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Derivative Instruments | 6 Months Ended
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Jun. 30, 2012
Derivative Instruments [Abstract] |
Derivative Instruments |
11. | 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 June 30, 2012, our natural gas and electric distribution operations did not have any outstanding derivative contracts. In May 2012, our propane distribution operation entered into call options to protect against an increase in propane prices associated with 1,260,000 gallons purchased for the propane price cap program in December 2012 through March 2013. The call options are exercised if the propane prices rise above the strike prices, which range from $0.905 per gallon to $0.99 per gallon during this four-month period. We will receive the difference between the market price and the strike price during those months. We paid $139,000 to purchase the call options and we accounted for the call options as a fair value hedge. As of June 30, 2012, the call options had a fair value of $123,000. There has been no ineffective portion of this fair value hedge thus far in 2012. 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. 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. 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 June 30, 2012, we had the following outstanding trading contracts, which we accounted for as derivatives:
|  | Quantity in |  |  | Estimated Market |  |  | Weighted Average |
At June 30, 2012 |  | Gallons |  |  | Prices |  |  | Contract Prices |
Forward Contracts |  |  |  |  |  |  |  |  |  |  |  |
Sale |  |  | 5,754,000 |  |  | $ | 0.7200 — $1.3775 |  |  | $ | 0.8933 |
Purchase |  |  | 5,670,000 |  |  | $ | 0.6825 — $1.3300 |  |  | $ | 0.8724 |
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 June 30, 2012 and December 31, 2011, are as follows:
|  | Asset Derivatives |
|  |  |  | Fair Value |
(in thousands) |  | Balance Sheet Location |  | June 30, 2012 |  |  | December 31, 2011 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |
Forward contracts |  | Mark-to-market energy assets |  | $ | 462 |  |  | $ | 1,686 |
Derivatives designated as fair value hedges |  |  |  |  |  |  |  |  |  |
Put option (1) |  | Mark-to-market energy assets |  |  | — |  |  |  | 68 |
Call option (2) |  | Mark-to-market energy assets |  |  | 123 |  |  |  | — |
Total asset derivatives |  |  |  | $ | 585 |  |  | $ | 1,754 |
|  | Liability Derivatives |
|  |  |  | Fair Value |
(in thousands) |  | Balance Sheet Location |  | June 30, 2012 |  |  | December 31, 2011 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |
Forward contracts |  | Mark-to-market energy liabilities |  | $ | 504 |  |  | $ | 1,496 |
Total liability derivatives |  |  |  | $ | 504 |  |  | $ | 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 June 30, 2012.
(2) | As a fair value hedge with no ineffective portion, the unrealized gains and losses associated with this call option are recorded in cost of sales, offset by the corresponding change in the value of propane inventory (hedged item), which is also recorded in cost of sales. The amounts in cost of sales offset to zero and the unrealized gains and losses of this call option effectively changed the value of propane inventory.
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 June 30, |  |  | For the Six Months Ended June 30, |
(in thousands) |  | (Loss) on Derivatives |  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) on forward contracts |  | Revenue |  | $ | (172 | ) |  | $ | (112 | ) |  | $ | (232 | ) |  | $ | (30 | )
Derivatives designated as fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Put Option |  | Cost of sales |  |  | — |  |  |  | — |  |  |  | 27 |  |  |  | — |
Call Option (1) |  | Inventory |  |  | (16 | ) |  |  | — |  |  |  | (16 | ) |  |  | — |
Total |  |  |  | $ | (188 | ) |  | $ | (112 | ) |  | $ | (221 | ) |  | $ | (30 | )
(1) | The change in fair value of the call option effectively adjusts the propane inventory balance until it is exercised, at which point the proceeds, if any, reduce cost of sales. There is no ineffective portion of this call option.
The effects of trading activities on the condensed consolidated statements of income are the following:
|  | Location in the |  |  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
(in thousands) |  | Statement of Income |  |  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Realized gains on forward contracts/put option |  |  | Revenue |  |  | $ | 807 |  |  | $ | 647 |  |  | $ | 1,321 |  |  | $ | 1,554 |
Unrealized loss on forward contracts |  |  | Revenue |  |  |  | (172 | ) |  |  | (112 | ) |  |  | (232 | ) |  |  | (30 | )
Total |  |  |  |  |  | $ | 635 |  |  | $ | 535 |  |  | $ | 1,089 |  |  | $ | 1,524 |

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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