Risk Management and Hedging Activities

9 Months Ended

Sep. 30, 2011

Risk Management and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

(5)Risk Management and Hedging Activities

PacifiCorp is exposed to the impact of market fluctuations in commodity prices and interest rates. PacifiCorp is principally exposed to electricity, natural gas, coal and fuel oil commodity price risk as it has an obligation to serve retail customer load in its regulated service territories. PacifiCorp's load and generating facilities represent substantial underlying commodity positions. Exposures to commodity prices consist mainly of variations in the price of fuel required to generate electricity and wholesale electricity that is purchased and sold. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists on variable-rate debt and future debt issuances. PacifiCorp does not engage in a material amount of proprietary trading activities.

PacifiCorp has established a risk management process that is designed to identify, assess, monitor, report, manage and mitigate each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, PacifiCorp uses commodity derivative contracts, including forwards, futures, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. PacifiCorp manages its interest rate risk by limiting its exposure to variable interest rates primarily through the issuance of fixed-rate long-term debt and by monitoring market changes in interest rates. Additionally, PacifiCorp may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate PacifiCorp's exposure to interest rate risk. No interest rate derivatives were in place during the periods presented. PacifiCorp does not hedge all of its commodity price and interest rate risks, thereby exposing the unhedged portion to changes in market prices.

There have been no significant changes in PacifiCorp's accounting policies related to derivatives. Refer to Note 4 for additional information on derivative contracts.

The following table, which excludes contracts that qualify for the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of PacifiCorp's derivative contracts, on a gross basis, and reconciles those amounts to the amounts presented on a net basis on the Consolidated Balance Sheets (in millions):

	Derivative Assets						Derivative Liabilities
	Current			Noncurrent			Current			Noncurrent			Total
As of September 30, 2011
Not designated as hedging contracts(1)(2):
Commodity assets	$	78		$	9		$	61		$	13		$	161
Commodity liabilities	(43		)	(3		)	(248		)	(290		)	(584		)
Total	35			6			(187		)	(277		)	(423		)
Total derivatives	35			6			(187		)	(277		)	(423		)
Cash collateral (payable) receivable	(3		)	—			75			11			83
Total derivatives - net basis	$	32		$	6		$	(112	)	$	(266	)	$	(340	)
As of December 31, 2010
Not designated as hedging contracts(1)(2):
Commodity assets	$	185		$	13		$	34		$	36		$	268
Commodity liabilities	(62		)	(4		)	(213		)	(476		)	(755		)
Total	123			9			(179		)	(440		)	(487		)
Total derivatives	123			9			(179		)	(440		)	(487		)
Cash collateral (payable) receivable	(9		)	—			95			41			127
Total derivatives - net basis	$	114		$	9		$	(84	)	$	(399	)	$	(360	)

(1) Derivative contracts within these categories subject to master netting arrangements are presented on a net basis on the Consolidated Balance Sheets.

(2) PacifiCorp's commodity derivatives are generally included in rates and as of September 30, 2011 and December 31, 2010, a net regulatory asset of $423 million and $487 million, respectively, was recorded related to the net derivative liability of $423 million and $487 million, respectively.

For PacifiCorp's commodity derivatives, the settled amount is generally included in rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of inclusion in rates are recorded as net regulatory assets. The following table reconciles the beginning and ending balances of PacifiCorp's net regulatory assets and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory assets, as well as amounts reclassified to earnings (in millions):

	Three-Month Periods						Nine-Month Periods
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010
Beginning balance	$	438		$	482		$	487		$	367
Changes in fair value recognized in net regulatory assets	42			10			(24		)	83
Net (losses) gains reclassified to operating revenue	(3		)	11			7			52
Net losses reclassified to energy costs	(54		)	(40		)	(47		)	(39		)
Ending balance	$	423		$	463		$	423		$	463

For PacifiCorp's derivatives for which changes in fair value are not recorded as a net regulatory asset, unrealized gains and losses are recognized on the Consolidated Statements of Operations as operating revenue for sales contracts and energy costs and operations and maintenance for purchase contracts and electricity, natural gas and fuel oil swap contracts. During the three- and nine-month periods ended September 30, 2011 and 2010, these amounts were insignificant.

Derivative Contract Volumes

The following table summarizes the net notional amounts of outstanding derivative contracts with fixed price terms that comprise the mark-to-market values as of (in millions):

	Unit of Measure	September 30, 2011		December 31, 2010
Commodity contracts:
Electricity sales	Megawatt hours	(8	)	(13	)
Natural gas purchases	Decatherms	109		159
Fuel oil purchases	Gallons	4		16

Credit Risk

PacifiCorp extends unsecured credit to other utilities, energy marketing companies, financial institutions and other market participants in conjunction with its wholesale energy supply and marketing activities. Credit risk relates to the risk of loss that might occur as a result of nonperformance by counterparties on their contractual obligations to make or take delivery of electricity, natural gas or other commodities and to make financial settlements of these obligations. Credit risk may be concentrated to the extent that one or more groups of counterparties have similar economic, industry or other characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in market or other conditions. In addition, credit risk includes not only the risk that a counterparty may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances involving other market participants that have a direct or indirect relationship with the counterparty.

PacifiCorp analyzes the financial condition of each significant wholesale counterparty before entering into any transactions, establishes limits on the amount of unsecured credit to be extended to each counterparty and evaluates the appropriateness of unsecured credit limits on an ongoing basis. To mitigate exposure to the financial risks of wholesale counterparties, PacifiCorp enters into netting and collateral arrangements that may include margining and cross-product netting agreements and obtains third‑party guarantees, letters of credit and cash deposits. Counterparties may be assessed fees for delayed payments. If required, PacifiCorp exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain provisions that require PacifiCorp to maintain specific credit ratings from one or more of the major credit rating agencies on its unsecured debt. These derivative contracts may either specifically provide bilateral rights to demand cash or other security if credit exposures on a net basis exceed specified rating-dependent threshold levels ("credit-risk-related contingent features") or provide the right for counterparties to demand "adequate assurance" in the event of a material adverse change in PacifiCorp's creditworthiness. These rights can vary by contract and by counterparty. As of September 30, 2011, PacifiCorp's credit ratings from the three recognized credit rating agencies were investment grade.

The aggregate fair value of PacifiCorp's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $398 million and $448 million as of September 30, 2011 and December 31, 2010, respectively, for which PacifiCorp had posted collateral of $86 million and $136 million, respectively. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of September 30, 2011 and December 31, 2010, PacifiCorp would have been required to post $183 million and $129 million, respectively, of additional collateral. PacifiCorp's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation or other factors.