Derivative Instruments

12 Months Ended

Dec. 31, 2013

Text Block [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. 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 December 31, 2013, our natural gas and electric distribution operations did not have any outstanding derivative contracts.

In June 2013, Sharp entered into put options to protect against the decline in propane prices and related potential inventory losses associated with 1.3 million gallons purchased for the propane price cap program in the upcoming heating season. If exercised, we will receive the difference between the market price and the strike price if propane prices fall below the strike prices of $0.830 per gallon in December 2013 through February of 2014 and $0.860 per gallon in January through March 2014. We account for these options as fair value hedges, and there is no ineffective portion of these hedges. We paid $120,000 to purchase these put options. As of December 31, 2013, the put options had a fair value of $20,000. The change in the fair value of the put options effectively reduced our propane inventory balance.

In May 2013, Sharp entered into a call option to protect against an increase in propane prices associated with 630,000 gallons expected to be purchased at market-based prices to supply the demands of our propane price cap program customers. The retail price that we can charge to those customers during the upcoming heating season is capped at a pre-determined level. The call option is exercised if the propane prices rise above the strike price of $0.975 per gallon in January through March 2014. We account for this call option as a derivative instrument on a mark-to-market basis with any change in its fair value being reflected in current period earnings. We paid $72,000 to purchase this call option. As of December 31, 2013, the call option had a fair value of $169,000.

In May 2012, Sharp entered into call options to protect against an increase in propane prices associated with 1,260,000 gallons purchased for the propane price cap program for the months of December 2012 through March 2013. The strike prices of these call options ranged from $0.905 per gallon to $0.990 per gallon during this four-month period. We paid $139,000 to purchase the call options, which expired without exercising the options as the market prices were below the strike prices. We accounted for the call options as a fair value hedge. As of December 31, 2012, the call options had a fair value of $28,000. There was no ineffective portion of this fair value hedge in 2012.

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 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 consolidated statements of income in the period of change. As of December 31, 2013, we had the following outstanding trading contracts, which we accounted for as derivatives:

	Quantity in	Estimated Market	Weighted Average
At December 31, 2013	Gallons	Prices	Contract Prices
Forward Contracts
Sale	1,892,000	$0.9900 - $1.4750	$	1.2786
Purchase	1,991,000	$0.9411 - $1.4600	$	1.2444

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

All contracts expire by the end of the first quarter of 2014.

Xeron has 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 consolidated balance sheets. At December 31, 2013, Xeron had a right to offset $2.8 million and $3.2 million of accounts receivable and accounts payable, respectively, with these two counterparties. At December 31, 2012, Xeron had a right to offset $1.2 million and $511,000 of accounts receivable and accounts payable, respectively, 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.

Fair values of the derivative contracts recorded in the consolidated balance sheets as of December 31, 2013 and 2012, are as follows:

	Asset Derivatives
		Fair Value As Of
(in thousands)	Balance Sheet Location	December 31, 2013		December 31, 2012
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy assets	$	196	$	182
Call Option	Mark-to-market energy assets	169		—
Derivatives designated as fair value hedges
Call option	Mark-to-market energy assets	—		28
Put option	Mark-to-market energy assets	20		—
Total asset derivatives		$	385	$	210

	Liability Derivatives
		Fair Value As Of
(in thousands)	Balance Sheet Location	December 31, 2013		December 31, 2012
Derivatives not designated as hedging instruments
Forward contracts	Mark-to-market energy liabilities	$	127	$	331
Total liability derivatives		$	127	$	331

The effects of gains and losses from derivative instruments are as follows:

	Amount of Gain (Loss) on Derivatives:
	Location of Gain (Loss) on Derivatives	For the Year Ended December 31,
(in thousands)		2013			2012			2011
Derivatives not designated as hedging instruments:
Unrealized gain (loss) on forward contracts	Revenue	$	217		$	(339	)	$	41
Call Option	Cost of Sales	97			—			(23		)
Derivatives designated as fair value hedges:
Put/Call Option	Cost of Sales	(28		)	27
Put/Call Option (1)	Propane Inventory	(100		)	(40		)	—
Total		$	186		$	(352	)	$	18

(1) 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 call option effectively changed the value of propane inventory.

The effects of trading activities on the consolidated statements of income are as follows:

		Amount of Trading Revenue
	Location of Gain	For the Year Ended December 31,
(in thousands)	(Loss) on Derivatives	2013		2012			2011
Realized gain on forward contracts and options	Revenue	$	1,127	$	2,695		$	2,215
Unrealized gain (loss) on forward contracts	Revenue	217		(339		)	41
Total		$	1,344	$	2,356		$	2,256