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Derivatives and Hedging-Disclosures and Fair Value Measurements
 12 Months Ended
Sep. 30, 2013
Derivatives and Hedging-Disclosures and Fair Value Measurements

5) Derivatives and Hedging—Disclosures and Fair Value Measurements

The Partnership uses derivative instruments such as futures, options, and swap agreements, in order to mitigate exposure to market risk associated with the purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit and priced purchase commitments.

To hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers as of September 30, 2013, the Partnership held 2.4 million gallons of physical inventory and had bought 6.0 million gallons of swap contracts with a notional value of $18.0 million and a fair value of $(0.2) million, 2.9 million gallons of call options with a notional value of $10.6 million and a fair value of $0.02 million, 5.0 million gallons of put options with a notional value of $11.8 million and a fair value of $0.04 million and 81.2 million net gallons of synthetic calls with a notional value of $252.8 million and a fair value of $(15.9) million, all in future months to match anticipated sales. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of September 30, 2013, had bought 17.4 million gallons of future contracts with a notional value of $51.9 million and a fair value of $(0.6) million, had sold 26.4 million gallons of future contracts with a notional value of $78.9 million and a fair value of $1.2 million and had sold 8.5 million gallons of future swap contracts with a notional value of $24.9 million and a fair value of $(0.3) million. To hedge high sulfur home heating oil gallons anticipated to be sold in future months, the Partnership as of September 30, 2013, had bought corresponding long and short 28.2 million net gallons of swap contracts with a notional value of $83.8 million and a fair value of $0.7 million and bought 6.0 million gallons of spread contracts (simultaneous long and short positions) with a notional value of $(0.5) million and a fair value of $0.1 million. To hedge a majority of its internal fuel usage for fiscal 2013, the Partnership as of September 30, 2013, had bought 3.2 million gallons of future swap contracts with a notional value of $9.0 million and a fair value of $0.05 million.

 

To hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers as of September 30, 2012, the Partnership held 3.3 million gallons of physical inventory and had bought 7.1 million gallons of swap contracts with a notional value of $21.1 million and a fair value of $0.8 million, 2.8 million gallons of call options with a notional value of $10.0 million and a fair value of $0.1 million, 6.8 million gallons of put options with a notional value of $16.1 million and a fair value of $0.1 million and 75.2 million net gallons of synthetic calls with a notional value of $237.5 million and a fair value of $3.7 million, all in future months to match anticipated sales. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of September 30, 2012, had bought 22.6 million gallons of future contracts with a notional value of $67.6 million and a fair value of $1.7 million, had sold 26.7 million gallons of future contracts with a notional value of $80.3 million and a fair value of $(1.9) million, had bought 19.2 million gallons of future swap contracts with a notional value of $60.6 million and a fair value of $(0.4) million and had sold 24.3 million gallons of future swap contracts with a notional value of $75.3 million and a fair value of $(0.3) million. To hedge a majority of its internal fuel usage for fiscal 2012, the Partnership as of September 30, 2012, had bought 2.2 million gallons of future swap contracts with a notional value of $5.7 million and a fair value of $0.6 million.

The Partnership’s derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., JPMorgan Chase Bank, N.A., Key Bank, N.A., Regions Financial Corporation, Societe Generale, and Wells Fargo Bank, N.A. The Partnership assesses counterparty credit risk and maintains master netting arrangements with counterparties to help manage the risks, and record derivative positions on a net basis. The Partnership considers counterparty credit risk to be low. At September 30, 2013, the aggregate cash posted as collateral in the normal course of business at counterparties was $1.1 million. Positions with counterparties who are also parties to our revolving credit facility are collateralized under that facility. As of September 30, 2013, $10.5 million of hedge positions were secured under the credit facility.

