Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Interest Rate Contracts

The Company has in place variable-rate debt. Management believes that it is prudent to limit the variability of a portion of the business’ interest payments and the business entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk on a portion of its variable-rate debt. Interest rate swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives variable rate interest payments and makes fixed rate interest payments, thereby creating the equivalent of fixed-rate debt for the portion of the debt that is swapped.

The Company does not use hedge accounting. All movements in the fair value of the interest rate derivatives are recorded directly through earnings.

Commodity Price Contracts

The risks associated with fluctuations in the prices that Hawaii Gas pays for liquefied petroleum gas ("LPG") is principally a result of market forces reflecting changes in supply and demand for LPG and other energy commodities. Hawaii Gas’ gross margin (revenue less cost of product sales excluding depreciation and amortization) is sensitive to changes in LPG supply costs and Hawaii Gas may not always be able to pass through cost increases fully or on a timely basis, particularly when product costs rise rapidly. To reduce its exposure to volatility in the business’ LPG wholesale market price, Hawaii Gas has used and expects to continue to use over-the-counter commodity derivative instruments. Hawaii Gas does not use commodity derivative instruments for speculative or trading purposes. Over-the-counter derivative instruments used by Hawaii Gas to hedge a portion of forecasted purchases of LPG are generally settled at expiration of the contract. On March 31, 2022, Hawaii Gas had 61.7 million gallons of LPG hedged through September 2024.

Financial Statement Location Disclosure for Derivative Instruments

The Company measures derivative instruments at fair value using the income approach which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations use primarily observable (level 2) inputs, including contractual terms, interest rates, and yield curves observable at commonly quoted intervals.

The Company’s fair value measurements of its derivative instruments and the related location of the assets and liabilities within the consolidated condensed balance sheets on March 31, 2022 and December 31, 2021 were ($ in thousands):


	Assets (Liabilities) at Fair Value
Balance Sheet Classification	March 31, 2022		December 31, 2021
Fair value of derivative instruments - other current assets	$	8,344	$	909
Fair value of derivative instruments - other noncurrent assets	4,078		470
Total derivative contracts - assets	$	12,422	$	1,379

Fair value of derivative instruments - other current liabilities	$	—	$	(122)

Total derivative contracts – liabilities	$	—	$	(122)

The Company’s hedging activities for the quarters ended March 31, 2022 and 2021 and the related location within the consolidated condensed statements of income (loss) were ($ in thousands):


Income Statement Classification	Gain Recognized for the Quarters Ended March 31,

	2022		2021

Interest expense - interest rate swaps	$	489	$	283
Cost of product sales - commodity swaps	12,928		1,626
Total	$	13,417	$	1,909

All of the Company's derivative instruments are collateralized by the assets of the respective businesses.