Accounting for Derivative Instruments

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Accounting for Derivative Instruments

Accounting for Derivative Instruments

The Company is exposed to the impact of market fluctuations in the price of electricity and natural gas and basis costs, storage and ancillary capacity charges from independent system operators. The Company uses derivative instruments to manage exposure to these risks, and historically designated certain derivative instruments as cash flow hedges for accounting purposes. For derivatives designated in a qualifying cash flow hedging relationship, the effective portion of the change in fair value is recognized in accumulated other comprehensive income (“OCI”) and reclassified to earnings in the period in which the hedged item affects earnings. Any ineffective portion of the derivative’s change in fair value is recognized currently in earnings. As of June 30, 2015 and 2014, the Company had not designated any derivative instruments as cash flow hedges.

The Company also holds certain derivative instruments that are not held for trading purposes but are also not designated as hedges for accounting purposes. These derivative instruments represent economic hedges that mitigate the Company’s exposure to fluctuations in commodity prices. For these derivative instruments, changes in the fair value are recognized currently in earnings in retail revenues or retail cost of revenues.

As part of the Company’s strategy to optimize its assets and manage related risks, it also manages a portfolio of commodity derivative instruments held for trading purposes. The Company’s commodity trading activities are subject to limits within the Company’s Risk Management Policy. For these derivative instruments, changes in the fair value are recognized currently in earnings in net asset optimization revenues.

Derivative assets and liabilities are presented net in the Company’s condensed combined and consolidated balance sheets when the derivative instruments are executed with the same counterparty under a master netting arrangement. The Company’s derivative contracts include transactions that are executed both on an exchange and centrally cleared as well as over-the-counter, bilateral contracts that are transacted directly with a third party. To the extent the Company has paid or received collateral related to the derivative assets or liabilities, such amounts would be presented net against the related derivative asset or liability’s fair value. As of June 30, 2015 and December 31, 2014, the Company had paid $0.2 million and zero in collateral, respectively. The specific types of derivative instruments the Company may execute to manage the commodity price risk include the following:

• Forward contracts, which commit the Company to purchase or sell energy commodities in the future;

• Futures contracts, which are exchange-traded standardized commitments to purchase or sell a commodity or financial instrument;

• Swap agreements, which require payments to or from counterparties based upon the differential between two prices for a predetermined notional quantity; and

• Option contracts, which convey to the option holder the right but not the obligation to purchase or sell a commodity.

The Company has entered into other energy-related contracts that do not meet the definition of a derivative instrument or qualify for the normal purchase or normal sale exception and are therefore not accounted for at fair value including the following:

•Forward electricity and natural gas purchase contracts for retail customer load, and

•Natural gas transportation contracts and storage agreements. 

Volumetric Underlying Derivative Transactions

The following table summarizes the net notional volume buy/(sell) of the Company’s open derivative financial instruments accounted for at fair value, broken out by commodity, as of:

Non-trading

Commodity	Notional	June 30, 2015	December 31, 2014
Natural Gas	MMBtu	6,677	9,690
Natural Gas Basis	MMBtu	1,303	2,710
Electricity	MWh	789	607

Trading

Commodity	Notional	June 30, 2015		December 31, 2014
Natural Gas	MMBtu	627		(155	)
Natural Gas Basis	MMBtu	(78	)	(56	)

Gains (Losses) on Derivative Instruments

Gains (losses) on derivative instruments, net and current period settlements on derivative instruments were as follows for the periods indicated (in thousands):

	Three Months Ended June 30,
	2015			2014
Loss on non-trading derivatives, net (including loss on non-trading derivatives—affiliates, net of $0 and $157 for the three months ended June 30, 2015 and 2014, respectively)	$	(4,041	)	$	(4,438	)
Gain (loss) on trading derivatives, net (including loss on trading derivatives—affiliates, net of $0 and $866 for the three months ended June 30, 2015 and 2014, respectively)	(14		)	419
Loss on derivatives, net	(4,055		)	(4,019		)
Current period settlements on non-trading derivatives	4,328			(97		)
Current period settlements on trading derivatives (including current period settlements on trading derivatives—affiliates, net of $0 and $866 for the three months ended June 30, 2015 and 2014, respectively)	29			38
Total current period settlements on derivatives	$	4,357		$	(59	)

