Note 12 — Derivative Instruments and Hedging Activities

We are exposed to certain market risks related to our ongoing business operations. Management uses derivative financial and commodity instruments, among other things, to manage these risks. The primary risks managed by derivative instruments are (1) commodity price risk and (2) interest rate risk. Although we use derivative financial and commodity instruments to reduce market risk associated with forecasted transactions, we do not use derivative financial and commodity instruments for speculative or trading purposes. The use of derivative instruments is controlled by our risk management and credit policies which govern, among other things, the derivative instruments we can use, counterparty credit limits and contract authorization limits. Because most of our commodity derivative instruments are generally subject to regulatory ratemaking mechanisms, we have limited commodity price risk associated with our Gas Utility or Electric Utility operations. For more information on the accounting for our derivative instruments, see Note 2.

Commodity Price Risk

Gas Utility’s tariffs contain clauses that permit recovery of all prudently incurred costs of natural gas it sells to retail core-market customers, including the cost of financial instruments used to hedge purchased gas costs. As permitted and agreed to by the PAPUC pursuant to Gas Utility’s annual PGC filings, Gas Utility currently uses NYMEX natural gas futures and option contracts to reduce commodity price volatility associated with a portion of the natural gas it purchases for its retail core-market customers. At March 31, 2019, September 30, 2018 and March 31, 2018, the volumes of natural gas associated with Gas Utility’s unsettled NYMEX natural gas futures and option contracts totaled 11.6 million dekatherms, 23.2 million dekatherms and 12.7 million dekatherms, respectively. At March 31, 2019, the maximum period over which Gas Utility is economically hedging natural gas market price risk is 12 months. Gains and losses on Gas Utility natural gas futures contracts and natural gas option contracts are recorded in regulatory assets or liabilities on the Condensed Consolidated Balance Sheets because it is probable such gains or losses will be recoverable from, or refundable to, customers through the PGC recovery mechanism (see Note 7).

Electric Utility’s DS tariffs permit the recovery of all prudently incurred costs of electricity it sells to DS customers, including the cost of financial instruments used to hedge electricity costs. Electric Utility enters into forward electricity purchase contracts to meet a substantial portion of its electricity supply needs. At March 31, 2019, September 30, 2018 and March 31, 2018, all Electric Utility forward electricity purchase contracts were subject to the NPNS exception.

In order to reduce operating expense volatility, UGI Utilities from time to time enters into NYMEX gasoline futures contracts for a portion of gasoline volumes expected to be used in the operation of its vehicles and equipment. At March 31, 2019, September 30, 2018 and March 31, 2018, the total volumes associated with gasoline futures contracts were not material.

Interest Rate Risk

UGI Utilities has a variable-rate term loan that is indexed to short-term market interest rates. UGI Utilities has entered into a forward starting, amortizing, pay-fixed, receive-variable interest rate swap that generally fixes the underlying prevailing market interest rates on borrowings at 3.00% beginning September 30, 2019 through July 2022. We have designated this forward-starting interest rate swap as a cash flow hedge. The initial notional amount of term loan debt subject to this interest rate swap agreement is $114,063.

Our long-term debt typically is issued at fixed rates of interest. As these long-term debt issuances mature, we typically refinance such debt with new debt having interest rates reflecting then-current market conditions. In order to reduce market rate risk on the underlying benchmark rate of interest associated with near- to medium-term forecasted issuances of fixed-rate debt, from time to time we enter into IRPAs. We account for IRPAs as cash flow hedges.

As of March 31, 2019, September 30, 2018 and March 31, 2018, we had no unsettled IRPAs. At March 31, 2019, the amount of net losses associated with interest rate hedges (excluding pay-fixed, receive-variable interest rate swaps) expected to be reclassified into earnings during the next twelve months is $3,485.

Derivative Instrument Credit Risk

Our commodity exchange-traded futures contracts generally require cash deposits in margin accounts. At March 31, 2019, September 30, 2018 and March 31, 2018, restricted cash in brokerage accounts totaled $837, $1,190 and $1,572, respectively.

Offsetting Derivative Assets and Liabilities

Derivative assets and liabilities are presented net by counterparty on the Condensed Consolidated Balance Sheets if the right of offset exists. Our derivative instruments include both those that are executed on an exchange through brokers and centrally cleared and over-the-counter transactions. Exchange contracts utilize a financial intermediary, exchange or clearinghouse to enter, execute or clear the transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Certain over-the-counter and exchange contracts contain contractual rights of offset through master netting arrangements, derivative clearing agreements and contract default provisions. In addition, the contracts are subject to conditional rights of offset through counterparty nonperformance, insolvency or other conditions.

