Under the joint agreements, each participating utility is responsible for financing its share of construction, operating and leasing costs. PacifiCorp’s portion is recorded in its applicable operations, maintenance and tax accounts, which is consistent with wholly owned plants.
In January 2003, the FASB issued FIN 46, which requires existing unconsolidated variable-interest entities (“VIEs”) to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. In October 2003, the FASB deferred the effective date of FIN 46, as it applied to variable-interest entities acquired before February 1, 2003, until the end of the first interim or annual period beginning after December 15, 2003. In December 2003, the FASB issued a revision of FIN 46 (“FIN 46R”) to clarify certain provisions of the standard. FIN 46R required that FIN 46 be applied to those entities that are considered to be special-purpose entities, no later than the end of the first interim or annual period ending after December 15, 2003. The application of FIN 46 to special-purpose entities as of December 31, 2003 had no impact on PacifiCorp’s consolidated financial position or results of operations. FIN 46R was adopted as of January 1, 2004 and resulted in certain disclosures describing variable interests that were identified. However, the adoption of the interpretation did not have a material impact on PacifiCorp’s consolidated financial position or results of operations. PacifiCorp will continue to evaluate the impact of FIN 46R as implementation guidance evolves. If subsequent guidance or interpretation is different from management’s current understanding, it is possible that PacifiCorp’s identification of VIEs and primary beneficiaries could change.
In general, a VIE is a corporation, partnership, trust or any other legal structure used for business purposes whose equity investors lack the characteristics of a controlling financial interest or whose equity investment at risk is not sufficient to support the entity’s activities without additional subordinated financial support. FIN 46R requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities or is entitled to receive a majority of the VIE’s residual returns. The company that is required to consolidate the VIE is called the primary beneficiary. FIN 46R requires deconsolidation of a VIE if a company is not the primary beneficiary of the VIE. The interpretation also requires disclosures regarding: (i) VIEs in which a company has a significant variable-interest but is not the primary beneficiary and (ii) the inability to obtain the information necessary to determine whether an entity is a VIE, identify the primary beneficiary, or consolidate the VIE.
PacifiCorp holds an undivided interest in 50.0% of the 474 MW Hermiston plant (see Note 12), procures 100.0% of the fuel input into the plant and subsequently acquires 100.0% of the generated electricity. Since PacifiCorp owns only 50.0% of the plant, it is required to purchase 50.0% of the generated electricity from the joint owner (in which PacifiCorp holds no equity interest) through a long-term purchase power agreement. As a result, PacifiCorp holds a variable-interest in the joint owner of the remaining 50.0% of the plant and is the primary beneficiary. However, PacifiCorp was unable to obtain the information necessary to consolidate the entity as the entity did not agree to supply the information due to the lack of a contractual obligation to do so. Electricity purchased from the joint owner was $33.7 million during the year ended March 31, 2004; $34.0 million during the year ended March 31, 2003; and $33.1 million during the year ended March 31, 2002. The entity is operated by the equity owners and PacifiCorp has no risk of loss in relation to the entity in the event of a disaster.
PacifiCorp is a party to certain operating and coal purchase agreements with Bridger Coal Company that create a variable interest under the provisions of FIN 46R. Bridger Coal Company owns and operates the Jim Bridger mine near Point of the Rocks, Wyoming, and produces 100.0% of its output for the benefit of the Bridger Power Plant. PacifiCorp has a 66.7% equity interest in both the Bridger Power Plant and Bridger Coal Company. As PacifiCorp is subject to a majority of the risk of loss from Bridger Coal Company’s activities, and is entitled to receive a majority of Bridger Coal Company’s residual returns, PacifiCorp is considered to be the primary beneficiary and is required to consolidate Bridger Coal Company. Accordingly, PacifiCorp will continue to consolidate Bridger Coal Company as in prior periods.
As discussed in Note 4, PacifiCorp leases the West Valley facility from PPM under an operating lease that contains purchase options at specified prices. Although the purchase options are variable interests in West Valley, PacifiCorp is not the primary beneficiary of the entity. PacifiCorp’s exposure to loss under the operating lease is negligible.
PacifiCorp is a party to certain operating and coal purchase agreements with Trapper Mining, Inc. that create a variable interest under the provisions of FIN 46R. Trapper Mining, Inc. owns and operates the Trapper Mine near Craig, Colorado, and produces 100.0% of its output for the benefit of the Craig Power Plant. PacifiCorp has a 19.3% equity interest in Craig Power Plant and a 21.4% equity interest in Trapper Mining, Inc. Since each equity investor in Trapper Mining, Inc. also holds a similar interest in the Craig Power Plant, and since none of the joint owners have more than a 50.0% interest in the Craig Power Plant or Trapper Mining, Inc., none of the joint owners are required to consolidate Trapper Mining, Inc. As such, PacifiCorp will continue to account for its interest in Trapper Mining, Inc. via the equity method under APB No. 18, The Equity Method of Accounting for Investments in Common Stock, as in prior periods.
Note 14 – Preferred Securities
During August 2003, PacifiCorp redeemed, prior to maturity, all of its Series C and D junior subordinated debentures held by two wholly owned subsidiary trusts of PacifiCorp (the “Trusts”), resulting in the redemption by the Trusts of all 8,680,000 of the 8.25% Series A Cumulative Quarterly Income Preferred Securities totaling $217.0 million and all 5,400,000 of the 7.70% Series B Preferred Securities totaling $135.0 million. Subsequent to these redemptions, the Trusts were cancelled. Upon redemption, $10.0 million of deferred charges were reclassified to a regulatory asset. These retirements were funded initially through short-term debt and subsequently by the long-term debt financing discussed in Note 8.
PacifiCorp’s Preferred Securities at March 31, 2003 were as follows:
| | March 31, 2003 | |
| |
| |
(Millions of dollars, thousands of Preferred Securities) | | Shares | | Amount | |
| |
| |
| |
8.25% Cumulative Quarterly Income Preferred Securities, Series A, | | | | | | |
with Trust assets of $223.7 million (a) | | 8,680 | | $ | 210.8 | |
| | | | | | |
7.70% Trust Preferred Securities, Series B, with Trust assets of $139.2 million (b) | | 5,400 | | | 131.0 | |
| |
| |
|
| |
| | 14,080 | | $ | 341.8 | |
| |
| |
|
| |
| (a) | Amount is net of unamortized issuance costs of $6.2 million. |
| (b) | Amount is net of unamortized issuance costs of $4.0 million. |
Note 15 – Preferred Stock
PacifiCorp’s Preferred stock was as follows:
(Millions of dollars, except per share amounts, thousands of shares) | | Redemption
Price
Per Share | | March 31, 2004 | | March 31, 2003 | |
|
| |
| |
Series | Shares | | Amount | | Shares | | Amount | |
| |
| |
| |
| |
| |
| |
Preferred stock not subject to mandatory redemption | | | | | | | | | | | | | | |
Serial Preferred, $100 stated value, 3,500 shares authorized | | | | | | | | | | | | | | |
4.52% | | $ | 103.5 | | 2 | | $ | 0.2 | | 2 | | $ | 0.2 | |
4.56 | | | 102.3 | | 85 | | | 8.4 | | 85 | | | 8.4 | |
4.72 | | | 103.5 | | 70 | | | 6.9 | | 70 | | | 6.9 | |
5.00 | | | 100.0 | | 42 | | | 4.2 | | 42 | | | 4.2 | |
5.40 | | | 101.0 | | 66 | | | 6.6 | | 66 | | | 6.6 | |
6.00 | | | Non–redeemable | | 6 | | | 0.6 | | 6 | | | 0.6 | |
7.00 | | | Non–redeemable | | 18 | | | 1.8 | | 18 | | | 1.8 | |
5.00% Preferred, $100 stated value, 127 shares authorized | | | 110.0 | | 126 | | | 12.6 | | 126 | | | 12.6 | |
| | | | |
| |
|
| |
| |
|
| |
| | | | | 415 | | $ | 41.3 | | 415 | | $ | 41.3 | |
| | | | |
| |
|
| |
| |
|
| |
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Generally, Preferred stock is redeemable at stipulated prices plus accrued dividends, subject to certain restrictions. Upon voluntary or involuntary liquidation, all Preferred stock is entitled to stated value or a specified preference amount per share 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.
