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EX-12 - EXHIBIT 12 - SOUTHERN Co GAS | q12016ex12.htm |
XML - IDEA: XBRL DOCUMENT - SOUTHERN Co GAS | R9999.htm |
EX-32.2 - EXHIBIT 32.2 - SOUTHERN Co GAS | q12016ex322.htm |
EX-31.1 - EXHIBIT 31.1 - SOUTHERN Co GAS | q12016ex311.htm |
EX-32.1 - EXHIBIT 32.1 - SOUTHERN Co GAS | q12016ex321.htm |
EX-31.2 - EXHIBIT 31.2 - SOUTHERN Co GAS | q12016ex312.htm |
UNITED STATES | |
SECURITIES AND EXCHANGE COMMISSION | |
Washington, D.C. 20549 | |
FORM 10-Q | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OF | |
THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended March 31, 2016 | |
Commission File Number 1-14174 | |
AGL RESOURCES INC. | |
Ten Peachtree Place NE, Atlanta, Georgia 30309 | |
404-584-4000 | |
Georgia | 58-2210952 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
AGL Resources Inc. (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |
AGL Resources Inc. has submitted electronically and posted on its corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. |
AGL Resources Inc. is a large accelerated filer and is not a shell company. |
The number of shares of AGL Resources Inc.’s common stock, $5.00 Par Value, outstanding as of April 29, 2016, was 120,680,030. |
AGL RESOURCES INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2016
TABLE OF CONTENTS
Page | ||
Item Number. | ||
GLOSSARY OF KEY TERMS | |
2015 Form 10-K | Our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 11, 2016 |
AGL Capital | AGL Capital Corporation |
AGL Credit Facility | $1.3 billion credit agreement entered into by AGL Capital to support its commercial paper program |
AGL Resources | AGL Resources Inc., together with its consolidated subsidiaries |
Atlanta Gas Light | Atlanta Gas Light Company |
Atlantic Coast Pipeline | Atlantic Coast Pipeline, LLC |
Bcf | Billion cubic feet |
Central Valley | Central Valley Gas Storage, LLC |
CUB | Citizens Utility Board |
EBIT | Earnings before interest and taxes, the primary measure of our reportable segments’ profit or loss, which includes operating income and other income and excludes interest on debt and income tax expense |
ERC | Environmental remediation costs |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
Fitch | Fitch Ratings |
Florida Commission | Florida Public Service Commission, the state regulatory agency for Florida City Gas |
GAAP | Accounting principles generally accepted in the United States of America |
Georgia Commission | Georgia Public Service Commission, the state regulatory agency for Atlanta Gas Light |
Golden Triangle | Golden Triangle Storage, Inc. |
Heating Degree Days | A measure of weather, calculated when the average daily temperatures are less than 65 degrees Fahrenheit |
Heating Season | The period from November through March when natural gas usage and operating revenues are generally higher |
Horizon Pipeline | Horizon Pipeline Company, LLC |
Illinois Commission | Illinois Commerce Commission, the state regulatory agency for Nicor Gas |
Jefferson Island | Jefferson Island Storage & Hub, LLC |
LIFO | Last-in, first-out |
LOCOM | Lower of weighted average cost or current market price |
Marketers | Marketers selling retail natural gas in Georgia and certificated by the Georgia Commission |
Maryland Commission | Maryland Public Service Commission, the state regulatory agency for Elkton Gas |
Merger Agreement | Agreement and Plan of Merger entered into on August 23, 2015 by Southern Company, AMS Corp., a subsidiary of Southern Company, and AGL Resources |
MGP | Manufactured Gas Plant |
Moody’s | Moody’s Investors Service |
New Jersey BPU | New Jersey Board of Public Utilities, the state regulatory agency for Elizabethtown Gas |
Nicor Gas | Northern Illinois Gas Company, doing business as Nicor Gas Company |
Nicor Gas Credit Facility | $700 million credit facility entered into by Nicor Gas to support its commercial paper program |
NYMEX | New York Mercantile Exchange, Inc. |
OCI | Other comprehensive income |
Operating margin | A non-GAAP measure of income, calculated as operating revenues minus cost of goods sold and revenue tax expense |
PennEast Pipeline | PennEast Pipeline Company, LLC |
PGA | Purchased gas adjustment |
Piedmont | Piedmont Natural Gas Company, Inc. |
Pivotal Utility | Pivotal Utility Holdings, Inc., doing business as Elizabethtown Gas, Elkton Gas and Florida City Gas |
PRP | Pipeline Replacement Program, Atlanta Gas Light's 15-year infrastructure replacement program, which ended in December 2013 |
S&P | Standard & Poor’s Ratings Services |
SEC | Securities and Exchange Commission |
Sequent | Sequent Energy Management, L.P. |
Southern Company | The Southern Company |
SouthStar | SouthStar Energy Services, LLC |
Triton | Triton Container Investments, LLC |
U.S. | The United States of America |
VaR | Value-at-risk |
VIE | Variable interest entity |
Virginia Commission | Virginia State Corporation Commission, the state regulatory agency for Virginia Natural Gas |
Virginia Natural Gas | Virginia Natural Gas, Inc. |
WACOG | Weighted average cost of gas |
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITIED)
As of | ||||||||||||
In millions, except share and per share amounts | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 20 | $ | 19 | $ | 41 | ||||||
Receivables | ||||||||||||
Natural gas, unbilled revenues and other | 564 | 516 | 834 | |||||||||
Energy marketing | 365 | 445 | 611 | |||||||||
Less allowance for uncollectible accounts | 36 | 29 | 48 | |||||||||
Total receivables, net | 893 | 932 | 1,397 | |||||||||
Inventories | 335 | 651 | 302 | |||||||||
Derivative instruments, including cash collateral | 160 | 206 | 189 | |||||||||
Prepaid expenses | 62 | 218 | 38 | |||||||||
Regulatory assets | 50 | 68 | 63 | |||||||||
