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Derivative Instruments
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
Our risk management activities are monitored by our Risk Management Committee, which consists of members of senior management and is charged with reviewing our risk management activities and enforcing policies. Our use of derivative instruments, including 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 instruments and energy-related contracts to manage natural gas price, interest rate, weather, automobile fuel price and foreign currency risks when deemed appropriate:
•
forward, futures and options contracts;
•
financial swaps;
•
treasury locks;
•
weather derivative contracts;
•
storage and transportation capacity contracts; and
•
foreign currency forward contracts
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 December 31, 2015 and 2014, for agreements with such features, derivative instruments with liability fair values totaled $46 million and $93 million, respectively, for which we had posted no collateral to our counterparties as we exceed the minimum credit rating requirements. As of December 31, 2015, the maximum collateral that could have been required with these features was $2 million. For additional information on our credit-risk-related contingent features, see “Energy Marketing Receivables and Payables” in Note 3 herein. Our derivative instrument activities are included within operating cash flows as an increase (decrease) to net income of $22 million, $(155) million and $66 million for the periods ended December 31, 2015, 2014 and 2013, respectively.
The following table summarizes the various ways in which we account for our derivative instruments and the impact on our consolidated financial statements.
 
Recognition and Measurement
Accounting Treatment
Balance Sheets
Income Statements
Cash flow hedge
Derivative carried at fair value
Ineffective portion of the gain or loss realized and unrealized 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 OCI (loss)
Effective portion of the gain or loss realized and unrealized on the derivative instrument is reclassified out of accumulated OCI (loss) and into earnings when the hedged transaction affects earnings
Fair value hedge
Derivative carried at fair value
 
Gains or losses realized and unrealized on the derivative instrument and the hedged item are recognized in earnings. As a result, to the extent the hedge is effective, the gains or losses will offset and there is no impact on earnings. Any hedge ineffectiveness will impact earnings
Changes in fair value of the hedged item are recorded as adjustments to the carrying amount of the hedged item
Not designated as hedges
Derivative carried at fair value
Gains or losses realized and unrealized on the derivative instrument are recognized in earnings
Distribution operations’ gains and losses on derivative instruments are deferred as regulatory assets or liabilities until included in cost of goods sold
Gains or losses realized and unrealized on the derivative instruments are ultimately included in billings to customers and are recognized in cost of goods sold in the same period as the related revenues
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 December 31, we had natural gas contracts outstanding in the following quantities:
In Bcf (1)
 
2015 (2)
 
2014
Cash flow hedges
 
5

 
9

Not designated as hedges
 
(14
)
 
75

Total volumes
 
(9
)
 
84

Short position – cash flow hedges
 
(6
)
 
(4
)
Short position – not designated as hedges
 
(3,089
)
 
(2,828
)
Long position – cash flow hedges
 
11

 
13

Long position – not designated as hedges
 
3,075

 
2,903

Net (short) long position
 
(9
)
 
84

(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 Consolidated Balance Sheets
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 Consolidated Balance Sheets until billed to customers. The following amounts deferred as a regulatory asset or liability on our Consolidated Balance Sheets represent the net realized gains (losses) related to these natural gas cost hedging activities as of December 31.
In millions
 
2015
 
2014
Nicor Gas
 
$
(47
)
 
$
10

Elizabethtown Gas
 
(20
)
 
2


The following table presents the fair values and Consolidated Balance Sheets classifications of our derivative instruments as of December 31.
 
 
 
2015
 
2014
In millions
Classification
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Designated as cash flow or fair value hedges
 
 
 
 
 
 
 
 
Natural gas contracts
Current
 
$
3

 
$
(5
)
 
$
6

 
$
(11
)
Natural gas contracts
Long-term
 
—

 
(2
)
 
—

 
(1
)
Interest rate swap agreements
Current
 
9

 
—

 
—

 
—

Total designated as cash flow or fair value hedges
 
 
$
12

 
$
(7
)
 
$
6

 
$
(12
)
Not designated as hedges
 
 

 
 

 
 

 
 

Natural gas and weather contracts
Current
 
$
751

 
$
(672
)
 
$
1,061

 
$
(1,020
)
Natural gas contracts
Long-term
 
179

 
(187
)
 
145

 
(119
)
Total not designated as hedges
 
 
$
930

 
$
(859
)
 
$
1,206

 
$
(1,139
)
Gross amount of recognized assets and liabilities (1) (2)
 
942

 
(866
)
 
1,212

 
(1,151
)
Gross amounts offset on our Consolidated Balance Sheets (2)
 
(724
)
 
820

 
(925
)
 
1,058

Net amounts of assets and liabilities presented on our Consolidated Balance Sheets (3)
 
$
218

 
$
(46
)
 
$
287

 
$
(93
)
(1)
The gross amounts of recognized assets and liabilities are netted on our Consolidated Balance Sheets 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 $96 million as of December 31, 2015 and $133 million as of December 31, 2014. Cash collateral is included in the “Gross amounts offset on our Consolidated Balance Sheets” line of this table.
(3)
As of December 31, 2015 and 2014, we held letters of credit from counterparties that under master netting arrangements would offset an insignificant portion of these assets.
Derivative Instruments on our Consolidated Statements of Income
The following table presents the impacts of our derivative instruments on our Consolidated Statements of Income for the years ended December 31.
In millions
 
2015
 
2014
 
2013
Designated as cash flow or fair value hedges
 
 
 
 
 
 
Natural gas contracts – net gain (loss) reclassified from OCI into cost of goods sold
 
$
(10
)
 
$
4

 
$
(1
)
Natural gas contracts – net gain (loss) reclassified from OCI into operation and maintenance expense
 
(1
)
 
1

 
—

Interest rate swaps – net gain (loss) reclassified from OCI into interest expense
 
2

 
—

 
(3
)
Income tax
 
1

 
(2
)
 
1

Total designated as cash flow or fair value hedges, net of tax
 
$
(8
)
 
$
3

 
$
(3
)
Not designated as hedges (1)
 
 

 
 

 
 

Natural gas contracts - net fair value adjustments recorded in operating revenues
 
$
56

 
$
149

 
$
(90
)
Natural gas contracts - net fair value adjustments recorded in cost of goods sold (2)
 
(6
)
 
(7
)
 
2

Income tax
 
(19
)
 
(54
)
 
34

Total not designated as hedges, net of tax
 
$
31

 
$
88

 
$
(54
)
Total gains (losses) on derivative instruments, net of tax
 
$
23

 
$
91

 
$
(57
)
(1)
Associated with the fair value of derivative instruments held at December 31, 2015, 2014 and 2013.
(2)
Excludes (gains) and losses recorded in cost of goods sold associated with weather derivatives of $(12) million, $7 million and $5 million for the years ended December 31, 2015, 2014 and 2013, respectively.
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 years ended December 31, 2015, 2014 and 2013. Our expected gains and losses to be reclassified from OCI into cost of goods sold, operation and maintenance expense, interest expense and operating revenues and recognized on our Consolidated Statements of Income over the next 12 months are $2 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 December 31, 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 Consolidated Statements of Income. See Note 10 for these amounts.