PacifiCorp had $0.5 million at March 31, 2004 and March 31, 2003 in dividends declared but unpaid on Preferred stock.
Note 16 – Common Stock
Common Stock - PacifiCorp has one class of common stock with no par value. A total of 750,000,000 shares were authorized and 312,176,089 shares were issued and outstanding at March 31, 2004 and 2003.
On August 22, 2002, PacifiCorp’s Board of Directors approved the issuance of up to 50 million additional shares of its common stock (“Shares”) to be sold, from time to time, to its direct parent, PHI, in such amounts and at such times as would be determined by PacifiCorp, subject to regulatory approval, which has been received. Issuance and sale of the Shares is subject to the receipt of cash for the Shares in an amount per share not less than the book value of the Shares at the end of the month prior to the date of the issuance. On December 19, 2002, PacifiCorp issued 14,851,485 Shares to PHI, receiving $150.0 million in cash proceeds, equal to $10.10 per share, the book value of the Shares at the end of November 2002. Proceeds were used to repay debt and for general corporate purposes.
Common Dividend Restrictions - ScottishPower is the sole indirect shareholder of PacifiCorp’s common stock. PacifiCorp is restricted from paying dividends or making other distributions without prior OPUC approval to the extent such payment or distribution would reduce PacifiCorp’s common stock equity below a specified percentage of its total capitalization. The percentage of total capitalization increases over time from 35.0% after December 31, 1999 to 40.0% after December 31, 2004. As of March 31, 2004, the minimum ratio was 39.0%. PacifiCorp is also subject to maximum debt-to-total capitalization levels under various debt agreements.
Under the PUHCA, PacifiCorp may pay dividends out of capital or unearned surplus only with SEC approval. Dividends from earned surplus are permitted without approval. PacifiCorp has previously received approval to pay dividends out of unearned surplus of the lesser of (a) $900.0 million or (b) the proceeds received from sales of non-utility assets. At March 31, 2004, PacifiCorp had $300.0 million of such proceeds from previous sales of non-utility assets. As a consequence of a new financing order expected to be issued by the SEC in June 2004, PacifiCorp expects the unearned surplus available for distribution pursuant to SEC authorization to be reduced to approximately $220.0 million. In addition, PacifiCorp must give the OPUC 30 days’ prior notice of any special cash dividend or any transfer involving more than 5.0% of PacifiCorp’s retained earnings in a six-month period.
Note 17 – Fair Value of Financial Instruments
| | March 31, 2004 | | March 31, 2003 | |
| |
| |
| |
(Millions of dollars) | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
Long-term debt (a) | | $ | 3,732.6 | | $ | 4,181.3 | | $ | 3,526.6 | | $ | 4,000.1 | |
Preferred Securities | | | — | | | — | | | 341.8 | | | 353.3 | |
Preferred stock subject to mandatory redemption | | | 60.0 | | | 67.9 | | | 66.7 | | | 78.1 | |
Weather derivative liability | | | 3.4 | | | 3.4 | | | 2.6 | | | 2.6 | |
| (a) | Includes long-term debt classified as currently maturing, less capitalized lease obligations. |
The carrying value of cash and cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments.
The fair value of PacifiCorp’s long-term debt, current maturities of long-term debt and redeemable preferred stock has been estimated by discounting projected future cash flows, using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. The fair value of Preferred Securities was estimated using quoted market prices at March 31, 2003.
The fair value of weather derivatives reflects the net present value of future premiums owed by PacifiCorp, offset by estimated settlements owed to/(by) PacifiCorp, for the remainder of the contract term. PacifiCorp estimates future settlements based upon actual hydrology conditions incurred for the current contract year and hydrology forecasts for the remaining contract term. Those hydrology forecasts generally reflect normal water conditions.
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Note 18 – Retirement Benefit Plans
In January 2004, the FASB issued SFAS No. 132R. The interim-period disclosures were effective for interim periods beginning after December 15, 2003, and this statement was generally effective for fiscal years ending after December 15, 2003. Adoption of this statement changed the required disclosures for pension and other postretirement benefit plan assets, obligations and net cost in the Notes to the Consolidated Financial Statements, but did not impact PacifiCorp’s consolidated financial position or results of operations.
Retirement Plans
PacifiCorp sponsors defined benefit pension plans that cover the majority of its employees. In addition, certain bargaining unit employees participate in a joint trust plan to which PacifiCorp contributes. Benefits under the main plan in the United States are based on the employee’s years of service and average monthly pay in the 60 consecutive months of highest pay out of the last 120 months, with adjustments to reflect benefits estimated to be received from social security. Pension costs are funded annually by no more than the maximum amount that can be deducted for federal income tax purposes. At March 31, 2004, plan assets were primarily invested in common stocks, bonds and United States government obligations. The measurement date for plan assets and obligations is December 31 of each year.
Components of the net periodic pension benefit cost (income) are summarized as follows:
| | Years Ended March 31, | |
| |
| |
(Millions of dollars) | | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | | | | | | | | | |
Service cost | | $ | 25.8 | (a) | $ | 21.6 | (a) | $ | 14.9 | |
Interest cost | | | 73.9 | | | 76.8 | | | 80.1 | |
Expected return on plan assets | | | (80.7 | ) | | (92.8 | ) | | (99.9 | ) |
Amortization of unrecognized net obligation | | | 8.4 | | | 8.4 | | | 8.4 | |
Amortization of unrecognized prior service cost | | | 1.5 | | | 2.1 | | | 0.5 | |
Amortization of unrecognized gain | | | — | | | (4.2 | ) | | (10.3 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net periodic pension benefit cost (income) | | $ | 28.9 | | $ | 11.9 | | $ | (6.3 | ) |
| |
|
| |
|
| |
|
| |
| (a) | Includes contributions of $5.6 million for the year ended March 31, 2004 and $5.0 million for the year ended March 31, 2003 to the PacifiCorp/IBEW Local 57 Retirement Trust Fund. |
The weighted average rates assumed in the actuarial calculations used to determine the net periodic benefit costs for the pension and postretirement benefit plans were as follows:
| | Years Ended March 31, | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Discount rate | | 6.75 | % | 7.50 | % | 7.75 | % |
Expected long-term rate of return on assets | | 8.75 | | 9.25 | | 9.25 | |
Rate of increase in compensation levels | | 4.00 | | 4.00 | | 4.00 | |
The weighted average rates assumed in the actuarial calculations used to determine benefit obligations for the pension and postretirement benefit plans were as follows:
| | Years Ended March 31, | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Discount rate | | 6.25 | % | 6.75 | % | 7.50 | % |
Rate of increase in compensation levels | | 4.00 | | 4.00 | | 4.00 | |
PacifiCorp determined the long-term rate of return based on historical asset class returns and current market conditions, taking into account the diversification benefits of investing in multiple asset classes.