Other | 17 | 21 | 49 | |||||||||
Total current assets | 1,537 | 2,115 | 2,079 | |||||||||
Long-term assets and other deferred debits | ||||||||||||
Property, plant and equipment | 12,777 | 12,566 | 11,689 | |||||||||
Less accumulated depreciation | 2,833 | 2,775 | 2,515 | |||||||||
Property, plant and equipment, net | 9,944 | 9,791 | 9,174 | |||||||||
Goodwill | 1,813 | 1,813 | 1,827 | |||||||||
Regulatory assets | 661 | 670 | 634 | |||||||||
Intangible assets | 105 | 109 | 116 | |||||||||
Other | 276 | 256 | 289 | |||||||||
Total long-term assets and other deferred debits | 12,799 | 12,639 | 12,040 | |||||||||
Total assets | $ | 14,336 | $ | 14,754 | $ | 14,119 | ||||||
Current liabilities | ||||||||||||
Short-term debt | $ | 557 | $ | 1,010 | $ | 526 | ||||||
Current portion of long-term debt | 470 | 545 | 75 | |||||||||
Energy marketing trade payables | 363 | 418 | 586 | |||||||||
Other accounts payable – trade | 250 | 255 | 285 | |||||||||
Accrued expenses | 231 | 200 | 259 | |||||||||
Regulatory liabilities | 159 | 134 | 168 | |||||||||
Customer deposits and credit balances | 141 | 165 | 109 | |||||||||
Accrued environmental remediation liabilities | 68 | 67 | 93 | |||||||||
Derivative instruments, including cash collateral | 64 | 44 | 48 | |||||||||
Temporary LIFO liquidation | 48 | — | 87 | |||||||||
Current deferred income taxes | 20 | 31 | — | |||||||||
Other | 118 | 131 | 135 | |||||||||
Total current liabilities | 2,489 | 3,000 | 2,371 | |||||||||
Long-term liabilities and other deferred credits | ||||||||||||
Long-term debt | 3,273 | 3,275 | 3,505 | |||||||||
Accumulated deferred income taxes | 1,921 | 1,912 | 1,738 | |||||||||
Regulatory liabilities | 1,632 | 1,611 | 1,612 | |||||||||
Accrued pension and retiree welfare benefits | 513 | 515 | 526 | |||||||||
Accrued environmental remediation liabilities | 355 | 364 | 326 | |||||||||
Other | 83 | 102 | 77 | |||||||||
Total long-term liabilities and other deferred credits | 7,777 | 7,779 | 7,784 | |||||||||
Total liabilities and other deferred credits | 10,266 | 10,779 | 10,155 | |||||||||
Commitments, guarantees and contingencies (see Note 11) | ||||||||||||
Contingently redeemable noncontrolling interest | 38 | — | — | |||||||||
Equity | ||||||||||||
Common stock, $5 par value; 750,000,000 shares authorized; outstanding: 120,679,004 shares at March 31, 2016, 120,376,721 shares at December 31, 2015, and 119,927,459 shares at March 31, 2015 | 604 | 603 | 601 | |||||||||
Additional paid-in capital | 2,110 | 2,099 | 2,090 | |||||||||
Retained earnings | 1,539 | 1,421 | 1,444 | |||||||||
Accumulated other comprehensive loss | (213 | ) | (186 | ) | (201 | ) | ||||||
Treasury shares, at cost: 216,523 shares at March 31, 2016, December 31, 2015, and March 31, 2015 | (8 | ) | (8 | ) | (8 | ) | ||||||
Total common shareholders’ equity | 4,032 | 3,929 | 3,926 | |||||||||
Noncontrolling interest | — | 46 | 38 | |||||||||
Total equity | 4,032 | 3,975 | 3,964 | |||||||||
Total liabilities, redeemable noncontrolling interest and equity | $ | 14,336 | $ | 14,754 | $ | 14,119 |
See Notes to Condensed Consolidated Financial Statements (Unaudited).
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31, | ||||||||
In millions, except per share amounts | 2016 | 2015 | ||||||
Operating revenues (includes revenue taxes of $40 and $56 for the three months ended March 31, 2016 and 2015, respectively) | $ | 1,334 | $ | 1,721 | ||||
Operating expenses | ||||||||
Cost of goods sold | 578 | 935 | ||||||
Operation and maintenance | 241 | 249 | ||||||
Depreciation and amortization | 102 | 97 | ||||||
Taxes other than income taxes | 62 | 76 | ||||||
Merger-related expenses | 3 | — | ||||||
Total operating expenses | 986 | 1,357 | ||||||
Operating income | 348 | 364 | ||||||
Other income | 3 | 3 | ||||||
Interest expense, net | (47 | ) | (44 | ) | ||||
Income before income taxes | 304 | 323 | ||||||
Income tax expense | 111 | 118 | ||||||
Net income | 193 | 205 | ||||||
Less net income attributable to noncontrolling interest | 11 | 12 | ||||||
Net income attributable to AGL Resources | $ | 182 | $ | 193 | ||||
Per common share information | ||||||||
Basic earnings per common share attributable to AGL Resources | $ | 1.52 | $ | 1.62 | ||||
Diluted earnings per common share attributable to AGL Resources | $ | 1.51 | $ | 1.62 | ||||
Cash dividends declared per common share | $ | 0.53 | $ | 0.51 | ||||
Weighted average number of common shares outstanding | ||||||||
Basic | 120.1 | 119.3 | ||||||
Diluted | 120.4 | 119.6 |
See Notes to Condensed Consolidated Financial Statements (Unaudited).
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended March 31, | ||||||||
In millions | 2016 | 2015 | ||||||
Net income | $ | 193 | $ | 205 | ||||
Other comprehensive (loss) income, net of tax | ||||||||
Retirement benefit plans, net of tax | ||||||||
Reclassification of actuarial losses to net benefit cost (net of income tax of $2 and $2 for the three months ended March 31, 2016 and 2015, respectively) | 3 | 3 | ||||||
Retirement benefit plans, net | 3 | 3 | ||||||
Cash flow hedges, net of tax | ||||||||
Net derivative (loss) gain arising during the period (net of income tax of $16 and $1 for the three months ended March 31, 2016 and 2015, respectively) | (29 | ) | 2 | |||||
Reclassification of realized derivative gain to net income (net of income tax of less than $1 million) | (1 | ) | — | |||||
Cash flow hedges, net | (30 | ) | 2 | |||||
Other comprehensive (loss) income, net of tax | (27 | ) | 5 | |||||
Comprehensive income | 166 | 210 | ||||||
Less comprehensive income attributable to noncontrolling interest | 11 | 12 | ||||||
Comprehensive income attributable to AGL Resources | $ | 155 | $ | 198 |
See Notes to Condensed Consolidated Financial Statements (Unaudited).
