Derivative Financial Instruments

9 Months Ended

Sep. 30, 2011

Notes To Financial Statements [Abstract]

Derivative Financial Instruments

Note 5 – Derivative Financial Instruments

Our risk management activities are monitored by our Risk Management Committee, which consists of members of senior management and is charged with reviewing and enforcing our risk management activities and policies. Our use of derivative financial instruments and physical transactions is limited to predefined risk tolerances associated with pre-existing or anticipated physical natural gas sales and purchases and system use and storage. We use the following types of derivative financial instruments and physical transactions to manage natural gas price, interest rate, weather and foreign currency risks:

- forward contracts;

- futures contracts;

- options contracts;

- financial swaps;

- treasury locks;

- weather derivative contracts;

- storage and transportation capacity transactions; and

- foreign currency forward contracts.

Our derivative financial instruments do not contain any material credit-risk-related or other contingent features that could increase the payments for collateral that we post in the normal course of business when our financial instruments are in net liability positions. Additional information on our energy marketing receivables and payables, which do have credit-risk-related or other contingent features, is discussed in Note 2.

On May 4, 2011, we entered into interest rate swaps with an aggregate notional amount of $250 million to effectively convert a portion of our fixed rate interest obligation on the $300 million 6.4% senior notes due July 15, 2016 to a variable-rate obligation. We pay a floating interest rate equal to the three-month London Inter-bank Offered Rate (LIBOR) plus 3.9%. We designated the interest rate swaps as fair value hedges. The fair values of our interest rate swaps were reflected as a long-term derivative asset of $13 million at September 30, 2011. For more information on our senior notes, see Note 7.

There have been no other significant changes to our derivative financial instruments, as described in Note 2 and Note 4 to our Consolidated Financial Statements and related notes included in Item 8 of our 2010 Form 10-K. The table below summarizes the various ways in which we account for our derivative instruments and the impact on our Condensed Consolidated Financial Statements:

Accounting Treatment	Recognition and Measurement
	Statement of Financial Position	Income Statement
Cash flow hedge	Recorded at fair value	Ineffective portion of the gain or loss on the derivative instrument is recognized in earnings
	Effective portion of the gain or loss on the derivative instrument is reported initially as a component of accumulated other comprehensive income (loss)	Effective portion of the gain or loss on the derivative instrument is reclassified out of accumulated other comprehensive income (loss) into earnings when the forecasted transaction affects earnings
Fair value hedge	Recorded at fair value	Ineffective portion of the gain or loss on the derivative instrument is recognized in earnings
	Change in fair value of the derivative instrument is recorded as an adjustment to book value	Effective portion of the gain or loss on the derivative instrument is recognized in earnings
Not designated as hedges	Recorded at fair value	The gain or loss on the derivative instrument is recognized in earnings
	Elizabethtown Gas’ derivative financial instruments are recorded as a regulatory asset or liability until included in natural gas costs	The gain or loss on these derivative instruments is reflected in natural gas costs and is ultimately included in billings to customers
	Change in fair value of the derivative instrument is recorded as an adjustment to book value	Change in fair value of the derivative instrument is recognized in earnings

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Quantitative Disclosures Related to Derivative Financial Instruments

As of the periods presented, our derivative financial instruments were comprised of both long and short natural gas positions. A long position is a contract to purchase natural gas, and a short position is a contract to sell natural gas.

We had net long natural gas contracts outstanding in the following quantities:

Natural gas contracts
In Bcf	September 30, 2011 (1)	December 31, 2010	September 30, 2010
Hedge designation:
Cash flow	4	4	(1)
Not designated	161	220	208
Total	165	224	207
Hedge position:
Short	(1,624)	(1,605)	(1,664)
Long	1,789	1,829	1,871
Net long position	165	224	207

(1) Approximately 97% of these contracts have durations of two years or less and the remaining 3% expire in 3 to 6 years.

