Derivative Instruments and Hedging Activities | 6 Months Ended |
Mar. 31, 2015 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Derivative Instruments and Hedging Activities | Note 7 — Derivative Instruments and Hedging Activities |
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The Partnership is exposed to certain market risks related to its ongoing business operations. Management uses derivative financial and commodity instruments, among other things, to manage these risks. The primary risks managed by derivative instruments are commodity price risk and interest rate risk. Although we use derivative financial and commodity instruments to reduce market risk associated with forecasted transactions, we do not use derivative financial and commodity instruments for speculative or trading purposes. The use of derivative instruments is controlled by our risk management and credit policies which govern, among other things, the derivative instruments the Partnership can use, counterparty credit limits and contract authorization limits. For information on the accounting for our derivative instruments, see Note 2, “Summary of Significant Accounting Policies,” in the Partnership’s 2014 Annual Report. |
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Commodity Price Risk |
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In order to manage market risk associated with the Partnership’s fixed-price programs, the Partnership uses over-the-counter derivative commodity instruments, principally price swap contracts. In addition, the Partnership uses over-the-counter price swap and option contracts to reduce propane price volatility associated with a portion of forecasted propane purchases. In addition, the Partnership from time to time enters into price swap and put option agreements to reduce the effects of short-term commodity price volatility. At March 31, 2015 and 2014, total volumes associated with propane commodity derivatives totaled 317.0 million gallons and 110.0 million gallons, respectively. At March 31, 2015, the maximum period over which we are economically hedging propane market price risk is 45 months . |
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At March 31, 2015, the amount of net gains associated with our commodity derivative instruments previously designated and qualified as cash flow hedges expected to be reclassified into earnings during the next twelve months is $517. |
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Derivative Instruments Credit Risk |
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The Partnership is exposed to credit loss in the event of nonperformance by counterparties to derivative financial and commodity instruments. Our counterparties principally comprise major energy companies and major U.S. financial institutions. We maintain credit policies with regard to our counterparties that we believe reduce overall credit risk. These policies include evaluating and monitoring our counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits. Certain of these agreements call for the posting of collateral by the counterparty or by the Partnership in the forms of letters of credit, parental guarantees or cash. Certain of our derivative contracts have credit-risk-related contingent features that may require the posting of additional collateral in the event of a downgrade in the Partnership’s debt rating. At March 31, 2015, if the credit-risk-related contingent features were triggered, the amount of collateral required to be posted would not be material. |
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Fair Value of Derivative Instruments |
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The following table presents the Partnership’s derivative assets and liabilities on a gross basis as of March 31, 2015 and 2014: |
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| | March 31, | | March 31, | | | | | | | | | | | | |
2015 | 2014 (a) | | | | | | | | | | | | |
Derivative assets: | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
Propane contracts | | $ | — | | | $ | 9,991 | | | | | | | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Propane contracts | | 282 | | | — | | | | | | | | | | | | | |
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Total derivative assets | | $ | 282 | | | $ | 9,991 | | | | | | | | | | | | | |
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Derivative liabilities: | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
Propane contracts | | $ | — | | | $ | (869 | ) | | | | | | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Propane contracts | | (73,269 | ) | | — | | | | | | | | | | | | | |
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Total derivative liabilities | | $ | (73,269 | ) | | $ | (869 | ) | | | | | | | | | | | | |
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(a) Certain immaterial amounts have been revised to correct the classification of derivatives. |
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Offsetting Derivative Assets and Liabilities |
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Derivative assets and liabilities are presented net by counterparty on our Condensed Consolidated Balance Sheets if the right of offset exists. Our derivative instruments comprise over-the-counter transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Certain over-the-counter contracts contain contractual rights of offset through master netting arrangements and contract default provisions. In addition, the contracts are subject to conditional rights of offset through counterparty nonperformance, insolvency, or other conditions. |
