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Derivatives and Hedging-Fair Value Measurements and Accounting for the Offsetting of Certain Contracts
 3 Months Ended
Dec. 31, 2013
Derivatives and Hedging-Fair Value Measurements and Accounting for the Offsetting of Certain Contracts

4) Derivatives and Hedging—Fair Value Measurements and Accounting for the Offsetting of Certain Contracts

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. The Partnership has elected not to designate its derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value 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 economically hedged, realized gains and losses are recorded in cost of product, cost of installations and service, or delivery and branch expenses.

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 December 31, 2013, the Partnership held 1.6 million gallons of physical inventory and had bought 10.0 million gallons of swap contracts, 4.5 million gallons of call options, 6.9 million gallons of put options and 86.0 million net gallons of synthetic calls, 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 December 31, 2013, had bought 57.6 million gallons of future contracts, had sold 76.5 million gallons of future contracts and had sold 16.3 million gallons of future swap contracts. In addition to the previously described hedging instruments, the Partnership as of December 31, 2013, had bought corresponding long and short 38.6 million net gallons of swap contracts and bought 3.9 million gallons of spread contracts (simultaneous long and short positions) to lock-in the differential between high sulfur home heating oil and ultra low sulfur diesel. To hedge a majority of its internal fuel usage for fiscal 2014, the Partnership as of December 31, 2013, had bought 2.4 million gallons of future swap contracts.

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 December 31, 2012, the Partnership held 2.4 million gallons of physical inventory and had bought 10.2 million gallons of swap contracts, 3.8 million gallons of call options, 7.8 million gallons of put options and 84.8 million net gallons of synthetic calls, 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 December 31, 2012, had bought 66.3 million gallons of future contracts, had sold 76.8 million gallons of future contracts, had bought 13.0 million gallons of diesel swap contracts (for NYS ultra-low sulfur heating oil customers) and had sold 30.8 million gallons of heating oil swap contracts (including 13.0 million gallons designated for NYS ultra-low sulfur heating oil customers). To hedge a majority of its internal fuel usage for fiscal 2013, the Partnership as of December 31, 2012, had bought 2.1 million gallons of future swap contracts.

The Partnership’s derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., 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 considers it to be low. We maintain master netting arrangements that allow for the non-conditional offsetting of amounts receivable and payable with counterparties to help manage our risks and record derivative positions on a net basis. The Partnership generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral maintained at counterparties. At December 31, 2013, the aggregate cash posted as collateral in the normal course of business at counterparties was $1.6 million. Positions with counterparties who are also parties to our revolving credit facility are collateralized under that facility. As of December 31, 2013, $5.1 million of hedge positions were secured under the credit facility.

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 December 31, 2013

Commodity contracts

Fair asset and fair liability value of derivative instruments

 $ 17,429 $ 4,714 $ 12,715 $ —

Commodity contract assets at December 31, 2013

 $ 17,429 $ 4,714 $ 12,715 $ —

Liability Derivatives at December 31, 2013

Commodity contracts

Fair liability and fair asset value of derivative instruments

 $ (15,208 ) $ (4,897 ) $ (10,311 ) $ —

Commodity contract liabilities at December 31, 2013

 $ (15,208 ) $ (4,897 ) $ (10,311 ) $ —

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 ) $ —

The Partnership’s derivative assets (liabilities) offset by counterparty and subject to an enforceable master netting arrangement are listed on the following table.

(In thousands) Gross Amounts Not Offset in the
Statement of Financial Position

Offsetting of Financial Assets (Liabilities) and Derivative Assets
(Liabilities)

 Gross
Assets
Recognized		 Gross
Liabilities
Offset in the
Statement of
Financial
Position		 Net Assets
(Liabilities)
Presented in
the
Statement of
Financial
Position		 Financial
Instruments		 Cash
Collateral
Received		 Net Amount

Fair asset value of derivative instruments

 $ 14,967 $ (11,709 ) $ 3,258 $ — $ — $ 3,258

Fair liability value of derivative instruments

 2,462 (3,499 ) (1,037 ) — — (1,037 )

Total at December 31, 2013

 $ 17,429 $ (15,208 ) $ 2,221 $ — $ — $ 2,221

Fair asset value of derivative instruments

 $ 7,254 $ (6,608 ) $ 646 $ — $ — $ 646

Fair liability value of derivative instruments

 7,213 (11,212 ) (3,999 ) — — (3,999 )

Total at September 30, 2013

 $ 14,467 $ (17,820 ) $ (3,353 ) $ — $ — $ (3,353 )

(In thousands)

The Effect of Derivative Instruments on the Statement of Operations
Amount of (Gain) or Loss Recognized

Derivatives Not
Designated as Hedging
Instruments Under
FASB ASC 815-10

Location of (Gain) or Loss Recognized in

Income on Derivative

 Three Months Ended
December 31, 2013		 Three Months Ended
December 31, 2012

Commodity contracts

Cost of product (a)

 $ 5,311 $ 4,876

Commodity contracts

Cost of installations and service (a)

 $ (8 ) $ (89 )

Commodity contracts

Delivery and branch expenses (a)

 $ (39 ) $ (85 )

Commodity contracts

(Increase) / decrease in the fair value of derivative instruments

 $ (5,458 ) $ 7,965

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