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The change in the projected benefit obligation, change in plan assets and funded status is as follows:
| | March 31, | |
| |
| |
(Millions of dollars) | | 2004 | | 2003 | |
| |
| |
| |
Change in projected benefit obligation | | | | | | | |
Projected benefit obligation - beginning of year | | $ | 1,151.6 | | $ | 1,079.3 | |
Service cost | | | 20.1 | | | 16.6 | |
Interest cost | | | 73.9 | | | 76.8 | |
Special termination benefits | | | — | | | (4.1 | )(a) |
Actuarial loss | | | 97.1 | | | 97.5 | |
Benefits paid | | | (112.9 | ) | | (114.5 | ) |
| |
|
| |
|
| |
Projected benefit obligation - end of year | | $ | 1,229.8 | | $ | 1,151.6 | |
| |
|
| |
|
| |
Change in plan assets | | | | | | | |
Plan assets at fair value - beginning of year | | $ | 681.2 | | $ | 826.2 | |
Actual return on plan assets | | | 128.3 | | | (60.0 | ) |
Company contributions | | | 36.6 | | | 29.5 | |
Benefits paid | | | (112.9 | ) | | (114.5 | ) |
| |
|
| |
|
| |
Plan assets at fair value - end of year | | $ | 733.2 | | $ | 681.2 | |
| |
|
| |
|
| |
| | | | | | | |
Reconciliation of accrued pension cost and total amount recognized | | | | | | | |
Funded status of the plan | | $ | (496.6 | ) | $ | (470.4 | ) |
Unrecognized net loss | | | 375.2 | | | 325.6 | |
Unrecognized prior service cost | | | 9.4 | | | 11.0 | |
Unrecognized net transition obligation | | | 24.4 | | | 32.8 | |
| |
|
| |
|
| |
Accrued pension cost | | $ | (87.6 | ) | $ | (101.0 | ) |
| |
|
| |
|
| |
| | | | | | | |
Accrued benefit liability | | $ | (360.5 | ) | $ | (381.5 | ) |
Intangible asset | | | 33.8 | | | 43.8 | |
Accumulated other comprehensive income | | | 12.9 | | | 2.9 | |
Regulatory assets | | | 226.2 | | | 233.8 | |
| |
|
| |
|
| |
Accrued pension cost | | $ | (87.6 | ) | $ | (101.0 | ) |
| |
|
| |
|
| |
| (a) | Represents an adjustment to the obligation to provide benefits to employees who elected a special termination benefit in the year ended March 31, 2001, but revoked the election in the year ended March 31, 2003. |
The aggregated accumulated benefit obligation was $1,093.7 million and the fair value of assets was $733.2 million as of March 31, 2004.
The PacifiCorp Retirement Plan and the Supplemental Executive Retirement Plan, together the “Plans,” currently have assets with a fair value that is less than the accumulated benefit obligation under the Plans primarily due to declines in the equity markets and historically low interest rate levels. As a result, PacifiCorp recognized minimum pension liabilities in the fourth quarters of the years ended March 31, 2004 and at March 31, 2003. The minimum pension liability adjustment impacted Regulatory assets, Intangible assets and Accumulated other comprehensive income. These adjustments are reflected in the table above and did not materially affect the consolidated results of operations. PacifiCorp requested and received accounting orders from the regulatory commissions in Utah, Oregon and Wyoming to classify most of this charge as a Regulatory asset instead of a charge to Other comprehensive income and has filed for similar treatment in Washington during fiscal 2004. PacifiCorp has determined that according to SFAS No. 87, Employers’ Accounting for Pensions (“SFAS No. 87”), costs for the PacifiCorp Retirement Plan are currently recoverable in rates. This increase to Regulatory assets will be adjusted in future periods as the difference between the fair value of the trust assets and the accumulated benefit obligation changes.
Pension plan assets are managed and invested in accordance with all applicable requirements, including the Employee Retirement Income Security Act and the Internal Revenue Service revenue code. PacifiCorp employs an investment approach whereby a mix of equities and fixed-income investments is used to maximize the long-term
91
return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments as shown in the table below. Equity investments are diversified across United States and non-United States stocks, as well as growth, value, and small and large capitalizations. Fixed-income investments are diversified across United States and non-United States bonds. Other assets, such as private equity, are used judiciously to enhance long-term returns while improving portfolio diversification. PacifiCorp primarily minimizes the risk of large losses through diversification but also monitors and manages other aspects of risk through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The following table shows a breakdown of the pension plan assets by investment category based on market values.
| | | | March 31, | |
| | | |
| |
| | Target | | 2004 | | 2003 | |
| |
| |
| |
| |
Equity securities | | 55.0 | % | 55.3 | % | 53.2 | % |
Debt securities | | 35.0 | | 34.4 | | 34.6 | |
Private equity | | 10.0 | | 10.3 | | 12.2 | |
In April 2004, PacifiCorp contributed $61.6 million to its Retirement Plan. In addition, PacifiCorp expects to contribute another $6.2 million to its Supplemental Executive Retirement Plan, as well as $31.7 million to its other postretirement benefit plan in fiscal 2005.
Employee Savings and Stock Ownership Plan
PacifiCorp has an employee savings and stock ownership plan that qualifies as a tax-deferred arrangement under the Internal Revenue Code. Eligible employees of adopting affiliates are those who are not temporary, casual, leased, or covered by a collective bargaining agreement that does not provide for participation. Employees of any company within the PacifiCorp controlled group of companies that has not adopted the plan are not eligible. Participating United States employees may defer up to 25.0% of their compensation, subject to certain statutory limitations. This limit was raised to 50.0% in February 2004. Compensation includes base pay, overtime and annual incentive, but is limited to the maximum allowable under the Internal Revenue Code. Employees can select a variety of investment options including ScottishPower American Depository Shares (formerly PacifiCorp shares). PacifiCorp matches 50.0% of employee contributions on amounts deferred up to 6.0% of total compensation, with that portion vesting over the initial five years of an employee’s participation in the Plan. Thereafter, PacifiCorp’s contributions vest immediately. PacifiCorp’s matching contribution is allocated based on the employee’s investment selections. PacifiCorp’s additional contribution is allocated based on the employee’s investment selections or to the money market fund if the employee has made no selections. PacifiCorp makes an additional contribution equal to a percentage of the employee’s eligible earnings. These contributions are immediately vested. PacifiCorp’s contributions to the employee savings and stock ownership plan were $19.3 million for the year ended March 31, 2004; $17.4 million for the year ended March 31, 2003; and $16.8 million for the year ended March 31, 2002, and represent amounts expensed for such periods.
Other Postretirement Benefits
PacifiCorp provides health care and life insurance benefits through various plans for eligible retirees. The cost of other postretirement benefits is accrued over the active service period of employees. The transition obligation represents the unrecognized prior service cost and is being amortized over a period of 20 years. PacifiCorp funds other postretirement benefits through a combination of funding vehicles. PacifiCorp contributed $25.3 million and $22.6 million for the years ended March 31, 2004 and 2003 and made no contributions for the year ended March 31, 2002. The measurement date for plan assets and obligations is December 31 of each year.
For the other postretirement benefit plan assets, PacifiCorp employs an investment approach whereby a mix of equities and fixed-income investments is used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments as shown in the table below. Equity investments are diversified across United States and non-United States stocks, as well as growth, value and small and large capitalizations. Fixed-income investments are diversified across United States and non-United States bonds. Other assets, such as private equity, are used judiciously to
92
enhance long-term returns while improving portfolio diversification. PacifiCorp primarily minimizes the risk of large losses through diversification, but also monitors and manages other aspects of risk through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The table below shows a breakdown of the other postretirement benefit plan assets by investment category based on market values.
