $6,522 are included in Other Current Assets on the Consolidated Balance Sheets at September 30, 2016 and 2015, respectively, since such amounts are expected to be recovered from ratepayers in the next 12 months. $6,311 and $4,373 are included in Other Regulatory Assets on the Consolidated Balance Sheets at September 30, 2016 and 2015, respectively.
(5)
$14,725 and $5,346 are included in Other Accruals and Current Liabilities on the Consolidated Balance Sheets at September 30, 2016 and 2015, respectively, since such amounts are expected to be recovered from ratepayers in the next 12 months. $16,655 and $27,577 are included in Other Regulatory Liabilities on the Consolidated Balance Sheets at September 30, 2016 and 2015, respectively.
If for any reason the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from the Consolidated Balance Sheets and included in income of the period in which the discontinuance of regulatory accounting treatment occurs.
Cost of Removal Regulatory Liability
In the Company’s Utility and Pipeline and Storage segments, costs of removing assets (i.e. asset retirement costs) are collected from customers through depreciation expense. These amounts are not a legal retirement obligation as discussed in Note B — Asset Retirement Obligations. Rather, they are classified as a regulatory liability in recognition of the fact that the Company has collected dollars from the customer that will be used in the future to fund asset retirement costs.
NYPSC Assessment
On April 7, 2009, the Governor of the State of New York signed into law an amendment to the Public Service Law increasing the allowed utility assessment from the then current rate of one-third of one percent to one percent of a utility’s in-state gross operating revenue, together with a temporary surcharge (expiring March 31, 2014) equal, as applied, to an additional one percent of the utility’s in-state gross operating revenue. Pursuant to a New York State budget agreement in 2014, the temporary increase in the assessment will be phased out over a three year period ending July 1, 2017. The NYPSC, in a generic proceeding initiated for the purpose of implementing the amended law, has authorized the recovery, through rates, of the full cost of the increased assessment. The assessment is currently being applied to customer bills in the Utility segment’s New York jurisdiction.
NYPSC Rate Proceeding
On April 28, 2016, Distribution Corporation commenced a rate case by filing proposed tariff amendments and supporting testimony requesting approval to increase its annual revenues by approximately $41.7 million. Distribution Corporation explained in the filing that its request for rate relief was necessitated by a revenue requirement driven primarily by rate base growth, higher operating expense and higher depreciation expense that are not reflected in current rates, among other things. The rate filing includes a proposal for system infrastructure modernization that includes the acceleration of Distribution Corporation’s replacement of certain gas mains, which are of a type generically classified by the NYPSC as “leak prone pipe”. The NYPSC may accept, reject or modify Distribution Corporation’s filing. On October 19, 2016, the Company filed a Notice of Impending Confidential Settlement Negotiations notifying the NYPSC that Distribution Corporation, Department of Public Service Staff and other interested parties were entering into settlement discussions, which may result in settlement of some or all of the issues raised in the proceeding. The outcome of the proceeding cannot be ascertained at this time.
FERC Rate Proceedings
Supply Corporation's current rate settlement requires a rate case filing no later than December 31, 2019 and prohibits any party from seeking to initiate a rate case proceeding before September 30, 2017.
By order dated January 21, 2016, the FERC began a NGA Section 5 rate review of Empire's rates. As required by that order, Empire filed a Cost and Revenue Study on April 5, 2016. On May 25, 2016, Empire reached a settlement in principle on this matter that would, among other things, reduce certain of Empire’s maximum transportation rates over a 14-month period, which, based on current contracts, is estimated to reduce Empire’s revenues on a yearly basis by between $3 million to $4 million. The settlement also reduces Empire’s depreciation rate from 2.5% to 2%. In addition, the settlement provides an annual revenue sharing mechanism, pursuant to which non-expansion transportation revenues exceeding $73.5 million are shared on a tiered basis. Under the settlement, Empire will be required to make a general rate filing no later than July 1, 2021. On July 22, 2016, Empire filed the settlement at the FERC and on October 20, 2016, the FERC issued an order conditionally approving the settlement. The settlement is not expected to have a material impact on the Company’s financial condition.
Off-System Sales and Capacity Release Credits
The Company, in its Utility segment, has entered into off-system sales and capacity release transactions. Most of the margins on such transactions are returned to the customer with only a small percentage being retained by the Company. The amount owed to the customer has been deferred as a regulatory liability.
Income Taxes
Income Taxes
Income Taxes
The components of federal and state income taxes included in the Consolidated Statements of Income are as follows:
 
Year Ended September 30
 
2016
 
2015
 
2014
 
(Thousands)
Current Income Taxes —
 
 
 
 
 
Federal
$
(6,658
)
 
$
25,064

 
$
34,579

State
20,903

 
13,387

 
12,620

Deferred Income Taxes —
 
 
 
 
 
Federal
(164,818
)
 
(244,336
)
 
116,143

State
(81,976
)
 
(113,251
)
 
26,272

 
(232,549
)
 
(319,136
)
 
189,614

Deferred Investment Tax Credit
(348
)
 
(414
)
 
(434
)
Total Income Taxes
$
(232,897
)
 
$
(319,550
)
 
$
189,180

Presented as Follows:
 
 
 
 
 
Other Income
$
(348
)
 
$
(414
)
 
$
(434
)
Income Tax Expense (Benefit)
(232,549
)
 
