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Derivative Instruments
 3 Months Ended
Mar. 31, 2012
Derivative Instruments [Abstract]  
DERIVATIVE INSTRUMENTS
10. Derivative Instruments

We use derivative and non-derivative contracts to engage in trading activities and 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 their customers. Purchases under these contracts either do not meet the definition of derivatives or are considered “normal purchases and sales” and are accounted for on an accrual basis. Our propane distribution operation may also enter into fair value hedges of its inventory in order to mitigate the impact of wholesale price fluctuations. As of March 31, 2012, our natural gas and electric distribution operations did not have any outstanding derivative contracts. In August 2011, our propane distribution operation entered into a put option to protect against the decline in propane prices and related potential inventory losses associated with 630,000 gallons purchased for the propane price cap program in the upcoming heating season. This put option was exercised as the propane prices fell below the strike price of $1.445 per gallon in January through March of 2012, and we received $118,000 representing the difference between the market price and the strike price during those months. We had paid $91,000 to purchase the put option, and we accounted for it as a fair value hedge. The change in the fair value of the put option effectively reduced our propane inventory balance until when it was exercised, at which point the proceeds reduced cost of sales. There was no ineffective portion of this fair value hedge.

Xeron, our propane wholesale and marketing subsidiary, engages in trading activities using forward and futures contracts. These contracts are considered derivatives and have been accounted for using the mark-to-market method of accounting. Under the mark-to-market method of accounting, the trading contracts are recorded at fair value, and the changes in fair value of those contracts are recognized as unrealized gains or losses in the statement of income in the period of change. As of March 31, 2012, we had the following outstanding trading contracts which we accounted for as derivatives:

 

                     
    Quantity in     Estimated Market   Weighted Average  

At March 31, 2012

   Gallons    

Prices

   Contract Prices  

Forward Contracts

                    

Sale

     4,936,000     $1.2350 — $1.3775   $ 1.2819  

Purchase

     3,991,000     $1.1950 — $1.3350   $ 1.2585  

Estimated market prices and weighted average contract prices are in dollars per gallon.

All contracts expire by the first quarter of 2013.

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 condensed consolidated balance sheet as of March 31, 2012 and December 31, 2011, are as follows:

 

                     
   

Asset Derivatives

  
        Fair Value  

(in thousands)

  

Balance Sheet Location

   March 31, 2012     December 31, 2011  

Derivatives not designated as hedging instruments

                    
       

Forward contracts

   Mark-to-market energy assets   $ 261     $ 1,686  
       

Derivatives designated as fair value hedges

                    

Put option (1)

   Mark-to-market energy assets     —         68  
       

 

 

    

 

 

  

Total asset derivatives

       $ 261     $ 1,754  
       

 

 

    

 

 

  

 

                     
   

Liability Derivatives

  
        Fair Value  

(in thousands)

  

Balance Sheet Location

   March 31, 2012     December 31, 2011  

Derivatives not designated as hedging instruments

                    
       

Forward contracts

   Mark-to-market energy liabilities   $ 131     $ 1,496  
       

 

 

    

 

 

  

Total liability derivatives

       $ 131     $ 1,496  
       

 

 

    

 

 

  

 

(1) We purchased a put option for the Pro-Cap Plan in August 2011. The put option, which expired in March 2012, had a fair value of $0 at March 31, 2012.

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 March 31,  

(in thousands)

   (Loss) on Derivatives   2012     2011  

Derivatives not designated as hedging instruments:

                    

Unrealized gain (loss) on forward contracts

   Revenue   $ (60 )    $ 83  
       

Derivatives designated as fair value hedges:

                    

Put Option

   Cost of sales     27       —    
       

 

 

    

 

 

  

Total

       $ (33 )    $ 83  
       

 

 

    

 

 

  

The effects of trading activities on the condensed consolidated statements of income are the following:

 

                     
    Location in the   Three months ended March 31,  

(in thousands)

   Statement of Income   2012     2011  

Realized gain on forward contracts/put option

   Revenue   $ 514     $ 907  

Unrealized gain (loss) on forward contracts

   Revenue     (60 )      83  
       

 

 

    

 

 

  

Total

       $ 454     $ 990