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
AGL Resources Shareholders | |||||||||||||||||||||||||||||||
Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Treasury shares | Noncontrolling interest | Total | |||||||||||||||||||||||||
In millions, except per share amounts | Shares | Amount | |||||||||||||||||||||||||||||
Balance as of December 31, 2014 | 119.6 | $ | 599 | $ | 2,087 | $ | 1,312 | $ | (206 | ) | $ | (8 | ) | $ | 44 | $ | 3,828 | ||||||||||||||
Net income | — | — | — | 193 | — | — | 12 | 205 | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 5 | — | — | 5 | |||||||||||||||||||||||
Dividends on common stock ($0.51 per share) | — | — | — | (61 | ) | — | — | — | (61 | ) | |||||||||||||||||||||
Distribution to noncontrolling interest | — | — | — | — | — | — | (18 | ) | (18 | ) | |||||||||||||||||||||
Stock granted, share-based compensation, net of forfeitures | — | — | (12 | ) | — | — | — | — | (12 | ) | |||||||||||||||||||||
Stock issued, dividend reinvestment plan | 0.1 | — | 3 | — | — | — | — | 3 | |||||||||||||||||||||||
Stock issued, share-based compensation, net of forfeitures | 0.2 | 2 | 10 | — | — | — | — | 12 | |||||||||||||||||||||||
Share-based compensation expense, net of tax | — | — | 2 | — | — | — | — | 2 | |||||||||||||||||||||||
Balance as of March 31, 2015 | 119.9 | $ | 601 | $ | 2,090 | $ | 1,444 | $ | (201 | ) | $ | (8 | ) | $ | 38 | $ | 3,964 |
AGL Resources Shareholders | |||||||||||||||||||||||||||||||
Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Treasury shares | Noncontrolling interest | Total | |||||||||||||||||||||||||
In millions, except per share amounts | Shares | Amount | |||||||||||||||||||||||||||||
Balance as of December 31, 2015 | 120.4 | $ | 603 | $ | 2,099 | $ | 1,421 | $ | (186 | ) | $ | (8 | ) | $ | 46 | $ | 3,975 | ||||||||||||||
Net income attributable to AGL Resources | — | — | — | 182 | — | — | — | 182 | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (27 | ) | — | — | (27 | ) | |||||||||||||||||||||
Dividends on common stock ($0.53 per share) | — | — | — | (64 | ) | — | — | — | (64 | ) | |||||||||||||||||||||
Stock granted, share-based compensation, net of forfeitures | — | — | (9 | ) | — | — | — | — | (9 | ) | |||||||||||||||||||||
Stock issued, dividend reinvestment plan | — | — | 3 | — | — | — | — | 3 | |||||||||||||||||||||||
Stock issued, share-based compensation, net of forfeitures | 0.3 | 1 | 14 | — | — | — | — | 15 | |||||||||||||||||||||||
Share-based compensation expense, net of tax | — | — | 3 | — | — | — | — | 3 | |||||||||||||||||||||||
Reclassification of noncontrolling interest | — | — | — | — | — | — | (46 | ) | (46 | ) | |||||||||||||||||||||
Balance as of March 31, 2016 | 120.7 | $ | 604 | $ | 2,110 | $ | 1,539 | $ | (213 | ) | $ | (8 | ) | $ | — | $ | 4,032 |
See Notes to Condensed Consolidated Financial Statements (Unaudited).
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, | ||||||||
In millions | 2016 | 2015 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 193 | $ | 205 | ||||
Adjustments to reconcile net income to net cash flow provided by operating activities | ||||||||
Depreciation and amortization | 102 | 97 | ||||||
Change in derivative instrument assets and liabilities | 51 | 33 | ||||||
Deferred income taxes | 15 | 5 | ||||||
Changes in certain assets and liabilities | ||||||||
Inventories, net of temporary LIFO liquidation | 364 | 501 | ||||||
Prepaid and miscellaneous taxes | 231 | 267 | ||||||
Energy marketing receivables and trade payables, net | 25 | (23 | ) | |||||
Accrued natural gas costs, net | — | 22 | ||||||
Trade payables, other than energy marketing | (8 | ) | (13 | ) | ||||
Receivables, other than energy marketing | (39 | ) | (24 | ) | ||||
Accrued expenses | (53 | ) | (54 | ) | ||||
Other, net | (40 | ) | 104 | |||||
Net cash flow provided by operating activities | 841 | 1,120 | ||||||
Cash flows from investing activities: | ||||||||
Expenditures for property, plant and equipment | (235 | ) | (188 | ) | ||||
Other, net | (3 | ) | 4 | |||||
Net cash flow used in investing activities | (238 | ) | (184 | ) | ||||
Cash flows from financing activities: | ||||||||
Net repayments of commercial paper | (453 | ) | (649 | ) | ||||
Payment of long-term debt | (75 | ) | (200 | ) | ||||
Dividends paid on common shares | (64 | ) | (61 | ) | ||||
Distribution to noncontrolling interest | (19 | ) | (18 | ) | ||||
Other, net | 9 | 2 | ||||||
Net cash flow used in financing activities | (602 | ) | (926 | ) | ||||
Net increase in cash and cash equivalents | 1 | 10 | ||||||
Cash and cash equivalents at beginning of period | 19 | 31 | ||||||
Cash and cash equivalents at end of period | $ | 20 | $ | 41 | ||||
Cash paid (received) during the period for | ||||||||
Interest | $ | 53 | $ | 57 | ||||
Income taxes | (132 | ) | (140 | ) |
See Notes to Condensed Consolidated Financial Statements (Unaudited).
AGL RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Organization and Basis of Presentation
General
AGL Resources Inc. is an energy services holding company that conducts substantially all of its operations through its subsidiaries. Unless the context requires otherwise, references to “we,” “us,” “our,” the “company,” or “AGL Resources” mean consolidated AGL Resources Inc. and its subsidiaries.
Our Condensed Consolidated Balance Sheet as of December 31, 2015 was derived from our audited consolidated financial statements. We have prepared the accompanying unaudited condensed consolidated financial statements under the rules and regulations of the SEC. In accordance with such rules and regulations, we have condensed or omitted certain information and notes that would typically be included in our annual audited financial statements. Our unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair statement of our financial results for the interim periods and should be read in conjunction with our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K.
Due to the seasonal nature of our business and other factors, our results of operations and our financial condition for the periods presented are not necessarily indicative of the results of operations or financial condition to be expected for, or as of, any other period.
Basis of Presentation
Our unaudited condensed consolidated financial statements include our accounts, the accounts of our wholly owned subsidiaries and the accounts of our VIE for which we are the primary beneficiary. For unconsolidated entities that we do not control, we use the equity method of accounting and our proportionate share of income or loss is recorded on our unaudited Condensed Consolidated Statements of Income. See Note 10 for additional information on our non-wholly owned entities. We have eliminated intercompany profits and transactions in consolidation except for intercompany profits where recovery of such amounts is probable under the affiliates’ rate regulation process.
Certain amounts from prior periods have been reclassified to conform to the current period presentation. These reclassifications had no material impact on our prior period balances.
