Derivative Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We use derivative and non-derivative contracts to 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 our customers. Aspire Energy has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these contracts typically either do not meet the definition of derivatives or are considered “normal purchases and normal sales” and are accounted for on an accrual basis. Our propane distribution may also enter into fair value hedges of their inventory or cash flow hedges of their future purchase commitments in order to mitigate the impact of wholesale price fluctuations. As of September 30, 2019, our natural gas and electric distribution operations did not have any outstanding derivative contracts.

PESCO's Derivative Instruments

As discussed in Note 3, Discontinued Operations, we reached an agreement to sell a majority of PESCO's operations to UET, NJRES and Gas South. The sale of assets and contracts to UET and NJRES closed on October 1, 2019. In anticipation of the consummation of the sale to UET and NJRES, the financial and commodity contracts sold were novated prior to the close of sale. At September 30, 2019, PESCO's natural gas futures contracts were primarily associated with the purchase and sale of natural gas for the producer services portfolio. We are actively marketing PESCO’s producer services portfolio and are targeting a sale by December 31, 2019. At September 30, 2019 and December 31, 2018, the fair value of PESCO's derivative assets was $3.2 million and $13.1 million, respectively. At September 30, 2019 and December 31, 2018, the fair value of PESCO's derivative liabilities was $0.9 million and $13.3 million, respectively. These amounts are reflected as assets and liabilities held for sale in the condensed consolidated balance sheets. The gains and losses associated with PESCO's financial instruments are reflected as discontinued operations in the condensed consolidated statements of income.

Volume of Derivative Activity

As of September 30, 2019, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity and a short position is a contract to sell the commodity. The volume of our open long/(short) commodity derivative contracts were as follows:



Business unit	Commodity	Quantity hedged (in millions)	Designation	Longest Expiration date of hedge
Sharp	Propane (gallons)	11.4	Cash flows hedges	June 2022

Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with the propane volumes expected to be purchased during the heating season. Under the futures and swap agreements, Sharp will receive the difference between: (i) the index prices (Mont Belvieu prices in August 2018 through March 2023), and (ii) the per gallon propane swap prices, to the extent the index prices exceed the contracted prices. If the index prices are lower than the swap prices, Sharp will pay the difference. We designated and accounted for propane swaps as cash flows hedges. The change in the fair value of the swap agreements is recorded as unrealized gain (loss) in other comprehensive income (loss) and later recognized in the statement of income in the same period and in the same line item as the hedged transaction. We expect to reclassify approximately $1.7 million from accumulated other comprehensive loss to earnings during the next 12-month period ended September 30, 2020.

Broker Margin

Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily MTM relative to maintenance margin requirements. We currently maintain a broker margin account for Sharp, and prior to September 30, 2019, we also maintained a broker margin account for PESCO. The balances related to the margin accounts are as follows:



(in thousands)	Balance Sheet Location	September 30, 2019			December 31, 2018
Sharp	Other Current Assets	$	2,488		$	2,170
PESCO	Other Current Assets	$	(524	)	$	2,810

Financial Statements Presentation

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. PESCO's derivatives assets and derivative liabilities are presented as assets or liabilities held for sale in our condensed consolidated balance sheets.

The fair values of the derivative contracts recorded in the condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, are as follows:



	Derivative Assets
		Fair Value As Of
(in thousands)	Balance Sheet Location	September 30, 2019		December 31, 2018
Derivatives designated as fair value hedges
Propane put options	Derivative assets, at fair value	$	—	$	71
Derivatives designated as cash flow hedges
Propane swap agreements	Derivative assets, at fair value	—		11
Total asset derivatives		$	—	$	82



	Derivative Liabilities
		Fair Value As Of
(in thousands)	Balance Sheet Location	September 30, 2019		December 31, 2018
Derivatives designated as cash flow hedges
Propane swap agreements	Derivative liabilities, at fair value	$	2,216	$	1,604
Total liability derivatives		$	2,216	$	1,604

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



		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	2019			2018			2019			2018
Derivatives not designated as hedging instruments
Propane swap agreements	Cost of sales	$	—		$	—		$	—		$	(13	)
Derivatives designated as cash flow hedges
Propane swap agreements	Cost of sales	290			(276		)	1,148			(921		)
Propane swap agreements	Other comprehensive income (loss)	(1,139		)	296			(624		)	(590		)
Natural gas swap contracts	Other comprehensive income (loss)	4			(25		)	(63		)	563
Natural gas futures contracts	Other comprehensive income (loss)	1,612			630			2,376			(241		)
Total		$	767		$	625		$	2,837		$	(1,202	)

Gains and losses associated with PESCO are presented in discontinued operations in the condensed consolidated statements of income. As of September 30, 2019, the following amounts were recorded in the condensed consolidated balance sheets related to fair value hedges:



(in thousands)	Carrying Amount of Hedged Item				Cumulative Adjustment Included in Carrying Amount of Hedged Item
Balance Sheet Location of Hedged Items	At September 30, 2019		At December 31, 2018		At September 30, 2019		At December 31, 2018
Inventory	$	—	$	212	$	—	$	—