(319,136
)
 
189,614

Total Income Taxes
$
(232,897
)
 
$
(319,550
)
 
$
189,180


Total income taxes as reported differ from the amounts that were computed by applying the federal income tax rate to income (loss) before income taxes. The following is a reconciliation of this difference:
 
Year Ended September 30
 
2016
 
2015
 
2014
 
(Thousands)
U.S. Income (Loss) Before Income Taxes
$
(523,855
)
 
$
(698,977
)
 
$
488,593

Income Tax Expense (Benefit), Computed at U.S. Federal Statutory Rate of 35%
$
(183,349
)
 
$
(244,642
)
 
$
171,008

State Income Taxes (Benefit)
(39,697
)
 
(64,912
)
 
25,280

Miscellaneous
(9,851
)
 
(9,996
)
 
(7,108
)
Total Income Taxes
$
(232,897
)
 
$
(319,550
)
 
$
189,180


 
Significant components of the Company’s deferred tax liabilities and assets were as follows:
 
At September 30
 
2016
 
2015
 
(Thousands)
Deferred Tax Liabilities:
 
 
 
Property, Plant and Equipment
$
1,049,100

 
$
1,291,718

Pension and Other Post-Retirement Benefit Costs
151,903

 
141,032

Unrealized Hedging Gains
50,179

 
118,522

Other
55,457

 
51,230

Total Deferred Tax Liabilities
1,306,639

 
1,602,502

Deferred Tax Assets:
 
 
 
Pension and Other Post-Retirement Benefit Costs
(195,829
)
 
(168,451
)
Tax Loss and Credit Carryforwards
(194,875
)
 
(185,681
)
Other
(92,140
)
 
(110,408
)
Total Deferred Tax Assets
(482,844
)
 
(464,540
)
Total Net Deferred Income Taxes
$
823,795

 
$
1,137,962


As a result of certain realization requirements of the authoritative guidance on stock-based compensation, the table of deferred tax liabilities and assets shown above does not include certain deferred tax assets that arose directly from excess tax deductions related to stock-based compensation. Tax benefits of $1.9 million, $9.1 million and $4.6 million relating to the excess stock-based compensation deductions were recorded in Paid in Capital during the years ended September 30, 2016, September 30, 2015 and September 30, 2014, respectively. Cumulative tax benefits of $32.6 million and $32.8 million remained as of September 30, 2016 and September 30, 2015, respectively, and will be recorded in Paid in Capital in future years when such tax benefits are realized or recorded to retained earnings when the Company adopts the authoritative guidance issued by the FASB in March 2016 that addresses several aspects of the accounting for stock-based compensation, whichever is earlier.
Regulatory liabilities representing the reduction of previously recorded deferred income taxes associated with rate-regulated activities that are expected to be refundable to customers amounted to $93.3 million and $89.4 million at September 30, 2016 and 2015, respectively. Also, regulatory assets representing future amounts collectible from customers, corresponding to additional deferred income taxes not previously recorded because of prior ratemaking practices, amounted to $177.3 million and $168.2 million at September 30, 2016 and 2015, respectively. Included in the above are regulatory liabilities and assets relating to the tax accounting method change noted below. The amounts are as follows: regulatory liabilities of $52.6 million as of September 30, 2016 and 2015 and regulatory assets of $94.2 million and $88.7 million as of September 30, 2016 and 2015, respectively.
The following is a reconciliation of the change in unrecognized tax benefits:
 
Year Ended September 30
 
2016
 
2015
 
2014
 
(Thousands)
Balance at Beginning of Year
$
5,085

 
$
3,147

 
$
2,001

Additions for Tax Positions of Prior Years
396

 
2,504

 
2,447

Reductions for Tax Positions of Prior Years
(1,314
)
 
(566
)
 
(1,301
)
Reductions Related to Settlements with Taxing Authorities
(3,771
)
 

 

Balance at End of Year
$
396

 
$
5,085

 
$
3,147


As a result of certain examinations in progress (discussed below), the Company anticipates the balance of unrecognized tax benefits could be reduced during the next 12 months. As of September 30, 2016, the entire balance of unrecognized tax benefits would favorably impact the effective tax rate, if recognized.
The IRS is currently conducting examinations of the Company for fiscal 2016 and fiscal 2015 in accordance with the Compliance Assurance Process (“CAP”). The CAP audit employs a real time review of the Company’s books and tax records by the IRS that is intended to permit issue resolution prior to the filing of the tax return. The federal statute of limitations remains open for fiscal 2009 and later years. During fiscal 2009, consent was received from the IRS National Office approving the Company’s application to change its tax method of accounting for certain capitalized costs relating to its utility property. While local IRS examiners issued no-change reports for fiscal 2009 through 2014, the IRS has reserved the right to re-examine these years, pending the anticipated issuance of IRS guidance addressing the issue for natural gas utilities.
The Company is also subject to various routine state income tax examinations. The Company’s principal subsidiaries operate mainly in four states which have statutes of limitations that generally expire between three to four years from the date of filing of the income tax return.
As of September 30, 2016, the Company has a federal net operating loss (NOL) carryover of $379 million, which expires in varying amounts between 2026 and 2032. Approximately $4.5 million of the NOL carryforward is subject to certain annual limitations, and $85 million is attributable to excess tax deductions related to stock-based compensation as discussed above. In addition, the Company has research and development tax credit carryforwards of $5.1 million, which begin to expire in 2031 and a minimum tax credit carryforward of $49 million, which has no expiration date. The Company has state NOL carryovers in Pennsylvania, California and New York of $332 million, $184 million and $80 million, respectively, which generally begin to expire in varying amounts between 2029 and 2035.
During fiscal 2014, legislation was enacted reducing the corporate tax rate in New York from 7.1% to 6.5%, effective for tax years beginning after January 1, 2016. As a result, a deferred tax benefit of approximately $2.8 million was recorded in the fiscal 2014 financial statements.
Capitalization And Short-Term Borrowings
Capitalization And Short-Term Borrowings
Capitalization and Short-Term Borrowings
Summary of Changes in Common Stock Equity
 
