Accounting for Derivative Instruments

9 Months Ended

Sep. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Accounting for Derivative Instruments

9. 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.

The Company holds certain derivative instruments that are not held for trading purposes and are 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 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 September 30, 2016 and December 31, 2015, the Company had $1.2 million and $0.1 million in collateral outstanding, 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 (in thousands):

Non-trading

Commodity	Notional	September 30, 2016	December 31, 2015
Natural Gas	MMBtu	6,760	7,543
Natural Gas Basis	MMBtu	—	455
Electricity	MWh	3,278	1,187

Trading

Commodity	Notional	September 30, 2016		December 31, 2015
Natural Gas	MMBtu	(2,366	)	8
Natural Gas Basis	MMBtu	242		(455	)

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 September 30,
	2016			2015
(Loss) gain on non-trading derivatives, net	$	(1,183	)	$	132
Gain (loss) on trading derivatives, net	574			(71		)
(Loss) gain on derivatives, net	(609		)	61
Current period settlements on non-trading derivatives (1) (2)	(8,889		)	4,035
Current period settlements on trading derivatives	20			128
Total current period settlements on derivatives	$	(8,869	)	$	4,163

(1) Excludes settlements of $0.5 million and $2.0 million, respectively, for the three months ended September 30, 2016 and 2015 related to non-trading derivative liabilities assumed in the acquisitions of CenStar and Oasis.

(2) Excludes settlements of $11.2 million for the three months ended September 30, 2016 related to non-trading derivative liabilities assumed in the acquisitions of the Provider Companies and Major Energy Companies.

	Nine Months Ended September 30,
	2016		2015
Gain (loss) on non-trading derivatives, net	$	2,519	$	(5,876	)
Gain (loss) on trading derivatives, net	368		(242		)
Loss on derivatives, net	2,887		(6,118		)
Current period settlements on non-trading derivatives (1) (2)	3,341		12,643
Current period settlements on trading derivatives	86		244
Total current period settlements on derivatives	$	3,427	$	12,887

(1) Excludes settlements of $0.6 million and $2.2 million, respectively, for the nine months ended September 30, 2016 and 2015 related to non-trading derivative liabilities assumed in the acquisitions of CenStar and Oasis.

(2) Excludes settlements of $14.7 million for the nine months ended September 30, 2016 related to non-trading derivative liabilities assumed in the acquisitions of the Provider Companies and Major Energy Companies.

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 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):

	September 30, 2016
Description	Gross Assets		Gross Amounts Offset			Net Assets		Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	1,909	$	(1,312	)	$	597	$	—	$	597
Trading commodity derivatives	952		(13		)	939		—		939
Total Current Derivative Assets	2,861		(1,325		)	1,536		—		1,536
Non-trading commodity derivatives	411		(93		)	318		—		318
Total Non-current Derivative Assets	411		(93		)	318		—		318
Total Derivative Assets	$	3,272	$	(1,418	)	$	1,854	$	—	$	1,854

	September 30, 2016
Description	Gross  Liabilities			Gross Amounts Offset		Net Liabilities			Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	(24,955	)	$	10,326	$	(14,629	)	$	1,200	$	(13,429	)
Trading commodity derivatives	(356		)	23		(333		)	—		(333		)
Total Current Derivative Liabilities	(25,311		)	10,349		(14,962		)	1,200		(13,762		)
Non-trading commodity derivatives	(4,532		)	3,065		(1,467		)	—		(1,467		)
Total Non-current Derivative Liabilities	(4,532		)	3,065		(1,467		)	—		(1,467		)
Total Derivative Liabilities	$	(29,843	)	$	13,414	$	(16,429	)	$	1,200	$	(15,229	)

	December 31, 2015
Description	Gross Assets		Gross Amounts Offset			Net Assets		Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	589	$	(389	)	$	200	$	—	$	200
Trading commodity derivatives	411		(6		)	405		—		405
Total Current Derivative Assets	1,000		(395		)	605		—		605
Non-trading commodity derivatives	—		—			—		—		—
Total Non-current Derivative Assets	—		—			—		—		—
Total Derivative Assets	$	1,000	$	(395	)	$	605	$	—	$	605

	December 31, 2015
Description	Gross  Liabilities			Gross Amounts Offset		Net Liabilities			Cash Collateral Offset		Net Amount Presented
Non-trading commodity derivatives	$	(13,618	)	$	3,151	$	(10,467	)	$	100	$	(10,367	)
Trading commodity derivatives	(320		)	67		(253		)	—		(253		)
Total Current Derivative Liabilities	(13,938		)	3,218		(10,720		)	100		(10,620		)
Non-trading commodity derivatives	(950		)	332		(618		)	—		(618		)
Total Non-current Derivative Liabilities	(950		)	332		(618		)	—		(618		)
Total Derivative Liabilities	$	(14,888	)	$	3,550	$	(11,338	)	$	100	$	(11,238	)