4) Derivatives and Hedging—Disclosures and Fair Value Measurements

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 Partnership 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. The Partnership has elected not to designate its derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value is recognized in its statement of operations in the line item (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 December 31, 2015, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Partnership held the following derivative instruments that settle in future months to match anticipated sales: 10.1 million gallons of swap contracts, 8.2 million gallons of call options, 6.0 million gallons of put options, and 98.9 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of December 31, 2015, had 1.4 million gallons of long swap contracts, 24.6 million gallons of long future contracts, and 57.1 million gallons of short future contracts that settle in future months. In addition to the previously described hedging instruments, to lock-in the differential between high sulfur home heating oil and ultra low sulfur diesel, the Partnership as of December 31, 2015, had 8.4 million gallons of spread contracts (simultaneous long and short positions). To hedge its internal fuel usage and other related activities for fiscal 2016, the Partnership, as of December 31, 2015, had 4.4 million gallons of swap contracts that settle in future months.

As of December 31, 2014, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Partnership held the following derivative instruments that settle in future months to match anticipated sales: 12.4 million gallons of swap contracts, 5.6 million gallons of call options, 7.7 million gallons of put options, and 94.1 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of December 31, 2014, had 29.6 million gallons of long future contracts, and 55.1 million gallons of short future contracts that settle in future months. To hedge its internal fuel usage for fiscal 2015, the Partnership as of December 31, 2014, had 2.9 million gallons of swap contracts that settle in future months.

The Partnership’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., Munich Re Trading LLC, Regions Financial Corporation, Societe Generale, and Wells Fargo Bank, N.A. The Partnership 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 Partnership generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral it maintains at counterparties. At December 31, 2015, the aggregate cash posted as collateral in the normal course of business at counterparties was $2.6 million ($2.3 million recorded in prepaid expenses and other current assets and $0.3 million recorded in fair liability value of derivative instruments). Positions with counterparties who are also parties to our credit agreement are collateralized under that facility. As of December 31, 2015, $24.8 million of hedge positions and payable amounts were secured under the credit facility.

FASB ASC 820-10 Fair Value Measurements and Disclosures, established a three-tier fair value hierarchy, which classified the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Partnership’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 Partnership’s Level 2 derivative assets and liabilities represent the fair value of commodity 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 Partnership 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 Partnership. The Partnership’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 Partnership are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.

The Partnership had no assets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Partnership’s 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 Under FASB ASC 815-10	Balance Sheet Location	Total			Quoted Prices in Active Markets for Identical Assets Level 1			Significant Other Observable Inputs Level 2
Asset Derivatives at December 31, 2015
Commodity contracts	Fair asset and fair liability value of derivative instruments	$	51,220		$	6,670		$	44,550
Commodity contracts	Long-term derivative assets included in the other long-term liabilities balance		9,216			4,586			4,630

Commodity contract assets at December 31, 2015		$	60,436		$	11,256		$	49,180


Liability Derivatives at December 31, 2015
Commodity contracts	Fair liability and fair asset value of derivative instruments	$	(72,658	)	$	(6,265	)	$	(66,393	)
Commodity contracts	Cash collateral		320			320			—
Commodity contracts	Long-term derivative liabilities included in the other long-term liabilities balance		(9,041	)		(3,489	)		(5,552	)

Commodity contract liabilities at December 31, 2015		$	(81,379	)	$	(9,434	)	$	(71,945	)


Asset Derivatives at September 30, 2015
Commodity contracts	Fair asset and fair liability value of derivative instruments	$	26,628		$	930		$	25,698
Commodity contracts	Long-term derivative assets included in the other long-term liabilities balance		4,975			2,017			2,958

Commodity contract assets at September 30, 2015		$	31,603		$	2,947		$	28,656


Liability Derivatives at September 30, 2015
Commodity contracts	Fair liability and fair asset value of derivative instruments	$	(41,270	)	$	—		$	(41,270	)
Commodity contracts	Cash collateral		2,758			2,758			—
Commodity contracts	Long-term derivative liabilities included in the other long-term liabilities balance		(5,977	)		(2,038	)		(3,939	)

Commodity contract liabilities at September 30, 2015		$	(44,489	)	$	720		$	(45,209	)

The Partnership’s 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	$	6,670	$	(6,265	)	$	405		$	—	$	—	$	405
Long-term derivative assets included in deferred charges and other assets, net	$	5,162	$	(3,918	)	$	1,244		$	—	$	—	$	1,244
Fair liability value of derivative instruments		44,550		(66,073	)		(21,523	)		—		—		(21,523	)
Long-term derivative liabilities included in other long-term liabilities, net		4,054		(5,123	)		(1,069	)						(1,069	)

Total at December 31, 2015	$	60,436	$	(81,379	)	$	(20,943	)	$	—	$	—	$	(20,943	)


Fair asset value of derivative instruments	$	935	$	—		$	935		$	—	$	—	$	935
Fair liability value of derivative instruments		25,693		(38,512	)		(12,819	)		—		—		(12,819	)
Long-term derivative liabilities included in other long-term liabilities, net		4,975		(5,977	)		(1,002	)						(1,002	)

Total at September 30, 2015	$	31,603	$	(44,489	)	$	(12,886	)	$	—	$	—	$	(12,886	)


(In thousands)
The Effect of Derivative Instruments on the Statement of Operations
		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 December 31, 2015			Three Months Ended December 31, 2014

Commodity contracts	Cost of product (a)	$	(3,434	)	$	(6,805	)
Commodity contracts	Cost of installations and service (a)	$	226		$	486
Commodity contracts	Delivery and branch expenses (a)	$	315		$	474

Commodity contracts	(Increase) / decrease in the fair value of derivative instruments	$	5,536		$	8,290

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