	Six Months Ended June 30,
	2015			2014
Gain (loss) on non-trading derivatives, net	$	(5,241	)	$	7,010
Loss on trading derivatives, net (including loss on trading derivatives—affiliates, net of $0 and $1,792 for the six months ended June 30, 2015 and 2014, respectively)	(119		)	(5,570		)
Gain (loss) on derivatives, net	(5,360		)	1,440
Current period settlements on non-trading derivatives	8,442			(12,998		)
Current period settlements on trading derivatives (including current period settlements on trading derivatives—affiliates, net of $0 and $1,693 for the six months ended June 30, 2015 and 2014, respectively)	105			2,742
Total current period settlements on derivatives	$	8,547		$	(10,256	)

Gains (losses) on trading derivative instruments are recorded in net asset optimization revenues and gains (losses) on non-trading derivative instruments are recorded in retail revenues or retail cost of revenues on the condensed combined and consolidated statements of operations.

Fair Value of Derivative Instruments

The following tables summarize the fair value and offsetting amounts of the Company’s derivative instruments by counterparty and collateral received or paid as of (in thousands):

	June 30, 2015
Description	Gross Assets		Gross Amounts Offset			Net Assets		Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	2,370	$	(1,478	)	$	892	$	—	$	892
Trading commodity derivatives	106		(74		)	32		—		32
Total Current Derivative Assets	2,476		(1,552		)	924		—		924
Non-trading commodity derivatives	400		(400		)	—		—		—
Total Non-current Derivative Assets	400		(400		)	—		—		—
Total Derivative Assets	$	2,876	$	(1,952	)	$	924	$	—	$	924

	June 30, 2015
Description	Gross  Liabilities			Gross Amounts Offset		Net Liabilities			Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	(10,385	)	$	1,478	$	(8,907	)	$	210	$	(8,697	)
Trading commodity derivatives	(202		)	74		(128		)	—		(128		)
Total Current Derivative Liabilities	(10,587		)	1,552		(9,035		)	210		(8,825		)
Non-trading commodity derivatives	(931		)	400		(531		)	—		(531		)
Total Non-current Derivative Liabilities	(931		)	400		(531		)	—		(531		)
Total Derivative Liabilities	$	(11,518	)	$	1,952	$	(9,566	)	$	210	$	(9,356	)

	December 31, 2014
Description	Gross Assets		Gross Amounts Offset			Net Assets		Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	3,642	$	(3,562	)	$	80	$	—	$	80
Trading commodity derivatives	234		(98		)	136		—		136
Total Current Derivative Assets	3,876		(3,660		)	216		—		216
Non-trading commodity derivatives	313		(313		)	—		—		—
Total Non-current Derivative Assets	313		(313		)	—		—		—
Total Derivative Assets	$	4,189	$	(3,973	)	$	216	$	—	$	216

	December 31, 2014
Description	Gross  Liabilities			Gross Amounts Offset		Net Liabilities			Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	(14,911	)	$	3,562	$	(11,349	)	$	—	$	(11,349	)
Trading commodity derivatives	(275		)	98		(177		)	—		(177		)
Total Current Derivative Liabilities	(15,186		)	3,660		(11,526		)	—		(11,526		)
Non-trading commodity derivatives	(791		)	313		(478		)	—		(478		)
Total Non-current Derivative Liabilities	(791		)	313		(478		)	—		(478		)
Total Derivative Liabilities	$	(15,977	)	$	3,973	$	(12,004	)	$	—	$	(12,004	)