FASB ASC 815-10-05 Derivatives and Hedging, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities, along with qualitative disclosures regarding the derivative activity. To the extent derivative instruments designated as cash flow hedges are effective and the standard’s documentation requirements have been met, changes in fair value are recognized in other comprehensive income until the underlying hedged item is recognized in earnings. The Partnership has elected not to designate its derivative instruments as hedging instruments under this standard and the change in fair value of the derivative instruments is recognized in our statement of operations in the line item (Increase) decrease in the fair value of derivative instruments. Depending on the risk being hedged, realized gains and losses are recorded in cost of product, cost of installations and service, or delivery and branch expenses.

FASB ASC 820-10 Fair Value Measurements and Disclosures, established a three-tier fair value hierarchy, which classified the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Partnership’s Level 1 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are identical and traded in active markets. The Partnership’s Level 2 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are valued using either directly or indirectly observable inputs, whose nature, risk and class are similar. No significant transfers of assets or liabilities have been made into and out of the Level 1 or Level 2 tiers. All derivative instruments were non-trading positions and were either a Level 1 or Level 2 instrument. The fair market value of our Level 1 and Level 2 derivative assets and liabilities are calculated by our counter-parties and are independently validated by the Partnership. The Partnership’s calculations are, for Level 1 derivative assets and liabilities, based on the published New York Mercantile Exchange (“NYMEX”) market prices for the commodity contracts open at the end of the period. For Level 2 derivative assets and liabilities the calculations performed by the Partnership are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.

 

The Partnership had no assets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Partnership’s financial assets and liabilities measured at fair value on a recurring basis are listed on the following table.

 

(In thousands)               Fair Value Measurements at Reporting Date Using:  

Derivatives Not Designated

as Hedging Instruments

Under FASB ASC 815-10

   

Balance Sheet Location

    Total     Quoted Prices in
Active Markets for
Identical Assets
Level 1		     Significant Other
Observable Inputs
Level 2		     Significant
Unobservable
Inputs
Level 3		  

Asset Derivatives at September 30, 2013

  

Commodity contracts

    Fair asset and fair liability value of derivative instruments    $ 14,467      $ 1,175      $ 13,292      $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

Commodity contract assets at September 30, 2013

    $ 14,467      $ 1,175      $ 13,292      $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

Liability Derivatives at September 30, 2013

  

Commodity contracts

    Fair liability and fair asset value of derivative instruments    $ (17,820 )    $ (519 )    $ (17,301 )    $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

Commodity contract liabilities at September 30, 2013

    $ (17,820 )    $ (519 )    $ (17,301 )    $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

Asset Derivatives at September 30, 2012

  

Commodity contracts

    Fair asset and fair liability value of derivative instruments    $ 15,100      $ 1,749      $ 13,351      $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

Commodity contract assets at September 30, 2012

    $ 15,100      $ 1,749      $ 13,351      $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

Liability Derivatives at September 30, 2012

  

Commodity contracts

    Fair liability and fair asset value of derivative instruments    $ (10,549 )    $ (1,898 )    $ (8,651 )    $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

Commodity contract liabilities at September 30, 2012

    $ (10,549 )    $ (1,898 )    $ (8,651 )    $ —     
     

 

 

    

 

 

    

 

 

    

 

 

  

 

(In thousands)                        

The Effect of Derivative Instruments on the Statement of Operations

  
          Amount of (Gain) or Loss Recognized  
          Years Ended September 30,  

Derivatives Not

Designated as Hedging

Instruments Under

FASB ASC 815-10

   

Location of (Gain) or

Loss Recognized in

Income on Derivative

    2013     2012     2011  

Commodity contracts

    Cost of product (a)    $ 17,769      $ 18,636      $ (9,089 ) 

Commodity contracts

    Cost of installations and service (a)    $ (440 )    $ (284 )    $ (1,030 ) 

Commodity contracts

    Delivery and branch expenses (a)    $ (286 )    $ (82 )    $ (740 ) 

Commodity contracts

    (Increase) / decrease in the fair value of derivative instruments    $ 6,775      $ (8,549 )    $ 2,567   

 

(a) Represents realized closed positions and includes the cost of options as they expire.