NATIONAL FUEL GAS CO, 10-Q filed on 1/31/2020
Quarterly Report
v3.19.3.a.u2
Document And Entity Information - $ / shares
3 Months Ended
Dec. 31, 2019
Jan. 31, 2020
Cover page.    
Amendment Flag false  
Current Fiscal Year End Date --09-30  
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2020  
Document Period End Date Dec. 31, 2019  
Document Quarterly Report true  
Document Transition Report false  
Document Type 10-Q  
Entity Address, Address Line One 6363 Main Street  
Entity Address, City or Town Williamsville,  
Entity Address, State or Province NY  
Entity Address, Postal Zip Code 14221  
Entity Central Index Key 0000070145  
Entity Common Stock, Shares Outstanding   86,560,898
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Emerging Growth Company false  
Entity File Number 1-3880  
Entity Filer Category Large Accelerated Filer  
Entity Incorporation, State or Country Code NJ  
Entity Registrant Name NATIONAL FUEL GAS COMPANY  
Entity Shell Company false  
Entity Small Business false  
Entity Tax Identification Number 13-1086010  
City Area Code 716  
Local Phone Number 857-7000  
Title of 12(b) Security Common Stock, par value $1.00 per share  
Trading Symbol NFG  
Security Exchange Name NYSE  
Entity Listing, Par Value Per Share $ 1.00  
v3.19.3.a.u2
Consolidated Statements Of Income And Earnings Reinvested In The Business (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Dec. 31, 2019
Dec. 31, 2018
INCOME    
Operating Revenues $ 444,188 $ 490,247
Operating Expenses:    
Property, Franchise and Other Taxes 23,144 24,005
Depreciation, Depletion and Amortization 74,918 64,255
Total Operating Expenses 296,168 328,564
Operating Income 148,020 161,683
Other Income (Expense):    
Other Income (Deductions) (3,040) (9,602)
Interest Expense on Long-Term Debt (25,443) (25,439)
Other Interest Expense (1,551) (1,073)
Income Before Income Taxes 117,986 125,569
Income Tax Expense 31,395 22,909
Net Income Available for Common Stock 86,591 102,660
EARNINGS REINVESTED IN THE BUSINESS    
Balance at Beginning of Period 1,272,601 1,098,900
Beginning Retained Earnings Unappropriated And Current Period Net Income 1,359,192 1,201,560
Dividends on Common Stock (37,650) (36,663)
Balance at December 31 $ 1,320,592 $ 1,172,334
Earnings Per Common Share, Basic:    
Net Income Available for Common Stock (in dollars per share) $ 1.00 $ 1.19
Earnings Per Common Share, Diluted:    
Net Income Available for Common Stock (in dollars per share) $ 1.00 $ 1.18
Weighted Average Common Shares Outstanding:    
Used in Basic Calculation (shares) 86,378,450 86,032,729
Used in Diluted Calculation (shares) 86,883,152 86,708,814
Dividends Per Common Share:    
Dividends Declared (in dollars per share) $ 0.435 $ 0.425
Purchased Gas [Member]    
Operating Expenses:    
Purchased Gas $ 92,272 $ 138,660
Utility and Energy Marketing [Member]    
INCOME    
Operating Revenues 228,026 272,092
Operating Expenses:    
Operation and Maintenance 43,256 43,915
Exploration and Production and Other [Member]    
INCOME    
Operating Revenues 167,193 163,937
Operating Expenses:    
Operation and Maintenance 36,693 32,795
Pipeline and Storage and Gathering [Member]    
INCOME    
Operating Revenues 48,969 54,218
Operating Expenses:    
Operation and Maintenance 25,885 24,934
Guidance for Hedging [Member]    
EARNINGS REINVESTED IN THE BUSINESS    
Cumulative Effect of Adoption of Authoritative Guidance (950) 0
Guidance for Recognition and Measurement of Financial Assets and Liabilities [Member]    
EARNINGS REINVESTED IN THE BUSINESS    
Cumulative Effect of Adoption of Authoritative Guidance $ 0 $ 7,437
v3.19.3.a.u2
Consolidated Statements Of Comprehensive Income (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Statement of Comprehensive Income [Abstract]    
Net Income Available for Common Stock $ 86,591 $ 102,660
Other Comprehensive Income (Loss), Before Tax:    
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period 495  
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period   44,518
Reclassification Adjustment for Realized (Gains) Losses on Derivative Financial Instruments in Net Income (7,352)  
Reclassification Adjustment for Realized (Gains) Losses on Derivative Financial Instruments in Net Income   20,517
Cumulative Effect of Adoption of Authoritative Guidance for Hedging 1,313 0
Reclassification Adjustment for the Cumulative Effect of Adoption of Authoritative Guidance for Financial Assets and Liabilities to Earnings Reinvested in the Business 0 (11,738)
Other Comprehensive Income (Loss), Before Tax (5,544) 53,297
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period 119  
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period   12,744
Reclassification Adjustment for Income Tax Benefit (Expense) on Realized Losses (Gains) from Derivative Financial Instruments in Net Income (2,031)  
Reclassification Adjustment for Income Tax Benefit (Expense) on Realized Losses (Gains) from Derivative Financial Instruments in Net Income   5,794
Income Tax Benefit (Expense) on Cumulative Effect of Adoption of Authoritative Guidance for Hedging 363 0
Reclassification Adjustment for Income Tax Benefit (Expense) on the Cumulative Effect of Adoption of Authoritative Guidance for Financial Assets and Liabilities to Earnings Reinvested in the Business 0 (4,301)
Income Taxes – Net (1,549) 14,237
Other Comprehensive Income (Loss) (3,995) 39,060
Comprehensive Income $ 82,596 $ 141,720
v3.19.3.a.u2
Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Dec. 31, 2019
Sep. 30, 2019
ASSETS    
Property, Plant and Equipment $ 11,402,308 $ 11,204,838
Less - Accumulated Depreciation, Depletion and Amortization 5,756,084 5,695,328
Property, Plant and Equipment, Net, Total 5,646,224 5,509,510
Current Assets    
Cash and Temporary Cash Investments 34,966 20,428
Hedging Collateral Deposits [1] 9,666 6,832
Receivables – Net of Allowance for Uncollectible Accounts of $26,717and $25,788, Respectively 158,944 139,956
Unbilled Revenue 58,306 18,758
Gas Stored Underground 29,991 36,632
Materials and Supplies - at average cost 40,373 40,717
Unrecovered Purchased Gas Costs 1,619 2,246
Other Current Assets 96,831 97,054
Total Current Assets 430,696 362,623
Other Assets    
Recoverable Future Taxes 116,188 115,197
Unamortized Debt Expense 13,578 14,005
Other Regulatory Assets 165,409 167,320
Deferred Charges 56,936 33,843
Other Investments 141,229 144,917
Goodwill 5,476 5,476
Prepaid Post-Retirement Benefit Costs 64,999 60,517
Fair Value of Derivative Financial Instruments 40,569 48,669
Other 21,354 80
Total Other Assets 625,738 590,024
Total Assets 6,702,658 6,462,157
Capitalization:    
Common Stock, $1 Par Value Authorized - 200,000,000 Shares; Issued and Outstanding - 86,551,528 Shares and 86,315,287 Shares, Respectively 86,552 86,315
Paid in Capital 831,146 832,264
Earnings Reinvested in the Business 1,320,592 1,272,601
Accumulated Other Comprehensive Loss (56,150) (52,155)
Total Comprehensive Shareholders’ Equity 2,182,140 2,139,025
Long-Term Debt, Net of Current Portion and Unamortized Discount and Debt Issuance Costs 2,134,339 2,133,718
Total Capitalization 4,316,479 4,272,743
Current and Accrued Liabilities    
Notes Payable to Banks and Commercial Paper 139,800 55,200
Current Portion of Long-Term Debt 0 0
Accounts Payable 126,985 132,208
Amounts Payable to Customers 3,444 4,017
Dividends Payable 37,650 37,547
Interest Payable on Long-Term Debt 29,461 18,508
Customer Advances 13,727 13,044
Customer Security Deposits 15,510 16,210
Other Accruals and Current Liabilities 173,603 139,600
Fair Value of Derivative Financial Instruments 6,282 5,574
Total Current and Accrued Liabilities 546,462 421,908
Deferred Credits    
Deferred Income Taxes 708,774 653,382
Taxes Refundable to Customers 361,556 366,503
Cost of Removal Regulatory Liability 222,172 221,699
Other Regulatory Liabilities 148,350 142,367
Pension and Other Post-Retirement Liabilities 129,616 133,729
Asset Retirement Obligations 128,382 127,458
Other Deferred Credits 140,867 122,368
Total Deferred Credits 1,839,717 1,767,506
Commitments and Contingencies (Note 8) 0 0
Total Capitalization and Liabilities $ 6,702,658 $ 6,462,157
[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.
v3.19.3.a.u2
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2019
Sep. 30, 2019
Statement of Financial Position [Abstract]    
Receivables, Allowance for Uncollectible Accounts $ 26,717 $ 25,788
Common Stock, Par Value $ 1 $ 1
Common Stock, Shares Authorized 200,000,000 200,000,000
Common Stock, Shares Issued 86,551,528 86,315,287
Common Stock, Shares Outstanding 86,551,528 86,315,287
v3.19.3.a.u2
Consolidated Statements Of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Dec. 31, 2019
Dec. 31, 2018
OPERATING ACTIVITIES    
Net Income Available for Common Stock $ 86,591 $ 102,660
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:    
Depreciation, Depletion and Amortization 74,918 64,255
Deferred Income Taxes 51,366 64,175
Stock-Based Compensation 3,266 5,311
Other 1,911 2,182
Change in:    
Receivables and Unbilled Revenue (58,655) (101,541)
Gas Stored Underground and Materials and Supplies 6,985 8,353
Unrecovered Purchased Gas Costs 627 (4,496)
Other Current Assets 14 (1,195)
Accounts Payable 8,280 1,502
Amounts Payable to Customers (573) (3,394)
Customer Advances 683 (6,258)
Customer Security Deposits (700) (1,861)
Other Accruals and Current Liabilities 15,438 38,412
Other Assets (28,259) (42,400)
Other Liabilities 5,857 (21,333)
Net Cash Provided by Operating Activities 167,749 104,372
INVESTING ACTIVITIES    
Capital Expenditures (198,495) (177,567)
Other 5,212 (2,549)
Net Cash Used in Investing Activities (193,283) (180,116)
Financing Activities    
Changes in Notes Payable to Banks and Commercial Paper 84,600 0
Dividends Paid on Common Stock (37,547) (36,532)
Net Repurchases of Common Stock (4,147) (8,233)
Net Cash Provided by (Used in) Financing Activities 42,906 (44,765)
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash 17,372 (120,509)
Cash, Cash Equivalents and Restricted Cash at October 1 27,260 233,047
Cash, Cash Equivalents and Restricted Cash at December 31 44,632 112,538
Supplemental Disclosure of Cash Flow Information, Non-Cash Investing Activities:    
Non-Cash Capital Expenditures $ 93,838 $ 86,175
v3.19.3.a.u2
Summary Of Significant Accounting Policies
3 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
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.