Derivative Financial Instruments on the Condensed Consolidated Statements of Financial Position

In accordance with regulatory requirements, realized losses on derivative financial instruments used at Elizabethtown Gas in our distribution operations segment were reflected in deferred natural gas costs within our Condensed Consolidated Statements of Financial Position for the periods presented and are contained in the following table.

	Three months ended September 30,		Nine months ended September 30,
In millions	2011	2010	2011	2010
Elizabethtown Gas	$6	$10	$19	$25

The following table presents the fair value and statements of financial position classification of our derivative financial instruments:

		As of
In millions	Statement of financial position location(1) (2)	Sep. 30, 2011		Dec. 31, 2010	Sep. 30, 2010
Designated as cash flow and fair value hedges
Asset Financial Instruments
Current natural gas contracts	Derivative financial instruments assets and liabilities – current portion	$8		$3	$13
Noncurrent natural gas contracts	Derivative financial instruments assets and liabilities	0		0	4
Interest rate swap agreements	Derivative financial instruments assets – long-term portion	13		0	0
Liability Financial Instruments
Current natural gas contracts	Derivative financial instruments assets and liabilities – current portion	(8)		(5)	(15)
Interest rate swap agreements	Derivative financial instruments liabilities – long-term portion	0		0	(23)
Total		13		(2)	(21)
Not designated as cash flow hedges
Asset Financial Instruments
Current natural gas contracts	Derivative financial instruments assets and liabilities – current portion	486		541	727
Noncurrent natural gas contracts	Derivative financial instruments assets and liabilities	78		105	139
Liability Financial Instruments
Current natural gas contracts	Derivative financial instruments assets and liabilities – current portion	(447)		(489)	(642)
Noncurrent natural gas contracts	Derivative financial instruments assets and liabilities	(82)		(80)	(117)
Total		35		77	107
Total derivative financial instruments		$48	$75		$86

(1) These amounts are netted within our Condensed Consolidated Statements of Financial Position. Some of our derivative financial instruments have asset positions which are presented as a liability in our Condensed Consolidated Statements of Financial Position, and we have derivative instruments that have liability positions which are presented as an asset in our Condensed Consolidated Statements of Financial position.

(2) As required by the authoritative guidance related to derivatives and hedging, the fair value amounts above are presented on a gross basis. As a result, the amounts above do not include cash collateral held on deposit in broker margin accounts of $79 million as of September 30, 2011, $91 million as of September 30, 2010 and $105 million as of December 31, 2010. Accordingly, the amounts above will differ from the amounts presented on our Condensed Consolidated Statements of Financial Position and the fair value information presented for our derivative financial instruments in the recurring values table of this note.

Derivative Financial Instruments on the Condensed Consolidated Statements of Income

The following table presents the impacts of our derivative financial instruments in our Condensed Consolidated Statements of Income:

	For the three months ended September 30,			For the nine months ended September 30,
In millions	2011	2010	2011		2010
Designated as cash flow and fair value hedges
Natural gas contracts – loss reclassified from OCI into cost of gas for settlement of hedged item (1)	$(1)	$(3)	$(2)		$(13)
Interest rate swaps – ineffectiveness recorded as an offset to interest expense	2	0	2		0
Not designated as hedges
Natural gas contracts – fair value adjustments recorded in operating revenues (2)	0	40	12		63
Natural gas contracts – net fair value adjustments recorded in cost of gas (3)	0	(1)	(2)		(3)
Total gains on derivative instruments	$1	$36	$10		$47

(1) We expect that $2 million of pre-tax net losses will be reclassified from OCI into cost of gas for the settlement of hedged items over the next twelve months.

(2) Associated with the fair value of existing derivative instruments at September 30, 2011 and 2010.

(3) Excludes losses recorded in cost of gas associated with weather derivatives of $4 million for the nine months ended September 30, 2011 and losses of $21 million for the nine months ended September 30, 2010.