Derivative Instruments

12 Months Ended

Dec. 31, 2019

8. DERIVATIVE INSTRUMENTS

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 operations 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 December 31, 2019 and 2018, our natural gas and electric distribution operations did not have any outstanding derivative contracts.

PESCO's Derivative Instruments

As discussed in Note 4, Acquisitions and Divestitures, during the fourth quarter of 2019, we sold PESCO's assets and contracts to UET, NJRES, Gas South, and DFS and, therefore, no longer have natural gas futures and contracts recorded in our consolidated financial statements. The gains and losses associated with PESCO's financial instruments are reflected as discontinued operations in the consolidated statements of income and PESCO's assets and liabilities are reflected as held-for-sale in the consolidated balance sheets.

Volume of Derivative Activity

As of December 31, 2019, the volume of our open commodity derivative contracts were as follows:



Business unit	Commodity	Quantity hedged (in millions)	Designation	Longest expiration date of hedge
Sharp	Propane (gallons)	9.9	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 December 2019 through June 2022) 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 $1.5 million from accumulated other comprehensive income to earnings during the next 12-month period ending December 31, 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, with the balance related to the account is as follows:



(in thousands)	Balance Sheet Location	December 31, 2019		December 31, 2018
Sharp	Other Current Assets	$	2,317	$	2,173

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. As discussed in Note 4, Acquisitions and Divestitures, during the fourth quarter of 2019, we sold PESCO's assets and contracts. PESCO's derivative assets and liabilities are reflected as assets and liabilities held-for-sale in the consolidated balance sheet as of December 31, 2018. Fair values of the derivative contracts recorded in the consolidated balance sheets as of December 31, 2019 and 2018 are as follows:



	Derivative Assets
		Fair Value as of
(in thousands)	Balance Sheet Location	December 31, 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 Derivative Assets		$	—	$	82



	Derivative Liabilities
		Fair Value as of
(in thousands)	Balance Sheet Location	December 31, 2019		December 31, 2018
Derivatives designated as cash flow hedges
Propane swap agreements	Derivative liabilities, at fair value	$	1,844	$	1,604
Total Derivative Liabilities		$	1,844	$	1,604

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)	Location of Gain (Loss) on Derivatives	2019			2018			2017
Derivatives not designated as hedging instruments
Realized gain on forward contracts and options ⁽¹⁾	Revenue	$	—		$	—		$	112
Propane swap agreements	Cost of sales	—			(13		)	8
Derivatives designated as fair value hedges
Put/Call option	Cost of sales	—			—			(9		)
Derivatives designated as cash flow hedges
Propane swap agreements	Cost of sales	1,520			(647		)	1,607
Propane swap agreements	Other comprehensive income (loss)	(253		)	(2,773		)	487
Natural gas swap contracts	Other comprehensive income (loss)	(63		)	200			986
Natural gas futures contracts	Other comprehensive income (loss)	(294		)	532			(1,476		)
Total		$	910		$	(2,701	)	$	1,715

⁽¹⁾ All of the realized and unrealized gain (loss) on forward contracts represented the effect of trading activities for Xeron on our consolidated statement of income.

As of December 31, 2019 and 2018, we did not have any material fair value hedges.