Earnings for Interim Periods.  The Company, in its opinion, has included all adjustments (which consist of only normally recurring adjustments, unless otherwise disclosed in this Form 10-Q) that are necessary for a fair statement of the results of operations for the reported periods. The consolidated financial statements and notes thereto, included herein, should be read in conjunction with the financial statements and notes for the years ended September 30, 2019, 2018 and 2017 that are included in the Company's 2019 Form 10-K.  The consolidated financial statements for the year ended September 30, 2020 will be audited by the Company's independent registered public accounting firm after the end of the fiscal year.
 
The earnings for the three months ended December 31, 2019 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2020.  Most of the business of both the Utility segment and the Company's NFR operations (included in the All Other category) is seasonal in nature and is influenced by weather conditions.  Due to the seasonal nature of the heating business in the Utility segment and in the Company's NFR operations, earnings during the winter months normally represent a substantial part of the earnings that those businesses are expected to achieve for the entire fiscal year.  The Company’s business segments are discussed more fully in Note 9 — Business Segment Information.
 
Consolidated Statements of Cash Flows.  The components, as reported on the Company’s Consolidated Balance Sheets, of the total cash, cash equivalents, and restricted cash presented on the Statement of Cash Flows are as follows (in thousands):
 
Three Months Ended 
 December 31, 2019
 
Three Months Ended 
 December 31, 2018
 
Balance at October 1, 2019
 
Balance at December 31, 2019
 
Balance at October 1, 2018
 
Balance at December 31, 2018
 
 
 
 
 
 
 
 
Cash and Temporary Cash Investments
$
20,428

 
$
34,966

 
$
229,606

 
$
109,754

Hedging Collateral Deposits
6,832

 
9,666

 
3,441

 
2,784

Cash, Cash Equivalents, and Restricted Cash
$
27,260

 
$
44,632

 
$
233,047

 
$
112,538



The Company considers all highly liquid debt instruments purchased with a maturity date of generally three months or less to be cash equivalents. The Company’s restricted cash is composed entirely of amounts reported as Hedging Collateral Deposits on the Consolidated Balance Sheets. Hedging Collateral Deposits 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 instruments liability or asset balances.

