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Risk Management and Derivatives: | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Risk Management and Derivatives | Risk Management and Derivatives Market and Credit Risk Disclosures Our activities in the regulated and non-regulated energy sectors expose us to a number of risks in the normal operations of our businesses. Depending on the activity, we are exposed to varying degrees of market risk and credit risk. Market Risk Market risk is the potential loss that may occur as a result of an adverse change in market price, rate or supply. We are exposed to the following market risks, including, but not limited to: •Commodity price risk associated with our retail natural gas, wholesale electric power marketing activities and our fuel procurement for several of our gas-fired generation assets which include market fluctuations due to unpredictable factors such as the COVID-19 pandemic, weather, market speculation, pipeline constraints, and other factors that may impact natural gas and electric energy supply and demand; and •Interest rate risk associated with future debt, including reduced access to liquidity during periods of extreme capital markets volatility, such as the 2008 financial crisis and the COVID-19 pandemic. Credit Risk Credit risk is the risk of financial loss resulting from non-performance of contractual obligations by a counterparty. We attempt to mitigate our credit exposure by conducting business primarily with high credit quality entities, setting tenor and credit limits commensurate with counterparty financial strength, obtaining master netting agreements, and mitigating credit exposure with less creditworthy counterparties through parental guarantees, cash collateral requirements, letters of credit, and other security agreements. We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and the customers’ current creditworthiness, as determined by review of their current credit information. We maintain a provision for estimated credit losses based upon historical experience, changes in current market conditions, expected losses and any specific customer collection issue that is identified. We continue to monitor COVID-19 impacts and changes to customer load, consistency in customer payments, requests for deferred or discounted payments, and requests for changes to credit limits to quantify estimated future financial impacts to the allowance for credit losses. During the three and nine months ended September 30, 2020, the potential economic impact of the COVID-19 pandemic was considered in forward looking projections related to write-off and recovery rates, and resulted in increases to the allowance for credit losses and bad debt expense of $1.7 million and $3.7 million, respectively. See Note 4 for further information. Derivatives and Hedging Activity Our derivative and hedging activities included in the accompanying Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income are detailed below and in Note 10. Utilities The operations of our utilities, including natural gas used by our Electric Utilities’ generation plants or those plants under PPAs where our Electric Utilities must provide the generation fuel (tolling agreements) and natural gas sold by our Gas Utilities, expose our utility customers to volatility in natural gas prices. Therefore, as allowed or required by state utility commissions, we have entered into commission-approved hedging programs utilizing natural gas futures, options, over-the-counter swaps and basis swaps to reduce our customers’ underlying exposure to these fluctuations. These transactions are considered derivatives, and in accordance with accounting standards for derivatives and hedging, mark-to-market adjustments are recorded as Derivative assets or Derivative liabilities on the accompanying Condensed Consolidated Balance Sheets, net of balance sheet offsetting as permitted by GAAP. For our regulated utilities’ hedging plans, unrealized and realized gains and losses, as well as option premiums and commissions on these transactions, are recorded as Regulatory assets or Regulatory liabilities in the accompanying Condensed Consolidated Balance Sheets in accordance with the state utility commission guidelines. When the related costs are recovered through our rates, the hedging activity is recognized in the Condensed Consolidated Statements of Income. We buy, sell and deliver natural gas at competitive prices by managing commodity price risk. As a result of these activities, this area of our business is exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risk using over-the-counter and exchange traded options and swaps with counterparties in anticipation of forecasted purchases and/or sales from October 2020 through May 2022. A portion of our over-the-counter swaps have been designated as cash flow hedges to mitigate the commodity price risk associated with deliveries under fixed price forward contracts to deliver gas to our Choice Gas Program customers. The gain or loss on these designated derivatives is reported in AOCI in the accompanying Condensed Consolidated Balance Sheets and reclassified into earnings in the same period that the underlying hedged item is recognized in earnings. Effectiveness of our hedging position is evaluated at least quarterly. The contract or notional amounts and terms of the electric and natural gas derivative commodity instruments held at our utilities are composed of both long and short positions. We had the following net long positions as of:
|  | September 30, 2020 |  | December 31, 2019 |  |
| Units | Notional Amounts |  | Maximum Term (months) (a) |  | Notional Amounts |  | Maximum Term (months) (a) |  |  |  |
Natural gas futures purchased | MMBtus | 1,930,000 |  |  | 6 |  | 1,450,000 |  |  | 12 |  |  |  |
Natural gas options purchased, net | MMBtus | 8,320,000 |  |  | 6 |  | 3,240,000 |  |  | 3 |  |  |  |
Natural gas basis swaps purchased | MMBtus | 1,780,000 |  |  | 6 |  | 1,290,000 |  |  | 12 |  |  |  |
Natural gas over-the-counter swaps, net (b) | MMBtus | 4,525,100 |  |  | 20 |  | 4,600,000 |  |  | 24 |  |  |  |
Natural gas physical contracts, net (c) | MMBtus | 23,350,287 |  |  | 13 |  | 13,548,235 |  |  | 12 |  |  |  |
Electric wholesale contracts (c) | MWh | 55,225 |  |  | 3 |  | — |  |  | 0 |  |  |  |
