Derivative Instruments

9 Months Ended

Sep. 30, 2011

Derivative Instruments [Abstract]

Derivative Instruments

10. 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, 2011, our natural gas and electric distribution operations did not have any outstanding derivative contracts. In August 2011, our propane distribution operation entered into a put option to protect against the decline in propane prices and related potential inventory losses associated with 630,000 gallons purchased for the propane price cap program in the upcoming heating season. This put option is exercised if the propane prices fall below the strike price of $1.445 per gallon in January through March of 2012 and we will receive the difference between the market price and the strike price during those months. We paid $91,000 to purchase the put option. We account for this put option as a fair value hedge. As of September 30, 2011, the put option had a fair value of $92,000. The change in the fair value of the put option reduced our propane inventory balance.

Xeron, our propane wholesale and 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 the mark-to-market method of accounting, 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 in the period of change. As of September 30, 2011, we had the following outstanding trading contracts which we accounted for as derivatives:

	Quantity in		Estimated Market		Weighted Average
At September 30, 2011	Gallons		Prices		Contract Prices
Forward Contracts
Sale		21,361,200	$	1.3900 – $1.6200	$	1.5231
Purchase		21,193,200	$	1.3344 – $1.6047	$	1.5149

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

All contracts expire during or prior to the first quarter of 2012.

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, 2011 and December 31, 2010, are the following:

	Asset Derivatives
		Fair Value
(in thousands)	Balance Sheet Location	September 30, 2011		December 31, 2010
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy assets	$	1,137	$	1,642
Put option (1)	Mark-to-market energy assets		—		—
Derivatives designated as fair value hedges
Put option (2)	Mark-to-market energy assets		92		—
Total asset derivatives		$	1,229	$	1,642

	Liability Derivatives
		Fair Value
(in thousands)	Balance Sheet Location	September 30, 2011		December 31, 2010
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy liabilities	$	956	$	1,492
Total liability derivatives		$	956	$	1,492

(1)	We purchased a put option for the Pro-Cap (propane price cap) Plan in October 2010. The put option, which expired in January and February 2011, had a fair value of $0 at December 31, 2010.
(2)	We purchased a put option for the Pro-Cap Plan in August 2011. The put option, which will expire during the first quarter of 2012, has a fair value of $92 at September 30, 2011.

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

		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	2011		2010		2011		2010
Derivatives not designated as hedging instruments:
Put Option(1)	Cost of Sales	$	—	$	—	$	—	$	—
Unrealized gain on forward contracts	Revenue		62		69		32		443
Derivatives designated as fair value hedges:
Put Option(2)	Propane inventory		1		—		1		—
Total		$	63	$	69	$	33	$	443

(1)	We purchased a put option for the Pro-Cap Plan in October 2010. The put option, which expired in January and February 2011, had a fair value of $0 at December 31, 2010.
(2)	We purchased a put option for the Pro-Cap Plan in August 2011. The put option, which will expire during the first quarter of 2012, has a fair value of $92 at September 30, 2011.

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

	Location in the	Three months ended September 30,				Nine months ended September 30,
(in thousands)	Statement of Income	2011		2010		2011		2010
Realized gains on forward contracts	Revenue	$	380	$	271	$	1,934	$	1,010
Changes in mark-to-market energy assets	Revenue		62		69		32		443
Total		$	442	$	340	$	1,966	$	1,453