Derivatives and Hedging-Disclosures and Fair Value Measurements

6 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging-Disclosures and Fair Value Measurements

6) Derivatives and Hedging—Disclosures and Fair Value Measurements

The Company uses derivative instruments such as futures, options and swap agreements in order to mitigate exposure to market risk associated with the purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit, priced purchase commitments and internal fuel usage. FASB ASC 815-10-05 Derivatives and Hedging, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities, along with qualitative disclosures regarding the derivative activity. The Company has elected not to designate its commodity derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value is recognized in its statement of operations in the caption “(Increase) decrease in the fair value of derivative instruments.” Depending on the risk being economically hedged, realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.

As of March 31, 2024, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 7.5 million gallons of swap contracts, 3.5 million gallons of call options, 3.5 million gallons of put options, and 35.1 million net gallons of synthetic call options. To hedge its physical inventory on hand, inventory in transit and basis risk, the Company, as of March 31, 2024, held 0.2 million gallons of swap contracts and 13.9 million gallons of short future contracts that settle in future months. To hedge its internal fuel usage and other activities for fiscal 2024 and 2025, the Company held 3.8 million gallons of swap contracts that settle in future months.

As of March 31, 2023, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 5.4 million gallons of swap contracts, 6.5 million gallons of call options, 2.4 million gallons of put options, and 36.7 million net gallons of synthetic call options. To hedge its physical inventory on hand, inventory in transit and basis risk, the Company, as of March 31, 2023, held 13.5 million gallons of swap contracts and 1.8 million gallons of short future contracts that settle in future months. To hedge its internal fuel usage and other activities for fiscal 2023 and 2024, the Company held 3.7 million gallons of swap contracts that settle in future months.

As of March 31, 2024, the Company has interest rate swap agreements in order to mitigate exposure to market risk associated with variable rate interest on $53.8 million, or 39%, of its long term debt. The Company has designated its interest rate swap agreements as cash flow hedging derivatives. To the extent these derivative instruments are effective and the accounting standard’s documentation requirements have been met, changes in fair value are recognized in other comprehensive income (loss) until the underlying hedged item is recognized in earnings. As of March 31, 2024 the fair value of the swap contracts was $0.8 million. As of September 30, 2023, the notional value of the swap contracts was $55.5 million and the fair value of the swap contracts was $1.6 million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of the swap contracts.

The Company’s derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A. and Wells Fargo Bank, N.A. The Company assesses counterparty credit risk and considers it to be low. We maintain master netting arrangements that allow for the non-conditional offsetting of amounts receivable and payable with counterparties to help manage our risks and record derivative positions on a net basis. The Company generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral it maintains at counterparties. At March 31, 2024, the aggregate cash posted as collateral in the normal course of business at counterparties was $2.1 million and recorded in “Prepaid expense and other current assets.” Positions with counterparties who are also parties to our credit agreement are collateralized under that facility. As of March 31, 2024, $2.2 million hedge positions or payable amounts were secured under the credit facility.

The Company’s Level 1 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are identical and traded in active markets. The Company’s Level 2 derivative assets and liabilities represent the fair value of commodity and interest rate contracts used in its hedging activities that are valued using either directly or indirectly observable inputs, whose nature, risk and class are similar. No significant transfers of assets or liabilities have been made into and out of the Level 1 or Level 2 tiers. All derivative instruments were non-trading positions and were either a Level 1 or Level 2 instrument. The Company had no Level 3 derivative instruments. The fair market value of our Level 1 and Level 2 derivative assets and liabilities are calculated by our counter-parties and are independently validated by the Company. The Company’s calculations are, for Level 1 derivative assets and liabilities, based on the published New York Mercantile Exchange (“NYMEX”) market prices for the commodity contracts open at the end of the period. For Level 2 derivative assets and liabilities the calculations performed by the Company are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.

The Company had no assets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Company’s commodity financial assets and liabilities measured at fair value on a recurring basis are listed on the following table.

