Disclosures about Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2011

Disclosures about Derivative Instruments and Hedging Activities

Disclosures about Derivative Instruments and Hedging Activities

(C)

Disclosures about Derivative Instruments and Hedging Activities.    Our risk management committee provides general oversight over all risk management activities, including but not limited to, commodity trading and investment portfolio management. We use commodity trading derivatives, which are designated as hedging instruments under authoritative guidance for accounting for derivatives and hedging, to manage our exposure to fluctuations in the market price of natural gas. Consistent with our rate-making treatment for energy costs which are flowed-through to our members, unrealized gains or losses on the natural gas swaps are reflected as an unbilled receivable. Within our nuclear decommissioning trust fund, derivatives including options, swaps and credit default swaps which are non-speculative, are utilized to mitigate volatility associated with duration, default, yield curve and the interest rate risks of the portfolio. We do not hold or enter into derivative transactions for trading or speculative purposes. Consistent with our rate-making treatment, unrealized gains or losses from the decommissioning trust fund are recorded as an increase or decrease to the regulatory asset or liability.

• Under the natural gas swap arrangements, we pay the counterparty a fixed price for specified natural gas quantities and receive a payment for such quantities based on a market price index. These payment obligations are netted, such that if the market price index is lower than the fixed price, we will make a net payment, and if the market price index is higher than the fixed price, we will receive a net payment.
  

  At June 30, 2011, the estimated fair value of our natural gas contracts was an unrealized loss of approximately $2,152,000. See Note B for further discussion on fair value measurements of financial instruments.
  

  We are exposed to credit risk as a result of entering into these hedging arrangements. Credit risk is the potential loss resulting from a counterparty's nonperformance under an agreement. We manage credit risk with policies and procedures for, among other things, counterparty analysis, exposure measurement, and exposure monitoring and mitigation in our natural gas hedging portfolio.
  

  It is possible that volatility in commodity prices could cause us to have credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations, we could suffer a financial loss. However, as of June 30, 2011, all of the counterparties with transaction amounts outstanding in our hedging portfolio are rated investment grade by the major rating agencies or have provided a guaranty from one of their affiliates that is rated investment grade.
  

  We have entered into International Swaps and Derivatives Association agreements with our natural gas hedge counterparties that mitigate credit exposure by creating contractual rights relating to creditworthiness, collateral, termination and netting (which allows us to use the net value of affected transactions with the same counterparty in the event of default by the counterparty or early termination of the agreement).
  

  Additionally, we have implemented procedures to monitor the creditworthiness of our counterparties and to evaluate nonperformance in valuing counterparty positions. We have contracted with a third party to assist in monitoring counterparties' credit standing, including those experiencing financial problems, significant swings in credit default swap rates, credit rating changes by external rating agencies, or changes in ownership. Net liability positions are generally not adjusted as we use derivative transactions as hedges and have the ability and intent to perform under each of our contracts. In the instance of net asset positions, we consider general market conditions and the observable financial health and outlook of specific counterparties, forward looking data such as credit default swaps, when available, and historical default probabilities from credit rating agencies in evaluating the potential impact of nonperformance risk to derivative positions.
  

  The contractual agreements contain provisions that could require us or the counterparty to post collateral or credit support. The amount of collateral or credit support that could be required is calculated as the difference between the aggregate fair value of the hedges and pre-established credit thresholds. The credit thresholds are contingent upon each party's credit standing and credit ratings from the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. As of June 30, 2011, neither we nor any counterparties were required to post credit support or collateral under any of these agreements. If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2011 due to our credit rating being downgraded below investment grade, we could have been required to post collateral or credit support totaling up to $2,152,000 with our counterparties.
  

  The following table reflects the volume activity of our natural gas derivatives as of June 30, 2011 that is expected to settle or mature each year:

Year	Natural Gas Swaps (MMBTUs) (in millions)
2011	3.30
2012	1.88
2013	0.19
Total	5.37

• The table below reflects the fair value of derivative instruments and their effect on our unaudited condensed balance sheet for the period ended June 30, 2011.

		Balance Sheet Location	Fair Value
				(dollars in thousands)
Designated as hedges under authoritative guidance related to derivatives and hedging activities:
Assets
	Natural Gas Swaps	Receivables	$	2,293
	Natural Gas Swaps	Receivables		(141	)
Total assets designated as hedges under authoritative guidance related to derivatives and hedging activities			$	2,152
Liabilities
	Natural Gas Swaps	Other current liabilities	$	2,293
	Natural Gas Swaps	Other current liabilities		(141	)
Total liabilities designated as hedges under authoritative guidance related to derivatives and hedging activities			$	2,152
Not designated as hedges under authoritative guidance related to derivatives and hedging activities:
Assets
	Nuclear decommissioning trust	Decommissioning fund	$	657
	Nuclear decommissioning trust	Decommissioning fund		(1,162	)
	Nuclear decommissioning trust	Deferred asset associated with retirement obligations		381
	Nuclear decommissioning trust	Deferred asset associated with retirement obligations		(452	)
Total not designated as hedges under authoritative guidance related to derivatives and hedging activities			$	(576	)

The following table presents the gains and (losses) on derivative instruments recognized in margins for the three and six months ended June 30, 2011.

Effect of Derivative Instruments on the Condensed Statement of Revenues and Expenses
		Statement of Revenues and Expenses Location	Three months ended			Six months ended
				(dollars in thousands)
Designated as hedges under authoritative guidance related to derivatives and hedging activities
	Natural Gas Swaps	Purchase power	$	74		$	96
	Natural Gas Swaps	Purchase power		(972	)		(1,255	)
Not designated as hedges under authoritative guidance related to derivatives and hedging activities
	Nuclear decommissioning trust	Investment income		830			1,070
	Nuclear decommissioning trust	Investment income		(322	)		(572	)
Total losses on derivatives			$	(390	)	$	(661	)