Common Stock
 
Paid In
Capital
 
Earnings
Reinvested
in the
Business
 
Accumulated
Other
Comprehensive
Income (Loss)
Shares
 
Amount
 
 
(Thousands, except per share amounts)
Balance at September 30, 2013
83,662

 
$
83,662

 
$
687,684

 
$
1,442,617

 
$
(19,234
)
Net Income Available for Common Stock
 
 
 
 
 
 
299,413

 
 
Dividends Declared on Common Stock ($1.52 Per Share)
 
 
 
 
 
 
(127,669
)
 
 
Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
 
 
15,255

Share-Based Payment Expense(2)
 
 
 
 
10,654

 
 
 
 
Common Stock Issued Under Stock and Benefit Plans(1)
495

 
495

 
17,806

 
 
 
 
Balance at September 30, 2014
84,157

 
84,157

 
716,144

 
1,614,361

 
(3,979
)
Net Income (Loss) Available for Common Stock
 
 
 
 
 
 
(379,427
)
 
 
Dividends Declared on Common Stock ($1.56 Per Share)
 
 
 
 
 
 
(131,734
)
 
 
Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
 
 
97,351

Share-Based Payment Expense(2)
 
 
 
 
2,207

 
 
 
 
Common Stock Issued Under Stock and Benefit Plans(1)
437

 
437

 
25,923

 
 
 
 
Balance at September 30, 2015
84,594

 
84,594

 
744,274

 
1,103,200

 
93,372

Net Income (Loss) Available for Common Stock
 
 
 
 
 
 
(290,958
)
 
 
Dividends Declared on Common Stock ($1.60 Per Share)
 
 
 
 
 
 
(135,881
)
 
 
Other Comprehensive Loss, Net of Tax
 
 
 
 
 
 
 
 
(99,012
)
Share-Based Payment Expense(2)
 
 
 
 
4,843

 
 
 
 
Common Stock Issued Under Stock and Benefit Plans(1)
525

 
525

 
22,047

 
 
 
 
Balance at September 30, 2016
85,119

 
$
85,119

 
$
771,164

 
$
676,361

(3)
$
(5,640
)
 
