Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

We use derivative and non-derivative contracts to engage in trading activities and manage risks related to obtaining adequate supplies and the price fluctuations of natural gas, electricity and propane. Our natural gas, electric and propane distribution operations have entered into agreements with suppliers to purchase natural gas, electricity and propane for resale to their customers. Purchases under these contracts either do not meet the definition of derivatives or are considered “normal purchases and sales” and are accounted for on an accrual basis. Our propane distribution operation may also enter into fair value hedges of its inventory in order to mitigate the impact of wholesale price fluctuations. As of September 30, 2013, our natural gas and electric distribution operations did not have any outstanding derivative contracts.

In June 2013, our propane distribution operation entered into put options to protect against the decline in propane prices and related potential inventory losses associated with 1.3 million gallons purchased for the propane price cap program in the upcoming heating season. The put options are exercised if propane prices fall below the strike prices of $0.830 per gallon in December 2013 through February of 2014, and $0.860 per gallon in January through March 2014. We will receive the difference between the market price and the strike prices during those months. We paid $120,000 to purchase the put options, and we accounted for them as fair value hedges. As of September 30, 2013, the put options had a fair value of $63,000. The change in the fair value of the put options reduced our propane inventory balance.

In May 2013, our propane distribution operation entered into a call option to protect against an increase in propane prices associated with 630,000 gallons expected to be purchased at market-based prices to supply the demands of our propane price cap program customers. The retail price that we can charge to those customers during the upcoming heating season, is capped at a pre-determined level. The call option is exercised if the propane prices rise above the strike price of $0.975 per gallon in January through March of 2014. We will receive the difference between the market price and the strike price during those months. We paid $72,000 to purchase the call option, and we accounted for it as a derivative instrument on a mark-to-market basis with any change in its fair value being reflected in current period earnings. As of September 30, 2013, the call option had a fair value of $102,000.

In May 2012, our propane distribution operation entered into call options to protect against an increase in propane prices associated with 1.3 gallons purchased for the propane price cap program for December 2012 through March 2013. The call options would have been exercised if the propane prices had risen above the strike prices, which ranged from $0.905 per gallon to $0.990 per gallon during that four-month period. We paid $139,000 to purchase the call options, which expired without exercise as the market prices were below the strike prices. We accounted for these call options as a fair value hedge. There was no ineffective portion of this fair value hedge.

Xeron, Inc. (“Xeron”), our propane wholesale marketing subsidiary, engages in trading activities using forward and futures contracts. These contracts are considered derivatives and have been accounted for using the mark-to-market method of accounting. Under this method, the trading contracts are recorded at fair value, and the changes in fair value of those contracts are recognized as unrealized gains or losses in the statement of income for the period of change. As of September 30, 2013, we had the following outstanding trading contracts which we accounted for as derivatives:

At September 30, 2013	Quantity in Gallons	Estimated Market Prices	Weighted Average Contract Prices
Forward Contracts
Sale	1,682,000	$0.9625 - $1.1338	$	1.0370
Purchase	1,682,000	$0.9038 - $1.3176	$	0.9861

Estimated market prices and weighted average contract prices are in dollars per gallon.

All contracts expire by the end of the first quarter of 2014.

Xeron has entered into master netting agreements with two counterparties to mitigate exposure to counterparty credit risk. The master netting agreements enable Xeron to net these two counterparties' outstanding accounts receivable and payable, which are presented on a gross basis in the accompanying condensed consolidated balance sheets. At September 30, 2013, Xeron had a right to offset $2.3 million and $1.1 million of accounts receivable and accounts payable, respectively, with these two counterparties. At December 31, 2012, Xeron had a right to offset $1.2 million and $511,000 of accounts receivable and accounts payable, respectively, with these two counterparties.

The following tables present information about the fair value and related gains and losses of our derivative contracts. We did not have any derivative contracts with a credit-risk-related contingency.

Fair values of the derivative contracts recorded in the condensed consolidated balance sheet as of September 30, 2013 and December 31, 2012, are as follows:

	Asset Derivatives
		Fair Value
(in thousands)	Balance Sheet Location	September 30, 2013		December 31, 2012
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy assets	$	214	$	182
Call Option	Mark-to-market energy assets	102		$	—
Derivatives designated as fair value hedges
Call options (1)	Mark-to-market energy assets	—		28
Put Options(2)	Mark-to-market energy assets	63		—
Total asset derivatives		$	379	$	210

	Liability Derivatives
		Fair Value
(in thousands)	Balance Sheet Location	September 30, 2013		December 31, 2012
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy liabilities	$	124	$	331
Total liability derivatives		$	124	$	331

⁽¹⁾  We purchased call options for the propane price cap program in May 2012. The call options expired in March 2013.

⁽²⁾  As a fair value hedge with no ineffective portion, the unrealized gains and losses associated with these put options are recorded in cost of sales, offset by the corresponding change in the value of propane inventory (hedged item), which is also recorded in cost of sales. The amounts in cost of sales offset to zero and the unrealized gains and losses of this call option effectively changed the value of propane inventory.

The effects of gains and losses from derivative instruments on the condensed consolidated financial statements are as follows:

		Amount of Gain (Loss) on Derivatives:
	Location of Gain	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	(Loss) on Derivatives	2013			2012			2013			2012
Derivatives not designated as hedging instruments:
Unrealized gain (loss) on forward contracts	Revenue	$	86		86			239			(147		)
Call Option	Cost of sales	38			—			29			—
Derivatives designated as fair value hedges:
Put/Call Option	Cost of sales	—			—			(28		)	27
Put/Call Options	Inventory	(43		)	(2		)	(57		)	(17		)
Total		$	81		$	84		$	183		$	(137	)

The effects of trading activities on the condensed consolidated statements of income are the following:

	Location in the	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	Statements of Income	2013		2012		2013		2012
Realized gain on forward contracts and options	Revenue	$	321	$	911	$	506	$	2,233
Unrealized gain (loss) on forward contracts	Revenue	86		86		239		(147		)
Total		$	407	$	997	$	745	$	2,086