Note 2 - Proposed Merger with Southern Company
On August 23, 2015, we entered into the Merger Agreement with Southern Company and a new wholly owned subsidiary of Southern Company (Merger Sub), providing for the merger of Merger Sub with and into AGL Resources, with us surviving as a wholly owned, direct subsidiary of Southern Company. At the effective time of the merger, which is expected to occur in the second half of 2016, each share of our common stock, other than certain excluded shares, will convert into the right to receive $66 in cash, without interest, less any applicable withholding taxes.
We and Southern Company have made joint filings seeking regulatory approval with all of the required state regulatory agencies. Completion of the merger remains subject to various closing conditions, including (i) the receipt of remaining required regulatory approvals from the Illinois Commission and New Jersey BPU, and such approvals having become final orders and (ii) the absence of a judgment, order, decision, injunction, ruling or other finding or agency requirement of a governmental entity prohibiting the closing of the merger.
To date, the proposed merger has been approved by the Maryland Commission, the Georgia Commission, the California Public Utilities Commission, the Virginia Commission and our shareholders. Additionally, we received consent from the Federal Communications Commission to transfer parent company control of radio licenses held by certain of our subsidiaries and the waiting period under the Hart-Scott-Rodino Act has expired.
On April 28, 2016, Southern Company, AGL Resources, Nicor Gas, the Illinois Attorney General’s Office, and the CUB filed a settlement agreement with the Illinois Commission that resolves all remaining contested issues with regards to the merger approval. This settlement agreement, along with the other resolved matters, is still subject to approval by the Illinois Commission.
The Merger Agreement contains certain termination rights for each party. In addition, the Merger Agreement, in certain circumstances, provides for the payment by AGL Resources of a $201 million termination fee to Southern Company and, in certain circumstances, provides for the reimbursement of expenses up to $5 million upon termination of the erger Agreement (which reimbursement would reduce on a dollar-for-dollar basis any termination fee subsequently paid by us). As of March 31, 2016, we had recorded no liability for termination fees.
During the three months ended March 31, 2016, we recorded $3 million ($2 million, net of tax) of merger-related costs on the accompanying unaudited Condensed Consolidated Statements of Income, which consisted primarily of legal expenses and additional share-based compensation expenses associated with the proposed merger. These costs are treated as tax deductible since the requisite closing conditions to the merger have not yet been satisfied. Once the merger is closed, we will evaluate the tax deductibility of all merger-related costs and adjust for any non-deductible amounts in the effective tax rate.
Note 3 - Significant Accounting Policies and Methods of Application
Our significant accounting policies are described in Note 3 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K. There have been no significant changes to our accounting policies during the three months ended March 31, 2016.
Use of Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires us to use judgment and make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our estimates may involve complex situations requiring a high degree of judgment either in the application and interpretation of existing accounting literature or in the development of estimates that impact our financial statements. The most significant estimates relate to the accounting for our rate-regulated subsidiaries, goodwill and other intangible assets, derivatives and hedging activities, uncollectible accounts and other allowances for contingent losses, retirement plan benefit obligations and provisions for income taxes. We evaluate our estimates on an ongoing basis, and our actual results could differ from our estimates.
Inventories
For our regulated utilities, except Nicor Gas, natural gas inventories and the inventories we hold for Marketers in Georgia are carried at cost on a WACOG basis.
Nicor Gas’ inventory is carried at cost on a LIFO basis. Under the LIFO method, inventory decrements occurring during the year that are expected to be restored prior to year-end are charged to cost of goods sold at the estimated annual replacement cost, and the difference between this cost and the actual liquidated LIFO layer cost is recorded as a temporary LIFO liquidation on our unaudited Condensed Consolidated Balance Sheets. Interim inventory decrements that are not expected to be restored prior to year-end are charged to cost of goods sold at the actual LIFO cost of the layers liquidated. The inventory decrement as of March 31, 2016 is expected to be restored prior to year-end and the inventory decrement as of March 31, 2015 was restored prior to December 31, 2015.
Our retail operations, wholesale services and midstream operations segments carry inventory at LOCOM, where cost is determined on a WACOG basis. For the periods presented, we recorded LOCOM adjustments to cost of goods sold in the following amounts to reduce the value of our natural gas inventories to market value.
Three Months Ended March 31, | ||||||||
In millions | 2016 | 2015 | ||||||
LOCOM adjustments | $ | 3 | $ | 10 |
Goodwill
We perform an annual impairment test on our reporting units that contain goodwill during the fourth fiscal quarter of each year or more frequently if impairment indicators arise. The amounts of goodwill as of March 31, 2016 and 2015, and December 31, 2015 are provided in the following table.
In millions | Distribution operations | Retail operations | Midstream operations | Consolidated | ||||||||||||
Goodwill - March 31, 2015 | $ | 1,640 | $ | 173 | $ | 14 | $ | 1,827 | ||||||||
Impairment (1) | — | — | (14 | ) | (14 | ) | ||||||||||
Goodwill - December 31, 2015 | 1,640 | 173 | — | 1,813 | ||||||||||||
Goodwill - March 31, 2016 | $ | 1,640 | $ | 173 | $ | — | $ | 1,813 |
(1) Based on the result of an interim impairment test performed as of September 30, 2015, we recorded a non-cash impairment charge of the full $14 million ($9 million, net of tax) of goodwill at midstream operations.
Earnings per Common Share
The following table shows the calculation of our diluted shares attributable to AGL Resources for the periods presented as if performance units currently earned under the plan ultimately vest and as if stock options currently exercisable at prices below the average market prices are exercised.
Three Months Ended March 31, | ||||||||
In millions, except per share amounts | 2016 | 2015 | ||||||
Net income attributable to AGL Resources | $ | 182 | $ | 193 | ||||
Denominator: | ||||||||
Basic weighted average number of shares outstanding (1) | 120.1 | 119.3 | ||||||
Effect of dilutive securities | 0.3 | 0.3 | ||||||
Diluted weighted average number of shares outstanding (2) | 120.4 | 119.6 | ||||||
Earnings per common share | ||||||||
Basic earnings per common share attributable to AGL Resources | $ | 1.52 | $ | 1.62 | ||||
Diluted earnings per common share attributable to AGL Resources | $ | 1.51 | $ | 1.62 |
(1) | Daily weighted average shares outstanding. |
(2) | Excludes all outstanding stock options whose effect would have been anti-dilutive. |
Accounting Developments
Accounting standards adopted in 2016
Effective January 1, 2016, we adopted the accounting guidance described below, none of which had a material impact on our unaudited condensed consolidated financial statements. For additional information on these accounting standards, see Note 3 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K.