(1)
Paid in Capital includes tax benefits of $1.9 million, $9.1 million and $4.6 million for September 30, 2016, 2015 and 2014, respectively, related to stock-based compensation.
(2)
Paid in Capital includes compensation costs associated with stock option, SARs, performance share and/or restricted stock awards. The expense is included within Net Income Available For Common Stock, net of tax benefits.
(3)
The availability of consolidated earnings reinvested in the business for dividends payable in cash is limited under terms of the indentures covering long-term debt. At September 30, 2016, $532.2 million of accumulated earnings was free of such limitations.
Common Stock
The Company has various plans which allow shareholders, employees and others to purchase shares of the Company common stock. The National Fuel Gas Company Direct Stock Purchase and Dividend Reinvestment Plan allows shareholders to reinvest cash dividends and make cash investments in the Company’s common stock and provides investors the opportunity to acquire shares of the Company common stock without the payment of any brokerage commissions in connection with such acquisitions. The 401(k) Plans allow employees the opportunity to invest in the Company common stock, in addition to a variety of other investment alternatives. Generally, at the discretion of the Company, shares purchased under these plans are either original issue shares purchased directly from the Company or shares purchased on the open market by an independent agent. During 2016, the Company issued 147,056 original issue shares of common stock for the Direct Stock Purchase and Dividend Reinvestment Plan and 118,864 original issue shares of common stock for the Company's 401(k) plans.
During 2016, the Company issued 293,841 original issue shares of common stock as a result of stock option and SARs exercises and 70,233 original issue shares of common stock for restricted stock units that vested. Holders of stock options, SARs, restricted share awards or restricted stock units will often tender shares of common stock to the Company for payment of option exercise prices and/or applicable withholding taxes. During 2016, 88,675 shares of common stock were tendered to the Company for such purposes. The Company considers all shares tendered as cancelled shares restored to the status of authorized but unissued shares, in accordance with New Jersey law. There were also 35,000 restricted stock award shares forfeited during 2016.
The Company also has a director stock program under which it issues shares of Company common stock to the non-employee directors of the Company who receive compensation under the Company’s 2009 Non-Employee Director Equity Compensation Plan, as partial consideration for the directors’ services during the fiscal year. Under this program, the Company issued 18,184 original issue shares of common stock during 2016.
Shareholder Rights Plan
In 1996, the Company’s Board of Directors adopted a shareholder rights plan (Plan). The Plan has been amended several times since it was adopted and is now embodied in an Amended and Restated Rights Agreement effective December 4, 2008, a copy of which was included as an exhibit to the Form 8-K filed by the Company on December 4, 2008.
Pursuant to the Plan, the holders of the Company’s common stock have one right (Right) for each of their shares. Each Right is initially evidenced by the Company’s common stock certificates representing the outstanding shares of common stock.
The Rights have anti-takeover effects because they will cause substantial dilution of the Company’s common stock if a person (an Acquiring Person) attempts to acquire the Company on terms not approved by the Board of Directors.
The Rights become exercisable upon the occurrence of a Distribution Date as described below, but after a Distribution Date, Rights that are owned by an Acquiring Person will be null and void. At any time following a Distribution Date, each holder of a Right may exercise its right to receive, upon payment of an amount calculated under the Rights Agreement, common stock of the Company (or, under certain circumstances, other securities or assets of the Company) having a value equal to two times the amount paid to exercise the Right. However, the Rights are subject to redemption or exchange by the Company prior to their exercise as described below.
A Distribution Date would occur upon the earlier of (i) ten days after the public announcement that a person or group has acquired, or obtained the right to acquire, beneficial ownership of the Company’s common stock or other voting stock (including Synthetic Long Positions as defined in the Plan) having 10% or more of the total voting power of the Company’s common stock and other voting stock or (ii) ten days after the commencement or announcement by a person or group of an intention to make a tender or exchange offer that would result in that person acquiring, or obtaining the right to acquire, beneficial ownership of the Company’s common stock or other voting stock having 10% or more of the total voting power of the Company’s common stock and other voting stock.
In certain situations after a person or group has acquired beneficial ownership of 10% or more of the total voting power of the Company’s stock as described above, each holder of a Right will have the right to receive, upon exercise of the Right, common stock of the acquiring company having a value equal to two times the amount paid to exercise the Right. These situations would arise if the Company is acquired in a merger or other business combination or if 50% or more of the Company’s assets or earning power is sold or transferred.
At any time prior to the end of the business day on the tenth day following the Distribution Date, the Company may redeem the Rights in whole, but not in part, at a price of $0.005 per Right, payable in cash or stock. A decision to redeem the Rights requires the vote of 75% of the Company’s full Board of Directors. Also, at any time following the Distribution Date, 75% of the Company’s full Board of Directors may vote to exchange the Rights, in whole or in part, at an exchange rate of one share of common stock, or other property deemed to have the same value, per Right, subject to certain adjustments.
Upon exercise of the Rights, the Company may need additional regulatory approvals to satisfy the requirements of the Rights Agreement. The Rights will expire on July 31, 2018, unless earlier than that date, they are exchanged or redeemed or the Plan is amended to extend the expiration date.
Stock Option and Stock Award Plans
The Company has various stock option and stock award plans which provide or provided for the issuance of one or more of the following to key employees: incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, performance units or performance shares.
Stock-based compensation expense for the years ended September 30, 2016, 2015 and 2014 was approximately $4.8 million, $2.1 million and $10.5 million, respectively. Stock-based compensation expense is included in operation and maintenance expense on the Consolidated Statements of Income. The total income tax benefit related to stock-based compensation expense during the years ended September 30, 2016, 2015 and 2014 was approximately $1.9 million, $0.9 million and $4.3 million, respectively. A portion of stock-based compensation expense is subject to capitalization under IRS uniform capitalization rules. Stock-based compensation of $0.1 million, $0.1 million and $0.1 million was capitalized under these rules during the years ended September 30, 2016, 2015 and 2014, respectively.
The Company realized excess tax benefits related to stock-based compensation of $1.6 million, $7.7 million, and $3.1 million for the fiscal years ended September 30, 2016, 2015 and 2014, respectively. These amounts are recorded in Paid in Capital when they meet the realization requirements of the authoritative guidance on stock-based compensation.
Stock Options
Transactions involving option shares for all plans are summarized as follows:
 
Number of
Shares Subject
to Option
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at September 30, 2015
306,500

 
$
37.73

 
 
 
 
Granted in 2016

 
$

 
 
 
 
Exercised in 2016
(287,500
)
 
$
37.62

 
 
 
 
Forfeited in 2016

 
$

 
 
 
 
Outstanding at September 30, 2016
19,000

 
$
39.48

 
0.19
 
$
277

Option shares exercisable at September 30, 2016
19,000

 
$
39.48

 
0.19
 
$
277

Option shares available for future grant at September 30, 2016(1)
2,714,005

 
 
 
 
 
 
 
(1)
Includes shares available for SARs, restricted stock and performance share grants.
The total intrinsic value of stock options exercised during the years ended September 30, 2016, 2015 and 2014 totaled approximately $4.1 million, $5.1 million, and $13.7 million, respectively. For 2016, 2015 and 2014, the amount of cash received by the Company from the exercise of such stock options was approximately $8.0 million, $5.6 million, and $7.4 million, respectively. The Company last granted stock options in fiscal 2007 and all outstanding stock options have been fully vested since fiscal 2010.
SARs
Transactions involving SARs for all plans are summarized as follows:
 
Number of
Shares Subject
To Option
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at September 30, 2015
1,732,784

 
$
48.70

 
 
 
 
Granted in 2016

 
$

 
 
 
 
Exercised in 2016
(96,796
)
 
$
52.02

 
 
 
 
