4) Derivatives and Hedging—Disclosures and Fair Value Measurements

FASB ASC 815-10-05 Derivatives and Hedging, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities, along with qualitative disclosures regarding the derivative activity. The Company uses derivative instruments such as futures, options and swap agreements in order to mitigate exposure to market risk associated with the purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit, priced purchase commitments and internal fuel usage. The Company has elected not to designate its derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value is recognized in its statement of operations in the line item (increase) decrease in the fair value of derivative instruments. Depending on the risk being economically hedged, realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.

As of June 30, 2018, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 8.4 million gallons of swap contracts, 3.2 million gallons of call options, 3.8 million gallons of put options, and 60.4 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Company, as of June 30, 2018, had 0.4 million gallons of long swap contracts, 53.6 million gallons of long future contracts, and 64.2 million gallons of short future contracts that settle in future months. To hedge its internal fuel usage and other related activities for fiscal 2018, the Company, as of June 30, 2018, had 3.1 million gallons of swap contracts that settle in future months.

As of June 30, 2017, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 9.0 million gallons of swap contracts, 3.6 million gallons of call options, 5.0 million gallons of put options, and 55.0 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Company, as of June 30, 2017, had 1.3 million gallons of long swap contracts, 53.3 million gallons of long future contracts, and 67.7 million gallons of short future contracts that settle in future months. In addition to the previously described hedging instruments, the Company as of June 30, 2017, had 0.4 million gallons of spread contracts (simultaneous long and short positions) to lock-in the differential between high sulfur home heating oil and ultra low sulfur diesel. To hedge its internal fuel usage and other related activities for fiscal 2017, the Company, as of June 30, 2017, had 6.5 million gallons of swap contracts that settle in future months.

The Company’s derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Munich Re Trading LLC, Regions Financial Corporation, Societe Generale, and Wells Fargo Bank, N.A. The Company assesses counterparty credit risk and considers it to be low. We maintain master netting arrangements that allow for the non-conditional offsetting of amounts receivable and payable with counterparties to help manage our risks and record derivative positions on a net basis. The Company generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral it maintains at counterparties. At June 30, 2018, the aggregate cash posted as collateral in the normal course of business at counterparties was $0.4 million and recorded in prepaid expense and other current assets. Positions with counterparties who are also parties to our credit agreement are collateralized under that facility. As of June 30, 2018, no hedge positions and payable amounts were secured under the credit facility.

FASB ASC 820-10 Fair Value Measurements and Disclosures, established a three-tier fair value hierarchy, which classified the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company’s Level 1 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are identical and traded in active markets. The Company’s Level 2 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are valued using either directly or indirectly observable inputs, whose nature, risk and class are similar. No significant transfers of assets or liabilities have been made into and out of the Level 1 or Level 2 tiers. All derivative instruments were non-trading positions and were either a Level 1 or Level 2 instrument. The Company had no Level 3 derivative instruments. The fair market value of our Level 1 and Level 2 derivative assets and liabilities are calculated by our counter-parties and are independently validated by the Company. The Company’s calculations are, for Level 1 derivative assets and liabilities, based on the published New York Mercantile Exchange (“NYMEX”) market prices for the commodity contracts open at the end of the period. For Level 2 derivative assets and liabilities the calculations performed by the Company are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.

The Company had no assets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Company’s financial assets and liabilities measured at fair value on a recurring basis are listed on the following table.

(In thousands)					Fair Value Measurements at Reporting Date Using:
Derivatives Not Designated as Hedging Instruments					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
Under FASB ASC 815-10	Balance Sheet Location	Total			Level 1		Level 2
Asset Derivatives at June 30, 2018
Commodity contracts	Fair asset value of derivative instruments	$	11,959		$	-	$	11,959
Commodity contracts	Long-term derivative assets included in the deferred charges and other assets, net balance		35			-		35
Commodity contract assets at June 30, 2018		$	11,994		$	-	$	11,994
Liability Derivatives at June 30, 2018
Commodity contracts	Fair asset value of derivative instruments	$	(53	)	$	-	$	(53	)
Commodity contracts	Long-term derivative liabilities included in the deferred charges and other assets, net balance		(5	)		-		(5	)
Commodity contract liabilities at June 30, 2018		$	(58	)	$	-	$	(58	)
Asset Derivatives at September 30, 2017
Commodity contracts	Fair asset and fair liability value of derivative instruments	$	7,729		$	-	$	7,729
Commodity contracts	Long-term derivative assets included in the deferred charges and other assets, net balance		996			-		996
Commodity contract assets September 30, 2017		$	8,725		$	-	$	8,725
Liability Derivatives at September 30, 2017
Commodity contracts	Fair liability and fair asset value of derivative instruments	$	(2,086	)	$	-	$	(2,086	)
Commodity contracts	Long-term derivative liabilities included in the deferred charges and other assets, net and other long-term liabilities balances		(731	)		-		(731	)
Commodity contract liabilities September 30, 2017		$	(2,817	)	$	-	$	(2,817	)

The Company’s derivative assets (liabilities) offset by counterparty and subject to an enforceable master netting arrangement are listed on the following table.

(In thousands)									Gross Amounts Not Offset in the Statement of Financial Position
Offsetting of Financial Assets (Liabilities) and Derivative Assets (Liabilities)	Gross Assets Recognized		Gross Liabilities Offset in the Statement of Financial Position			Net Assets (Liabilities) Presented in the Statement of Financial Position			Financial Instruments		Cash Collateral Received		Net Amount
Fair asset value of derivative instruments	$	11,959	$	(53	)	$	11,906		$	-	$	-	$	11,906
Long-term derivative assets included in deferred charges and other assets, net		35		-			35			-		-		35
Fair liability value of derivative instruments		-		-			-			-		-		-
Long-term derivative liabilities included in other long-term liabilities, net		-		(5	)		(5	)		-		-		(5	)
Total at June 30, 2018	$	11,994	$	(58	)	$	11,936		$	-	$	-	$	11,936
Fair asset value of derivative instruments	$	6,023	$	(91	)	$	5,932		$	-	$	-	$	5,932
Long-term derivative assets included in other long-term assets, net		996		(730	)		266			-		-		266
Fair liability value of derivative instruments		1,706		(1,995	)		(289	)		-		-		(289	)
Long-term derivative liabilities included in other long-term liabilities, net		-		(1	)		(1	)		-		-		(1	)
Total at September 30, 2017	$	8,725	$	(2,817	)	$	5,908		$	-	$	-	$	5,908

(In thousands)
The Effect of Derivative Instruments on the Statement of Operations
		Amount of (Gain) or Loss Recognized					Amount of (Gain) or Loss Recognized
Derivatives Not Designated as Hedging Instruments Under FASB ASC 815-10	Location of (Gain) or Loss Recognized in Income on Derivative	Three Months Ended June 30, 2018			Three Months Ended June 30, 2017		Nine Months Ended June 30, 2018			Nine Months Ended June 30, 2017
Commodity contracts	Cost of product (a)	$	914		$	1,092	$	(8,463	)	$	4,073
Commodity contracts	Cost of installations and service (a)	$	(102	)	$	-	$	(673	)	$	(526	)
Commodity contracts	Delivery and branch expenses (a)	$	(61	)	$	27	$	(1,335	)	$	(422	)
Commodity contracts	(Increase) / decrease in the fair value of derivative instruments (b)	$	(7,515	)	$	3,135	$	(7,306	)	$	7,026

(a)	Represents realized closed positions and includes the cost of options as they expire.

(b)	Represents the change in value of unrealized open positions and expired options.