Derivative Instruments

6 Months Ended

Jun. 30, 2014

Derivative Instrument Detail [Abstract]

Derivative Instruments [Text Block]

12. DERIVATIVE INSTRUMENTS

We enter into financial derivative contracts to meet our utility’s natural gas sales requirements. These contracts include swaps, options, and combinations of option contracts. We primarily use these derivative financial instruments to manage commodity price variability. A small portion of our derivative hedging strategy involves foreign currency exchange contracts. The financial derivatives used in order to meet our utility's natural gas requirements qualify for regulatory deferral accounting.

We enter into these financial derivatives, up to prescribed limits, primarily to hedge price variability related to our physical gas supply contracts as well as to hedge spot purchases of natural gas. The foreign currency forward contracts are used to hedge the fluctuation in foreign currency exchange rates for pipeline demand charges paid in Canadian dollars.

In the normal course of business, we also enter into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of utility customers. These contracts qualify for regulatory deferral accounting treatment. We also enter into exchange contracts related to the asset management of our gas portfolio, some of which are derivatives that do not qualify for hedge accounting or regulatory deferral, but are subject to our regulatory sharing agreement.

Notional Amounts

The following table presents the absolute notional amounts related to open positions on our derivative instruments:

	June 30,				December 31,
In thousands	2014		2013		2013
Natural gas (in therms):
Financial	297,925		359,135		389,225
Physical	241,150		322,675		552,500
Foreign exchange	$	10,844	$	17,171	$	15,002

Purchased Gas Adjustment

Derivatives entered into by the utility for the procurement or hedging of natural gas for future gas years and prior to our annual PGA filing receive regulatory deferred accounting treatment. Derivative contracts entered into after the annual PGA rate is set for the current gas contract year are subject to our PGA incentive sharing mechanism, which provides for either an 80% or 90% deferral of any gains and losses as regulatory assets or liabilities, with the remaining 10% or 20% recognized in current income. For the current gas year we have selected the 90% deferral option. In general, our commodity hedging for the current gas year is completed prior to the start of the upcoming gas year, and hedge prices are included in the Company's weighted-average cost of gas in the PGA filing. As of November 1, 2013, we reached our target hedge percentage of approximately 75% for the 2013-14 gas year, and these hedge prices were included in the PGA filing and qualified for regulatory deferral. 

Unrealized and Realized Gain/Loss

The following table reflects the income statement presentation for the unrealized gains and losses from our derivative instruments. Outstanding derivative instruments related to regulated utility operations are deferred in accordance with regulatory accounting standards.

	Three months ended June 30,
	2014						2013
In thousands	Natural gas commodity			Foreign currency			Natural gas commodity			Foreign currency
Benefit (expense) to cost of gas	$	(5,379	)	$	454		$	(16,139	)	$	(274	)
Less:
Amounts deferred to regulatory accounts on the balance sheet	5,223			(454		)	16,069			274
Total loss in pre-tax earnings	$	(156	)	$	—		$	(70	)	$	—

	Six months ended June 30,
	2014						2013
In thousands	Natural gas commodity			Foreign currency			Natural gas commodity			Foreign currency
Benefit (expense) to cost of gas	$	10,533		$	179		$	(8,956	)	$	(513	)
Less:
Amounts deferred to regulatory accounts on the balance sheet	(10,652		)	(179		)	9,032			513
Total gain (loss) in pre-tax earnings	$	(119	)	$	—		$	76		$	—

The cost of foreign currency forward contracts and natural gas derivative contracts are recognized immediately in the cost of gas; however, costs above or below the amount embedded in the current year PGA are subject to a regulatory deferral tariff and therefore, are recorded as a regulatory asset or liability.

We realized a net gain of $4.3 million and $12.8 million for the three and six months endedJune 30, 2014, compared to net gain of $1.4 million and a net loss of $4.0 million for the three and six months endedJune 30, 2013, respectively, from the settlement of natural gas financial derivative contracts. Realized gains are recorded as a reduction to the cost of gas, while realized losses were recorded as increases to the cost of gas.

Credit Risk Management of Financial Derivatives Instruments

No collateral was posted with or by our counterparties as of June 30, 2014 or 2013. We attempt to minimize the potential exposure to collateral calls by counterparties to manage our liquidity risk. Counterparties generally allow a certain credit limit threshold before requiring us to post collateral against loss positions. Given our counterparty credit limits and portfolio diversification, we have not been subject to collateral calls in 2013 or 2014. Our collateral call exposure is set forth under credit support agreements, which generally contain credit limits. We could also be subject to collateral call exposure where we have agreed to provide adequate assurance, which is not specific as to the amount of credit limit allowed, but could potentially require additional collateral in the event of a material adverse change. Based upon current financial derivative contracts outstanding, which reflect unrealized gains of $11.3 million at June 30, 2014, we do not have any collateral demand exposure.

Our financial derivative instruments are subject to master netting arrangements; however, they are presented on a gross basis in our statement of financial position. The Company and its counterparties have the ability to set-off their obligations to each other under specified circumstances. Such circumstances may include: when there is a defaulting party, or in the event of a credit change due to a merger that affects either party, or any other termination event. If netted by counterparty, our derivative position would result in an asset of $11.5 million and a liability of $0.8 million as of June 30, 2014. As of June 30, 2013, our derivative position would have resulted in an asset of $0.2 million and a liability of $9.7 million.

We are exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps to hedge the risk of price increases for our natural gas purchases made on behalf of customers. See Note 13 in our 2013 Form 10-K.

Fair Value

In accordance with fair value accounting, we include nonperformance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of our counterparties when we are in an unrealized gain position, or on our own credit spread when we are in an unrealized loss position. The inputs in our valuation techniques include natural gas futures, volatility, credit default swap spreads, and interest rates. Additionally, our assessment of non-performance risk is generally derived from the credit default swap market and from bond market credit spreads. The impact of the credit risk adjustments for all outstanding derivatives was immaterial to the fair value calculation at June 30, 2014. As of June 30, 2014 and 2013 and December 31, 2013, the net fair value was an asset of $10.7 million, a liability of $9.5 million, and an asset of $4.7 million, respectively, using significant other observable, or Level 2, inputs. We have used no Level 3 inputs in our derivative valuations. We did not have any transfers between Level 1 or Level 2 during the six months ended June 30, 2014 and 2013.