DERIVATIVE FINANCIAL INSTRUMENTS:

6 Months Ended

Jun. 30, 2012

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments

DERIVATIVE FINANCIAL INSTRUMENTS

Commodity Price Risk

Idaho Power is exposed to market risk relating to electricity, natural gas, and other fuel commodity prices, all of which are heavily influenced by supply and demand.  Market risk includes the fluctuation in the market price of associated derivative commodity instruments. Market risk may also be influenced by market participants’ nonperformance of their contractual obligations and commitments, which affects the supply of or demand for the commodity.  Idaho Power uses derivative instruments, such as physical and financial forward contracts, futures, and swaps for both electricity and fuel to manage the risks relating to these commodity price exposures.  The objective of Idaho Power’s energy purchase and sale activity is to meet the demand of retail electric customers, maintain appropriate physical reserves to ensure reliability, and make economic use of temporary surpluses that may develop. Idaho Power has an energy risk management policy and an associated energy risk management standard that are collectively intended to systematically identify, measure, evaluate, and manage both the physical and financial exposures to business and market-driven uncertainties within a defined and controlled framework, in collaboration with representatives of Idaho Power's customers. Idaho Power’s energy risk management committee administers the company’s energy risk management standard and monitors compliance. The energy risk management committee is comprised of certain Idaho Power officers, including the chief risk officer, and other members of management. Idaho Power's board of directors also has a substantial role in oversight of enterprise risk management.

As part of its resource procurement and management operations in the electric business, Idaho Power engages in an ongoing process of resource optimization, which involves the economic selection from available energy resources to serve load obligations and the use of these resources to capture available economic value. Idaho Power purchases and sells wholesale electric capacity and energy and fuel as part of the process of acquiring and balancing resources to serve its load obligations. This involves Idaho Power making continuing projections of resource needs and of loads, which are dependent on (among other things) estimates of usage and weather. On the basis of these projections, Idaho Power makes purchases and sales of electric capacity and energy and fuel to match expected resources to expected electric load requirements. Idaho Power's optimization process includes entering into hedging transactions to manage associated risks.

All commodity-related derivative instruments not meeting the normal purchases and normal sales exception to derivative accounting are recorded at fair value on the balance sheet.  Because of Idaho Power's PCA mechanisms, unrealized gains and losses associated with the changes in fair value of these derivative instruments are recorded as regulatory assets or liabilities. With the exception of forward contracts for the purchase of natural gas for use at Idaho Power’s natural gas generation facilities, Idaho Power’s physical forward contracts qualify for the normal purchases and normal sales exception.

All of Idaho Power's derivative instruments have been entered into for the purpose of economically hedging forecasted purchases and sales, though none of these instruments have been designated as cash flow hedges under derivative accounting guidance. Idaho Power offsets fair value amounts recognized on its balance sheet related to derivative instruments executed with the same counterparty under the same master netting agreement.

Derivative Instrument Summary

The table below presents the fair values and locations of derivative instruments not designated as hedging instruments recorded on the balance sheets at June 30, 2012 and December 31, 2011 (in thousands of dollars).

	Asset Derivatives			Liability Derivatives
	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
June 30, 2012
Current:
Financial swaps	Other current assets	$	3,262	Other current assets	$	1,946
Financial swaps	Other current liabilities	3,668		Other current liabilities	7,043
Forward contracts	Other current assets	31		Other current liabilities	1,898
Forward contracts	Other current liabilities	134
Long-term:
Financial swaps	Other assets	428		Other assets	312
Financial swaps	Other liabilities	7		Other liabilities	310
Forward contracts	Other assets	241
Total		$	7,771		$	11,509
December 31, 2011
Current:
Financial swaps	Other current assets	$	4,361	Other current assets	$	1,036
Financial swaps	Other current liabilities	1,526		Other current liabilities	4,755
Forward contracts	Other current assets	70		Other current liabilities	1,370
Long-term:
Financial swaps	Other assets	359		Other liabilities	108
Total		$	6,316		$	7,269

The table below presents the gains and losses on derivatives not designated as hedging instruments for the three and six months endedJune 30, 2012 and 2011 (in thousands of dollars).