| | | | March 31, | |
| | | |
| |
| | Target | | 2004 | | 2003 | |
| |
| |
| |
| |
Equity securities | | 63.0 | % | 62.1 | % | 61.6 | % |
Debt securities | | 35.0 | | 36.1 | | 36.6 | |
Private equity | | 2.0 | | 1.8 | | 1.8 | |
Components of the net periodic postretirement benefit cost are summarized as follows:
| | Years Ended March 31, | |
| |
| |
(Millions of dollars) | | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Service cost | | $ | 7.4 | | $ | 5.6 | | $ | 5.2 | |
Interest cost | | | 34.3 | | | 34.2 | | | 28.6 | |
Expected return on plan assets | | | (26.6 | ) | | (28.5 | ) | | (29.2 | ) |
Amortization of unrecognized net obligation | | | 12.2 | | | 12.2 | | | 12.2 | |
Amortization of unrecognized loss (gain) | | | 0.6 | | | — | | | (4.5 | ) |
Regulatory deferral | | | — | | | 1.1 | | | 1.5 | |
| |
|
| |
|
| |
|
| |
Net periodic postretirement benefit cost | | $ | 27.9 | | $ | 24.6 | | $ | 13.8 | |
| |
|
| |
|
| |
|
| |
The change in the accumulated postretirement benefit obligation, change in plan assets and funded status are as follows:
| | March 31, | |
| |
| |
(Millions of dollars) | | 2004 | | 2003 | |
| |
| |
| |
Change in accumulated postretirement benefit obligation | | | | | | | |
Accumulated postretirement benefit obligation - beginning of year | | $ | 522.4 | | $ | 470.4 | |
Service cost | | | 7.4 | | | 5.6 | |
Interest cost | | | 34.3 | | | 34.2 | |
Plan participant contributions | | | 6.8 | | | 6.1 | |
Special termination benefits | | | — | | | (0.9 | ) (a) |
Plan amendments | | | 0.6 | | | — | |
Actuarial loss | | | 21.5 | | | 40.8 | |
Benefits paid | | | (37.7 | ) | | (33.8 | ) |
| |
|
| |
|
| |
Accumulated postretirement benefit obligation - end of year | | $ | 555.3 | | $ | 522.4 | |
| |
|
| |
|
| |
Change in plan assets | | | | | | | |
Plan assets at fair value - beginning of year | | $ | 218.0 | | $ | 262.5 | |
Actual return on plan assets | | | 50.8 | | | (21.4 | ) |
Company contributions | | | 23.7 | | | 4.6 | |
Plan participant contributions | | | 6.8 | | | 6.1 | |
Net benefits paid | | | (37.7 | ) | | (33.8 | ) |
| |
|
| |
|
| |
Plan assets at fair value - end of year | | $ | 261.6 | | $ | 218.0 | |
| |
|
| |
|
| |
Reconciliation of accrued postretirement costs and total amount recognized | | | | | | | |
Funded status of the plan | | $ | (293.7 | ) | $ | (304.4 | ) |
Unrecognized net transition obligation | | | 106.8 | | | 119.0 | |
Unrecognized prior service cost | | | 0.6 | | | — | |
Unrecognized loss | | | 140.1 | | | 143.4 | |
| |
|
| |
|
| |
Accrued postretirement benefit cost, before final contribution | | | (46.2 | ) | | (42.0 | ) |
Final contribution made after measurement date but before March 31 | | | 25.3 | | | 21.1 | |
| |
|
| |
|
| |
Accrued postretirement cost | | $ | (20.9 | ) | $ | (20.9 | ) |
| |
|
| |
|
| |
| (a) | Represents an adjustment to the obligation to provide benefits to employees who elected a special termination benefit in the year ended March 31, 2001, but revoked the election in the year ended March 31, 2003. |
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The following assumptions were used in the actuarial calculations to develop the related other postretirement balances:
| | March 31, | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Discount rate | | 6.25 | % | 6.75 | % | 7.50 | % |
Estimated long-term rate of return on assets | | 8.75 | | 8.75 | | 9.25 | |
Initial health care cost trend - under 65 | | 8.5 | | 9.5 | | 10.5 | |
Initial health care cost trend - over 65 | | 10.5 | | 11.5 | | 12.5 | |
Ultimate health care cost trend rate | | 5.0 | | 5.0 | | 5.0 | |
| | | | | | | |
Year that rate reaches ultimate - under 65 | | 2007 | | 2007 | | 2007 | |
Year that rate reaches ultimate - over 65 | | 2009 | | 2009 | | 2009 | |
The health care cost trend rate assumption has a significant effect on the amounts reported. An annual increase or decrease in the assumed medical care cost trend rate of one percent would affect the accumulated postretirement benefit obligation and the service and interest cost components as follows:
| | One Percent | |
| |
| |
(Millions of dollars) | | Increase | | Decrease | |
| |
| |
| |
Accumulated postretirement benefit obligation | | $ | 31.9 | | $ | (27.0 | ) |
Service and interest cost components | | | 2.7 | | | (2.3 | ) |
Note 19 – Stock Option Incentive Plan
During 1997, PacifiCorp adopted a Stock Option Incentive Plan (the “Option Plan”). The exercise price of options granted under the Option Plan was 100.0% of the fair market value of the common stock on the day prior to the date of the grant. Stock options generally became exercisable in two or three equal installments on each of the first through third anniversaries of the grant date. The maximum exercise period under the Option Plan was 10 years. The Option Plan expired on November 29, 2001.
Upon completion of the merger with ScottishPower (the “Merger”), all stock options granted prior to January 1999 became 100.0% vested. All outstanding stock options were converted into options to purchase ScottishPower American Depository Shares. Stock options to purchase ScottishPower American Depository Shares granted in connection with the Merger vest over the same number of years as stock options granted prior to the Merger.
The table below summarizes the stock option activity under the Option Plan.
ScottishPower American Depository Shares | | Number of
Shares | | Weighted
Average
Price | |
| |
| |
| |
| | | | | | |
Outstanding options at March 31, 2001 | | 3,727,020 | | $ | 33.49 | |
| | | | | | |
Granted | | 824,750 | | | 25.68 | |
Exercised | | (24,665 | ) | | 26.94 | |
Forfeited | | (560,109 | ) | | 32.74 | |
| |
| | | | |
| | | | | | |
Outstanding options at March 31, 2002 | | 3,966,996 | | | 32.01 | |
| | | | | | |
Forfeited | | (563,745 | ) | | 34.06 | |
| |
| | | | |
| | | | | | |
Outstanding options at March 31, 2003 | | 3,403,251 | | | 31.67 | |
| | | | | | |
Exercised | | (147,496 | ) | | 25.55 | |
Forfeited | | (331,706 | ) | | 34.65 | |
| |
| | | | |
| | | | | | |
Outstanding options at March 31, 2004 | | 2,924,049 | | | 31.64 | |
| |
| | | | |
94
Information with respect to options outstanding and options exercisable as of March 31, 2004 and 2003 was as follows:
| | Options Outstanding | | Options Exercisable | |
| |
| |
| |
Range of Exercise Prices | | Number
of Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Life (in years) | | Number
of Shares | | Weighted
Average
Exercise
Price | |
| |
| |
| |
| |
| |
| |
Year ended March 31, 2004 | | | | | | | | | | | |
$25.06 - $36.64 | | 2,367,392 | | $ | 29.51 | | 5.5 | | 2,156,368 | | $ | 29.88 | |
$39.99 - $43.83 | | 556,657 | | 40.72 | | 3.9 | | 556,657 | | 40.72 | |
| |
| | | | | |
| | | |
Total | | 2,924,049 | | 31.64 | | 5.2 | | 2,713,025 | | 32.10 | |
| |
| | | | | |
| | | |
Year ended March 31, 2003 | | | | | | | | | | | |
$25.06 - $36.64 | | 2,737,760 | | $ | 29.45 | | 6.1 | | 2,104,695 | | $ | 30.10 | |
$39.99 - $43.83 | | 665,491 | | 40.81 | | 4.3 | | 665,491 | | 40.81 | |
| |
| | | | | |
| | | |
Total | | 3,403,251 | | 31.67 | | 5.8 | | 2,770,186 | | 32.68 | |
| |
| | | | | |
| | | |
Note 20 – Income Taxes
The difference between the United States federal statutory tax rate and the effective income tax rate attributed to income from continuing operations is as follows:
| | Years Ended March 31, | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Federal statutory rate | | 35.0 | % | 35.0 | % | 35.0 | % |
State taxes, net of federal benefit | | 1.9 | | 3.4 | | 2.9 | |
Effect of regulatory treatment of depreciation differences | | 4.5 | | 6.5 | | 2.9 | |
Tax reserves (a) | | (1.4 | ) | 1.9 | | 4.5 | |
Sale of Australian Electric Operations (b) | | — | | — | | (2.1 | ) |
