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Risk Management and Hedging Activities (MEC) (MidAmerican Energy Company and Subsidiaries [Member])
 6 Months Ended
Jun. 30, 2011
MidAmerican Energy Company and Subsidiaries [Member]
  
Notes to Consolidated Financial Statements [Line Items]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
(4)    Risk Management and Hedging Activities


MidAmerican Energy is exposed to the impact of market fluctuations in commodity prices and interest rates. MidAmerican Energy 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 territory. MidAmerican Energy also provides nonregulated retail electricity and natural gas services in competitive markets. MidAmerican Energy'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, wholesale electricity that is purchased and sold, and natural gas supply for regulated and nonregulated retail customers. 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. MidAmerican Energy does not engage in a material amount of proprietary trading activities.


MidAmerican Energy 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, MidAmerican Energy 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. MidAmerican Energy 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, MidAmerican Energy may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate its exposure to interest rate risk. MidAmerican Energy 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 MidAmerican Energy's accounting policies related to derivatives. Refer to Note 3 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 MidAmerican Energy'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):


 
Current
Assets -
Other
 
Other
Assets -
Other
 
Current
Liabilities -
Other
 
Other
Liabilities -
Other
 
Total
As of June 30, 2011
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1)(2):
 
 
 
 
 
 
 
 
 
Commodity assets
$
11


 
$
5


 
$
7


 
$
2


 
$
25


Commodity liabilities
(5
)
 
(2
)
 
(25
)
 
(11
)
 
(43
)
Total
6


 
3


 
(18
)
 
(9
)
 
(18
)
 
 


 
 


 
 


 
 


 
 


Designated as hedging contracts(1):
 


 
 


 
 


 
 


 
 


Commodity assets
4


 
3


 
1


 
2


 
10


Commodity liabilities
(2
)
 
(1
)
 
(15
)
 
(5
)
 
(23
)
Total
2


 
2


 
(14
)
 
(3
)
 
(13
)
 
 


 
 


 
 


 
 


 
 


Total derivatives
8


 
5


 
(32
)
 
(12
)
 
(31
)
Cash collateral receivable
—


 
—


 
5


 
1


 
6


Total derivatives - net basis
$
8


 
$
5


 
$
(27
)
 
$
(11
)
 
$
(25
)
As of December 31, 2010
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1)(2):
 
 
 
 
 
 
 
 
 
Commodity assets
$
19


 
$
5


 
$
12


 
$
2


 
$
38


Commodity liabilities
(2
)
 
(2
)
 
(47
)
 
(13
)
 
(64
)
Total
17


 
3


 
(35
)
 
(11
)
 
(26
)
 
 


 
 


 
 


 
 


 
 


Designated as hedging contracts(1):
 


 
 


 
 


 
 


 
 


Commodity assets
1


 
2


 
2


 
1


 
6


Commodity liabilities
(1
)
 
(1
)
 
(31
)
 
(6
)
 
(39
)
Total
—


 
1


 
(29
)
 
(5
)
 
(33
)
 
 


 
 


 
 


 
 


 
 


Total derivatives
17


 
4


 
(64
)
 
(16
)
 
(59
)
Cash collateral receivable
—


 
—


 
11


 
3


 
14


Total derivatives - net basis
$
17


 
$
4


 
$
(53
)
 
$
(13
)
 
$
(45
)


(1)
Derivative contracts within these categories subject to master netting arrangements are presented on a net basis on the Consolidated Balance Sheets.
 
 
(2)
The majority of MidAmerican Energy's commodity derivatives not designated as hedging contracts are included in regulated rates, and as of June 30, 2011 and December 31, 2010, a net regulatory asset of $20 million and $27 million, respectively, was recorded related to the net derivative liability of $18 million and $26 million, respectively.


Not Designated as Hedging Contracts


For MidAmerican Energy's regulated electric and regulated gas commodity derivatives not designated as hedging contracts, the settled amount is generally included in regulated 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 regulated rates are recorded as net regulatory assets or liabilities. The following table reconciles the beginning and ending balances of MidAmerican Energy's net regulatory assets (liabilities) and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory assets (liabilities), as well as amounts reclassified to earnings (in millions):


 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Beginning balance
$
3


 
$
(28
)
 
$
27


 
$
(14
)
Changes in fair value recognized in net regulatory assets (liabilities)
16


 
15


 
10


 
(2
)
Net (losses) gains reclassified to operating revenue
(1
)
 
7


 
(1
)
 
8


Net gains reclassified to cost of fuel, energy and capacity
2


 
4


 
5


 
10


Net losses reclassified to cost of gas sold
—


 
(1
)
 
