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Derivative Instruments
 6 Months Ended
Jun. 30, 2016
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 3 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K. See Note 5 herein for additional information on the fair value of 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 June 30, 2016, December 31, 2015 and June 30, 2015, for agreements with such features, derivative instruments with liability fair values totaled $79 million, $46 million and $45 million, respectively, for which we had posted no collateral to our counterparties as we exceed the minimum credit rating requirements. As of June 30, 2016, 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 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K. Our derivative instrument activities are included within operating cash flows as increases to net income of $136 million and $42 million for the six months ended June 30, 2016 and 2015, respectively.
Quantitative Disclosures Related to Derivative Instruments
Our derivative instruments include 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 natural gas contracts outstanding in the following quantities:
In Bcf  (1)
 
June 30, 2016 (2)
 
December 31, 2015
 
June 30, 2015
Cash flow hedges
 
4

 
5

 
6

Not designated as hedges
 
38

 
(14
)
 
24

Total volumes
 
42

 
(9
)
 
30

Short position – cash flow hedges
 
(5
)
 
(6
)
 
(8
)
Short position – not designated as hedges
 
(3,092
)
 
(3,089
)
 
(2,930
)
Long position – cash flow hedges
 
9

 
11

 
14

Long position – not designated as hedges
 
3,130

 
3,075

 
2,954

Net long (short) position
 
42

 
(9
)
 
30

(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)
97% of these contracts have durations of two years or less and 3% expire between two and five years.
In addition to natural gas derivative contracts, we entered into interest rate swaps, which we account for as cash flow hedges. See Note 8 herein for additional information on our interest rate swaps.
Derivative Instruments on our Unaudited Condensed 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 unaudited Condensed Consolidated Balance Sheets until they are billed to customers. The following amounts deferred as a regulatory asset or liability on our unaudited Condensed Consolidated Balance Sheets are included in the net realized gains (losses) related to these natural gas cost hedging activities as of the periods presented.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
 
2016
 
2015
 
2016
 
2015
Nicor Gas
 
$
(10
)
 
$
(18
)
 
$
(12
)
 
$
(21
)
Elizabethtown Gas
 
(4
)
 
(4
)
 
(10
)
 
(8
)

The following table presents the fair values and unaudited Condensed Consolidated Balance Sheets classifications of our derivative instruments as of the dates presented.
 
 
 
 
June 30, 2016
 
December 31, 2015
 
June 30, 2015
In millions
 
Classification
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas contracts
 
Current
 
$
4

 
$
(4
)
 
$
3

 
$
(5
)
 
$
—

 
$
(4
)
Natural gas contracts
 
Long-term
 
—

 
(1
)
 
—

 
(2
)
 
—

 
(1
)
Interest rate swap agreements
 
Current
 
—

 
(30
)
 
9

 
—

 
24

 
—

Interest rate swap agreements
 
Long-term
 
—

 
—

 
—

 
—

 
23

 
—

Total designated as cash flow hedges
 
$
4

 
$
(35
)
 
$
12

 
$
(7
)
 
$
47

 
$
(5
)
Not designated as hedges
 
 

 
 

 
 

 
 

 
 

 
 

Natural gas contracts
 
Current
 
$
520

 
$
(557
)
 
$
751

 
$
(672
)
 
$
473

 
$
(481
)
Natural gas contracts
 
Long-term
 
83

 
(99
)
 
179

 
(187
)
 
92

 
(91
)
Total not designated as hedges
 
$
603

 
$
(656
)
 
$
930

 
$
(859
)
 
$
565

 
$
(572
)
Gross amounts of recognized assets and liabilities (1) (2)
 
$
607

 
$
(691
)
 
$
942

 
$
(866
)
 
$
612

 
$
(577
)
Gross amounts offset on our unaudited Condensed Consolidated Balance Sheets (2)
 
(492
)
 
612

 
(724
)
 
820

 
(415
)
 
532

Net amounts of assets and liabilities presented on our unaudited Condensed Consolidated Balance Sheets (3)
 
$
115

 
$
(79
)
 
$
218

 
$
(46
)
 
$
197

 
$
(45
)
(1)
The gross amounts of recognized assets and liabilities are netted within our unaudited Condensed 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 $120 million as of June 30, 2016, $96 million as of December 31, 2015, and $117 million as of June 30, 2015. Cash collateral is included in the “Gross amounts offset on our unaudited Condensed Consolidated Balance Sheets” line of this table.
(3)
As of June 30, 2016, December 31, 2015, and June 30, 2015, we held letters of credit from counterparties that under master netting arrangements would offset an insignificant portion of these assets.
Derivative Instruments on our 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 June 30,
 
Six Months Ended June 30,
In millions
 
2016
 
2015
 
2016
 
2015
Designated as cash flow hedges (1)
 
 
 
 
 
 
 
 
Natural gas contracts - net loss reclassified from OCI into cost of goods sold
 
$
(1
)
 
$
(3
)
 
$
(1
)
 
$
(4
)
 Natural gas contracts - net loss reclassified from OCI into operation and maintenance expense
 
—

 
(1
)
 
—

 
(1
)
Interest rate swaps - net (loss) gain reclassified from OCI into interest expense
 
(1
)
 
—

 
—

 
1

Total designated as cash flow hedges, net of tax
 
(2
)
 
(4
)
 
(1
)
 
(4
)
Not designated as hedges (1)
 
 

 
 

 
 

 
 

Natural gas contracts - net fair value adjustments recorded in operating revenues
 
(93
)
 
3

 
(73
)
 
(21
)
Natural gas contracts - net fair value adjustments recorded in cost of goods sold (2)
 
5

 
1

 
4

 
(1
)
Income tax
 
33

 
(1
)
 
26

 
9

Total not designated as hedges, net of tax
 
(55
)
 
3

 
(43
)
 
(13
)
Total losses on derivative instruments, net of tax
 
$
(57
)
 
$
(1
)
 
$
(44
)
 
$
(17
)
(1)
Associated with the fair value of derivative instruments held at June 30, 2016 and 2015.
(2)
Excludes gains (losses) recorded in cost of goods sold associated with weather derivatives of less than $1 million and $3 million for the three and six months ended June 30, 2016, respectively, and $1 million and $(1) million for the three and six months ended June 30, 2015, respectively, as they are accounted for based on intrinsic value rather than fair value.
Amounts recognized in income related to ineffectiveness or due to a forecasted transaction that is no longer expected to occur were immaterial for all periods presented. Upon settlement of our interest rate swaps on May 13, 2016, we realized a $26 million loss that was recognized in accumulated other comprehensive loss on our unaudited Condensed Consolidated Balance Sheet as of June 30, 2016. Our expected net losses to be reclassified from OCI into cost of goods sold, operation and maintenance expense, interest expense and operating revenues to be recognized on our unaudited Condensed Consolidated Statements of Income over the next 12 months are $3 million. These deferred losses are related to natural gas derivative contracts associated with retail operations’ and Nicor Gas’ system use and our interest rate swaps. The expected losses are based upon the fair values of these financial instruments at June 30, 2016. 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 herein for these amounts.
There have been no other significant changes to our derivative instruments, as described in Note 3, Note 5, Note 6 and Note 10 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K.