Forfeited in 2016

 
$

 
 
 
 
Expired in 2016
(45,000
)
 
$
59.48

 
 
 
 
Outstanding at September 30, 2016
1,590,988

 
$
48.19

 
3.94
 
$
9,356

SARs exercisable at September 30, 2016
1,585,988

 
$
48.16

 
3.93
 
$
9,369

The Company did not grant any SARs during the years ended September 30, 2015 and 2014. The Company’s SARs include both performance based and non-performance based SARs, but the performance conditions associated with the performance based SARs at the time of grant have all been subsequently met. The SARs are considered equity awards under the current authoritative guidance for stock-based compensation. The accounting for SARs is the same as the accounting for stock options.
The total intrinsic value of SARs exercised during the years ended September 30, 2016, 2015 and 2014 totaled approximately $0.4 million, $2.0 million, and $8.4 million, respectively. For the years ended September 30, 2016, 2015 and 2014, 113,082 SARs, 157,386 SARs and 323,188 SARs, respectively, became fully vested. The total fair value of the SARs that became vested during each of the years ended September 30, 2016, 2015 and 2014 was approximately $1.2 million, $1.7 million and $3.8 million, respectively. As of September 30, 2016, unrecognized compensation expense related to SARs totaled less than $0.1 million, which will be recognized over a weighted average period of 7 months.
 
 
 
 
 
 

Restricted Share Awards
Transactions involving restricted share awards for all plans are summarized as follows: 
 
Number of
Restricted
Share Awards
 
Weighted Average
Fair Value per
Award
Outstanding at September 30, 2015
60,000

 
$
47.53

Granted in 2016

 
$

Vested in 2016
(5,000
)
 
$
48.41

Forfeited in 2016
(35,000
)
 
$
47.46

Outstanding at September 30, 2016
20,000

 
$
47.46


The Company did not grant any restricted share awards (non-vested stock as defined by the current accounting literature) during the years ended September 30, 2015 and 2014. As of September 30, 2016, unrecognized compensation expense related to restricted share awards totaled approximately $0.3 million, which will be recognized over a weighted average period of 2.6 years.
Vesting restrictions for the 20,000 outstanding shares of non-vested restricted stock at September 30, 2016 will lapse in 2021.
Restricted Stock Units
Transactions involving non-performance based restricted stock units for all plans are summarized as follows:
 
Number of
Restricted
Stock Units
 
Weighted Average
Fair Value per
Award
Outstanding at September 30, 2015
236,948

 
$
59.04

Granted in 2016
101,943

 
$
35.89

Vested in 2016
(70,233
)
 
$
58.57

Forfeited in 2016
(29,507
)
 
$
56.18

Outstanding at September 30, 2016
239,151

 
$
49.67


The Company also granted 88,899 and 82,151 non-performance based restricted stock units during the years ended September 30, 2015 and 2014, respectively. The weighted average fair value of such non-performance based restricted stock units granted in 2015 and 2014 was $64.04 per share and $65.24 per share, respectively. As of September 30, 2016, unrecognized compensation expense related to non-performance based restricted stock units totaled approximately $4.5 million, which will be recognized over a weighted average period of 1.6 years.
Vesting restrictions for the non-performance based restricted stock units outstanding at September 30, 2016 will lapse as follows: 2017 — 64,036 units; 2018 — 44,817 units; 2019 — 53,232 units; 2020 - 43,757 units; and 2021 - 33,309 units.
Transactions involving performance based restricted stock units for all plans are summarized as follows:
 
Number of Performance Based
Restricted Stock Units
 
Weighted Average
Fair Value per
Award
Outstanding at September 30, 2015
233,487

 
$
49.61

Granted in 2016

 
$

Vested in 2016

 
$

Forfeited in 2016

 
$

Canceled in 2016
(233,487
)
 
$
49.61

Outstanding at September 30, 2016

 
$


The Company did not grant any performance based restricted stock units during the years ended September 30, 2015 and 2014. The performance based restricted stock units outstanding at September 30, 2015 had to 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, was 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 were to vest depended upon the Company’s performance relative to the report group and not upon the absolute level of return achieved by the Company. Based on the significant loss that the Company experienced during 2015, management determined as of September 30, 2015 that the performance conditions associated with the performance based restricted stock units outstanding at September 30, 2015 would not be met. Accordingly, the cumulative stock-based compensation expense of approximately $8.0 million associated with such restricted stock units was reversed during 2015, and during the year ended September 30, 2016, the restricted stock units were canceled.
Performance Shares
Transactions involving performance shares for all plans are summarized as follows:
 
Number of
Performance
Shares
 
Weighted Average
Fair Value per
Award
Outstanding at September 30, 2015
204,742

 
$
66.17

Granted in 2016
309,996

 
$
30.71

Vested in 2016

 
$

Forfeited in 2016
(76,504
)
 