In general, most of our over-the-counter transactions and all exchange contracts are subject to collateral requirements. Types of collateral generally include cash or letters of credit. Cash collateral paid by us to our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative liabilities. Cash collateral received by us from our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative assets. Certain other accounts receivable and accounts payable balances recognized on the Condensed Consolidated Balance Sheets with our derivative counterparties are not included in the table below but could reduce our net exposure to such counterparties because such balances are subject to master netting or similar arrangements.

Fair Value of Derivative Instruments

The following table presents the Company’s derivative assets and liabilities, as well as the effects of offsetting:



	March 31, 2019			September 30, 2018			March 31, 2018
Derivative assets:
Derivatives designated as hedging instruments:
Interest rate contracts	$	—		$	30		$	—
Derivatives subject to PGC and DS mechanisms:
Commodity contracts	1,258			3,002			860
Derivatives not designated as hedging instruments:
Commodity contracts	—			152			191
Total derivative assets — gross	1,258			3,184			1,051
Gross amounts offset in the balance sheet	(211		)	(146		)	(37		)
Total derivative assets — net (a)	$	1,047		$	3,038		$	1,014

Derivative liabilities:
Derivatives designated as hedging instruments:
Interest rate contracts	$	(2,528	)	$	—		$	—
Derivatives subject to PGC and DS mechanisms:
Commodity contracts	(211		)	(146		)	(589		)
Derivatives not designated as hedging instruments:
Commodity contracts	(40		)	—			—
Total derivative liabilities — gross	(2,779		)	(146		)	(589		)
Gross amounts offset in the balance sheet	211			146			37
Total derivative liabilities — net (a)	$	(2,568	)	$	—		$	(552	)


(a)	Derivative assets and liabilities with maturities greater than one year are recorded in “Other assets” and “Other noncurrent liabilities” on the Condensed Consolidated Balance Sheets. Derivative liabilities with maturities less than one year are recorded in “Other current liabilities” on the Condensed Consolidated Balance Sheets.

Effects of Derivative Instruments

The following table provides information on the effects of derivative instruments not subject to ratemaking mechanisms on the Condensed Consolidated Statements of Income and changes in AOCI for the three and six months ended March 31, 2019 and 2018:



	Loss Recognized in AOCI					Loss Reclassified from AOCI into Income						Location of Loss Reclassified from AOCI into Income
Three Months Ended March 31,	2019			2018		2019			2018			Location of Loss Reclassified from AOCI into Income
Cash Flow Hedges:
Interest rate contracts	$	(873	)	$	—	$	(870	)	$	(872	)	Interest expense

	Gain Recognized in Income					Location of Gain Recognized in Income
Three Months Ended March 31,	2019			2018
Derivatives Not Subject to PGC and DS Mechanisms:
Commodity contracts	$	129		$	12	Operating and administrative expenses

	Loss Recognized in AOCI					Loss Reclassified from AOCI into Income						Location of Loss Reclassified from AOCI into Income
Six Months Ended March 31,	2019			2018		2019			2018			Location of Loss Reclassified from AOCI into Income
Cash Flow Hedges:
Interest rate contracts	$	(2,558	)	$	—	$	(1,742	)	$	(1,743	)	Interest expense

	(Loss) Gain Recognized in Income					Location of (Loss) Gain Recognized in Income
Six Months Ended March 31,	2019			2018
Derivatives Not Subject to PGC and DS Mechanisms:
Commodity contracts	$	(267	)	$	161	Operating and administrative expenses

The amounts of derivative gains and losses on cash flow hedges representing ineffectiveness were not material for all periods presented.

We are also a party to a number of other contracts that have elements of a derivative instrument. These contracts include, among others, binding purchase orders, contracts which provide for the purchase and delivery of natural gas and electricity, and service contracts that require the counterparty to provide commodity storage, transportation or capacity service to meet our normal sales commitments. Although many of these contracts have the requisite elements of a derivative instrument, these contracts qualify for NPNS exception accounting because they provide for the delivery of products or services in quantities that are expected to be used in the normal course of operating our business and the price in the contract is based on an underlying that is directly associated with the price of the product or service being purchased or sold.