Gas Stored Underground.  In the Utility segment, gas stored underground is carried at lower of cost or net realizable value, on a LIFO method.  Gas stored underground normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters.  In the Utility segment, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets under the caption “Other Accruals and Current Liabilities.”  Such reserve, which amounted to $1.1 million at December 31, 2019, is reduced to zero by September 30 of each year as the inventory is replenished.
 
Property, Plant and Equipment.  In the Company’s Exploration and Production segment, oil and gas property acquisition, exploration and development costs are capitalized under the full cost method of accounting. Under this methodology, all costs associated with property acquisition, exploration and development activities are capitalized, including internal costs directly identified with acquisition, exploration and development activities. The internal costs that are capitalized do not include any costs
related to production, general corporate overhead, or similar activities. The Company does not recognize any gain or loss on the sale or other disposition of oil and gas properties unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center. The Company's capitalized costs relating to oil and gas producing activities, net of accumulated depreciation, depletion and amortization, were $1.7 billion at both December 31, 2019 and September 30, 2019.
 
Capitalized costs include costs related to unproved properties, which are excluded from amortization until proved reserves are found or it is determined that the unproved properties are impaired.  Such costs amounted to $57.9 million and $53.5 million at December 31, 2019 and September 30, 2019, respectively.  All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the pool of capitalized costs being amortized.
 
Capitalized costs are subject to the SEC full cost ceiling test. The ceiling test, which is performed each quarter, determines a limit, or ceiling, on the amount of property acquisition, exploration and development costs that can be capitalized. The ceiling under this test represents (a) the present value of estimated future net cash flows, excluding future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, using a discount factor of 10%, which is computed by applying prices of oil and gas (as adjusted for hedging) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet, less estimated future expenditures, plus (b) the cost of unevaluated properties not being depleted, less (c) income tax effects related to the differences between the book and tax basis of the properties. The gas and oil prices used to calculate the full cost ceiling are based on an unweighted arithmetic average of the first day of the month oil and gas prices for each month within the twelve-month period prior to the end of the reporting period. If capitalized costs, net of accumulated depreciation, depletion and amortization and related deferred income taxes, exceed the ceiling at the end of any quarter, a permanent impairment is required to be charged to earnings in that quarter.  At December 31, 2019, the ceiling exceeded the book value of the oil and gas properties by approximately $59.1 million. In adjusting estimated future cash flows for hedging under the ceiling test at December 31, 2019, estimated future net cash flows were increased by $9.1 million.
    
Accumulated Other Comprehensive Loss.  The components of Accumulated Other Comprehensive Loss and changes for the three months ended December 31, 2019 and 2018, 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
Three Months Ended December 31, 2019
 
 
 
 
 
 
 
Balance at October 1, 2019
$
34,675

 
$

 
$
(86,830
)
 
$
(52,155
)
Other Comprehensive Gains and Losses Before Reclassifications
376

 

 

 
376

Amounts Reclassified From Other Comprehensive Income (Loss)
(5,321
)
 

 

 
(5,321
)
Cumulative Effect of Adoption of Authoritative Guidance for Hedging
950

 

 

 
950

Balance at December 31, 2019
$
30,680

 
$

 
$
(86,830
)
 
$
(56,150
)
Three Months Ended December 31, 2018
 
 
 
 
 
 
 
Balance at October 1, 2018
$
(28,611
)
 
$
7,437

 
$
(46,576
)
 
$
(67,750
)
Other Comprehensive Gains and Losses Before Reclassifications
31,774

 

 

 
31,774

Amounts Reclassified From Other Comprehensive Income (Loss)
14,723

 

 

 
14,723

Reclassification Adjustment for the Cumulative Effect of Adoption of Authoritative Guidance for Financial Assets and Liabilities

 
(7,437
)
 

 
(7,437
)
Balance at December 31, 2018
$
17,886

 
$

 
$
(46,576
)
 
$
(28,690
)


In August 2017, the FASB issued authoritative guidance which changes the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and to simplify the application of hedge accounting.
The Company adopted this authoritative guidance effective October 1, 2019, recognizing a cumulative effect adjustment that decreased retained earnings by $1.0 million and increased accumulated other comprehensive income by the same amount.

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 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 accumulated other comprehensive income. The Company adopted this authoritative guidance effective October 1, 2018 and, as called for by the modified retrospective method of adoption, recorded a cumulative effect adjustment during the quarter ended December 31, 2018 to increase retained earnings by $7.4 million and decrease accumulated other comprehensive income by the same amount.
    
Reclassifications Out of Accumulated Other Comprehensive Loss.  The details about the reclassification adjustments out of accumulated other comprehensive loss for the three months ended December 31, 2019 and 2018 are as follows (amounts in parentheses indicate debits to the income statement) (in thousands):
Details About Accumulated Other Comprehensive Loss Components
 
Amount of Gain or (Loss) Reclassified from
Accumulated Other Comprehensive Loss
Affected Line Item in the Statement Where Net Income is Presented
 
Three Months Ended December 31,
 
 
2019
 
2018
 
Gains (Losses) on Derivative Financial Instrument Cash Flow Hedges:
 
 
 
 
 
 
     Commodity Contracts
 

$7,541

 

($18,522
)
 
Operating Revenues
     Commodity Contracts
 
2

 
(902
)
 
Purchased Gas
     Foreign Currency Contracts
 
(191
)
 
(1,093
)
 
Operating Revenues
 
 
7,352

 
(20,517
)
 
Total Before Income Tax
 
 
(2,031
)
 
5,794

 
Income Tax Expense
 
 

$5,321

 

($14,723
)
 
Net of Tax

Other Current Assets.  The components of the Company’s Other Current Assets are as follows (in thousands):
                            
At December 31, 2019
 
At September 30, 2019
 
 
 
 
Prepayments
$
9,135

 
$
12,728

Prepaid Property and Other Taxes
15,340

 
14,361

Federal Income Taxes Receivable
42,389

 
42,388

State Income Taxes Receivable
5,576

 
8,579

Fair Values of Firm Commitments
9,803

 
7,538

Regulatory Assets
14,588

 
11,460

 
$
96,831

 
$
97,054



Other Assets.  The components of the Company’s Other Assets are as follows (in thousands):
                            
