Mr. Sokol’s employment agreement gives him the right during the term of his employment to serve as a member of the Board of Directors and to nominate two additional directors.
Pursuant to a shareholders agreement, as amended on December 7, 2005, Mr. Scott or any of the Scott Family Interests and Messrs. Sokol and Abel are able to require Berkshire Hathaway to exchange any or all of their respective shares of our common stock for shares of Berkshire Hathaway common stock. The number of shares of Berkshire Hathaway stock to be exchanged is based on the fair market value of our common stock divided by the closing price of the Berkshire Hathaway stock on the day prior to the date of exchange.
Certain Relationships and Related Transactions, and Director Independence.
The Berkshire Hathaway Inc. Code of Business Conduct and Ethics and the MEHC Code of Business Conduct, or the Codes, which apply to all of our directors, officers and employees and those of our subsidiaries, generally govern the review, approval or ratification of any related-person transaction. A related-person transaction is one in which we or any of our subsidiaries participate and in which one or more of our directors, executive officers, holders of more than five percent of our voting securities or any of such persons’ immediate family members have a direct or indirect material interest.
Under the Codes, all of our directors and executive officers (including those of our subsidiaries) must disclose to our legal department any material transaction or relationship that reasonably could be expected to give rise to a conflict with our interests. No action may be taken with respect to such transaction or relationship until approved by the legal department. For our chief executive officer and chief financial officer, prior approval for any such transaction or relationship must be given by Berkshire Hathaway’s audit committee. In addition, prior legal department approval must be obtained before a director or executive officer can accept employment, offices or board positions in other for-profit businesses, or engage in his or her own business that raises a potential conflict or appearance of conflict with our interests. Transactions with Berkshire Hathaway require the approval of our Board of Directors.
At June 30, 2007 and December 31, 2006, Berkshire Hathaway and its affiliates held 11% mandatorily redeemable preferred securities due from certain of our wholly owned subsidiary trusts
Table of Contentswith liquidation preferences of $988 million and $1.06 billion, respectively. Principal repayments on these securities totaled $67 million during the first six months of 2007. Interest expense on these securities totaled $29 million and $58 million during the three- and six-month periods, respectively, ended June 30, 2007 and $58 million during the six-month period ended June 30, 2007. Principal repayments and interest expense on these securities totaled $234 million and $134 million, respectively, during 2006.
On February 9, 2006, following the effective date of the repeal of PUHCA 1935, Berkshire Hathaway converted its 41,263,395 shares of our no par zero-coupon convertible preferred stock into an equal number of shares of our common stock.
On March 1, 2006, we entered into the Berkshire Equity Commitment with Berkshire Hathaway pursuant to which Berkshire Hathaway has agreed to purchase up to $3.5 billion of our common equity upon any requests authorized from time to time by our Board of Directors. The proceeds of any such equity contribution shall only be used for the purpose of (a) paying when due MEHC’s debt obligations and (b) funding the general corporate purposes and capital requirements of our regulated subsidiaries. Berkshire Hathaway will have up to 180 days to fund any such request. The Berkshire Equity Commitment will expire on February 28, 2011.
On March 6, 2006, we issued 450,000 shares of our common stock, no par value, to Mr. Sokol upon the exercise by Mr. Sokol of 450,000 of his outstanding common stock options. The common stock options were exercisable at a price of $29.01 per share and the aggregate exercise price paid by Mr. Sokol was $13 million. This issuance was pursuant to a private placement and was exempt from the registration requirements of the Securities Act of 1933, as amended. Additionally, on March 6, 2006, we repurchased 344,274 shares of our common stock from Mr. Sokol for a purchase price of $50 million.
On March 21, 2006, Berkshire Hathaway and certain other of our existing shareholders and related companies invested $5.11 billion, in the aggregate, in 35,237,931 shares of our common stock in order to provide equity funding for the PacifiCorp acquisition. The per-share value assigned to the shares of common stock issued, which were effected pursuant to a private placement and were exempt from the registration requirements of the Securities Act of 1933, as amended, was based on an assumed fair market value as agreed to by our shareholders.
On March 28, 2006, we repurchased 11,724,138 shares of our common stock from Berkshire Hathaway for an aggregate purchase price of $1.7 billion.
On November 15, 2006, we issued 200,000 shares of our common stock, no par value, to Mr. Sokol upon the exercise by Mr. Sokol of 200,000 of his outstanding common stock options. The common stock options were exercisable at a price of $34.69 per share and the aggregate exercise price paid by Mr. Sokol was $7 million. We also issued, on November 15, 2006, 125,000 shares of our common stock, no par value, to Mr. Abel upon the exercise by Mr. Abel of 125,000 of his outstanding common stock options. The common stock options were exercisable at a weighted-average price of $17.68 per share and the aggregate exercise price paid by Mr. Abel was $2 million. These issuances were pursuant to private placements and were exempt from the registration requirements of the Securities Act of 1933, as amended.
Director Independence
Based on the standards of the New York Stock Exchange, on which the common stock of our majority owner, Berkshire Hathaway, is listed, our Board of Directors has determined that none of our directors are considered independent because of their employment by Berkshire Hathaway or us or their ownership of our common stock.
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Table of ContentsDESCRIPTION OF THE BONDS
The initial bonds were, and the exchange bonds will be, issued pursuant to a supplemental indenture to the indenture, dated as of October 4, 2002, as amended as of August 28, 2007, between MidAmerican Energy Holdings Company and The Bank of New York Trust Company, N.A., as trustee. The term ‘‘indenture’’ when used in this prospectus will refer to the indenture as amended by all supplemental indentures executed and delivered on or prior to the date on which the bonds are issued and sold. The terms of the bonds include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended.
On October 4, 2002, we issued $200,000,000 of our 4.625% Senior Notes due 2007 (hereafter referred to as the series A notes) and $500,000,000 of our 5.875% Senior Notes due 2012 (hereafter referred to as the series B notes); on May 16, 2003, we issued $450,000,000 of our 3.50% Senior Notes due 2008 (hereafter referred to as the series C notes); on February 12, 2004, we issued $250,000,000 of our 5.00% Senior Notes due 2014 (hereinafter referred to as the series D notes); on March 24, 2006, we issued $1,700,000,000 of our 6.125% Senior Bonds due 2036 (hereafter referred to as the series E bonds); and on May 11, 2007, we issued $550,000,000 of our 5.95% Senior Bonds due 2037 (hereafter referred to as the series F bonds), in each case pursuant to the indenture. Unless otherwise indicated, references hereafter to the securities in this prospectus include the series A notes, the series B notes, the series C notes, the seri es D notes, the series E bonds, the series F bonds and the bonds (and any other series of notes, bonds or other securities hereafter issued under a supplemental indenture or otherwise pursuant to the indenture), except that any references to ‘‘securities’’ in this prospectus, to the extent related to a determination of whether a ‘‘Change of Control’’ has occurred (and the related definitions), refer only to the bonds and the series E and F bonds. The principal difference between the Change of Control provisions for the bonds and the series E and F bonds and the comparable provisions for all other series of securities issued under the indenture relates to the definition of the applicable ‘‘Rating Decline.’’
The following description is a summary of the material provisions of the indenture and the related registration rights agreement. It does not restate those agreements in their entirety. We urge you to read the indenture and the registration rights agreement because they, and not this description, define your rights as a holder of the bonds. The definitions of certain capitalized terms used in the following summary are set forth below under ‘‘— Definitions.’’
General
The indenture does not limit the aggregate principal amount of the debt securities that may be issued thereunder and provides that debt securities may be issued from time to time in one or more series.
The initial bonds were initially offered in the aggregate principal amount of $1,000,000,000. We may, without the consent of the holders, increase such principal amount in the future on the same terms and conditions (except for the issue date and issue price) and with the same CUSIP number(s) as the bonds.
The initial bonds were, and the exchange bonds will be, issued in one series, will bear interest at the rate of 6.50% per annum and will mature on September 15, 2037. Interest on the bonds is payable semi-annually in arrears on each March 15 and September 15, commencing March 15, 2008, to the holders thereof at the close of business on the preceding March 1 and September 1, respectively. Interest on the bonds will be computed on the basis of a 360-day year of twelve 30-day months.
The initial bonds were, and the exchange bonds will be, issued without coupons and in fully registered form only in denominations of $2,000 and any integral multiple of $1,000 in excess thereof.
MEHC files certain reports and other information with the SEC in accordance with the requirements of Sections 13 and 15(d) under the Exchange Act. See ‘‘Where You Can Find More Information.’’ In addition, at any time that Sections 13 and 15(d) cease to apply to MEHC, we will covenant, and have covenanted, in the indenture to file comparable reports and information with the trustee and the SEC, and mail such reports and information to holders of securities at their registered addresses, for so long as any securities remain outstanding.
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Table of ContentsIf (i) a registration statement of which this prospectus is a part is not declared effective by the SEC within 270 days after the closing date for the initial bonds, (ii) a shelf registration statement with respect to the resale of the bonds is not declared effective by the SEC within 150 days after our obligation to file such shelf registration statement arises (but in any event not prior to 270 days after the closing date for the initial bonds) or (iii) any of the foregoing registration statements (or the prospectuses related thereto) after being declared effective by the SEC cease to be so effective or usable (subject to certain exceptions) in connection with resales of the initial bonds or exchange bonds for the periods specified and in accordance with the registration rights agreement, the interest rate on the bonds that are then subject to such cessation or other registration default will increase by 0.5% from and including the date on which any such event occurs until such event ceases to be continuing. The exchange offer and the registration rights are more fully described under ‘‘The Exchange Offer.’’
Any initial bonds that remain outstanding after the consummation of the exchange offer, together with all exchange bonds issued in connection with the exchange offer, will be treated as a single class of securities under the indenture.
Optional Redemption
General
The bonds will be redeemable in whole or in part, at our option at any time, at a redemption price equal to the greater of:
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| (1) | 100% of the principal amount of the bonds being redeemed; or |
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| (2) | the sum of the present values of the remaining scheduled payments of principal of and interest on the bonds being redeemed discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Yield plus 25 basis points, |
plus, for (1) or (2) above, whichever is applicable, accrued interest on such bonds to the date of redemption.
Notice of redemption shall be given not less than 30 days nor more than 60 days prior to the date of redemption. If fewer than all of the bonds are to be redeemed, the selection of the bonds for redemption will be made by the trustee pro rata among all outstanding bonds.
Unless we default in payment of the Redemption Price (as defined below), from and after the date of redemption the bonds or portions of bonds called for redemption will cease to bear interest, and the holders of those bonds will have no right in respect of those bonds except the right to receive the applicable Redemption Price.
Optional Redemption Provisions
Under the procedures described above, the price payable upon the optional redemption at any time of a bond (or the Redemption Price) is determined by calculating the present value (or the Present Value) at such time of each remaining payment of principal of or interest on such bond and then totaling those Present Values. If the sum of those Present Values is equal to or less than 100% of the principal amount of such bond, the Redemption Price of such bond will be 100% of its principal amount (redemption at par). If the sum of those Present Values is greater than 100% of the principal amount of such bond, the Redemption Price of such bond will be such greater amount (redemption at a premium). In no event may a bond be redeemed optionally at less than 100% of its principal amount.
The Present Value at any time of a payment of principal of or interest on a bond is calculated by applying to such payment the discount rate (or the Discount Rate) applicable to such payment. The Discount Rate applicable at any time to payment of principal of or interest on a bond equals the equivalent yield to maturity at such time of a fixed rate United States treasury security having a maturity comparable to the maturity of such payment plus 25 basis points, such yield being calculated
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Table of Contentson the basis of the interest rate borne by such United States treasury security and the price at such time of such security. The United States treasury security employed in the calculation of a Discount Rate (or a Relevant Security) as well as the price and equivalent yield to maturity of such Relevant Security will be selected or determined by an Independent Investment Banker.
Whether the sum of the Present Values of the remaining payments of principal of and interest on a bond to be redeemed optionally will or will not exceed 100% of its principal amount and, accordingly, whether such bond will be redeemed at par or at a premium will depend on the Discount Rate used to calculate such Present Values. Such Discount Rate, in turn, will depend upon the equivalent yield to maturity of a Relevant Security, which yield will itself depend on the interest rate borne by, and the price of, the Relevant Security. While the interest rate borne by the Relevant Security is fixed, the price of the Relevant Security tends to vary with interest rate levels prevailing from time to time. In general, if at a particular time the prevailing level of interest rates for a newly issued United States treasury security having a maturity comparable to that of a Relevant Security is higher than the level of interest rates for newly issued United States treasury s ecurities having a maturity comparable to such Relevant Security prevailing at the time the Relevant Security was issued, the price of the Relevant Security will be lower than its issue price. Conversely, if at a particular time the prevailing level of interest rates for a newly issued United States treasury security having a maturity comparable to that of a Relevant Security is lower than the level of interest rates prevailing for newly issued United States treasury securities having a maturity comparable to the Relevant Security at the time the Relevant Security was issued, the price of the Relevant Security will be higher than its issue price.
Because the equivalent yield to maturity on a Relevant Security depends on the interest rate it bears and its price, an increase or a decrease in the level of interest rates for newly issued United States treasury securities with a maturity comparable to that of a Relevant Security above or below the levels of interest rates for newly issued United States treasury securities having a maturity comparable to the Relevant Security prevailing at the time of issue of the Relevant Security will generally result in an increase or a decrease, respectively, in the Discount Rate used to determine the Present Value of a payment of principal of or interest on a bond. An increase or a decrease in the Discount Rate, and therefore an increase or a decrease in the levels of interest rates for newly issued United States treasury securities having a maturity comparable to the Relevant Security, will result in a decrease or an increase, respectively, of the Present Value of a paym ent of principal of or interest on a bond. In other words, the Redemption Price varies inversely with the levels of interest rates for newly issued United States treasury securities having a maturity comparable to the Comparable Treasury Issue. As noted above, however, if the sum of the Present Values of the remaining payments of principal of and interest on a bond proposed to be redeemed is less than its principal amount, such bond may only be redeemed at par.
Sinking Fund
The bonds will not be subject to any mandatory sinking fund.
Ranking
The bonds are general, unsecured senior obligations of MEHC and will rank pari passu in right of payment with all other existing and future senior unsecured obligations of MEHC (including the series A notes, series B notes, series C notes, series D notes, series E bonds and series F bonds) and senior in right of payment to all existing and future subordinated obligations of MEHC. The bonds will be effectively subordinated to all existing and future secured obligations of MEHC and to all existing and future obligations of MEHC’s Subsidiaries. At June 30, 2007, MEHC’s outstanding senior indebtedness was $5.0 billion, which does not include the $1.0 billion of bonds issued on August 28, 2007, and MEHC’s outstanding subordinated indebtedness, which consists of MEHC’s trust preferred securities, was $1.3 billion. These amounts exclude MEHC’s guarantees and letters of credit in respect of Subsidiary and equit y investment indebtedness aggregating $90.1 million as of June 30, 2007. MEHC’s Subsidiaries also have significant amounts of indebtedness. At June 30, 2007, MEHC’s
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Table of Contentsconsolidated Subsidiaries had outstanding indebtedness totaling $12.9 billion. This amount does not include (i) any trade debt or preferred stock obligations of MEHC’s Subsidiaries, (ii) MEHC’s Subsidiaries’ letters of credit in respect of their indebtedness or (iii) MEHC’s share of the outstanding indebtedness of its and its Subsidiaries’ equity investments.
Covenants
Except as set forth under ‘‘— Defeasance and Discharge – Covenant Defeasance’’ below, for so long as any securities remain outstanding, we will comply with the terms of the covenants set forth below.
Restrictions on Liens
MEHC will not be permitted to pledge, mortgage, hypothecate or permit to exist any pledge, mortgage or other Lien upon any property or assets at any time directly owned by MEHC to secure any indebtedness for money borrowed which is incurred, issued, assumed or guaranteed by MEHC (or Indebtedness for Borrowed Money), without making effective provisions whereby the outstanding securities will be equally and ratably secured with any and all such Indebtedness for Borrowed Money and with any other Indebtedness for Borrowed Money similarly entitled to be equally and ratably secured; provided, however, that this restriction will not apply to or prevent the creation or existence of:
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| (1) | any Liens existing prior to the issuance of the securities; |
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| (2) | purchase money Liens that do not exceed the cost or value of the purchased property or assets; |
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| (3) | any Liens not to exceed 10% of Consolidated Net Tangible Assets; and |
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| (4) | any Liens on property or assets granted in connection with extending, renewing, replacing or refinancing in whole or in part the Indebtedness for Borrowed Money (including, without limitation, increasing the principal amount of such Indebtedness for Borrowed Money) secured by Liens described in the foregoing clauses (1) through (3), provided that the Liens in connection with any such extension, renewal, replacement or refinancing will be limited to the specific property or assets that was subject to the original Lien. |
In the event that MEHC proposes to pledge, mortgage or hypothecate or permit to exist any pledge, mortgage or other Lien upon any property or assets at any time directly owned by it to secure any Indebtedness for Borrowed Money, other than as permitted by clauses (1) through (4) of the previous paragraph, MEHC will give prior written notice thereof to the trustee and MEHC will, prior to or simultaneously with such pledge, mortgage or hypothecation, effectively secure all the securities equally and ratably with such Indebtedness for Borrowed Money.
The foregoing covenant will not restrict the ability of our Subsidiaries and affiliates to pledge, mortgage, hypothecate or permit to exist any mortgage, pledge or Lien upon their property or assets, in connection with project financings or otherwise.
Consolidation, Merger, Conveyance, Sale or Lease
So long as any securities are outstanding, MEHC is not permitted to consolidate with or merge with or into any other person, or convey, transfer or lease its consolidated properties and assets substantially as an entirety to any person, or permit any person to merge into or consolidate with MEHC, unless (1) MEHC is the surviving or continuing corporation or the surviving or continuing corporation or purchaser or lessee is a corporation incorporated under the laws of the United States of America, one of the states thereof or the District of Columbia or Canada and assumes MEHC’s obligations under the securities and under the indenture and (2) immediately before and after such transaction, no event of default under the indenture shall have occurred and be continuing.
Except for a sale of the consolidated properties and assets of MEHC substantially as an entirety as provided above, and other than properties or assets required to be sold to conform with laws or
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Table of Contentsgovernmental regulations, MEHC is not permitted, directly or indirectly, to sell or otherwise dispose of any of its consolidated properties or assets (other than short-term, readily marketable investments purchased for cash management purposes with funds not representing the proceeds of other asset sales) if on a pro forma basis, the aggregate net book value of all such sales during the most recent 12-month period would exceed 10% of Consolidated Net Tangible Assets computed as of the end of the most recent quarter preceding such sale; provided, however, that (1) any such sales shall be disregarded for purposes of this 10% limitation if the net proceeds are invested in properties or assets in similar or related lines of business of MEHC and its Subsidiaries, including, without limitation, any of the lines of business in which MEHC or any of its Subsidiaries is engaged on the date of such sale or disposition, and (2) MEHC may sell or otherwise dispose of consolidated properties and assets in excess of such 10 % limitation if the net proceeds from such sales or dispositions, which are not reinvested as provided above, are retained by MEHC as cash or Cash Equivalents or used to retire its Indebtedness for Borrowed Money (other than Indebtedness for Borrowed Money which is subordinated to the securities) and that of its Subsidiaries.
The covenant described immediately above includes a phrase relating to a conveyance, transfer or lease of our consolidated properties and assets ‘‘substantially as an entirety.’’ Although there is a limited body of case law interpreting the phrase ‘‘substantially as an entirety,’’ there is no precise established definition of the phrase under applicable law. Accordingly, the nature and extent of the restriction on our ability to convey, transfer or lease our consolidated properties or assets substantially as an entirety, and the protections provided to the holders of securities by such restriction, may be uncertain.
Purchase of Securities Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of the securities will have the right to require that we repurchase all or any part of such holder’s securities at a purchase price in cash equal to 101% of the principal thereof on the date of purchase plus accrued interest, if any, to the date of purchase.
The Change of Control provisions may not be waived by the trustee or by our board of directors, and any modification thereof must be approved by each holder. Nevertheless, the Change of Control provisions will not necessarily afford protection to holders, including protection against an adverse effect on the value of the securities of any series, including the bonds, in the event that we or our Subsidiaries incur additional Debt, whether through recapitalizations or otherwise.
Within 30 days following a Change of Control, we will mail a notice to each holder of the securities with a copy to the trustee, stating the following:
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| (1) | that a Change of Control has occurred and that such holder has the right to require us to purchase such holder’s securities at the purchase price described above (or the Change of Control Offer); |
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| (2) | the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); |
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| (3) | the purchase date (which will be not earlier than 30 days nor later than 60 days from the date such notice is mailed) (or the Purchase Date); |
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| (4) | that after the Purchase Date interest on such security will continue to accrue (except as provided in clause (5)); |
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| (5) | that any security properly tendered pursuant to the Change of Control Offer will cease to accrue interest after the Purchase Date (assuming sufficient moneys for the purchase thereof are deposited with the trustee); |
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| (6) | that holders electing to have a security purchased pursuant to a Change of Control Offer will be required to surrender the security, with the form entitled ‘‘Option of Holder To Elect Purchase’’ on the reverse of the security completed, to the paying agent at the address specified in the notice prior to the close of business on the fifth business day prior to the Purchase Date; |
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| (7) | that a holder will be entitled to withdraw such holder’s election if the paying agent receives, not later than the close of business on the third business day (or such shorter periods as may be required by applicable law) preceding the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the principal amount of securities the holder delivered for purchase, and a statement that such holder is withdrawing his election to have such securities of such series purchased; and |
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| (8) | that holders that elect to have their securities purchased only in part will be issued new securities having a principal amount equal to the portion of the securities that were surrendered but not tendered and purchased. |
On the Purchase Date, we will (1) accept for payment all securities or portions thereof tendered pursuant to the Change of Control Offer, (2) deposit with the trustee money sufficient to pay the purchase price of all securities or portions thereof so tendered for purchase and (3) deliver or cause to be delivered to the trustee the securities properly tendered together with an officer’s certificate identifying the securities or portions thereof tendered to us for purchase. The trustee will promptly mail, to the holders of the securities properly tendered and purchased, payment in an amount equal to the purchase price, and promptly authenticate and mail to each holder a new security having a principal amount equal to any portion of such holder’s securities that were surrendered but not tendered and purchased. We will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Purchase Date.
If we are prohibited by applicable law from making the Change of Control Offer or purchasing securities of any series, including the bonds, thereunder, we need not make a Change of Control Offer pursuant to this covenant for so long as such prohibition is in effect.
We will comply with all applicable tender offer rules, including, without limitation, Rule 14e-1 under the Exchange Act, in connection with a Change of Control Offer.
Events of Default
An event of default with respect to the securities of any series, including the bonds, will be defined in the indenture as being any one of the following events:
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| (1) | default as to the payment of principal of, or premium, if any, on any security of that series or as to any payment required in connection with a Change of Control; |
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| (2) | default as to the payment of interest on any security of that series for 30 days after payment is due; |
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| (3) | failure to make a Change of Control Offer required under the covenants described under ‘‘Purchase of Securities Upon a Change of Control’’ above or a failure to purchase the securities of that series tendered in respect of such Change of Control Offer; |
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| (4) | default by us in the performance, or breach, of any covenant, agreement or warranty contained in the indenture and the securities of that series and such failure continues for 30 days after written notice is given to us by the trustee or to us and the trustee by the holders of at least a majority in aggregate principal amount outstanding of the securities of that series, as provided in the indenture; |
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| (5) | default on any other of Debt of MEHC or any Significant Subsidiary (other than Debt that is Non-Recourse to MEHC) if either (x) such default results from failure to pay principal of such Debt in excess of $100 million when due after any applicable grace period or (y) as a result of such default, the maturity of such Debt has been accelerated prior to its scheduled maturity and such default has not been cured within the applicable grace period, and such acceleration has not been rescinded, and the principal amount of such Debt, together with the principal amount of any other Debt of MEHC and its Significant Subsidiaries (not including Debt that is Non-Recourse to MEHC) that is in default as to principal, or the maturity of which has been accelerated, aggregates $100 million or more; |
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| (6) | the entry by a court of one or more judgments or orders against MEHC or any Significant Subsidiary for the payment of money that in the aggregate exceeds $100 million (excluding (i) the amount thereof covered by insurance or by a bond written by a person other than an affiliate of MEHC (other than, with respect to the series C or D notes, the series E or F bonds and the bonds, Berkshire Hathaway or any of its affiliates that provide commercial insurance in the ordinary course of their business) and (ii) judgments that are Non-Recourse to MEHC, which judgments or orders have not been vacated, discharged or satisfied or stayed pending appeal within 60 days from the entry thereof, provided that such a judgment or order will not be an event of defa ult if such judgment or order does not require any payment by MEHC; and |
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| (7) | certain events involving bankruptcy, insolvency or reorganization of MEHC or any of its Significant Subsidiaries. |
The indenture provides that the trustee may withhold notice to the holders of any default (except in payment of principal of, premium, if any, or interest on any series of securities and any payment required in connection with a Change of Control) if the trustee considers it in the interest of holders to do so.
The indenture provides that if an event of default with respect to the securities of any series at the time outstanding, including the bonds (other than an event of bankruptcy, insolvency or reorganization of MEHC or a Significant Subsidiary) has occurred and is continuing, either the trustee or (i) in the case of any event of default described in clause (1) or (2) above, the holders of at least 33% in aggregate principal amount of the securities of that series then outstanding, or (ii) in the case of any other event of default, the holders of at least a majority in aggregate principal amount of the securities of that series then outstanding, may declare the principal of and any accrued interest on all securities of that series to be due and payable immediately, but upon certain conditions such declaration may be annulled and past defaults (except, unless theretofore cured, a default in payment of principal of, premium, if any, or interest on the securities of t hat series or any payment required in connection with a Change of Control) may be waived by the holders of a majority in principal amount of the securities of that series then outstanding. If an event of default due to the bankruptcy, insolvency or reorganization of MEHC or a Significant Subsidiary occurs, the indenture provides that the entire principal amount of and any interest accrued on all securities will become immediately due and payable without any action by the trustee, the holders of securities or any other person.
The holders of a majority in principal amount of the securities of any series then outstanding, including the bonds, will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee under the indenture with respect to the securities of such series, subject to certain limitations specified in the indenture, provided that the holders of securities of such series must have offered to the trustee reasonable indemnity against expenses and liabilities.
The indenture requires the annual filing by MEHC with the trustee of a written statement as to its knowledge of the existence of any default in the performance and observance of any of the covenants contained in the indenture.
Modification of the Indenture
The indenture contains provisions permitting us and the trustee, with the consent of the holders of not less than a majority in principal amount of the outstanding securities of each series affected by the modification, including the bonds, to modify the indenture or the rights of the holders of such series, except that no such modification may (1) extend the stated maturity of the principal of or any installment of interest on the securities, reduce the principal amount thereof or the interest rate thereon, reduce any premium payable on redemption or purchase thereof, impair the right of any holder to institute suit for the enforcement of any such payment on or after the stated maturity thereof or make any change in the covenants regarding a Change of Control or the related definitions without the consent of the holder of each outstanding security so affected, or (2) reduce the percentage of any series of securities, the consent of the holders of which is required for any such modification, without the consent of the holders of all series of securities then outstanding.
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Table of ContentsDefeasance and Discharge
Legal Defeasance
The indenture provides that we will be deemed to have paid and will be discharged from any and all obligations in respect of the bonds or any other series of securities issued thereunder on the 123rd day after the deposit referred to below has been made (or immediately if an opinion of counsel is delivered to the effect described in clause (B)(3)(y) below), and the provisions of the indenture will cease to be applicable with respect to the securities of such series (except for, among other matters, certain obligations to register the transfer or exchange of the securities of such series, to replace stolen, lost or mutilated securities of such series, to maintain paying agents and to hold monies for payment in trust) if, among other things:
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| (A) | we have deposited with the trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued and unpaid interest on the applicable securities, on the respective stated maturities of the securities or, if we make arrangements satisfactory to the trustee for the redemption of the securities prior to their stated maturity, on any earlier redemption date in accordance with the terms of the indenture and the applicable securities; |
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| (B) | we have delivered to the trustee: |
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| (1) | either (x) an opinion of counsel to the effect that holders of securities of such series will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred and we had paid or redeemed such securities on the applicable dates, which opinion of counsel must be based upon a ruling of the IRS to the same effect or a change in applicable federal income tax law or related Treasury regulations after the date of the indenture, or (y) a ruling directed to the trustee or us received from the IRS to the same effec t as the aforementioned opinion of counsel; |
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| (2) | an opinion of counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940; and |
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| (3) | an opinion of counsel to the effect that either (x) after the passage of 123 days following the deposit referred to in clause (A) above, the trust fund will not be subject to the effect of Section 547 or 548 of the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law or (y) based upon existing precedents, if the matter were properly briefed, a court should hold that the deposit of moneys and/or U.S. Government Obligations as provided in clause (A) above would not constitute a preference voidable under Section 547 or 548 of the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law; |
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| (C) | if at such time the securities are listed on a national securities exchange, we have delivered to the trustee an opinion of counsel to the effect that the securities will not be delisted as a result of such deposit, defeasance and discharge; and |
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| (D) | immediately after giving effect to such deposit referred to in clause (A) above on a pro forma basis, no event of default under the indenture, or event that after the giving of notice or lapse of time or both would become an event of default, will have occurred and be continuing on the date of such deposit or (unless an opinion of counsel is delivered to the effect described in clause (B)(3)(y) above) during the period ending on the 123rd day after the date of such deposit, and such deposit and discharge will not result in a breach or violation of, or constitute a default under, any other material agreement or instrument to which MEHC is a party or by which it is bound. |
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Table of ContentsCovenant Defeasance
The indenture further provides that the provisions of the covenants described herein under ‘‘— Covenants — Restrictions on Liens,’’ ‘‘— Consolidation, Merger, Conveyance, Sale or Lease’’ and ‘‘— Purchase of Securities Upon a Change of Control,’’ clauses (3) and (4) under ‘‘Events of Default’’ with respect to such covenants, clause (2) under ‘‘Events of Default’’ with respect to offers to purchase upon a Change of Control as described above and clauses (5) and (6) under ‘‘Events of Default’’ will cease to be applicable to us and our Subsidiaries upon the satisfaction of the provisions described in clauses (A), (B), (C) and (D) of the preceding paragraph; provided, however, that with respect to such covenant defeasance, the opinion of counsel described in clause (B)(1)(x) above need not be base d upon any ruling of the IRS or change in applicable federal income tax law or related Treasury regulations.
Defeasance and Certain Other Events of Default
If we exercise our option to omit compliance with certain covenants and provisions of the indenture with respect to the securities of any series, including the bonds, as described in the immediately preceding paragraph and any series of securities is declared due and payable because of the occurrence of an event of default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the trustee will be sufficient to pay amounts due on such securities at the time of their stated maturity or scheduled redemption, but may not be sufficient to pay amounts due on such securities at the time of acceleration resulting from such event of default. MEHC will remain liable for such payments.
Governing Law
The indenture and the securities will be governed by, and construed in accordance with, the law of the State of New York, including Section 5-1401 of the New York General Obligations Law, but otherwise without regard to conflict of laws rules.
Trustee
The Bank of New York Trust Company, N.A. is the trustee under the indenture. The Bank of New York Trust Company, N.A. (or one of its affiliates) currently serves, and may in the future serve, as trustee under indentures evidencing other indebtedness of MEHC and its affiliates. The Bank of New York Trust Company, N.A. (or one of its affiliates) is also, and may in the future be, a lender under credit facilities for MEHC and its affiliates.
Definitions
Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the indenture. Reference is made to the indenture for the full definitions of all such terms as well as any other capitalized terms used herein for which no definition is provided.
‘‘Attributable Value’’ means, as to a Capitalized Lease Obligation under which any person is at the time liable and at any date as of which the amount thereof is to be determined, the capitalized amount thereof that would appear on the face of a balance sheet of such person in accordance with GAAP.
‘‘Berkshire Hathaway’’ means Berkshire Hathaway Inc. and any Subsidiary of Berkshire Hathaway Inc.
‘‘Capital Stock’’ means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in, or interests (however designated) in, the equity of such person that is outstanding or issued on or after the date of the indenture, including, without limitation, all common stock and preferred stock and partnership and joint venture interests in such person.
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Table of Contents‘‘Capitalized Lease’’ means, as applied to any person, any lease of any property of which the discounted present value of the rental obligations of such person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such person, and ‘‘Capitalized Lease Obligation’’ means the rental obligations, as aforesaid, under any such lease.
‘‘Cash Equivalent’’ means any of the following:
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| (1) | securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof); |
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| (2) | time deposits and certificates of deposit of any commercial bank organized in the United States having capital and surplus in excess of $500,000,000 or any commercial bank organized under the laws of any other country having total assets in excess of $500,000,000 with a maturity date not more than two years from the date of acquisition; |
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| (3) | repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clauses (1) or (5) of this definition that were entered into with any bank meeting the qualifications set forth in clause (2) of this definition or another financial institution of national reputation; |
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| (4) | direct obligations issued by any state or other jurisdiction of the United States or any other country or any political subdivision or public instrumentality thereof maturing, or subject to tender at the option of the holder thereof, within 90 days after the date of acquisition thereof and, at the time of acquisition, having a rating of at least A from S&P or A-2 from Moody’s (or, if at any time neither S&P nor Moody’s may be rating such obligations, then from another nationally recognized rating service acceptable to the trustee); |
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| (5) | commercial paper issued by (a) the parent corporation of any commercial bank organized in the United States having capital and surplus in excess of $500,000,000 or any commercial bank organized under the laws of any other country having total assets in excess of $500,000,000, and (b) others having one of the two highest ratings obtainable from either S&P or Moody’s (or, if at any time neither S&P nor Moody’s may be rating such obligations, then from another nationally recognized rating service acceptable to the trustee) and in each case maturing within one year after the date of acquisition; |
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| (6) | overnight bank deposits and bankers’ acceptances at any commercial bank organized in the United States having capital and surplus in excess of $500,000,000 or any commercial bank organized under the laws of any other country having total assets in excess of $500,000,000; |
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| (7) | deposits available for withdrawal on demand with any commercial bank organized in the United States having capital and surplus in excess of $500,000,000 or any commercial bank organized under the laws of any other country having total assets in excess of $500,000,000; |
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| (8) | investments in money market funds substantially all of whose assets comprise securities of the types described in clauses (1) through (6) and (9) of this definition; and |
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| (9) | auction rate securities or money market preferred stock having one of the two highest ratings obtainable from either S&P or Moody’s (or, if at any time neither S&P nor Moody’s may be rating such obligations, then from another nationally recognized rating service acceptable to the trustee). |
‘‘Change of Control’’ means the occurrence of one or more of the following events:
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| (1) | a transaction pursuant to which Berkshire Hathaway ceases to own, on a diluted basis, at least a majority of the issued and outstanding common stock of MEHC; or |
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| (2) | MEHC or its Subsidiaries sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all the property of MEHC and its Subsidiaries taken as a whole to any person or entity other than an entity at least a majority of the issued and outstanding common stock of which is owned by Berkshire Hathaway, calculated on a diluted basis as described above; |
provided that with respect to the foregoing subparagraphs (1) and (2), a Change of Control will not be deemed to have occurred unless and until a Rating Decline has occurred as well.
‘‘Comparable Treasury Issue’’ means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of securities of any series to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such securities.
‘‘Comparable Treasury Price’’ means, with respect to any Redemption Date, (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated ‘‘Composite 3:30 p.m. Quotations for U.S. Government Securities’’ or (2) if such release (or any successor release) is not published or does not contain such prices on such business day, the Reference Treasury Dealer Quotation for such Redemption Date.
‘‘Consolidated Net Tangible Assets’’ means, as of the date of any determination thereof, the total amount of all of the assets of MEHC determined on a consolidated basis in accordance with GAAP as of such date less the sum of (a) the consolidated current liabilities of MEHC determined in accordance with GAAP and (b) assets properly classified as Intangible Assets.
‘‘Currency Protection Agreement’’ means, with respect to any person, any foreign exchange contract, currency swap agreement or other similar agreement or arrangement intended to protect such person against fluctuations in currency values to or under which such person is a party or a beneficiary on the date of the indenture or becomes a party or a beneficiary thereafter.
