Derivative Instruments

12 Months Ended

Dec. 31, 2023

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 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 December 31, 2023 and 2022, our natural gas and electric distribution operations did not have any outstanding derivative contracts.

Volume of Derivative Activity

As of December 31, 2023, the volume of our open commodity derivative contracts were as follows:

Business unit

Commodity

Contract Type

Quantity hedged (in millions)

Designation

Longest expiration date of hedge

Sharp

Propane (gallons)

Purchases

18.1

Cash flow hedges

June 2026

Sharp

Propane (gallons)

Sales

3.2

Cash flow hedges

March 2024

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 and/or sold during the heating season. Under the futures and swap agreements, Sharp will receive or pay the difference between (i) the index prices (Mont Belvieu prices in December 2023 through June 2026) and (ii) the per gallon propane contracted prices, to the extent the index prices deviate from the contracted prices. We designated and accounted for the propane swaps as cash flows hedges. The change in the fair value of the swap agreements is initially recorded as a component of accumulated other comprehensive income (loss) and later recognized in our consolidated statement of income in the same period and in the same line item as the hedged transaction. We expect to reclassify approximately $0.3 million of unrealized losses from accumulated other comprehensive income (loss) to earnings during the next 12-month period.

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 September 2022, we entered into an interest rate swap with a notional amount of $50.0 million through September 2025, with pricing of 3.98 percent.

In February 2021, we entered into an interest rate swap with a notional amount of $40.0 million through December 2021 with pricing of 0.17 percent. In the fourth quarter of 2020, we entered into interest rate swaps with notional amounts totaling $60.0 million through December 2021 with pricing of approximately 0.20 percent for the period associated with our outstanding borrowing under the Revolver.

In August 2022, we amended and restated the Revolver and transitioned the benchmark interest rate to the 30-day SOFR as a result of the expiration of LIBOR. Accordingly, our current interest rate swap is cash settled monthly as the counter-party pays us the 30-day SOFR rate less the fixed rate. Prior to August 2022, our short-term borrowing interest rate was based on the 30-day LIBOR rate. Our pre-2022 interest rate swaps were cash settled monthly as the counter-party paid us the 30-day LIBOR rate less the fixed rate.

We designate and account for interest rate swaps as cash flows hedges. Accordingly, unrealized gains and losses associated with the interest rate swaps are initially recorded as a component of accumulated other comprehensive income (loss). As the interest rate swap settles each month, the realized gain or loss is recorded in the income statement and is recognized as a component of interest charges.

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 included within other current assets on the consolidated balance sheet with a balance of $2.1 million as of December 31, 2023 compared to a current liability of $0.1 million at December 31, 2022.

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. Fair values of the derivative contracts recorded in the consolidated balance sheets as of December 31, 2023 and 2022 are as follows:


	Derivative Assets
		Fair Value as of
(in thousands)	Balance Sheet Location	December 31, 2023		December 31, 2022




Derivatives designated as cash flow hedges
Propane swap agreements	Derivative assets, at fair value (1)	$	702	$	3,317
Interest rate swap agreements	Derivative assets, at fair value (1)	365		452
Total Derivative Assets		$	1,067	$	3,769

(1) Derivative assets, at fair value include $1.0 million and $2.8 million in current assets in the consolidated balance sheet at December 31, 2023 and 2022, respectively, with the remainder of the balance classified as long-term.


	Derivative Liabilities
		Fair Value as of
(in thousands)	Balance Sheet Location	December 31, 2023		December 31, 2022




Derivatives designated as cash flow hedges
Propane swap agreements	Derivative liabilities, at fair value (1)	$	1,078	$	1,810
Interest rate swap agreements	Derivative liabilities, at fair value (1)	203		405
Total Derivative Liabilities		$	1,281	$	2,215

(1) Derivative liabilities, at fair value include $0.4 million and $0.6 million in current liabilities in the consolidated balance sheet at December 31, 2023 and 2022, respectively, with the remainder of the balance classified as long-term.

The effects of gains and losses from derivative instruments and their location in the consolidated statements of income are as follows:


	Amount of Gain (Loss) on Derivatives:
	Location of Gain (Loss) on Derivatives	For the Year Ended December 31,
(in thousands)		2023		2022		2021
Derivatives not designated as hedging instruments

Propane swap agreements	Propane and natural gas costs	$	—	$	56	$	(1)
Derivatives designated as fair value hedges
Put/Call option	Propane and natural gas costs	—		—		(24)

Derivatives designated as cash flow hedges
Propane swap agreements	Revenues	1,221		(373)		(536)
Propane swap agreements	Propane and natural gas costs	(1,160)		3,881		7,187

Interest rate swap agreements	Interest expense	523		(47)		(40)



Total		$	584	$	3,517	$	6,586