Tax credits | | (2.5 | ) | (5.6 | ) | (2.3 | ) |
Other | | (0.8 | ) | (0.6 | ) | (3.4 | ) |
| |
| |
| |
| |
Effective income tax rate | | 36.7 | % | 40.6 | % | 37.5 | % |
| |
| |
| |
| |
| (a) | PacifiCorp has established, and periodically reviews, an estimated contingent tax reserve on its Consolidated Balance Sheets to provide for the possibility of adverse outcomes in tax proceedings. |
| | During the year ended March 31, 2004, PacifiCorp reached an agreement in principle with the Internal Revenue Service on certain tax issues related to PacifiCorp’s 1994 through 1998 federal income tax returns. The agreement in principle results in a tax and interest liability of $13.1 million, for which a contingency tax reserve was previously provided. |
| | The Internal Revenue Service started its examination of the 1999 and 2000 tax years in September 2002. During the year ended March 31, 2004, PacifiCorp reached an agreement in principle with the Internal Revenue Service on certain tax issues related to PacifiCorp’s 1999 and 2000 federal income tax returns and, as a result, released $17.8 million of previously provided tax contingency reserves. This was partially offset by an increase to the tax contingency reserve of $5.6 million primarily to accrue interest on remaining tax contingencies provided for in prior periods. The resulting change in the tax contingency reserve during the year ended March 31, 2004 was a net release of $12.2 million. |
| | PacifiCorp believes that final settlement and payment on settled issues and other unresolved issues related to the federal income tax returns through March 31, 2000 will not have a material adverse impact on its consolidated financial position or results of operations. |
| (b) | In accordance with United States federal income tax law, a portion of the excess capital loss from the sale of PacifiCorp’s Australian Operations during the year ended March 31, 2001 was reattributed to another member and a benefit was taken in the federal consolidated tax return filed for the year ended March 31, 2002. |
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The provision for income taxes is summarized as follows:
| | Years Ended March 31, | |
| |
| |
(Millions of dollars) | | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Current | | | | | | | | | | |
Federal | | $ | 63.0 | | $ | 54.2 | | $ | 104.1 | |
State | | | 1.0 | | | 11.2 | | | 11.1 | |
| |
|
| |
|
| |
|
| |
Total | | | 64.0 | | | 65.4 | | | 115.2 | |
| |
|
| |
|
| |
|
| |
Deferred | | | | | | | | | | |
Federal | | | 77.8 | | | 38.6 | | | 63.2 | |
State | | | 10.6 | | | 1.1 | | | 8.5 | |
| |
|
| |
|
| |
|
| |
Total | | | 88.4 | | | 39.7 | | | 71.7 | |
| |
|
| |
|
| |
|
| |
Investment tax credits | | | (7.9 | ) | | (7.9 | ) | | (10.8 | ) |
| |
|
| |
|
| |
|
| |
Total income tax expense | | $ | 144.5 | | $ | 97.2 | | $ | 176.1 | |
| |
|
| |
|
| |
|
| |
The tax effect of temporary differences giving rise to significant portions of PacifiCorp’s deferred tax liabilities and deferred tax assets were as follows:
| | March 31, | |
| |
| |
(Millions of dollars) | | 2004 | | 2003 | |
| |
| |
| |
Deferred tax liabilities | | | | | | | |
Property, plant and equipment | | $ | 1,413.2 | | $ | 1,018.8 | |
Regulatory assets | | | 700.0 | | | 814.0 | |
Derivative contract regulatory assets | | | 160.2 | | | 192.4 | |
Other deferred tax liabilities | | | 76.2 | | | 53.6 | |
| |
|
| |
|
| |
| | | 2,349.6 | | | 2,078.8 | |
| |
|
| |
|
| |
Deferred tax assets | | | | | | | |
Regulatory liabilities | | | (329.7 | ) | | (79.4 | ) |
Employee benefits | | | (164.8 | ) | | (209.7 | ) |
Derivative contracts | | | (173.4 | ) | | (197.8 | ) |
Other deferred tax assets | | | (148.6 | ) | | (111.9 | ) |
| |
|
| |
|
| |
| | | (816.5 | ) | | (598.8 | ) |
| |
|
| |
|
| |
Net deferred tax liability | | $ | 1,533.1 | | $ | 1,480.0 | |
| |
|
| |
|
| |
PacifiCorp made net income tax payments of $114.1 million for the year ended March 31, 2004; $82.2 million for the year ended March 31, 2003; and $83.1 million for the year ended March 31, 2002. The income tax payments include payments for current federal and state income taxes, as well as amounts paid in settlement of prior years’ liabilities as a result of income tax proceedings.
Note 21 – Discontinued Operations
PacifiCorp recognized $146.7 million of income in the year ended March 31, 2002 as a result of PGHC collecting a contingent note receivable relating to the discontinued operations of its former mining and resource development business, NERCO, Inc. (“NERCO”), which was sold in 1993. This note from the buyer was recorded at the date of the NERCO sale along with a corresponding deferred gain. Payments on this note were contingent upon the buyer’s receiving payment under a coal supply contract. PacifiCorp recognized this gain on a cost-recovery basis as payments were received by PGHC from the buyer. In June 2001, PGHC received $189.9 million, which was full payment of the remaining balance of the note and recognized the remaining balance of the deferred gain. Deferred tax expense of $36.4 million was recognized on the gain in June 2001.
96
Note 22 – Dispositions
On December 31, 2001, NAGP contributed all of the common stock of PacifiCorp to PHI. On February 4, 2002, PacifiCorp transferred all of the capital stock of PGHC to PHI. Accordingly, the results of operations and assets of PGHC are not included with those of PacifiCorp commencing February 4, 2002.
In October 2001, PFS sold its synthetic fuel operations. The sale resulted in a pretax gain of approximately $11.3 million for the year ended March 31, 2002.
During the year ended March 31, 2002, PFS sold aircraft owned by one of its subsidiaries. PFS received proceeds of approximately $36.0 million and recorded a $9.3 million pretax gain on the sale.
During the year ended March 31, 2001, PGHC completed the sale of its ownership of Powercor Australia Ltd. and its 19.9% interest in Hazelwood Power Partnership. Powercor Australia Ltd. and Hazelwood Power Partnership represented the entire Australian Operations segment of PacifiCorp. In June 2001, upon resolution of a contingency under the provisions of the Powercor Australia Ltd. sale agreement, PGHC received further proceeds due from the sale that resulted in income of $27.4 million for the year ended March 31, 2002.
Note 23 – Concentration of Customers
During the year ended March 31, 2004, no single retail customer accounted for more than 1.7% of PacifiCorp’s retail electric revenues and the 20 largest retail customers accounted for 13.0% of total retail electric revenues. The geographical distribution of PacifiCorp’s retail operating revenues for the year ended March 31, 2004 was Utah, 38.5%; Oregon, 31.5%; Wyoming, 12.8%; Washington, 8.4%; Idaho 6.3%; and California, 2.5%.
Note 24 – Segment Information
PacifiCorp previously operated in two business segments (excluding other and discontinued operations): Domestic Electric Operations and Australian Operations. The Australian Operations were sold in fall 2000. PacifiCorp currently has one segment, Electric Operations, which includes the regulated retail and wholesale electric operations in the six western states in which it operates. Australian Operations included the deregulated electric operations in Australia. Other Operations consisted of PFS and other energy development businesses, as well as the activities of PGHC, including financing costs. PGHC and its subsidiaries, including PFS, were transferred to PHI in February 2002 as discussed in Note 1.
Note 25 – Subsequent Events
On April 15, 2004, the PacifiCorp Board of Directors declared a dividend on common stock of approximately $0.155 per share for a total of approximately $48.3 million, payable on May 27, 2004.
