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Derivative Instruments and Hedging Activities | 9 Months Ended
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Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | Note 12 — Derivative Instruments and Hedging Activities We are exposed to certain market risks related to our ongoing business operations. Management uses derivative financial and commodity instruments, among other things, to manage: (1) commodity price risk; (2) interest rate risk; and (3) foreign currency exchange rate risk. Although we use derivative financial and commodity instruments to reduce market risk associated with forecasted transactions, we do not use derivative financial and commodity instruments for speculative or trading purposes. The use of derivative instruments is controlled by our risk management and credit policies, which govern, among other things, the derivative instruments we can use, counterparty credit limits and contract authorization limits. Although our commodity derivative instruments extend over a number of years, a significant portion of our commodity derivative instruments economically hedge commodity price risk during the next twelve months. For information on the accounting for our derivative instruments, see Note 2. The following summarizes the types of derivative instruments used by the Company to manage certain market risks: Commodity Price Risk Regulated Utility Operations Natural Gas Gas Utility’s tariffs contain clauses that permit recovery of all prudently incurred costs of natural gas it sells to retail core-market customers, including the cost of financial instruments used to hedge purchased gas costs. As permitted and agreed to by the PAPUC pursuant to Gas Utility’s annual PGC filings, Gas Utility currently uses NYMEX natural gas futures and option contracts to reduce commodity price volatility associated with a portion of the natural gas it purchases for its retail core-market customers. See Note 6 for further information on the regulatory accounting treatment for these derivative instruments. Non-utility Operations LPG In order to manage market price risk associated with the Partnership’s fixed-price programs and to reduce the effects of short-term commodity price volatility, the Partnership uses over-the-counter derivative commodity instruments, principally price swap contracts. In addition, the Partnership and our UGI International operations also use over-the-counter price swap contracts to reduce commodity price volatility associated with a portion of their forecasted LPG purchases. Natural Gas In order to manage market price risk relating to fixed-price sales contracts for physical natural gas, Midstream & Marketing enters into NYMEX and over-the-counter natural gas futures and over-the-counter and ICE natural gas basis swap contracts. In addition, Midstream & Marketing uses NYMEX and over-the-counter futures and options contracts to economically hedge price volatility associated with the gross margin derived from the purchase and anticipated later near-term sale of natural gas storage inventories. Outside of the financial market, Midstream & Marketing also uses ICE and over-the-counter forward physical contracts. UGI International also uses natural gas futures and forward contracts to economically hedge market price risk associated with fixed-price sales contracts with its customers. Electricity In order to manage market price risk relating to fixed-price sales contracts for electricity, Midstream & Marketing enters into electricity futures and forward contracts. Midstream & Marketing also uses NYMEX and over-the-counter electricity futures contracts to economically hedge the price of a portion of its anticipated future sales of electricity from its electric generation facilities. UGI International also uses electricity futures and forward contracts to economically hedge market price risk associated with fixed-price sales and purchase contracts for electricity. Interest Rate Risk Certain of our long-term debt agreements have interest rates that are generally indexed to short-term market interest rates. In order to fix the underlying short-term market interest rates, we may enter into pay-fixed, receive-variable interest rate swap agreements and designate such swaps as cash flow hedges. As previously mentioned in Note 7, on May 4, 2021, UGI entered into the 2021 UGI Corporation Senior Credit Facility, which as amended, includes a new term loan commitment of up to $215. Borrowings on this commitment will bear interest at a rate indexed to short-term market rates. In June 2021, UGI entered into two forward starting, pay-fixed, receive-variable interest rate swap agreements, commencing in January 2022. These swaps generally fix the underlying variable interest rate on $125 of future borrowings at 0.69% through September 2024. We have designated these interest rate swaps as a cash flow hedges. The remainder of our long-term debt is typically issued at fixed rates of interest. As this long-term debt matures, we typically refinance such debt with new debt having interest rates reflecting then-current market conditions. In order to reduce market rate risk on the underlying benchmark rate of interest associated with near- to medium-term forecasted issuances of fixed-rate debt, from time to time, we enter into IRPAs. We account for IRPAs as cash flow hedges. There were no unsettled IRPAs during any of the periods presented. At June 30, 2021, the amount of pre-tax net losses associated with interest rate hedges (excluding pay-fixed, receive-variable interest rate swaps) expected to be reclassified into earnings during the next twelve months is $4. Foreign Currency Exchange Rate Risk Forward Foreign Currency Exchange Contracts In