
(7)	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 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, which may include 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 8 for additional information on derivative contracts.

The following table, which reflects master netting arrangements and excludes contracts that have been designated as normal under 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 Balance Sheets (in millions):



	Current Assets - Other			Other Assets - Other			Current Liabilities - Other			Other Liabilities - Other			Total
As of June 30, 2014:
Not designated as hedging contracts⁽¹⁾:
Commodity assets	$	—		$	1		$	37		$	1		$	39
Commodity liabilities	(1		)	(1		)	(79		)	(5		)	(86		)
Total	(1		)	—			(42		)	(4		)	(47		)

Designated as hedging contracts:
Commodity assets	21			9			2			1			33
Commodity liabilities	(1		)	(3		)	(1		)	(1		)	(6		)
Total	20			6			1			—			27

Total derivatives	19			6			(41		)	(4		)	(20		)
Cash collateral receivable	(1		)	—			36			3			38
Total derivatives - net basis	$	18		$	6		$	(5	)	$	(1	)	$	18



	Current Assets - Other			Other Assets - Other			Current Liabilities - Other			Other Liabilities - Other			Total
As of December 31, 2013:
Not designated as hedging contracts⁽¹⁾:
Commodity assets	$	3		$	3		$	16		$	1		$	23
Commodity liabilities	(1		)	(1		)	(32		)	(6		)	(40		)
Total	2			2			(16		)	(5		)	(17		)

Designated as hedging contracts:
Commodity assets	1			—			1			—			2
Commodity liabilities	(1		)	—			(5		)	(6		)	(12		)
Total	—			—			(4		)	(6		)	(10		)

Total derivatives	2			2			(20		)	(11		)	(27		)
Cash collateral receivable	(2		)	—			1			1			—
Total derivatives - net basis	$	—		$	2		$	(19	)	$	(10	)	$	(27	)


(1)	MidAmerican Energy's commodity derivatives not designated as hedging contracts are generally included in regulated rates, and as of June 30, 2014 and December 31, 2013, a net regulatory asset of $48 million and $10 million, respectively, was recorded related to the net derivative liability of $47 million and $17 million, respectively.

Not Designated as Hedging Contracts

The following table reconciles the beginning and ending balances of MidAmerican Energy'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						Six-Month Periods
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013

Beginning balance	$	32		$	24		$	10		$	45
Changes in fair value recognized in net regulatory assets	20			1			62			—
Net (losses) gains reclassified to operating revenue	(5		)	—			(24		)	3
Net gains (losses) reclassified to cost of gas sold	1			(2		)	—			(25		)
Ending balance	$	48		$	23		$	48		$	23

The following table summarizes the pre-tax gains (losses) included on the 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,
	2014		2013			2014			2013

Nonregulated operating revenue	$	1	$	3		$	(8	)	$	1
Nonregulated cost of sales	—		(3		)	21			—
Total	$	1	$	—		$	13		$	1

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 (income) 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,
	2014			2013			2014			2013

Beginning balance	$	(13	)	$	2		$	11		$	32
Changes in fair value recognized in OCI	(21		)	25			(79		)	—
Net gains (losses) reclassified to nonregulated cost of sales	6			(1		)	40			(6		)
Ending balance	$	(28	)	$	26		$	(28	)	$	26

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, 2014 and 2013, hedge ineffectiveness was insignificant. As of June 30, 2014, MidAmerican Energy had cash flow hedges with expiration dates extending through December 2017, and $21 million of pre-tax net unrealized gains are forecasted to be reclassified from AOCI 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	2014	2013

Electricity purchases	Megawatt hours	7	5
Natural gas purchases	Decatherms	16	21

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 Midcontinent Independent System Operator, Inc. and the PJM Interconnection, L.L.C.

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain credit support provisions that in part base MidAmerican Energy's collateral requirements on its credit ratings for senior unsecured debt as reported by one or more of the three recognized credit rating agencies. 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," or in some cases terminate the contract, 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, 2014, 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 $26 million and $35 million as of June 30, 2014 and December 31, 2013, respectively, for which MidAmerican Energy had posted collateral of $- million. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of June 30, 2014 and December 31, 2013, MidAmerican Energy would have been required to post $7 million and $24 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.