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SUPPLEMENTAL INFORMATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
| | Quarters Ended | |
| |
| |
(Millions of dollars, except per share amounts) | | June 30 | | September 30 | | December 31 | | March 31 | |
| |
| |
| |
| |
| |
2004 | | | | | | | | | | | | | |
Revenues (a) | | $ | 783.9 | | $ | 845.4 | | $ | 788.4 | | $ | 776.8 | |
Income from operations | | | 168.9 | | | 149.3 | | | 161.5 | | | 139.0 | |
Income from continuing operations before cumulative effect of accounting change | | | 63.5 | | | 59.1 | | | 60.5 | | | 65.9 | |
Cumulative effect of accounting change | | | (0.9 | ) | | — | | | — | | | — | |
Net income | | | 62.6 | | | 59.1 | | | 60.5 | | | 65.9 | |
Earnings on common stock | | | 60.8 | | | 58.6 | | | 60.0 | | | 65.4 | |
Common dividends declared per share | | | 12.8¢ | | | 12.8¢ | | | 12.8¢ | | | 12.8¢ | |
Common dividends paid per share | | | 12.8¢ | | | 12.8¢ | | | 12.8¢ | | | 12.8¢ | |
| | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | |
Revenues (a) | | $ | 712.0 | | $ | 762.4 | | $ | 782.0 | | $ | 826.0 | |
Income from operations | | | 118.7 | | | 132.0 | | | 121.0 | | | 117.2 | |
Income from continuing operations before cumulative effect of accounting change | | | 37.5 | | | 31.5 | | | 39.7 | | | 33.3 | |
Cumulative effect of accounting change | | | (1.9 | ) | | — | | | — | | | — | |
Net income | | | 35.6 | | | 31.5 | | | 39.7 | | | 33.3 | |
Earnings on common stock | | | 33.7 | | | 29.7 | | | 37.9 | | | 31.5 | |
Common dividends declared per share | | | — | | | — | | | — | | | — | |
Common dividends paid per share | | | — | | | — | | | — | | | — | |
| (a) | Certain amounts from prior periods have been reclassified to conform to the year ended March 31, 2004 method of presentation. |
98
The following schedule provides a reconciliation from the current year quarterly schedule to the amounts presented in the most recent quarterly or annual SEC filings.
| | Quarters Ended | |
| |
| |
(Millions of dollars) | | June 30 | | September 30 | | December 31 | | March 31 | |
| |
| |
| |
| |
| |
2004 | | | | | | | | | | | | | |
Revenues as previously reported | | $ | 894.8 | | $ | 958.0 | | $ | 873.6 | | $ | 776.8 | |
Adoption of EITF No. 03-11 | | | (110.7 | ) | | (104.7 | ) | | (90.5 | ) | | — | |
Reclassification of Unrealized (gain) loss on derivative contracts | | | (0.2 | ) | | (7.9 | ) | | 5.3 | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
Revenues as currently reported | | $ | 783.9 | | $ | 845.4 | | $ | 788.4 | | $ | 776.8 | |
| |
|
| |
|
| |
|
| |
|
| |
2003 | | | | | | | | | | | | | |
Revenues as previously reported | | $ | 885.6 | | $ | 943.9 | | $ | 853.2 | | $ | 910.7 | |
Adoption of EITF No. 03-11 | | | (177.2 | ) | | (181.5 | ) | | (71.2 | ) | | (84.9 | ) |
Reclassification of Unrealized (gain) loss on derivative contracts | | | 3.6 | | | — | | | — | | | 0.2 | |
| |
|
| |
|
| |
|
| | |
| |
Revenues as currently reported | | $ | 712.0 | | $ | 762.4 | | $ | 782.0 | | $ | 826.0 | |
| |
|
| |
|
| |
|
| |
|
| |
On March 31, 2004, there was one common shareholder of record.
99
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No information is required to be reported pursuant to this item.
ITEM 9A. CONTROLS AND PROCEDURES
(a) PacifiCorp maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this annual report. PacifiCorp performed an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of PacifiCorp’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2004 the disclosure controls and procedures were effective, in all material respects, in timely alerting management to material information relating to PacifiCorp and its consolidated subsidiaries required to be included in its periodic reports filed pursuant to the Securities Exchange Act of 1934.
(b) There has been no change in PacifiCorp’s internal control over financial reporting that occurred during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, PacifiCorp’s internal control over financial reporting.
100
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of directors of PacifiCorp as of March 31, 2004.
Name and Age | | Business Experience Past Five Years |
| | |
Ian M. Russell (51) | | Chairman of the Board of Directors. Director since November 1999. |
| | |
| | Mr. Russell was appointed Chief Executive of ScottishPower in April 2001 and Chairman of PacifiCorp in January 2002. Mr. Russell serves on the Board of Directors for Scottish Power plc. He previously served as Deputy Chief Executive of ScottishPower since November 1998, having previously been appointed Finance Director of ScottishPower in April 1994 and serving in both capacities from November 1998 to December 1999. In his present capacity, he is responsible for United Kingdom and United States operations. |
| | |
Judith A. Johansen (45) | | President and Chief Executive Officer. Director since December 2000. |
| | |
| | Ms. Johansen was elected President and Chief Executive Officer in June 2001 and served as Executive Vice President since December 2000. Ms. Johansen was appointed to the Board of Directors for Scottish Power plc in October 2003. She was Administrator and Chief Executive Officer of the Bonneville Power Administration in Portland, Oregon from June 1998 to November 2000. From June 1996 to May 1998, Ms. Johansen was vice president of business development with Avista Energy. |
| | |
Barry G. Cunningham (59) | | Senior Vice President. Director since April 2002. |
| | |
| | Mr. Cunningham was named PacifiCorp’s Senior Vice President of Generation in February 2002. Mr. Cunningham joined PacifiCorp in June 1977 and served as a Vice President from May 1999 to February 2002 and as an Assistant Vice President from September 1998 to May 1999. |
| | |
Andrew P. Haller (52) | | Senior Vice President, General Counsel and Corporate Secretary. Director since May 2003. |
| | |
| | Mr. Haller joined PacifiCorp in December 2000. Prior to joining PacifiCorp, he was chief executive for the United States operations of Kvaerner Process, a position he held from 1998 to 2000. Mr. Haller began his career with Kvaerner in 1987, and held various senior counsel and management positions, including Senior Vice President and General Counsel-Americas. From 1998 to 1999, he served as the Associate General Counsel for the parent company, Kvaerner ASA, in its United States corporate headquarters. |
| | |
Nolan E. Karras (59) | | Director since February 1993. |
| | |
| | Mr. Karras is President of The Karras Company, Inc., an investment adviser, and has served in that capacity since 1983. He is Chief Executive Officer of Western Hay Company, Inc., a non-executive Director of Scottish Power plc and Beneficial Life Insurance Company and is a Registered Principal for Raymond James Financial Services. |
| | |
William D. Landels (61) | | Executive Vice President. Director since November 1999. |
101
| | Mr. Landels has been with ScottishPower since 1985. He was elected Executive Vice President and Director of PacifiCorp in November 1999. Prior to that, he served with the ScottishPower Group in various senior management roles, including as Managing Director of Manweb, Managing Director of Energy Supply and Managing Director of Distribution. Mr. Landels retired in April 2004. |
| | |
Andrew N. MacRitchie (40) | | Executive Vice President. Director since May 2000. |
| | |
| | Mr. MacRitchie was elected Executive Vice President in May 2000. Mr. MacRitchie has been with ScottishPower since 1986. He served as the Transition Director for the PacifiCorp Merger from December 1999 to May 2000. He served as ScottishPower’s United States Chief of Staff on the PacifiCorp Merger from December 1998 to December 1999, and, prior to that, he served as Manager, Business and Organizational Development. |
| | |
Richard D. Peach (40) | | Chief Financial Officer. Director since May 2003. |
| | |
| | Mr. Peach was named PacifiCorp’s Chief Financial Officer effective January 2003. Mr. Peach had previously served as Senior Vice President of Finance since March 2002. Prior to his appointment as Chief Financial Officer, Mr. Peach served as Group Controller for ScottishPower since March 2000 and served in various management positions since 1995. |
| | |
Michael J. Pittman (51) | | Senior Vice President. Director since May 2000. |
| | |
| | Mr. Pittman was elected a Senior Vice President of Human Resources in May 2000. He formerly served as a Vice President of PacifiCorp from May 1993. Mr. Pittman is also Chairman of the PacifiCorp Foundation for Learning. |
| | |
A. Richard Walje (52) | | Senior Vice President. Director since July 2001. |
| | |
| | Mr. Walje has served as PacifiCorp’s Senior Vice President of Corporate Business Services from May 2001 and served as PacifiCorp’s Vice President and Chief Information Officer from May 2000 to July 2001. Mr. Walje also served as PacifiCorp’s Vice President for Transmission and Distribution Operations and Customer Service from 1998 to 2000. Mr. Walje serves on the PacifiCorp Foundation for Learning Board of Directors. |