order to reduce the volatility in net income associated with our foreign operations, principally as a result of changes in the U.S. dollar exchange rate to the euro and British pound sterling, we enter into forward foreign currency exchange contracts. We layer in these foreign currency exchange contracts over a multi-year period to eventually equal approximately 90% of anticipated UGI International foreign currency earnings before income taxes. Because these contracts are not designated as hedging instruments, realized and unrealized gains and losses on these contracts are recorded in “Other non-operating income (expense), net,” on the Condensed Consolidated Statements of Income. Net Investment Hedges From time to time, we also enter into certain forward foreign currency exchange contracts to reduce the volatility of the U.S. dollar value of a portion of our UGI International euro-denominated net investments. We account for these foreign currency exchange contracts as net investment hedges and all changes in the fair value of these contracts are reported in the cumulative translation adjustment component in AOCI. Our euro-denominated long-term debt has also been designated as net investment hedges of a portion of our UGI International euro-denominated net investment. We recognized pre-tax losses associated with these net investment hedges in the cumulative translation adjustment component in AOCI of $8 and $13 during the three months ended June 30, 2021 and 2020, respectively, $9 and $22 during the nine months ended June 30, 2021 and 2020, respectively. Quantitative Disclosures Related to Derivative Instruments The following table summarizes by derivative type the gross notional amounts related to open derivative contracts at June 30, 2021, September 30, 2020 and June 30, 2020, and the final settlement dates of the Company's open derivative contracts as of June 30, 2021, excluding those derivatives that qualified for the NPNS exception:
|  |  |  |  |  | Notional Amounts (in millions)
Type |  | Units |  | Settlements Extending Through |  | June 30, 2021 |  | September 30, 2020 |  | June 30, 2020
Commodity Price Risk: |  |  |  |  |  |  |  |  |  |
Regulated Utility Operations |  |  |  |  |  |  |  |  |  |
Gas Utility NYMEX natural gas futures and option contracts |  | Dekatherms |  | February 2022 |  | 12 |  |  | 22 |  |  | 16 |
Non-utility Operations |  |  |  |  |  |  |  |  |  |
LPG swaps |  | Gallons |  | November 2023 |  | 688 |  |  | 846 |  |  | 890 |
Natural gas futures, forward, basis swap, options and pipeline contracts |  | Dekatherms |  | July 2026 |  | 344 |  |  | 339 |  |  | 343 |
Electricity forward and futures contracts |  | Kilowatt hours |  | January 2026 |  | 4,730 |  |  | 4,705 |  |  | 4,144 |
Interest Rate Risk: |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Euro |  | October 2022 |  | € | 300 |  |  | € | 300 |  |  | € | 300 |
Interest rate swaps |  | USD |  | September 2024 |  | $ | 1,424 |  |  | $ | 1,344 |  |  | $ | 1,347 |
Foreign Currency Exchange Rate Risk: |  |  |  |  |  |  |  |  |  |
Forward foreign currency exchange contracts |  | USD |  | October 2024 |  | $ | 504 |  |  | $ | 511 |  |  | $ | 440 |
Net investment hedge forward foreign exchange contracts |  | Euro |  | October 2024 |  | € | 173 |  |  | € | 173 |  |  | € | 173 |
Derivative Instrument Credit Risk We are exposed to risk of loss in the event of nonperformance by our derivative instrument counterparties. Our derivative instrument counterparties principally comprise large energy companies and major U.S. and international financial institutions. We maintain credit policies with regard to our counterparties that we believe reduce overall credit risk. These policies include evaluating and monitoring our counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits or entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate. Certain of these agreements call for the posting of collateral by the counterparty or by the Company in the forms of letters of credit, parental guarantees or cash. Additionally, our commodity exchange traded futures contracts generally require cash deposits in margin accounts. Restricted cash in brokerage accounts is reported in “Restricted cash” on the Condensed Consolidated Balance Sheets. Although we have concentrations of credit risk associated with derivative instruments, the maximum amount of loss we would incur if these counterparties failed to perform according to the terms of their contracts, based upon the gross fair values of the derivative instruments, was not material at June 30, 2021. Certain of the Partnership’s derivative contracts have credit-risk-related contingent features that may require the posting of additional collateral in the event of a downgrade of the Partnership’s debt rating. At June 30, 2021, if the credit-risk-related contingent features were triggered, the amount of collateral required to be posted would not be material. Offsetting Derivative Assets and Liabilities Derivative assets and liabilities are presented net by counterparty on the Condensed Consolidated Balance Sheets if the right of offset exists. We offset amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against amounts recognized for derivative instruments executed with the same counterparty. Our derivative instruments include both those that are executed on an exchange through brokers and centrally cleared and over-the-counter transactions. Exchange contracts utilize a financial intermediary, exchange or clearinghouse to enter, execute or clear the transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Certain over-the-counter and exchange contracts contain contractual rights of offset through master netting arrangements, derivative clearing agreements and contract default provisions. In