• | accounting for a share-based compensation performance target that could be achieved after the requisite service period; |
• | consolidation of other legal entities into our financial statements; |
• | accounting for fees paid in connection with arrangements with cloud-based software providers; and |
• | reducing the diversity in fair value measurements hierarchy disclosures. |
Other newly issued accounting standards and updated authoritative guidance
In March 2016, the FASB issued updated authoritative guidance related to accounting for certain aspects of share-based payment transactions. The new guidance changes the income tax accounting related to the tax "windfall" or "shortfall" on share-based compensation, increases the tax withholding level allowed before triggering liability classification of the award and allows for a policy election to account for forfeitures as they occur. This guidance is effective for us beginning January 1, 2017, and early adoption is permitted. We are currently evaluating the potential impact of this new guidance.
In February 2016, the FASB issued updated authoritative guidance related to accounting for lease transactions. The new guidance will require all organizations that use leased assets, referred to as "lessees," to recognize all leases with terms of more than 12 months on the balance sheet as right of use assets and corresponding liabilities. Lessees will continue to recognize lease expense based on classification of the lease, using a straight-line expense pattern for operating leases and a front-loaded expense pattern for financing leases. The accounting for lessors is substantially equivalent to the existing guidance. It also requires additional disclosures, both qualitative and quantitative, including amount, timing, and uncertainty of cash flows arising from leases. The new guidance is effective for us beginning January 1, 2019 and must be applied using the modified retrospective approach to each prior period presented. Early adoption of this new guidance is permitted. We are currently evaluating the potential impact of this new guidance.
In January 2016, the FASB issued updated authoritative guidance related to classification and measurement of financial instruments. The amendments modify the accounting and presentation for certain financial liabilities and equity investments not consolidated or reported using the equity method. The guidance is effective for us beginning January 1, 2018, and limited early adoption is permitted. We are currently evaluating the potential impact of this new guidance, but do not anticipate that it will have a material impact on our consolidated financial statements.
In November 2015, the FASB issued updated authoritative guidance related to the balance sheet classification of deferred taxes, which requires companies to present deferred income tax assets and deferred income tax liabilities as noncurrent on a classified balance sheet instead of the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The guidance is effective for us beginning January 1, 2017, and early application is permitted either prospectively or retrospectively. We have determined that this new guidance will not have a material impact on our consolidated financial statements.
In July 2015, the FASB issued an update to authoritative guidance to simplify the measurement of certain inventories. Under the new guidance, inventories are required to be measured at the lower of cost and net realizable value, the latter representing the estimated selling price in the ordinary course of business, reduced by costs of completion, disposal and transportation. Under current guidance, inventories are required to be measured at the lower of cost or market, but depending upon specific circumstances, market could refer to replacement cost, net realizable value, or net realizable value reduced by a normal profit margin. The amendments do not apply to inventories carried on a LIFO basis, which for us applies only to our Nicor Gas inventories. The guidance is to be applied prospectively, is effective for us beginning January 1, 2017, and early adoption is permitted. We are currently evaluating the potential impact of this new guidance.
In May 2014, the FASB issued an update to authoritative guidance related to revenue from contracts with customers. The update replaces most of the existing guidance with a single set of principles for recognizing revenue from contracts with customers. In July 2015, the FASB delayed the effective date by one year and the guidance will now be effective for us beginning January 1, 2018. Early adoption of the standard is permitted, but not before the original effective date of December 15, 2016. The new guidance must be applied retrospectively to each prior period presented or via a cumulative effect upon the date of initial application. We have not determined the impact of this new guidance, nor have we selected a transition method.
Note 4 - Regulated Operations
The accounting policies for our regulated operations are described within "Regulated Operations" in Note 3 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K. Our regulatory assets and liabilities reflected within our unaudited Condensed Consolidated Balance Sheets as of the dates presented are summarized in the following table.
In millions | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
Regulatory assets | ||||||||||||
Recoverable ERC | $ | 21 | $ | 31 | $ | 37 | ||||||
Recoverable pension and retiree welfare benefit costs | 12 | 12 | 11 | |||||||||
Deferred natural gas costs | 2 | 6 | 7 | |||||||||
Recoverable seasonal rates | — | 10 | — | |||||||||
Other | 15 | 9 | 8 | |||||||||
Regulatory assets – current | 50 | 68 | 63 | |||||||||
Recoverable ERC | 364 | 370 | 331 | |||||||||
Recoverable pension and retiree welfare benefit costs | 111 | 113 | 108 | |||||||||
Recoverable regulatory infrastructure program costs | 83 | 83 | 73 | |||||||||
Long-term debt fair value adjustment | 64 | 66 | 72 | |||||||||
Other | 39 | 38 | 50 | |||||||||
Regulatory assets – long-term | 661 | 670 | 634 | |||||||||
Total regulatory assets | $ | 711 | $ | 738 | $ | 697 | ||||||
Regulatory liabilities | ||||||||||||
Accumulated removal costs | $ | 53 | $ | 53 | $ | 25 | ||||||
Bad debt over collection | 47 | 42 | 30 | |||||||||
Accrued natural gas costs | 20 | 24 | 53 | |||||||||
Deferred seasonal rates | 20 | — | 20 | |||||||||
Other | 19 | 15 | 40 | |||||||||
Regulatory liabilities – current | 159 | 134 | 168 | |||||||||
Accumulated removal costs | 1,551 | 1,538 | 1,524 | |||||||||
Bad debt over collection | 28 | 21 | 19 | |||||||||
Regulatory income tax liability | 26 | 27 | 27 | |||||||||
Unamortized investment tax credit | 19 | 20 | 22 | |||||||||
Other | 8 | 5 | 20 | |||||||||
Regulatory liabilities – long-term | 1,632 | 1,611 | 1,612 | |||||||||
Total regulatory liabilities | $ | 1,791 | $ | 1,745 | $ | 1,780 |
Base rates are designed to provide the opportunity to recover cost and earn a return on investment during the period rates are in effect. As such, all of our regulatory assets recoverable through base rates are subject to review by the respective state regulatory agency during future rate proceedings. We are not aware of evidence that these costs will not be recoverable through either rate riders or base rates, and we believe that we will be able to recover such costs consistent with our historical recoveries.
Unrecognized Ratemaking Amounts The following table illustrates our authorized ratemaking amounts that are not recognized on our unaudited Condensed Consolidated Balance Sheets. These amounts are primarily composed of an allowed equity rate of return on assets associated with certain of our regulatory infrastructure programs. These amounts will be recognized as revenues in our financial statements in the periods they are billable to our customers.