At December 31, 2019
 
At September 30, 2019
 
 
 
 
Federal Income Taxes Receivable
$
21,273

 
$

Other
81

 
80

 
$
21,354

 
$
80


 
Other Accruals and Current Liabilities.  The components of the Company’s Other Accruals and Current Liabilities are as follows (in thousands):
                            
At December 31, 2019
 
At September 30, 2019
 
 
 
 
Accrued Capital Expenditures
$
59,933

 
$
33,713

Regulatory Liabilities
50,713

 
50,332

Reserve for Gas Replacement
1,100

 

Liability for Royalty and Working Interests
20,052

 
18,057

Non-Qualified Benefit Plan Liability
13,194

 
13,194

Other
28,611

 
24,304

 
$
173,603

 
$
139,600


 
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 had outstanding were SARs, restricted stock units and performance shares.  For the quarter ended December 31, 2019, 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.  SARs, restricted stock units and performance shares that are antidilutive are excluded from the calculation of diluted earnings per common share. There were 733,617 securities and 318,106 securities excluded as being antidilutive for the quarter ended December 31, 2019 and December 31, 2018 respectively.
 
Stock-Based Compensation.  The Company granted 254,608 performance shares during the quarter ended December 31, 2019. The weighted average fair value of such performance shares was $43.32 per share for the quarter ended December 31, 2019. 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.
 
Half of the performance shares granted during the quarter ended December 31, 2019 must meet a performance goal related to relative return on capital over a three-year performance cycle.  The performance goal over the performance cycle is the Company’s total return on capital relative to the total return on capital of other companies in a group selected by the Compensation Committee (“Report Group”).  Total return on capital for a given company means the average of the Report Group companies’ returns on capital for each twelve month period corresponding to each of the Company’s fiscal years during the performance cycle, based on data reported for the Report Group companies in the Bloomberg database.  The number of these performance shares that will vest and be paid will depend upon the Company’s performance relative to the Report Group and not upon the absolute level of return achieved by the Company.  The fair value of these performance shares is calculated by multiplying the expected number of shares that will be issued by the average market price of Company common stock on the date of grant reduced by the present value of forgone dividends over the vesting term of the award.  The fair value is recorded as compensation expense over the vesting term of the award.  The other half of the performance shares granted during the quarter ended December 31, 2019 must meet a performance goal related to relative total shareholder return over a three-year performance cycle.  The performance goal over the performance cycle is the Company’s three-year total shareholder return relative to the three-year total shareholder return of the other companies in the Report Group.  Three-year total 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 total shareholder return performance shares ("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.
 
The Company granted 150,839 nonperformance-based restricted stock units during the quarter ended December 31, 2019.  The weighted average fair value of such nonperformance-based restricted stock units was $40.38 per share for the quarter ended December 31, 2019.  Restricted stock units represent the right to receive shares of common stock of the Company (or the
equivalent value in cash or a combination of cash and shares of common stock of the Company, as determined by the Company) at the end of a specified time period. These nonperformance-based restricted stock units do not entitle the participant to receive dividends during the vesting period. The accounting for nonperformance-based restricted stock units is the same as the accounting for restricted share awards, except that the fair value at the date of grant of the restricted stock units must be reduced by the present value of forgone dividends over the vesting term of the award.
v3.19.3.a.u2
Revenue from Contracts with Customers
3 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
Revenue from Contracts with Customers Revenue from Contracts with Customers
 
The Company adopted authoritative guidance regarding revenue recognition on October 1, 2018 using the modified retrospective method of adoption for open contracts as of October 1, 2018. A cumulative effect adjustment to retained earnings was not necessary since no revenue recognition differences were identified when comparing the revenue recognition criteria under the new authoritative guidance to the previous guidance. The Company records revenue related to its derivative financial instruments in the Exploration and Production segment as well as in its NFR operations (included in the All Other category). The Company also records revenue related to alternative revenue programs in its Utility segment. Revenue related to derivative financial instruments and alternative revenue programs are excluded from the scope of the new authoritative guidance since they are accounted for under other existing accounting guidance.

The following tables provide a disaggregation of the Company's revenues for the three months ended December 31, 2019 and 2018, presented by type of service from each reportable segment. As reported in the Company's 2019 Form 10-K, the Company's NFR operations were previously reported as the Energy Marketing segment, however the Company is no longer reporting the energy marketing operations as a separate reportable segment. Prior year disaggregation of revenue information shown below has been restated to reflect this change in presentation.
Quarter Ended December 31, 2019 (Thousands)
 
 
 
 
 
 

 
 

 
 

Revenues By Type of Service
Exploration and Production
 
Pipeline and Storage
 
Gathering
 
Utility
 
All Other
 
Corporate and Intersegment Eliminations
 
Total Consolidated
Production of Natural Gas
$
119,874

 
$

 
$

 
$

 
$

 
$

 
$
119,874

Production of Crude Oil
37,664

 

 

 

 

 

 
37,664

Natural Gas Processing
688

 

 

 

 

 

 
688

Natural Gas Gathering Services

 

 
34,788

 

 

 
(34,788
)
 

Natural Gas Transportation Service

 
53,452

 

 
32,808

 

 
(16,986
)
 
69,274

Natural Gas Storage Service

 
18,426

 

 

 

 
(7,993
)
 
10,433

Natural Gas Residential Sales

 

 

 
144,370

 

 

 
144,370

Natural Gas Commercial Sales

 

 

 
18,841

 

 

 
18,841

Natural Gas Industrial Sales

 

 

 
1,270

 

 

 
1,270

Natural Gas Marketing

 

 

 

 
34,108

 
(177
)
 
33,931

Other
172

 
342

 

 
(3,324
)
 
1,120

 
(52
)
 
(1,742
)
Total Revenues from Contracts with Customers
158,398

 
72,220

 
34,788

 
193,965

 
35,228

 
(59,996
)
 
434,603

Alternative Revenue Programs

 

 

 
2,860

 

 

 
2,860

Derivative Financial Instruments
7,541

 

 

 

 
(816
)
 

 
6,725

Total Revenues
$
165,939

 
$
72,220

 
$
34,788

 
$
196,825

 
$
34,412

 
$
(59,996
)
 
$
444,188

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Quarter Ended December 31, 2018 (Thousands)
 
 
 
 
 
 

 
 

 
 