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In general, most of our over-the-counter transactions are subject to collateral requirements. Types of collateral generally include cash or letters of credit. Cash collateral paid by us to our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative liabilities. Cash collateral received by us from our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative assets. Certain other accounts receivable and accounts payable balances recognized on our Condensed Consolidated Balance Sheets with our derivative counterparties are not included in the table below but could reduce our net exposure to such counterparties because such balances are subject to master netting or similar arrangements. |
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The following table presents the Partnership’s derivative assets and liabilities, as well as the effects of offsetting, as of March 31, 2015 and 2014: |
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| | Gross Amounts Recognized | | Gross Amounts Offset in Balance Sheet | | Net Amounts Recognized | | Cash Collateral (Received) Pledged | | Net Amounts Recognized in Balance Sheet |
31-Mar-15 | | | | | | | | | | |
Derivative assets | | $ | 282 | | | $ | (282 | ) | | $ | — | | | $ | — | | | $ | — | |
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Derivative liabilities | | $ | (73,269 | ) | | $ | 282 | | | $ | (72,987 | ) | | $ | 3,160 | | | $ | (69,827 | ) |
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March 31, 2014 | | | | | | | | | | |
Derivative assets | | $ | 9,991 | | | $ | (654 | ) | | $ | 9,337 | | | $ | — | | | $ | 9,337 | |
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Derivative liabilities | | $ | (869 | ) | | $ | 654 | | | $ | (215 | ) | | $ | — | | | $ | (215 | ) |
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Effect of Derivative Instruments |
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The following tables provide information on the effects of derivative instruments in the Condensed Consolidated Statements of Operations and changes in AOCI and noncontrolling interests for the three and six months ended March 31, 2015 and 2014: |
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| | Gain | | Gain | | Location of Gain | | |
Recognized in | Reclassified from | Reclassified from | | |
AOCI and | AOCI and Noncontrolling | AOCI and Noncontrolling | | |
Noncontrolling Interest | Interest into Income | Interest into Income | | |
Three Months Ended March 31, | | 2015 | | 2014 | | 2015 | | 2014 | | | | |
Cash Flow Hedges: | | | | | | | | | | | | |
Propane contracts | | $ | — | | | $ | 11,105 | | | $ | 711 | | | $ | 35,154 | | | Cost of sales - propane | | |
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| | Gain | | Location of Gain | | | | |
Recognized in Income | Recognized in Income | | |
Three Months Ended March 31, | | 2015 | | 2014 | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | |
Propane contracts | | $ | (4,086 | ) | | $ | — | | | Cost of sales - propane | | | | |
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| | Gain | | Gain | | Location of Gain | | |
Recognized in | Reclassified from | Reclassified from | | |
AOCI and | AOCI and Noncontrolling | AOCI and Noncontrolling | | |
Noncontrolling Interest | Interest into Income | Interest into Income | | |
Six Months Ended March 31, | | 2015 | | 2014 | | 2015 | | 2014 | | | | |
Cash Flow Hedges: | | | | | | | | | | | | |
Propane contracts | | $ | — | | | $ | 45,347 | | | $ | 2,305 | | | $ | 48,427 | | | Cost of sales - propane | | |
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| | Gain (Loss) | | Location of Gain (Loss) | | | | |
Recognized in Income | Recognized in Income | | |
Six Months Ended March 31, | | 2015 | | 2014 | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | | | |
Propane contracts | | $ | (180,485 | ) | | $ | 6,930 | | | Cost of sales - propane | | | | |
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For those derivative instruments accounted for as cash flow hedges during the three and six months ended March 31, 2014, the amounts of derivative gains or losses representing ineffectiveness, and the amounts of gains or losses recognized in income as a result of excluding derivatives from ineffectiveness testing, were not material. |
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We are also a party to a number of contracts that have elements of a derivative instrument. These contracts include, among others, binding purchase orders, contracts which provide for the purchase and delivery of propane and service contracts that require the counterparty to provide commodity storage or transportation service to meet our normal sales commitments. Although many of these contracts have the requisite elements of a derivative instrument, these contracts qualify for normal purchase and normal sales exception accounting under GAAP because they provide for the delivery of products or services in quantities that are expected to be used in the normal course of operating our business and the price in the contract is based on an underlying that is directly associated with the price of the product or service being purchased or sold. |