Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

Derivative Instruments and Hedging Activities

11. Derivative Instruments and Hedging Activities

The Company is exposed to certain risks in its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk and commodity price risk. Interest rate swaps and treasury rate locks are the principal derivative instruments used by the Company to manage interest rate risk associated with its long-term borrowings, although other interest rate derivative contracts may also be used from time to time. Natural gas and NGL price swaps and NGL processing spread swaps are the principal derivative instruments used by the Company to manage commodity price risk associated with purchases and/or sales of natural gas and/or NGL, although other commodity derivative contracts may also be used from time to time. The Company recognizes all derivative instruments as assets or liabilities at fair value in the Consolidated Balance Sheet.

Interest Rate Contracts

The Company may enter into interest rate swaps to manage its exposure to changes in interest payments on long-term debt attributable to movements in market interest rates, and may enter into treasury rate locks to manage its exposure to changes in future interest payments attributable to changes in treasury rates prior to the issuance of new long-term debt instruments.

Interest Rate Swaps. In 2011, the Company entered into interest rate swap agreements associated with the $600 million Junior Subordinated Notes due 2066 (Junior Subordinated Notes) with an aggregate notional amount of $525 million, of which $450 million were for ten-year periods and $75 million were for five-year periods. These interest rate swaps became effective on November 1, 2011. The Company will pay interest on the Junior Subordinated Notes at the floating rate of three-month LIBOR plus a credit spread of 3.0175 percent beginning November 1, 2011. The interest rate swaps effectively fix the interest rate applicable to the floating rate on a portion of the Junior Subordinated Notes and are accounted for as cash flow hedges, with the effective portion of their settled value recorded in Accumulated other comprehensive loss and reclassified into Interest expense in the same periods during which the related interest payments on long-term debt impact earnings.  As of December 31, 2011, the floating rate LIBOR-based portion of the interest payments commencing November 1, 2011 was exchanged for weighted average fixed rate interest payments of 3.63 percent.

The Company also has outstanding pay-fixed interest rate swaps with a total notional amount of $455 million applicable to the LNG Holdings $455 million term loan. These interest rate swaps are accounted for as cash flow hedges, with the effective portion of changes in their fair value recorded in Accumulated other comprehensive loss and reclassified into Interest expense in the same periods during which the related interest payments on long-term debt impact earnings.

As of December 31, 2011, approximately $12.4 million of net after-tax losses in Accumulated other comprehensive loss related to these interest rate swaps is expected to be amortized into Interest expense during the next twelve months. There was no swap ineffectiveness during the period ended December 31, 2011.  Any ineffective portion of the cash flow hedge would be reported in current-period earnings.

Treasury Rate Locks. As of December 31, 2011, the Company had no outstanding treasury rate locks. However, certain of its treasury rate locks that settled in prior periods are associated with interest payments on outstanding long-term debt. These treasury rate locks are accounted for as cash flow hedges, with the effective portion of their settled value recorded in Accumulated other comprehensive loss and reclassified into Interest expense in the same periods during which the related interest payments on long-term debt impact earnings. As of December 31, 2011, approximately $571,000 of net after-tax losses in Accumulated other comprehensive loss related to these treasury rate locks will be amortized into Interest expense during the next twelve months.

Commodity Contracts – Gathering and Processing Segment

The Company primarily enters into natural gas and NGL price swaps and NGL processing spread swaps to manage its exposure to changes in margin on forecasted sales of equity natural gas and NGL volumes resulting from movements in market commodity prices.

Natural Gas Price Swaps. As of December 31, 2011, the Company had outstanding receive-fixed natural gas price swaps with a total notional amount of 3,660,000 MMBtus for 2012. These natural gas price swaps are accounted for as cash flow hedges, with the effective portion of changes in their fair value recorded in Accumulated other comprehensive loss and reclassified into Operating revenues in the same periods during which the forecasted natural gas sales impact earnings. As of December 31, 2011, approximately $4 million of net after-tax gains in Accumulated other comprehensive loss related to these natural gas price swaps are expected to be amortized into Operating revenues during the next twelve months. Any ineffective portion of the cash flow hedge is reported in current-period earnings.

NGL Price Swaps. As of December 31, 2011, the Company had outstanding receive-fixed NGL price swaps with a total notional amount of 65,378,124 gallons (5,490,000 MMBtu equivalent basis) for 2012. These NGL price swaps are accounted for as cash flow hedges, with the effective portion of changes in their fair value recorded in Accumulated other comprehensive loss and reclassified into Operating revenues in the same periods during which the forecasted NGL sales impact earnings. As of December 31, 2011, approximately $4million of net after-tax losses in Accumulated other comprehensive loss related to these NGL price swaps are expected to be amortized into Operating revenues during the next twelve months. Any ineffective portion of the cash flow hedge is reported in current-period earnings.

