Derivative Instruments

9 Months Ended

Sep. 30, 2020

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 and to mitigate interest rate risk. 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. Our natural gas gathering and transmission company 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. Occasionally, we may enter into interest rate swap agreements to mitigate risk associated with changes in short-term borrowing rates. As of September 30, 2020, our natural gas and electric distribution operations did not have any outstanding derivative contracts.

PESCO's Derivative Instruments

As discussed in Note 3, Acquisitions and Divestitures, during the fourth quarter of 2019, we sold PESCO's assets and contracts and, therefore, no longer have natural gas futures and contracts recorded in our condensed consolidated financial statements.

Commodity Derivative Activities

As of September 30, 2020, the volume of our commodity derivative contracts were as follows:

Business unit

Commodity

Quantity hedged (in millions)

Designation

Longest Expiration date of hedge

Sharp

Propane (gallons)

21.7

Cash flows hedges

May 2023

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 for September 2020 through May 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 $1.0 million from accumulated other comprehensive income (loss) to earnings during the next 12-month period ended September 30, 2021.

Interest Rate Swap Activities

We manage interest rate risk by entering into derivative contracts to hedge the variability in cash flows attributable to changes in the short-term borrowing rates. In the second quarter of 2020, we entered into interest rate swaps with notional amounts totaling $100.0 million associated with three of our short-term lines of credit through October 2020. The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period. Pricing on the interest rate swaps range between 0.2615 and 0.3875 percent for the period. Our short-term borrowing is based on the 30-day LIBOR rate. The interest rate swaps are cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate.

We designated and accounted for interest rate swaps as cash flows hedges. Accordingly, unrealized gains and losses associated with the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss). When the interest rate swaps settle, the realized gain or loss will be recorded in the income statement and recognized as a component of interest charges. We expect to reclassify less than $0.1 million from accumulated other comprehensive income (loss) to earnings during the next 12-month period ended September 30, 2021.

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 mark-to-market 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	September 30, 2020		December 31, 2019
Sharp	Other Current Assets	$	177	$	2,317

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 of September 30, 2020 and December 31, 2019, we did not have material fair value hedges. The fair values of the derivative contracts recorded in the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, are as follows:


	Derivative Assets
		Fair Value As Of
(in thousands)	Balance Sheet Location	September 30, 2020		December 31, 2019


Derivatives designated as cash flow hedges
Propane swap agreements	Derivative assets, at fair value	$	1,967	$	—
Total asset derivatives		$	1,967	$	—


	Derivative Liabilities
		Fair Value As Of
(in thousands)	Balance Sheet Location	September 30, 2020		December 31, 2019
Derivatives designated as cash flow hedges
Propane swap agreements	Derivative liabilities, at fair value	$	426	$	1,844
Interest rate swap agreements	Derivative liabilities, at fair value	13		—
Total liability derivatives		$	439	$	1,844

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	2020		2019		2020		2019


Derivatives designated as cash flow hedges
Propane swap agreements	Cost of sales	$	116	$	290	$	1,581	$	1,148
Propane swap agreements	Other comprehensive income (loss)	1,022		(1,139)		3,385		(624)
Interest rate swap agreements	Interest expense	34		—		45		—
Interest rate swap agreements	Other comprehensive income (loss)	37		—		(14)		—
Natural gas swap contracts	Other comprehensive income (loss)	—		4		—		(63)
Natural gas futures contracts	Other comprehensive income (loss)	—		1,612		—		2,376
Total		$	1,209	$	767	$	4,997	$	2,837