Derivative Instruments

3 Months Ended

Mar. 31, 2016

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. Aspire Energy has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these contracts typically 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 and natural gas marketing operations may also enter into fair value hedges of their inventory or cash flow hedges of their future purchase commitments in order to mitigate the impact of wholesale price fluctuations. As of March 31, 2016, our natural gas and electric distribution operations did not have any outstanding derivative contracts.

Hedging Activities in 2016

Beginning in October 2015, PESCO entered into natural gas futures contracts associated with the purchase and sale of natural gas to specific customers. These contracts expire within two years and we have accounted for them as cash flow hedges. There is no ineffective portion of these hedges. At March 31, 2016, PESCO had a total of 6,723 Dts/d hedged under natural gas futures contracts, with a liability fair value of $423,000. The change in fair value of the natural gas futures contracts is recorded as unrealized gain/loss in other comprehensive income (loss).

Hedging Activities in 2015

In March, May and June 2015, Sharp paid a total of $143,000 to purchase put options to protect against a decline in propane prices and related potential inventory losses associated with 2.5 million gallons for the propane price cap program in the 2015-2016 heating season. We exercised the put options as propane prices fell below the strike prices of $0.4950, $0.4888 and $0.4500 per gallon in December 2015 through February 2016 and $0.4200 per gallon in January through March 2016. We received $239,000 representing the difference between the market prices and the strike prices during those months. We accounted for the put options as fair value hedges.

In March, May and June 2015, Sharp entered into swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with 2.5 million gallons purchased in December 2015 through March 2016. Under these swap agreements, Sharp would have received the difference between the index prices (Mont Belvieu prices in December 2015 through March 2016) and the swap prices, which ranged from $0.5200 to $0.5950 per gallon, for each swap agreement, to the extent the index prices exceeded the swap prices. If the index prices were lower than the swap prices, Sharp would pay the difference. These swap agreements essentially fixed the price of the 2.5 million gallons that we purchased during this period. We accounted for the swap agreements as cash flow hedges. Sharp paid $484,000, representing the difference between the index prices and swap prices during those months of the swap agreements.

Commodity Contracts for Trading Activities

Xeron 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 statements of income for the period of change. As of March 31, 2016, we had the following outstanding trading contracts, which we accounted for as derivatives:

	Quantity in	Estimated Market		Weighted Average
At March 31, 2016	Gallons	Prices		Contract Prices
Forward Contracts
Sale	630,000	$	0.4425	$	0.4425
Purchase	631,000	$	0.4413	$	0.4422

Estimated market prices and weighted average contract prices are in dollars per gallon. All contracts expire by the end of the second quarter of 2016.

Xeron 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 March 31, 2016, Xeron had no accounts receivable or accounts payable balances to offset with these two counterparties. At December 31, 2015, Xeron had a right to offset $431,000 of accounts payable with these two counterparties. At December 31, 2015, Xeron did not have outstanding accounts receivable 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. The fair values of the derivative contracts recorded in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, are as follows:

	Asset Derivatives
		Fair Value As Of
(in thousands)	Balance Sheet Location	March 31, 2016		December 31, 2015
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy assets	$	—	$	1
Derivatives designated as fair value hedges
Put options	Mark-to-market energy assets			152
Total asset derivatives		$	—	$	153

	Liability Derivatives
		Fair Value As Of
(in thousands)	Balance Sheet Location	March 31, 2016		December 31, 2015
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy liabilities	$	—	$	1
Derivatives designated as cash flow hedges
Propane swap agreements	Mark-to-market energy liabilities	—		323
Natural gas futures contracts	Mark-to-market energy liabilities	423		109
Total liability derivatives		$	423	$	433

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 March 31,
(in thousands)	(Loss) on Derivatives	2016			2015
Derivatives not designated as hedging instruments
Realized gain on forward contracts (1)	Revenue	$	187		$	277
Unrealized gain (loss) on forward contracts (1)	Revenue	1			(125		)
Propane swap agreements	Cost of sales	—			18
Derivatives designated as fair value hedges
Put /Call options	Cost of sales	73			506
Put /Call options (2)	Propane Inventory	—			(3		)
Derivatives designated as cash flow hedges
Propane swap agreements	Cost of sales	(364		)	—
Propane swap agreements	Other Comprehensive Loss	—			(12		)
Call options	Cost of sales	—			(81		)
Natural gas futures contracts	Cost of sales	149			—
Natural gas futures contracts	Other Comprehensive Loss	(462		)	—
Total		$	(416	)	$	580

⁽¹⁾  All of the realized and unrealized gain (loss) on forward contracts represents the effect of trading activities on our condensed consolidated statements of income.

⁽²⁾  As a fair value hedge with no ineffective portion, the unrealized gains and losses associated with this call option 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 put option effectively changed the value of propane inventory.