(21
)
 
(5
)
Ending balance
$
20


 
$
(3
)
 
$
20


 
$
(3
)


For most of MidAmerican Energy's derivatives not designated as hedging contracts and for which changes in fair value are not recorded as a net regulatory asset or liability, unrealized gains and losses are recognized on the Consolidated Statements of Operations as nonregulated operating revenue for sales contracts and as nonregulated cost of sales for purchase contracts and electricity and natural gas swap contracts. MidAmerican Energy also had a weather derivative contract for which unrealized gains and losses were recognized in regulated cost of gas sold. The following table summarizes the pre-tax gains (losses) included on the Consolidated Statements of Operations associated with MidAmerican Energy's commodity derivative contracts not designated as hedging contracts and not recorded as a net regulatory asset or liability (in millions):


 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Nonregulated operating revenue
$
2


 
$
1


 
$
3


 
$
11


Regulated cost of gas sold
—


 
—


 
—


 
3


Nonregulated cost of sales
—


 
(3
)
 
—


 
(10
)
Total
$
2


 
$
(2
)
 
$
3


 
$
4




Designated as Hedging Contracts


MidAmerican Energy uses commodity derivative contracts accounted for as cash flow hedges to hedge electricity and natural gas commodity prices for delivery to nonregulated customers.


The following table reconciles the beginning and ending balances of MidAmerican Energy's accumulated other comprehensive loss (pre-tax) and summarizes pre-tax gains and losses on commodity derivative contracts designated and qualifying as cash flow hedges recognized in other comprehensive income ("OCI"), as well as amounts reclassified to earnings (in millions):


 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Beginning balance
$
31


 
$
90


 
$
34


 
$
63


Changes in fair value recognized in OCI
(15
)
 
(28
)
 
(14
)
 
10


Net losses reclassified to nonregulated cost of sales
(3
)
 
(13
)
 
(7
)
 
(24
)
Ending balance
$
13


 
$
49


 
$
13


 
$
49




Realized gains and losses on hedges and hedge ineffectiveness are recognized in income as nonregulated operating revenue or nonregulated cost of sales depending upon the nature of the item being hedged. For the three- and six-month periods ended June 30, 2011 and 2010, hedge ineffectiveness was insignificant. As of June 30, 2011, MidAmerican Energy had cash flow hedges with expiration dates extending through December 2014, and $11 million of pre-tax net unrealized losses are forecasted to be reclassified from accumulated other comprehensive loss into earnings over the next twelve months as contracts settle.


Derivative Contract Volumes


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


 
Unit of
 
June 30,
 
December 31,
 
Measure
 
2011
 
2010
 
 
 
 
 
 
Electricity purchases
Megawatt hours
 
5


 
2


Natural gas purchases
Decatherms
 
59


 
53


Fuel purchases
Gallons
 
2


 
4




Credit Risk


MidAmerican Energy 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.


MidAmerican Energy 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, MidAmerican Energy 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, MidAmerican Energy exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.


MidAmerican Energy also has potential indirect credit exposure to other market participants in the regional transmission organization ("RTO") markets where it actively participates, including the Midwest Independent Transmission System Operator, Inc. and the PJM Interconnection, L.L.C. In the event of a default by a RTO market participant on its market-related obligations, losses are allocated among all other market participants in proportion to each participant's share of overall market activity during the period of time the loss was incurred, diversifying MidAmerican Energy's exposure to credit losses from individual participants. Transactional activities of MidAmerican Energy and other participants in organized RTO markets are governed by credit policies specified in each respective RTO's governing tariff or related business practices. Credit policies of RTO's, which have been developed through extensive stakeholder participation, generally seek to minimize potential loss in the event of a market participant default without unnecessarily inhibiting access to the marketplace. MidAmerican Energy's share of historical losses from defaults by other RTO market participants has not been material.


Collateral and Contingent Features


In accordance with industry practice, certain wholesale derivative contracts contain provisions that require MidAmerican Energy to maintain specific credit ratings from one or more of the major credit rating agencies on its senior 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 MidAmerican Energy's creditworthiness. These rights can vary by contract and by counterparty. As of June 30, 2011, MidAmerican Energy's credit ratings from the three recognized credit rating agencies were investment grade.


The aggregate fair value of MidAmerican Energy's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $55 million and $80 million as of June 30, 2011 and December 31, 2010, respectively, for which MidAmerican Energy had not posted any collateral. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of June 30, 2011 and As of December 31, 2010, MidAmerican Energy would have been required to post $35 million and $65 million, respectively, of additional collateral. MidAmerican Energy's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors.