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Derivative Instruments
 9 Months Ended
Sep. 30, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
Our objectives and strategies for using derivative instruments, and the related accounting policies and methods used to determine their fair values are described within "Fair Value Measurements" in Note 2 to our consolidated financial statements and related notes included in Item 8 of our 2014 Form 10-K. See Note 5 herein for additional information on fair value and our derivative instruments.
Certain of our derivative instruments contain credit-risk-related or other contingent features that could require us to post collateral in the normal course of business when our financial instruments are in net liability positions. As of September 30, 2015, December 31, 2014 and September 30, 2014, for agreements with such features, derivative instruments with liability fair values totaled $61 million, $93 million and $47 million, respectively, for which we had posted no collateral to our counterparties as we exceed the minimum credit rating requirements. As of September 30, 2015, the maximum collateral that could have been required with these features was $5 million. For additional information on our credit-risk-related contingent features, see “Energy Marketing Receivables and Payables” in Note 2 to our consolidated financial statements and related notes included in Item 8 of our 2014 Form 10-K. Our derivative instrument activities are included within operating cash flows as an increase (decrease) to net income of $85 million and $(27) million for the nine months ended September 30, 2015 and 2014, respectively.
Quantitative Disclosures Related to Derivative Instruments
Our derivative instruments are 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. As of the dates presented, we had net (short) and long natural gas contracts positions outstanding in the following quantities:
In Bcf (1)
 
September 30, 2015 (2)
 
December 31, 2014
 
September 30, 2014
Cash flow hedges
 
6

 
9

 
7

Not designated as hedges
 
(9
)
 
75

 
97

Total volumes
 
(3
)
 
84

 
104

Short position – cash flow hedges
 
(9
)
 
(7
)
 
(7
)
Short position – not designated as hedges
 
(3,109
)
 
(2,825
)
 
(2,749
)
Long position – cash flow hedges
 
15

 
16

 
14

Long position – not designated as hedges
 
3,100

 
2,900

 
2,846

Net (short) long position
 
(3
)
 
84

 
104

(1)
Volumes related to Nicor Gas exclude variable-priced contracts, which are carried at fair value, but whose fair values are not directly impacted by changes in commodity prices.
(2)
Approximately 96% of these contracts have durations of two years or less and approximately 4% expire between two and five years.
Derivative Instruments on our Unaudited Condensed Consolidated Statements of Financial Position
In accordance with regulatory requirements, gains and losses on derivative instruments used in hedging activities of natural gas purchases for customer use at distribution operations are reflected in accrued natural gas costs within our unaudited Condensed Consolidated Statements of Financial Position until billed to customers. The following amounts deferred as a regulatory asset or liability on our unaudited Condensed Consolidated Statements of Financial Position represent the net realized gains (losses) related to these natural gas cost hedging activities as of the periods presented.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
 
2015
 
2014
 
2015
 
2014
Nicor Gas
 
$
(15
)
 
$
(4
)
 
$
(36
)
 
$
8

Elizabethtown Gas
 
(4
)
 
(1
)
 
(12
)
 
4


The following table presents the fair values and unaudited Condensed Consolidated Statements of Financial Position classifications of our derivative instruments as of the dates presented.
.
 
 
 
 
September 30, 2015
 
December 31, 2014
 
September 30, 2014
In millions
 
Classification
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Designated as cash flow or fair value hedges
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas contracts
 
Current
 
$
4

 
$
(7
)
 
$
6

 
$
(11
)
 
$
2

 
$
(2
)
Natural gas contracts
 
Long-term
 
—

 
(1
)
 
—

 
(1
)
 
—

 
—

Interest rate swap agreements
 
Current
 
—

 
(5
)
 
—

 
—

 
—

 
—

Interest rate swap agreements
 
Long-term
 
6

 
—

 
—

 
—

 
—

 
—

Total designated as cash flow or fair value hedges
 
$
10

 
$
(13
)
 
$
6

 
$
(12
)
 
$
2

 
$
(2
)
Not designated as hedges
 
 

 
 

 
 

 
 

 
 

 
 

Natural gas contracts
 
Current
 
$
689

 
$
(663
)
 
$
1,061

 
$
(1,020
)
 
$
834

 
$
(891
)
Natural gas contracts
 
Long-term
 
103

 
(105
)
 