__________ (a) Term reflects the maximum forward period hedged. (b) As of September 30, 2020, 1,274,900 MMBtus of natural gas over-the-counter swaps purchases were designated as cash flow hedges. (c) Volumes exclude contracts that qualify for the normal purchases and normal sales exception. We have certain derivative contracts which contain credit provisions. These credit provisions may require the Company to post collateral when credit exposure to the Company is in excess of a negotiated line of unsecured credit. At September 30, 2020, the Company posted $0.5 million related to such provisions, which is included in Other current assets on the Condensed Consolidated Balance Sheets. Derivatives by Balance Sheet Classification As required by accounting standards for derivatives and hedges, fair values within the following tables are presented on a gross basis aside from the netting of asset and liability positions. Netting of positions is permitted in accordance with accounting standards for offsetting and under terms of our master netting agreements that allow us to settle positive and negative positions. The following table presents the fair value and balance sheet classification of our derivative instruments (in thousands) as of:
| Balance Sheet Location |  | September 30, 2020 | December 31, 2019
Derivatives designated as hedges: |  |  |  |
Asset derivative instruments: |  |  |  |
Current commodity derivatives | Derivative assets, current |  | $ | 435 |  | $ | 1 |
Noncurrent commodity derivatives | Other assets, non-current |  | 94 |  | 3 |
Liability derivative instruments: |  |  |  |
Current commodity derivatives | Derivative liabilities, current |  | (9) |  | (490) |
Noncurrent commodity derivatives | Other deferred credits and other liabilities |  | — |  | (29) |
Total derivatives designated as hedges |  |  | $ | 520 |  | $ | (515) |
Derivatives not designated as hedges: |  |  |  |
Asset derivative instruments: |  |  |  |
Current commodity derivatives | Derivative assets, current |  | $ | 1,566 |  | $ | 341 |
Noncurrent commodity derivatives | Other assets, non-current |  | 434 |  | 2 |
Liability derivative instruments: |  |  |  |
Current commodity derivatives | Derivative liabilities, current |  | (1,430) |  | (1,764) |
Noncurrent commodity derivatives | Other deferred credits and other liabilities |  | — |  | (63) |
Total derivatives not designated as hedges |  |  | $ | 570 |  | $ | (1,484) |
Derivatives Designated as Hedges The impacts of cash flow hedges on our Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statements of Income are presented below for the three and nine months ended September 30, 2020 and 2019. Note that this presentation does not reflect gains or losses arising from the underlying physical transactions; therefore, it is not indicative of the economic profit or loss we realized when the underlying physical and financial transactions were settled.
| Three Months Ended September 30, |  | Three Months Ended September 30,
| 2020 | 2019 |  | 2020 | 2019
Derivatives in Cash Flow Hedging Relationships | Amount of (Gain)/Loss Recognized in OCI | Income Statement Location | Amount of Gain/(Loss) Reclassified from AOCI into Income
| (in thousands) |  | (in thousands)
Interest rate swaps | $ | 712 |  | $ | 713 |  | Interest expense | $ | (712) |  | $ | (713) |
Commodity derivatives | 691 |  | (21) |  | Fuel, purchased power and cost of natural gas sold | (178) |  | (129) |
Total | $ | 1,403 |  | $ | 692 |  |  | $ | (890) |  | $ | (842) |
| Nine Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 | 2019 |  | 2020 | 2019
Derivatives in Cash Flow Hedging Relationships | Amount of (Gain)/Loss Recognized in OCI | Income Statement Location | Amount of Gain/(Loss) Reclassified from AOCI into Income
| (in thousands) |  | (in thousands)
Interest rate swaps | $ | 2,138 |  | $ | 2,139 |  | Interest expense | $ | (2,138) |  | $ | (2,139) |
Commodity derivatives | 959 |  | (942) |  | Fuel, purchased power and cost of natural gas sold | (734) |  | 508 |
Total | $ | 3,097 |  | $ | 1,197 |  |  | $ | (2,872) |  | $ | (1,631) |
Based on September 30, 2020 prices, a $0.1 million gain would be realized, reported in pre-tax earnings and reclassified from AOCI during the next 12 months. As market prices fluctuate, estimated and actual realized gains or losses will change during future periods. Derivatives Not Designated as Hedges The following table summarizes the impacts of derivative instruments not designated as hedge instruments on our Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019. Note that this presentation does not reflect gains or losses arising from the underlying physical transactions; therefore, it is not indicative of the economic profit or loss we realized when the underlying physical and financial transactions were settled.
|  | Three Months Ended September 30,
|  | 2020 | 2019
Derivatives Not Designated as Hedging Instruments | Income Statement Location | Amount of Gain/(Loss) on Derivatives Recognized in Income
Commodity derivatives - Electric | Fuel, purchased power and cost of natural gas sold | $ | (1,386) |  | $ | — |
Commodity derivatives - Electric | Other income (expense), net | — |  | 142 |
Commodity derivatives - Natural Gas | Fuel, purchased power and cost of natural gas sold | 1,777 |  | (20) |
|  | $ | 391 |  | $ | 122 |
|  | Nine Months Ended September 30,
|  | 2020 | 2019
Derivatives Not Designated as Hedging Instruments | Income Statement Location | Amount of Gain/(Loss) on Derivatives Recognized in Income
|  | (in thousands)
Commodity derivatives - Electric | Fuel, purchased power and cost of natural gas sold | $ | (228) |  | $ | — |
Commodity derivatives - Electric | Other income (expense), net | — |  | 142 |
Commodity derivatives - Natural Gas | Fuel, purchased power and cost of natural gas sold | 2,992 |  | (1,180) |
|  | $ | 2,764 |  | $ | (1,038) |
As discussed above, financial instruments used in our regulated utilities are not designated as cash flow hedges. There is no earnings impact for our Gas Utilities because the unrealized gains and losses arising from the use of these financial instruments are recorded as Regulatory assets or Regulatory liabilities. The net unrealized losses included in our Regulatory asset or Regulatory liability accounts related to these derivatives in our Gas Utilities were $0.5 million and $3.3 million as of September 30, 2020 and December 31, 2019, respectively. For our Electric Utilities, the unrealized gains and losses arising from these derivatives are recognized in the Condensed Consolidated Statements of Income.

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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 + Details
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