DERIVATIVES AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2011

DERIVATIVES AND HEDGING ACTIVITIES [Abstract]

DERIVATIVES AND HEDGING ACTIVITIES

NOTE 6.                       DERIVATIVES AND HEDGING ACTIVITIES

NVE, NPC and SPPC apply the accounting guidance as required by the Derivatives and Hedging Topic of the FASC.  The accounting guidance for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value, and recognize changes in the fair value of the derivative instruments in earnings in the period of change, unless the derivative meets certain defined conditions and qualifies as an effective hedge.  The accounting guidance for derivative instruments also provides a scope exception for commodity contracts that meet the normal purchase and sales criteria specified in the standard.  The normal purchases and normal sales exception requires, among other things, physical delivery in quantities expected to be used or sold over a reasonable period in the normal course of business.  Contracts that are designated as normal purchase and normal sales are accounted for under deferred energy accounting and not recorded on the consolidated balance sheets of NVE and the Utilities at fair value.

Commodity Risk

The energy supply function encompasses the reliable and efficient operation of the Utilities' generation, the procurement of all fuels and power and resource optimization (i.e., physical and economic dispatch) and is exposed to risks relating to, but not limited to, changes in commodity prices.  NVE and the Utilities' objective in using derivative instruments is to reduce exposure to energy price risk.  Energy price risks result from activities that include the generation, procurement and sale of power and the procurement and sale of natural gas.  Derivative instruments used to manage energy price risk from time to time may include: forward contracts, which involve physical delivery of an energy commodity; over-the-counter options with financial institutions and other energy companies, which mitigate price risk by providing the right, but not the requirement, to buy or sell energy related commodities at a fixed price; and swaps, which require the Utilities to receive or make payments based on the difference between a specified price and the actual price of the underlying commodity. These contracts assist the Utilities to reduce the risks associated with volatile electricity and natural gas markets.

Interest Rate Risk

In August 2009, NPC entered into two interest rate swap agreements which terminated in June 2011, for an aggregated notional amount of $350 million associated with its $350 million 8.25% General and Refunding Mortgage Notes, Series A, due June 1, 2011.  Interest rate hedges manage existing and future fixed rate interest rate exposure with a variable interest rate in order to lower overall borrowing costs.  The interest rate swaps terminated in the second quarter of 2011 in conjunction with the payment at maturity of NPC's $350 million 8.25% General and Refunding Mortgage Notes, Series A, due 2011, see Note 4, Long-Term Debt.

Determination of Fair Value

 As required by the Fair Value Measurements and Disclosure Topic of the FASC, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Risk management assets and liabilities in the recurring fair value measures table below include over-the-counter forwards, swaps, options and interest rate swaps.  Total risk management assets below do not include option premiums on commodity contracts which are not considered a derivative asset.  Option premiums upon settlement are recorded in fuel and purchased power expense and are subsequently requested for recovery through the deferred energy mechanism.  Option premium amounts included in risk management assets and liabilities for NVE, NPC and SPPC were as follows (dollars in millions):

Option Premiums
	June 30, 2011								December 31, 2010
	NVE			NPC			SPPC		NVE			NPC			SPPC
Current Assets	$	0.4		$	0.4		$	-	$	1.9		$	1.4		$	0.5
Current Liabilities	$	(0.4	)	$	(0.4	)	$	-	$	(0.4	)	$	(0.4	)	$	-

Forwards and swaps are valued using a market approach that uses quoted forward commodity prices for similar assets and liabilities, which incorporates a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical expedient for valuing its assets and liabilities measured and reported at fair value.  Options are valued based on an income approach using an option pricing model that includes various inputs; such as forward commodity prices, interest rate yield curves and option volatility rates.  The determination of the fair value for derivative instruments not only includes counterparty risk, but also the impact of NVE and the Utilities' nonperformance risk on their liabilities, which as of June 30, 2011, had an immaterial impact to the fair value of their derivative instruments.

The following table shows the fair value of the open derivative positions recorded on the consolidated balance sheets of NVE, NPC and SPPC and the related regulatory assets and/or liabilities that did not meet the normal purchase and normal sales exception criteria as required by the Derivatives and Hedging Topic of the FASC.  Due to regulatory accounting treatment under

which the utilities operate, regulatory assets and liabilities are established to the extent that derivative gains and losses are recoverable or payable through future rates, once realized.  This accounting treatment is intended to defer the recognition of mark-to-market gains and losses on derivative transactions until the period of settlement (dollars in millions):

	June 30, 2011									December 31, 2010
Derivative Contracts	Level 2									Level 2
	NVE			NPC			SPPC			NVE			NPC			SPPC
Risk management assets - current (1)	$	-		$	-		$	-		$	2.1		$	2.1		$	-
Risk management liabilities- current (1)		5.0			4.1			0.9			32.9			22.4			10.5
Risk management regulatory assets/liabilities - net	$	(5.0	)	$	(4.1	)	$	(0.9	)	$	(30.8	)	$	(20.3	)	$	(10.5	)

(1) When amount is negative it represents a risk management regulatory asset, when positive it represents a risk management regulatory liability.  For the three months ended June 30, 2011, NVE, NPC and SPPC would have recorded cumulative gains of $3.2 million, $2.6 and $0.6 million, respectively, and for the six months ended June 30, 2011 NVE, NPC and SPPC would have recorded gains of $25.8 million, $16.2 and $9.6 million, respectively.  However, as permitted by the Regulated Operations Topic of the FASB Accounting Standards Codification, NVE and the Utilities deferred these gains and losses, which are included in the risk management regulatory asset amounts above.

As a result of the nature of operations and the use of mark-to-market accounting for certain derivatives that do not meet the normal purchase and normal sales exception criteria, mark-to-market fair values will fluctuate.  The Utilities cannot predict these fluctuations, but the primary factors that cause changes in the fair values are the number and size of the Utilities' open derivative positions with their counterparties and the changes in market prices.  Risk management liabilities decreased as of June 30, 2011 as compared to December 31, 2010, due to settlements of derivative contracts and the suspension of the Utilities' hedging program as of October 2009.

The following table shows the commodity volume for our open derivative contracts related to natural gas contracts (amounts in millions):

June 30, 2011

December 31, 2010

Commodity Volume (MMBTU)

Commodity Volume (MMBTU)

NVE

NPC

SPPC

NVE

NPC

SPPC

Commodity volume liabilities- current (1)

3.5

3.0

0.5

18.1

12.9

5.2

(1) The change in commodity volumes at June 30, 2011, as compared to December 31, 2010, is primarily due to the suspension of the Utilities' hedging program as of October 2009.  As such, the Utilities' exposure to mark-to-market hedging transactions has declined.