| | |
Matthew R. Wright (39) | | Executive Vice President. Director since July 2001. |
| | |
| | Mr. Wright was appointed Executive Vice President of Power Delivery in January 2002. Mr. Wright served as Senior Vice President of Strategy and Planning in November 2001 and as Vice President of Regulation from 1999 to 2001. Prior to joining PacifiCorp, Mr. Wright served the ScottishPower group in various management positions since 1995. |
| | |
The following is a list of the executive officers of PacifiCorp not named above. There are no family relationships among the executive officers of PacifiCorp. Officers of PacifiCorp are normally elected annually. | |
| | | |
Name and Age | | Business Experience Past Five Years | |
| | | |
Donald N. Furman (47) | | Senior Vice President. | |
| | | |
| | Mr. Furman was named PacifiCorp’s Senior Vice President of Regulation and Government Affairs in July 2001. Mr. Furman served as Vice President of Transmission and Business Development from 1997 to 2001 and as President of PPM from 1995 to 1997. | |
102
Robert A. Klein (56) | | Senior Vice President. |
| | |
| | Mr. Klein has served as PacifiCorp’s Senior Vice President of Commercial and Trading since August 2001. In March 2003, he was named ScottishPower’s Energy Risk Director. Prior to joining PacifiCorp in December 2000, Mr. Klein served as Senior Vice President and General Manager of Equitable Resources’ deregulated marketing business from 1998 to 1999 and as Vice President of Risk Management for Coral Equity from 1997 to 1998. |
| | |
Robert Moir (54) | | Senior Vice President. |
| | |
| | Mr. Moir was named PacifiCorp’s Senior Vice President of Distribution in February 2002. Mr. Moir served as Vice President since May 2000. Mr. Moir has been with ScottishPower since 1967. He retired in March 2004. |
| | |
Stan Watters (45) | | Senior Vice President. |
| | |
| | Mr. Watters was elected Senior Vice President of Commercial and Trading in June 2003. Mr. Watters served as Vice President of Trading and Origination from July 2001 to June 2003. Mr. Watters has been with PacifiCorp since 1982. |
| | |
Bruce N. Williams (45) | | Treasurer. |
| | |
| | Mr. Williams was named Treasurer in February 2000. Prior to being elected Treasurer, he served as Assistant Treasurer of PacifiCorp and has been with PacifiCorp since 1985. |
In addition to its Guide to Business Conduct, which provides a basis for employee ethical standards and conduct for all employees, the PacifiCorp Board of Directors has approved and implemented a “Code of Ethics for Principal Officers” designed to promote the integrity of PacifiCorp’s financial reporting and legal compliance. The Code of Ethics applies to PacifiCorp’s Chief Executive Officer and its financial and accounting officers. The Guide to Business Conduct and Code of Ethics are available in the Investor Relations section of PacifiCorp’s website at www.pacificorp.com. PacifiCorp intends to make available on its website any amendment to, or waiver from, the Code of Ethics as the Code applies to PacifiCorp’s Chief Executive Officer and its financial and accounting officers.
Because PacifiCorp’s common stock is indirectly, wholly owned by ScottishPower, its Board of Directors consists almost entirely of internal executives. Accordingly, the audit committee functions of PacifiCorp are carried out by the Audit Committee of ScottishPower (the “ScottishPower Audit Committee”), which consists entirely of directors who are independent of ScottishPower, determined in accordance with New York Stock Exchange listing standards.
Neither the PacifiCorp Board of Directors nor the ScottishPower Audit Committee currently has an independent director who is an audit committee financial expert in respect of PacifiCorp. However, the ScottishPower Audit Committee does have significant financial experience and includes one member who has been determined by the ScottishPower Board of Directors to be an audit committee financial expert for ScottishPower, due in part to his understanding of generally accepted accounting principles as applied in the United Kingdom. There is limited availability of appropriately experienced individuals who are experts in both United Kingdom and United States generally accepted accounting principles and otherwise qualified as independent financial experts in accordance with the rules of the SEC. The PacifiCorp Board of Directors believes that the Scottish Power Audit Committee is able to provide appropriate levels of oversight.
103
ITEM 11. EXECUTIVE COMPENSATION
BOARD OF DIRECTORS OF PACIFICORP REPORT ON EXECUTIVE COMPENSATION
Introduction
The Board of Directors of PacifiCorp submits this report on executive compensation, which outlines the compensation provided to PacifiCorp’s executive officers. The Remuneration Committee of the ScottishPower Board of Directors, assisted by its outside advisors, has the responsibility to approve compensation levels and executive compensation plans for the PacifiCorp Chief Executive Officer and to review compensation for other officers of PacifiCorp. The Remuneration Committee is composed entirely of independent, non-employee directors. With the exception of any compensation requiring review by the Remuneration Committee, the ScottishPower Chief Executive Officer, the PacifiCorp Chief Executive Officer and the ScottishPower Human Resources Director have responsibility for approving compensation levels and executive compensation plans for officers of PacifiCorp. Each of these individuals serve on the Board of Directors of PacifiCorp. The Remuneration Committee must approve any stock-based compensation to PacifiCorp executive officers. The following describes the components of PacifiCorp’s executive compensation program and the basis upon which recommendations and determinations were made for the period from April 1, 2003 to March 31, 2004.
Compensation Philosophy
PacifiCorp’s philosophy is that executive compensation, including that of its Chief Executive Officer, should be linked closely to corporate and operational performance, customer service and increases in shareholder value. PacifiCorp’s compensation program has the following objectives:
| (i) | provide competitive total compensation that enables PacifiCorp to attract and retain key executives; |
| (ii) | provide variable compensation opportunities that are linked to PacifiCorp, operational area, and individual performance; and |
| (iii) | establish an appropriate balance between incentives focused on short-term objectives and those encouraging sustained performance improvements and increases in shareholder value. |
Qualifying compensation for deductibility under Internal Revenue Code Section 162(m) is one of the factors the ScottishPower Chief Executive Officer, the ScottishPower Human Resources Director and the PacifiCorp Chief Executive Officer consider in designing PacifiCorp’s incentive compensation arrangements. Internal Revenue Code Section 162(m) limits to $1.0 million the annual deduction by a publicly held corporation of compensation paid to any executive, except with respect to certain forms of incentive compensation that qualify for exclusion. Although it is the intent to design and administer compensation programs that maximize deductibility, the Remuneration Committee, the ScottishPower Chief Executive Officer, the ScottishPower Human Resources Director and the PacifiCorp Chief Executive Officer view the objectives outlined above as more important than compliance with the technical requirements necessary to exclude compensation from the deductibility limit of Internal Revenue Code Section 162(m). Nevertheless, the Remuneration Committee, the ScottishPower Chief Executive Officer, the ScottishPower Human Resources Director and the PacifiCorp Chief Executive Officer believe that nearly all compensation paid to the executive officers for services rendered in the year ended March 31, 2004 is fully deductible.
Compensation Program Components
During the year ended March 31, 2004, the compensation programs were focused on market-based comparisons on the relevant industry for each officer. The electric utility industry was utilized as the exclusive basis for market comparison for positions with a principal focus on electric operations. For positions with a corporate-wide focus, the weighting of approximately 67.0% general industry and 33.0% electric utility industry was used for market comparison. In all cases, compensation is targeted at market median levels, with an assumption that total compensation greater than market median, in any specific time period, anticipates that Company performance exceeds the median performance of peer companies.