‘‘Debt’’ means, with respect to any person, at any date of determination (without duplication):
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| (1) | all Indebtedness for Borrowed Money of such person; |
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| (2) | all obligations of such person evidenced by bonds, bonds, securities or other similar instruments; |
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| (3) | all obligations of such person in respect of letters of credit, bankers’ acceptances, surety, bid, operating and performance bonds, performance guarantees or other similar instruments or obligations (or reimbursement obligations with respect thereto) (except, in each case, to the extent incurred in the ordinary course of business); |
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| (4) | all obligations of such person to pay the deferred purchase price of property or services, except Trade Payables; |
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| (5) | the Attributable Value of all obligations of such person as lessee under Capitalized Leases; |
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| (6) | all Debt of others secured by a Lien on any Property of such person, whether or not such Debt is assumed by such person, provided that, for purposes of determining the amount of any Debt of the type described in this clause, if recourse with respect to such Debt is limited to such Property, the amount of such Debt will be limited to the lesser of the fair market value of such Property or the amount of such Debt; |
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| (7) | all Debt of others Guaranteed by such person to the extent such Debt is Guaranteed by such person; |
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| (8) | all Redeemable Stock valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and |
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| (9) | to the extent not otherwise included in this definition, all net obligations of such person under Currency Protection Agreements and Interest Rate Protection Agreements. |
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Table of ContentsFor purposes of determining any particular amount of Debt that is or would be outstanding, Guarantees of, or obligations with respect to letters of credit or similar instruments supporting (to the extent the foregoing constitutes Debt), Debt otherwise included in the determination of such particular amount will not be included. For purposes of determining compliance with the indenture, in the event that an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, we, in our sole discretion, will classify such item of Debt and only be required to include the amount and type of such Debt in one of such clauses.
‘‘Guarantee’’ means any obligation, contingent or otherwise, of any person directly or indirectly guaranteeing any Debt of any other person and, without limiting the generality of the foregoing, any Debt obligation, direct or indirect, contingent or otherwise, of such person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other person (whether arising by virtue of partnership arrangements (other than solely by reason of being a general partner of a partnership), or by agreement to keep-well, to purchase assets, goods, securities or services or to take-or-pay, or to maintain financial statement conditions or otherwise) or (2) entered into for purposes of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term ‘‘Guarantee’’ will not include endorsements for collection or deposit in the ordinary course of business or the grant of a lien in connection with any Non-Recourse Debt. The term ‘‘Guarantee’’ used as a verb has a corresponding meaning.
‘‘Independent Investment Banker’’ means an independent investment banking institution of international standing appointed by us.
‘‘Intangible Assets’’ means, as of the date of determination thereof, all assets of MEHC properly classified as intangible assets determined on a consolidated basis in accordance with GAAP.
‘‘Interest Rate Protection Agreement’’ means, with respect to any person, any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement intended to protect such person against fluctuations in interest rates to or under which such person or any of its Subsidiaries is a party or a beneficiary on the date of the indenture or becomes a party or a beneficiary thereafter.
‘‘Joint Venture’’ means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form.
‘‘Lien’’ means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property, but will not include any partnership, joint venture, shareholder, voting trust or similar governance agreement with respect to Capital Stock in a Subsidiary or Joint Venture. For purposes of the indenture, MEHC will be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such Property.
‘‘Non-Recourse’’ means any Debt or other obligation (or that portion of such Debt or other obligation) that is without recourse to MEHC or any property or assets directly owned by MEHC (other than a pledge of the equity interests in any of its Subsidiaries, to the extent recourse to MEHC under such pledge is limited to such equity interests).
‘‘Property’’ of any person means all types of real, personal, tangible or mixed property owned by such person whether or not included in the most recent consolidated balance sheet of such person under GAAP.
‘‘Rating Agencies’’ means (1) S&P and (2) Moody’s or (3) if S&P or Moody’s or both do not make a rating of the securities publicly available, a nationally recognized securities rating agency or agencies, as the case may be, selected by us, which will be substituted for S&P or Moody’s or both, as the case may be.
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Table of Contents‘‘Rating Decline’’ means the occurrence of the following on, or within 90 days after, the earlier of (1) the occurrence of a Change of Control and (2) the earlier of (x) the date of public notice of the occurrence of a Change of Control or (y) the date of the public notice of our intention to effect a Change of Control (or the Rating Date), which period will be extended so long as the rating of the bonds is under publicly announced consideration for possible downgrading by any of the Rating Agencies: the rating of such securities by both such Rating Agencies is reduced below BBB+, in the case of S&P, and Baa1, in the case of Moody’s.
‘‘Redeemable Stock’’ means any class or series of Capital Stock of any person that by its terms or otherwise is (1) required to be redeemed prior to the stated maturity of any series of the securities, (2) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the stated maturity of any series of the securities or (3) convertible into or exchangeable for Capital Stock referred to in clause (1) or (2) above or Debt having a scheduled maturity prior to the stated maturity of any series of the securities, provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require MEHC to purchase or redeem such Capital Stock upon the occurrence of a ‘‘change of control’’ occurring prior to the stated maturity of any series of the securities will not constitute Redeemable Stock if the ‘‘change of control’’ provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the covenants described under ‘‘Purchase of Securities Upon a Change of Control’’ above.
‘‘Redemption Date’’ means any date on which we redeem all or any portion of the securities in accordance with the terms of the indenture.
‘‘Reference Treasury Dealer’’ means a primary U.S. government securities dealer in New York City appointed by us.
‘‘Reference Treasury Dealer Quotation’’ means, with respect to the Reference Treasury Dealer and any Redemption Date, the average, as determined by us, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount and quoted in writing to us by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such Redemption Date).
‘‘Significant Subsidiary’’ means a ‘‘significant subsidiary’’ as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act, substituting 20 percent for 10 percent each place it appears therein. Unless the context otherwise clearly requires, any reference to a ‘‘Significant Subsidiary’’ is a reference to a Significant Subsidiary of MEHC.
‘‘Subsidiary’’ means, with respect to any person, including, without limitation, we and our Subsidiaries, any corporation or other entity of which such person owns, directly or indirectly, a majority of the Capital Stock or other ownership interests and has ordinary voting power to elect a majority of the board of directors or other persons performing similar functions.
‘‘Trade Payables’’ means, with respect to any person, any accounts payable or any other indebtedness or monetary obligation to trade creditors incurred, created, assumed or Guaranteed by such person or any of its Subsidiaries or Joint Ventures arising in the ordinary course of business.
‘‘Treasury Yield’’ means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
‘‘U.S. Government Obligations’’ means any security that is (1) a direct obligation of the United States for the payment of which its full faith and credit is pledged or (2) an obligation of a person controlled or supervised by and acting as an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, that, in the case of clause (1) or (2) is not callable or redeemable at the option of the issuer thereof, and will also include any depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligations or a specific payment of interest on or
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Table of Contentsprincipal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.
‘‘Voting Stock’’ means, with respect to any person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors (or persons fulfilling similar responsibilities) of such person.
Global Bonds; Book-Entry System
The initial bonds were and the exchange bonds will be, issued under a book-entry system in the form of one or more global bonds (or, each, a Global Bond). Each Global Bond with respect to the initial bonds was, and each Global Bond with respect to the exchange bonds will be, deposited with, or on behalf of, a depositary, which will be The Depository Trust Company, New York, New York (or the Depositary). The Global Bonds with respect to the initial bonds were, and the Global Bonds with respect to the exchange bonds will be, registered in the name of the Depositary or its nominee.
The initial bonds were not issued in certificated form and, except under the limited circumstances described below, owners of beneficial interests in the Global Bonds are not entitled to physical delivery of the bonds in certificated form. The Global Bonds may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any nominee to a successor of the Depositary or a nominee of such successor.
The Depositary is a limited-purpose trust company organized under the New York Banking Law, a ‘‘banking organization’’ within the meaning of the New York Banking Law, a member of the Federal Reserve System, a ‘‘clearing corporation’’ within the meaning of the New York Uniform Commercial Code, and a ‘‘clearing agency’’ registered pursuant to the provisions of Section 17A of the Exchange Act. The Depositary holds securities that its participants (or Direct Participants) deposit with the Depositary. The Depositary also facilitates the post-trade settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Participants’ accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks , trust companies, clearing corporations and certain other organizations, including Euroclear Bank S.A./N.V. as operator of the Euroclear System (or Euroclear) and Clearstream Banking, societe anonyme (or Clearstream). The Depositary is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (or DTCC). DTCC, in turn, is owned by a number of Direct Participants and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation and Emerging Markets Clearing Corporation, also subsidiaries of DTCC, as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC and the National Association of Securities Dealers, Inc. Access to the Depositary system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (or Indirect Participants). The rules applicable to the Deposi tary and its Direct and Indirect Participants are on file with the SEC.
Purchases of the securities under the Depositary system must be made by or through Direct Participants, which will receive a credit for the securities on the Depositary’s records. The ownership interest of each actual purchaser of each security (or Beneficial Owner) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from the Depositary of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the securities are to be accomplished by entries made
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Table of Contentson the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in securities, except in the event that use of the book-entry system for the securities is discontinued.
To facilitate subsequent transfers, all bonds deposited by Direct Participants with the Depositary are registered in the name of the Depositary’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of the Depositary. The deposit of bonds with the Depositary and their registration in the name of Cede & Co. or such other nominee effect no change in beneficial ownership. The Depositary has no knowledge of the actual Beneficial Owners of the bonds; the Depositary’s records reflect only the identity of the Direct Participants to whose accounts such bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners are governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Neither the Depositary nor Cede & Co. (nor any other nominee of the Depositary) will consent or vote with respect to the bonds unless authorized by a Direct Participant in accordance with the Depositary’s procedures. Under its usual procedures, the Depositary mails an Omnibus Proxy to us as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Principal (and premium, if any) and interest payments on the bonds and any redemption payments are made to Cede & Co. (or such other nominee as may be requested by an authorized representative of the Depositary). The Depositary’s practice is to credit Direct Participants’ accounts upon the Depositary’s receipt of funds and corresponding detail information from us or the trustee on the payable date in accordance with their respective holdings shown on the Depositary’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in ‘‘street name,’’ and will be the responsibility of such Participant and not of the Depositary, the trustee or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal (and p remium, if any), interest and any redemption proceeds to Cede & Co. (or such other nominee as may be requested by an authorized representative of the Depositary) is the responsibility of MEHC, disbursements of such payments to Direct Participants shall be the responsibility of the Depositary, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities depositary with respect to the bonds at any time by giving reasonable notice to us or the trustee. Under such circumstances, in the event that a successor securities depositary is not obtained, certificated bonds are required to be printed and delivered. We may decide to discontinue use of the system of book-entry transfers through the Depositary (or a successor securities depositary). In that event, certificated bonds will be printed and delivered.
The information in this section concerning the Depositary and the Depositary’s book-entry system has been obtained from sources that we believe to be reliable but has not been independently verified by us, the initial purchasers or the trustee.
Prior to the expiration of the ‘‘40-day distribution compliance period’’ (within the meaning of Rule 903 of Regulation S), beneficial interests in any Global Bond for bonds sold outside the United States in reliance on Regulation S under the Securities Act may only be held through Euroclear or Clearstream, unless delivery is made pursuant to an exemption from registration under the Securities Act in accordance with the certification requirements of the indenture.
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Table of ContentsA Global Bond may not be transferred except as a whole by the Depositary to a nominee or successor of the Depositary or by a nominee of the Depositary to another nominee of the Depositary. A Global Bond representing bonds is exchangeable, in whole but not in part, for bonds in definitive form of like tenor and terms if (1) the Depositary notifies us that it is unwilling or unable to continue as depositary for such Global Bond or if at any time the Depositary is no longer eligible to be or in good standing as a ‘‘clearing agency’’ registered under the Exchange Act, and in either case, a successor depositary is not appointed by us within 120 days of receipt by us of such notice or of our becoming aware of such ineligibility, (2) while such Global Bond is subject to the transfer restrictions described under ‘‘Transfer Restrictions,’’ the book-entry interests in such Global Bond cease to be eligible for Depositary serv ices because such bonds are neither (a) rated in one of the top four categories by a nationally recognized statistical rating organization nor (b) included within a Self-Regulatory Organization system approved by the SEC for the reporting of quotation and trade information of securities eligible for transfer pursuant to Rule 144A under the Securities Act, or (3) we in our sole discretion at any time determine not to have such bonds represented by a Global Bond and notify the trustee thereof. A Global Bond exchangeable pursuant to the preceding sentence shall be exchangeable for bonds registered in such names and in such authorized denominations as the Depositary shall direct.
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Table of ContentsCERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The exchange of initial bonds for exchange bonds pursuant to the exchange offer will not constitute a taxable event for U.S. federal income tax purposes. The exchange bonds received by a holder of initial bonds should be treated as a continuation of such holder’s investment in the initial bonds; thus there should be no material U.S. federal income tax consequences to holders exchanging initial bonds for exchange bonds. As a result:
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| • | a holder of initial bonds will not recognize taxable gain or loss as a result of the exchange of initial bonds for exchange bonds pursuant to the exchange offer; |
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| • | the holding period of the exchange bonds will include the holding period of the initial bonds surrendered in exchange therefor; and |
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| • | a holder’s adjusted tax basis in the exchange bonds will be the same as such holder’s adjusted tax basis in the initial bonds surrendered in exchange therefor. |
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Table of ContentsPLAN OF DISTRIBUTION
Based on existing interpretations of the Securities Act by the staff of the SEC set forth in several no-action letters to third parties, and subject to the immediately following sentence, we believe that the exchange bonds that will be issued pursuant to the exchange offer may be offered for resale, resold and otherwise transferred by the holders thereof without further compliance with the registration and prospectus delivery provisions of the Securities Act. However, any purchaser of bonds who is an ‘‘affiliate’’ (within the meaning of the Securities Act) of ours or who intends to participate in the exchange offer for the purpose of distributing the exchange bonds or a broker-dealer (within the meaning of the Securities Act) that acquired initial bonds in a transaction other than as part of its market-making or other trading activities and who has arranged or has an understanding with any person to participate in the distribution of the exchange bonds: (1) will not be able to rely on the interpretations by the staff of the SEC set forth in the above-mentioned no-action letters; (2) will not be able to tender its initial bonds in the exchange offer; and (3) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the bonds unless such sale or transfer is made pursuant to an exemption from such requirements.
Each broker-dealer that receives exchange bonds for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange bonds. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange bonds received in exchange for initial bonds where such initial bonds were acquired as a result of market-marketing activities or other trading activities. We have agreed that, for a period of 120 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any such sale of exchange bonds by broker-dealers. Exchange bonds received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange bonds or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker/dealer and/or the purchasers of any such exchange bonds. Any broker-dealer that resells exchange bonds that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such exchange bonds may be d eemed to be an ‘‘underwriter’’ within the meaning of the Securities Act and any profit on any such resale of exchange bonds and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an ‘‘underwriter’’ within the meaning of the Securities Act.
For a period of 120 days after the expiration date we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer (including the expenses of one counsel for the holders of the bonds other than commissions or concessions of any brokers or dealers and will indemnify the holders of the bonds (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act.
156
Table of ContentsLEGAL MATTERS
Certain legal matters with respect to the exchange bonds will be passed upon for us by Willkie Farr & Gallagher LLP, New York, New York.
EXPERTS
The Consolidated Financial Statements and related financial statement schedules of MidAmerican Energy Holdings Company and its subsidiaries, as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006, included in this prospectus and the related financial statement schedules included elsewhere in the registration statement, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R), as of December 31, 200 6), appearing herein, and has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
With respect to the unaudited interim financial information of MidAmerican Energy Holdings Company and its subsidiaries, as of June 30, 2007 and for the three-month and six-month periods ended June 30, 2007 and 2006, included in this prospectus, Deloitte & Touche LLP, an independent registered public accounting firm, have applied limited procedures in accordance with the standards of the Public Company Accounting Oversight Board (United States) for a review of such information. However, as stated in their report included herein, they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. Deloitte & Touche LLP are not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited interim financial informatio n because this report is not a ‘‘report’’ or a ‘‘part’’ of the registration statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.
The Consolidated Financial Statements of PacifiCorp and its subsidiaries as of December 31, 2006 and for the nine-month period then ended, included in this prospectus, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R), as of December 31, 2006), appearing herein, and has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The Consolidated Financial Statements of PacifiCorp and its subsidiaries as of March 31, 2006 and for each of the two years in the period ended March 31, 2006 included in this prospectus have been so included in reliance upon the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
With respect to the unaudited interim financial information of PacifiCorp and its subsidiaries, as of June 30, 2007 and for the three-month and six-month periods ended June 30, 2007 and 2006, included in this prospectus, Deloitte & Touche LLP, an independent registered public accounting firm, have applied limited procedures in accordance with the standards of the Public Company Accounting Oversight Board (United States) for a review of such information. However, as stated in their report included herein, they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. Deloitte & Touche LLP are not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited interim financial information because this report is not a ‘‘report’’ or a ‘‘part’’ of the registration statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.
157
Table of ContentsWHERE YOU CAN FIND MORE INFORMATION
MEHC files reports and information statements and other information with the SEC. Such reports, proxy and information statements and other information filed by us with the SEC can be inspected and copied at the Public Reference Section of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549, and at the regional offices of the SEC located at Woolworth Building, 233 Broadway, New York, New York 10279 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549 at prescribed rates. The SEC maintains a Web site that contains reports, proxy and information statements and other materials that are filed through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (or EDGAR) system. This Web site can be accessed at http://www.sec.gov.
MEHC makes available free of charge through its internet website at http://www.midamerican.com its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files with, or furnishes them to, the SEC. Any information available on or through its website is not part of this prospectus and its web address is included as an inactive textual reference only.
158
FINANCIAL STATEMENTS
Index to Financial Statements
MidAmerican Energy Holdings Company:
Unaudited Interim Consolidated Financial Statements
| | | |
| Report of Independent Registered Public Accounting Firm | | | F-2 |
| Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 | | | F-3 |
| Consolidated Statements of Operations for the Three- and Six-Month Periods Ended June 30, 2007 and 2006 | | | F-5 |
| Consolidated Statements of Shareholders’ Equity for the Six-Month Periods Ended June 30, 2007 and 2006 | | | F-6 |
| Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2007 and 2006 | | | F-7 |
| Notes to Consolidated Financial Statements | | | F-8 |
| Audited Consolidated Financial Statements | | | |
| Report of Independent Registered Public Accounting Firm | | | F-23 |
| Consolidated Balance Sheets as of December 31, 2006 and 2005 | | | F-24 |
| Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004 | | | F-26 |
| Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004 | | | F-27 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 | | | F-28 |
| Notes to Consolidated Financial Statements | | | F-29 |
| PacifiCorp: | | | |
| Unaudited Interim Consolidated Financial Statements | | | |
| Report of Independent Registered Public Accounting Firm | | | F-78 |
| Consolidated Statements of Income for the Three- and Six-Month Periods Ended June 30, 2007 and 2006 | | | F-79 |
| Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 | | | F-80 |
| Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2007 and 2006 | | | F-82 |
| Notes to Consolidated Financial Statements | | | F-83 |
| Audited Consolidated Financial Statements | | | |
| Reports of Independent Registered Public Accounting Firms | | | F-90 |
| Consolidated Statements of Income for the Nine-Month Period Ended December 31, 2006 and for the Years Ended March 31, 2006 and 2005 | | | F-92 |
| Consolidated Balance Sheets as of December 31, 2006 and March 31, 2006 | | | F-93 |
| Consolidated Statements of Cash Flows for the Nine-Month Period Ended December 31, 2006 and for the Years Ended March 31, 2006 and 2005 | | | F-95 |
| Consolidated Statements of Changes in Common Shareholder’s Equity and Comprehensive Income for the Nine-Month Period Ended December 31, 2006 and for the Years Ended March 31, 2006 and 2005 | | | F-96 |
| Notes to the Consolidated Financial Statements | | | F-97 |
F-1
Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Holdings Company and subsidiaries (the ‘‘Company’’) as of June 30, 2007, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2007 and 2006, and of shareholders’ equity and cash flows for the six-month periods ended June 30, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2007, we expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph related to the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2006, is fair ly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
July 31, 2007
F-2
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)
| | | | | | | | | | | | |
| | | | As of |
| | | | June 30,
2007 | | | December 31,
2006 |
| ASSETS |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 1,178 | | | | | $ | 343 | |
| Short-term investments | | | | | 115 | | | | | | 15 | |
| Restricted cash and short-term investments | | | | | 106 | | | | | | 132 | |
| Accounts receivable, net | | | | | 1,273 | | | | | | 1,280 | |
| Amounts held in trust | | | | | 130 | | | | | | 97 | |
| Inventories | | | | | 412 | | | | | | 407 | |
| Derivative contracts | | | | | 192 | | | | | | 236 | |
| Deferred income taxes | | | | | 215 | | | | | | 152 | |
| Other investments | | | | | 602 | | | | | | 196 | |
| Other current assets | | | | | 180 | | | | | | 281 | |
| Total current assets | | | | | 4,403 | | | | | | 3,139 | |
| Property, plant and equipment, net | | | | | 24,922 | | | | | | 24,039 | |
| Goodwill | | | | | 5,366 | | | | | | 5,345 | |
| Regulatory assets | | | | | 1,686 | | | | | | 1,827 | |
| Derivative contracts | | | | | 221 | | | | | | 248 | |
| Investments | | | | | 702 | | | | | | 1,089 | |
| Deferred charges and other assets | | | | | 797 | | | | | | 760 | |
| Total assets | | | | $ | 38,097 | | | | | $ | 36,447 | |
The accompanying notes are an integral part of these financial statements.
F-3
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)
(Amounts in millions)
| | | | | | | | | | | | |
| | | | As of |
| | | | June 30,
2007 | | | December 31,
2006 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |
| Current liabilities: | | | | | | | | | | | | |
| Accounts payable | | | | $ | 941 | | | | | $ | 1,049 | |
| Accrued interest | | | | | 312 | | | | | | 306 | |
| Accrued property and other taxes | | | | | 347 | | | | | | 231 | |
| Amounts held in trust | | | | | 130 | | | | | | 97 | |
| Derivative contracts | | | | | 314 | | | | | | 271 | |
| Other liabilities | | | | | 747 | | | | | | 616 | |
| Short-term debt | | | | | 30 | | | | | | 552 | |
| Current portion of long-term debt | | | | | 1,881 | | | | | | 1,103 | |
| Current portion of MEHC subordinated debt | | | | | 234 | | | | | | 234 | |
| Total current liabilities | | | | | 4,936 | | | | | | 4,459 | |
| Other long-term accrued liabilities | | | | | 940 | | | | | | 861 | |
| Regulatory liabilities | | | | | 1,596 | | | | | | 1,839 | |
| Derivative contracts | | | | | 477 | | | | | | 618 | |
| Pension and post-retirement obligations | | | | | 666 | | | | | | 855 | |
| MEHC senior debt | | | | | 4,028 | | | | | | 3,929 | |
| MEHC subordinated debt | | | | | 1,057 | | | | | | 1,123 | |
| Subsidiary and project debt | | | | | 11,972 | | | | | | 11,061 | |
| Deferred income taxes | | | | | 3,513 | | | | | | 3,449 | |
| Total liabilities | | | | | 29,185 | | | | | | 28,194 | |
| Minority interest | | | | | 112 | | | | | | 114 | |
| Preferred securities of subsidiaries | | | | | 128 | | | | | | 128 | |
| Commitments and contingencies (Note 11) | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | |
| Common stock — 115 shares authorized, no par value, 74 shares issued and outstanding | | | | | — | | | | | | — | |
| Additional paid-in capital | | | | | 5,422 | | | | | | 5,420 | |
| Retained earnings | | | | | 3,147 | | | | | | 2,598 | |
| Accumulated other comprehensive income (loss), net | | | | | 103 | | | | | | (7 | ) |
| Total shareholders’ equity | | | | | 8,672 | | | | | | 8,011 | |
| Total liabilities and shareholders’ equity | | | | $ | 38,097 | | | | | $ | 36,447 | |
The accompanying notes are an integral part of these financial statements.
F-4
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Operating revenue | | | | $ | 3,003 | | | | | $ | 2,617 | | | | | $ | 6,227 | | | | | $ | 4,672 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of sales | | | | | 1,383 | | | | | | 1,150 | | | | | | 2,900 | | | | | | 2,110 | |
| Operating expense | | | | | 724 | | | | | | 691 | | | | | | 1,407 | | | | | | 1,136 | |
| Depreciation and amortization | | | | | 298 | | | | | | 304 | | | | | | 584 | | | | | | 492 | |
| Total costs and expenses | | | | | 2,405 | | | | | | 2,145 | | | | | | 4,891 | | | | | | 3,738 | |
| Operating income | | | | | 598 | | | | | | 472 | | | | | | 1,336 | | | | | | 934 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | | | (324 | ) | | | | | (308 | ) | | | | | (640 | ) | | | | | (530 | ) |
| Capitalized interest | | | | | 16 | | | | | | 10 | | | | | | 30 | | | | | | 15 | |
| Interest and dividend income | | | | | 23 | | | | | | 18 | | | | | | 42 | | | | | | 34 | |
| Other income | | | | | 29 | | | | | | 52 | | | | | | 55 | | | | | | 175 | |
| Other expense | | | | | (3 | ) | | | | | (7 | ) | | | | | (4 | ) | | | | | (9 | ) |
| Total other income (expense) | | | | | (259 | ) | | | | | (235 | ) | | | | | (517 | ) | | | | | (315 | ) |
| Income before income tax expense, minority interest and preferred dividends of subsidiaries and equity income | | | | | 339 | | | | | | 237 | | | | | | 819 | | | | | | 619 | |
| Income tax expense | | | | | 100 | | | | | | 82 | | | | | | 260 | | | | | | 213 | |
| Minority interest and preferred dividends of subsidiaries | | | | | 5 | | | | | | 10 | | | | | | 17 | | | | | | 14 | |
| Income before equity income | | | | | 234 | | | | | | 145 | | | | | | 542 | | | | | | 392 | |
| Equity income | | | | | 8 | | | | | | 8 | | | | | | 12 | | | | | | 10 | |
| Net income | | | | $ | 242 | | | | | $ | 153 | | | | | $ | 554 | | | | | $ | 402 | |
The accompanying notes are an integral part of these financial statements.
F-5
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding
Common
Shares | | | Common
Stock | | | Additional
Paid-in
Capital | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Income (Loss), Net | | | Total |
| Balance, January 1, 2006 | | | | | 9 | | | | | $ | — | | | | | $ | 1,963 | | | | | $ | 1,720 | | | | | $ | (298 | ) | | | | $ | 3,385 | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 402 | | | | | | — | | | | | | 402 | |
| Other comprehensive income | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 156 | | | | | | 156 | |
| Preferred stock conversion to common stock | | | | | 41 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Exercise of common stock options | | | | | 1 | | | | | | — | | | | | | 13 | | | | | | — | | | | | | — | | | | | | 13 | |
| Tax benefit from exercise of common stock options | | | | | — | | | | | | — | | | | | | 19 | | | | | | — | | | | | | — | | | | | | 19 | |
| Common stock issuances | | | | | 35 | | | | | | — | | | | | | 5,110 | | | | | | — | | | | | | — | | | | | | 5,110 | |
| Common stock purchases | | | | | (12 | ) | | | | | — | | | | | | (1,712 | ) | | | | | (38 | ) | | | | | — | | | | | | (1,750 | ) |
| Balance, June 30, 2006 | | | | | 74 | | | | | $ | — | | | | | $ | 5,393 | | | | | $ | 2,084 | | | | | $ | (142 | ) | | | | $ | 7,335 | |
| Balance, January 1, 2007 | | | | | 74 | | | | | $ | — | | | | | $ | 5,420 | | | | | $ | 2,598 | | | | | $ | (7 | ) | | | | $ | 8,011 | |
| Adoption of FASB Interpretation No. 48 | | | | | — | | | | | | — | | | | | | — | | | | | | (5 | ) | | | | | — | | | | | | (5 | ) |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 554 | | | | | | — | | | | | | 554 | |
| Other comprehensive income | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 110 | | | | | | 110 | |
| Other equity transactions | | | | | — | | | | | | — | | | | | | 2 | | | | | | — | | | | | | — | | | | | | 2 | |
| Balance, June 30, 2007 | | | | | 74 | | | | | $ | — | | | | | $ | 5,422 | | | | | $ | 3,147 | | | | | $ | 103 | | | | | $ | 8,672 | |
The accompanying notes are an integral part of these financial statements.
F-6
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)
| | | | | | | | | | | | |
| | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net Income | | | | $ | 554 | | | | | $ | 402 | |
| Adjustments to reconcile net income to cash flows from operations: | | | | | | | | | | | | |
| Gain on other items, net | | | | | (15 | ) | | | | | (130 | ) |
| Depreciation and amortization | | | | | 584 | | | | | | 492 | |
| Amortization of regulatory assets and liabilities | | | | | (8 | ) | | | | | 26 | |
| Provision for deferred income taxes | | | | | 32 | | | | | | 172 | |
| Other | | | | | (56 | ) | | | | | (2 | ) |
| Changes in other items, net of effects from acquisitions: | | | | | | | | | | | | |
| Accounts receivable and other current assets | | | | | 5 | | | | | | 284 | |
| Accounts payable and other accrued liabilities | | | | | 316 | | | | | | (291 | ) |
| Net cash flows from operating activities | | | | | 1,412 | | | | | | 953 | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| PacifiCorp acquisition, net of cash acquired | | | | | — | | | | | | (4,932 | ) |
| Other acquisitions, net of cash acquired | | | | | — | | | | | | (68 | ) |
| Capital expenditures relating to operating projects | | | | | (755 | ) | | | | | (698 | ) |
| Construction and other development costs | | | | | (912 | ) | | | | | (219 | ) |
| Purchases of available-for-sale securities | | | | | (684 | ) | | | | | (867 | ) |
| Proceeds from sale of available-for-sale securities | | | | | 572 | | | | | | 975 | |
| Proceeds from sale of assets | | | | | 33 | | | | | | 14 | |
| Decrease in restricted cash and investments | | | | | 29 | | | | | | 3 | |
| Other | | | | | 13 | | | | | | 2 | |
| Net cash flows from investing activities | | | | | (1,704 | ) | | | | | (5,790 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from the issuances of common stock | | | | | — | | | | | | 5,123 | |
| Purchases of common stock | | | | | — | | | | | | (1,750 | ) |
| Proceeds from MEHC senior debt | | | | | 547 | | | | | | 1,699 | |
| Repayments of MEHC subordinated debt | | | | | (67 | ) | | | | | (67 | ) |
| Proceeds from subsidiary and project debt | | | | | 1,400 | | | | | | 12 | |
| Repayments of subsidiary and project debt | | | | | (217 | ) | | | | | (245 | ) |
| Net repayment of MEHC revolving credit facility | | | | | (152 | ) | | | | | (51 | ) |
| Net (repayments of) proceeds from subsidiary short-term debt | | | | | (370 | ) | | | | | 114 | |
| Net proceeds from settlement of treasury rate lock agreements | | | | | 3 | | | | | | 53 | |
| Other | | | | | (20 | ) | | | | | (16 | ) |
| Net cash flows from financing activities | | | | | 1,124 | | | | | | 4,872 | |
| Effect of exchange rate changes | | | | | 3 | | | | | | 1 | |
| Net change in cash and cash equivalents | | | | | 835 | | | | | | 36 | |
| Cash and cash equivalents at beginning of period | | | | | 343 | | | | | | 358 | |
| Cash and cash equivalents at end of period | | | | $ | 1,178 | | | | | $ | 394 | |
The accompanying notes are an integral part of these financial statements
F-7
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
MidAmerican Energy Holdings Company (‘‘MEHC’’) is a holding company owning subsidiaries (together with MEHC, the ‘‘Company’’) that are principally engaged in energy businesses. MEHC is a consolidated subsidiary of Berkshire Hathaway Inc. (‘‘Berkshire Hathaway’’). The Company is organized and managed as eight distinct platforms: PacifiCorp, MidAmerican Funding, LLC (‘‘MidAmerican Funding’’) (which primarily includes MidAmerican Energy Company (‘‘MidAmerican Energy’’)), Northern Natural Gas Company (‘‘Northern Natural Gas’’), Kern River Gas Transmission Company (‘‘Kern River’’), CE Electric UK Funding Company (‘‘CE Electric UK’’) (which primarily includes Northern Electric Distribution Limited (‘‘Northern Electric’’) and Yorkshire Electricity Distribut ion plc (‘‘Yorkshire Electricity’’)), CalEnergy Generation-Foreign (the subsidiaries owning the Malitbog and Mahanagdong Projects (collectively the ‘‘Leyte Projects’’) and the Casecnan Project), CalEnergy Generation-Domestic (the subsidiaries owning interests in independent power projects in the United States) and HomeServices of America, Inc. (collectively with its subsidiaries, ‘‘HomeServices’’). Through these platforms, the Company owns and operates an electric utility company in the Western United States, a combined electric and natural gas utility company in the Midwestern United States, two interstate natural gas pipeline companies in the United States, two electricity distribution companies in Great Britain, a diversified portfolio of domestic and international independent power projects and the second largest residential real estate brokerage firm in the United States.
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’) for interim financial information and the U.S. Securities and Exchange Commission’s rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the financial statements as of June 30, 2007, and for the three- and six-month periods ended June 30, 2007 and 2006. Certain amounts in the prior period Consolidated Financial Statements have been reclassified to conform to the current period presentation. Such reclassifications did not impact p reviously reported operating income, net income or retained earnings. The results of operations for the three- and six-month periods ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited Consolidated Financial Statements include the accounts of MEHC and its subsidiaries in which it holds a controlling financial interest. The unaudited Consolidated Statements of Operations include the revenues and expenses of an acquired entity from the date of acquisition. Intercompany accounts and transactions have been eliminated.
The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, describes the most significant accounting estimates and policies used in the preparation of the Consolidated Financial Statements. There have been no significant changes in the Company’s assumptions regarding significant accounting policies during the first six months of 2007, except as described in Note 2.
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Table of Contents(2) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’). The Company adopted the provisions of FIN 48 effective January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
As of January 1, 2007, the Company had $117 million of unrecognized tax benefits. Of this amount, the Company recognized a net increase in the liability for unrecognized tax benefits of $22 million as a cumulative effect of adopting FIN 48, which was offset by reductions in beginning retained earnings of $5 million, deferred income tax liabilities of $31 million and goodwill of $15 million, respectively, and an increase in regulatory assets of $1 million in the Consolidated Balance Sheet. The remaining $95 million had been previously accrued under Statement of Financial Accounting Standards (‘‘SFAS’’) No. 5, ‘‘Accounting for Contingencies,’’ or SFAS No. 109, ‘‘Accounting for Income Taxes.’’ The entire $117 million of unrecognized tax benefits as of January 1, 2007 is included in other long-term accrued liabilities in the Consolidated Bal ance Sheet.
Included in the $117 million is $98 million of net unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility and tax positions related to acquired companies. Recognition of these tax benefits, other than applicable interest and penalties, would not affect the Company’s effective tax rate. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of January 1, 2007, the Company had $3 million accrued for the payment of interest and penalties, which is included in unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The U.S. Internal Revenue Service has closed examination of the Company’s income tax returns through 2003. In addition, open tax years related to a number of state and foreign jurisdictions remain subject to examination. During the six-month period ended June 30, 2007, there were no material changes to the liability for uncertain tax positions.
In February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115’’ (‘‘SFAS No. 159’’). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a remeasurement event that gives rise to new-basis accounting. The decision about whether to elect the fair value option is applied on an instrument-by-instrument basis, is irrevocable and is applied only to an entire instrument and not only to specified risks, cash flows or portions of that instrument. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 159 on its consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements’’ (‘‘SFAS No. 157’’). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not impose fair value measurements on items not already accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and
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Table of Contentsinterim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial position and results of operations.
(3) PacifiCorp Acquisition
General
In May 2005, MEHC reached a definitive agreement with Scottish Power plc (‘‘ScottishPower’’) and its subsidiary, PacifiCorp Holdings, Inc., to acquire 100% of the common stock of ScottishPower’s wholly-owned indirect subsidiary, PacifiCorp. On March 21, 2006, a wholly owned subsidiary of MEHC acquired 100% of the common stock of PacifiCorp from a wholly owned subsidiary of ScottishPower for a cash purchase price of $5.11 billion, which was funded through the issuance of common stock. MEHC also incurred $10 million of direct transaction costs associated with the acquisition, which consisted principally of investment banker commissions and outside legal and accounting fees, resulting in a total purchase price of $5.12 billion. As a result of the acquisition, MEHC controls substantially all of PacifiCorp’s voting securities, which include both common and preferred stock. The results of PacifiCorp’s operations are included in the Company’s results beginning March 21, 2006 (the ‘‘acquisition date’’).