In millions | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
Atlanta Gas Light (1) | $ | 105 | $ | 103 | $ | 119 | ||||||
Virginia Natural Gas | 12 | 12 | 12 | |||||||||
Elizabethtown Gas | 4 | 4 | 2 | |||||||||
Nicor Gas | 3 | 3 | — | |||||||||
Total | $ | 124 | $ | 122 | $ | 133 |
(1) | In October 2015, Atlanta Gas Light received an order from the Georgia Commission, which included a final determination of the true-up recovery related to the PRP that allows Atlanta Gas Light to recover $144 million of the $178 million of incurred and allowed costs that were deferred for future recovery. |
Deferred/Accrued Natural Gas Costs We charge our utility customers for natural gas consumed using natural gas cost recovery mechanisms established by the state regulatory agencies. Under these mechanisms, all prudently incurred natural gas costs are passed through to customers without markup, subject to regulatory review. We defer or accrue the difference between the actual cost of gas and the amount of commodity revenue earned in a given period, such that no operating margin is recognized related to these costs. The deferred or accrued amount is either billed or refunded to our customers prospectively through adjustments to the commodity rate.
Environmental Remediation Costs We are subject to federal, state and local laws and regulations governing environmental quality and pollution control that require us to remove or remedy the effect on the environment of the disposal or release of specified substances at our current and former operating sites, substantially all of which is related to former MGP sites. The ERC assets and liabilities are associated with our distribution operations segment and remediation costs are generally recoverable from customers through rate mechanisms approved by regulators. Accordingly, both costs incurred to remediate the former MGP sites, plus the future estimated cost recorded as liabilities, net of amounts previously collected, are recognized as a regulatory asset until recovered from customers.
Our accrued environmental remediation liabilities are estimates of future remediation costs for investigation and cleanup of our current and former operating sites that are contaminated. These estimates are determined using engineering-based estimates and probabilistic models of potential costs when such estimates cannot be made, on an undiscounted basis. These estimates contain various assumptions, which we refine and update on an ongoing basis. These liabilities do not include other potential expenses, such as unasserted property damage claims, personal injury or natural resource damage claims, legal expenses or other costs for which we may be held liable but for which we cannot reasonably estimate an amount.
Our accrued environmental remediation liabilities are not regulatory liabilities; however, the associated expenses are deferred as corresponding regulatory assets until the costs are recovered from customers. We primarily recover these deferred costs through rate riders that authorize dollar-for-dollar recovery. We expect to collect $21 million in revenues over the next 12 months, which is reflected as a current regulatory asset. The following table provides additional information on the estimated costs to remediate our current and former operating sites as of March 31, 2016.
In millions | # of sites | Probabilistic model cost estimates | Engineering-based estimates | Amount recorded | Expected costs over next 12 months | Cost recovery period | |||||||||||||
Illinois (1) | 26 | $200 - $457 | $ | 46 | $ | 246 | $ | 30 | As incurred | ||||||||||
New Jersey | 6 | 115 - 195 | 7 | 122 | 25 | 7 years | |||||||||||||
Georgia and Florida | 13 | 29 - 52 | 21 | 50 | 13 | 5 years | |||||||||||||
North Carolina (2) | 1 | n/a | 5 | 5 | — | No recovery | |||||||||||||
Total | 46 | $344 - $704 | $ | 79 | $ | 423 | $ | 68 |
(1) | Nicor Gas is responsible in whole or in part for 26 MGP sites, two of which have been remediated and their use is no longer restricted by the environmental condition of the property. Nicor Gas and Commonwealth Edison Company are parties to an agreement to cooperate in cleaning up residue at 23 of the sites. Nicor Gas’ allocated share of cleanup costs for these sites is 52%. |
(2) | We have no regulatory recovery mechanism for the site in North Carolina and there is no amount included within our regulatory assets. Changes in estimated costs are recognized in income during the period of change. |
Regulatory Infrastructure Programs An update to our infrastructure improvement programs at our utilities is as follows.
Virginia Natural Gas In March 2016, the Virginia Commission approved an extension to our original Steps to Advance Virginia's Energy (SAVE) program, under which Virginia Natural Gas is allowed to invest up to $210 million on qualifying infrastructure projects through 2021 to replace more than 200 miles of aging pipeline infrastructure.
Note 5 - Fair Value Measurements
The methods used to determine the fair values of our assets and liabilities 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.
Derivative Instruments
The following table summarizes, by level within the fair value hierarchy, our derivative assets and liabilities that were carried at fair value, net of counterparty offset and collateral, on a recurring basis on our unaudited Condensed Consolidated Balance Sheets as of the dates presented. See Note 6 herein for additional information on our derivative instruments.
March 31, 2016 | December 31, 2015 | March 31, 2015 | ||||||||||||||||||||||
In millions | Assets (1) | Liabilities | Assets (1) | Liabilities | Assets (1) | Liabilities | ||||||||||||||||||
Quoted prices in active markets (Level 1) | $ | — | $ | (96 | ) | $ | 53 | $ | (63 | ) | $ | — | $ | (106 | ) | |||||||||
Significant other observable inputs (Level 2) | 108 | (65 | ) | 122 | (46 | ) | 108 | (52 | ) | |||||||||||||||
Netting of counterparty offset and cash collateral | 69 | 96 | 33 | 63 | 104 | 106 | ||||||||||||||||||
Total carrying value (2) | $ | 177 | $ | (65 | ) | $ | 208 | $ | (46 | ) | $ | 212 | $ | (52 | ) |
(1) | Balances of $9 million at March 31, 2016, $10 million at December 31, 2015 and $1 million at March 31, 2015, associated with certain weather derivatives have been excluded, as they are accounted for based on intrinsic value rather than fair value. |
(2) | There were no significant unobservable inputs (Level 3) or significant transfers between Level 1, Level 2 or Level 3 for any of the dates presented. |
Debt
Our long-term debt is recorded at amortized cost, with the exception of Nicor Gas’ first mortgage bonds, which are recorded at their acquisition-date fair value. We amortize the fair value adjustment of Nicor Gas’ first mortgage bonds over the lives of the bonds. The following table lists the carrying amount and fair value of our long-term debt as of the dates presented.
