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, priced purchase commitments and internal fuel usage. 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 its 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 services, or delivery and branch expenses.

As of March 31, 2015, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Partnership held the following derivative instruments that settle in future months to match anticipated sales: 6.3 million gallons of swap contracts, 4.1 million gallons of call options, 3.1 million gallons of put options and 54.7 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of March 31, 2015, had 34.1 million gallons of purchased future contracts and 54.7 million gallons of sold future contracts that settle in future months. To hedge its internal fuel usage for the remainder of fiscal 2015 and for fiscal 2016, the Partnership, as of March 31, 2015, had 3.2 million gallons of swap contracts that settle in future months.

As of March 31, 2014, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Partnership held 0.3 million gallons of physical inventory and the following derivative instruments that settle in future months to match anticipated sales: 6.3 million gallons of swap contracts, 1.1 million gallons of call options, 4.2 million gallons of put options and 47.7 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of March 31, 2014, had 46.2 million gallons of purchased future contracts and 60.0 million gallons of sold future contracts that settle in future months. In addition to the previously described hedging instruments, to lock-in the differential between high sulfur home heating oil and ultra low sulfur diesel, the Partnership as of March 31, 2014, had 33.1 million gallons of corresponding purchased and sold swap contracts. To hedge its internal fuel usage for the remainder of fiscal 2014, the Partnership as of March 31, 2014, had 1.0 million gallons of swap contracts that settle in future months.

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 it maintains at counterparties. At March 31, 2015, the aggregate cash posted as collateral in the normal course of business at counterparties was $2.1 million. Positions with counterparties who are also parties to our revolving credit facility are collateralized under that facility. As of March 31, 2015, $12.2 million of hedge positions and payable amounts 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 Partnership had no Level 3 derivative instruments. 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
Asset Derivatives at March 31, 2015
Commodity contracts	Fair asset and fair liability value of derivative instruments	$	34,566		$	8,124		$	26,442
Commodity contracts	Long-term derivative assets included in the deferred charges and other assets, net balance		1,093			180			913

Commodity contract assets at March 31, 2015		$	35,659		$	8,304		$	27,355


Liability Derivatives at March 31, 2015
Commodity contracts	Fair liability and fair asset value of derivative instruments	$	(41,647	)	$	(7,591	)	$	(34,056	)
Commodity contracts	Long-term derivative liabilities included in the other long-term liabilities balance		(1,063	)		(122	)		(941	)

Commodity contract liabilities at March 31, 2015		$	(42,710	)	$	(7,713	)	$	(34,997	)


Asset Derivatives at September 30, 2014
Commodity contracts	Fair asset and fair liability value of derivative instruments	$	26,263		$	2,328		$	23,935

Commodity contract assets at September 30, 2014		$	26,263		$	2,328		$	23,935


Liability Derivatives at September 30, 2014
Commodity contracts	Fair liability and fair asset value of derivative instruments	$	(36,279	)	$	—		$	(36,279	)

Commodity contract liabilities at September 30, 2014		$	(36,279	)	$	—		$	(36,279	)

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	$	8,159	$	(7,590	)	$	569		$	—	$	—	$	569
Long-term derivative assets included in deferred charges and other assets, net		672		(550	)		122			—		—		122
Fair liability value of derivative instruments		26,407		(34,057	)		(7,650	)		—		—		(7,650	)
Long-term derivative liabilities included in other long-term liabilities, net		421		(513	)		(92	)						(92	)

Total at March 31, 2015	$	35,659	$	(42,710	)	$	(7,051	)	$	—	$	—	$	(7,051	)

Fair asset value of derivative instruments	$	2,342	$	—		$	2,342		$	—	$	—	$	2,342
Fair liability value of derivative instruments		23,921		(36,279	)		(12,358	)		—		—		(12,358	)

Total at September 30, 2014	$	26,263	$	(36,279	)	$	(10,016	)	$	—	$	—	$	(10,016	)


(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 March 31, 2015			Three Months Ended March 31, 2014			Six Months Ended March 31, 2015			Six Months Ended March 31, 2014
Closed Positions
Commodity contracts	Cost of product (a)	$	17,322		$	3,216		$	10,517		$	8,527
Commodity contracts	Cost of installations and service (a)	$	859		$	(87	)	$	1,345		$	(95	)
Commodity contracts	Delivery and branch expenses (a)	$	991		$	(75	)	$	1,465		$	(114	)

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

Open Positions
Commodity contracts	(Increase) / decrease in the fair value of derivative instruments	$	(12,631	)	$	4,105		$	(4,341	)	$	(1,353	)