Allocation of Purchase Price
SFAS No. 141, ‘‘Business Combinations,’’ requires that the total purchase price be allocated to PacifiCorp’s net tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. PacifiCorp’s operations are regulated, which provide revenue derived from cost, and are accounted for pursuant to SFAS No. 71, ‘‘Accounting for the Effects of Certain Types of Regulation.’’ PacifiCorp has demonstrated a past history of recovering its costs incurred through its rate making process. Certain adjustments, which were not significant, related to derivative contracts, severance costs and income taxes were made to the purchase price allocation. The following table summarizes the adjusted fair values of the assets acquired and liabilities assumed as of the acquisition date (in millions).
| | | | | | |
| | | | Fair Value |
| Current assets, including cash and cash equivalents of $183 | | | | $ | 1,115 | |
| Property, plant and equipment, net | | | | | 10,047 | |
| Goodwill | | | | | 1,140 | |
| Regulatory assets | | | | | 1,307 | |
| Other non-current assets | | | | | 665 | |
| Total assets | | | | | 14,274 | |
| Current liabilities, including short-term debt of $184 and current portion of long-term debt of $221 | | | | | (1,283 | ) |
| Regulatory liabilities | | | | | (818 | ) |
| Pension and postretirement obligations | | | | | (830 | ) |
| Subsidiary and project debt, less current portion | | | | | (3,762 | ) |
| Deferred income taxes | | | | | (1,606 | ) |
| Other non-current liabilities | | | | | (855 | ) |
| Total liabilities | | | | | (9,154 | ) |
| Net assets acquired | | | | $ | 5,120 | |
Certain transition activities, pursuant to established plans, were undertaken as PacifiCorp was integrated into the Company. Costs, relating primarily to employee termination activities, have been incurred associated with such transition activities, which were completed as of March 31, 2007. The finalization of certain integration plans resulted in adjustments to the purchase price allocation for the acquired assets and assumed liabilities of PacifiCorp. Qualifying severance costs accrued during the three-month period ended March 31, 2007, and the period from the acquisition date to March 31,
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Table of Contents2006, totaled $7 million and $9 million, respectively. Accrued severance costs were $34 million and $31 million as of March 31, 2007 and December 31, 2006, respectively.
Pro Forma Financial Information
The following pro forma condensed consolidated results of operations assume that the acquisition of PacifiCorp was completed as of January 1, 2006, and provide information for the six-month period ended June 30, 2006 (in millions):
| | | | | | |
| Operating revenue | | | | $ | 5,824 | |
| Net income | | | | $ | 537 | |
The pro forma financial information represents the historical operating results of the combined company with adjustments for purchase accounting and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the period presented.
(4) Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following (in millions):
| | | | | | | | | | | | | | | |
| | | | | | | As of |
| | | | Depreciation
Life | | | June 30,
2007 | | | December 31,
2006 |
| Regulated assets: | | | | | | | | | | | | | | | |
| Utility generation and distribution system | | | 5-85 years | | | | $ | 28,891 | | | | | $ | 27,687 | |
| Interstate pipeline assets | | | 3-67 years | | | | | 5,339 | | | | | | 5,329 | |
| | | | | | | | | 34,230 | | | | | | 33,016 | |
| Accumulated depreciation and amortization | | | | | | | | (12,251 | ) | | | | | (11,872 | ) |
| Regulated assets, net | | | | | | | | 21,979 | | | | | | 21,144 | |
| Non-regulated assets: | | | | | | | | | | | | | | | |
| Independent power plants | | | 10-30 years | | | | | 1,184 | | | | | | 1,184 | |
| Other assets | | | 3-30 years | | | | | 630 | | | | | | 586 | |
| | | | | | | | | 1,814 | | | | | | 1,770 | |
| Accumulated depreciation and amortization | | | | | | | | (908 | ) | | | | | (844 | ) |
| Non-regulated assets, net | | | | | | | | 906 | | | | | | 926 | |
| Net operating assets | | | | | | | | 22,885 | | | | | | 22,070 | |
| Construction in progress | | | | | | | | 2,037 | | | | | | 1,969 | |
| Property, plant and equipment, net | | | | | | | $ | 24,922 | | | | | $ | 24,039 | |
Substantially all of the construction in progress as of June 30, 2007 and December 31, 2006 relates to the construction of regulated assets.
(5) Jointly Owned Utility Plant
The Walter Scott, Jr. Energy Center Unit No. 4 (‘‘WSEC Unit 4’’), formerly Council Bluffs Energy Center Unit No. 4, a 790-megawatt (‘‘MW’’) (accredited capacity) super-critical-temperature, coal-fired generating plant, began commercial operation on June 1, 2007. MidAmerican Energy operates the plant and holds an undivided ownership interest of 59.66%, or approximately 471 MW, as a tenant in common with the other owners of the plant. MidAmerican Energy accounts for, and provided financing for, its proportional share of the plant. In conjunction with WSEC Unit 4 being placed in service, $710 million was transferred from construction in progress to utility generation and distribution system.
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Table of Contents(6) Regulatory Matters
The following are updates to regulatory matters based upon material changes that occurred subsequent to December 31, 2006.
Rate Matters
Iowa Electric Revenue Sharing
Under a series of settlement agreements between MidAmerican Energy, the Iowa Office of Consumer Advocate (‘‘OCA’’) and other intervenors approved by the Iowa Utilities Board (‘‘IUB’’), MidAmerican Energy has agreed not to seek a general increase in electric base rates to become effective prior to January 1, 2014, unless its Iowa jurisdictional electric return on equity for any year covered by the applicable agreement falls below 10%, computed as prescribed in each respective agreement. Prior to filing for a general increase in electric rates, MidAmerican Energy is required to conduct 30 days of good faith negotiations with the signatories to the settlement agreements to attempt to avoid a general increase in such rates. As a party to the settlement agreements, the OCA has agreed not to request or support any decrease in MidAmerican Energy’s Iowa electric base rates to become effective prior to January&nb sp;1, 2014. The settlement agreements specifically allow the IUB to approve or order electric rate design or cost of service rate changes that could result in changes to rates for specific customers as long as such changes do not result in an overall increase in revenues for MidAmerican Energy.
The settlement agreements also each provide that revenues associated with Iowa retail electric returns on equity within specified ranges will be shared with customers and that the portion assigned to customers will be recorded as a regulatory liability. The following table summarizes the ranges of Iowa electric returns on equity subject to revenue sharing under each settlement agreement, the percent of revenues within those ranges to be assigned to customers, and the method by which the liability to customers will be settled.
| | | | | | | | | | | | |
Date Approved
By the IUB | | | Years
Covered | | | Range of
Iowa Electric
Return on
Equity Subject
to Sharing | | | Customers’
Share of
Revenues
Within Range | | | Method to be Used to
Settle Liability to Customers |
| December 21, 2001 | | | 2001 – 2005 | | | 12% – 14%
Above 14% | | | 50%
83.33% | | | Credits against the cost of new generation plant in Iowa |
| October 17, 2003 | | | 2006 – 2010 | | | 11.75% – 13%
13% – 14%
Above 14% | | | 40%
50%
83.3% | | | Credits against the cost of new generation plant in Iowa |
| January 31, 2005 | | | 2011 | | | Same as 2006 – 2010 | | | Credits to customer bills in 2012 |
| April 18, 2006 | | | 2012 | | | Same as 2006 – 2010 | | | Credits to customer bills in 2013 |
| July 27, 2007 | | | 2013 | | | Same as 2006 – 2010(1) | | | Credits against the cost of wind-powered generation projects covered by this agreement |
| (1) | If a rate case is filed pursuant to the 10% threshold, as discussed above, the revenue sharing arrangement for 2013 is changed such that 83.3% of revenues associated with Iowa operating income in excess of electric returns on equity allowed by the IUB as a result of the rate case will be shared with customers. |
The regulatory liabilities created by the settlement agreements have been and are currently recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. As a result of the credits applied to generating plant balances when the related plant is placed in service, depreciation expense is reduced. On June 1, 2007, WSEC Unit 4 was placed in service. Accordingly, $264 million, the January 1, 2007 balance of the revenue sharing liability, plus the related interest accrued in 2007, was applied against the cost of WSEC Unit 4 in utility generation and distribution system.
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Table of ContentsRefund Matters
PacifiCorp
On June 21, 2007, the Federal Energy Regulatory Commission (‘‘FERC’’) approved PacifiCorp’s settlement and release of claims agreement (‘‘Settlement’’) with Pacific Gas and Electric Company, Southern California Edison Company, San Diego Gas & Electric Company, the People of the State of California, ex rel. Edmund G. Brown Jr., Attorney General, the California Electricity Oversight Board, and the California Public Utilities Commission (collectively, the ‘‘California Parties’’), certain of which purchased energy in the California Independent System Operator (‘‘ISO’’) and the California Power Exchange (‘‘PX’’) markets during past periods of high energy prices in 2000 and 2001. The Settlement, which was executed by PacifiCorp on April 11, 2007, settles claims brought by the California Parties against PacifiCorp for refunds and remedies in numerous related proceedings (together, the ‘‘FERC Proceedings’’), as well as certain potential civil claims, arising from events and transactions in Western United States energy markets during the period January 1, 2000 through June 20, 2001 (the ‘‘Refund Period’’). Under the Settlement, PacifiCorp made cash payments to escrows controlled by the California Parties in the amount of $16 million in April 2007, and upon FERC approval of the agreement in June 2007, PacifiCorp allowed the PX to release an additional $12 million to such escrows, which represented PacifiCorp’s estimated unpaid receivable from the transactions in the PX and ISO markets during the Refund Periods, plus interest. The monies held in escrow are for distribution to buyers from the ISO and PX markets that purchased power during the Refund Period. The agreement provides for the release of claims by the California Parties (as well as additiona l parties that chose to join in the Settlement) against PacifiCorp for refunds, disgorgement of profits, or other monetary or non-monetary remedies in the FERC Proceedings, and provides a mutual release of claims for civil damages and equitable relief.
(7) Recent Debt Transactions
On June 29, 2007, MidAmerican Energy issued $400 million of 5.65% Senior Notes due July 15, 2012, and $250 million of 5.95% Senior Notes due July 15, 2017. The proceeds are being used by MidAmerican Energy to pay construction costs of its interest in the WSEC Unit 4 and its wind projects in Iowa, to repay short-term indebtedness and for general corporate purposes.
On May 11, 2007, MEHC issued $550 million of 5.95% Senior Bonds due May 15, 2037. The proceeds will be used by MEHC to repay at maturity its 4.625% senior notes due in 2007 in an aggregate principal amount of $200 million and its 7.63% senior notes due in 2007 in an aggregate principal amount of $350 million. Pending repayment of this indebtedness, the proceeds are being used to repay short-term indebtedness, with the balance invested in short-term securities or used for other general corporate purposes.
On March 14, 2007, PacifiCorp issued $600 million of 5.75% First Mortgage Bonds due April 1, 2037. The proceeds were used by PacifiCorp to repay its short-term debt and for other general corporate purposes.
On February 12, 2007, Northern Natural Gas issued $150 million of 5.8% Senior Bonds due February 15, 2037. The proceeds are being used by Northern Natural Gas to fund capital expenditures and for other general corporate purposes.
(8) Risk Management and Hedging Activities
The Company is exposed to the impact of market fluctuations in commodity prices, principally natural gas and electricity, particularly through its ownership of PacifiCorp and MidAmerican Energy. Interest rate risk exists on variable rate debt, commercial paper and future debt issuances. MEHC is also exposed to foreign currency risk from its business operations and investments in Great Britain and the Philippines. The Company employs established policies and procedures to manage its risks associated with these market fluctuations using various commodity and financial derivative instruments, including forward contracts, futures, swaps and options. The risk management process
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Table of Contentsestablished by each business platform is designed to identify, assess, monitor, report, manage, and mitigate each of the various types of risk involved in its business. The Company does not engage in a material amount of proprietary trading activities.
The following table summarizes the various derivative mark-to-market positions included in the Consolidated Balance Sheet as of June 30, 2007 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Derivative Net Assets (Liabilities) | | | Regulatory
Net Assets
(Liabilities) | | | Accumulated
Other
Comprehensive
(Income) Loss(1) |
| | | | Assets | | | Liabilities | | | Net |
| Commodity derivatives | | | | $ | 356 | | | | | $ | (630 | ) | | | | $ | (274 | ) | | | | $ | 272 | | | | | $ | (6 | ) |
| Interest rate contracts | | | | | 55 | | | | | | — | | | | | | 55 | | | | | | — | | | | | | (55 | ) |
| Foreign currency contracts | | | | | 2 | | | | | | (161 | ) | | | | | (159 | ) | | | | | (1 | ) | | | | | 161 | |
| | | | | $ | 413 | | | | | $ | (791 | ) | | | | $ | (378 | ) | | | | $ | 271 | | | | | $ | 100 | |
| Current | | | | $ | 192 | | | | | $ | (314 | ) | | | | $ | (122 | ) | | | | | | | | | | | | |
| Non-current | | | | | 221 | | | | | | (477 | ) | | | | | (256 | ) | | | | | | | | | | | | |
| Total | | | | $ | 413 | | | | | $ | (791 | ) | | | | $ | (378 | ) | | | | | | | | | | | | |
The following table summarizes the various derivative mark-to-market positions included in the Consolidated Balance Sheet as of December 31, 2006 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Derivative Net Assets (Liabilities) | | | Regulatory
Net Assets
(Liabilities) | | | Accumulated
Other
Comprehensive
(Income) Loss(1) |
| | | | Assets | | | Liabilities | | | Net |
| Commodity derivatives | | | | $ | 467 | | | | | $ | (740 | ) | | | | $ | (273 | ) | | | | $ | 247 | | | | | $ | 6 | |
| Interest rate contracts | | | | | 13 | | | | | | — | | | | | | 13 | | | | | | — | | | | | | (13 | ) |
| Foreign currency contracts | | | | | 4 | | | | | | (149 | ) | | | | | (145 | ) | | | | | (3 | ) | | | | | 149 | |
| | | | | $ | 484 | | | | | $ | (889 | ) | | | | $ | (405 | ) | | | | $ | 244 | | | | | $ | 142 | |
| Current | | | | $ | 236 | | | | | $ | (271 | ) | | | | $ | (35 | ) | | | | | | | | | | | | |
| Non-current | | | | | 248 | | | | | | (618 | ) | | | | | (370 | ) | | | | | | | | | | | | |
| Total | | | | $ | 484 | | | | | $ | (889 | ) | | | | $ | (405 | ) | | | | | | | | | | | | |
(9) Other Income
Other income consists of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Gain on Mirant bankruptcy claim | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | 89 | |
| Gains on sales of non-strategic assets and investments | | | | | — | | | | | | 32 | | | | | | 1 | | | | | | 45 | |
| Allowance for equity funds used during construction | | | | | 21 | | | | | | 15 | | | | | | 40 | | | | | | 23 | |
| Other | | | | | 8 | | | | | | 5 | | | | | | 14 | | | | | | 18 | |
| Total other income | | | | $ | 29 | | | | | $ | 52 | | | | | $ | 55 | | | | | $ | 175 | |
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Table of ContentsGain on Mirant Americas Energy Marketing (‘‘Mirant’’) Bankruptcy Claim
Mirant was one of the shippers that entered into a 15-year, 2003 Expansion Project, firm gas transportation contract (90,000 decatherms per day) with Kern River (the ‘‘Mirant Agreement’’) and provided a letter of credit equivalent to 12 months of reservation charges as security for its obligations thereunder. In July 2003, Mirant filed for Chapter 11 bankruptcy protection. Kern River claimed $210 million in damages due to the rejection of the Mirant Agreement. The bankruptcy court ultimately determined that Kern River was entitled to a general unsecured claim of $74 million in addition to $15 million of cash collateral. In January 2006, Mirant emerged from bankruptcy. In February 2006, Kern River received an initial distribution of such shares in payment of the majority of its allowed claim. Kern River sold all of the shares of new Mirant stock received from its allowed claim amount plus interest in the first quarter of 2006 and recognized a gain from those sales of $89 million.
(10) Related Party Transactions
As of June 30, 2007 and December 31, 2006, Berkshire Hathaway and its affiliates held 11% mandatory redeemable preferred securities due from certain wholly owned subsidiary trusts of MEHC of $988 million and $1.06 billion, respectively. Interest expense on these securities totaled $29 million and $35 million for the three-month periods ended June 30, 2007 and 2006, respectively, and $58 million and $71 million for the six-month periods ended June 30, 2007 and 2006, respectively. Accrued interest totaled $21 million as of June 30, 2007 and December 31, 2006.
(11) Commitments and Contingencies
Environmental Matters
The Company is subject to federal, state, local and foreign laws and regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters that have the potential to impact the Company’s current and future operations. The Company believes it is in material compliance with current environmental requirements.
Accrued Environmental Costs
The Company is fully or partly responsible for environmental remediation at various contaminated sites, including sites that are or were part of the Company’s operations and sites owned by third parties. The Company accrues environmental remediation expenses when the expense is believed to be probable and can be reasonably estimated. The quantification of environmental exposures is based on many factors, including changing laws and regulations, advancements in environmental technologies, the quality of available site-specific information, site investigation results, expected remediation or settlement timelines, the Company’s proportionate responsibility, contractual indemnities and coverage provided by insurance policies. The liability recorded as of June 30, 2007 and December 31, 2006 was $32 million and $50 million, respectively, and is included in other liabilities and other long-term accrued liabilities on the accompanying Con solidated Balance Sheets. Environmental remediation liabilities that separately result from the normal operation of long-lived assets and that are associated with the retirement of those assets are separately accounted for as asset retirement obligations.
Hydroelectric Relicensing
PacifiCorp’s hydroelectric portfolio consists of 49 plants with an aggregate facility net owned capacity of 1,160 MW. The FERC regulates 98% of the net capacity of this portfolio through 18 individual licenses. Several of PacifiCorp’s hydroelectric projects are in some stage of relicensing with the FERC. Hydroelectric relicensing and the related environmental compliance requirements and litigation are subject to uncertainties. PacifiCorp expects that future costs relating to these matters may be significant and will consist primarily of additional relicensing costs, operations and
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Table of Contentsmaintenance expense, and capital expenditures. Electricity generation reductions may result from the additional environmental requirements. PacifiCorp had incurred $83 million and $79 million in costs as of June 30, 2007 and December 31, 2006, respectively, for ongoing hydroelectric relicensing, which are included in construction in progress and reflected in property, plant and equipment, net in the accompanying Consolidated Balance Sheets.
In February 2004, PacifiCorp filed with the FERC a final application for a new license to operate the 169-MW nameplate-rated Klamath hydroelectric project in anticipation of the March 2006 expiration of the existing license. PacifiCorp is currently operating under an annual license issued by the FERC and expects to continue to operate under annual licenses until the new operating license is issued. As part of the relicensing process, the United States Departments of Interior and Commerce filed proposed licensing terms and conditions with the FERC in March 2006, which proposed that PacifiCorp construct upstream and downstream fish passage facilities at the Klamath hydroelectric project’s four mainstem dams. In April 2006, PacifiCorp filed alternatives to the federal agencies’ proposal and requested an administrative hearing to challenge some of the federal agencies’ factual assumptions supporting their proposal for the constr uction of the fish passage facilities. A hearing was held in August 2006 before an administrative law judge. The administrative law judge issued a ruling in September 2006 generally supporting the federal agencies’ factual assumptions. In January 2007, the United States Departments of Interior and Commerce filed modified terms and conditions consistent with March 2006 filings and rejected the alternatives proposed by PacifiCorp. PacifiCorp is prepared to meet and implement the federal agencies’ terms and conditions as part of the project’s relicensing. However, PacifiCorp expects to continue in settlement discussions with various parties in the Klamath Basin area who have intervened with the FERC licensing proceeding to try to achieve a mutually acceptable outcome for the project.
Also, as part of the relicensing process, the FERC is required to perform an environmental review. In September 2006, the FERC issued its draft environmental impact statement on the Klamath hydroelectric project license. The public comment period on the draft environmental impact statement closed on December 1, 2006. The FERC is expected to issue its final environmental impact statement in summer 2007. Other federal agencies are also working to complete their endangered species analyses. PacifiCorp will need to obtain water quality certifications from Oregon and California prior to the FERC issuing a final license.
In the relicensing of the Klamath hydroelectric project, PacifiCorp had incurred $45 million and $42 million in costs as of June 30, 2007 and December 31, 2006, respectively, which are included in construction in progress and reflected in property, plant and equipment, net in the accompanying Consolidated Balance Sheets. While the costs of implementing new license provisions cannot be determined until such time as a new license is issued, such costs could be material.
Legal Matters
The Company is party in a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company does not believe that such normal and routine litigation will have a material effect on its consolidated financial results. The Company is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties in substantial amounts and are described below.
PacifiCorp
In February 2007, the Sierra Club and the Wyoming Outdoor Council filed a complaint against PacifiCorp in the federal district court in Cheyenne, Wyoming, alleging violations of the Clean Air Act’s opacity standards at PacifiCorp’s Jim Bridger plant in Wyoming. Opacity is an indication of the amount of light that is obscured in the flue of a generating facility. The complaint alleges thousands of violations of asserted six-minute compliance periods and seeks an injunction ordering the Jim Bridger plant’s compliance with opacity limits, civil penalties of $32,500 per day per violation, and the plaintiffs’ costs of litigation. PacifiCorp believes it has a number of defenses to the claims. PacifiCorp intends to vigorously oppose the lawsuit but cannot predict its outcome at this time. PacifiCorp has
F-16
Table of Contentsalready committed to invest at least $812 million in pollution control equipment at its generating facilities, including the Jim Bridger plant. This commitment is expected to significantly reduce system-wide emissions, including emissions at the Jim Bridger plant.
CalEnergy Generation-Foreign
Pursuant to the share ownership adjustment mechanism in the CE Casecnan Water and Energy Company, Inc. (‘‘CE Casecnan’’) shareholder agreement, which is based upon proforma financial projections of the Casecnan Project prepared following commencement of commercial operations, in February 2002, MEHC’s indirect wholly owned subsidiary, CE Casecnan Ltd., advised the minority shareholder of CE Casecnan, LaPrairie Group Contractors (International) Ltd. (‘‘LPG’’), that MEHC’s indirect ownership interest in CE Casecnan had increased to 100% effective from commencement of commercial operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the State of California, City and County of San Francisco against CE Casecnan Ltd. and MEHC. LPG’s complaint, as amended, seeks compensatory and punitive damages arising out of CE Casecnan Ltd.’s and MEHC&r squo;s alleged improper calculation of the proforma financial projections and alleged improper settlement of the National Irrigation Administration arbitration. On January 21, 2004, CE Casecnan Ltd., LPG and CE Casecnan entered into a status quo agreement pursuant to which the parties agreed to set aside certain distributions related to the shares subject to the LPG dispute and CE Casecnan agreed not to take any further actions with respect to such distributions without at least 15 days prior notice to LPG. Accordingly, 15% of the CE Casecnan dividend declarations from 2004 to 2006 was set aside in a separate bank account in the name of CE Casecnan.
On January 3, 2006, the court entered a judgment in favor of LPG against CE Casecnan Ltd. Pursuant to the judgment, 15% of the distributions of CE Casecnan was deposited into escrow, plus interest at 9% per annum. On February 21, 2007, the appellate court issued a decision, and as a result of the decision, CE Casecnan Ltd. determined that LPG would retain an ownership of 10% of the shares of CE Casecnan, with the remaining 5% ownership being transferred to CE Casecnan Ltd. subject to certain buy-up rights under the shareholder agreement. Pursuant to the appellate court decision, on May 7, 2007, CE Casecnan released $22 million of dividends and $4 million of accrued interest from the dividend set aside account representing the 10% share to LPG while the remaining 5% share is still held in escrow. The parties have submitted briefs on the final calculation of the internal rate of return and whether LPG is entitled to buy-up its in terest to 15% and, if so, the buy-up price. The determination of the internal rate of return is pending the court’s decision. A hearing is scheduled for October 10, 2007, for further proceedings on whether LPG is entitled to buy-up its interest. The parties are proceeding in the trial court on LPG’s remaining claim against MEHC for damages for alleged breach of fiduciary duty. The Company intends to vigorously defend and pursue the remaining claims.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. (‘‘San Lorenzo’’), an original shareholder substantially all of whose shares in CE Casecnan were purchased by MEHC in 1998, threatened to initiate legal action against the Company in the Philippines in connection with certain aspects of its option to repurchase such shares. The Company believes that San Lorenzo has no valid basis for any claim and, if named as a defendant in any action that may be commenced by San Lorenzo, the Company will vigorously defend such action. On July 1, 2005, MEHC and CE Casecnan Ltd. commenced an action against San Lorenzo in the District Court of Douglas County, Nebraska, seeking a declaratory judgment as to MEHC’s and CE Casecnan Ltd.’s rights vis-à-vis San Lorenzo in respect of such shares. San Lorenzo filed a motion to dismiss on September 19, 2005. Subsequently, San Lorenzo purported to exercise its option to repurchase such shares. On January 30, 2006, San Lorenzo filed a counterclaim against MEHC and CE Casecnan Ltd. seeking declaratory relief that it has effectively exercised its option to purchase 15% of the shares of CE Casecnan, that it is the rightful owner of such shares and that it is due all dividends paid on such shares. On March 9, 2006, the court granted San Lorenzo’s motion to dismiss, but has since permitted MEHC and CE Casecnan Ltd. to file an amended complaint incorporating the purported exercise of the option. The complaint has been amended and the action is proceeding. The impact, if any, of San Lorenzo’s purported exercise of its option and the Nebraska litigation on the Company cannot be determined at this time. The Company intends to vigorously defend the counterclaims.
F-17
Table of Contents | |
| (12) | Employee Benefit Plans |
Domestic Operations
In December 2006, PacifiCorp’s non-bargaining employees were notified that PacifiCorp would switch from a traditional final average pay formula for its retirement plan to a cash balance formula effective June 1, 2007. As a result of the change, benefits under the traditional final average pay formula were frozen as of May 31, 2007, and PacifiCorp’s pension liability and regulatory assets each decreased by $111 million.
The components of the combined net periodic benefit cost for the Company’s domestic pension and other postretirement benefit plans were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Pension | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | | | $ | 13 | | | | | $ | 14 | | | | | $ | 26 | | | | | $ | 21 | |
| Interest cost | | | | | 27 | | | | | | 28 | | | | | | 56 | | | | | | 40 | |
| Expected return on plan assets | | | | | (27 | ) | | | | | (27 | ) | | | | | (55 | ) | | | | | (39 | ) |
| Net amortization | | | | | 8 | | | | | | 8 | | | | | | 17 | | | | | | 10 | |
| Net periodic benefit cost | | | | $ | 21 | | | | | $ | 23 | | | | | $ | 44 | | | | | $ | 32 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Other Postretirement | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | | | $ | 4 | | | | | $ | 4 | | | | | $ | 8 | | | | | $ | 6 | |
| Interest cost | | | | | 13 | | | | | | 11 | | | | | | 25 | | | | | | 16 | |
| Expected return on plan assets | | | | | (12 | ) | | | | | (9 | ) | | | | | (22 | ) | | | | | (12 | ) |
| Net amortization | | | | | 6 | | | | | | 7 | | | | | | 11 | | | | | | 7 | |
| Net periodic benefit cost | | | | $ | 11 | | | | | $ | 13 | | | | | $ | 22 | | | | | $ | 17 | |
Employer contributions to the pension and other postretirement plans are expected to be $94 million and $46 million, respectively, in 2007. As of June 30, 2007, $66 million and $24 million of contributions had been made to the pension and other postretirement plans, respectively.
CE Electric UK
The components of the net periodic benefit cost for the Company’s UK pension plan were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Service cost | | | | $ | 6 | | | | | $ | 5 | | | | | $ | 12 | | | | | $ | 9 | |
| Interest cost | | | | | 23 | | | | | | 19 | | | | | | 46 | | | | | | 38 | |
| Expected return on plan assets | | | | | (29 | ) | | | | | (25 | ) | | | | | (58 | ) | | | | | (49 | ) |
| Net amortization | | | | | 8 | | | | | | 8 | | | | | | 16 | | | | | | 16 | |
| Net periodic benefit cost | | | | $ | 8 | | | | | $ | 7 | | | | | $ | 16 | | | | | $ | 14 | |
F-18
Table of ContentsEmployer contributions to the UK pension plan are expected to be £36 million for 2007. As of June 30, 2007, £18 million, or $35 million, of contributions had been made to the UK pension plan.
| |
| (13) | Comprehensive Income and Components of Accumulated Other Comprehensive Income (Loss), Net |
The components of comprehensive income are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods Ended
June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Net income | | | | $ | 242 | | | | | $ | 153 | | | | | $ | 554 | | | | | $ | 402 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrecognized amounts on retirement benefits, net of tax of $1; $—; $4; and $— | | | | | 1 | | | | | | — | | | | | | 6 | | | | | | — | |
| Minimum pension liability adjustment, net of tax of $—; $(6); $—; and $(6) | | | | | — | | | | | | (13 | ) | | | | | — | | | | | | (15 | ) |
| Foreign currency translation adjustment | | | | | 52 | | | | | | 120 | | | | | | 65 | | | | | | 136 | |
| Fair value adjustment on cash flow hedges, net of tax of $15; $(4); $24; and $22 | | | | | 25 | | | | | | (5 | ) | | | | | 38 | | | | | | 36 | |
| Unrealized gains on marketable securities, net of tax of $1; $(1); $1; and $(1) | | | | | 1 | | | | | | (2 | ) | | | | | 1 | | | | | | (1 | ) |
| Total other comprehensive income | | | | | 79 | | | | | | 100 | | | | | | 110 | | | | | | 156 | |
| Comprehensive income | | | | $ | 321 | | | | | $ | 253 | | | | | $ | 664 | | | | | $ | 558 | |
Accumulated other comprehensive income (loss), net is included in the accompanying Consolidated Balance Sheets in the common shareholders’ equity section, and consists of the following components, net of tax, as follows (in millions):
| | | | | | | | | | | | |
| | | | As of |
| | | | June 30,
2007 | | | December 31,
2006 |
| Unrecognized amounts on retirement benefits, net of tax of $(156) and $(160) | | | | $ | (361 | ) | | | | $ | (367 | ) |
| Foreign currency translation adjustment | | | | | 391 | | | | | | 326 | |
| Fair value adjustment on cash flow hedges, net of tax of $45 and $21 | | | | | 67 | | | | | | 29 | |
| Unrealized gains on marketable securities, net of tax of $4 and $3 | | | | | 6 | | | | | | 5 | |
| Total accumulated other comprehensive income (loss), net | | | | $ | 103 | | | | | $ | (7 | ) |
F-19
Table of Contents(14) Segment Information
MEHC’s reportable segments were determined based on how the Company’s strategic units are managed. The Company’s foreign reportable segments include CE Electric UK, whose business is principally in Great Britain, and CalEnergy Generation-Foreign, whose business is in the Philippines. Intersegment eliminations and adjustments, including the allocation of goodwill, have been made. Information related to the Company’s reportable segments is shown below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Operating revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 1,026 | | | | | $ | 860 | | | | | $ | 2,053 | | | | | $ | 936 | |
| MidAmerican Funding | | | | | 971 | | | | | | 761 | | | | | | 2,208 | | | | | | 1,803 | |
| Northern Natural Gas | | | | | 108 | | | | | | 103 | | | | | | 342 | | | | | | 317 | |
| Kern River | | | | | 111 | | | | | | 86 | | | | | | 197 | | | | | | 166 | |
| CE Electric UK | | | | | 254 | | | | | | 216 | | | | | | 502 | | | | | | 426 | |
| CalEnergy Generation — Foreign | | | | | 64 | | | | | | 74 | | | | | | 130 | | | | | | 159 | |
| CalEnergy Generation — Domestic | | | | | 8 | | | | | | 8 | | | | | | 16 | | | | | | 16 | |
| HomeServices | | | | | 470 | | | | | | 517 | | | | | | 805 | | | | | | 873 | |
| Corporate/other(1) | | | | | (9 | ) | | | | | (8 | ) | | | | | (26 | ) | | | | | (24 | ) |
| Total operating revenue | | | | $ | 3,003 | | | | | $ | 2,617 | | | | | $ | 6,227 | | | | | $ | 4,672 | |
| Depreciation and amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 122 | | | | | $ | 116 | | | | | $ | 243 | | | | | $ | 129 | |
| MidAmerican Funding | | | | | 76 | | | | | | 87 | | | | | | 145 | | | | | | 161 | |
| Northern Natural Gas | | | | | 15 | | | | | | 14 | | | | | | 29 | | | | | | 28 | |
| Kern River | | | | | 20 | | | | | | 20 | | | | | | 39 | | | | | | 47 | |
| CE Electric UK | | | | | 44 | | | | | | 34 | | | | | | 86 | | | | | | 64 | |
| CalEnergy Generation – Foreign | | | | | 17 | | | | | | 23 | | | | | | 35 | | | | | | 45 | |
| CalEnergy Generation – Domestic | | | | | 2 | | | | | | 2 | | | | | | 4 | | | | | | 4 | |
| HomeServices | | | | | 5 | | | | | | 11 | | | | | | 10 | | | | | | 16 | |
| Corporate/other(1) | | | | | (3 | ) | | | | | (3 | ) | | | | | (7 | ) | | | | | (2 | ) |
| Total depreciation and amortization | | | | $ | 298 | | | | | $ | 304 | | | | | $ | 584 | | | | | $ | 492 | |
F-20
Table of Contents
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Operating income: | | | | | | | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 210 | | | | | $ | 131 | | | | | $ | 430 | | | | | $ | 153 | |
| MidAmerican Funding | | | | | 113 | | | | | | 79 | | | | | | 258 | | | | | | 213 | |
| Northern Natural Gas | | | | | 22 | | | | | | 19 | | | | | | 171 | | | | | | 144 | |
| Kern River | | | | | 77 | | | | | | 52 | | | | | | 138 | | | | | | 92 | |
| CE Electric UK | | | | | 125 | | | | | | 117 | | | | | | 272 | | | | | | 231 | |
| CalEnergy Generation – Foreign | | | | | 32 | | | | | | 44 | | | | | | 76 | | | | | | 101 | |
| CalEnergy Generation – Domestic | | | | | 4 | | | | | | 4 | | | | | | 8 | | | | | | 6 | |
| HomeServices | | | | | 32 | | | | | | 35 | | | | | | 27 | | | | | | 35 | |
| Corporate/other(1) | | | | | (17 | ) | | | | | (9 | ) | | | | | (44 | ) | | | | | (41 | ) |
| Total operating income | | | | | 598 | | | | | | 472 | | | | | | 1,336 | | | | | | 934 | |
| Interest expense | | | | | (324 | ) | | | | | (308 | ) | | | | | (640 | ) | | | | | (530 | ) |
| Capitalized interest | | | | | 16 | | | | | | 10 | | | | | | 30 | | | | | | 15 | |
| Interest and dividend income | | | | | 23 | | | | | | 18 | | | | | | 42 | | | | | | 34 | |
| Other income | | | | | 29 | | | | | | 52 | | | | | | 55 | | | | | | 175 | |
| Other expense | | | | | (3 | ) | | | | | (7 | ) | | | | | (4 | ) | | | | | (9 | ) |
| Total income before income tax expense, minority interest and preferred dividends of subsidiaries and equity income | | | | $ | 339 | | | | | $ | 237 | | | | | $ | 819 | | | | | $ | 619 | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 79 | | | | | $ | 69 | | | | | $ | 154 | | | | | $ | 77 | |
| MidAmerican Funding | | | | | 41 | | | | | | 38 | | | | | | 83 | | | | | | 77 | |
| Northern Natural Gas | | | | | 15 | | | | | | 13 | | | | | | 28 | | | | | | 25 | |
| Kern River | | | | | 19 | | | | | | 18 | | | | | | 37 | | | | | | 36 | |
| CE Electric UK | | | | | 59 | | | | | | 54 | | | | | | 117 | | | | | | 103 | |
| CalEnergy Generation — Foreign | | | | | 4 | | | | | | 6 | | | | | | 8 | | | | | | 11 | |
| CalEnergy Generation — Domestic | | | | | 4 | | | | | | 4 | | | | | | 9 | | | | | | 9 | |
| HomeServices | | | | | 1 | | | | | | 1 | | | | | | 1 | | | | | | 1 | |
| Corporate/other(1) | | | | | 102 | | | | | | 105 | | | | | | 203 | | | | | | 191 | |
| Total interest expense | | | | $ | 324 | | | | | $ | 308 | | | | | $ | 640 | | | | | $ | 530 | |
F-21
Table of Contents
| | | | | | | | | | | | |
| | | | As of |
| | | | June 30,
2007 | | | December 31,
2006 |
| Total assets: | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 15,413 | | | | | $ | 14,970 | |
| MidAmerican Funding | | | | | 8,991 | | | | | | 8,651 | |
| Northern Natural Gas | | | | | 2,451 | | | | | | 2,277 | |
| Kern River | | | | | 2,027 | | | | | | 2,057 | |
| CE Electric UK | | | | | 6,851 | | | | | | 6,560 | |
| CalEnergy Generation – Foreign | | | | | 543 | | | | | | 559 | |
| CalEnergy Generation – Domestic | | | | | 542 | | | | | | 545 | |
| HomeServices | | | | | 818 | | | | | | 795 | |
| Corporate/other(1) | | | | | 461 | | | | | | 33 | |
| Total assets | | | | $ | 38,097 | | | | | $ | 36,447 | |
| (1) | The remaining differences between the segment amounts and the consolidated amounts described as ‘‘Corporate/other’’ relate principally to intersegment eliminations for operating revenue and, for the other items presented, to (i) corporate functions, including administrative costs, interest expense, corporate cash and related interest income, (ii) intersegment eliminations and (iii) fair value adjustments relating to acquisitions. |
Goodwill is allocated to each reportable segment included in total assets above. Goodwill as of December 31, 2006, and the changes for the six-month period ended June 30, 2007 by reportable segment are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | PacifiCorp | | | MidAmerican
Funding | | | Northern
Natural
Gas | | | Kern
River | | | CE
Electric
UK | | | CalEnergy
Generation
Domestic | | | Home-
Services | | | Total |
| Goodwill at December 31, 2006 | | | | $ | 1,118 | | | | | $ | 2,108 | | | | | $ | 301 | | | | | $ | 34 | | | | | $ | 1,328 | | | | | $ | 71 | | | | | $ | 385 | | | | | $ | 5,345 | |
| Acquisitions(1) | | | | | 22 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 6 | | | | | | 28 | |
| Adoption of FIN 48 | | | | | (10 | ) | | | | | (4 | ) | | | | | — | | | | | | — | | | | | | (1 | ) | | | | | — | | | | | | — | | | | | | (15 | ) |
| Foreign currency translation | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 27 | | | | | | — | | | | | | — | | | | | | 27 | |
| Other(2) | | | | | (6 | ) | | | | | — | | | | | | (13 | ) | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (19 | ) |
| Goodwill at June 30, 2007 | | | | $ | 1,124 | | | | | $ | 2,104 | | | | | $ | 288 | | | | | $ | 34 | | | | | $ | 1,354 | | | | | $ | 71 | | | | | $ | 391 | | | | | $ | 5,366 | |
| (1) | The $22 million adjustment to PacifiCorp’s goodwill was due to the completion of the purchase price allocation in the first quarter of 2007. |
| (2) | Other goodwill adjustments relate primarily to income tax adjustments. |
F-22
Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have audited the accompanying consolidated balance sheets of MidAmerican Energy Holdings Company and subsidiaries (the ‘‘Company’’) as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedules listed in Item 21. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as we ll as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 158 ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),’’ as of December 31, 2006.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
February 27, 2007
F-23
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
| | | | | | | | | | | | |
| | | | As of December 31, |
| | | | 2006 | | | 2005 |
| ASSETS |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 342.8 | | | | | $ | 357.9 | |
| Short-term investments | | | | | 15.0 | | | | | | 38.4 | |
| Restricted cash and short-term investments | | | | | 132.3 | | | | | | 102.9 | |
| Accounts receivable, net | | | | | 1,280.3 | | | | | | 802.6 | |
| Amounts held in trust | | | | | 96.9 | | | | | | 108.5 | |
| Inventories | | | | | 407.0 | | | | | | 128.2 | |
| Derivative contracts | | | | | 236.0 | | | | | | 54.0 | |
| Deferred income taxes | | | | | 152.2 | | | | | | 177.7 | |
| Other current investments | | | | | 195.8 | | | | | | — | |
| Other current assets | | | | | 281.1 | | | | | | 140.1 | |
| Total current assets | | | | | 3,139.4 | | | | | | 1,910.3 | |
| Property, plant and equipment, net | | | | | 24,039.4 | | | | | | 11,915.4 | |
| Goodwill | | | | | 5,344.7 | | | | | | 4,156.2 | |
| Regulatory assets | | | | | 1,827.2 | | | | | | 441.1 | |
| Other investments | | | | | 835.2 | | | | | | 798.7 | |
| Derivative contracts | | | | | 247.6 | | | | | | 6.1 | |
| Deferred charges and other assets | | | | | 1,013.8 | | | | | | 1,142.9 | |
| Total assets | | | | $ | 36,447.3 | | | | | $ | 20,370.7 | |
The accompanying notes are an integral part of these financial statements.