(In thousands)					Fair Value Measurements at Reporting Date Using:
Derivatives Not Designated    as Hedging Instruments					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
Under FASB ASC 815-10	Balance Sheet Location	Total			Level 1		Level 2
Asset Derivatives at March 31, 2024
Commodity contracts	Fair asset and liability value of derivative instruments	$	7,671		$	—	$	7,671
Commodity contracts	Long-term derivative assets included in the deferred charges and other assets, net and other long-term liabilities, net balances		490			—		490
Commodity contract assets at March 31, 2024		$	8,161		$	—	$	8,161
Liability Derivatives at March 31, 2024
Commodity contracts	Fair asset and liability value of derivative instruments	$	(9,638	)	$	—	$	(9,638	)
Commodity contracts	Long-term derivative liabilities included in the deferred charges and other assets, net and other long-term liabilities, net balances		(491	)		—		(491	)
Commodity contract liabilities at March 31, 2024		$	(10,129	)	$	—	$	(10,129	)
Asset Derivatives at September 30, 2023
Commodity contracts	Fair asset and liability value of derivative instruments	$	17,891		$	—	$	17,891
Commodity contracts	Long-term derivative assets included in the deferred charges and other assets, net and other long-term liabilities, net balances		779			—		779
Commodity contract assets September 30, 2023		$	18,670		$	—	$	18,670
Liability Derivatives at September 30, 2023
Commodity contracts	Fair asset and liability value of derivative instruments	$	(7,349	)	$	—	$	(7,349	)
Commodity contracts	Long-term derivative liabilities included in the deferred charges and other assets, net and other long-term liabilities, net balances		(679	)		—		(679	)
Commodity contract liabilities September 30, 2023		$	(8,028	)	$	—	$	(8,028	)

The Company’s commodity derivative assets (liabilities) offset by counterparty and subject to an enforceable master netting arrangement are listed on the following table.

(In thousands)									Gross Amounts Not Offset in the Statement of Financial Position
Offsetting of Financial Assets (Liabilities)    and Derivative Assets (Liabilities)	Gross Assets Recognized		Gross Liabilities Offset in the Statement of Financial Position			Net Assets (Liabilities) Presented in the Statement of Financial Position			Financial Instruments		Cash Collateral Received		Net Amount
Fair asset value of derivative instruments	$	1,951	$	(1,729	)	$	222		$	—	$	—	$	222
Long-term derivative assets included in deferred charges and other assets, net		124		(84	)		40			—		—		40
Fair liability value of derivative instruments		5,720		(7,909	)		(2,189	)		—		—		(2,189	)
Long-term derivative liabilities included in other long-term liabilities, net		366		(407	)		(41	)		—		—		(41	)
Total at March 31, 2024	$	8,161	$	(10,129	)	$	(1,968	)	$	—	$	—	$	(1,968	)
Fair asset value of derivative instruments	$	17,815	$	(7,155	)	$	10,660		$	—	$	—	$	10,660
Long-term derivative assets included in deferred charges and other assets, net		567		(452	)		115			—		—		115
Fair liability value of derivative instruments		76		(194	)		(118	)		—		—		(118	)
Long-term derivative liabilities included in other long-term liabilities, net		212		(227	)		(15	)		—		—		(15	)
Total at September 30, 2023	$	18,670	$	(8,028	)	$	10,642		$	—	$	—	$	10,642

(In thousands)
The Effect of Derivative Instruments on the Statement of Operations
		Amount of (Gain) or Loss Recognized					Amount of (Gain) or Loss Recognized
Derivatives Not Designated as Hedging Instruments Under FASB ASC 815-10	Location of (Gain) or Loss Recognized in Income on Derivative	Three Months Ended March 31, 2024			Three Months Ended March 31, 2023		Six Months Ended March 31, 2024			Six Months Ended March 31, 2023
Commodity contracts	Cost of product (a)	$	13,386		$	13,954	$	18,109		$	5,012
Commodity contracts	Cost of installations and service (a)	$	(55	)	$	39	$	(41	)	$	79
Commodity contracts	Delivery and branch expenses (a)	$	(517	)	$	349	$	(909	)	$	149
Commodity contracts	(Increase) / decrease in the fair  value of derivative instruments (b)	$	(11,752	)	$	3,022	$	7,278		$	20,658

(a)Represents realized closed positions and includes the cost of options as they expire.

(b)Represents the change in value of unrealized open positions and expired options.