Revenues By Type of Service
Exploration and Production
 
Pipeline and Storage
 
Gathering
 
Utility
 
All Other
 
Corporate and Intersegment Eliminations
 
Total Consolidated
Production of Natural Gas
$
135,911

 
$

 
$

 
$

 
$

 
$

 
$
135,911

Production of Crude Oil
37,555

 

 

 

 

 

 
37,555

Natural Gas Processing
975

 

 

 

 

 

 
975

Natural Gas Gathering Services

 

 
29,690

 

 

 
(29,690
)
 

Natural Gas Transportation Service

 
56,135

 

 
35,631

 

 
(17,065
)
 
74,701

Natural Gas Storage Service

 
18,929

 

 

 

 
(7,973
)
 
10,956

Natural Gas Residential Sales

 

 

 
166,867

 

 

 
166,867

Natural Gas Commercial Sales

 

 

 
22,047

 

 

 
22,047

Natural Gas Industrial Sales

 

 

 
1,501

 

 

 
1,501

Natural Gas Marketing

 

 

 

 
49,287

 
(332
)
 
48,955

Other
382

 
2,005

 

 
(2,861
)
 
1,007

 
(404
)
 
129

Total Revenues from Contracts with Customers
174,823

 
77,069

 
29,690

 
223,185

 
50,294

 
(55,464
)
 
499,597

Alternative Revenue Programs

 

 

 
(528
)
 

 

 
(528
)
Derivative Financial Instruments
(11,947
)
 

 

 

 
3,125

 

 
(8,822
)
Total Revenues
$
162,876

 
$
77,069

 
$
29,690

 
$
222,657

 
$
53,419

 
$
(55,464
)
 
$
490,247


 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company’s Pipeline and Storage segment expects to recognize the following revenue amounts in future periods related to “fixed” charges associated with remaining performance obligations for transportation and storage contracts: $125.6 million for the remainder of fiscal 2020; $148.7 million for fiscal 2021; $121.8 million for fiscal 2022; $87.6 million for fiscal 2023; $77.4 million for fiscal 2024; and $318.6 million thereafter.
v3.19.3.a.u2
Leases
3 Months Ended
Dec. 31, 2019
Leases [Abstract]  
Leases Leases
 
On October 1, 2019, the Company adopted authoritative guidance regarding lease accounting, which requires entities that lease the use of property, plant and equipment to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including leases classified as operating leases. The Company implemented the new standard using the optional transition method and elected to apply the following practical expedients provided in the authoritative guidance:

1.
For contracts that commenced prior to and existed as of October 1, 2019, a package of practical expedients to not reassess whether a contract is or contains a lease, lease classification, and initial direct costs under the new authoritative guidance;
2.
An election not to apply the recognition requirements in the new authoritative guidance to short-term leases (a lease that at commencement date has a lease term of one year or less);
3.
A practical expedient to not reassess certain land easements that existed prior to October 1, 2019 and were not previously accounted for as leases under the prior authoritative guidance; and
4.
A practical expedient that permits combining lease and non-lease components in a contract and accounting for the combination as a lease (elected by asset-class).

Upon adoption, the Company increased assets and liabilities on its Consolidated Balance Sheet by $19.7 million. The adoption did not result in a cumulative effect adjustment to earnings reinvested in the business or have a material impact on the Company’s Consolidated Statement of Income or Consolidated Statement of Cash Flows. Comparative periods, including disclosures relating to those periods, were not restated.

Nature of Leases

The Company primarily leases building space and drilling rigs, and on a limited basis compressor equipment and other miscellaneous assets. The Company determines if an arrangement is a lease at the inception of the arrangement. To the extent that an arrangement represents a lease, the Company classifies that lease as an operating or a finance lease in accordance with the authoritative guidance. As of December 31, 2019, the Company did not have any finance leases. Aside from a sublease of office space at the Company’s corporate headquarters, the Company does not have any material arrangements where the Company is the lessor.

Buildings and Property

The Company enters into building and property rental agreements with third parties for office space, certain field locations and other properties used in the Company’s operations. Building and property leases include the Company’s corporate headquarters in Williamsville, New York, and Exploration and Production segment offices in Houston, Texas, and Pittsburgh, Pennsylvania. The primary non-cancelable terms of the Company’s building and property leases range from six months to eleven years. Most building leases include one or more options to renew, generally at the Company’s sole discretion, with renewal terms that can extend the lease terms from one year to fourteen years. Renewal options are included in the lease term if they are reasonably certain to be exercised. The agreements do not contain any material restrictive covenants.

Drilling Rigs

The Company enters into contracts for drilling rig services with third party contractors to support Seneca’s development activities in Pennsylvania and California. Seneca’s drilling rig arrangements are structured with a non-cancelable primary term of one year or less. Upon mutual agreement with the contractor, Seneca has the option to extend the contract with amended terms and conditions, including a renegotiated day rate fee.

The Company has strategically entered into shorter-term drilling rig arrangements to allow for operational and financial flexibility to respond to changes in its operating and economic environment. The Company uses discretion in choosing to extend or not extend drilling rig contracts on a rig by rig basis depending on market and operating conditions present at the time the contract expires, including prices for natural gas and oil.

Due to these considerations, the Company concluded that it is not reasonably certain that it will elect to extend any of its drilling rig arrangements beyond their primary non-cancelable terms of one year or less. Consequently, the Company’s drilling rig leases are deemed to be short-term leases subject to the exemption for balance sheet recognition. These costs are capitalized as part of oil and natural gas properties on the Consolidated Balance Sheet when incurred.

Significant Judgments

Lease Identification

The Company uses judgment when determining whether or not an arrangement is or contains a lease. A contract is or contains a lease if the contract conveys the right to use an explicitly or implicitly identified asset that is physically distinct and the Company has the right to control the use of the identified asset for a period of time. When determining right of control, the Company evaluates whether it directs the use of the asset and obtains substantially all of the economic benefits from the use of the asset.

Discount Rate

The Company uses a discount rate to calculate the present value of lease payments in order to determine lease classification and measurement of the lease asset and liability. In the absence of a rate of interest that is readily determinable in the contract, the Company estimates the incremental borrowing rate (IBR) for each lease. The IBR reflects the rate of interest that the Company would pay on the lease commencement date to borrow an amount equal to the lease payments on a collateralized basis over a similar term in similar economic environments.

Firm Transportation and Storage Contracts

The Company’s subsidiaries enter into long-term arrangements to both reserve firm transportation capacity on third party pipelines and provide firm transportation and storage services to third party shippers. The Company’s firm capacity contracts with non-affiliated entities do not provide rights to use substantially all of the underlying pipeline or storage asset. As such, the Company has concluded that these arrangements are not leases under the authoritative guidance.