addition, the contracts are subject to conditional rights of offset through counterparty nonperformance, insolvency or other conditions. In general, most of our over-the-counter transactions and all exchange contracts are subject to collateral requirements. Types of collateral generally include cash or letters of credit. Cash collateral paid by us to our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative liabilities. Cash collateral received by us from our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative assets. Certain other accounts receivable and accounts payable balances recognized on the Condensed Consolidated Balance Sheets with our derivative counterparties are not included in the table below but could reduce our net exposure to such counterparties because such balances are subject to master netting or similar arrangements. Fair Value of Derivative Instruments The following table presents the Company’s derivative assets and liabilities by type, as well as the effects of offsetting:
|  | June 30, 2021 |  | September 30, 2020 |  | June 30, 2020
Derivative assets: |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |
Foreign currency contracts |  | $ | 15 |  |  | $ | 17 |  |  | $ | 25 |
Derivatives subject to PGC and DS mechanisms: |  |  |  |  |  |
Commodity contracts |  | 14 |  |  | 7 |  |  | 3 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Commodity contracts |  | 623 |  |  | 100 |  |  | 65 |
Foreign currency contracts |  | 9 |  |  | 15 |  |  | 24 |
|  | 632 |  |  | 115 |  |  | 89 |
Total derivative assets — gross |  | 661 |  |  | 139 |  |  | 117 |
Gross amounts offset in the balance sheet |  | (77) |  |  | (57) |  |  | (42) |
Cash collateral received |  | (105) |  |  | — |  |  | — |
Total derivative assets — net |  | $ | 479 |  |  | $ | 82 |  |  | $ | 75 |
Derivative liabilities: |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |
Interest rate contracts |  | $ | (35) |  |  | $ | (55) |  |  | $ | (59) |
Derivatives subject to PGC and DS mechanisms: |  |  |  |  |  |
Commodity contracts |  | (6) |  |  | — |  |  | (2) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Commodity contracts |  | (139) |  |  | (118) |  |  | (170) |
Foreign currency contracts |  | (13) |  |  | (14) |  |  | (7) |
|  | (152) |  |  | (132) |  |  | (177) |
Total derivative liabilities — gross |  | (193) |  |  | (187) |  |  | (238) |
Gross amounts offset in the balance sheet |  | 77 |  |  | 57 |  |  | 42 |
Cash collateral pledged |  | — |  |  | 7 |  |  | 21 |
Total derivative liabilities — net |  | $ | (116) |  |  | $ | (123) |  |  | $ | (175) |
Effects of Derivative Instruments The following tables provide information on the effects of derivative instruments on the Condensed Consolidated Statements of Income and changes in AOCI:
Three Months Ended June 30,: |  |  |  |  |  |  |  |  |  |
|  | Gain (Loss) Recognized in AOCI |  | Loss Reclassified from AOCI into Income |  | Location of Loss Reclassified from AOCI into Income
Cash Flow Hedges: |  | 2021 |  | 2020 |  | 2021 |  | 2020 |
Interest rate contracts |  | $ | (1) |  |  | $ | (11) |  |  | $ | (6) |  |  | $ | (6) |  |  | Interest expense
Net Investment Hedges: |  |  |  |  |  |  |  |  |  |
Foreign currency contracts |  | $ | (1) |  |  | $ | (3) |  |  |  |  |  |  |
|  | Gain (Loss) Recognized in Income |  |  |  |  |  |
Derivatives Not Designated as Hedging Instruments: |  | 2021 |  | 2020 |  | Location of Gain (Loss) Recognized in Income
Commodity contracts |  | $ | (5) |  |  | $ | 6 |  |  | Revenues
Commodity contracts |  | 347 |  |  | 127 |  |  | Cost of sales
Commodity contracts |  | — |  |  | 1 |  |  | Operating and administrative expenses
Foreign currency contracts |  | (1) |  |  | (5) |  |  | Other non-operating income (expense), net
Total |  | $ | 341 |  |  | $ | 129 |  |  |  |  |  |  |
Nine Months Ended June 30,: |  |  |  |  |  |  |  |  |  |
|  | Gain (Loss) Recognized in AOCI |  | Loss Reclassified from AOCI into Income |  | Location of Loss Reclassified from AOCI into Income
Cash Flow Hedges: |  | 2021 |  | 2020 |  | 2021 |  | 2020 |
Interest rate contracts |  | $ | 5 |  |  | $ | (53) |  |  | $ | (19) |  |  | $ | (8) |  |  | Interest expense
Net Investment Hedges: |  |  |  |  |  |  |  |  |  |
Foreign currency contracts |  | $ | (2) |  |  | $ | 7 |  |  |  |  |  |  |
|  | Gain (Loss) Recognized in Income |  |  |  |  |  |
Derivatives Not Designated as Hedging Instruments: |  | 2021 |  | 2020 |  | Location of Gain (Loss) Recognized in Income
Commodity contracts |  | $ | (4) |  |  | $ | 14 |  |  | Revenues
Commodity contracts |  | 585 |  |  | (112) |  |  | Cost of sales
Commodity contracts |  | — |  |  | 1 |  |  | Operating and administrative expenses
Commodity contracts |  | 5 |  |  | — |  |  | Other operating income, net
Foreign currency contracts |  | (4) |  |  | (5) |  |  | Other non-operating income (expense), net
Total |  | $ | 582 |  |  | $ | (102) |  |  |  |  |  |  |
We are also a party to a number of other contracts that have elements of a derivative instrument. However, these contracts qualify for NPNS exception accounting because they provide for the delivery of products or services in quantities that are expected to be used in the normal course of operating our business and the price in the contract is based on an underlying that is directly associated with the price of the product or service being purchased or sold. These contracts include, among others, binding purchase orders, contracts that provide for the purchase and delivery, or sale, of energy products, and service contracts that require the counterparty to provide commodity storage, transportation or capacity service to meet our normal sales commitments.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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