145

 
(119
)
 
78

 
(80
)
Total not designated as hedges
 
$
792

 
$
(768
)
 
$
1,206

 
$
(1,139
)
 
$
912

 
$
(971
)
Gross amounts of recognized assets and liabilities (1) (2)
 
802

 
(781
)
 
1,212

 
(1,151
)
 
914

 
(973
)
Gross amounts offset on our unaudited Condensed Consolidated Statements of Financial Position (2)
 
(631
)
 
720

 
(925
)
 
1,058

 
(801
)
 
926

Net amounts of assets and liabilities presented on our unaudited Condensed Consolidated Statements of Financial Position (3)
 
$
171

 
$
(61
)
 
$
287

 
$
(93
)
 
$
113

 
$
(47
)
(1)
The gross amounts of recognized assets and liabilities are netted within our unaudited Condensed Consolidated Statements of Financial Position to the extent that we have netting arrangements with the counterparties.
(2)
As required by the authoritative guidance related to derivatives and hedging, the gross amounts of recognized assets and liabilities do not include cash collateral held on deposit in broker margin accounts of $89 million as of September 30, 2015, $133 million as of December 31, 2014, and $125 million as of September 30, 2014. Cash collateral is included in the “Gross amounts offset on our unaudited Condensed Consolidated Statements of Financial Position” line of this table.
(3)
As of September 30, 2015, December 31, 2014, and September 30, 2014, we held letters of credit from counterparties that under master netting arrangements would offset an insignificant portion of these assets.
Derivative Instruments on the Unaudited Condensed Consolidated Statements of Income
The following table presents the impacts of our derivative instruments on our unaudited Condensed Consolidated Statements of Income for the periods presented.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
 
2015
 
2014
 
2015
 
2014
Designated as cash flow or fair value hedges
 
 
 
 
 
 
 
 
Natural gas contracts - net (loss) gain reclassified from OCI into cost of goods sold
 
$
(2
)
 
$
(1
)
 
$
(6
)
 
$
4

Natural gas contracts - net gain (loss) reclassified from OCI into operation and maintenance expense
 
—

 
1

 
(1
)
 
2

Interest rate swaps - net gain reclassified from OCI into interest expense
 
1

 
—

 
2

 
—

Income tax
 
—

 
—

 
—

 
(1
)
Total designated as cash flow or fair value hedges, net of tax
 
(1
)
 
—

 
(5
)
 
5

Not designated as hedges (1)
 
 

 
 

 
 

 
 

Natural gas contracts - net fair value adjustments recorded in operating revenues
 
28

 
(6
)
 
7

 
(6
)
Natural gas contracts - net fair value adjustments recorded in cost of goods sold (2)
 
(3
)
 
(1
)
 
(4
)
 
—

Income tax
 
(10
)
 
2

 
(1
)
 
2

Total not designated as hedges, net of tax
 
15

 
(5
)
 
2

 
(4
)
Total gains (losses) on derivative instruments, net of tax
 
$
14

 
$
(5
)
 
$
(3
)
 
$
1

(1)
Associated with the fair values of derivative instruments held at September 30, 2015 and 2014.
(2)
Excludes losses recorded in cost of goods sold associated with weather derivatives of $(1) million and $(6) million for the nine months ended September 30, 2015 and 2014, respectively. There were no amounts recorded for the three months ended September 30, 2015 and 2014.
Any amounts recognized in operating income related to ineffectiveness or due to a forecasted transaction that is no longer expected to occur were immaterial for the three and nine months ended September 30, 2015 and 2014. Our expected gains to be reclassified from OCI into cost of goods sold, operation and maintenance expense, interest expense and operating revenues and recognized on our unaudited Condensed Consolidated Statements of Income over the next 12 months are $5 million. These deferred gains are related to natural gas derivative contracts associated with retail operations’ and Nicor Gas’ system use. The expected gains are based upon the fair values of these financial instruments at September 30, 2015. The effective portions of gains and losses on derivative instruments qualifying as cash flow hedges that were recognized in OCI during the periods are presented on our unaudited Condensed Consolidated Statements of Income. See Note 9 for these amounts.
There have been no other significant changes to our derivative instruments, as described in Note 2, Note 4, Note 5 and Note 8 to our consolidated financial statements and related notes included in Item 8 of our 2014 Form 10-K.