Oil and Gas Leases

The new authoritative guidance does not apply to leases to explore for or use minerals, oil or natural gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained. As such, the Company has concluded that its oil and gas exploration and production leases and gas storage leases are not leases under the authoritative guidance.

Amounts Recognized in the Financial Statements

Operating lease costs, excluding those relating to short-term drilling rig leases that are capitalized as part of oil and natural gas properties under full cost pool accounting, are presented in Operations and Maintenance expense on the Consolidated Statement of Income. The following table summarizes the components of the Company’s total operating lease costs (in thousands):
 
Three Months Ended 
 December 31, 2019
 
 
Operating Lease Expense
$
974

Variable Lease Expense (1)
134

Short-Term Lease Expense (2)
64

Sublease Income
(80
)
Total Lease Expense
$
1,092

 
 
Short-Term Lease Costs Recorded to Property, Plant and Equipment (3)
$
7,512


(1) 
Variable lease payments that are not dependent on an index or rate are not included in the lease liability.
(2) 
Short-term lease costs exclude expenses related to leases with a lease term of one month or less.
(3) 
Short-term lease costs relating to drilling rig leases that are capitalized as part of oil and natural gas properties under full cost pool accounting.

Right-of-use assets and lease liabilities are recognized at the commencement date of a leasing arrangement based on the present value of lease payments over the lease term. As of December 31, 2019, the weighted average remaining lease term was 8.7 years and the weighted average discount rate was 3.49%.

The Company’s right-of-use operating lease assets are reflected as Deferred Charges on the Consolidated Balance Sheet. The corresponding operating lease liabilities are reflected in Other Accruals and Current Liabilities (current) and Other Deferred Credits (noncurrent). Short-term leases that have a lease term of one year or less are not recorded on the Consolidated Balance Sheet.

The following amounts related to operating leases were recorded on the Company’s Consolidated Balance Sheet (in thousands):
 
At December 31, 2019
Assets:
 
Deferred Charges
$
18,940

 
 
Liabilities:
 
Other Accruals and Current Liabilities
$
3,298

Other Deferred Credits
$
15,434



For the three months ended December 31, 2019, cash paid for operating liabilities, and reported in cash flows provided by operating activities on the Company’s Consolidated Statement of Cash Flows, was $1.1 million. During the three months ended December 31, 2019, the Company did not record any right-of-use assets in exchange for new lease liabilities.

The following schedule of operating lease liability maturities summarizes the undiscounted lease payments owed by the Company to lessors pursuant to contractual agreements in effect as of December 31, 2019 (in thousands):
 
At December 31, 2019
 
 
2020 (remaining 9 months)
$
2,575

2021
2,813

2022
2,264

2023
2,270

2024
2,237

Thereafter
9,717

Total Lease Payments
21,876

Less: Interest
(3,144
)
Total Lease Liability
$
18,732


The future minimum operating lease payments as of September 30, 2019, as reported in the Company's 2019 Form 10-K, under the prior authoritative guidance are as follows (in thousands):
 
At September 30, 2019
 
 
2020 (1)
$
12,356

2021
2,813

2022
2,264

2023
2,270

2024
2,237

Thereafter
9,717

Total Operating Lease Obligations
$
31,657


(1) 
The future minimum operating lease payment amount for 2020 includes short-term leases, including drilling rigs, that are not included in the schedule of operating lease liability maturities above under the new authoritative guidance.
v3.19.3.a.u2
Fair Value Measurements
3 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
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 December 31, 2019 and September 30, 2019.  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.  
Recurring Fair Value Measures
At fair value as of December 31, 2019
(Thousands of Dollars)   
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments(1)
 
Total(1)
Assets:
 

 
 

 
 

 
 

 
 

Cash Equivalents – Money Market Mutual Funds
$
20,924

 
$

 
$

 
$

 
$
20,924

Derivative Financial Instruments:
 

 
 

 
 

 
 

 
 

Commodity Futures Contracts – Gas
2,096

 

 

 
(2,096
)
 

Over the Counter Swaps – Gas and Oil

 
46,686

 

 
(5,031
)
 
41,655

Foreign Currency Contracts

 
118

 

 
(1,204
)
 
(1,086
)
Other Investments:
 

 
 

 
 

 
 

 
 

Balanced Equity Mutual Fund
36,740

 

 

 

 
36,740

Fixed Income Mutual Fund
62,220

 

 

 

 
62,220

Common Stock – Financial Services Industry
933

 

 

 

 
933

Hedging Collateral Deposits
9,666

 

 

 

 
9,666

Total                                           
$
132,579

 
$
46,804

 
$

 
$
(8,331
)
 
$
171,052

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Derivative Financial Instruments:
 

 
 

 
 

 
 

 
 

Commodity Futures Contracts – Gas
$
7,741

 
$

 
$

 
$
(2,096
)
 
$
5,645

Over the Counter Swaps – Gas and Oil

 
5,524

 

 
(5,031
)
 
493

Foreign Currency Contracts

 
1,348

 

 
(1,204
)
 
144

Total
$
7,741

 
$
6,872

 
$

 
$
(8,331
)
 
$
6,282

Total Net Assets/(Liabilities)
$
124,838

 
$
39,932

 
$

 
$

 
$
164,770

 
Recurring Fair Value Measures
At fair value as of September 30, 2019
(Thousands of Dollars)   
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments(1)
 
Total(1)
Assets:
 

 
 

 
 

 
 

 
 

Cash Equivalents – Money Market Mutual Funds
$
10,521

 
$

 
$

 
$

 
$
10,521

Derivative Financial Instruments:
 

 
 

 
 

 
 

 
 

Commodity Futures Contracts – Gas
2,055

 

 

 
(2,055
)
 

Over the Counter Swaps – Gas and Oil

 
52,076

 

 
(1,483
)
 
50,593

Foreign Currency Contracts

 
5

 

 
(2,052
)
 
(2,047
)
Other Investments:
 

 
 

 
 

 
 

 
 

Balanced Equity Mutual Fund
40,660

 

 

 

 
40,660

Fixed Income Mutual Fund
62,339

 

 

 

 
62,339

Common Stock – Financial Services Industry
844

 

 

 

 
844

Hedging Collateral Deposits
6,832

 

 

 

 
6,832

Total                                           
$
123,251

 
$
52,081

 
$

 
$
(5,590
)
 