$
43.89

Outstanding at September 30, 2016
438,234

 
$
44.98


The Company granted 107,044 and 116,090 performance shares during the years ended September 30, 2015 and 2014, respectively. The weighted average grant date fair value of such performance shares granted in 2015 and 2014 was $65.26 per share and $67.16 per share, respectively. As of September 30, 2016, unrecognized compensation expense related to performance shares totaled approximately $7.0 million, which will be recognized over a weighted average period of 1.4 years. Vesting restrictions for the outstanding performance shares at September 30, 2016 will lapse as follows: 2017 - 86,968 shares; 2018 - 89,192 shares; and 2019 - 262,074 shares.
Half of the performance shares granted during the year ended September 30, 2016 must meet a performance goal related to relative return on capital over the performance cycle of October 1, 2015 to September 30, 2018. In addition, half of the performance shares granted during the year ended September 30, 2015 must meet a performance goal related to relative return on capital over the performance cycle of October 1, 2014 to September 30, 2017, and half of the performance shares granted during the year ended September 30, 2014 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 goals over their respective performance cycles for these performance shares granted during 2016, 2015 and 2014 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 year ended September 30, 2016 must meet a performance goal related to relative total shareholder return over the performance cycle of October 1, 2015 to September 30, 2018. In addition, the other half of the performance shares granted during the year ended September 30, 2015 must meet a performance goal related to relative total shareholder return over the performance cycle of October 1, 2014 to September 30, 2017, and the other half of the performance shares granted during the year ended September 30, 2014 must meet a performance goal related to relative total shareholder return over the performance cycle of October 1, 2013 to September 30, 2016.  The performance goals over their respective performance cycles for these total shareholder return performance shares ("TSR performance shares") granted during 2016, 2015 and 2014 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 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 TSR 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 the TSR 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 TSR performance shares awarded, the result of which is recorded as compensation expense over the vesting term of the award. In calculating fair value of the award, the risk-free interest rate is based on the yield of a Treasury Note with a term commensurate with the remaining term of the TSR performance shares. The remaining term is based on the remainder of the performance cycle as of the date of grant. The expected volatility is based on historical daily stock price returns. For the TSR performance shares, it was assumed that there would be no forfeitures, based on the vesting term and the number of grantees. The following assumptions were used in estimating the fair value of the TSR performance shares at the date of grant:
 
Year Ended September 30
 
2016
 
2015
 
2014
Risk-Free Interest Rate
1.26
%
 
1.01
%
 
0.62
%
Remaining Term at Date of Grant (Years)
2.79

 
2.78

 
2.78

Expected Volatility
20.5
%
 
20.1
%
 
28.3
%
Expected Dividend Yield (Quarterly)
N/A

 
N/A

 
N/A


Redeemable Preferred Stock
As of September 30, 2016, there were 10,000,000 shares of $1 par value Preferred Stock authorized but unissued.
Long-Term Debt
The outstanding long-term debt is as follows:
 
At September 30
 
2016
 
2015
 
(Thousands)
Medium-Term Notes(1):
 
 
 
7.4% due March 2023 to June 2025
$
99,000

 
$
99,000

Notes(1)(3):
 
 
 
3.75% to 8.75% due April 2018 to July 2025
2,000,000

 
2,000,000

Total Long-Term Debt
2,099,000

 
2,099,000

Less Unamortized Discount and Debt Issuance Costs
12,748

 
14,991

Less Current Portion(2)

 

 
$
2,086,252

 
$
2,084,009

 
(1)
The Medium-Term Notes and Notes are unsecured.
(2)
None of the Company’s long-term debt at September 30, 2016 and 2015 will mature within the following twelve-month period.
(3)
The holders of these notes may require the Company to repurchase their notes at a price equal to 101% of the principal amount in the event of both a change in control and a ratings downgrade to a rating below investment grade.
On June 25, 2015, the Company issued $450.0 million of 5.20% notes due July 15, 2025. After deducting underwriting discounts, commissions and other debt issuance costs, the net proceeds to the Company amounted to $444.6 million. The proceeds of this debt issuance were used for general corporate purposes, including the reduction of short-term debt.
As of September 30, 2016, the aggregate principal amounts of long-term debt maturing during the next five years and thereafter are as follows: zero in 2017, $300.0 million in 2018, $250.0 million in 2019, zero in 2020 and 2021 and $1,549.0 million thereafter.
Short-Term Borrowings
The Company historically has obtained short-term funds either through bank loans or the issuance of commercial paper. On September 9, 2016, the Company entered into a Third Amended and Restated Credit Agreement (Credit Agreement) with a syndicate of 14 banks. This Credit Agreement provides a $750.0 million multi-year unsecured committed revolving credit facility through December 5, 2019. The Credit Agreement also provides a $500.0 million 364-day unsecured committed revolving credit facility with 11 of the 14 banks through September 8, 2017. The Company also has a number of individual uncommitted or discretionary lines of credit with certain financial institutions for general corporate purposes. Borrowings under the uncommitted lines of credit are made at competitive market rates. The uncommitted credit lines are revocable at the option of the financial institutions and are reviewed on an annual basis. The Company anticipates that its uncommitted lines of credit generally will be renewed or substantially replaced by similar lines. The total amount available to be issued under the Company’s commercial paper program is $500.0 million. At September 30, 2016, the commercial paper program was backed by the Credit Agreement.
The Company did not have any outstanding commercial paper or short term notes payable to banks at September 30, 2016 and 2015.
Debt Restrictions
The Credit Agreement provides that the Company's debt to capitalization ratio will not exceed .675 at the last day of any fiscal quarter through September 30, 2017, or .65 at the last day of any fiscal quarter from October 1, 2017 through December 5, 2019. At September 30, 2016, the Company’s debt to capitalization ratio (as calculated under the facility) was .58. The constraints specified in the Credit Agreement would have permitted an additional $1.08 billion in short-term and/or long-term debt to be outstanding (further limited by the indenture covenants discussed below) before the Company’s debt to capitalization ratio exceeded .675.
A downgrade in the Company’s credit ratings could increase borrowing costs, negatively impact the availability of capital from banks, commercial paper purchasers and other sources, and require the Company's subsidiaries to post letters of credit, cash or other assets as collateral with certain counterparties. If the Company is not able to maintain investment-grade credit ratings, it may not be able to access commercial paper markets. However, the Company expects that it could borrow under its credit facilities or rely upon other liquidity sources, including cash provided by operations.
The Credit Agreement contains a cross-default provision whereby the failure by the Company or its significant subsidiaries to make payments under other borrowing arrangements, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement. In particular, a repayment obligation could be triggered if (i) the Company or any of its significant subsidiaries fails to make a payment when due of any principal or interest on any other indebtedness aggregating $40.0 million or more, or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $40.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of September 30, 2016, the Company had no debt outstanding under the Credit Agreement.
Under the Company’s existing indenture covenants, at September 30, 2016, the Company expects to be precluded from issuing additional long-term unsecured indebtedness until the second half of fiscal 2017 as a result of impairments of its oil and gas properties recognized during the years ended September 30, 2016 and 2015. The 1974 indenture would not preclude the Company from issuing new indebtedness to replace maturing debt, and the Company expects that it could borrow under its credit facilities. The Company's present liquidity position is believed to be adequate to satisfy known demands.
The Company’s 1974 indenture pursuant to which $98.7 million (or 4.7%) of the Company’s long-term debt (as of September 30, 2016) was issued, contains a cross-default provision whereby the failure by the Company to perform certain obligations under other borrowing arrangements could trigger an obligation to repay the debt outstanding under the indenture. In particular, a repayment obligation could be triggered if the Company fails (i) to pay any scheduled principal or interest on any debt under any other indenture or agreement, or (ii) to perform any other term in any other such indenture or agreement, and the effect of the failure causes, or would permit the holders of the debt to cause, the debt under such indenture or agreement to become due prior to its stated maturity, unless cured or waived.
Fair Value Measurements
Fair Value Measurements
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 September 30, 2016 and 2015. 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 combines gas and oil swaps because a significant number of the counterparties enter into both gas and oil swap agreements with the Company. 
 