In millions | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||
Long-term debt carrying amount (1) | $ | 3,743 | $ | 3,820 | $ | 3,580 | ||||||
Long-term debt fair value (2) | 4,156 | 4,066 | 4,102 |
(1) | The change in the March 31, 2015 balance is related to our adoption of new accounting guidance in 2015 that resulted in the reclassification of debt issuance costs from other long-term assets to offset the related debt balances in long-term debt. |
(2) | Fair value determined using Level 2 inputs. |
Note 6 - 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 March 31, 2016, December 31, 2015 and March 31, 2015, for agreements with such features, derivative instruments with liability fair values totaled $65 million, $46 million and $52 million, respectively, for which we had posted no collateral to our counterparties as we exceed the minimum credit rating requirements. As of March 31, 2016, the maximum collateral that could have been required with these features was less than $1 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 $51 million and $33 million for the three months ended March 31, 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) | March 31, 2016 (2) | December 31, 2015 | March 31, 2015 | ||||||
Cash flow hedges | 5 | 5 | 9 | ||||||
Not designated as hedges | 81 | (14 | ) | 231 | |||||
Total volumes | 86 | (9 | ) | 240 | |||||
Short position – cash flow hedges | (6 | ) | (6 | ) | (6 | ) | |||
Short position – not designated as hedges | (2,974 | ) | (3,089 | ) | (2,735 | ) | |||
Long position – cash flow hedges | 11 | 11 | 15 | ||||||
Long position – not designated as hedges | 3,055 | 3,075 | 2,966 | ||||||
Net long (short) position | 86 | (9 | ) | 240 |
(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) | 99% of these contracts have durations of two years or less and 1% expire between two and five years. |
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 March 31, | ||||||||
In millions | 2016 | 2015 | ||||||
Nicor Gas | $ | (2 | ) | $ | (3 | ) | ||
Elizabethtown Gas | (6 | ) | (4 | ) |
The following table presents the fair values and unaudited Condensed Consolidated Balance Sheets classifications of our derivative instruments as of the dates presented.
March 31, 2016 | December 31, 2015 | March 31, 2015 | ||||||||||||||||||||||||
In millions | Classification | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||
Designated as cash flow hedges | ||||||||||||||||||||||||||
Natural gas contracts | Current | $ | 1 | $ | (4 | ) | $ | 3 | $ | (5 | ) | $ | — | $ | (6 | ) | ||||||||||
Natural gas contracts | Long-term | — | (1 | ) | — | (2 | ) | — | (1 | ) | ||||||||||||||||
Interest rate swap agreements | Current | — | (36 | ) | 9 | — | 1 | — | ||||||||||||||||||
Interest rate swap agreements | Long-term | — | — | — | — | 3 | — | |||||||||||||||||||
Total designated as cash flow hedges | $ | 1 | $ | (41 | ) | $ | 12 | $ | (7 | ) | $ | 4 | $ | (7 | ) | |||||||||||
Not designated as hedges | ||||||||||||||||||||||||||
Natural gas contracts | Current | $ | 419 | $ | (432 | ) | $ | 751 | $ | (672 | ) | $ | 557 | $ | (592 | ) | ||||||||||
Natural gas contracts | Long-term | 92 | (83 | ) | 179 | (187 | ) | 98 | (109 | ) | ||||||||||||||||
Total not designated as hedges | $ | 511 | $ | (515 | ) | $ | 930 | $ | (859 | ) | $ | 655 | $ | (701 | ) | |||||||||||
Gross amounts of recognized assets and liabilities (1) (2) | $ | 512 | $ | (556 | ) | $ | 942 | $ | (866 | ) | $ | 659 | $ | (708 | ) | |||||||||||
Gross amounts offset on our unaudited Condensed Consolidated Balance Sheets (2) | (326 | ) | 491 | (724 | ) | 820 | (446 | ) | 656 | |||||||||||||||||
Net amounts of assets and liabilities presented on our unaudited Condensed Consolidated Balance Sheets (3) | $ | 186 | $ | (65 | ) | $ | 218 | $ | (46 | ) | $ | 213 | $ | (52 | ) |
(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 $165 million as of March 31, 2016, $96 million as of December 31, 2015, and $210 million as of March 31, 2015. Cash collateral is included in the “Gross amounts offset on our unaudited Condensed Consolidated Balance Sheets” line of this table. |
(3) | As of March 31, 2016, December 31, 2015, and March 31, 2015, 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 March 31, | ||||||||
In millions | 2016 | 2015 | ||||||
Designated as cash flow hedges (1) | ||||||||
Natural gas contracts - net loss reclassified from OCI into cost of goods sold | $ | — | $ | (1 | ) | |||
Interest rate swaps - net gain reclassified from OCI into interest expense | 1 | 1 | ||||||
Total designated as cash flow hedges, net of tax | 1 | — | ||||||
Not designated as hedges (1) | ||||||||
Natural gas contracts - net fair value adjustments recorded in operating revenues | 20 | (24 | ) | |||||
Natural gas contracts - net fair value adjustments recorded in cost of goods sold (2) | (1 | ) | (2 | ) | ||||
Income tax | (7 | ) | 10 | |||||
Total not designated as hedges, net of tax | 12 | (16 | ) | |||||
Total gains (losses) on derivative instruments, net of tax | $ | 13 | $ | (16 | ) |
(1) | Associated with the fair value of derivative instruments held at March 31, 2016 and 2015. |
(2) | Excludes gains (losses) recorded in cost of goods sold associated with weather derivatives of $3 million and $(2) million for the three months ended March 31, 2016 and 2015, respectively, as they are accounted for based on intrinsic value rather than fair value. |
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 months ended March 31, 2016 and 2015. 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 $4 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 March 31, 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 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.
Note 7 - Employee Benefit Plans
Pension Benefits
We sponsor the AGL Resources Inc. Retirement Plan, a tax-qualified defined benefit retirement plan for our eligible employees, which is described in Note 7 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K. Following are the components of our pension costs for the periods indicated.
Three Months Ended March 31, | ||||||||
In millions | 2016 | 2015 | ||||||
Service cost (1) | $ | 6 | $ | 7 | ||||
Interest cost (1) | 10 | 11 | ||||||
Expected return on plan assets | (16 | ) | (16 | ) | ||||
Net amortization of prior service credit | — | (1 | ) | |||||
Recognized actuarial loss | 6 | 8 | ||||||
Net periodic pension benefit cost | $ | 6 | $ | 9 |
(1) Effective January 1, 2016, we use a spot rate approach to estimate the service cost and interest cost components. Historically, we estimated these components using a single weighted-average discount rate.
Welfare Benefits
The benefits of our Health and Welfare Plan for Retirees and Inactive Employees of AGL Resources Inc. are described in Note 7 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K. Following are the components of our welfare costs for the periods indicated.
Three Months Ended March 31, | ||||||||
In millions | 2016 | 2015 | ||||||
Service cost (1) | $ | 1 | $ | 1 | ||||
Interest cost (1) | 3 | 3 | ||||||
Expected return on plan assets | (2 | ) | (2 | ) | ||||
Net amortization of prior service credit | (1 | ) | — | |||||
Recognized actuarial loss | 1 | 1 | ||||||
Net periodic welfare benefit cost | $ | 2 | $ | 3 |
(1) Effective January 1, 2016, we use a spot rate approach to estimate the service cost and interest cost components. Historically, we estimated these components using a single weighted-average discount rate.
