DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2011

DERIVATIVE INSTRUMENTS [Abstract]

DERIVATIVE INSTRUMENTS

8. DERIVATIVE INSTRUMENTS

A description of the company’s objectives and strategies for using derivative instruments, and related accounting policies, is included in Note 3 – Accounting Policies – Derivative instruments and Credit risk and concentrations.  All derivatives recognized on the Condensed Consolidated Balance Sheets are measured at fair value, as described in Note 7 – Fair Value Measurements.

Condensed Consolidated Balance Sheets.  Derivative assets and liabilities are classified as shown in the table below (in millions):

	June 30		December 31		June 30
	2011		2010		2010
Derivatives designated as hedging instruments
Assets
Derivative instruments	$	.3	$	.4	$	.1
Other - noncurrent		-		1.0		-
	$	.3	$	1.4	$	.1
Liabilities
Derivative instruments	$	.8	$	2.2	$	1.6
Other - noncurrent		-		3.2		4.7
	$	.8	$	5.4	$	6.3

	June 30		December 31		June 30
	2011		2010		2010
Derivatives not designated as hedging instruments
Assets
Derivative instruments	$	36.3	$	48.7	$	44.3
Other - noncurrent		11.4		17.2		14.0
	$	47.7	$	65.9	$	58.3
Liabilities
Derivative instruments	$	56.5	$	80.7	$	86.5
Other - noncurrent		9.1		16.1		21.6
	$	65.6	$	96.8	$	108.1

Volumes.  As of June 30, 2011, December 31, 2010 and June 30, 2010, Nicor Gas held outstanding derivative contracts of approximately 43 Bcf, 49 Bcf and 53 Bcf, respectively, to hedge natural gas purchases for customer use, with hedges spanning as long as three years.  Commodity price-risk exposure arising from Nicor Enerchange’s activities and Nicor Gas’ natural gas purchases for company use is mitigated with derivative instruments that total to a net short position of 3.9 Bcf as of June 30, 2011 and December 31, 2010 and 2.6 Bcf as of June 30, 2010.  The above volumes exclude contracts such as variable-priced contracts and basis swaps, which are accounted for as derivatives but whose fair values are not directly impacted by changes in commodity prices.

Nicor held forward-starting interest rate swaps with a notional totaling $90 million at June 30, 2011 and December 31, 2010 and $50 million at June 30, 2010. The swaps hedge the risk associated with the interest payments attributable to the probable issuance of long-term fixed-rate debt in 2012.

Condensed Consolidated Statements of Income – cash flow hedges.  Changes in the fair value of derivatives designated as a cash flow hedge are recognized in other comprehensive income until the hedged transaction is recognized in the Condensed Consolidated Statements of Income.  Cash flow hedges used by the company’s other energy ventures, to hedge utility-bill management products, are eventually recognized within operating revenues.  Cash flow hedges used by Nicor Gas, to hedge purchases of natural gas for company use, are eventually recorded within operating and maintenance expense.  Cash flow hedges used by Nicor, to hedge the interest payments attributable to long-term fixed-rate debt, will eventually be recorded within interest expense.

Cash flow hedges affected accumulated other comprehensive income (effective portion) as shown in the following table (in millions):

	Three months ended June 30				Six months ended June 30
	2011		2010		2011		2010
Pretax loss recognized in other comprehensive income	$	3.5	$	4.3	$	3.3	$	7.3

The pretax loss reclassified from accumulated other comprehensive income into income (effective portion) is shown in the following table (in millions):

	Three months ended June 30				Six months ended June 30
Location	2011		2010		2011		2010
Operating revenues	$	.1	$	.6	$	1.4	$	1.0
Operating and maintenance		.2		.3		.5		.6
	$	.3	$	.9	$	1.9	$	1.6

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 six months ended June 30, 2011 and 2010.

As of June 30, 2011, December 31, 2010 and June 30, 2010, the time horizon of cash flow hedges of natural gas purchases for Nicor Gas company use and for utility-bill management products sold by Nicor’s other energy ventures span as long as two years.  For these hedges, the total pretax loss deferred in accumulated other comprehensive income at June 30, 2011, December 31, 2010 and June 30, 2010 was $0.8 million ($0.4 million after taxes), $2.0 million ($1.2 million after taxes) and $2.1 million ($1.3 million after taxes), respectively.  At the respective reporting dates, substantially all of these amounts were expected to be reclassified to earnings within the next 12 months.

The amounts deferred in accumulated other comprehensive income for the forward-starting interest rate swaps will be amortized to interest expense upon the issuance of long-term fixed-rate debt.  The total pretax loss deferred in accumulated other comprehensive income relating to the interest rate swaps at June 30, 2011, December 31, 2010 and June 30, 2010 was $5.0 million ($3.0 million after taxes), $2.2 million ($1.3 million after taxes) and $4.5 million ($2.7 million after taxes), respectively.

Condensed Consolidated Statements of Income – derivatives not designated as hedges.  The earnings of the company are subject to volatility for those derivatives not designated as hedges.  Non-designated derivatives used by the company’s other energy ventures, to hedge energy trading activities and utility-bill management products, are recorded in operating revenues.  Non-designated derivatives used by Nicor Gas, to hedge purchases of natural gas for company use, are recorded within operating and maintenance expense.  Pretax net gains (losses) recognized in income are summarized in the table below (in millions):

	Three months ended June 30						Six months ended June 30
Location	2011			2010			2011			2010
Operating revenues	$	(4.0	)	$	(.4	)	$	(4.2	)	$	(1.4	)
Operating and maintenance		-			.2			(.1	)		(.7	)
	$	(4.0	)	$	(.2	)	$	(4.3	)	$	(2.1	)

Nicor Gas’ derivatives used to hedge the purchase of natural gas for its customers are also not designated as hedging instruments.  Gains or losses on these derivatives are not recognized in pretax earnings, but are deferred as regulatory assets or liabilities until the related revenue is recognized.  Net gains (losses) deferred for the three and six months ended June 30, 2011 were $(7.2) million and $(3.6) million, respectively, and $16.2 million and $(74.1) million, respectively, for the same periods in 2010.

Credit-risk-related contingent features.  Provisions within certain derivative agreements require the company to post collateral if the company’s net liability position exceeds a specified threshold.  Also, certain derivative agreements contain credit-risk-related contingent features, whereby the company would be required to provide additional collateral or pay the amount due to the counterparty when a credit event occurs, such as if the company’s credit rating was to be lowered.  As of June 30, 2011, December 31, 2010 and June 30, 2010 for agreements with such features, derivative contracts with liability fair values totaled approximately $5 million, $12 million and $22 million, respectively, for which the company had posted no collateral to its counterparties.  If it was assumed that the company had to post the maximum contractually specified collateral or settle the liability, the company would have been required to pay approximately $4 million, $11 million and $21 million at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.