Deferred Energy Accounting
Under deferred energy accounting, to the extent actual fuel and purchased power costs exceed fuel and purchased power costs
recoverable through current rates, the excess is not recorded as a current expense on the statement of operations but rather is deferred
and recorded as an asset on the balance sheet. Conversely, a liability is recorded to the extent fuel and purchased power costs
recoverable through current rates exceed actual fuel and purchased power costs. These excess amounts are reflected in adjustments to
rates and recorded as revenue or expense in future time periods, subject to PUCN approval. Nevada law provides that the PUCN may
not allow the recovery of any costs for purchased fuel or purchased power “that were the result of any practice or transaction that was
undertaken, managed or performed imprudently by the electric utility.” Nevada law specifies that fuel and purchased power costs
include all costs incurred to purchase fuel, to purchase capacity, and to purchase energy. Both Utilities are entitled under statute to
utilize deferred energy accounting for their electric operations and both Utilities accumulate amounts in their deferral of energy costs
accounts. The Utilities also record, and are eligible under the statute to recover, a carrying charge on such deferred balances,
recognized as interest income/expense on regulatory items in the current period.
The Utilities are exposed to commodity price risk primarily related to changes in the market price of electricity as well as
changes in fuel costs incurred to generate electricity. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for a
discussion of the Utilities’ purchased power procurement strategies, and commodity price risk and commodity risk management
program. Currently, commodity price increases are recoverable through the deferred energy accounting mechanism, with no
anticipated effect on earnings. However, the Utilities are subject to regulatory risk related to commodity price changes due to the fact
that the PUCN may disallow recovery for any of these costs that it considers imprudently incurred.
See Note 3, Regulatory Actions of the Notes to Financial Statements, for additional discussion of the regulatory process to
recover these deferred costs.
Accounting for 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 requires that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value, unless they meet the normal purchase/normal sale scope
exception. The accounting for derivatives depends on the intended use of the derivatives and the resulting designation.
Fuel and Purchased Power Contracts
In order to manage loads, resources and energy price risk, the Utilities may enter into forward contracts to purchase or sell a
specified amount of energy at a specified time or during a specified period in the future. In addition, the Utilities’ use over-thecounter options with financial institutions and other energy companies to manage price risk which are typically considered derivatives
under the Derivatives and Hedging Topic of the FASC and are marked-to-market in the statement of financial position unless the
contract qualifies for the normal purchases or sales exemption per the accounting guidance for derivative instruments.
The PUCN and the CPUC have authorized the Utilities to defer the recognition of mark to market gains and losses on energy
commodity transactions, that would otherwise be recorded to the statement of operations and/or comprehensive income, until the
period of settlement by recording a risk management regulatory asset or liability. Upon settlement of these transactions, actual gains
and losses are recognized as fuel and purchased power costs.
Interest Rate Swap Contracts
NVE, NPC, and SPPC are subject to risk of fluctuating interest rates in the normal course of business. As such, management
may enter into interest rate swaps to manage fixed interest rate exposure with variable interest rate instruments in order to lower
overall borrowing costs. If the conditions required by the Regulated Operations Topic of the FASC are met, NVE, NPC and SPPC are
permitted to defer the change in fair value of the interest rate swap as Risk Management Regulatory Asset/Liability.
Fair Value Measurements and Disclosures
Effective January 1, 2008, NVE and the Utilities’ adopted the requirements of the Fair Value Measurements and Disclosure
Topic of the FASC, which defines fair value, establishes a framework for measuring fair value and enhances disclosures about assets
and liabilities recorded at fair value.
Fair Value Measurements and Disclosure Topic of the FASC establishes a three-level hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are
defined as follows:
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