Note 8 - Debt and Credit Facilities
The following table provides maturity dates or ranges, year-to-date weighted average interest rates and amounts outstanding for our various debt securities and facilities for the periods presented. We fully and unconditionally guarantee all debt issued by AGL Capital and the gas facility revenue bonds issued by Pivotal Utility. Additionally, substantially all of Nicor Gas' properties are subject to the lien of the indenture securing its first mortgage bonds. For additional information on our debt and credit facilities, see Note 9 to our consolidated financial statements and related notes included in Item 8 of our 2015 Form 10-K.
March 31, 2016 | March 31, 2015 | |||||||||||||||||||
Dollars in millions | Year(s) due | Weighted average interest rate (1) | Outstanding | December 31, 2015 | Weighted average interest rate (1) | Outstanding | ||||||||||||||
Short-term debt | ||||||||||||||||||||
Commercial paper - AGL Capital (2) | 2016 | 0.8 | % | $ | 204 | $ | 471 | 0.5 | % | $ | 176 | |||||||||
Commercial paper - Nicor Gas (2) | 2016 | 0.6 | 353 | 539 | 0.4 | 350 | ||||||||||||||
Total short-term debt | 0.7 | % | $ | 557 | $ | 1,010 | 0.4 | % | $ | 526 | ||||||||||
Current portion of long-term debt | 2016 | 5.2 | % | $ | 470 | $ | 545 | 2.9 | % | $ | 75 | |||||||||
Long-term debt - excluding current portion | ||||||||||||||||||||
Senior notes | 2018-2043 | 4.9 | % | $ | 2,455 | $ | 2,455 | 5.0 | % | $ | 2,625 | |||||||||
First mortgage bonds | 2019-2038 | 5.9 | 375 | 375 | 6.0 | 425 | ||||||||||||||
Gas facility revenue bonds | 2022-2033 | 1.1 | 200 | 200 | 0.8 | 200 | ||||||||||||||
Medium-term notes | 2017-2027 | 7.8 | 181 | 181 | 7.8 | 181 | ||||||||||||||
Total principal long-term debt | 4.8 | % | $ | 3,211 | $ | 3,211 | 4.9 | % | $ | 3,431 | ||||||||||
Unamortized fair value adjustment of long-term debt | n/a | n/a | 66 | 68 | n/a | 77 | ||||||||||||||
Unamortized debt premium, net | n/a | n/a | 16 | 16 | n/a | 16 | ||||||||||||||
Unamortized debt issuance costs | n/a | n/a | (20 | ) | (20 | ) | n/a | (19 | ) | |||||||||||
Total non-principal long-term debt | n/a | n/a | $ | 62 | $ | 64 | n/a | $ | 74 | |||||||||||
Total long-term debt - excluding current portion | $ | 3,273 | $ | 3,275 | $ | 3,505 | ||||||||||||||
Total debt | $ | 4,300 | $ | 4,830 | $ | 4,106 |
(1) | Interest rates are calculated based on the daily weighted average balance outstanding for the three months ended March 31, 2016 and 2015. |
(2) | As of March 31, 2016, the effective interest rates on our commercial paper borrowings were 0.8% for AGL Capital and 0.6% for Nicor Gas. |
Commercial Paper Programs
We maintain commercial paper programs at AGL Capital and at Nicor Gas that consist of short-term, unsecured promissory notes used in conjunction with cash from operations to fund our seasonal working capital requirements. Working capital needs fluctuate during the year and are highest during the injection period in advance of the Heating Season. Nicor Gas’ commercial paper program supports working capital needs at Nicor Gas, while all of our other subsidiaries and SouthStar participate in AGL Capital’s commercial paper program. During the first three months of 2016, our commercial paper maturities ranged from 1 to 59 days, and at March 31, 2016, remaining terms to maturity ranged from 1 to 46 days. During the first three months of 2016, there were no commercial paper issuances with original maturities over three months.
Long-Term Debt
On February 1, 2016, $75 million of Nicor Gas first mortgage bonds matured and were repaid using the proceeds from commercial paper borrowings.
On January 23, 2015, we executed $800 million in notional value of 10-year and 30-year fixed-rate forward-starting interest rate swaps to hedge potential interest rate volatility prior to our senior note issuance in the fourth quarter of 2015 and our anticipated issuances in 2016. We have designated the forward-starting interest rate swaps, which are settled on the respective debt issuance dates, as cash flow hedges. We settled $200 million of these interest rate swaps on November 18, 2015, in conjunction with the aforementioned senior note issuance. We performed a qualitative assessment of effectiveness on the remaining interest rate swaps as of March 31, 2016 and concluded that the remaining hedges are highly effective.
Financial and Non-Financial Covenants
The AGL Credit Facility and the Nicor Gas Credit Facility each include a financial covenant that requires us to maintain a ratio of total debt to total capitalization of no more than 70% at the end of any month. The following table contains our debt-to-capitalization ratios for the dates presented, which are below the maximum allowed.
AGL Resources | Nicor Gas | |||||||||||||||||
March 31, 2016 | December 31, 2015 | March 31, 2015 | March 31, 2016 | December 31, 2015 | March 31, 2015 | |||||||||||||
Debt covenants (1) | 50 | % | 54 | % | 50 | % | 47 | % | 56 | % | 54 | % |
(1) | As defined in our credit facilities, these ratios include standby letters of credit and performance/surety bonds and exclude accumulated OCI items related to non-cash pension adjustments, welfare benefits liability adjustments and accounting for cash flow hedges. |
The credit facilities contain certain non-financial covenants that, among other things, restrict liens and encumbrances, loans and investments, acquisitions, dividends and other restricted payments, asset dispositions, mergers and consolidations, and other matters customarily restricted in such agreements.
Default Provisions
Our credit facilities and other financial obligations include provisions that, if not complied with, could require early payment or similar actions. The most important default events include the following:
• | a maximum leverage ratio; |
• | insolvency events and/or nonpayment of scheduled principal or interest payments; |
• | acceleration of other financial obligations; and |
• | change of control provisions. |
We have no triggering events in our debt instruments that are tied to changes in our specified credit ratings or our stock price and have not entered into any transaction that requires us to issue equity based on credit ratings or other triggering events. We were in compliance with all existing debt provisions and covenants, both financial and non-financial, for all periods presented.
Note 9 - Equity
Our other comprehensive income (loss) amounts are aggregated within accumulated other comprehensive loss on our unaudited Condensed Consolidated Balance Sheets. The following table provides changes in the components of our accumulated other comprehensive loss balances, net of the related income tax effects.
2016 | 2015 | |||||||||||||||||||||||
In millions (1) | Cash flow hedges | Retirement benefit plans | Total | Cash flow hedges |