F-24
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in millions)
| | | | | | | | | | | | |
| | | | As of December 31, |
| | | | 2006 | | | 2005 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | | | | | |
| Accounts payable | | | | $ | 1,049.1 | | | | | $ | 523.6 | |
| Accrued interest | | | | | 306.3 | | | | | | 198.3 | |
| Accrued property and other taxes | | | | | 231.1 | | | | | | 189.1 | |
| Amounts held in trust | | | | | 96.9 | | | | | | 108.5 | |
| Derivative contracts | | | | | 270.6 | | | | | | 61.7 | |
| Other liabilities | | | | | 616.3 | | | | | | 389.3 | |
| Short-term debt | | | | | 551.8 | | | | | | 70.1 | |
| Current portion of long-term debt | | | | | 1,103.3 | | | | | | 313.7 | |
| Current portion of parent company subordinated debt | | | | | 234.0 | | | | | | 234.0 | |
| Total current liabilities | | | | | 4,459.4 | | | | | | 2,088.3 | |
| Other long-term accrued liabilities | | | | | 860.9 | | | | | | 766.9 | |
| Regulatory liabilities | | | | | 1,838.7 | | | | | | 773.9 | |
| Pension and post-retirement obligations | | | | | 855.2 | | | | | | 633.3 | |
| Derivative contracts | | | | | 618.2 | | | | | | 106.8 | |
| Parent company senior debt | | | | | 3,928.9 | | | | | | 2,776.2 | |
| Parent company subordinated debt | | | | | 1,122.6 | | | | | | 1,354.1 | |
| Subsidiary and project debt | | | | | 11,060.6 | | | | | | 6,836.6 | |
| Deferred income taxes | | | | | 3,449.3 | | | | | | 1,539.6 | |
| Total liabilities | | | | | 28,193.8 | | | | | | 16,875.7 | |
| Minority interest | | | | | 114.4 | | | | | | 21.4 | |
| Preferred securities of subsidiaries | | | | | 128.5 | | | | | | 88.4 | |
| Commitments and contingencies (Note 19) | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | |
| Zero coupon convertible preferred stock — no shares authorized, issued or outstanding as of December 31, 2006; 50.0 shares authorized, no par value, 41.3 shares issued and outstanding as of December 31, 2005 | | | | | — | | | | | | — | |
| Common stock — 115.0 shares authorized, no par value, 74.5 shares issued and outstanding as of December 31, 2006; 60.0 shares authorized, no par value; 9.3 shares issued and outstanding as of December 31, 2005 | | | | | — | | | | | | — | |
| Additional paid-in capital | | | | | 5,420.4 | | | | | | 1,963.3 | |
| Retained earnings | | | | | 2,597.7 | | | | | | 1,719.5 | |
| Accumulated other comprehensive loss, net | | | | | (7.5 | ) | | | | | (297.6 | ) |
| Total shareholders’ equity | | | | | 8,010.6 | | | | | | 3,385.2 | |
| Total liabilities and shareholders’ equity | | | | $ | 36,447.3 | | | | | $ | 20,370.7 | |
The accompanying notes are an integral part of these financial statements.
F-25
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Operating revenue | | | | $ | 10,300.7 | | | | | $ | 7,115.5 | | | | | $ | 6,553.4 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | |
| Cost of sales | | | | | 4,587.4 | | | | | | 3,293.4 | | | | | | 2,757.9 | |
| Operating expense | | | | | 2,586.0 | | | | | | 1,685.2 | | | | | | 1,631.9 | |
| Depreciation and amortization | | | | | 1,006.8 | | | | | | 608.2 | | | | | | 638.2 | |
| Total costs and expenses | | | | | 8,180.2 | | | | | | 5,586.8 | | | | | | 5,028.0 | |
| Operating income | | | | | 2,120.5 | | | | | | 1,528.7 | | | | | | 1,525.4 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | |
| Interest expense | | | | | (1,152.5 | ) | | | | | (891.0 | ) | | | | | (903.2 | ) |
| Capitalized interest | | | | | 39.7 | | | | | | 16.7 | | | | | | 20.0 | |
| Interest and dividend income | | | | | 73.5 | | | | | | 58.1 | | | | | | 38.9 | |
| Other income | | | | | 239.3 | | | | | | 74.5 | | | | | | 128.2 | |
| Other expense | | | | | (13.0 | ) | | | | | (22.1 | ) | | | | | (10.1 | ) |
| Total other income (expense) | | | | | (813.0 | ) | | | | | (763.8 | ) | | | | | (726.2 | ) |
| Income from continuing operations before income tax expense, minority interest and preferred dividends of subsidiaries and equity income | | | | | 1,307.5 | | | | | | 764.9 | | | | | | 799.2 | |
| Income tax expense | | | | | 406.7 | | | | | | 244.7 | | | | | | 265.0 | |
| Minority interest and preferred dividends of subsidiaries | | | | | 28.2 | | | | | | 16.0 | | | | | | 13.3 | |
| Income from continuing operations before equity income | | | | | 872.6 | | | | | | 504.2 | | | | | | 520.9 | |
| Equity income | | | | | 43.5 | | | | | | 53.3 | | | | | | 16.9 | |
| Income from continuing operations | | | | | 916.1 | | | | | | 557.5 | | | | | | 537.8 | |
| Income (loss) from discontinued operations, net of tax (Note 17) | | | | | — | | | | | | 5.2 | | | | | | (367.6 | ) |
| Net income available to common and preferred shareholders | | | | $ | 916.1 | | | | | $ | 562.7 | | | | | $ | 170.2 | |
The accompanying notes are an integral part of these financial statements.
F-26
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2006
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding
Common
Shares | | | Common
Stock | | | Additional
Paid-in
Capital | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Loss | | | Total |
| Balance, January 1, 2004 | | | | | 9.3 | | | | | $ | — | | | | | $ | 1,957.3 | | | | | $ | 999.6 | | | | | $ | (185.5 | ) | | | | $ | 2,771.4 | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 170.2 | | | | | | — | | | | | | 170.2 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 107.4 | | | | | | 107.4 | |
| Fair value adjustment on cash flow hedges, net of tax of $(6.1) | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (12.3 | ) | | | | | (12.3 | ) |
| Minimum pension liability adjustment, net of tax of $(19.9) | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (46.4 | ) | | | | | (46.4 | ) |
| Unrealized gains on securities, net of tax of $0.3 | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 0.5 | | | | | | 0.5 | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 219.4 | |
| Common stock purchase | | | | | (0.2 | ) | | | | | — | | | | | | (7.0 | ) | | | | | (13.0 | ) | | | | | — | | | | | | (20.0 | ) |
| Other equity transactions | | | | | — | | | | | | — | | | | | | 0.4 | | | | | | — | | | | | | — | | | | | | 0.4 | |
| Balance, December 31, 2004 | | | | | 9.1 | | | | | | — | | | | | | 1,950.7 | | | | | | 1,156.8 | | | | | | (136.3 | ) | | | | | 2,971.2 | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 562.7 | | | | | | — | | | | | | 562.7 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (186.2 | ) | | | | | (186.2 | ) |
| Fair value adjustment on cash flow hedges, net of tax of $(9.8) | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (19.5 | ) | | | | | (19.5 | ) |
| Minimum pension liability adjustment, net of tax of $18.0 | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 43.7 | | | | | | 43.7 | |
| Unrealized gains on securities, net of tax of $0.5 | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 0.7 | | | | | | 0.7 | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 401.4 | |
| Exercise of common stock options | | | | | 0.2 | | | | | | — | | | | | | 5.8 | | | | | | — | | | | | | — | | | | | | 5.8 | |
| Tax benefit from exercise of common stock options | | | | | — | | | | | | — | | | | | | 6.2 | | | | | | — | | | | | | — | | | | | | 6.2 | |
| Other equity transactions | | | | | — | | | | | | — | | | | | | 0.6 | | | | | | — | | | | | | — | | | | | | 0.6 | |
| Balance, December 31, 2005 | | | | | 9.3 | | | | | | — | | | | | | 1,963.3 | | | | | | 1,719.5 | | | | | | (297.6 | ) | | | | | 3,385.2 | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 916.1 | | | | | | — | | | | | | 916.1 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 262.6 | | | | | | 262.6 | |
| Fair value adjustment on cash flow hedges, net of tax of $32.0 | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 53.4 | | | | | | 53.4 | |
| Minimum pension liability adjustment, net of tax of $145.6 | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 338.4 | | | | | | 338.4 | |
| Unrealized gains on securities, net of tax of $1.9 | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 2.8 | | | | | | 2.8 | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,573.3 | |
| Adjustment to initially apply FASB Statement No. 158, net of tax of $(159.7) | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (367.1 | ) | | | | | (367.1 | ) |
| Preferred stock conversion to common stock | | | | | 41.3 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Exercise of common stock options | | | | | 0.8 | | | | | | — | | | | | | 22.2 | | | | | | — | | | | | | — | | | | | | 22.2 | |
| Tax benefit from exercise of common stock options | | | | | — | | | | | | — | | | | | | 34.1 | | | | | | — | | | | | | — | | | | | | 34.1 | |
| Common stock issuances | | | | | 35.2 | | | | | | — | | | | | | 5,109.5 | | | | | | — | | | | | | — | | | | | | 5,109.5 | |
| Common stock purchases | | | | | (12.1 | ) | | | | | — | | | | | | (1,712.1 | ) | | | | | (37.9 | ) | | | | | — | | | | | | (1,750.0 | ) |
| Other equity transactions | | | | | — | | | | | | — | | | | | | 3.4 | | | | | | — | | | | | | — | | | | | | 3.4 | |
| Balance, December 31, 2006 | | | | | 74.5 | | | | | $ | — | | | | | $ | 5,420.4 | | | | | $ | 2,597.7 | | | | | $ | (7.5 | ) | | | | $ | 8,010.6 | |
The accompanying notes are an integral part of these financial statements.
F-27
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | $ | 916.1 | | | | | $ | 557.5 | | | | | $ | 537.8 | |
| Adjustments to reconcile income from continuing | | | | | | | | | | | | | | | | | | |
| operations to cash flows from continuing operations: | | | | | | | | | | | | | | | | | | |
| Distributions less income on equity investments | | | | | (6.8 | ) | | | | | (18.9 | ) | | | | | 20.0 | |
| Gain on other items, net | | | | | (145.1 | ) | | | | | (6.3 | ) | | | | | (71.8 | ) |
| Depreciation and amortization | | | | | 1,006.8 | | | | | | 608.2 | | | | | | 638.2 | |
| Amortization of regulatory assets and liabilities | | | | | 26.2 | | | | | | 38.7 | | | | | | (1.6 | ) |
| Amortization of deferred financing costs | | | | | 18.7 | | | | | | 16.1 | | | | | | 20.9 | |
| Provision for deferred income taxes | | | | | 260.3 | | | | | | 130.0 | | | | | | 176.6 | |
| Other | | | | | (11.4 | ) | | | | | (37.8 | ) | | | | | 16.9 | |
| Changes in other items, net of effects from acquisitions: | | | | | | | | | | | | | | | | | | |
| Accounts receivable and other current assets | | | | | (39.0 | ) | | | | | (136.0 | ) | | | | | (43.6 | ) |
| Accounts payable and other accrued liabilities | | | | | (70.1 | ) | | | | | 167.4 | | | | | | 171.5 | |
| Deferred income | | | | | (32.5 | ) | | | | | (7.8 | ) | | | | | (6.5 | ) |
| Net cash flows from continuing operations | | | | | 1,923.2 | | | | | | 1,311.1 | | | | | | 1,458.4 | |
| Net cash flows from discontinued operations | | | | | — | | | | | | (0.3 | ) | | | | | (33.8 | ) |
| Net cash flows from operating activities | | | | | 1,923.2 | | | | | | 1,310.8 | | | | | | 1,424.6 | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | |
| PacifiCorp acquisition, net of cash acquired | | | | | (4,932.4 | ) | | | | | (5.2 | ) | | | | | — | |
| Other acquisitions, net of cash acquired | | | | | (73.7 | ) | | | | | (5.0 | ) | | | | | (36.7 | ) |
| Capital expenditures relating to operating projects | | | | | (1,684.3 | ) | | | | | (796.3 | ) | | | | | (778.3 | ) |
| Construction and other development costs | | | | | (738.8 | ) | | | | | (399.9 | ) | | | | | (401.1 | ) |
| Purchases of available-for-sale securities | | | | | (1,504.0 | ) | | | | | (2,842.4 | ) | | | | | (2,819.7 | ) |
| Proceeds from sale of available-for-sale securities | | | | | 1,605.7 | | | | | | 2,913.1 | | | | | | 2,738.0 | |
| Purchase of other investments | | | | | — | | | | | | (556.6 | ) | | | | | — | |
| Proceeds from sale of assets | | | | | 30.2 | | | | | | 102.8 | | | | | | 8.6 | |
| Proceeds from notes receivable | | | | | — | | | | | | — | | | | | | 169.2 | |
| Proceeds from affiliate notes | | | | | 1.0 | | | | | | 4.4 | | | | | | 14.1 | |
| (Increase) decrease in restricted cash and investments | | | | | (31.8 | ) | | | | | 26.7 | | | | | | (18.5 | ) |
| Other | | | | | 6.7 | | | | | | 0.7 | | | | | | 25.3 | |
| Net cash flows from continuing operations | | | | | (7,321.4 | ) | | | | | (1,557.7 | ) | | | | | (1,099.1 | ) |
| Net cash flows from discontinued operations | | | | | — | | | | | | 6.4 | | | | | | 1.0 | |
| Net cash flows from investing activities | | | | | (7,321.4 | ) | | | | | (1,551.3 | ) | | | | | (1,098.1 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | |
| Proceeds from the issuances of common stock | | | | | 5,131.7 | | | | | | 5.8 | | | | | | — | |
| Purchases of common stock | | | | | (1,750.0 | ) | | | | | — | | | | | | (20.0 | ) |
| Proceeds from parent company senior debt | | | | | 1,699.3 | | | | | | — | | | | | | 249.8 | |
| Proceeds from subsidiary and project debt | | | | | 717.7 | | | | | | 1,050.6 | | | | | | 375.4 | |
| Repayments of parent company senior and subordinated debt | | | | | (234.0 | ) | | | | | (448.5 | ) | | | | | (100.0 | ) |
| Repayments of subsidiary and project debt | | | | | (516.5 | ) | | | | | (875.4 | ) | | | | | (368.4 | ) |
| Net proceeds from parent company revolving credit facility | | | | | 101.0 | | | | | | 51.0 | | | | | | — | |
| Net proceeds from (repayment of) subsidiary short-term debt | | | | | 196.3 | | | | | | 10.4 | | | | | | (43.9 | ) |
| Net proceeds from settlement of treasury rate lock agreements | | | | | 53.0 | | | | | | — | | | | | | — | |
| Other | | | | | (21.1 | ) | | | | | (13.0 | ) | | | | | (61.0 | ) |
| Net cash flows from continuing operations | | | | | 5,377.4 | | | | | | (219.1 | ) | | | | | 31.9 | |
| Net cash flows from discontinued operations | | | | | — | | | | | | — | | | | | | (137.3 | ) |
| Net cash flows from financing activities | | | | | 5,377.4 | | | | | | (219.1 | ) | | | | | (105.4 | ) |
| Effect of exchange rate changes | | | | | 5.7 | | | | | | (19.9 | ) | | | | | 28.6 | |
| Net change in cash and cash equivalents | | | | | (15.1 | ) | | | | | (479.5 | ) | | | | | 249.7 | |
| Cash and cash equivalents at beginning of period | | | | | 357.9 | | | | | | 837.4 | | | | | | 587.7 | |
| Cash and cash equivalents at end of period | | | | $ | 342.8 | | | | | $ | 357.9 | | | | | $ | 837.4 | |
The accompanying notes are an integral part of these financial statements.
F-28
Table of ContentsMIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
MidAmerican Energy Holdings Company (‘‘MEHC’’) is a holding company owning subsidiaries (together with MEHC, the ‘‘Company’’) that are principally engaged in energy businesses. MEHC is a consolidated subsidiary of Berkshire Hathaway Inc. (‘‘Berkshire Hathaway’’). The Company is organized and managed as eight distinct platforms: PacifiCorp (which was acquired on March 21, 2006), MidAmerican Funding, LLC (‘‘MidAmerican Funding’’) (which primarily includes MidAmerican Energy Company (‘‘MidAmerican Energy’’)), Northern Natural Gas Company (‘‘Northern Natural Gas’’), Kern River Gas Transmission Company (‘‘Kern River’’), CE Electric UK Funding Company (‘‘CE Electric UK’’) (which primarily includes Northern Electric Distribution Limited (‘‘Northern Electric&r squo;’) and Yorkshire Electricity Distribution plc (‘‘Yorkshire Electricity’’)), CalEnergy Generation-Foreign (the subsidiaries owning the Malitbog and Mahanagdong Projects (collectively the ‘‘Leyte Projects’’) and the Casecnan Project), CalEnergy Generation-Domestic (the subsidiaries owning interests in independent power projects in the United States), and HomeServices of America, Inc. (collectively with its subsidiaries, ‘‘HomeServices’’). Through these platforms, the Company owns and operates an electric utility company in the Western United States, a combined electric and natural gas utility company in the Midwestern United States, two interstate natural gas pipeline companies in the United States, two electricity distribution companies in Great Britain, a diversified portfolio of domestic and international independent power projects and the second largest residential real estate brokerage firm in the United States.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of MEHC and its subsidiaries in which it holds a controlling financial interest. The Consolidated Statements of Operations include the revenues and expenses of an acquired entity from the date of acquisition.
Intercompany accounts and transactions have been eliminated.
Reclassifications
Certain amounts in the fiscal 2005 and 2004 Consolidated Financial Statements and supporting note disclosures have been reclassified to conform to the fiscal 2006 presentation. As of December 31, 2005, the Company reclassified $1.6 billion of accumulated depreciation related to the acquisitions of Northern Natural Gas and Kern River from gross property to accumulated depreciation.
Use of Estimates in Preparation of Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (‘‘GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. These estimates include, but are not limited to, unbilled receivables, valuation of energy contracts, the effects of regulation, long-lived asset recovery, goodwill impairment, the accounting for contingencies, including environmental, regulatory and income tax matters, and certain assumptions made in accounting for pension and postretirement benefits. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Cash Equivalents
Cash equivalents consist of funds invested in commercial paper, money market securities and in other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where the availability for distribution is restricted by legal requirements, loan
F-29
Table of Contentsagreements or other contractual provisions. Restricted amounts are included in restricted cash and short-term investments and deferred charges and other assets in the accompanying Consolidated Balance Sheets.
Investments
The Company’s management determines the appropriate classification of investments in debt securities and equity securities at the acquisition date and re-evaluates the classifications at each balance sheet date. The Company’s investments in debt and equity securities are primarily classified as available-for-sale.
Held-to-maturity investments are carried at amortized cost, reflecting the Company’s intent and ability to hold the securities to maturity. Available-for-sale securities are stated at fair value with realized gains and losses, as determined on a specific identification basis, recognized in earnings and unrealized gains and losses recognized in accumulated other comprehensive income (‘‘AOCI’’), net of tax, except for realized and unrealized gains and losses on certain trust funds related to the decommissioning of nuclear generation assets and the final reclamation of leased coal mining property. Realized and unrealized gains and losses on these trust funds are recorded as regulatory assets or liabilities since the Company expects to recover costs for these activities through rates.
The Company utilizes the equity method of accounting with respect to investments where it exercises significant influence, but not control, over the operating and financial policies of the investee. The equity method of accounting is normally applied where the Company has a voting interest of at least 20% and no greater than 50%. In applying the equity method, investments are recorded at cost and subsequently increased or decreased by the Company’s proportionate share of the net earnings or losses of the investee. The Company also records a proportionate share of other comprehensive income items of the investee as a component of its other comprehensive income. Dividends or other equity distributions are recorded as a reduction of the investment. Equity investments are required to be tested for impairment when it is determined that an other-than-temporary loss in value below the carrying amount has occurred.
Accounting for the Effects of Certain Types of Regulation
PacifiCorp, MidAmerican Energy, Northern Natural Gas and Kern River (the ‘‘Domestic Regulated Businesses’’) prepare their financial statements in accordance with the provisions of Statement of Financial Accounting Standards (‘‘SFAS’’) No. 71, ‘‘Accounting for the Effects of Certain Types of Regulation,’’ (‘‘SFAS No. 71’’) which differs in certain respects from the application of GAAP by non-regulated businesses. In general, SFAS No. 71 recognizes that accounting for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated entity is required to defer the recognition of costs or income if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, the Domestic Regulated Businesses have deferred certain costs and income that will be recognized in earnings over various future periods.
Management continually evaluates the applicability of SFAS No. 71 and assesses whether its regulatory assets are probable of future recovery by considering factors such as a change in the regulator’s approach to setting rates from cost-based rate making to another form of regulation, other regulatory actions or the impact of competition which could limit the Company’s ability to recover its costs. Based upon this continual assessment, management believes the application of SFAS No. 71 continues to be appropriate and its existing regulatory assets are probable of recovery. If it becomes no longer probable that these costs will be recovered, the regulatory assets and regulatory liabilities would be written off and recognized in operating income.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of payments from its customers. This assessment requires judgment regarding the outcome of pending disputes, arbitrations and the ability of customers to pay the amounts owed to the Company. At December 31, 2006 and 2005, the allowance for doubtful accounts totaled $30.4 million and $21.4 million, respectively.
F-30
Table of ContentsAmounts Held in Trust
Amounts held in trust consist of separately designated trust accounts for homebuyers’ earnest money and other deposits, which are held until pending sales of properties are closed. Subsequent disbursements are made in accordance with the settlement instructions.
Derivatives
The Company employs a number of different derivative instruments in connection with its electric and natural gas, foreign currency exchange rate and interest rate risk management activities, including forward purchases and sales, futures, swaps and options. Derivative instruments are recorded in the Consolidated Balance Sheets at fair value as either assets or liabilities unless they are designated and qualify for the normal purchases and normal sales exemptions afforded by GAAP. Derivative contracts for commodities used in the Company’s normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases and normal sales pursuant to the exemption provided by GAAP. Recognition of these contracts in operating revenue or cost of sales in the Consolidated Statements of Operations occurs when the contracts settle.
For contracts designated in hedge relationships (‘‘hedge contracts’’), the Company maintains formal documentation of the hedge. In addition, at inception and on a quarterly basis, the Company formally assesses whether the hedge contracts are highly effective in offsetting changes in cash flows or fair values of the hedged items. The Company documents hedging activity by transaction type and risk management strategy.
Changes in the fair value of a derivative designated and qualified as a cash flow hedge, to the extent effective, are included in the Consolidated Statements of Shareholders’ Equity as AOCI, net of tax, until the hedged item is recognized in earnings. The Company discontinues hedge accounting prospectively when it has determined that a derivative no longer qualifies as an effective hedge, or when it is no longer probable that the hedged forecasted transaction will occur. When hedge accounting is discontinued because the derivative no longer qualifies as an effective hedge, future changes in the value of the derivative are charged to earnings. Gains and losses related to discontinued hedges that were previously recorded in AOCI will remain in AOCI until the hedged item is realized, unless it is probable that the hedged forecasted transaction will not occur at which time associated deferred amounts in AOCI are immediately recognized in current earnings.
Certain derivative electric and gas contracts utilized by the regulated operations of PacifiCorp and MidAmerican Energy are recoverable through rates. Accordingly, unrealized changes in fair value of these contracts are deferred as net regulatory assets or liabilities pursuant to SFAS No. 71.
When available, quoted market prices or prices obtained through external sources are used to measure a contract’s fair value. For contracts without available quoted market prices, fair value is determined based on internally developed modeled prices.
Inventories
Inventories consist mainly of materials and supplies, coal stocks, gas in storage and fuel oil, which are valued at the lower of cost or market. The cost of materials and supplies, coal stocks and fuel oil is determined primarily using average cost. The cost of gas in storage is determined using the last-in-first-out (‘‘LIFO’’) method. With respect to inventories carried at LIFO cost, the cost determined under the first-in-first-out method would be $76.4 million and $125.0 million higher as of December 31, 2006 and 2005, respectively.
Property, Plant and Equipment, Net
General
Property, plant and equipment is recorded at historical cost. The Company capitalizes all construction related material, direct labor costs and contract services, as well as indirect construction
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Table of Contentscosts, which include capitalized interest and equity AFUDC. The cost of major additions and betterments are capitalized, while costs for replacements, maintenance, and repairs that do not improve or extend the lives of the respective assets are charged to operating expense. Depreciation and amortization are generally computed by applying the straight-line method based on estimated economic lives or regulatorily mandated recovery periods. The Company believes the useful lives assigned to the depreciable assets, which range from 3 to 85 years, are reasonable.
When the Company retires its regulated property, plant and equipment, it charges the original cost to accumulated depreciation. The cost of removal is charged against the cost of removal regulatory liability that was established through depreciation rates. Generally, when regulated assets are sold, the cost is removed from the property accounts, the related accumulated depreciation and amortization accounts are reduced and the residual gain or loss is deferred and subsequently amortized through future depreciation rates. Any gain or loss on disposals of assets from non-regulated businesses is recorded in income or expense.
The Domestic Regulated Businesses record AFUDC, which represents the estimated debt and equity costs of capital funds necessary to finance the construction of domestic regulated facilities. AFUDC is capitalized as a component of property, plant and equipment cost, with offsetting credits to the accompanying Consolidated Statements of Operations. After construction is completed, the Company is permitted to earn a return on these costs by their inclusion in rate base, as well as recover these costs through depreciation expense over the useful life of the related assets.
Asset Retirement Obligations
The Company recognizes legal asset retirement obligations (‘‘ARO’’), mainly related to the decommissioning of nuclear generation assets and the final reclamation of leased coal mining property. The fair value of a liability for a legal ARO is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the liability is adjusted for any material revisions to the expected value of the retirement obligation (with corresponding adjustments to property, plant and equipment) and for accretion of the liability due to the passage of time. The difference between the ARO liability, the corresponding ARO asset included in property, plant and equipment and amounts recovered in rates to satisfy such liabilities is r ecorded as a regulatory asset or liability. Estimated removal costs that PacifiCorp and MidAmerican Energy recover through approved depreciation rates, but that do not meet the requirements of a legal ARO are accumulated in asset retirement removal costs within regulatory liabilities in the accompanying Consolidated Balance Sheets.
Impairment
The Company evaluates long-lived assets, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or the assets meet the criteria of held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated discounted present value of the expected future cash flows from using the asset. For regulated assets, any impairment charge is offset by the establishment of a regulatory asset to the extent recovery in rates is probable. For assets of non-regulated businesses, any resulting impairment loss is reflected in the Consolidated Statement of Operations.
Goodwill
Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Goodwill is allocated to each reporting unit and is tested for impairment using a variety of methods, principally discounted projected future net cash flows, at least annually and impairments, if any, are charged to earnings. The Company completed its annual review
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Table of Contentsas of October 31. Key assumptions used in the testing include, but are not limited to, the use of an appropriate discount rate and estimated future cash flows. In estimating cash flows, the Company incorporates current market information as well as historical factors. During 2006 and 2005, the Company did not record any goodwill impairments.
The Company records goodwill adjustments for (i) changes in the estimates or the settlement of tax bases of acquired assets, liabilities and carryforwards and items relating to acquired entities’ prior income tax returns, (ii) the tax benefit associated with the excess of tax-deductible goodwill over the reported amount of goodwill, and (iii) changes to the purchase price allocation prior to the end of the allocation period, which is generally one year from the acquisition date.
Revenue Recognition
Energy Businesses
Revenue from electric customers is recognized as electricity is delivered and includes amounts for services rendered. Revenue from the sale, distribution and transportation of natural gas is recognized when either the service is provided or the product is delivered. Revenue recognized includes unbilled as well as billed amounts.
Rates charged by the domestic regulated energy businesses are subject to federal and state regulation. When preliminary rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a provision for estimated refunds is accrued. Electric distribution revenues in the U.K. are limited to amounts allowed under their regulatory formula while under-recoveries are not recognized in revenue. Over- or under-recoveries of amounts allowed under the regulatory formula are either refunded to customers or recovered through adjustments in future rates.
Electricity and water is delivered in the Philippines pursuant to provisions of the respective project agreements which are accounted for as arrangements that contain both a lease and a service contract. The leases are classified as operating due to significant uncertainty regarding the collection of future amounts mainly due to the existence of political, economic and other uncertainties in the Philippines. The majority of the revenue under these arrangements is fixed.
Real Estate Commission Revenue and Related Fees
Commission revenue from real estate brokerage transactions and related amounts due to agents are recognized when a real estate transaction is closed. Title fee revenue from real estate transactions and related amounts due to the title insurer are recognized at closing.
Unamortized Debt Premiums, Discounts and Financing Costs
Premiums, discounts and financing costs incurred during the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Foreign Currency
The accounts of foreign-based subsidiaries are measured in most instances using the local currency as the functional currency. Revenue and expenses of these businesses are translated into U.S. dollars at the average exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses from translating the financial statements of foreign-based operations are included in shareholders’ equity as a component of AOCI. Gains or losses arising from other transactions denominated in a foreign currency are included in the accompanying Consolidated Statements of Operations.
Income Taxes
Berkshire Hathaway commenced including the Company in its U.S. federal income tax return in 2006 as a result of converting its convertible preferred stock of MEHC into shares of MEHC common
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Table of Contentsstock on February 9, 2006. The Company’s provision for income taxes has been computed on a stand-alone basis. Prior to the conversion, the Company filed a consolidated U.S. federal income tax return.
Deferred tax assets and liabilities are based on differences between the financial statements and tax bases of assets and liabilities using the estimated tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities that are associated with components of other comprehensive income are charged or credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. Valuation allowances have been established for certain deferred tax assets where management has judged that realization is not likely.
Both PacifiCorp and MidAmerican Energy are required to pass income tax benefits related to certain accelerated tax depreciation and other property-related basis differences on to their customers in most state jurisdictions. These amounts were recognized as a net regulatory asset of $581.0 million as of December 31, 2006 and $146.0 million as of December 31, 2005, and will be included in rates when the temporary differences reverse. Management believes the existing net regulatory asset is probable of recovery.
Investment tax credits are generally deferred and amortized over the estimated useful lives of the related properties or as prescribed by various regulatory jurisdictions.
The Company has not provided U.S. federal deferred income taxes on its currency translation adjustment or the cumulative earnings of international subsidiaries that have been determined by management to be reinvested indefinitely. The cumulative earnings related to ongoing operations were approximately $1.1 billion as of December 31, 2006. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely. Deferred taxes are provided for earnings of international subsidiaries when the Company plans to remit those earnings.
In determining the Company’s tax liabilities, management is required to interpret complex tax laws and regulations. In preparing tax returns, the Company is subject to continuous examinations by federal, state, local and foreign tax authorities that may give rise to different interpretations of these complex laws and regulations. Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved. The Internal Revenue Service has closed examination of the Company’s income tax returns through 2001. Although the ultimate resolution of the Company’s federal and state tax examinations is uncertain, the Company believes it has made adequate provisions for these tax positions and the aggregate amount of any additional tax liabilities that may result from these examinations, if any, will not have a material adverse affect on the Company’s financial results. The Company&rsq uo;s provision for tax uncertainties is included in accrued property and other taxes and other long-term accrued liabilities, as appropriate, in the accompanying Consolidated Balance Sheets.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 157, ‘‘Fair Value Measurements’’ (‘‘SFAS No. 157’’). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not impose fair value measurements on items not already accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)’’ (‘‘SFAS No. 158’’). SFAS No. 158 requires an employer to recognize in its statement of financial position the over- or under-funded status of a defined benefit postretirement plan measured
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Table of Contentsas the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. SFAS No. 158 also requires entities to recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period, but were not recognized as components of net periodic benefit cost of the period pursuant to SFAS No. 87, ‘‘Employers’ Accounting for Pensions’’ (‘‘SFAS No. 87’’) and SFAS No. 106, ‘‘Employers’ Accounting for Postretirement Benefits Other Than Pensions’’ (‘‘SFAS No. 106’’). The Company recognized as regulatory assets (liabilities) the majority of the amounts attributable to its domest ic regulated operations that would otherwise be recorded to AOCI, net of tax, pursuant to SFAS No. 71. SFAS No. 158 does not impact the calculation of net periodic benefit cost and the amounts recognized in either AOCI or regulatory assets (liabilities) will be adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of SFAS No. 87 and SFAS No. 106.