$
169,742

 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

Derivative Financial Instruments:
 

 
 

 
 

 
 

 
 

Commodity Futures Contracts – Gas
$
7,149

 
$

 
$

 
$
(2,055
)
 
$
5,094

Over the Counter Swaps – Gas and Oil

 
1,671

 

 
(1,483
)
 
188

     Foreign Currency Contracts

 
2,344

 

 
(2,052
)
 
292

Total
$
7,149

 
$
4,015

 
$

 
$
(5,590
)
 
$
5,574

Total Net Assets/(Liabilities)
$
116,102

 
$
48,066

 
$

 
$

 
$
164,168


(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 December 31, 2019 and September 30, 2019, the derivative financial instruments reported in Level 1 consist of natural gas NYMEX and ICE futures contracts used by NFR (included in the All Other category). Hedging collateral deposits of $9.7 million (at December 31, 2019) and $6.8 million (at September 30, 2019), which were associated with these futures contracts, have been reported in Level 1 as well. The derivative financial instruments reported in Level 2 at December 31, 2019 and September 30, 2019 consist of natural gas price swap agreements used in the Company’s Exploration and Production segment and in its NFR operations, crude oil price swap agreements used in the Company’s Exploration and Production segment, basis hedge swap agreements used by NFR 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 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 December 31, 2019, 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.
 
For the quarters ended December 31, 2019 and December 31, 2018, there were no assets or liabilities measured at fair value and classified as Level 3. For the quarters ended December 31, 2019 and December 31, 2018, no transfers in or out of Level 1 or Level 2 occurred.
v3.19.3.a.u2
Financial Instruments
3 Months Ended
Dec. 31, 2019
Financial Instruments, Owned, at Fair Value [Abstract]  
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 (in thousands): 
 
December 31, 2019
 
September 30, 2019
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-Term Debt
$
2,134,339

 
$
2,253,232

 
$
2,133,718

 
$
2,257,085


 
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. Temporary cash investments are considered Level 1, while notes payable to banks and commercial paper are considered to be Level 2.  Given the short-term nature of the notes payable to banks and commercial paper, the Company believes cost is a reasonable approximation of fair value.

Other Investments. The components of the Company's Other Investments are as follows (in thousands):
 
At December 31, 2019
 
At September 30, 2019
 
 
 
 
Life Insurance Contracts
$
41,336

 
$
41,074

Equity Mutual Fund
36,740

 
40,660

Fixed Income Mutual Fund
62,220

 
62,339

Marketable Equity Securities
933

 
844

 
$
141,229

 
$
144,917


 
Investments in life insurance contracts are stated at their cash surrender values or net present value. Investments in an equity mutual fund, a fixed income mutual fund and the stock of an insurance company (marketable equity securities) are stated at fair value based on quoted market prices with changes in fair value recognized in net income. The insurance contracts and marketable equity and fixed income securities are primarily informal funding mechanisms for various benefit obligations the Company has to certain employees.
 
Derivative Financial Instruments.  The Company uses derivative financial instruments to manage commodity price risk in the Exploration and Production segment as well as by NFR (included in the All Other category). The Company enters into futures contracts and over-the-counter swap agreements for natural gas and crude oil to manage the price risk associated with forecasted sales of gas and oil. In addition, the Company also enters into foreign exchange forward contracts to manage the risk of currency fluctuations associated with transportation costs denominated in Canadian currency in the Exploration and Production segment. These instruments are accounted for as cash flow hedges. The Company also enters into futures contracts and swaps, which are accounted for as cash flow hedges, to manage the price risk associated with forecasted gas purchases. The Company enters into futures contracts and swaps to mitigate risk associated with fixed price sales commitments, fixed price purchase commitments, and the decline in value of natural gas held in storage. These instruments are accounted for as fair value hedges. The duration of the Company’s combined cash flow and fair value commodity hedges does not typically exceed 5 years while the foreign currency forward contracts do not exceed 7 years. The Exploration and Production segment holds the majority of the Company’s derivative financial instruments.

The Company has presented its net derivative assets and liabilities as “Fair Value of Derivative Financial Instruments” on its Consolidated Balance Sheets at December 31, 2019 and September 30, 2019.  Substantially all of the derivative financial instruments reported on those line items relate to commodity contracts and a small portion relates to foreign currency forward contracts.
 
Cash Flow Hedges
 
For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the period or periods during which the hedged transaction affects earnings. Prior to October 1, 2019, gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the the assessment of effectiveness were recognized in current earnings rather than as a component of other comprehensive income (loss). During the quarter ended December 31, 2018, the Company recorded a $6.5 million hedging ineffectiveness gain that impacted operating revenue. With the October 1, 2019 adoption of the authoritative guidance that changes the financial reporting of hedging relationships and simplifies the application of hedge accounting, derivative instruments that are designated and qualify as a cash flow hedge will no longer have hedge ineffectiveness or a component excluded from the assessment of the effectiveness.

As of December 31, 2019, the Company had the following commodity derivative contracts (swaps and futures contracts) outstanding:
Commodity
Units

 
Natural Gas
88.1

 Bcf (short positions)
Natural Gas
2.7

 Bcf (long positions)
Crude Oil
2,376,000

 Bbls (short positions)
    
As of December 31, 2019, the Company was hedging a total of $77.3 million of forecasted transportation costs denominated in Canadian dollars with foreign currency forward contracts (long positions).

As of December 31, 2019, the Company had $41.8 million ($30.7 million after tax) of net hedging gains included in the accumulated other comprehensive income (loss) balance. It is expected that $39.1 million ($28.7 million after tax) of unrealized gains will be reclassified into the Consolidated Statement of Income within the next 12 months as the underlying hedged transactions are recorded in earnings.
The Effect of Derivative Financial Instruments on the Statement of Financial Performance for the
Three Months Ended December 31, 2019 and 2018 (Thousands of Dollars)
Derivatives in Cash Flow Hedging Relationships
Amount of Derivative Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on the Consolidated Statement of Comprehensive Income (Loss)
for the
Three Months Ended
December 31,
Location of Derivative Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheet into the Consolidated Statement of Income
Amount of Derivative Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheet into the Consolidated Statement of Income for the
Three Months Ended
December 31,
 
2019
2018
 
2019
2018
Commodity Contracts
$
(1,555
)
$
50,052

Operating Revenue
$
7,541

$
(18,522
)
Commodity Contracts
1,131

(1,279
)
Purchased Gas
2

(902
)
Foreign Currency Contracts
919

(4,255
)
Operating Revenue
(191
)
(1,093
)
Total
$
495

$
44,518

 
$
7,352

$
(20,517
)
 