At Fair Value as of September 30, 2016
Recurring Fair Value Measures
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustments(1)
 
Total(1)
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Cash Equivalents — Money Market Mutual Funds
$
113,407

 
$

 
$

 
$

 
$
113,407

Derivative Financial Instruments:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts — Gas
2,623

 

 

 
(2,276
)
 
347

Over the Counter Swaps — Gas and Oil

 
119,654

 

 
(3,860
)
 
115,794

Foreign Currency Contracts

 

 

 
(2,337
)
 
(2,337
)
Other Investments:
 
 
 
 
 
 
 
 

Balanced Equity Mutual Fund
36,658

 

 

 

 
36,658

Fixed Income Mutual Fund
31,395

 

 

 

 
31,395

Common Stock — Financial Services Industry
2,902

 

 

 

 
2,902

Hedging Collateral Deposits
1,484

 

 

 

 
1,484

Total
$
188,469

 
$
119,654

 
$

 
$
(8,473
)
 
$
299,650

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts — Gas
$
2,276

 
$

 
$

 
$
(2,276
)
 
$

Over the Counter Swaps — Gas and Oil

 
5,322

 

 
(3,860
)
 
1,462

Foreign Currency Contracts

 
2,337

 

 
(2,337
)
 

Total
$
2,276

 
$
7,659

 
$

 
$
(8,473
)
 
$
1,462

Total Net Assets/(Liabilities)
$
186,193

 
$
111,995

 
$

 
$

 
$
298,188


 
At Fair Value as of September 30, 2015
Recurring Fair Value Measures
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustments(1)
 
Total(1)
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Cash Equivalents — Money Market Mutual Funds
$
92,196

 
$

 
$

 
$

 
$
92,196

Derivative Financial Instruments:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts — Gas
6,373

 

 

 
(6,373
)
 

Over the Counter Swaps — Gas and Oil

 
272,335

 
1,791

 
(808
)
 
273,318

Foreign Currency Contracts

 

 

 
(2,955
)
 
(2,955
)
Other Investments:
 
 
 
 
 
 
 
 
 
Balanced Equity Mutual Fund
34,884

 

 

 

 
34,884

Fixed Income Mutual Fund
8,004

 

 

 

 
8,004

Common Stock — Financial Services Industry
4,318

 

 

 

 
4,318

Other Common Stock
450

 

 

 

 
450

Hedging Collateral Deposits
11,124

 

 

 

 
11,124

Total
$
157,349


$
272,335


$
1,791


$
(10,136
)

$
421,339

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts — Gas
$
15,276

 
$

 
$

 
$
(6,373
)
 
$
8,903

Over the Counter Swaps — Gas and Oil

 
1,981

 

 
(808
)
 
1,173

Foreign Currency Contracts

 
2,955

 

 
(2,955
)
 

Total
$
15,276

 
$
4,936

 
$

 
$
(10,136
)
 