The Company adopted the recognition and related disclosure provisions of SFAS No. 158 as of December 31, 2006. The incremental impact to the accompanying Consolidated Balance Sheet of such adoption is as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Before
SFAS No. 158 | | | Increase
(Decrease) | | | After
SFAS No. 158 |
| Regulatory assets | | | | $ | 1,837.6 | | | | | $ | (10.4 | ) | | | | $ | 1,827.2 | |
| Deferred charges and other assets | | | | | 1,451.7 | | | | | | (437.9 | ) | | | | | 1,013.8 | |
| Total assets | | | | | 36,895.6 | | | | | | (448.3 | ) | | | | | 36,447.3 | |
| Other liabilities | | | | | 605.0 | | | | | | 11.3 | | | | | | 616.3 | |
| Total current liabilities | | | | | 4,448.1 | | | | | | 11.3 | | | | | | 4,459.4 | |
| Regulatory liabilities | | | | | 1,697.5 | | | | | | 141.2 | | | | | | 1,838.7 | |
| Pension and other postretirement obligations | | | | | 902.7 | | | | | | (47.5 | ) | | | | | 855.2 | |
| Deferred income taxes | | | | | 3,638.2 | | | | | | (188.9 | ) | | | | | 3,449.3 | |
| Total liabilities | | | | | 28,277.7 | | | | | | (83.9 | ) | | | | | 28,193.8 | |
| Accumulated other comprehensive income (loss), net | | | | | 356.9 | | | | | | (364.4 | ) | | | | | (7.5 | ) |
| Total shareholders’ equity | | | | | 8,375.0 | | | | | | (364.4 | ) | | | | | 8,010.6 | |
| Total liabilities and shareholders’ equity | | | | | 36,895.6 | | | | | | (448.3 | ) | | | | | 36,447.3 | |
Immediately prior to the initial adoption of SFAS No. 158, an after-tax benefit of $338.4 million was recorded in other comprehensive income which reduced the additional minimum pension liability recorded under SFAS No. 87. This benefit to shareholders’ equity related primarily to the elimination of CE Electric UK’s additional minimum pension liability as the market value of the plan assets was greater than the accumulated benefit obligation at that date. This increase to shareholders’ equity is reflected in the ‘‘Before SFAS No. 158’’ column in the table above.
In February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115’’ (‘‘SFAS No. 159’’). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a remeasurement event that gives rise to new-basis accounting. The decision about whether to elect the fair value option is applied on an instrument-by-instrument basis, is irrevocable and is applied only to an entire instrument and not only to specified risks, cash flows or portions of that instrument. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 159 on its consolidated financial position and results of operations.
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Table of ContentsIn July 2006, the FASB issued FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, ‘‘Accounting for Income Taxes’’ (‘‘SFAS No. 109’’), and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Guidance is also provided on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to adopt FIN 48 in the first quarter of fi scal year 2007. The Company is currently evaluating the impact and based upon its assessment to date does not believe the adoption of FIN 48 will have a material effect on its consolidated financial position.
(3) PacifiCorp Acquisition
General
In May 2005, MEHC reached a definitive agreement with Scottish Power plc (‘‘ScottishPower’’) and its subsidiary, PacifiCorp Holdings, Inc., to acquire 100% of the common stock of ScottishPower’s wholly-owned indirect subsidiary, PacifiCorp. On March 21, 2006, a wholly owned subsidiary of MEHC acquired 100% of the common stock of PacifiCorp from a wholly owned subsidiary of ScottishPower for a cash purchase price of $5,109.5 million, which was funded through the issuance of common stock (see Note 18). MEHC also incurred $10.6 million of direct transaction costs associated with the acquisition, which consisted principally of investment banker commissions and outside legal and accounting fees, resulting in a total purchase price of $5,120.1 million. As a result of the acquisition, MEHC controls the significant majority of PacifiCorp’s voting securities, which include both common and preferred stock. The results of PacifiCorp’s operations are included in the Company’s results beginning March 21, 2006 (the ‘‘acquisition date’’).
PacifiCorp is a regulated electric utility serving approximately 1.7 million residential, commercial and industrial customers in service territories in portions of the states of Utah, Oregon, Wyoming, Washington, Idaho and California. The regulatory commissions in each state approve rates for retail electric sales within their respective states. PacifiCorp also sells electricity on the wholesale market to public and private utilities, energy marketing companies and to incorporated municipalities.
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Table of ContentsAllocation of Purchase Price
SFAS No. 141, ‘‘Business Combinations,’’ requires that the total purchase price be allocated to PacifiCorp’s net tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. PacifiCorp’s operations are regulated, which provide revenue derived from cost, and are accounted for pursuant to SFAS No. 71. PacifiCorp has demonstrated a past history of recovering its costs incurred through its rate making process. Certain adjustments related to derivative contracts, severance costs and income taxes have been made through December 31, 2006, which were not significant to the overall purchase price allocation. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in millions).
| | | | | | |
| | | | Fair Value |
| Current assets, including cash and cash equivalents of $182.5 | | | | $ | 1,115.3 | |
| Property, plant and equipment, net | | | | | 10,050.9 | |
| Goodwill | | | | | 1,118.1 | |
| Regulatory assets(1) | | | | | 1,307.1 | |
| Other non-current assets | | | | | 664.7 | |
| Total assets | | | | | 14,256.1 | |
| Current liabilities, including short-term debt of $184.4 and current portion of long-term debt of $220.6 | | | | | (1,260.4 | ) |
| Regulatory liabilities | | | | | (818.2 | ) |
| Pension and postretirement obligations | | | | | (828.6 | ) |
| Subsidiary and project debt, less current portion | | | | | (3,762.3 | ) |
| Deferred income taxes | | | | | (1,616.2 | ) |
| Other non-current liabilities | | | | | (850.3 | ) |
| Total liabilities | | | | | (9,136.0 | ) |
| Net assets acquired | | | | $ | 5,120.1 | |
| (1) | $51.2 million of total regulatory assets, represent net unrealized losses related to derivative contracts that are probable of recovery in retail rates as of the acquisition date. In February 2006 in Oregon and in March 2006 in Utah, PacifiCorp filed rate cases to ensure, among other items, that PacifiCorp would achieve recovery of its future net power costs. Actual rate case settlements were achieved in both states during the third quarter of 2006. Based on management’s consideration of the rate settlements, as well as the new power costs recovery adjustment mechanisms obtained in Wyoming and California earlier in 2006, it was determined that certain contracts were probable of being recovered in retail rates as of the acquisition date. Accordingly, the Company recorded a $43.5 million reduction to its regulatory assets and a corresponding increase to goodwill related to its estimate of the unrealized gains on contracts receiving recovery. |
The Company has not identified any material pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. The Company will adjust goodwill prospectively for the settlement of any income tax related pre-acquisition contingencies. Prior to the end of the purchase price allocation period, if information becomes available that a non-income tax related pre-acquisition related loss had been incurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.
Certain transition activities, pursuant to established plans, were undertaken as PacifiCorp was integrated into the Company. Costs, consisting primarily of employee termination activities, have been incurred associated with such transition activities, which have been substantially completed as of December 31, 2006. The finalization of certain integration plans resulted in adjustments to the purchase price allocation for the acquired assets and assumed liabilities of PacifiCorp. Qualifying
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Table of Contentsseverance costs accrued during the period from the acquisition date to December 31, 2006 totaled $40.7 million. Accrued severance costs were $31.3 million as of December 31, 2006.
Goodwill
The excess of the purchase price paid over the estimated fair values of the identifiable assets acquired and liabilities assumed totaled $1,118.1 million and was allocated as goodwill to the PacifiCorp reportable segment. Goodwill is not amortized, but rather is reviewed annually for impairment or more frequently if indicators of impairment exist. Deferred taxes are not recorded on the goodwill since it is not tax deductible.
The recognition of goodwill from the acquisition of PacifiCorp resulted from various attributes of PacifiCorp’s operations and business in general. There is no assurance that these attributes will continue to exist to the same degree as believed at the time of the acquisition. These attributes include, but are not limited to:
| | |
| • | Ability to improve operational results through the prudent deployment of capital; |
| | |
| • | Operations in six states providing regulatory and geographic diversity; |
| | |
| • | Ability to improve regulatory relationships and develop customer solutions; |
| | |
| • | Low-cost competitive position; |
| | |
| • | Generation and fuel diversification, including: |
| | |
| • | The operation of coal generation; |
| | |
| • | The operation of several coal mines contributing to low-cost supply and supply certainty; |
| | |
| • | Access to multiple gas suppliers; and |
| | |
| • | Low-cost hydroelectric generation; |
| | |
| • | Strong customer service reputation; and |
| | |
| • | Significant customer and load growth opportunities. |
Pro Forma Financial Information
The following pro forma condensed consolidated results of operations assume that the acquisition of PacifiCorp was completed as of January 1, 2005 and provides information for the years ended December 31 (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Operating revenue | | | | $ | 11,453.1 | | | | | $ | 10,405.0 | |
| Net income available to common and preferred shareholders | | | | $ | 1,059.5 | | | | | $ | 863.4 | |
The pro forma financial information represents the historical operating results of the combined company with adjustments for purchase accounting and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each period presented.
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Table of Contents(4) Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | |
| | | | Depreciation
Life | | | 2006 | | | 2005 |
| Regulated assets: | | | | | | | | | | | | | | | |
| Utility generation and distribution system | | | 5-85 years | | | | $ | 27,686.5 | | | | | $ | 10,499.1 | |
| Interstate pipeline assets | | | 3-67 years | | | | | 5,329.4 | | | | | | 5,321.8 | |
| | | | | | | | | 33,015.9 | | | | | | 15,820.9 | |
| Accumulated depreciation and amortization | | | | | | | | (11,872.1 | ) | | | | | (5,683.1 | ) |
| Regulated assets, net | | | | | | | | 21,143.8 | | | | | | 10,137.8 | |
| Non-regulated assets: | | | | | | | | | | | | | | | |
| Independent power plants | | | 10-30 years | | | | | 1,184.3 | | | | | | 1,384.6 | |
| Other assets | | | 3-30 years | | | | | 585.9 | | | | | | 476.5 | |
| | | | | | | | | 1,770.2 | | | | | | 1,861.1 | |
| Accumulated depreciation and amortization | | | | | | | | (844.1 | ) | | | | | (931.1 | ) |
| Non-regulated assets, net | | | | | | | | 926.1 | | | | | | 930.0 | |
| Net operating assets | | | | | | | | 22,069.9 | | | | | | 11,067.8 | |
| Construction in progress | | | | | | | | 1,969.5 | | | | | | 847.6 | |
| Property, plant and equipment, net | | | | | | | $ | 24,039.4 | | | | | $ | 11,915.4 | |
Substantially all of the construction in progress as of December 31, 2006 and 2005 relates to the construction of regulated assets.
Northern Natural Gas entered into a purchase and sale agreement for the West Hugoton non-strategic section of its interstate pipeline system in the fourth quarter of 2005. As a result of entering into the purchase and sale agreement, Northern Natural Gas recognized a non-cash impairment charge of $29.0 million ($17.5 million after-tax) to write down the carrying value of the asset to its fair value. The fair value was determined based on the agreed sale price. The impairment charge is recorded in operating expense in the accompanying Consolidated Statements of Operations for the year ended December 31, 2005.
(5) Jointly Owned Utility Plant
Under joint plant ownership agreements with other utilities, both PacifiCorp and MidAmerican Energy, as a tenants in common, have undivided interests in jointly owned generation and transmission facilities. The Company accounts for its proportional share of each facility. Operating costs of each plant are assigned to joint owners based on ownership percentage or energy purchased, depending on the nature of the cost. Operating expenses in the accompanying Consolidated Statements of Operations include the Company’s share of the expenses of these units.
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Table of ContentsThe amounts shown in the table below represent the Company’s share in each jointly owned facility as of December 31, 2006 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Company
Share | | | Plant in
Service | | | Accumulated
Depreciation | | | Construction
Work in
Progress |
| PacifiCorp: | | | | | | | | | | | | | | | | | | | | | | | | |
| Jim Bridger Nos. 1-4 | | | | | 66.7 | % | | | | $ | 941.8 | | | | | $ | 459.9 | | | | | $ | 10.0 | |
| Wyodak | | | | | 80.0 | | | | | | 337.2 | | | | | | 167.5 | | | | | | 0.9 | |
| Hunter No. 1 | | | | | 93.8 | | | | | | 305.3 | | | | | | 141.9 | | | | | | 0.9 | |
| Colstrip Nos. 3 and 4 | | | | | 10.0 | | | | | | 241.2 | | | | | | 114.3 | | | | | | 1.1 | |
| Hunter No. 2 | | | | | 60.3 | | | | | | 193.8 | | | | | | 84.6 | | | | | | 0.2 | |
| Hermiston | | | | | 50.0 | | | | | | 168.3 | | | | | | 36.3 | | | | | | 0.8 | |
| Craig Nos. 1 and 2 | | | | | 19.3 | | | | | | 166.2 | | | | | | 73.0 | | | | | | 0.2 | |
| Hayden No. 1 | | | | | 24.5 | | | | | | 42.6 | | | | | | 18.6 | | | | | | 0.2 | |
| Foote Creek | | | | | 78.8 | | | | | | 36.3 | | | | | | 11.5 | | | | | | 0.1 | |
| Hayden No. 2 | | | | | 12.6 | | | | | | 26.6 | | | | | | 12.8 | | | | | | 0.2 | |
| Other transmission and distribution plants | | | Various | | | | | 79.2 | | | | | | 18.1 | | | | | | 0.4 | |
| Total PacifiCorp | | | | | | | | | | | 2,538.5 | | | | | | 1,138.5 | | | | | | 15.0 | |
| MidAmerican Energy: | | | | | | | | | | | | | | | | | | | | | | | | |
| Louisa Unit No. 1 | | | | | 88.0 | % | | | | | 563.8 | | | | | | 333.4 | | | | | | 71.8 | |
| Council Bluffs Unit No. 3 | | | | | 79.1 | | | | | | 332.2 | | | | | | 218.4 | | | | | | 11.8 | |
| Quad Cities Unit Nos. 1 and 2 | | | | | 25.0 | | | | | | 311.4 | | | | | | 150.5 | | | | | | 9.2 | |
| Ottumwa Unit No. 1 | | | | | 52.0 | | | | | | 231.9 | | | | | | 143.7 | | | | | | 12.0 | |
| Neal Unit No. 4 | | | | | 40.6 | | | | | | 169.0 | | | | | | 118.2 | | | | | | 0.1 | |
| Neal Unit No. 3 | | | | | 72.0 | | | | | | 142.8 | | | | | | 99.6 | | | | | | — | |
| Transmission facilities | | | Various | | | | | 152.9 | | | | | | 43.7 | | | | | | 0.1 | |
| Total MidAmerican Energy | | | | | | | | 1,904.0 | | | | | | 1,107.5 | | | | | | 105.0 | |
| Total | | | | | | | $ | 4,442.5 | | | | | $ | 2,246.0 | | | | | $ | 120.0 | |
(6) Regulatory Matters
Regulatory Assets and Liabilities
Regulatory assets represent costs that are expected to be recovered in future rates. The Company’s regulatory assets reflected in the accompanying Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | |
| | | | Average
Remaining Life | | | 2006 | | | 2005 |
| Deferred income taxes(1) | | | 28 years | | | | $ | 665.9 | | | | | $ | 173.9 | |
| Employee benefit plans(2) | | | 11 years | | | | | 624.7 | | | | | | 20.1 | |
| Unrealized loss on regulated derivatives(3) | | | 5 years | | | | | 265.6 | | | | | | 45.4 | |
| Asset retirement obligations | | | 12 years | | | | | 45.6 | | | | | | 21.0 | |
| Computer systems development costs | | | 5 years | | | | | 45.2 | | | | | | 54.4 | |
| System levelized account | | | 1 year | | | | | 12.6 | | | | | | 26.5 | |
| Other | | | Various | | | | | 167.6 | | | | | | 99.8 | |
| Total | | | | | | | $ | 1,827.2 | | | | | $ | 441.1 | |
| (1) | Amounts represent income tax benefits related to certain accelerated tax depreciation, property-related basis differences and other various differences that were previously flowed through to customers and will be included in rates when the temporary differences reverse. |
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Table of Contents| (2) | Amounts represent unrecognized components of benefit plans’ funded status that are recoverable in rates when recognized in net periodic benefit cost. |
| (3) | Amounts represent net unrealized losses related to derivative contracts included in rates. |
The Company had regulatory assets not earning a return or earning less than the stipulated return as of December 31, 2006 and 2005 of $1,722.6 million and $400.8 million, respectively.
Regulatory liabilities represent income to be recognized or amounts to be returned to customers in future periods. The Company’s regulatory liabilities reflected in the accompanying Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | |
| | | | Average
Remaining Life | | | 2006 | | | 2005 |
| Cost of removal accrual(1)(2) | | | 28 years | | | | $ | 1,164.2 | | | | | $ | 448.5 | |
| Iowa electric settlement accrual(1) | | | 1 year | | | | | 259.2 | | | | | | 213.1 | |
| Employee benefit plans(3) | | | 14 years | | | | | 141.2 | | | | | | — | |
| Asset retirement obligations(1) | | | 30 years | | | | | 133.2 | | | | | | 66.0 | |
| Deferred income taxes | | | 29 years | | | | | 47.9 | | | | | | — | |
| Unrealized gain on regulated derivatives | | | 1 year | | | | | 21.4 | | | | | | 29.6 | |
| Other | | | Various | | | | | 71.6 | | | | | | 16.7 | |
| Total | | | | | | | $ | 1,838.7 | | | | | $ | 773.9 | |
| (1) | Amounts are deducted from rate base or otherwise accrue a carrying cost. |
| (2) | Amounts represent the remaining estimated costs, as accrued through depreciation rates, of removing electric utility assets in accordance with accepted regulatory practices. |
| (3) | Amounts represent unrecognized components of benefit plans’ funded status that are to be returned to customers in future periods when recognized in net periodic benefit cost. |
Rate Matters
Oregon Senate Bill 408
In September 2005, Oregon’s governor signed into law Senate Bill 408. This legislation is intended to address differences between income taxes collected by Oregon public utilities in retail rates and actual taxes paid by the utilities or consolidated groups in which utilities are included for income tax reporting purposes.
Oregon Senate Bill 408 requires that PacifiCorp and other large regulated, investor-owned utilities that provided electric or natural gas service to Oregon customers file an annual tax report with the Oregon Public Utility Commission (‘‘OPUC’’). Among other information, the tax report must contain (i) the amount of taxes paid by the utility, or paid by the affiliated group and ‘‘properly attributed’’ to the regulated operations of the utility, and (ii) the amount of taxes ‘‘authorized to be collected in rates.’’ If the OPUC determines that the amount of taxes ‘‘authorized to be collected’’ differs by more than $100,000 from the amount of taxes paid, in either direction, the OPUC will require the public utility to implement a rate schedule with an automatic adjustment clause resulting in an increase or a decrease on customer bills. The law is applicable for years begin ning on or after January 1, 2006. The first tax report that can result in a rate adjustment will be filed on or before October 15, 2007 with the resulting increase or decrease, if any, implemented in rates on or before June 1, 2008.
The final administrative rules define the amount of federal, state, and local taxes paid by the utility, or paid by the affiliated group and ‘‘properly attributed’’ to the regulated operations of the utility, as the lowest of: (i) the total tax liability of the affiliated group of which the utility is a member; (ii) the standalone tax liability of the utility; or (iii) the tax liability calculated using the ‘‘apportionment method.’’ The ‘‘apportionment method’’ uses an evenly weighted three-factor formula premised on property, payroll and sales, with amounts for the regulated operations of the utility in the
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Table of Contentsnumerator and amounts for the affiliated group in the denominator, to generate an allocation factor that is applied against the tax liability of PacifiCorp’s respective affiliated group in order to ‘‘apportion’’ part of that tax liability to the regulated operations of the utility. For federal purposes, the affiliated group of which PacifiCorp is a member is Berkshire Hathaway and its subsidiaries. For state and local purposes, the affiliated group differs based upon jurisdictional filing requirements.
As a result of the law and the final administrative rules, the tax liability of the affiliated group of which PacifiCorp is a member and the affiliated group’s impact on the factor determined under the ‘‘apportionment method’’ may impact the amount of taxes paid and ‘‘properly attributed’’ to PacifiCorp. PacifiCorp cannot predict the financial results and the related impact of its federal affiliated group, Berkshire Hathaway and subsidiaries, and therefore, cannot determine the impact this law may have on its consolidated financial results.
Additionally, the calculation of ‘‘taxes authorized to be collected in rates,’’ as defined by the OPUC, is based upon assumptions in the latest rate case(s) used to set rates for the respective financial reporting period. As such, ‘‘taxes authorized to be collected in rates’’ does not reflect actual tax collections. The resulting difference between actual tax collections and the amount deemed collected pursuant to Oregon Senate Bill 408 may be a benefit or detriment to PacifiCorp and cannot be reasonably predicted.
The OPUC recognizes that a potential conflict between its rules and federal Internal Revenue Code regulations could deny PacifiCorp the tax benefits of accelerated depreciation. As such, at the request of the OPUC in December 2006, PacifiCorp and the other affected utilities filed requests for private letter rulings from the Internal Revenue Service on this issue, which may result in further changes to the rule or underlying law.
Oregon Senate Bill 408 cannot be used to decrease utility rates below a fair and reasonable level and the final administrative rules expressly provide that a utility may challenge any adjustment resulting in rates that are not fair, just and reasonable resulting in confiscatory rates.
PacifiCorp continues to evaluate its legal and legislative options with respect to Oregon Senate Bill 408.
In September 2005, the OPUC issued an order granting a general rate increase of $25.9 million, or an average increase of 3.2%, effective October 2005. The OPUC’s order reduced PacifiCorp’s revenue requirement by $26.6 million (and therefore denied any related further rate increase) based on the OPUC’s interpretation of Senate Bill 408. In October 2005, PacifiCorp filed with the OPUC a motion for reconsideration and rehearing of the rate order generally on the basis that the tax adjustment was not made in compliance with applicable law. With the motion, PacifiCorp also filed a deferred accounting application with the OPUC to track revenues related to the disallowed tax expenses. In July 2006, a final order was issued by the OPUC affirming its initial application of Senate Bill 408. The order also modified the tax adjustment, resulting in an additional annual increase in PacifiCorp’s revenue of $6.1 millio n effective July 2006, as well as granting deferred accounting for the period from October 2005 to July 2006. In September 2006, PacifiCorp filed an application for deferred accounting treatment of the remainder of the tax adjustment, pending the outcome of the permanent rulemaking for Senate Bill 408. This application was necessary to ensure that PacifiCorp is allowed the opportunity to recover any revenue shortfall related to its allocated tax expense in rates for 2006, to the extent any such revenue shortfall is not recovered through the Senate Bill 408 automatic adjustment clause. Because the result of the automatic adjustment clause will not be known until after the October 2007 tax reports are filed, PacifiCorp’s application for deferred accounting of the remainder of the tax adjustment will be postponed until fall 2007.
Iowa Electric Revenue Sharing
Under a series of electric settlement agreements between MidAmerican Energy, the Iowa Office of Consumer Advocate and other interveners approved by the Iowa Utilities Board (‘‘IUB’’), MidAmerican Energy has agreed not to seek a general increase in electric base rates to become effective prior to January 1, 2013, unless its Iowa jurisdictional electric return on equity in any year
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Table of Contentsfalls below 10%. Under the settlement agreements, MidAmerican Energy has agreed to share revenue based upon certain predetermined return on equity thresholds. MidAmerican Energy agreed to share revenues through December 31, 2005 at an amount equal to 50% of revenues associated with returns on equity between 12% and 14%, and 83.33% of revenues associated with returns on equity above 14%. From January 1, 2006 to December 31, 2012, MidAmerican Energy has agreed to share amounts equal to 40% of revenues associated with returns on equity between 11.75% and 13%, 50% of revenues associated with returns on equity between 13% and 14%, and 83.3% of revenues associated with returns on equity above 14%. Separate regulatory liability accounts are maintained by year.
The regulatory liabilities created by the settlement agreements are recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Additionally, interest expense is accrued on the portion of the regulatory liability balance recorded in prior years. Regulatory liabilities created for the years through 2010 will be reduced as they are credited against plant in service associated with generating plant additions. As a result of such credits applied to generating plant balances, future depreciation will be reduced. The regulatory liability accrued for 2011 and 2012, if any, will be credited to customer bills in 2012 and 2013.
Refund Matters
PacifiCorp
PacifiCorp is a party to a Federal Energy Regulatory Commission (‘‘FERC’’) proceeding that is investigating potential refunds for energy transactions in the California Independent System Operator and the California Power Exchange markets during past periods of high energy prices in 2000 and 2001. PacifiCorp has reserved for these potential refunds. Also in that time period, PacifiCorp experienced defaults of amounts due to PacifiCorp from certain counterparties resulting from transactions with the California Independent System Operator and California Power Exchange as a result of California market conditions. PacifiCorp has reserved for these receivables. As part of the global settlement process underway in the FERC proceeding, as sponsored by the United States Court of Appeals for the Ninth Circuit and the FERC, PacifiCorp has been working with the California parties in an effort to explore settlement of these claims.
Northern Natural Gas
On May 1, 2003, Northern Natural Gas filed a general rate case proceeding for increased rates with the FERC and filed an additional rate case proceeding on January 30, 2004 to reflect further cost increases. The FERC consolidated the 2003 and 2004 rate cases due to the similarity of issues in both cases and the updated costs. On March 25, 2005, as modified on April 22, 2005, Northern Natural Gas filed a stipulation and agreement with the FERC (the ‘‘Settlement’’) resolving the consolidated rate cases. On June 20, 2005, the FERC approved the Settlement without modification. The Settlement represents the agreement Northern Natural Gas reached with its customers to settle the base tariff rates and related tariff issues in the consolidated cases. The Settlement provided for, among other things, rates designed to generate revenues on an annual basis above the base rates which were in effect as of October 31, 2003, as follows: $48 million for the period November 1, 2003 through October 31, 2004, $53 million for the period November 1, 2004 through October 31, 2005, $58 million for the period November 1, 2005 through October 31, 2006, and $62 million beginning November 1, 2006. Northern Natural Gas provided refunds including interest of $71.5 million to its customers in the third quarter of 2005 consistent with the terms of the Settlement, reflecting the difference between the rate increases implemented on November 1, 2003 and November 1, 2004 and the revenue generated using the Settlement rates.
In April 2004, Northern Natural Gas also filed tariff sheets with the FERC in relation to its system levelized account (‘‘SLA’’) (an imbalance recovery mechanism) with the new rates going into effect on June 1, 2004, subject to refund. On February 14, 2005, Northern Natural Gas received FERC approval of the SLA settlement. The SLA settlement provides for recovery of the final SLA balance as of December 31, 2004, over a forty-eight month period beginning November 1, 2003. Under the SLA settlement, Northern Natural Gas is responsible for the financial impacts of managing operational storage volumes.
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Table of ContentsKern River
Kern River’s 2004 general rate case hearing concluded in August 2005. On March 2, 2006, Kern River received an initial decision on the case from the administrative law judge. On October 19, 2006, the FERC issued an order that modified certain aspects of the administrative law judge’s initial decision, including changing the allowed return on equity from 9.34% to 11.2% and granting Kern River an income tax allowance. The order also affirmed the rejection of certain issues included in Kern River’s filed position, including the load factors to be used in calculating rates for the vintage system. The FERC determined that a 100% load factor should be used in the rate calculation rather than the 95% load factor requested by Kern River. The FERC also rejected a 3% inflation factor for certain operating expenses and a shorter useful life for certain plant. Kern River and other parties filed their requests for rehearing of the initial ord er on November 20, 2006. Kern River submitted its compliance filing, which sets forth compliance rates in accordance with the initial order, on December 18, 2006. A final order on the request for rehearing and compliance filing is expected to be issued in the first or second quarter of 2007. Rate refunds will be due within 30 days after the final order is issued. Kern River was permitted to bill the requested rate increase prior to final approval by the FERC, subject to refund, beginning effective November 1, 2004. Since that time, Kern River has recorded a provision for estimated refunds. As a result of the October 19, 2006 order, additional customer billings and the accrual of interest, the liability for rates subject to refund increased $77.8 million during 2006 to $107.3 million as of December 31, 2006.
(7) Investments
Other Investments
Other investments are classified as non-current, until currently due according to stated maturities, in the accompanying Consolidated Balance Sheets as management does not intend to use them in current operations. Gross realized and unrealized gains and losses of other investments are not material as of December 31, 2006 and 2005. Other investments consist of the following as of December 31 (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Guaranteed investment contracts | | | | $ | 587.3 | | | | | $ | 516.3 | |
| Nuclear decommissioning trust funds | | | | | 258.8 | | | | | | 228.1 | |
| Mine reclamation trust funds | | | | | 109.8 | | | | | | — | |
| Other | | | | | 75.1 | | | | | | 54.3 | |
| | | | | | 1,031.0 | | | | | | 798.7 | |
| Less current portion | | | | | (195.8 | ) | | | | | — | |
| Total other investments | | | | $ | 835.2 | | | | | $ | 798.7 | |
In May 2005, certain indirect wholly owned subsidiaries of CE Electric UK purchased £300.0 million of fixed rate guaranteed investment contracts (£100.0 million at 4.75% and £200.0 million at 4.73%) with a portion of the proceeds of the issuance of £350.0 million of 5.125% bonds due in 2035. These guaranteed investment contracts mature in December 2007 (£100.0 million) and February 2008 (£200.0 million). The proceeds of which will be used to repay certain long-term debt of subsidiaries of CE Electric UK. The guaranteed investment contracts are reported at cost.
MidAmerican Energy has established trusts for the investment of funds for decommissioning the Quad Cities Nuclear Station Units 1 and 2. These investments in debt and equity securities are classified as available-for-sale and are reported at fair value. Funds are invested in the trust in accordance with applicable federal investment guidelines and are restricted for use as reimbursement for costs of decommissioning the Quad Cities Station. As of December 31, 2006, approximately 56% of the fair value of the trusts’ funds was invested in domestic common equity securities, approximately 13% in domestic corporate debt securities and the remainder in investment grade municipal and U.S. Treasury bonds. As of December 31, 2005, approximately 56% of the fair value of the trusts’ funds was invested in domestic common equity securities, 14% in domestic corporate debt securities and the remainder in investment grade municipal and U.S. Treasury bo nds.
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Table of ContentsPacifiCorp has established a trust for the investment of funds for final reclamation of a leased coal mining property. These investments in debt and equity securities are classified as available-for-sale and are reported at fair value. Amounts funded are based on estimated future reclamation costs and estimated future coal deliveries. As of December 31, 2006, approximately 56% of the fair value of the trust’s funds was invested in equity securities with the remainder invested in debt securities.
(8) Short-Term Borrowings
Short-term borrowings consist of the following as of December 31 (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| MEHC | | | | $ | 152.0 | | | | | $ | 51.0 | |
| PacifiCorp | | | | | 397.3 | | | | | | — | |
| CE Electric UK | | | | | — | | | | | | 10.4 | |
| HomeServices | | | | | 2.5 | | | | | | 8.7 | |
| Total short-term debt | | | | $ | 551.8 | | | | | $ | 70.1 | |
MEHC
MEHC has a $600.0 million unsecured credit facility expiring in July 2011. The credit facility has a variable interest rate based on the London Interbank Offered Rate (‘‘LIBOR’’) plus 0.195% that varies based on MEHC’s credit ratings for its senior unsecured long-term debt securities or a base rate, at MEHC’s option, and the credit facility supports letters of credit for the benefit of certain subsidiaries and affiliates. As of December 31, 2006, the outstanding balance of the credit facility totaled $152.0 million, at an interest rate of 5.57%, and letters of credit issued under the credit agreement totaled $59.7 million. As of December 31, 2005, the outstanding balance of the credit facility totaled $51.0 million, at an interest rate of 4.85%, and letters of credit issued totaled $41.9 million. The related credit agreement requires that MEHC’s ratio of consolidated debt to total capitalization, including current maturities, not exceed 0.70 to 1.0 as of the last day of any quarter.
PacifiCorp
PacifiCorp has an $800.0 million unsecured revolving credit facility expiring in July 2011. The credit facility includes a variable interest rate borrowing option based on LIBOR plus 0.195% that varies based on PacifiCorp’s credit ratings for its senior unsecured long-term debt securities and it supports PacifiCorp’s commercial paper program. As of December 31, 2006, PacifiCorp had $397.3 million of commercial paper arrangements outstanding at an average interest rate of 5.3% and no borrowings outstanding under its revolving credit agreement as of December 31, 2006. The revolving credit agreement requires that PacifiCorp’s ratio of consolidated debt to total capitalization, including current maturities, at no time exceed 0.65 to 1.0.
MidAmerican Energy
MidAmerican Energy has a $500.0 million unsecured revolving credit facility expiring in July 2011. The credit facility has a variable interest rate based on the LIBOR plus 0.115% that varies based on MidAmerican Energy’s credit ratings for its senior unsecured long-term debt securities and it supports MidAmerican Energy’s $379.6 million commercial paper program and its variable rate pollution control revenue obligations. As of December 31, 2006 and 2005, MidAmerican Energy had no commercial paper or bank notes outstanding. The related credit agreement requires that MidAmerican Energy’s ratio of consolidated debt to total capitalization, including current maturities, not exceed 0.65 to 1.0 as of the last day of any quarter.
CE Electric UK
CE Electric UK has a £100.0 million unsecured revolving credit facility expiring in April 2010. The facility carries a variable interest rate based on sterling LIBOR plus 0.25% to 0.40%. As of
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Table of ContentsDecember 31, 2006 there were no borrowings outstanding. As of December 31, 2005 there was $10.4 million outstanding at an interest rate of 5.14%. The related credit agreement requires that CE Electric UK’s ratio of consolidated senior net debt to regulated asset value, including current maturities, not exceed 0.8 to 1.0 at CE Electric UK and 0.65 to 1.0 at Northern Electric and Yorkshire Electricity as of June 30 and December 31. Additionally, CE Electric UK’s interest coverage ratio can not exceed 2.0 to 1.0 during 2006 and 2.5 to 1.0 thereafter.
CE Electric UK also has a total of £35.0 million in unsecured, uncommitted lines of credit, none of which were drawn on as of December 31, 2006 and 2005. The interest rate of these uncommitted lines of credit as of December 31, 2006 is variable based on sterling LIBOR plus 0.40%.
HomeServices
HomeServices has a $125.0 million unsecured senior revolving credit facility expiring in December 2010. The facility carries a variable interest rate based on the prime lending rate or LIBOR, at HomeServices’ option, plus 0.5% to 1.125%, that varies based on HomeServices’ total debt ratio. The spread was 0.5% as of December 31, 2006 and 2005. As of December 31, 2006 and 2005 there were no borrowings outstanding. The related credit agreement requires that HomeServices’ ratio of consolidated total debt to EBITDA not exceed 3.0 to 1.0 at the end of any fiscal quarter and its ratio of EBITDA to interest can not be less than 2.5 to 1.0 at the end of any fiscal quarter.
Additionally, HomeServices has a $25.0 million mortgage warehouse line of credit expiring in May 2008. The line of credit carries a variable interest rate based on LIBOR plus 1.75% to 2.00% depending on the type of mortgage loan funded. As of December 31, 2006, the balance outstanding on this line of credit was $2.5 million at a weighted average interest rate of 7.10% and the balance outstanding on this line of credit as of December 31, 2005 was $8.7 million at a weighted average interest rate of 6.14%.