 
 
 
 
 
 
 
 

Fair Value Hedges
 
The Company utilizes fair value hedges to mitigate risk associated with fixed price sales commitments, fixed price purchase commitments and the decline in the value of certain natural gas held in storage. With respect to fixed price sales commitments, the Company enters into long positions to mitigate the risk of price increases for natural gas supplies that could occur after the Company enters into fixed price sales agreements with its customers. With respect to fixed price purchase commitments, the Company enters into short positions to mitigate the risk of price decreases that could occur after the Company locks into fixed price purchase deals with its suppliers. With respect to storage hedges, the Company enters into short positions to mitigate the risk of price decreases that could result in a lower of cost or net realizable value writedown of the value of natural gas in storage that is recorded in the Company’s financial statements. As of December 31, 2019, NFR had fair value hedges covering approximately 23.5 Bcf (23.3 Bcf of fixed price sales commitments and 0.2 Bcf of commitments related to the withdrawal of storage gas). For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk completely offset each other in current earnings, as shown below.

Derivatives in Fair Value Hedging Relationships
Location of Gain or (Loss) on Derivative and Hedged Item Recognized in the Consolidated Statement of Income
Amount of Gain or (Loss) on Derivative Recognized in the Consolidated Statement of Income for the
Three Months Ended December 31, 2019
(In Thousands)
Amount of Gain or (Loss) on the Hedged Item Recognized in the Consolidated Statement of Income for the
Three Months Ended December 31, 2019
(In Thousands)
Commodity Contracts
Operating Revenues
$
(732
)
$
732

Commodity Contracts
Purchased Gas
$

$

 
 
$
(732
)
$
732

 
Credit Risk
 
The Company may be exposed to credit risk on any of the derivative financial instruments that are in a gain position. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. To mitigate such credit risk, management performs a credit check, and then on a quarterly basis monitors counterparty credit exposure. The majority of the Company’s counterparties are financial institutions and energy traders. The Company has over-the-counter swap positions and applicable foreign currency forward contracts with fourteen counterparties of which twelve are in a net gain position. On average, the Company had $3.4 million of credit exposure per counterparty in a gain position at December 31, 2019. The maximum credit exposure per counterparty in a gain position at
December 31, 2019 was $6.9 million. As of December 31, 2019, no collateral was received from the counterparties by the Company. The Company's gain position on such derivative financial instruments had not exceeded the established thresholds at which the counterparties would be required to post collateral, nor had the counterparties' credit ratings declined to levels at which the counterparties were required to post collateral.
 
As of December 31, 2019, eleven of the fourteen counterparties to the Company’s outstanding derivative instrument contracts (specifically the over-the-counter swaps and applicable foreign currency forward contracts) had a common credit-risk related contingency feature. In the event the Company’s credit rating increases or falls below a certain threshold (applicable debt ratings), the available credit extended to the Company would either increase or decrease. A decline in the Company’s credit rating, in and of itself, would not cause the Company to be required to increase the level of its hedging collateral deposits (in the form of cash deposits, letters of credit or treasury debt instruments). If the Company’s outstanding derivative instrument contracts were in a liability position (or if the liability were larger) and/or the Company’s credit rating declined, then additional hedging collateral deposits may be required.  At December 31, 2019, the fair market value of the derivative financial instrument assets with a credit-risk related contingency feature was $31.3 million according to the Company’s internal model (discussed in Note 4 — Fair Value Measurements).  At December 31, 2019, the fair market value of the derivative financial instrument liabilities with a credit-risk related contingency feature was $0.6 million according to the Company's internal model. For its over-the-counter swap agreements and foreign currency forward contracts, no hedging collateral deposits were required to be posted by the Company at December 31, 2019.
   
For its exchange traded futures contracts, the Company was required to post $9.7 million in hedging collateral deposits as of December 31, 2019. As these are exchange traded futures contracts, there are no specific credit-risk related contingency features. The Company posts or receives hedging collateral based on open positions and margin requirements it has with its counterparties.
 
The Company’s requirement to post hedging collateral deposits and the Company's right to receive hedging collateral deposits is based on the fair value determined by the Company’s counterparties, which may differ from the Company’s assessment of fair value. Hedging collateral deposits may also include closed derivative positions in which the broker has not cleared the cash from the account to offset the derivative liability. The Company records liabilities related to closed derivative positions in Other Accruals and Current Liabilities on the Consolidated Balance Sheet. These liabilities are relieved when the broker clears the cash from the hedging collateral deposit account.
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Income Taxes
3 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes

The effective tax rates for the quarters ended December 31, 2019 and December 31, 2018 were 26.6% and 18.2%, respectively. The increase in the effective tax rate was primarily the result of the reversal of a $5.0 million valuation allowance in fiscal 2019 related to sequestration of AMT credit refunds discussed below, differences between the book and tax treatment of stock compensation, as well as the elimination of the Enhanced Oil Recovery tax credit in fiscal 2020.
The 2017 Tax Reform Act repealed the corporate alternative minimum tax (AMT) and provides that the Company’s existing AMT credit carryovers are refundable, if not utilized to reduce tax, beginning in fiscal 2019. As of September 30, 2018, the Company had $85.0 million of AMT credit carryovers that are expected to be refunded between fiscal 2020 and fiscal 2023, if not previously utilized. During fiscal 2018, the Department of Treasury indicated that a portion of the refundable AMT credit carryovers would be subject to sequestration. Accordingly, the Company recorded a $5.0 million valuation allowance related to this sequestration in fiscal 2018. During the quarter ended December 31, 2018, the Office of Management and Budget determined that these AMT refunds would not be subject to sequestration. As such, the Company removed the valuation allowance. These amounts are recorded in Deferred Income Taxes and will be reclassified to a receivable when the amounts are expected to be realized in cash. The Company reclassified AMT credit refunds of $21.3 million and $42.1 million from Deferred Income Taxes to Other Assets at December 31, 2019 and 2018, respectively. The Company received $42.5 million of AMT credit refunds related to fiscal 2019 in January 2020.
The SEC issued guidance in Staff Accounting Bulletin 118 (SAB 118) which provides for up to a one year period (the measurement period) in which to complete the required analysis and income tax accounting for the 2017 Tax Reform Act. Based upon the available guidance, the Company completed the remeasurement of deferred income taxes as of December 31, 2018. Any subsequent guidance or clarification related to the 2017 Tax Reform Act will be accounted for in the period that the guidance is issued.