$
10,076

Total Net Assets/(Liabilities)
$
142,073

 
$
267,399

 
$
1,791

 
$

 
$
411,263

 
(1)
Netting Adjustments represent the impact of legally-enforceable master netting arrangements that allow the Company to net gain and loss positions held with the same counterparties. The net asset or net liability for each counterparty is recorded as an asset or liability on the Company’s balance sheet.
Derivative Financial Instruments
At September 30, 2016 and 2015, the derivative financial instruments reported in Level 1 consist of natural gas NYMEX and ICE futures contracts used in the Company’s Energy Marketing segment. Hedging collateral deposits of $1.5 million (at September 30, 2016) and $11.1 million (at September 30, 2015), which are associated with these futures contracts, have been reported in Level 1 as well. The derivative financial instruments reported in Level 2 at September 30, 2016 and 2015 consist of natural gas price swap agreements used in the Company’s Exploration and Production and Energy Marketing segments, the majority of the crude oil price swap agreements used in the Company’s Exploration and Production segment and foreign currency contracts used in the Company's Exploration and Production segment. The fair value of the Level 2 price swap agreements is based on an internal, discounted cash flow model that uses observable inputs (i.e. LIBOR based discount rates and basis differential information, if applicable, at active natural gas and crude oil trading markets). The fair value of the Level 2 foreign currency contracts is determined using the market approach based on observable market transactions of forward Canadian currency rates. The derivative financial instruments reported in Level 3 consisted of a small portion of the crude oil price swap agreements used in the Company’s Exploration and Production segment at September 30, 2015 that settled prior to December 31, 2015. The fair value of the Level 3 crude oil price swap agreements was based on an internal, discounted cash flow model that uses both observable (i.e. LIBOR based discount rates) and unobservable inputs (i.e. basis differential information of crude oil trading markets with low trading volume).

The accounting rules for fair value measurements and disclosures require consideration of the impact of nonperformance risk (including credit risk) from a market participant perspective in the measurement of the fair value of assets and liabilities. At September 30, 2016, the Company determined that nonperformance risk would have no material impact on its financial position or results of operation. To assess nonperformance risk, the Company considered information such as any applicable collateral posted, master netting arrangements, and applied a market-based method by using the counterparty's (assuming the derivative is in a gain position) or the Company’s (assuming the derivative is in a loss position) credit default swaps rates.
The tables listed below provide reconciliations of the beginning and ending net balances for assets and liabilities measured at fair value and classified as Level 3 for the years ended September 30, 2016 and September 30, 2015, respectively. For the years ended September 30, 2016 and September 30, 2015, no transfers in or out of Level 1 or Level 2 occurred. There were no purchases or sales of derivative financial instruments during the periods presented in the tables below. All settlements of the derivative financial instruments are reflected in the Gains/Losses Realized and Included in Earnings column of the tables below (amounts in parentheses indicate credits in the derivative asset/liability accounts). 
Fair Value Measurements Using Unobservable Inputs (Level 3)
 
 
 
Total Gains/Losses
 
 
 
 
 
October 1,
2015
 
(Gains)/Losses
Realized and
Included in
Earnings
 
Gains/(Losses)
Unrealized and
Included in Other
Comprehensive
 Income (Loss)
 
Transfer
In/(Out) of
Level 3
 
September 30,
2016
 
(Dollars in thousands)
Derivative Financial Instruments(2)
$
1,791

 
$
(2,002
)
(1)
$
211

 
$

 
$

 
(1)
Amounts are reported in Operating Revenues in the Consolidated Statement of Income for the year ended September 30, 2016.
(2)
Derivative Financial Instruments are shown on a net basis.
 
 
 
Total Gains/Losses
 
 
 
 
 
October 1,
2014
 
(Gains)/Losses
Realized and
Included in
Earnings
 
Gains/(Losses)
Unrealized and
Included in Other
Comprehensive
 Income (Loss)
 
Transfer
In/(Out) of
Level 3
 
September 30,
2015
 
(Dollars in thousands)
Derivative Financial Instruments(2)
$
1,368

 
$
(12,738
)
(1)
$
13,161

 
$

 
$
1,791

 
(1)
Amounts are reported in Operating Revenues in the Consolidated Statement of Income for the year ended September 30, 2015.
(2)
Derivative Financial Instruments are shown on a net basis.
Financial Instruments
Financial Instruments
Financial Instruments
Long-Term Debt
The fair market value of the Company’s debt, as presented in the table below, was determined using a discounted cash flow model, which incorporates the Company’s credit ratings and current market conditions in determining the yield, and subsequently, the fair market value of the debt. Based on these criteria, the fair market value of long-term debt, including current portion, was as follows:
 
 
At September 30
 
2016 Carrying
Amount
 
2016 Fair
Value
 
2015 Carrying
Amount
 
2015 Fair
Value
 
(Thousands)
Long-Term Debt
$
2,086,252

 
$
2,255,562

 
$
2,084,009

 
$
2,129,558


The fair value amounts are not intended to reflect principal amounts that the Company will ultimately be required to pay. Carrying amounts for other financial instruments recorded on the Company’s Consolidated Balance Sheets approximate fair value. The fair value of long-term debt was calculated using observable inputs (U.S. Treasuries/LIBOR for the risk-free component and company specific credit spread information — generally obtained from recent trade activity in the debt). As such, the Company considers the debt to be Level 2.
Any temporary cash investments, notes payable to banks and commercial paper are stated at cost.