		Gain/(Loss) on Derivatives Recognized
		in Income(1)
	Location of Gain/(Loss) on Derivatives Recognized in Income	Three months ended						Six months ended
		June 30						June 30
		2012			2011			2012			2011
Financial swaps	Off-system sales	$	5,471		$	(215	)	$	9,910		$	6,506
Financial swaps	Purchased power	(2,159		)	195			(3,152		)	28
Financial swaps	Fuel expense	(3,633		)	386			(3,717		)	386
Financial swaps	Other operations and maintenance	24			227			(21		)	227

⁽¹⁾  Excludes changes in fair value of derivatives, which are recorded on the balance sheet as regulatory assets or regulatory liabilities.

Settlement gains and losses on electricity swap contracts are recorded on the income statement in off-system sales or purchased power depending on the forecasted position being economically hedged by the derivative contract.  Settlement gains and losses on both financial and physical contracts for natural gas are reflected in fuel expense.  Settlement gains and losses on diesel derivatives are recorded in other operations and maintenance expense.  See Note 13 for additional information concerning the determination of fair value for Idaho Power’s assets and liabilities from price risk management activities.

Idaho Power had volumes of derivative commodity forward contracts and swaps outstanding at June 30, 2012 and 2011 set forth in the table below.

		June 30,
Commodity	Units	2012	2011
Electricity purchases	MWh	421,550	529,600
Electricity sales	MWh	1,358,245	764,875
Natural gas purchases	MMBtu	20,295,429	1,908,639
Natural gas sales	MMBtu	2,238,804	705,622
Diesel purchases	Gallons	537,374	449,248

Credit Risk

Credit risk relates to the potential losses that Idaho Power would incur as a result of non-performance by counterparties of their contractual obligations to deliver energy or make financial settlements. Idaho Power often extends credit to counterparties and customers and is exposed to the risk that it may not be able to collect amounts owed to it. Changes in market prices may dramatically alter the size of credit risk with counterparties, even when conservative credit limits are established. Should a counterparty fail to perform, Idaho Power may be required to honor the underlying commitment or to replace existing contracts with contracts at then-current market prices. Idaho Power manages these risks by establishing appropriate credit and concentration limits on transactions with counterparties and requiring contractual guarantees, cash deposits, or letters of credit from counterparties or their affiliates, as deemed necessary. Idaho Power actively monitors credit risk exposure through reviews of counterparty credit quality, corporate-wide counterparty credit exposure, and corporate-wide counterparty concentration levels.   Further, Idaho Power’s physical power contracts are under Western Systems Power Pool agreements, physical gas contracts are under North American Energy Standards Board contracts, and financial transactions are under International Swaps and Derivatives Association, Inc. contracts. These contracts contain adequate assurance clauses requiring collateralization if a counterparty has debt that is downgraded below investment grade by at least one rating agency.  The standardized agreements typically allow for the netting or offsetting of positive and negative exposures associated with a single counterparty or affiliated group.

Idaho Power maintains margin agreements with certain counterparties and margin calls are routinely made and/or received. Margin calls are triggered when exposures exceed predetermined contractual limits or when there are changes in a counterparty’s creditworthiness. Price movements in electricity and fuel can generate exposure levels in excess of these contractual limits. Negotiating for collateral in the form of cash, letters of credit, or performance guarantees is common industry practice.

At June 30, 2012, Idaho Power did not have material credit risk exposure from financial instruments, including derivatives.   

Credit-Contingent Features

Certain of Idaho Power's derivative instruments contain provisions that require Idaho Power's unsecured debt to maintain an investment grade credit rating from Moody's Investors Service and Standard & Poor's Ratings Services.  If Idaho Power's unsecured debt were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions.  The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position at June 30, 2012, was $11.7 million.  Idaho Power posted $1.0 million of cash collateral related to this amount.  If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2012, Idaho Power would have been required to post $7.5 million of additional cash collateral to its counterparties.