(9) Parent Company Senior Debt
Parent company senior debt represents unsecured senior obligations of MEHC and consists of the following, including fair value adjustments and unamortized premiums and discounts, as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| 4.625% Senior Notes, due 2007 | | | | $ | 200.0 | | | | | $ | 199.8 | | | | | $ | 199.6 | |
| 7.63% Senior Notes, due 2007 | | | | | 350.0 | | | | | | 348.9 | | | | | | 347.4 | |
| 3.50% Senior Notes, due 2008 | | | | | 450.0 | | | | | | 449.8 | | | | | | 449.6 | |
| 7.52% Senior Notes, due 2008 | | | | | 550.0 | | | | | | 546.9 | | | | | | 545.3 | |
| 5.875% Senior Notes, due 2012 | | | | | 500.0 | | | | | | 499.9 | | | | | | 499.9 | |
| 5.00% Senior Notes, due 2014 | | | | | 250.0 | | | | | | 249.8 | | | | | | 249.8 | |
| 8.48% Senior Notes, due 2028 | | | | | 475.0 | | | | | | 484.4 | | | | | | 484.6 | |
| 6.125% Senior Notes, due 2036 | | | | | 1,700.0 | | | | | | 1,699.3 | | | | | | — | |
| Total Parent Company Senior Debt | | | | $ | 4,475.0 | | | | | $ | 4,478.8 | | | | | $ | 2,776.2 | |
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Table of Contents(10) Parent Company Subordinated Debt
Parent company subordinated debt consists of the following, including fair value adjustments, as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| CalEnergy Capital Trust II – 6.25%, due 2012 | | | | $ | 104.6 | | | | | $ | 94.2 | | | | | $ | 92.7 | |
| CalEnergy Capital Trust III – 6.5%, due 2027 | | | | | 270.0 | | | | | | 207.2 | | | | | | 206.2 | |
| MidAmerican Capital Trust I – 11%, due 2010 | | | | | 318.3 | | | | | | 318.3 | | | | | | 409.3 | |
| MidAmerican Capital Trust II – 11%, due 2011 | | | | | 500.0 | | | | | | 500.0 | | | | | | 600.0 | |
| MidAmerican Capital Trust III – 11%, due 2012 | | | | | 236.9 | | | | | | 236.9 | | | | | | 279.9 | |
| Total Parent Company Subordinated Debt | | | | $ | 1,429.8 | | | | | $ | 1,356.6 | | | | | $ | 1,588.1 | |
The Capital Trusts were formed for the purpose of issuing trust preferred securities to holders and investing the proceeds received in parent company subordinated debt issued by MEHC. The terms of the parent company subordinated debt are substantially identical to those of the trust preferred securities. The parent company subordinated debt associated with the CalEnergy Trusts is callable at the option of MEHC at any time at par value plus accrued interest. The parent company subordinated debt associated with the MidAmerican Capital Trusts is not callable by MEHC except upon the limited occurrence of specified events. Distributions on the parent company subordinated debt are payable either quarterly or semi-annually, depending on the issue, in arrears, and can be deferred at the option of MEHC for up to five years. During the deferral period, interest continues to accrue on the CalEnergy Capital Trusts at their stated rates, while interest accrues on t he MidAmerican Capital Trusts at 13% per annum. The CalEnergy Capital Trust preferred securities are convertible any time into cash at the option of the holder for an aggregate amount of $283.7 million.
The MidAmerican Capital Trusts preferred securities are held by Berkshire Hathaway and its affiliates, which are prohibited from transferring the securities absent an event of default to non-affiliated persons. Interest expense to Berkshire Hathaway for the years ended December 31, 2006, 2005 and 2004 was $133.8 million, $157.3 million and $169.9 million, respectively. Interest expense on the CalEnergy Capital Trusts for the years ended December 31, 2006, 2005 and 2004 was $27.4 million, $27.1 million and $27.0 million, respectively.
The parent company subordinated debt is subordinated to all senior indebtedness of MEHC and is subject to certain covenants, events of default and optional and mandatory redemption provisions, all described in the indenture. Upon involuntary liquidation, the holder is entitled to par value plus any distributions in arrears. MEHC has agreed to pay to the holders of the trust preferred securities, to the extent that the applicable Trust has funds available to make such payments, quarterly distributions, redemption payments and liquidation payments on the trust preferred securities.
(11) Subsidiary and Project Debt
MEHC’s direct and indirect subsidiaries are organized as legal entities separate and apart from MEHC and its other subsidiaries. Pursuant to separate financing agreements, the assets of each subsidiary may be pledged or encumbered to support or otherwise provide the security for its own project or subsidiary debt. It should not be assumed that the assets of any subsidiary will be available to satisfy MEHC’s obligations or the obligations of its other subsidiaries. However, unrestricted cash or other assets which are available for distribution may, subject to applicable law, regulatory commitments and the terms of financing and ring-fencing arrangements for such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to MEHC or affiliates thereof.
Distributions at these separate legal entities are limited by various covenants including, among others, leverage ratios, interest coverage ratios and debt service coverage ratios. As of December 31, 2006, all subsidiaries were in compliance with their covenants. However, Cordova Energy’s 537-MW gas-fired power plant in the Quad Cities, Illinois area is currently prohibited from making distributions by the terms of its indenture due to its failure to meet its debt service coverage ratio requirement.
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Table of ContentsLong-term debt of subsidiaries and projects consists of the following, including fair value adjustments and unamortized premiums and discounts, as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| PacifiCorp | | | | $ | 4,137.0 | | | | | $ | 4,131.2 | | | | | $ | — | |
| MidAmerican Funding | | | | | 700.0 | | | | | | 651.1 | | | | | | 648.4 | |
| MidAmerican Energy | | | | | 1,826.6 | | | | | | 1,821.0 | | | | | | 1,631.8 | |
| Northern Natural Gas | | | | | 800.0 | | | | | | 799.6 | | | | | | 799.6 | |
| Kern River | | | | | 1,091.4 | | | | | | 1,091.4 | | | | | | 1,157.3 | |
| CE Electric UK | | | | | 2,609.6 | | | | | | 2,775.6 | | | | | | 2,507.5 | |
| CE Casecnan | | | | | 106.3 | | | | | | 105.4 | | | | | | 140.6 | |
| Leyte Projects | | | | | 18.9 | | | | | | 18.9 | | | | | | 42.6 | |
| Cordova Funding | | | | | 194.3 | | | | | | 191.9 | | | | | | 196.2 | |
| HomeServices | | | | | 28.9 | | | | | | 27.9 | | | | | | 26.3 | |
| Total Subsidiary and Project Debt | | | | $ | 11,513.0 | | | | | $ | 11,614.0 | | | | | $ | 7,150.3 | |
PacifiCorp
The components of PacifiCorp’s long-term debt consist of the following, including unamortized premiums and discounts, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | |
| First mortgage bonds: | | | | | | | | | | | | | | | | | | |
| 4.3% to 9.2%, due through 2011 | | | | $ | 1,277.8 | | | | | $ | 1,276.7 | | | | | | | |
| 5.0% to 8.8%, due 2012 to 2016 | | | | | 457.0 | | | | | | 456.3 | | | | | | | |
| 8.4% to 8.5%, due 2017 to 2021 | | | | | 21.7 | | | | | | 21.7 | | | | | | | |
| 6.7% to 8.3%, due 2022 to 2026 | | | | | 404.0 | | | | | | 404.0 | | | | | | | |
| 7.7% due 2031 | | | | | 300.0 | | | | | | 299.3 | | | | | | | |
| 5.3% to 6.1%, due 2034 to 2036 | | | | | 850.0 | | | | | | 847.2 | | | | | | | |
| Guaranty of pollution-control revenue bonds: | | | | | | | | | | | | | | | | | | |
| Variable rate series (3.9% to 4.0%): | | | | | | | | | | | | | | | | | | |
| Due 2013(1)(2) | | | | | 40.7 | | | | | | 40.7 | | | | | | | |
| Due 2014 to 2025(2) | | | | | 325.2 | | | | | | 325.2 | | | | | | | |
| Due 2024(1)(2) | | | | | 175.8 | | | | | | 175.8 | | | | | | | |
| 3.4% to 5.7%, due 2014 to 2025(1) | | | | | 184.0 | | | | | | 183.6 | | | | | | | |
| 6.2%, due 2030 | | | | | 12.7 | | | | | | 12.6 | | | | | | | |
| Mandatorily Redeemable Preferred Stock, due 2007 | | | | | 37.5 | | | | | | 37.5 | | | | | | | |
| Capital lease obligations: | | | | | | | | | | | | | | | | | | |
| 10.4% to 14.8%, due through 2036 | | | | | 50.6 | | | | | | 50.6 | | | | | | | |
| | | | | $ | 4,137.0 | | | | | $ | 4,131.2 | | | | | | | |
| (1) | Secured by pledged first mortgage bonds generally at the same interest rates, maturity dates and redemption provisions as the pollution-control revenue bonds. |
| (2) | Interest rates fluctuate based on various rates, primarily on certificate of deposit rates, interbank borrowing rates, prime rates or other short-term market rates. |
First mortgage bonds of PacifiCorp may be issued in amounts limited by PacifiCorp’s property, earnings and other provisions of the mortgage indenture. Approximately $14.6 billion of the eligible assets (based on original cost) of PacifiCorp were subject to the lien of the mortgage as of December 31, 2006.
As of December 31, 2006, $2.7 billion of first mortgage bonds were redeemable at PacifiCorp’s option at redemption prices dependent upon United States Treasury yields. As of December 31, 2006,
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Table of Contents$541.7 million of variable-rate pollution-control revenue bonds were redeemable at PacifiCorp’s option at par. As of December 31, 2006, $71.2 million of fixed-rate pollution-control revenue bonds were redeemable at PacifiCorp’s option at par and another $12.7 million at 102.0% of par. The remaining long-term debt was not redeemable as of December 31, 2006.
As of December 31, 2006, PacifiCorp had $517.8 million of standby letters of credit and standby bond purchase agreements available to provide credit enhancement and liquidity support for variable-rate pollution-control revenue bond obligations. In addition, PacifiCorp had approximately $21.0 million of standby letters of credit to provide credit support for certain transactions as requested by third parties. These committed bank arrangements were all fully available as of December 31, 2006 and expire periodically through February 2011.
MidAmerican Funding
The components of MidAmerican Funding’s senior notes and bonds consist of the following, including fair value adjustments, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| 6.339% Senior Notes, due 2009 | | | | $ | 175.0 | | | | | $ | 169.9 | | | | | $ | 167.9 | |
| 6.75% Senior Notes, due 2011 | | | | | 200.0 | | | | | | 200.0 | | | | | | 200.0 | |
| 6.927% Senior Bonds, due 2029 | | | | | 325.0 | | | | | | 281.2 | | | | | | 280.5 | |
| Total MidAmerican Funding | | | | $ | 700.0 | | | | | $ | 651.1 | | | | | $ | 648.4 | |
MidAmerican Funding’s subsidiaries must make payments on their own indebtedness before making distributions to MidAmerican Funding. The distributions are also subject to utility regulatory restrictions agreed to by MidAmerican Energy in March 1999, whereby it committed to the IUB to use commercially reasonable efforts to maintain an investment grade rating on its long-term debt and to maintain a common equity to total capitalization ratio above 42%, except under circumstances beyond its control. MidAmerican Energy’s common equity to total capitalization ratio is not allowed to decline below 39% for any reason. If the ratio declines below the defined threshold, MidAmerican Energy must seek the approval of a reasonable utility capital structure from the IUB. MidAmerican Energy’s ability to issue debt could also be restricted. As of December 31, 2006, MidAmerican Energy’s common equity to total capitalization ratio, computed o n a basis consistent with the commitment, was 53.6%.
F-49
Table of ContentsMidAmerican Energy
The components of MidAmerican Energy’s mortgage bonds, pollution control revenue obligations and notes consist of the following, including unamortized premiums and discounts, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| Pollution control revenue obligations: | | | | | | | | | | | | | | | | | | |
| 6.10% Series, due 2007 | | | | $ | 1.0 | | | | | $ | 1.0 | | | | | $ | 1.0 | |
| 5.95% Series, due 2023, secured by general mortgage bonds | | | | | 29.0 | | | | | | 29.0 | | | | | | 29.0 | |
| Variable rate series (2006-3.97%, 2005-3.59%): | | | | | | | | | | | | | | | | | | |
| Due 2016 and 2017 | | | | | 37.6 | | | | | | 37.6 | | | | | | 37.6 | |
| Due 2023, secured by general mortgage bonds | | | | | 28.3 | | | | | | 28.3 | | | | | | 28.3 | |
| Due 2023 | | | | | 6.9 | | | | | | 6.9 | | | | | | 6.9 | |
| Due 2024 | | | | | 34.9 | | | | | | 34.9 | | | | | | 34.9 | |
| Due 2025 | | | | | 12.8 | | | | | | 12.8 | | | | | | 12.8 | |
| Notes: | | | | | | | | | | | | | | | | | | |
| 6.375% Series, due 2006 | | | | | — | | | | | | — | | | | | | 160.0 | |
| 5.125% Series, due 2013 | | | | | 275.0 | | | | | | 274.6 | | | | | | 274.6 | |
| 4.65% Series, due 2014 | | | | | 350.0 | | | | | | 349.8 | | | | | | 349.7 | |
| 6.75% Series, due 2031 | | | | | 400.0 | | | | | | 395.8 | | | | | | 395.6 | |
| 5.75% Series, due 2035 | | | | | 300.0 | | | | | | 299.8 | | | | | | 299.7 | |
| 5.80% Series, due 2036 | | | | | 350.0 | | | | | | 349.4 | | | | | | — | |
| Other | | | | | 1.1 | | | | | | 1.1 | | | | | | 1.7 | |
| Total MidAmerican Energy | | | | $ | 1,826.6 | | | | | $ | 1,821.0 | | | | | $ | 1,631.8 | |
Northern Natural Gas
The components of Northern Natural Gas’ senior notes consist of the following, including unamortized premiums and discounts, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| 6.75% Senior Notes, due 2008 | | | | $ | 150.0 | | | | | $ | 150.0 | | | | | $ | 150.0 | |
| 7.00% Senior Notes, due 2011 | | | | | 250.0 | | | | | | 250.0 | | | | | | 250.0 | |
| 5.375% Senior Notes, due 2012 | | | | | 300.0 | | | | | | 299.7 | | | | | | 299.7 | |
| 5.125% Senior Notes, due 2015 | | | | | 100.0 | | | | | | 99.9 | | | | | | 99.9 | |
| Total Northern Natural Gas | | | | $ | 800.0 | | | | | $ | 799.6 | | | | | $ | 799.6 | |
On February 12, 2007, Northern Natural Gas issued $150.0 million of 5.8% Senior Notes due February 15, 2037. The proceeds will be used by Northern Natural Gas to fund capital expenditures and for other general corporate purposes.
Kern River
The components of Kern River’s term notes are due in monthly installments and consist of the following as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| 6.676% Senior Notes, due 2016 | | | | $ | 389.2 | | | | | $ | 389.2 | | | | | $ | 415.2 | |
| 4.893% Senior Notes, due 2018 | | | | | 702.2 | | | | | | 702.2 | | | | | | 742.1 | |
| Total Kern River | | | | $ | 1,091.4 | | | | | $ | 1,091.4 | | | | | $ | 1,157.3 | |
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Table of ContentsKern River provides a debt service reserve letter of credit in amounts equal to the next six months of principal and interest payments due on the loans which were equal to $64.4 million and $64.5 million, respectively, as of December 31, 2006 and 2005.
CE Electric UK
The components of CE Electric UK and its subsidiaries’ long-term debt consist of the following, including fair value adjustments and unamortized premiums and discounts, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| 6.995% Senior Notes, due 2007 | | | | $ | 237.0 | | | | | $ | 234.7 | | | | | $ | 232.5 | |
| 6.496% Yankee Bonds, due 2008 | | | | | 281.0 | | | | | | 281.0 | | | | | | 281.1 | |
| 8.875% Bearer Bonds, due 2020(1) | | | | | 195.8 | | | | | | 231.0 | | | | | | 208.9 | |
| 9.25% Eurobonds, due 2020(1) | | | | | 391.5 | | | | | | 481.6 | | | | | | 429.5 | |
| 7.25% Sterling Bonds, due 2022(1) | | | | | 391.5 | | | | | | 417.0 | | | | | | 371.4 | |
| 7.25% Eurobonds, due 2028(1) | | | | | 363.1 | | | | | | 383.9 | | | | | | 338.4 | |
| 5.125% Bonds, due 2035(1) | | | | | 391.5 | | | | | | 389.6 | | | | | | 342.5 | |
| 5.125% Bonds, due 2035(1) | | | | | 293.6 | | | | | | 292.2 | | | | | | 256.9 | |
| CE Gas Credit Facility, 7.62% and 6.86%(1) | | | | | 64.6 | | | | | | 64.6 | | | | | | 46.3 | |
| Total CE Electric UK | | | | $ | 2,609.6 | | | | | $ | 2,775.6 | | | | | $ | 2,507.5 | |
| (1) | The par values for these debt instruments are denominated in sterling and have been converted to U.S. dollars at the applicable exchange rate. |
CE Casecnan
CE Casecnan Water and Energy Company, Inc. (‘‘CE Casecnan’’) has 11.95% Senior Secured Series B Bonds, due in 2010 with a par value of $106.3 million. The outstanding balance of these bonds, including fair value adjustments, as of December 31, 2006 and 2005 was $105.4 million and $140.6 million, respectively.
Leyte Projects
The Leyte Projects’ term loans consist of the following as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| Mahanagdong Project 6.92% Term Loan, due 2007 | | | | $ | 15.5 | | | | | $ | 15.5 | | | | | $ | 30.9 | |
| Mahanagdong Project 7.60% Term Loan, due 2007 | | | | | 3.4 | | | | | | 3.4 | | | | | | 6.9 | |
| Upper Mahiao Project 5.95% Term Loan, due 2006 | | | | | — | | | | | | — | | | | | | 4.8 | |
| Total Leyte Projects | | | | $ | 18.9 | | | | | $ | 18.9 | | | | | $ | 42.6 | |
MEHC provides a debt service reserve letter of credit in amounts equal to the next six months of principal and interest payments due on the loans which were equal to $13.2 million and $18.8 million as of December 31, 2006 and 2005, respectively.
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Table of ContentsCordova Funding
Cordova Funding Corporation’s (‘‘Cordova Funding’’) senior secured bonds are due in semi-annual installments and consist of the following, including fair value adjustments, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| 8.48% Senior Secured Bonds, due 2019 | | | | $ | 11.0 | | | | | $ | 11.0 | | | | | $ | 11.3 | |
| 8.64% Senior Secured Bonds, due 2019 | | | | | 80.7 | | | | | | 78.6 | | | | | | 80.5 | |
| 8.79% Senior Secured Bonds, due 2019 | | | | | 27.0 | | | | | | 26.7 | | | | | | 27.2 | |
| 8.82% Senior Secured Bonds, due 2019 | | | | | 50.2 | | | | | | 50.2 | | | | | | 51.3 | |
| 9.07% Senior Secured Bonds, due 2019 | | | | | 25.4 | | | | | | 25.4 | | | | | | 25.9 | |
| Total Cordova Funding | | | | $ | 194.3 | | | | | $ | 191.9 | | | | | $ | 196.2 | |
MEHC has issued a limited guarantee of a specified portion of the final scheduled principal payment on December 15, 2019, on the Cordova Funding senior secured bonds in an amount up to a maximum of $37.0 million. On September 14, 2006, MEHC gave notice to terminate the then existing debt service reserve guarantee, the maximum amount of which was equal at any given time to the difference between the next succeeding debt service payment ($11.0 million as of December 31, 2005) and the amount then on deposit in the debt service reserve fund ($9.0 million as of December 31, 2005). As required by the debt service reserve guarantee, the debt service reserve account is fully funded with cash and the required amount is equal to or exceeds the current debt service required balance.
HomeServices
The components of HomeServices’ long-term debt consist of the following, including fair value adjustments, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Par Value | | | 2006 | | | 2005 |
| 7.12% Senior Notes, due 2010 | | | | $ | 20.0 | | | | | $ | 19.0 | | | | | $ | 23.5 | |
| Other | | | | | 8.9 | | | | | | 8.9 | | | | | | 2.8 | |
| Total HomeServices | | | | $ | 28.9 | | | | | $ | 27.9 | | | | | $ | 26.3 | |
Annual Repayments of Long-Term Debt
The annual repayments of parent company and subsidiary and project debt for the years beginning January 1, 2007 and thereafter, excluding fair value adjustments and unamortized premiums and discounts, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | Thereafter | | | Total |
| Parent company senior debt | | | | $ | 550.0 | | | | | $ | 1,000.0 | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | 2,925.0 | | | | | $ | 4,475.0 | |
| Parent company subordinated debt | | | | | 234.0 | | | | | | 234.0 | | | | | | 234.0 | | | | | | 188.5 | | | | | | 143.1 | | | | | | 396.2 | | | | | | 1,429.8 | |
| PacifiCorp | | | | | 164.4 | | | | | | 413.9 | | | | | | 140.0 | | | | | | 16.5 | | | | | | 588.8 | | | | | | 2,813.4 | | | | | | 4,137.0 | |
| MidAmerican Funding | | | | | — | | | | | | — | | | | | | 175.0 | | | | | | — | | | | | | 200.0 | | | | | | 325.0 | | | | | | 700.0 | |
| MidAmerican Energy | | | | | 1.6 | | | | | | 0.5 | | | | | | — | | | | | | — | | | | | | — | | | | | | 1,824.5 | | | | | | 1,826.6 | |
| Northern Natural Gas | | | | | — | | | | | | 150.0 | | | | | | — | | | | | | — | | | | | | 250.0 | | | | | | 400.0 | | | | | | 800.0 | |
| Kern River | | | | | 75.0 | | | | | | 72.8 | | | | | | 74.9 | | | | | | 78.7 | | | | | | 81.1 | | | | | | 708.9 | | | | | | 1,091.4 | |
| CE Electric UK | | | | | 244.7 | | | | | | 290.3 | | | | | | 9.5 | | | | | | 9.5 | | | | | | 9.6 | | | | | | 2,046.0 | | | | | | 2,609.6 | |
| CE Casecnan | | | | | 37.7 | | | | | | 37.7 | | | | | | 13.7 | | | | | | 17.2 | | | | | | — | | | | | | — | | | | | | 106.3 | |
| Leyte Projects | | | | | 18.9 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 18.9 | |
| Cordova Funding | | | | | 4.2 | | | | | | 4.7 | | | | | | 6.4 | | | | | | 9.0 | | | | | | 9.2 | | | | | | 160.8 | | | | | | 194.3 | |
| HomeServices | | | | | 6.9 | | | | | | 5.5 | | | | | | 11.2 | | | | | | 5.2 | | | | | | 0.1 | | | | | | — | | | | | | 28.9 | |
| Totals | | | | $ | 1,337.4 | | | | | $ | 2,209.4 | | | | | $ | 664.7 | | | | | $ | 324.6 | | | | | $ | 1,281.9 | | | | | $ | 11,599.8 | | | | | $ | 17,417.8 | |
F-52
Table of Contents(12) Asset Retirement Obligations
The Company estimates its ARO liabilities based upon detailed engineering calculations of the amount and timing of the future cash spending for a third party to perform the required work. Spending estimates are escalated for inflation and then discounted at a credit-adjusted, risk-free rate. Changes in estimates could occur due to plan revisions, changes in estimated costs and changes in timing of the performance of reclamation activities. The change in the balance of the total ARO liability, which is included in other long-term accrued liabilities in the accompanying Consolidated Balance Sheets, is summarized as follows (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Balance, January 1 | | | | $ | 208.5 | | | | | $ | 185.8 | |
| PacifiCorp acquisition | | | | | 212.1 | | | | | | — | |
| Adoption of FIN 47 | | | | | — | | | | | | 11.4 | |
| Revisions | | | | | (19.6 | ) | | | | | 1.1 | |
| Additions | | | | | 6.4 | | | | | | 3.9 | |
| Retirements | | | | | (4.9 | ) | | | | | (4.3 | ) |
| Accretion | | | | | 20.5 | | | | | | 10.6 | |
| Balance, December 31 | | | | $ | 423.0 | | | | | $ | 208.5 | |
PacifiCorp’s coal mining operations are subject to the Surface Mining Control and Reclamation Act of 1977 and similar state statutes that establish operational, reclamation and closure standards that must be met during and upon completion of mining activities. These statutes mandate that mine property be restored consistent with specific standards and the approved reclamation plan. PacifiCorp is incurring expenditures for both ongoing and final reclamation. The fair value of PacifiCorp’s estimated mine and plant reclamation costs was $140.8 million as of December 31, 2006 and is the asset retirement obligation for these mines. PacifiCorp has established trusts for the investment of funds for certain mine and plant reclamation. The fair value of the assets held in trusts was $109.8 million as of December 31, 2006, and is reflected in other investments in the accompanying Consolidated Balance Sheet.
The Nuclear Regulatory Commission (‘‘NRC’’) regulates the decommissioning of nuclear power plants, which includes the planning and funding for the decommissioning. In accordance with these regulations, MidAmerican Energy submits a biennial report to the NRC providing reasonable assurance that funds will be available to pay for its share of the Quad Cities Station decommissioning. These expected costs have been developed based on a site-specific decommissioning study that includes decontamination, dismantling, site restoration and dry fuel storage using an assumed shutdown date. The decommissioning costs are included in base rates in MidAmerican Energy’s Iowa tariffs. The fair value of MidAmerican Energy’s share of estimated Quad Cities Station decommissioning costs was $142.1 million and $163.0 million, respectively, as of December 31, 2006 and 2005, and is the asset retirement obligation for Quad Cities St ation. MidAmerican Energy has established trusts for the investment of decommissioning funds. The fair value of the assets held in the trusts was $258.8 million and $228.1 million, respectively, as of December 31, 2006 and 2005, and is reflected in other investments in the accompanying Consolidated Balance Sheets.
The majority of the revisions recorded in 2006 are a result of a new valuation, consistent with its practice of periodically performing such studies, conducted by the operator of the Quad Cities Station related to the nuclear decommissioning ARO liability. The revision increased regulatory liabilities and did not impact earnings.
On December 31, 2005, the Company adopted FASB Interpretation No. 47, ‘‘Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143’’ (‘‘FIN 47’’). FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, ‘‘Accounting for Asset Retirement Obligations,’’ refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, the Company is required to
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Table of Contentsrecognize a liability for the fair value of a conditional ARO if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional ARO should be factored into the measurement of the liability when sufficient information exists.
In conjunction with the adoption of FIN 47, the Company recorded $11.4 million of conditional ARO liabilities; $0.8 million of associated ARO assets, net of accumulated depreciation; and a $10.6 million reduction of regulatory liabilities. Adoption of FIN 47 did not impact net income. The total ARO liability, computed on a pro forma basis as if FIN 47 had been applied during each of the periods presented in the Consolidated Financial Statements, would have been $295.2 million as of January 1, 2004 and $197.0 million as of December 31, 2004.
In addition to the ARO liabilities, the Company has accrued for the cost of removing other electric and gas assets through its depreciation rates, in accordance with accepted regulatory practices. These accruals are reflected as regulatory liabilities and total $1,164.2 million and $448.5 million as of December 31, 2006 and 2005, respectively.
(13) Preferred Securities of Subsidiaries
The total outstanding preferred stock of PacifiCorp, which does not have mandatory redemption requirements, was $41.3 million as of December 31, 2006. Generally, this preferred stock is redeemable at stipulated prices plus accrued dividends, subject to certain restrictions. Upon voluntary liquidation, all preferred stock is entitled to stated value or a specified preference amount per share plus accrued dividends. Upon involuntary liquidation, all preferred stock is entitled to stated value plus accrued dividends. Any premium paid on redemptions of preferred stock is capitalized, and recovery is sought through future rates. Dividends on all preferred stock are cumulative. Holders also have the right to elect members to the PacifiCorp board of directors in the event dividends payable are in default in an amount equal to four full quarterly payments.
The total outstanding cumulative preferred securities of MidAmerican Energy are not subject to mandatory redemption requirements and may be redeemed at the option of MidAmerican Energy at prices which, in the aggregate, total $31.1 million as of December 31, 2006 and 2005. The aggregate total the holders of all preferred securities outstanding as of December 31, 2006 and 2005, are entitled to upon involuntary bankruptcy is $30.3 million plus accrued dividends.
The total outstanding 8.061% cumulative preferred securities of a subsidiary of CE Electric UK, which are redeemable in the event of the revocation of the subsidiary’s electricity distribution license by the Secretary of State, was $56.0 million as of December 31, 2006 and 2005.
(14) Risk Management and Hedging Activities
MEHC is exposed to the impact of market fluctuations in commodity prices, principally natural gas and electricity, particularly through its ownership of PacifiCorp and MidAmerican Energy. Interest rate risk exists on variable rate debt, commercial paper and future debt issuances. MEHC is also exposed to foreign currency risk from its business operations and investments in Great Britain and the Philippines. The Company employs established policies and procedures to manage its risks associated with these market fluctuations using various commodity and financial derivative instruments, including forward contracts, futures, swaps and options. The risk management process established by each business platform is designed to identify, assess, monitor, report, manage, and mitigate each of the various types of risk involved in its business. The Company does not engage in a material amount of proprietary trading activities.
F-54
Table of ContentsThe following table summarizes the various derivative mark-to-market positions included in the balance sheets as of December 31, 2006 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Net Assets (Liabilities) | | | Regulatory
Net Asset
(Liability) | | | Accumulated
Other
Comprehensive
Income (Loss)(1) |
| Assets | | | Liabilities | | | Total |
| Commodity derivatives | | | | $ | 467.0 | | | | | $ | (739.9 | ) | | | | $ | (272.9 | ) | | | | $ | 247.5 | | | | | $ | 6.1 | |
| Interest rate locks | | | | | 13.0 | | | | | | — | | | | | | 13.0 | | | | | | — | | | | | | (13.0 | ) |
| Foreign currency swaps | | | | | 3.6 | | | | | | (148.9 | ) | | | | | (145.3 | ) | | | | | (3.3 | ) | | | | | 8.5 | |
| | | | | $ | 483.6 | | | | | $ | (888.8 | ) | | | | $ | (405.2 | ) | | | | $ | 244.2 | | | | | $ | 1.6 | |
| Current | | | | $ | 236.0 | | | | | $ | (270.6 | ) | | | | $ | (34.6 | ) | | | | | | | | | | | | |
| Non-current | | | | | 247.6 | | | | | | (618.2 | ) | | | | | (370.6 | ) | | | | | | | | | | | | |
| Total | | | | $ | 483.6 | | | | | $ | (888.8 | ) | | | | $ | (405.2 | ) | | | | | | | | | | | | |
The following table summarizes the various derivative mark-to-market positions included in the balance sheets as of December 31, 2005 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Net Assets (Liabilities) | | | Regulatory
Net Asset
(Liability) | | | Accumulated
Other
Comprehensive
Income (Loss)(1) |
| Assets | | | Liabilities | | | Total |
| Commodity derivatives | | | | $ | 59.8 | | | | | $ | (80.1 | ) | | | | $ | (20.3 | ) | | | | $ | 15.8 | | | | | $ | 7.3 | |
| Interest rate locks | | | | | 0.3 | | | | | | — | | | | | | 0.3 | | | | | | — | | | | | | (0.3 | ) |
| Foreign currency swaps | | | | | — | | | | | | (88.4 | ) | | | | | (88.4 | ) | | | | | — | | | | | | 27.8 | |
| | | | | $ | 60.1 | | | | | $ | (168.5 | ) | | | | $ | (108.4 | ) | | | | $ | 15.8 | | | | | $ | 34.8 | |
| Current | | | | $ | 54.0 | | | | | $ | (61.7 | ) | | | | $ | (7.7 | ) | | | | | | | | | | | | |
| Non-current | | | | | 6.1 | | | | | | (106.8 | ) | | | | | (100.7 | ) | | | | | | | | | | | | |
| Total | | | | $ | 60.1 | | | | | $ | (168.5 | ) | | | | $ | (108.4 | ) | | | | | | | | | | | | |
Commodity Price Risk
MEHC is subject to significant commodity risk particularly through its ownership of PacifiCorp and MidAmerican Energy. Exposures include variations in the price of wholesale electricity that is purchased and sold, fuel costs to generate electricity, and natural gas supply for regulated retail gas customers. Electricity and natural gas prices are subject to wide price swings as demand responds to, among many other items, changing weather, limited storage, transmission and transportation constraints, and lack of alternative supplies from other areas. To mitigate a portion of the risk, both utilities use derivative instruments, including forwards, futures, options, swap and other over-the-counter agreements, to effectively secure future supply or sell future production at fixed prices. The settled cost of these contracts is generally recovered from customers in regulated rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives, that are probable of recovery in rates, are recorded as regulatory net assets or liabilities.
MidAmerican Energy also uses futures, options and swap agreements to economically hedge gas commodity prices for physical delivery to non-regulated customers. Non-regulated physical contracts are considered normal purchases or sales and gains and losses on such contracts are recognized when settled. All other non-regulated gas and electric contracts are recorded at fair value.
Other MEHC subsidiaries use derivative instruments such as swaps, future, forwards and options principally as cash flow hedges for spring operational sales, natural gas storage and other transactions.
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Table of ContentsDuring 2006, CE Gas recognized $14.4 million of unrealized losses on derivative contracts that became ineffective due to its inability to effectively forecast the associated hedged transactions.
Realized gains and losses on all hedges and hedge ineffectiveness are recognized in income as operating revenue, cost of sales or operating expenses depending upon the nature of the item being hedged. Net unrealized gains and losses on hedges utilized for regulatory purposes are generally recorded as regulatory assets and liabilities. As of December 31, 2006, the Company had cash flow hedges with expiration dates through November 2009. For the year ended December 31, 2006, hedge ineffectiveness was insignificant. As of December 31, 2006, $1.1 million of pre-tax net unrealized gains are forecasted to be reclassified from AOCI into earnings over the next twelve months as contracts settle.
Foreign Currency Risk
MEHC selectively reduces its foreign currency risk by hedging through foreign currency derivatives. CE Electric UK has entered into certain currency rate swap agreements with large multi-national financial institutions for its U.S. dollar denominated senior notes and Yankee bonds. The swap agreements effectively convert the U.S. dollar fixed interest rate to a fixed rate in sterling for $237.0 million of 6.995% senior notes and $281.0 million of 6.496% Yankee bonds outstanding as of December 31, 2006. The agreements extend to the maturity date of the bonds, December 30, 2007 and February 25, 2008, respectively. The estimated fair value of these swap agreements as of December 31, 2006 and 2005, was $148.9 million and $77.5 million, respectively, based on quotes from the counterparties to these instruments and represents the estimated amount that the Company would expect to pay if these agreements were terminated.
Interest Rate Risk
The Company may enter into contractual agreements to hedge exposure to interest rate risk. In September 2006, MEHC entered into a treasury rate lock agreement in the notional amount of $1.55 billion to protect against an increase in interest rates on future long-term debt issuances. As of December 31, 2006, the fair value of the treasury rate lock agreement was $12.5 million. In May 2005, MEHC entered into a treasury rate lock agreement in the notional amount of $1.6 billion to protect against an increase in interest rates on future long-term debt issuances. The financing occurred on March 24, 2006 and MEHC received $53.0 million, which is being amortized as a reduction to interest expense over the term of the related financing.
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Table of Contents(15) Income Taxes
Income tax expense on continuing operations consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Current: | | | | | | | | | | | | | | | | | | |
| Federal | | | | $ | 6.5 | | | | | $ | 35.5 | | | | | $ | 18.8 | |
| State | | | | | 4.8 | | | | | | 5.4 | | | | | | (9.9 | ) |
| Foreign | | | | | 135.1 | | | | | | 73.8 | | | | | | 79.5 | |
| | | | | | 146.4 | | | | | | 114.7 | | | | | | 88.4 | |
| Deferred: | | | | | | | | | | | | | | | | | | |
| Federal | | | | | 248.7 | | | | | | 57.1 | | | | | | 117.1 | |
| State | | | | | 0.1 | | | | | | 10.0 | | | | | | 0.6 | |
| Foreign | | | | | 21.1 | | | | | | 67.1 | | | | | | 63.3 | |
| | | | | | 269.9 | | | | | | 134.2 | | | | | | 181.0 | |
| Investment tax credit, net | | | | | (9.6 | ) | | | | | (4.2 | ) | | | | | (4.4 | ) |
| Total | | | | $ | 406.7 | | | | | $ | 244.7 | | | | | $ | 265.0 | |
A reconciliation of the federal statutory tax rate to the effective tax rate on continuing operations applicable to income before income tax expense for the years ended December 31 follows:
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Federal statutory rate | | | | | 35.0 | % | | | | | 35.0 | % | | | | | 35.0 | % |
| General business tax credits | | | | | (3.1 | ) | | | | | (2.0 | ) | | | | | (0.6 | ) |
| State taxes, net of federal tax effect | | | | | 1.9 | | | | | | 1.5 | | | | | | 2.2 | |
| Equity income, net of dividends received deduction | | | | | 0.5 | | | | | | 1.1 | | | | | | 0.7 | |
| Tax effect of foreign income | | | | | (2.3 | ) | | | | | (2.0 | ) | | | | | 0.3 | |
| Effects of ratemaking | | | | | 0.6 | | | | | | (0.8 | ) | | | | | (0.9 | ) |
| Other items, net | | | | | (1.5 | ) | | | | | (0.8 | ) | | | | | (3.5 | ) |
| Effective tax rate | | | | | 31.1 | % | | | | | 32.0 | % | | | | | 33.2 | % |
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Table of ContentsThe net deferred tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Deferred tax assets: | | | | | | | | | | | | |
| Regulatory liabilities | | | | $ | 451.6 | | | | | $ | 44.3 | |
| Employee benefits | | | | | 361.7 | | | | | | — | |
| Minimum pension liability adjustment | | | | | — | | | | | | 145.8 | |
| Net operating loss (‘‘NOL’’) and credit carryforwards | | | | | 200.8 | | | | | | 284.4 | |
| Accruals not currently deductible for tax purposes | | | | | 141.5 | | | | | | 87.1 | |
| Revenue sharing accruals | | | | | 109.9 | | | | | | 92.0 | |
| Revenue subject to refund | | | | | 40.8 | | | | | | 11.2 | |
| Nuclear reserve and decommissioning | | | | | 22.8 | | | | | | 17.9 | |
| Deferred income | | | | | 0.3 | | | | | | 8.8 | |
| Other | | | | | 52.9 | | | | | | 7.0 | |
| Total deferred tax assets | | | | | 1,382.3 | | | | | | 698.5 | |
| Valuation allowance | | | | | (19.7 | ) | | | | | (18.8 | ) |
| Total deferred tax assets, net | | | | | 1,362.6 | | | | | | 679.7 | |
| Deferred tax liabilities: | | | | | | | | | | | | |
| Property, plant and equipment, net | | | | | (3,562.0 | ) | | | | | (1,732.8 | ) |
| Regulatory assets | | | | | (1,095.1 | ) | | | | | (260.6 | ) |
| Employee benefits | | | | | — | | | | | | (35.8 | ) |
| Other | | | | | (2.6 | ) | | | | | (12.4 | ) |
| Total deferred tax liabilities | | | | | (4,659.7 | ) | | | | | (2,041.6 | ) |
| Net deferred tax liability | | | | $ | (3,297.1 | ) | | | | $ | (1,361.9 | ) |
| Reflected as: | | | | | | | | | | | | |
| Deferred income taxes — current asset | | | | $ | 152.2 | | | | | $ | 177.7 | |
| Deferred income taxes — non-current liability | | | | | (3,449.3 | ) | | | | | (1,539.6 | ) |
| | | | | $ | (3,297.1 | ) | | | | $ | (1,361.9 | ) |
As of December 31, 2006, the Company has available unused NOL and credit carryforwards that may be applied against future taxable income and that expire at various intervals between 2007 and 2026.