Commodity Contracts - Distribution Segment

The Company enters into natural gas commodity financial instruments to manage the exposure to changes in the cost of natural gas passed through to utility customers that result from movements in market commodity prices. The cost of the derivative instruments and settlement of the respective obligations are recovered from utility customers through the purchased natural gas adjustment clause as authorized by the applicable regulatory authority and therefore do not impact earnings.

Natural Gas Price Swaps. As of December 31, 2011, the Company had outstanding pay-fixed natural gas price swaps with total notional amounts of 19,400,000 MMBtu and 5,560,000 MMBtu for 2012 and 2013, respectively. These natural gas price swaps are accounted for as economic hedges, with changes in their fair value recorded to Deferred natural gas purchases.

Summary Financial Statement Information

The following table summarizes the fair value amounts of the Company's derivative instruments and their location in the Consolidated Balance Sheet at the dates indicated.

			Asset Derivatives (1)					Liability Derivatives (1)
			December 31,				December 31,
Balance Sheet Location			2011		2010		2011		2010
			(In thousands)				(In thousands)
Cash Flow Hedges:
Interest rate contracts
		Derivative instruments-liabilities	$	-	$	-	$	19,936	$	19,694
		Deferred credits		-		-		59,789		4,652
Commodity contracts - Gathering and Processing:
	Natural gas price swaps
		Prepayments and other assets		6,124		-		-		-
		Derivative instruments-liabilities		-		16,459		-		-
	NGL price swaps
		Prepayments and other assets		-		-		1,996		-
		Derivative instruments-liabilities		-		-		4,144		-
			$	6,124	$	16,459	$	85,865	$	24,346
Economic Hedges:
Commodity contracts - Gathering and Processing:
	NGL processing spread swaps
		Derivative instruments-liabilities	$	-	$	-	$	-	$	29,057
	Other derivative instruments
		Prepayments and other assets		-		133		-		-
		Derivative instruments-liabilities		-		-		50		-
Commodity contracts - Distribution:
	Natural gas price swaps
		Derivative instruments-liabilities		-		234		34,468		34,968
		Deferred credits		3		105		5,643		2,806
			$	3	$	472	$	40,161	$	66,831
	Total		$	6,127	$	16,931	$	126,026	$	91,177

_____________

• The Company has master netting arrangements with certain of its counterparties, which permit applicable obligations of the parties to be settled on a net versus gross basis. If a right of offset exists, the fair value amounts for the derivative instruments are reported in the Consolidated Balance Sheet on a net basis and disclosed herein on a gross basis.

The following table summarizes the location and amount of derivative instrument gains and losses reported in the Company's consolidated financial statements for the periods presented:

				Years Ended December 31,
				2011		2010		2009
					(In thousands)
Cash Flow Hedges: (1)
	Interest rate contracts:
		Change in fair value - increase in Accumulated other comprehensive
			loss, excluding tax expense effect of $27,589, $5,237 and $3,051, respectively	$	74,059	$	13,028	$	7,589
		Reclassification of unrealized loss from Accumulated other
			comprehensive loss - increase of Interest expense, excluding tax
			expense effect of $(9,012), $(9,019) and $(8,222), respectively		(22,455)		(22,483)		(20,572)
	Commodity contracts - Gathering and Processing:
		Change in fair value - decrease in Accumulated other comprehensive
			loss, excluding tax expense effect of $(2,598), $(14,093) and $(3,773),
			respectively		(7,208)		(39,105)		(10,469)
		Reclassification of unrealized gain from Accumulated other comprehensive
			loss - increase of Operating revenues, excluding tax expense effect of $8,536,
			$6,787 and $16,231, respectively		23,685		18,833		45,035
Economic Hedges:
	Commodity contracts - Gathering and Processing:
		Change in fair value of strategic hedges - (increase)/decrease in Operating revenues (2)			29,855		31,154		88,799
		Change in fair value of other hedges - (increase)/decrease in Operating revenues			(96)		283		(12)
	Commodity contracts - Distribution:
		Change in fair value - increase/(decrease) in Deferred gas purchases			2,673		(6,166)		(49,083)

_________________

• See Note 7 – Comprehensive Income (Loss) for additional related information.
• Includes $29.1 million, $34.5 million and$59.7 millionof the cash settlement impact for previously recognized unrealized losses in the years ended December 31, 2011 and 2010 and unrealized gains in the year ended December 31,2009, respectively. Additionally, includes nil, $18.6 million and $44.9 million of unrealized mark-to-market losses recorded in the years ended December 31, 2011, 2010 and 2009, respectively.

Derivative Instrument Contingent Features

Certain of the Company's derivative instruments contain provisions that require the Company's debt to be maintained at an investment grade credit rating from each of the major credit rating agencies. If the Company's debt were to fall below investment grade, the Company would be in violation of these provisions, and the counterparties to the derivative instruments could potentially require the Company to post collateral for certain of the derivative instruments. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position at December 31, 2011was $22.9 million.