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Table of Contents(16) Other Income and Expense
Other Income
Other income, as shown on the accompanying Consolidated Statements of Operations, for the years ending December 31 consists of the following (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Gains on Mirant bankruptcy claim | | | | $ | 89.3 | | | | | $ | — | | | | | $ | 14.8 | |
| Allowance for equity funds used during construction | | | | | 56.7 | | | | | | 26.2 | | | | | | 20.5 | |
| Gains on sales of non-strategic assets and investments | | | | | 54.7 | | | | | | 23.3 | | | | | | 3.6 | |
| Corporate-owned life insurance income | | | | | 12.5 | | | | | | 5.2 | | | | | | 5.4 | |
| Gains on Enron note receivable and other claims | | | | | — | | | | | | 6.4 | | | | | | 72.2 | |
| Other | | | | | 26.1 | | | | | | 13.4 | | | | | | 11.7 | |
| Total other income | | | | $ | 239.3 | | | | | $ | 74.5 | | | | | $ | 128.2 | |
Gain on Mirant Americas Energy Marketing (‘‘Mirant’’) Bankruptcy Claim
Mirant was one of the shippers that entered into a 15-year, 2003 Expansion Project, firm gas transportation contract (90,000 Dth per day) with Kern River (the ‘‘Mirant Agreement’’) and provided a letter of credit equivalent to 12 months of reservation charges as security for its obligations thereunder. In July 2003, Mirant filed for Chapter 11 bankruptcy protection and Kern River subsequently drew on the letter of credit and held the proceeds thereof, $14.8 million, as cash collateral. Kern River claimed $210.2 million in damages due to the rejection of the Mirant Agreement. The bankruptcy court ultimately determined that Kern River was entitled to a general unsecured claim of $74.4 million in addition to the $14.8 million cash collateral. In January 2006, Mirant emerged from bankruptcy. In February 2006, Kern River received an initial distribution of such shares in payment of the majority of its allowed claim. Kern River sold all of the shares of new Mirant stock received from its allowed claim amount plus interest in the first quarter of 2006 and recognized a gain from those sales of $89.3 million.
Gains on Sales of Non-Strategic Assets and Investments
Included in gains on sales of non-strategic assets and investments for the year ended December 31, 2006 are gains at MidAmerican Funding from the disposition of common shares held in an electronic energy and metals trading exchange where MidAmerican Funding sold a majority of these common shares and realized a pre-tax gain of $27.6 million. Also included in gains on sales of non-strategic assets and investments for the years ended December 31, 2006 and 2005, are gains from sales of certain non-strategic, passive investments at MidAmerican Funding of $15.3 million and $13.4 million, respectively, and CE Electric UK of $- million and $8.4 million, respectively.
Gains on Enron Note Receivable and Other Claims
Northern Natural Gas had a note receivable of approximately $259.0 million (the ‘‘Enron Note Receivable’’) with Enron. As a result of Enron filing for bankruptcy on December 2, 2001, Northern Natural Gas filed a bankruptcy claim against Enron seeking to recover payment of the Enron Note Receivable. As of December 31, 2001, Northern Natural Gas had written-off the note. By stipulation, Enron and Northern Natural Gas agreed to a value of $249.0 million for the claim and received approval of the stipulation from Enron’s Bankruptcy Court on August 26, 2004. On November 23, 2004, Northern Natural Gas sold its stipulated general, unsecured claim against Enron of $249.0 million to a third party investor for $72.2 million.
Other Expense
MidAmerican Funding has investments in commercial passenger aircraft leased to major domestic airlines, which are accounted for as leveraged leases. During 2005, the airline industry continued to deteriorate and two major airline carriers filed for bankruptcy. MidAmerican Funding evaluated its
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Table of Contentsinvestments in commercial passenger aircraft and recognized losses totaling $15.6 million for other-than-temporary impairments of those investments.
(17) Discontinued Operations — Zinc Recovery Project and Mineral Assets
Indirect wholly-owned subsidiaries of MEHC own the rights to commercial quantities of extractable minerals from elements in solution in the geothermal brine and fluids utilized at certain geothermal energy generation facilities located in the Imperial Valley of California and a zinc recovery plant constructed near the geothermal energy generation facilities designed to recover zinc from the geothermal brine through an ion exchange, solvent extraction, electrowinning and casting process (the ‘‘Zinc Recovery Project’’).
The Zinc Recovery Project began limited production during December 2002 and continued limited production until September 2004 when management made the decision to cease operations. Based on this decision, a non-cash, after-tax impairment charge of $340.3 million was recorded to write-off the Zinc Recovery Project, rights to quantities of extractable minerals, and allocated goodwill (collectively, the ‘‘Mineral Assets’’). The charge and the related activity of the Mineral Assets are classified separately as discontinued operations in the accompanying Consolidated Statements of Operations and include the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Operating revenue | | | | $ | — | | | | | $ | — | | | | | $ | 3.4 | |
| Losses from discontinued operations | | | | $ | — | | | | | $ | — | | | | | $ | (42.8 | ) |
| Proceeds from (costs of) disposal activities, net | | | | | — | | | | | | 7.6 | | | | | | (4.1 | ) |
| Asset impairment charges | | | | | — | | | | | | — | | | | | | (479.2 | ) |
| Goodwill impairment charges | | | | | — | | | | | | — | | | | | | (52.8 | ) |
| Income tax (expense) benefit | | | | | — | | | | | | (2.4 | ) | | | | | 211.3 | |
| Income (loss) from discontinued operations, net of tax | | | | $ | — | | | | | $ | 5.2 | | | | | $ | (367.6 | ) |
In connection with ceasing operations, the Zinc Recovery Project’s assets have been dismantled and sold and certain employees of the operator of the Zinc Recovery Project were paid one-time termination benefits. Implementation of the decommissioning plan began in September 2004 and, as of December 31, 2005, the dismantling, decommissioning, and sale of remaining assets of the Zinc Recovery Project was completed.
(18) Shareholders’ Equity
Preferred Stock
As of December 31, 2005, Berkshire Hathaway owned 41,263,395 shares of MEHC’s no par zero-coupon convertible preferred stock. Each share of preferred stock was convertible at the option of the holder into one share of MEHC’s common stock subject to certain adjustments as described in MEHC’s Amended and Restated Articles of Incorporation. The convertible preferred stock was convertible into common stock only upon the occurrence of specified events, including modification or elimination of the Public Utility Holding Company Act of 1935 (‘‘PUHCA 1935’’) so that holding company registration would not be triggered by conversion. On February 9, 2006, following the effective date of the repeal of the Public Utility Holding Company Act of 1935, Berkshire Hathaway converted its 41,263,395 shares of MEHC’s no par zero-coupon convertible preferred stock into an equal number of shares of MEHC’s common stoc k.
Common Stock
On March 14, 2000, and as amended on December 7, 2005, MEHC’s shareholders entered into a Shareholder Agreement that provides specific rights to certain shareholders. One of these rights allows certain shareholders the ability to put their common shares back to MEHC at the then current fair value dependent on certain circumstances controlled by MEHC.
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Table of ContentsOn March 1, 2006, MEHC and Berkshire Hathaway entered into an Equity Commitment Agreement (the ‘‘Berkshire Equity Commitment’’) pursuant to which Berkshire Hathaway has agreed to purchase up to $3.5 billion of common equity of MEHC upon any requests authorized from time to time by the Board of Directors of MEHC. The proceeds of any such equity contribution shall only be used for the purpose of (a) paying when due MEHC’s debt obligations and (b) funding the general corporate purposes and capital requirements of the Company’s regulated subsidiaries. Berkshire Hathaway will have up to 180 days to fund any such request. The Berkshire Equity Commitment will expire on February 28, 2011.
On March 2, 2006, MEHC amended its Articles of Incorporation to (i) increase the amount of its common stock authorized for issuance to 115,000,000 shares and (ii) no longer provide for the authorization to issue any preferred stock of MEHC.
In March 2006, MEHC repurchased 12,068,412 shares of common stock for an aggregate purchase price of $1,750.0 million.
On March 21, 2006, Berkshire Hathaway and certain other of MEHC’s existing shareholders and related companies invested $5,109.5 million, in the aggregate, in 35,237,931 shares of MEHC’s common stock in order to provide equity funding for the PacifiCorp acquisition (see Note 3). The per-share value assigned to the shares of common stock issued, which were effected pursuant to a private placement and were exempt from the registration requirements of the Securities Act of 1933, as amended, was based on an assumed fair market value as agreed to by MEHC’s shareholders.
On January 6, 2004, MEHC repurchased shares of common stock for an aggregate purchase price of $20.0 million.
Common Stock Options
There were no common stock options granted, forfeited or allowed to expire during each of the three years in the period ended December 31, 2006, and there were no common stock options exercised during the year ended December 31, 2004. There were 775,000 common stock options exercised during the year ended December 31, 2006 having a weighted-average exercise price of $28.65 per share. There were 1,073,329 common stock options outstanding and exercisable with a weighted-average exercise price of $32.27 per share as of December 31, 2006. As of December 31, 2006, 370,000 of the outstanding and exercisable common stock options have exercise prices ranging from $24.22 to $34.69 per share, a weighted-average exercise price of $26.99 per share and a remaining contractual life of 1.25 years. The remaining 703,329 outstanding and exercisable common stock options have an exercise price of $35.05 per share and a remaining contractual life of 3. 25 years.
There were 200,000 common stock options exercised during the year ended December 31, 2005 having an exercise price of $29.01 per share. There were 1,848,329 common stock options outstanding and exercisable with a weighted-average exercise price of $30.75 per share as of December 31, 2005. 1,145,000 of the outstanding and exercisable common stock options had exercise prices ranging from $15.94 to $34.69 per share, a weighted-average exercise price of $28.11 per share and a remaining contractual life of 2.25 years. The remaining 703,329 outstanding and exercisable common stock options had an exercise price of $35.05 per share and a remaining contractual life of 4.25 years. There were 2,048,329 common stock options outstanding and exercisable with a weighted-average exercise price of $30.58 per share as of December 31, 2004 and 2003.
(19) Commitments and Contingencies
Environmental Matters
The Company is subject to federal, state, local and foreign laws and regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters and believes it is in material compliance with current environmental requirements.
Air Quality
Litigation was filed in the federal district court for the southern district of New York seeking to require reductions of carbon dioxide emissions from generating facilities of five large electric utilities.
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Table of ContentsThe court dismissed the suit, ruling that critical issues affecting the United States, like greenhouse gas emissions reductions, are not the domain of the courts and should be resolved by the executive branch of the federal government and the U.S. Congress. This ruling has been appealed to the Second Circuit Court of Appeals. The outcome of climate change litigation and federal and state climate change initiatives cannot be determined at this time; however, adoption of stringent limits on greenhouse gas emissions could significantly impact the Company’s fossil-fueled facilities and, therefore, its financial results.
The EPA’s regulation of certain pollutants under the Clean Air Act, and its failure to regulate other pollutants, is being challenged by various lawsuits brought by both individual state attorney generals and environmental groups. To the extent that these actions may be successful in imposing additional and/or more stringent regulation of emissions on fossil-fueled facilities in general and PacifiCorp’s and MidAmerican Energy’s facilities in particular, such actions could significantly impact the Company’s fossil-fueled facilities and, therefore, its financial results.
Accrued Environmental Costs
The Company is fully or partly responsible for environmental remediation that results from other than normal operations at various contaminated sites, including sites that are or were part of the Company’s operations and sites owned by third parties. The Company accrues environmental remediation expenses when the expense is believed to be probable and can be reasonably estimated. The quantification of environmental exposures is based on many factors, including changing laws and regulations, advancements in environmental technologies, the quality of available site-specific information, site investigation results, expected remediation or settlement timelines, the Company’s proportionate responsibility, contractual indemnities and coverage provided by insurance policies. The liability recorded as of December 31, 2006 and 2005 was $50.4 million and $7.5 million, respectively, and is included in other liabilities and other long-term accrued liabilities on the accompanying Consolidated Balance Sheets. Environmental remediation liabilities that result from the normal operation of a long-lived asset and that are associated with the retirement of those assets is accounted for as an asset retirement obligation.
Hydroelectric Relicensing
PacifiCorp’s hydroelectric portfolio consists of 50 plants with an aggregate facility net owned capacity of 1,160.1 MW. The FERC regulates 97.9% of the installed capacity of this portfolio through 18 individual licenses. Several of PacifiCorp’s hydroelectric plants are in some stage of relicensing with the FERC. Hydroelectric relicensing and the related environmental compliance requirements are subject to uncertainties. PacifiCorp expects that future costs relating to these matters may be significant and will consist primarily of additional relicensing costs, operations and maintenance expense, and capital expenditures. Electricity generation reductions may result from the additional environmental requirements. PacifiCorp had incurred $79.0 million in costs as of December 31, 2006 for ongoing hydroelectric relicensing, which are included in construction in progress and reflected in property, plant and equipment, net in the accompanying Cons olidated Balance Sheet.
In February 2004, PacifiCorp filed with the FERC a final application for a new license to operate the 169.0-MW nameplate-rated Klamath hydroelectric project in anticipation of the March 2006 expiration of the existing license. PacifiCorp is currently operating under an annual license issued by the FERC and expects to continue to operate under annual licenses until the new operating license is issued. As part of the relicensing process, the United States Departments of Interior and Commerce filed proposed licensing terms and conditions with the FERC in March 2006, which proposed that PacifiCorp construct upstream and downstream fish passage facilities at the Klamath hydroelectric project’s four mainstem dams. In April 2006, PacifiCorp filed alternatives to the federal agencies’ proposal and requested an administrative hearing to challenge some of the federal agencies’ factual assumptions supporting their proposal for the cons truction of the fish passage facilities. A hearing was held in August 2006 before an administrative law judge. The administrative law judge issued a ruling in September 2006 generally supporting the federal agencies’ factual assumptions. In January 2007, the
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Table of ContentsUnited States Departments of Interior and Commerce filed modified terms and conditions consistent with March 2006 filings and rejected the alternatives proposed by PacifiCorp. PacifiCorp is prepared to meet and implement the federal agencies’ terms and conditions as part of the project’s relicensing. However, PacifiCorp will continue in settlement discussions with various parties in the Klamath Basin area who have intervened with the FERC licensing proceeding to try to achieve a mutually acceptable outcome for the project.
Also, as part of the relicensing process, the FERC is required to perform an environmental review. In September 2006, the FERC issued its draft environmental impact statement on the Klamath hydroelectric project license. The public comment period on the draft environmental impact statement closed on December 1, 2006. The FERC is expected to issue its final environmental impact statement by April 2007, after which other federal agencies will complete their endangered species analyses. The states of Oregon and California will need to issue water quality certifications prior to the FERC issuing a final license.
As of December 31, 2006, PacifiCorp has incurred costs of $42.1 million, which are reflected in property, plant and equipment, net in the accompanying Consolidated Balance Sheet, in the relicensing of the Klamath project. While the costs of implementing new license provisions cannot be determined until such time as a new license is issued, such costs could be material.
Legal Matters
The Company is party in a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company does not believe that such normal and routine litigation will have a material effect on its consolidated financial results. The Company is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties in substantial amounts and are described below.
PacifiCorp
In February 2007, the Sierra Club and the Wyoming Outdoor Council filed a compliant against PacifiCorp in the federal district court in Cheyenne, Wyoming, alleging violations of the Clean Air Act’s opacity standards at PacifiCorp’s Jim Bridger Power Plant in Wyoming. Under the Clean Air Act, a potential source of pollutants such as a coal-fired generating facility must meet minimum standards for opacity, which is a measurement of light in the flue of a generating facility. The complaint alleges thousands of violations and seeks an injunction ordering the Jim Bridger plant’s compliance with opacity limits, civil penalties of $32,500 per day per violation, and the plaintiffs’ costs of litigation. PacifiCorp believes it has a number of defenses to the claims, and it has already committed to invest at least $812.0 million in pollution control equipment at its generating facilities, including the Jim Bridger plant, that is expected t o significantly reduce emissions. PacifiCorp intends to vigorously oppose the lawsuit but cannot predict its outcome at this time.
CalEnergy Generation-Foreign
Pursuant to the share ownership adjustment mechanism in the CE Casecnan stockholder agreement, which is based upon proforma financial projections of the Casecnan Project prepared following commencement of commercial operations, in February 2002, MEHC’s indirect wholly owned subsidiary, CE Casecnan Ltd., advised the minority shareholder of CE Casecnan, LaPrairie Group Contractors (International) Ltd. (‘‘LPG’’), that MEHC’s indirect ownership interest in CE Casecnan had increased to 100% effective from commencement of commercial operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the State of California, City and County of San Francisco against CE Casecnan Ltd. and MEHC. LPG’s complaint, as amended, seeks compensatory and punitive damages arising out of CE Casecnan Ltd.’s and MEHC’s alleged improper calculation of the proforma financial projections and alleged improper settlement of the NIA arbitration. On January 21, 2004, CE Casecnan Ltd., LPG and CE Casecnan entered into a status quo agreement pursuant to which the parties agreed to set aside certain distributions related to the shares subject to the LPG dispute and CE Casecnan agreed not to take any further actions with respect to such
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Table of Contentsdistributions without at least 15 days prior notice to LPG. Accordingly, 15% of the CE Casecnan dividend declarations in 2006, 2005 and 2004, totaling $32.5 million, was set aside in a separate bank account in the name of CE Casecnan.
On August 4, 2005, the court issued a decision, ruling in favor of LPG on five of the eight disputed issues in the first phase of the litigation. On September 12, 2005, LPG filed a motion seeking the release of the funds which have been set aside pursuant to the status quo agreement referred to above. MEHC and CE Casecnan Ltd. filed an opposition to the motion on October 3, 2005, and at the hearing on October 26, 2005, the court denied LPG’s motion. On January 3, 2006, the court entered a judgment in favor of LPG against CE Casecnan Ltd. According to the judgment, LPG would retain its ownership of 15% of the shares of CE Casecnan and distributions of the amounts deposited into escrow plus interest at 9% per annum. On February 28, 2006, CE Casecnan Ltd. filed an appeal of this judgment and the August 4, 2005 decision. On February 21, 2007, California Court of Appeals remand ed the case to the lower court to modify its finding on one of the five disputed issues previously determined in favor of LPG. The judgment was affirmed in all other respects. The Company is currently evaluating the Court of Appeal’s order. The parties are proceeding in the trial court on LPG’s remaining claim against MEHC for damages for alleged breach of fiduciary duty. This claim is expected to be resolved sometime in 2007. The Company intends to vigorously defend the remaining claims.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. (‘‘San Lorenzo’’), an original shareholder substantially all of whose shares in CE Casecnan were purchased by MEHC in 1998, threatened to initiate legal action against the Company in the Philippines in connection with certain aspects of its option to repurchase such shares. The Company believes that San Lorenzo has no valid basis for any claim and, if named as a defendant in any action that may be commenced by San Lorenzo, the Company will vigorously defend such action. On July 1, 2005, MEHC and CE Casecnan Ltd. commenced an action against San Lorenzo in the District Court of Douglas County, Nebraska, seeking a declaratory judgment as to MEHC’s and CE Casecnan Ltd.’s rights vis-à-vis San Lorenzo in respect of such shares. San Lorenzo filed a motion to dismiss on September 19, 2005. Subsequently, San Lorenzo purporte d to exercise its option to repurchase such shares. On January 30, 2006, San Lorenzo filed a counterclaim against MEHC and CE Casecnan Ltd. seeking declaratory relief that it has effectively exercised its option to purchase 15% of the shares of CE Cascenan, that it is the rightful owner of such shares and that it is due all dividends paid on such shares. On March 9, 2006, the court granted San Lorenzo’s motion to dismiss, but has since permitted MEHC and CE Casecnan Ltd. to file an amended complaint incorporating the purported exercise of the option. The complaint has been amended and the matter is currently in the early stages of discovery. The Company intends to vigorously defend the counterclaims.
F-64
Table of ContentsUnconditional Purchase Obligations
The Company has the following unconditional purchase obligations as of December 31, 2006 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Minimum payments required for |
| | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012
and After | | | Total |
| Contract type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Coal, electricity and natural gas contract commitments | | | | $ | 1,538.7 | | | | | $ | 1,063.5 | | | | | $ | 1,008.4 | | | | | $ | 779.6 | | | | | $ | 533.7 | | | | | $ | 3,764.3 | | | | | $ | 8,688.2 | |
| Owned hydroelectric commitments | | | | | 48.5 | | | | | | 55.8 | | | | | | 73.5 | | | | | | 104.7 | | | | | | 39.4 | | | | | | 384.3 | | | | | | 706.2 | |
| Operating leases, easements and maintenance contracts | | | | | 106.3 | | | | | | 87.0 | | | | | | 66.9 | | | | | | 54.2 | | | | | | 42.8 | | | | | | 193.4 | | | | | | 550.6 | |
| Deferred construction payments | | | | | 200.0 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 200.0 | |
| | | | | $ | 1,893.5 | | | | | $ | 1,206.3 | | | | | $ | 1,148.8 | | | | | $ | 938.5 | | | | | $ | 615.9 | | | | | $ | 4,342.0 | | | | | $ | 10,145.0 | |
Coal, Electricity and Natural Gas Contract Commitments
PacifiCorp and MidAmerican Energy have fuel supply and related transportation contracts for their coal-fired and gas generating stations. PacifiCorp and MidAmerican Energy expect to supplement these contracts with additional contracts and spot market purchases to fulfill their future fossil fuel needs. PacifiCorp and MidAmerican Energy acquire a portion of their electricity through long-term purchases and/or exchange agreements. Included in the purchased electricity payments are any power purchase agreements that meet the definition of an operating lease.
Owned Hydroelectric Commitments
As part of the hydroelectric relicensing process, PacifiCorp entered into settlement agreements with various interested parties that resulted in commitments for environmental mitigation and enhancement measures over the life of the licenses.
Operating Leases, Easements and Maintenance Contracts
The Company has non-cancelable operating leases primarily for computer equipment, office space, certain operating facilities, land and rail cars. These leases generally require the Company to pay for insurance, taxes and maintenance applicable to the leased property. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. The Company also has non-cancelable easements for land on which its wind-farm turbines are located, as well as non-cancelable maintenance contracts for the turbines. Rent expense on non-cancelable operating leases totaled $117.0 million for 2006, $79.4 million for 2005 and $71.5 million for 2004.
Deferred Construction Payments
On February 12, 2003, MidAmerican Energy executed a contract with Mitsui & Co. Energy Development, Inc. (‘‘Mitsui’’) for engineering, procurement and construction of a 790-MW (based on expected accreditation) coal-fired generating plant expected to be completed in the summer of 2007. MidAmerican Energy currently holds a 60.67% individual ownership interest as a tenant in common with the other owners of the plant. Under the contract, MidAmerican Energy is allowed to defer payments, including the other owners’ shares, for up to $200.0 million of billed construction costs through the end of the project. In July 2005, MidAmerican Energy reached the total allowed amount of $200.0 million of deferred payments. In the accompanying Consolidated Balance Sheets, the liability is reflected in accounts payable as of December 31, 2006 and other long-term accrued liabilities as of December 31, 2005.
F-65
Table of ContentsA $78.7 million asset representing the other owners’ share of the deferred payments is reflected in the accompanying Consolidated Balance Sheets in other current assets as of December 31, 2006 and deferred charges and other assets as of December 31, 2005. MidAmerican Energy will bill each of the other owners for its share of the deferred payments when payment is made to Mitsui.
Guarantees
The Company has entered into guarantees as part of the normal course of business and the sale of certain assets. These guarantees are not expected to have a material impact on the Company’s consolidated financial results. The Company is generally required to obtain state regulatory commission approval prior to guaranteeing debt or obligations of other parties. The following represent the material indemnification obligations of the Company as of December 31, 2006.
PacifiCorp
PacifiCorp has made certain commitments related to the decommissioning or reclamation of certain jointly owned facilities and mine sites. The decommissioning guarantees require PacifiCorp to pay a proportionate share of the decommissioning costs based upon percentage of ownership. The mine reclamation obligations require PacifiCorp to pay the mining entity a proportionate share of the mine’s reclamation costs based on the amount of coal purchased by PacifiCorp. In the event of default by any of the other joint participants, PacifiCorp potentially may be obligated to absorb, directly or by paying additional sums to the entity, a proportionate share of the defaulting party’s liability. PacifiCorp has recorded its estimated share of the decommissioning and reclamation obligations as either an asset retirement obligation, regulatory liability or other liability.
(20) Employee Benefit Plans
Domestic Operations
PacifiCorp sponsors defined benefit pension plans that cover the majority of its employees. PacifiCorp’s pension plans include a noncontributory defined benefit pension plan, a supplemental executive retirement plan (‘‘SERP’’) and a joint trust plan to which PacifiCorp contributes on behalf of certain bargaining unit employees of International Brotherhood of Electrical Workers Local 57. MidAmerican Energy sponsors defined benefit pension plans that cover substantially all employees of MEHC and its domestic energy subsidiaries other than PacifiCorp. MidAmerican Energy’s pension plans included a noncontributory defined benefit pension plan and a SERP.
In December 2006, non-bargaining employees were notified that PacifiCorp is changing from a traditional final average pay formula for the Retirement Plan to a cash balance formula effective June 1, 2007. Benefits under the final average pay formula will be frozen as of May 31, 2007, with no further benefit accrual under that formula. All future benefits will be earned under the cash balance formula.
PacifiCorp and MidAmerican Energy also provide certain postretirement health care and life insurance benefits through various plans for eligible retirees.
MidAmerican Energy’s postretirement benefit plan was amended for non-union employees on July 1, 2004, and substantially all union participants on July 1, 2006. As a result, non-union employees hired after June 30, 2004, and union employees hired after June 30, 2006, are not eligible for postretirement benefits other than pensions. The plan, as amended, establishes retiree medical accounts for participants to which the Company makes fixed contributions until the employee’s retirement. Participants will use such accounts to pay a portion of their medical premiums during retirement.
Plan assets and obligations for PacifiCorp-sponsored plans are measured as of September 30, 2006 and MidAmerican Energy-sponsored plans are measured as of December 31, 2006. For purposes of calculating the expected return on pension plan assets, a market-related value is used. Market-related value is equal to fair value except for gains and losses on investments, which are amortized into market-related value on a straight-line basis over five years.
F-66
Table of ContentsThe components of the combined net periodic benefit cost for the pension, including supplemental retirement, and other postretirement benefits plans for the years ended December 31 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension | | | Other Postretirement |
| | | | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 |
| Service cost | | | | $ | 49.2 | | | | | $ | 25.8 | | | | | $ | 25.6 | | | | | $ | 14.4 | | | | | $ | 6.7 | | | | | $ | 7.8 | |
| Interest cost | | | | | 96.9 | | | | | | 36.5 | | | | | | 35.2 | | | | | | 39.9 | | | | | | 13.5 | | | | | | 15.7 | |
| Expected return on plan assets | | | | | (95.3 | ) | | | | | (38.2 | ) | | | | | (38.3 | ) | | | | | (30.5 | ) | | | | | (9.6 | ) | | | | | (8.4 | ) |
| Net amortization | | | | | 27.3 | | | | | | 4.1 | | | | | | 3.5 | | | | | | 20.2 | | | | | | 3.9 | | | | | | 6.9 | |
| Net periodic benefit cost | | | | $ | 78.1 | | | | | $ | 28.2 | | | | | $ | 26.0 | | | | | $ | 44.0 | | | | | $ | 14.5 | | | | | $ | 22.0 | |
The following table is a reconciliation of the combined fair value of plan assets as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension | | | Other Postretirement |
| | | | 2006 | | | 2005 | | | 2006 | | | 2005 |
| Plan assets at fair value, beginning of year | | | | $ | 612.8 | | | | | $ | 591.6 | | | | | $ | 190.9 | | | | | $ | 179.4 | |
| PacifiCorp acquisition | | | | | 828.6 | | | | | | — | | | | | | 292.6 | | | | | | — | |
| Employer contributions | | | | | 81.5 | | | | | | 5.8 | | | | | | 47.3 | | | | | | 16.6 | |
| Participant contributions | | | | | — | | | | | | — | | | | | | 16.1 | | | | | | 9.1 | |
| Actual return on plan assets | | | | | 137.6 | | | | | | 47.0 | | | | | | 34.6 | | | | | | 5.9 | |
| Benefits paid and other | | | | | (112.4 | ) | | | | | (31.6 | ) | | | | | (49.6 | ) | | | | | (20.1 | ) |
| Plan assets at fair value, end of year | | | | $ | 1,548.1 | | | | | $ | 612.8 | | | | | $ | 531.9 | | | | | $ | 190.9 | |
The SERPs have no assets, however the Company has Rabbi trusts that hold corporate-owned life insurance and other investments to provide funding for the future cash requirements of the SERPs. The cash surrender value of all of the policies included in the Rabbi trusts, net of amounts borrowed against the cash surrender value, plus the fair market value of other Rabbi trust investments was $147.9 million and $102.9 million as of December 31, 2006 and 2005, respectively. These assets are not included in the plan assets in the above table. The portion of the pension projected benefit obligation related to the Company’s SERPs was $160.5 million and $105.7 million as of December 31, 2006 and 2005, respectively.
The following table is a reconciliation of the combined benefit obligations as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension | | | Other Postretirement |
| | | | 2006 | | | 2005 | | | 2006 | | | 2005 |
| Benefit obligation, beginning of year | | | | $ | 678.1 | | | | | $ | 657.4 | | | | | $ | 249.6 | | | | | $ | 256.0 | |
| PacifiCorp acquisition | | | | | 1,340.5 | | | | | | — | | | | | | 581.2 | | | | | | — | |
| Service cost | | | | | 49.2 | | | | | | 25.8 | | | | | | 14.4 | | | | | | 6.7 | |
| Interest cost | | | | | 96.9 | | | | | | 36.5 | | | | | | 39.9 | | | | | | 13.5 | |
| Participant contributions | | | | | — | | | | | | — | | | | | | 16.1 | | | | | | 9.1 | |
| Plan amendments | | | | | 3.7 | | | | | | (3.1 | ) | | | | | (16.0 | ) | | | | | (0.5 | ) |
| Actuarial (gain) loss | | | | | (18.5 | ) | | | | | (6.9 | ) | | | | | (11.7 | ) | | | | | (15.1 | ) |
| Benefits paid and other | | | | | (112.4 | ) | | | | | (31.6 | ) | | | | | (49.6 | ) | | | | | (20.1 | ) |
| Benefit obligation, end of year | | | | $ | 2,037.5 | | | | | $ | 678.1 | | | | | $ | 823.9 | | | | | $ | 249.6 | |
| Accumulated benefit obligation, end of year | | | | $ | 1,807.4 | | | | | $ | 608.4 | | | | | | | | | | | | | |
F-67
Table of ContentsAs of December 31, 2006 the funded status of the pension and other postretirement plans was recorded in the Consolidated Balance Sheet as required under the adoption of SFAS No. 158. Balance sheet amounts recorded as of December 31, 2005 did not include the unrecognized net actuarial losses (gains), prior service costs and net transition obligations of ($42.1) million for the pension plans and $46.6 million for the other postretirement plans. The combined funded status of the plans and the net amount recognized in the accompanying Consolidated Balance Sheets as of December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension | | | Other Postretirement |
| | | | 2006 | | | 2005 | | | 2006 | | | 2005 |
| Plan assets at fair value, end of year | | | | $ | 1,548.1 | | | | | $ | 612.8 | | | | | $ | 531.9 | | | | | $ | 190.9 | |
| Less — Benefit obligation, end of year | | | | | 2,037.5 | | | | | | 678.1 | | | | | | 823.9 | | | | | | 249.6 | |
| Funded status | | | | | (489.4 | ) | | | | | (65.3 | ) | | | | | (292.0 | ) | | | | | (58.7 | ) |
| Unrecognized net actuarial losses (gains) and other | | | | | — | | | | | | (42.1 | ) | | | | | — | | | | | | 46.6 | |
| Contributions after the measurement date but before year-end | | | | | — | | | | | | — | | | | | | 27.3 | | | | | | — | |
| Net liability recognized in the Consolidated Balance Sheets | | | | $ | (489.4 | ) | | | | $ | (107.4 | ) | | | | $ | (264.7 | ) | | | | $ | (12.1 | ) |
| Net amount recognized in the Consolidated Balance Sheets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Regulatory assets | | | | $ | — | | | | | $ | 11.7 | | | | | $ | — | | | | | $ | — | |
| Deferred charges and other assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Prepaid benefit asset | | | | | 66.6 | | | | | | — | | | | | | — | | | | | | — | |
| Intangible assets | | | | | — | | | | | | 11.9 | | | | | | — | | | | | | — | |
| Other current liabilities | | | | | (10.9 | ) | | | | | (6.7 | ) | | | | | (0.4 | ) | | | | | (0.1 | ) |
| Pension and post-retirement obligations | | | | | (545.1 | ) | | | | | (128.8 | ) | | | | | (264.3 | ) | | | | | (12.0 | ) |
| Accumulated other comprehensive loss | | | | | — | | | | | | 4.5 | | | | | | — | | | | | | — | |
| Net liability recognized | | | | $ | (489.4 | ) | | | | $ | (107.4 | ) | | | | $ | (264.7 | ) | | | | $ | (12.1 | ) |
| Amounts not yet recognized as components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss (gain) | | | | $ | 291.5 | | | | | | (51.3 | ) | | | | $ | 144.0 | | | | | | 29.8 | |
| Prior service cost | | | | | 18.3 | | | | | | 9.2 | | | | | | 16.2 | | | | | | — | |
| Net transition obligation | | | | | 5.3 | | | | | | — | | | | | | 75.5 | | | | | | 16.8 | |
| Total | | | | $ | 315.1 | | | | | $ | (42.1 | ) | | | | $ | 235.7 | | | | | $ | 46.6 | |
| Amounts not yet recognized as components of net periodic benefit cost have been recorded as follows in the Consolidated Balance Sheet: | | | | | | | | | | | | | | | | | | | | | | | | |
| Regulatory assets | | | | $ | 424.0 | | | | | | | | | | | $ | 183.5 | | | | | | | |
| Regulatory liabilities | | | | | (122.3 | ) | | | | | | | | | | | (18.9 | ) | | | | | | |
| Deferred income taxes | | | | | — | | | | | | | | | | | | 71.0 | | | | | | | |
| Accumulated other comprehensive loss, before tax | | | | | 13.4 | | | | | | | | | | | | 0.1 | | | | | | | |
| Total | | | | $ | 315.1 | | | | | | | | | | | $ | 235.7 | | | | | | | |
The net loss, prior service cost and net transition obligation that will be amortized in 2007 into net periodic benefit cost are estimated to be as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Net
Loss | | | Prior Service
Cost | | | Net Transition
Obligation | | | Total |
| Pension benefits | | | | $ | 28.1 | | | | | $ | 3.8 | | | | | $ | 2.6 | | | | | $ | 34.5 | |
| Other postretirement benefits | | | | | 6.8 | | | | | | 2.6 | | | | | | 12.6 | | | | | | 22.0 | |
| Total | | | | $ | 34.9 | | | | | $ | 6.4 | | | | | $ | 15.2 | | | | | $ | 56.5 | |
F-68
Table of ContentsPlan Assumptions
Assumptions used to determine benefit obligations as of December 31 and net benefit cost for the years ended December 31 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension | | | Other Postretirement |
| | | | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 |
| | | | % | | | % | | | % | | | % | | | % | | | % |
| Benefit obligations as of the measurement date: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PacifiCorp-sponsored plans — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | | 5.85 | | | | | | — | | | | | | — | | | | | | 6.00 | | | | | | — | | | | | | — | |
| Rate of compensation increase | | | | | 4.00 | | | | | | — | | | | | | — | | | | | | N/A | | | | | | N/A | | | | | | N/A | |
| MidAmerican Energy-sponsored plans — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | |
| Rate of compensation increase | | | | | 4.50 | | | | | | 5.00 | | | | | | 5.00 | | | | | | N/A | | | | | | N/A | | | | | | N/A | |
| Net benefit cost for the period ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PacifiCorp-sponsored plans — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | | 5.75 | | | | | | — | | | | | | — | | | | | | 5.75 | | | | | | — | | | | | | — | |
| Expected return on plan assets | | | | | 8.50 | | | | | | — | | | | | | — | | | | | | 8.50 | | | | | | — | | | | | | — | |
| Rate of compensation increase | | | | | 4.00 | | | | | | — | | | | | | — | | | | | | N/A | | | | | | N/A | | | | | | N/A | |
| MidAmerican Energy-sponsored plans — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | | | | | | 5.75 | |
| Expected return on plan assets | | | | | 7.00 | | | | | | 7.00 | | | | | | 7.00 | | | | | | 7.00 | | | | | | 7.00 | | | | | | 7.00 | |
| Rate of compensation increase | | | | | 5.00 | | | | | | 5.00 | | | | | | 5.00 | | | | | | N/A | | | | | | N/A | | | | | | N/A | |
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Assumed health care cost trend rates as of the measurement date: | | | | | | | | | | | | |
| PacifiCorp-sponsored plans — | | | | | | | | | | | | |
| Health care cost trend rate assumed for next year — under 65 | | | | | 10.00 | % | | | | | — | |
| Health care cost trend rate assumed for next year — over 65 | | | | | 8.00 | % | | | | | — | |
| Rate that the cost trend rate gradually declines to | | | | | 5.00 | % | | | | | — | |
| Year that the rate reaches the rate it is assumed to remain at — under 65 | | | | | 2012 | | | | | | — | |
| Year that the rate reaches the rate it is assumed to remain at — over 65 | | | | | 2010 | | | | | | — | |
| MidAmerican Energy-sponsored plans — | | | | | | | | | | | | |
| Health care cost trend rate assumed for next year | | | | | 8.00 | % | | | | | 9.00 | % |
| Rate that the cost trend rate gradually declines to | | | | | 5.00 | % | | | | | 5.00 | % |
| Year that the rate reaches the rate it is assumed to remain at | | | | | 2010 | | | | | | 2010 | |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in millions):
| | | | | | | | | | | | |
| | | | Increase (Decrease) in Expense |
| | | | One Percentage-
Point Increase | | | One Percentage-
Point Decrease |
| Effect on total service and interest cost | | | | $ | 4.3 | | | | | $ | (3.4 | ) |
| Effect on other postretirement benefit obligation | | | | $ | 59.4 | | | | | $ | (49.2 | ) |
Contributions and Benefit Payments
PacifiCorp contributions to the pension and other postretirement plans are expected to be $94.9 million and $43.9 million, respectively, for 2007.
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Table of ContentsThe expected benefit payments to participants from its pension and other postretirement plans for 2007 through 2011 and for the five years thereafter are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Projected Benefit Payments |
| | | | | | | Other Postretirement |
| | | | Pension | | | Gross | | | Medicare Subsidy | | | Net of Subsidy |
| 2007 | | | | $ | 136.1 | | | | | $ | 55.9 | | | | | $ | 5.9 | | | | | $ | 50.0 | |
| 2008 | | | | | 140.2 | | | | | | 59.4 | | | | | | 6.5 | | | | | | 52.9 | |
| 2009 | | | | | 147.8 | | | | | | 62.5 | | | | | | 7.0 | | | | | | 55.5 | |
| 2010 | | | | | 140.5 | | | | | | 65.5 | | | | | | 7.4 | | | | | | 58.1 | |
| 2011 | | | | | 148.4 | | | | | | 68.7 | | | | | | 7.9 | | | | | | 60.8 | |
| 2012-16 | | | | | 843.9 | | | | | | 386.5 | | | | | | 49.0 | | | | | | 337.5 | |
Investment Policy and Asset Allocation
The investment policy for the Company’s pension and other postretirement plans is to balance risk and return through a diversified portfolio of equity securities, fixed income securities and other alternative investments. Asset allocation for the pension and postretirement plans are as indicated in the tables below. Maturities for fixed income securities are managed to targets consistent with prudent risk tolerances. Sufficient liquidity is maintained to meet near-term benefit payment obligations. The plans retain outside investment advisors to manage plan investments within the parameters outlined by each plan’s Pension and Employee Benefits Plans Administrative Committee. The return on assets assumption is based on a weighted average of the expected historical performance for the types of assets in which the plans invest.
PacifiCorp’s asset allocation as of December 31 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension | | | Other Postretirement |
| | | | 2006 | | | Target | | | 2006 | | | Target |
| | | | % | | | % | | | % | | | % |
| Equity securities | | | | | 58 | | | | | | 55 | | | | | | 65 | | | | | | 65 | |
| Debt securities | | | | | 35 | | | | | | 35 | | | | | | 35 | | | | | | 35 | |
| Other | | | | | 7 | | | | | | 10 | | | | | | — | | | | | | — | |
| Total | | | | | 100 | | | | | | | | | | | | 100 | | | | | | | |
MidAmerican Energy’s asset allocation as of December 31 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension | | | Other Postretirement |
| | | | 2006 | | | 2005 | | | Target | | | 2006 | | | 2005 | | | Target |
| | | | % | | | % | | | % | | | % | | | % | | | % |
| Equity securities | | | | | 70 | | | | | | 66 | | | | | | 65-75 | | | | | | 52 | | | | | | 50 | | | | | | 45-55 | |
| Debt securities | | | | | 24 | | | | | | 26 | | | | | | 20-30 | | | | | | 47 | | | | | | 48 | | | | | | 45-55 | |
| Other | | | | | 6 | | | | | | 8 | | | | | | 0-10 | | | | | | 1 | | | | | | 2 | | | | | | 0-10 | |
| Total | | | | | 100 | | | | | | 100 | | | | | | | | | | | | 100 | | | | | | 100 | | | | | | | |
Defined Contribution Plans
The Company sponsors defined contribution pension plans (401(k) plans) and an employee savings plan covering substantially all employees. The Company’s contributions vary depending on the plan, but are based primarily on each participant’s level of contribution and cannot exceed the maximum allowable for tax purposes. Total Company contributions were $33.8 million, $17.3 million and $17.1 million for 2006, 2005 and 2004, respectively.
F-70
Table of ContentsUnited Kingdom Operations
Certain wholly-owned subsidiaries of CE Electric UK participate in the Northern Electric group of the United Kingdom industry-wide Electricity Supply Pension Scheme (the ‘‘UK Plan’’), which provides pension and other related defined benefits, based on final pensionable pay, to the majority of the employees of CE Electric UK.
Plan assets and obligations for the UK Plan are measured as of December 31, 2006. For purposes of calculating the expected return on pension plan assets, a market-related value is used. Market-related value is equal to fair value except for gains and losses on equity investments which are amortized into market-related value on a straight-line basis over five years. The components of the combined net periodic cost for the UK Plan for the years ended December 31 was as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Service cost | | | | $ | 18.4 | | | | | $ | 15.3 | | | | | $ | 12.1 | |
| Interest cost | | | | | 77.8 | | | | | | 76.5 | | | | | | 73.5 | |
| Expected return on plan assets | | | | | (101.5 | ) | | | | | (96.9 | ) | | | | | (98.4 | ) |
| Net amortization | | | | | 33.9 | | | | | | 24.7 | | | | | | 14.6 | |
| Net periodic benefit cost | | | | $ | 28.6 | | | | | $ | 19.6 | | | | | $ | 1.8 | |
The following table is a reconciliation of the fair value of plan assets as of December 31 (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Plan assets at fair value, beginning of year | | | | $ | 1,419.5 | | | | | $ | 1,364.7 | |
| Employer contributions | | | | | 65.8 | | | | | | 55.7 | |
| Participant contributions | | | | | 6.3 | | | | | | 6.2 | |
| Actual return on plan assets | | | | | 166.9 | | | | | | 211.7 | |
| Benefits paid | | | | | (69.7 | ) | | | | | (67.2 | ) |
| Foreign currency exchange rate changes | | | | | 205.7 | | | | | | (151.6 | ) |
| Plan assets at fair value, end of year | | | | $ | 1,794.5 | | | | | $ | 1,419.5 | |
The following table is a reconciliation of the benefit obligations as of December 31 (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Benefit obligation, beginning of year | | | | $ | 1,559.3 | | | | | $ | 1,571.6 | |
| Service cost | | | | | 18.4 | | | | | | 15.3 | |
| Interest cost | | | | | 77.8 | | | | | | 76.5 | |
| Participant contributions | | | | | 6.3 | | | | | | 6.2 | |
| Benefits paid | | | | | (69.7 | ) | | | | | (67.2 | ) |
| Experience loss and change of assumptions | | | | | 3.9 | | | | | | 127.6 | |
| Foreign currency exchange rate changes | | | | | 216.5 | | | | | | (170.7 | ) |
| Benefit obligation, end of year | | | | $ | 1,812.5 | | | | | $ | 1,559.3 | |
| Accumulated benefit obligation, end of year | | | | $ | 1,724.1 | | | | | $ | 1,490.8 | |
F-71
Table of ContentsAs of December 31, 2006 the funded status of the U.K. pension was recorded in the Consolidated Balance Sheet as required under the adoption of SFAS No. 158. Balance sheet amounts recorded as of December 31, 2005 did not include the unrecognized net actuarial losses and prior service costs of $561.1 million. However, an additional minimum pension liability of $492.5 million was recorded at December 31, 2005. The funded status of the plan and the net amount recognized in the accompanying Consolidated Balance Sheets as of December 31 is as follows (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Plan assets at fair value, end of year | | | | $ | 1,794.5 | | | | | $ | 1,419.5 | |
| Less — Benefit obligation, end of year | | | | | 1,812.5 | | | | | | 1,559.3 | |
| Funded status | | | | | (18.0 | ) | | | | | (139.8 | ) |
| Unrecognized net actuarial losses and other | | | | | — | | | | | | 561.1 | |
| Net amount recognized in the Consolidated Balance Sheets | | | | $ | (18.0 | ) | | | | $ | 421.3 | |
| Net amount recognized in the Consolidated Balance Sheets: | | | | | | | | | | | | |
| Deferred charges and other assets: | | | | | | | | | | | | |
| Prepaid benefit cost | | | | $ | — | | | | | $ | 421.3 | |
| Intangible assets | | | | | — | | | | | | 12.9 | |
| Pension and post-retirement obligations | | | | | (18.0 | ) | | | | | (492.5 | ) |
| Accumulated other comprehensive loss | | | | | — | | | | | | 479.6 | |
| Net amount recognized | | | | $ | (18.0 | ) | | | | $ | 421.3 | |
| Amounts not yet recognized as components of net periodic benefit cost(1): | | | | | | | | | | | | |
| Net loss | | | | $ | 500.4 | | | | | $ | 548.1 | |
| Prior service cost | | | | | 12.9 | | | | | | 13.0 | |
| Total | | | | $ | 513.3 | | | | | $ | 561.1 | |
| (1) | The December 31, 2006 amounts not recognized as components of net periodic benefit cost totaling $513.3 million was recorded as an adjustment to accumulated other comprehensive income as part of the adoption of SFAS No. 158. |
The net loss and prior service cost that will be amortized from accumulated other comprehensive income (loss) in 2007 into net periodic benefit cost is estimated to be $36.4 million and $1.7 million, respectively.
Plan Assumptions
Assumptions used to determine benefit obligations as of December 31 and net benefit cost for the years ended December 31 are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| | | | % | | | % | | | % |
| Benefit obligations as of December 31: | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | | 5.20 | | | | | | 4.75 | | | | | | 5.25 | |
| Rate of compensation increase | | | | | 3.25 | | | | | | 2.75 | | | | | | 2.75 | |
| Net benefit cost for the years ended December 31: | | | | | | | | | | | | | | | | | | |
| Discount rate | | | | | 4.75 | | | | | | 5.25 | | | | | | 5.50 | |
| Expected return on plan assets | | | | | 7.00 | | | | | | 7.00 | | | | | | 7.00 | |
| Rate of compensation increase | | | | | 2.75 | | | | | | 2.75 | | | | | | 2.75 | |
F-72
Table of ContentsContributions and Benefit Payments
The expected benefit payments to participants from the UK Plan for 2007 through 2011 and for the five years thereafter are summarized below (in millions):
| | | | | | |
| 2007 | | | | $ | 70.9 | |
| 2008 | | | | | 72.9 | |
| 2009 | | | | | 75.1 | |
| 2010 | | | | | 77.5 | |
| 2011 | | | | | 79.7 | |
| 2012-2016 | | | | | 436.0 | |
In 2005, the triennial process of valuing the UK Plan’s assets and liabilities, using a March 31, 2004 measurement date, resulted in a £190.3 million funding deficiency. Contributions are computed based on the objective of eliminating the funding deficiency by April 1, 2017. Employer contributions to the UK Plan, including £23.1 million for the funding deficiency, are currently expected to be £35.9 million for 2007.
Investment Policy and Asset Allocation
CE Electric UK’s investment policy for its pension plan is to balance risk and return through a diversified portfolio of equity securities, fixed income securities and real estate. Maturities for fixed income securities are managed such that sufficient liquidity exists to meet near-term benefit payment obligations. The plan retains outside investment advisors to manage plan investments within the parameters set by the trustees of the UK Plan in consultation with CE Electric UK. The return on assets assumption is based on a weighted average of the expected historical performance for the types of assets in which the plans invest.
CE Electric UK’s pension plan asset allocation as of December 31 was as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Percentage of Plan Assets |
| | | | 2006 | | | 2005 | | | Target |
| | | | % | | | % | | | % |
| Equity securities | | | | | 52 | | | | | | 51 | | | | | | 50 | |
| Debt securities | | | | | 37 | | | | | | 37 | | | | | | 40 | |
| Real estate and other | | | | | 11 | | | | | | 12 | | | | | | 10 | |
| Total | | | | | 100 | | | | | | 100 | | | | | | | |
(21) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity or frequent remarketing of these instruments. Derivative instruments are recorded at their fair values, which are based upon published market indexes as adjusted for other market factors such as location pricing differences or internally developed models. Substantially all investments are carried at their fair values, which are based on quoted market prices.
The fair value of the Company’s long-term debt has been estimated based upon quoted market prices as supplied by third-party broker dealers. The carrying amount of variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying amount and estimated fair value of the Company’s long-term debt, including the current portion, as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| | | | Carrying
Amount | | | Fair Value | | | Carrying
Amount | | | Fair Value |
| Long-term debt | | | | $ | 17,449.4 | | | | | $ | 18,292.5 | | | | | $ | 11,514.6 | | | | | $ | 12,232.6 | |
F-73
Table of Contents(22) Supplemental Cash Flow Information
The summary of supplemental cash flow information for the years ending December 31 follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Interest paid | | | | $ | 1,075.5 | | | | | $ | 861.4 | | | | | $ | 875.4 | |
| Income taxes paid (refunded)(1) | | | | $ | 132.1 | | | | | $ | 60.5 | | | | | $ | (16.6 | ) |
| (1) | 2006 is net of $19.7 million of income taxes received from Berkshire Hathaway. |
(23) Components of Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is included in the accompanying Consolidated Balance Sheets in the common shareholders’ equity section, and consists of the following components, net of tax, as of December 31 (in millions):
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Unrecognized amounts on retirement benefits, net of tax of $(159.7) and $ — | | | | $ | (367.1 | ) | | | | $ | — | |
| Minimum pension liability adjustment, net of tax of $— and $(145.6) | | | | | — | | | | | | (338.4 | ) |
| Foreign currency translation adjustment | | | | | 325.7 | | | | | | 63.1 | |
| Fair value adjustment on cash flow hedges, net of tax of $20.8 and $(11.2) | | | | | 29.2 | | | | | | (24.2 | ) |
| Unrealized gains on marketable securities, net of tax of $3.2 and $1.3 | | | | | 4.7 | | | | | | 1.9 | |
| Total accumulated other comprehensive loss | | | | $ | (7.5 | ) | | | | $ | (297.6 | ) |
F-74
(24) Segment Information
MEHC’s reportable segments were determined based on how the Company’s strategic units are managed. The Company’s foreign reportable segments include CE Electric UK, whose business is principally in Great Britain, and CalEnergy Generation-Foreign, whose business is in the Philippines. Intersegment eliminations and adjustments, including the allocation of goodwill, have been made. Information related to the Company’s reportable segments is shown below (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Operating revenue: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 2,939.2 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 3,452.8 | | | | | | 3,166.1 | | | | | | 2,701.7 | |
| Northern Natural Gas | | | | | 633.6 | | | | | | 569.1 | | | | | | 544.8 | |
| Kern River | | | | | 325.2 | | | | | | 323.6 | | | | | | 316.1 | |
| CE Electric UK | | | | | 928.3 | | | | | | 884.1 | | | | | | 936.4 | |
| CalEnergy Generation — Foreign | | | | | 336.3 | | | | | | 312.3 | | | | | | 307.4 | |
| CalEnergy Generation — Domestic | | | | | 31.7 | | | | | | 33.8 | | | | | | 39.0 | |
| HomeServices | | | | | 1,701.8 | | | | | | 1,868.5 | | | | | | 1,756.5 | |
| Corporate/other(1) | | | | | (48.2 | ) | | | | | (42.0 | ) | | | | | (48.5 | ) |
| Total operating revenue | | | | $ | 10,300.7 | | | | | $ | 7,115.5 | | | | | $ | 6,553.4 | |
| Depreciation and amortization: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 367.9 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 274.8 | | | | | | 269.1 | | | | | | 266.4 | |
| Northern Natural Gas | | | | | 56.9 | | | | | | 30.4 | | | | | | 67.9 | |
| Kern River | | | | | 56.3 | | | | | | 62.4 | | | | | | 53.3 | |
| CE Electric UK | | | | | 138.5 | | | | | | 135.7 | | | | | | 137.7 | |
| CalEnergy Generation — Foreign | | | | | 80.1 | | | | | | 90.4 | | | | | | 90.3 | |
| CalEnergy Generation — Domestic | | | | | 7.8 | | | | | | 8.7 | | | | | | 8.7 | |
| HomeServices | | | | | 31.8 | | | | | | 17.8 | | | | | | 20.8 | |
| Corporate/other(1) | | | | | (7.3 | ) | | | | | (6.3 | ) | | | | | (6.9 | ) |
| Total depreciation and amortization | | | | $ | 1,006.8 | | | | | $ | 608.2 | | | | | $ | 638.2 | |
| Operating income: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 528.4 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 420.6 | | | | | | 381.1 | | | | | | 355.9 | |
| Northern Natural Gas | | | | | 269.1 | | | | | | 208.8 | | | | | | 190.3 | |
| Kern River | | | | | 216.9 | | | | | | 204.5 | | | | | | 204.8 | |
| CE Electric UK | | | | | 515.7 | | | | | | 483.9 | | | | | | 497.4 | |
| CalEnergy Generation — Foreign | | | | | 229.9 | | | | | | 185.0 | | | | | | 188.5 | |
| CalEnergy Generation — Domestic | | | | | 14.4 | | | | | | 15.1 | | | | | | 21.5 | |
| HomeServices | | | | | 54.7 | | | | | | 125.3 | | | | | | 112.9 | |
| Corporate/other(1) | | | | | (129.2 | ) | | | | | (75.0 | ) | | | | | (45.9 | ) |
| Total operating income | | | | | 2,120.5 | | | | | | 1,528.7 | | | | | | 1,525.4 | |
| Interest expense | | | | | (1,152.5 | ) | | | | | (891.0 | ) | | | | | (903.2 | ) |
| Capitalized interest | | | | | 39.7 | | | | | | 16.7 | | | | | | 20.0 | |
| Interest and dividend income | | | | | 73.5 | | | | | | 58.1 | | | | | | 38.9 | |
| Other income | | | | | 239.3 | | | | | | 74.5 | | | | | | 128.2 | |
| Other expense | | | | | (13.0 | ) | | | | | (22.1 | ) | | | | | (10.1 | ) |
| Total income from continuing operations before income tax expense, minority interest and preferred dividends of subsidiaries and equity income | | | | $ | 1,307.5 | | | | | $ | 764.9 | | | | | $ | 799.2 | |
F-75
| | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Interest expense: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 223.5 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 154.7 | | | | | | 137.7 | | | | | | 125.2 | |
| Northern Natural Gas | | | | | 50.0 | | | | | | 52.6 | | | | | | 53.1 | |
| Kern River | | | | | 74.0 | | | | | | 73.1 | | | | | | 76.7 | |
| CE Electric UK | | | | | 215.1 | | | | | | 217.9 | | | | | | 202.0 | |
| CalEnergy Generation — Foreign | | | | | 20.4 | | | | | | 31.3 | | | | | | 42.7 | |
| CalEnergy Generation — Domestic | | | | | 17.7 | | | | | | 18.3 | | | | | | 19.0 | |
| HomeServices | | | | | 2.3 | | | | | | 2.4 | | | | | | 2.8 | |
| Corporate/other(1) | | | | | 233.5 | | | | | | 173.2 | | | | | | 184.8 | |
| Parent company subordinated debt | | | | | 161.3 | | | | | | 184.5 | | | | | | 196.9 | |
| Total interest expense | | | | $ | 1,152.5 | | | | | $ | 891.0 | | | | | $ | 903.2 | |
| Income tax expense: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 139.5 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 94.5 | | | | | | 91.4 | | | | | | 87.3 | |
| Northern Natural Gas | | | | | 85.1 | | | | | | 70.5 | | | | | | 84.4 | |
| Kern River | | | | | 87.4 | | | | | | 50.4 | | | | | | 54.1 | |
| CE Electric UK | | | | | 100.0 | | | | | | 92.8 | | | | | | 80.2 | |
| CalEnergy Generation — Foreign | | | | | 68.4 | | | | | | 55.9 | | | | | | 62.5 | |
| CalEnergy Generation — Domestic | | | | | 0.5 | | | | | | (1.0 | ) | | | | | 1.2 | |
| HomeServices | | | | | 30.3 | | | | | | 56.4 | | | | | | 53.0 | |
| Corporate/other(1) | | | | | (199.0 | ) | | | | | (171.7 | ) | | | | | (157.7 | ) |
| Total income tax expense | | | | $ | 406.7 | | | | | $ | 244.7 | | | | | $ | 265.0 | |
| Capital expenditures: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 1,114.4 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 758.2 | | | | | | 701.0 | | | | | | 633.8 | |
| Northern Natural Gas | | | | | 122.1 | | | | | | 124.7 | | | | | | 138.7 | |
| Kern River | | | | | 3.4 | | | | | | 7.4 | | | | | | 26.9 | |
| CE Electric UK | | | | | 404.4 | | | | | | 342.6 | | | | | | 334.5 | |
| CalEnergy Generation — Foreign | | | | | 1.9 | | | | | | 0.6 | | | | | | 4.6 | |
| CalEnergy Generation — Domestic | | | | | 0.1 | | | | | | 0.6 | | | | | | 1.3 | |
| HomeServices | | | | | 18.1 | | | | | | 18.9 | | | | | | 20.8 | |
| Corporate/other(1) | | | | | 0.5 | | | | | | 0.4 | | | | | | 18.8 | |
| Total capital expenditures | | | | $ | 2,423.1 | | | | | $ | 1,196.2 | | | | | $ | 1,179.4 | |
| | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Property, plant and equipment, net: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 10,810.4 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 5,034.3 | | | | | | 4,447.5 | | | | | | 3,892.0 | |
| Northern Natural Gas | | | | | 1,655.3 | | | | | | 1,585.0 | | | | | | 1,491.4 | |
| Kern River | | | | | 1,843.1 | | | | | | 1,891.0 | | | | | | 1,945.1 | |
| CE Electric UK | | | | | 4,265.9 | | | | | | 3,501.2 | | | | | | 3,691.5 | |
| CalEnergy Generation — Foreign | | | | | 352.4 | | | | | | 430.6 | | | | | | 520.4 | |
| CalEnergy Generation — Domestic | | | | | 230.1 | | | | | | 241.7 | | | | | | 256.4 | |
| HomeServices | | | | | 67.4 | | | | | | 62.3 | | | | | | 59.8 | |
| Corporate/other(1) | | | | | (219.5 | ) | | | | | (243.9 | ) | | | | | (249.3 | ) |
| Total property, plant and equipment, net | | | | $ | 24,039.4 | | | | | $ | 11,915.4 | | | | | $ | 11,607.3 | |
F-76
| | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Total assets: | | | | | | | | | | | | | | | | | | |
| PacifiCorp | | | | $ | 14,969.6 | | | | | $ | — | | | | | $ | — | |
| MidAmerican Energy | | | | | 8,650.9 | | | | | | 8,003.4 | | | | | | 7,275.0 | |
| Northern Natural Gas | | | | | 2,277.3 | | | | | | 2,245.3 | | | | | | 2,200.8 | |
| Kern River | | | | | 2,056.7 | | | | | | 2,099.6 | | | | | | 2,135.3 | |
| CE Electric UK | | | | | 6,560.5 | | | | | | 5,742.7 | | | | | | 5,794.9 | |
| CalEnergy Generation — Foreign | | | | | 559.4 | | | | | | 643.1 | | | | | | 767.5 | |
| CalEnergy Generation — Domestic | | | | | 544.7 | | | | | | 555.1 | | | | | | 553.7 | |
| HomeServices | | | | | 795.2 | | | | | | 814.3 | | | | | | 737.1 | |
| Corporate/other(1) | | | | | 33.0 | | | | | | 267.2 | | | | | | 439.3 | |
| Total assets | | | | $ | 36,447.3 | | | | | $ | 20,370.7 | | | | | $ | 19,903.6 | |
| (1) | The remaining differences between the segment amounts and the consolidated amounts described as ‘‘Corporate/other’’ relate principally to intersegment eliminations for operating revenue and, for the other items presented, to (i) corporate functions, including administrative costs, interest expense, corporate cash and related interest income, (ii) intersegment eliminations and (iii) fair value adjustments relating to acquisitions. |
The following table shows the change in the carrying amount of goodwill by reportable segment for the years ended December 31, 2006 and 2005 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | PacifiCorp | | | MidAmerican
Energy | | | Northern
Natural Gas | | | Kern River | | | CE Electric
UK | | | CalEnergy
Generation
Domestic | | | Home-
Services | | | Total |
| Balance, January 1, 2005 | | | | $ | — | | | | | $ | 2,121.1 | | | | | $ | 354.9 | | | | | $ | 33.9 | | | | | $ | 1,329.8 | | | | | $ | 72.5 | | | | | $ | 394.5 | | | | | $ | 4,306.7 | |
| Goodwill from acquisitions during the year | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 3.6 | | | | | | 3.6 | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (106.4 | ) | | | | | — | | | | | | — | | | | | | (106.4 | ) |
| Other goodwill adjustments (1) | | | | | — | | | | | | (3.5 | ) | | | | | (27.8 | ) | | | | | — | | | | | | (16.2 | ) | | | | | (0.1 | ) | | | | | (0.1 | ) | | | | | (47.7 | ) |
| Balance, December 31, 2005 | | | | | — | | | | | | 2,117.6 | | | | | | 327.1 | | | | | | 33.9 | | | | | | 1,207.2 | | | | | | 72.4 | | | | | | 398.0 | | | | | | 4,156.2 | |
| Goodwill from acquisitions during the year | | | | | 1,118.1 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 34.0 | | | | | | 1,152.1 | |
| Reclassification of intangible assets(2) | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (44.9 | ) | | | | | (44.9 | ) |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 125.9 | | | | | | — | | | | | | — | | | | | | 125.9 | |
| Other goodwill adjustments(1) | | | | | — | | | | | | (10.1 | ) | | | | | (26.2 | ) | | | | | — | | | | | | (4.7 | ) | | | | | (1.3 | ) | | | | | (2.3 | ) | | | | | (44.6 | ) |
| Balance, December 31, 2006 | | | | $ | 1,118.1 | | | | | $ | 2,107.5 | | | | | $ | 300.9 | | | | | $ | 33.9 | | | | | $ | 1,328.4 | | | | | $ | 71.1 | | | | | $ | 384.8 | | | | | $ | 5,344.7 | |
| (1) | Other goodwill adjustments relate primarily to income tax adjustments. |
| (2) | During 2006, the Company reclassified $44.9 million of identifiable intangible assets from goodwill that principally related to trade names at HomeServices that were determined to have finite lives. |
F-77
Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of PacifiCorp:
We have reviewed the accompanying consolidated balance sheet of PacifiCorp and its subsidiaries (‘‘PacifiCorp’’) as of June 30, 2007, the related consolidated statements of income for the three- and six-month periods ended June 30, 2007 and 2006, and the related consolidated statements of cash flows for the six-month periods ended June 30, 2007 and 2006. These interim financial statements are the responsibility of PacifiCorp’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PacifiCorp and its subsidiaries as of December 31, 2006, and the related consolidated statements of income, common shareholder’s equity and comprehensive income, and of cash flows for the nine-month period then ended (not presented herein); and in our report dated February 27, 2007, we expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph related to the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2006 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Portland, Oregon
July 31, 2007
F-78
Table of ContentsPACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three-Month Periods
Ended June 30, | | | Six-Month Periods
Ended June 30, |
| | | | 2007 | | | 2006 | | | 2007 | | | 2006 |
| Revenues | | | | $ | 1,026 | | | | | $ | 860 | | | | | $ | 2,053 | | | | | $ | 2,090 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy costs | | | | | 425 | | | | | | 336 | | | | | | 840 | | | | | | 884 | |
| Operations and maintenance | | | | | 255 | | | | | | 260 | | | | | | 517 | | | | | | 534 | |
| Depreciation and amortization | | | | | 122 | | | | | | 116 | | | | | | 243 | | | | | | 229 | |
| Taxes, other than income taxes | | | | | 23 | | | | | | 26 | | | | | | 51 | | | | | | 50 | |
| Total | | | | | 825 | | | | | | 738 | | | | | | 1,651 | | | | | | 1,697 | |
| Income from operations | | | | | 201 | | | | | | 122 | | | | | | 402 | | | | | | 393 | |
| Interest and other expense (income): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | | | 79 | | | | | | 69 | | | | | | 154 | | | | | | 138 | |
| Interest income | | | | | (4 | ) | | | | | (2 | ) | | | | | (7 | ) | | | | | (4 | ) |
| Allowance for borrowed funds | | | | | (9 | ) | | | | | (5 | ) | | | | | (16 | ) | | | | | (10 | ) |
| Allowance for equity funds | | | | | (10 | ) | | | | | (6 | ) | | | | | (17 | ) | | | | | (12 | ) |
| Other | | | | | (2 | ) | | | | | — | | | | | | (2 | ) | | | | | (2 | ) |
| Total | | | | | 54 | | | | | | 56 | | | | | | 112 | | | | | | 110 | |
| Income before income tax expense | | | | | 147 | | | | | | 66 | | | | | | 290 | | | | | | 283 | |
| Income tax expense | | | | | 42 | | | | | | 23 | | | | | | 86 | | | | | | 93 | |
| Net income | | | | $ | 105 | | | | | $ | 43 | | | | | $ | 204 | | | | | $ | 190 | |
The accompanying notes are an integral part of these financial statements.
F-79
Table of ContentsPACIFICORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)
| | | | | | | | | | | | |
| | | | As of |
| | | | June 30,
2007 | | | December 31,
2006 |
| ASSETS |
| | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 56 | | | | | $ | 59 | |
| Accounts receivable, net | | | | | 319 | | | | | | 342 | |
| Unbilled revenue | | | | | 194 | | | | | | 178 | |
| Amounts due from affiliates | | | | | 12 | | | | | | 53 | |
| Inventories at average costs: | | | | | | | | | | | | |
| Materials and supplies | | | | | 160 | | | | | | 140 | |
| Fuel | | | | | 136 | | | | | | 104 | |
| Derivative contracts | | | | | 109 | | | | | | 151 | |
| Deferred income taxes | | | | | 69 | | | | | | 28 | |
| Other | | | | | 44 | | | | | | 57 | |
| Total current assets | | | | | 1,099 | | | | | | 1,112 | |
| Property, plant and equipment | | | | | 16,201 | | | | | | 15,843 | |
| Accumulated depreciation and amortization | | | | | (6,002 | ) | | | | | (5,842 | ) |
| | | | | | 10,199 | | | | | | 10,001 | |
| Construction work-in-progress | | | | | 1,147 | | | | | | 809 | |
| Total property, plant and equipment, net | | | | | 11,346 | | | | | | 10,810 | |
| Other assets: | | | | | | | | | | | | |
| Regulatory assets | | | | | 1,293 | | | | | | 1,397 | |
| Derivative contracts | | | | | 208 | | | | | | 235 | |
| Deferred charges and other | | | | | 304 | | | | | | 298 | |
| Total other assets | | | | | 1,805 | | | | | | 1,930 | |
| Total assets | | | | $ | 14,250 | | | | | $ | 13,852 | |
The accompanying notes are an integral part of these financial statements.
F-80
Table of ContentsPACIFICORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)
(Amounts in millions)
| | | | | | | | | | | | |
| | | | As of |
| | | | June 30,
2007 | | | December 31,
2006 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | |
| Accounts payable | | | | $ | 477 | | | | | $ | 385 | |
| Amounts due to affiliates | | | | | 2 | | | | | | 1 | |
| Accrued employee expenses | | | | | 119 | | | | | | 85 | |
| Taxes payable, other than income taxes | | | | | 46 | | | | | | 30 | |
| Interest payable | | | | | 66 | | | | | | 57 | |
| Derivative contracts | | | | | 116 | | | | | | 110 | |
| Long-term debt and capital lease obligations, currently maturing | | | | | 221 | | | | | | 127 | |
| Preferred stock subject to mandatory redemption, currently maturing | | | | | — | | | | | | 38 | |
| Short-term debt | | | | | 30 | | | | | | 397 | |
| Other | | | | | 132 | | | | | | 135 | |
| Total current liabilities | | | | | 1,209 | | | | | | 1,365 | |
| Deferred credits: | | | | | | | | | | | | |
| Deferred income taxes | | | | | 1,646 | | | | | | 1,641 | |
| Investment tax credits | | | | | 58 | | | | | | 62 | |
| Regulatory liabilities | | | | | 796 | | | | | | 822 | |
| Derivative contracts | | | | | 474 | | | | | | 504 | |
| Pension and other post employment liabilities | | | | | 523 | | | | | | 691 | |
| Other | | | | | 381 | | | | | | 374 | |
| Total deferred credits | | | | | 3,878 | | | | | | 4,094 | |
| Long-term debt and capital lease obligations, net of current maturities | | | | | 4,366 | | | | | | 3,967 | |
| Total liabilities | | | | | 9,453 | | | | | | 9,426 | |
| Commitments and contingencies (Note 5) | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | |
| Preferred stock | | | | | 41 | | | | | | 41 | |
| Common equity: | | | | | | | | | | | | |
| Common shareholder’s capital-750 shares authorized, no par value, 357 shares issued and outstanding | | | | | 3,752 | | | | | | 3,600 | |
| Retained earnings | | | | | 1,006 | | | | | | 789 | |
| Accumulated other comprehensive loss, net | | | | | (2 | ) | | | | | (4 | ) |
| Total common equity | | | | | 4,756 | | | | | | 4,385 | |
| Total shareholders’ equity | | | | | 4,797 | | | | | | 4,426 | |
| Total liabilities and shareholders’ equity | | | | $ | 14,250 | | | | | $ | 13,852 | |
The accompanying notes are an integral part of these financial statements.
F-81
Table of ContentsPACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)
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