PacifiCorp’s executive compensation programs have three principal elements: base salaries, annual incentive compensation and long-term incentive compensation, as described below.
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Base Salaries
Base salaries and target incentive amounts are reviewed for adjustment at least annually based upon competitive pay levels, individual performance and potential, and changes in duties and responsibilities. Base salary and the incentive target are set at a level such that total annual compensation for satisfactory performance would approximate the midpoint of pay levels in the comparison group used to develop competitive data. In the year ended March 31, 2004, the base salary of each executive officer was increased, based on market analysis, to reflect competitive market changes, individual performance and changes in the responsibilities of some officers.
Annual Incentive Compensation
All PacifiCorp officers, including those listed in the Summary Compensation Table, participated in PacifiCorp’s Annual Incentive Program. Performance goals were based on PacifiCorp performance, operational performance and individual performance, and may include ScottishPower performance based on the level, influence and impact of the officer.
Long-Term Incentive Compensation
Historically, the Board of Directors of PacifiCorp annually reviewed and approved grants of restricted stock and stock options under the Stock Incentive Plan. However, on November 29, 2001, the Stock Incentive Plan expired. Restricted stock and stock option awards made under the Stock Incentive Plan on or before April 24, 2001 will continue to remain outstanding until such time as they are exercised or expire.
Restricted stock awards under the Stock Incentive Plan are subject to terms, conditions and restrictions determined by the Board of Directors of PacifiCorp to be consistent with the plan and the best interests of the shareholders. In general, restricted stock awards vest over a four-year period from the date of grant, subject to compliance with the stock ownership and other terms of the grant. The restrictions include stock transfer restrictions and forfeiture provisions designed to facilitate the participants’ achievement of specified stock ownership goals. Participants are also required to invest their own personal resources in ScottishPower American Depository Shares or ordinary shares (“Ordinary Shares”) in order to meet the vesting requirements associated with these grants. The Summary Compensation Table below shows the grants of restricted stock made to the listed executive officers under the Stock Incentive Plan in the year ended March 31, 2002.
In April 2003, the Remuneration Committee approved grants of stock options and performance share awards under ScottishPower’s Executive Share Option Plan 2001 (“ExSOP”) and the Long-Term Incentive Plan (“LTIP”), respectively, for a select group of executive officers and other senior managers. ExSOP and performance share grants were awarded to PacifiCorp senior managers in May 2003. See below for LTIP awards.
All stock options awarded to officers and senior management of PacifiCorp in the years ended March 31, 2004, 2003 and 2002 are non-statutory, non-discounted options with a three-year vesting requirement and a 10-year term from the date of the grant.
The LTIP links the rewards closely between management and shareholders, and focuses on long-term corporate performance. The awards will vest only if the Remuneration Committee is satisfied that certain threshold customer service and financial performance measures are achieved. The number of shares that actually vest is dependent upon ScottishPower’s comparative Total Shareholder Return performance, over a three-year performance period.
The Board of Directors of PacifiCorp report on executive compensation detailed above has been submitted by all the members of the PacifiCorp Board of Directors as listed below:
| • | Ian M. Russell, Chairman |
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Executive Compensation
The following table sets forth information concerning compensation for services in all capacities to PacifiCorp for the years ended March 31, 2004, 2003 and 2002 of those persons who were the Chief Executive Officer of PacifiCorp during any portion of the year ended March 31, 2004 and the next four other most highly compensated executive officers of PacifiCorp who were serving as executive officers at the end of the last completed fiscal year.
Summary Compensation Table
| | | | | | | | Long-Term Compensation | | | |
| | | | | | | |
| | | |
| | | | | | | | Restricted
Stock
Awards (c) | | Securities
Underlying
Options (d) | | LTIP
Payout
(e) | | ScottishPower
Performance
Shares (f) | | All Other
Compensation
(g) | |
Name and Principal Position | | | | Annual Compensation (a) | | | | | | |
| | |
| | | | | | |
| Year | | Salary | | Bonus (b) | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Judith A. Johansen
President and Chief Executive Officer | | 2004 | | $ | 589,394 | | $ | 337,500 | | $ | — | | 61,475 | | $ | — | | 12,458 | | $ | 22,883 | |
| 2003 | | | 492,444 | | | 149,767 | | | — | | 61,825 | | | — | | 9,199 | | | 21,170 | |
| 2002 | | | 360,501 | | | 12,902 | | | 141,683 | | 57,350 | | | — | | — | | | 11,707 | |
| | | | | | | | | | | | | | | | | | | | | | |
Andrew P. Haller
Senior Vice President, General Counsel and Corporate Secretary | | 2004 | | | 327,996 | | | 190,109 | | | — | | 13,530 | | | — | | 5,484 | | | 20,165 | |
| 2003 | | | 310,930 | | | 132,020 | | | — | | 19,165 | | | 23,069 | | 5,069 | | | 21,037 | |
| 2002 | | | 299,425 | | | 8,392 | | | 112,768 | | 56,800 | | | 23,644 | | — | | | 10,524 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Michael J. Pittman
Senior Vice President | | 2004 | | | 313,125 | | | 187,500 | | | — | | 38,729 | | | — | | 7,849 | | | 20,097 | |
| 2003 | | | 300,000 | | | 47,057 | | | — | | 50,954 | | | — | | 7,581 | | | 18,860 | |
| 2002 | | | 275,167 | | | 150,008 | | | 53,203 | | 13,500 | | | — | | — | | | 20,449 | |
| | | | | | | | | | | | | | | | | | | | | | |
A. Richard Walje
Executive Vice President | | 2004 | | | 299,544 | | | 127,557 | | | — | | 17,751 | | | — | | 7,195 | | | 20,324 | |
| 2003 | | | 275,500 | | | 95,550 | | | — | | 24,840 | | | — | | 6,570 | | | 19,278 | |
| 2002 | | | 240,375 | | | 128,854 | | | 53,203 | | 14,000 | | | 12,222 | | — | | | 19,606 | |
| | | | | | | | | | | | | | | | | | | | | | |
Robert A. Klein
Senior Vice President | | 2004 | | | 265,000 | | | 143,100 | | | — | | 10,860 | | | — | | 4,402 | | | 19,795 | |
| 2003 | | | 228,339 | | | 75,075 | | | — | | 14,011 | | | — | | 3,706 | | | 21,079 | |
| 2002 | | | 202,500 | | | 13,295 | | | — | | — | | | — | | — | | | 10,212 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (a) | May include amounts deferred pursuant to the Compensation Reduction Plan, under which key executives and directors may defer receipt of cash compensation until retirement or a preset future date. Amounts deferred are invested in ScottishPower American Depository Shares or a cash account on which interest is paid at a rate equal to the Moody’s Intermediate Corporate Bond Yield for AA-rated Public Utility Bonds. |
| (b) | Amounts in this column for the year ended March 31, 2003 include a promotion bonus in the amount of $41,556 for Ms. Johansen. Amounts in this column for the year ended March 31, 2002 include a retention bonus in the amount of $125,610 for Mr. Pittman and $104,000 for Mr. Walje. |
| (c) | On March 31, 2004, the aggregate value of all restricted stock holdings, based on the market value of ScottishPower American Depository Shares at March 31, 2004, without giving effect to the diminution of value attributed to the restrictions on such stock, was $104,444 for Ms. Johansen, $83,129 for Mr. Haller, $26,146 for Mr. Pittman, and $26,146 for Mr. Walje. The aggregate number of restricted share holdings was 3,675 for Ms. Johansen, 2,925 for Mr. Haller, 920 for Mr. Pittman, and 920 for Mr. Walje. Regular quarterly dividends are paid on the restricted stock. Participants may defer receipt of restricted stock awards to their stock accounts under the Compensation Reduction Plan. |
| d) | Amounts shown for the year ended March 31, 2004 and 2003 represent the number of American Depository Shares option shares awarded under the ScottishPower ExSOP. Amounts shown for the year ended March 31, |
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2002 represent the number of American Depository Shares options awarded under the PacifiCorp Stock Incentive Plan.
| (e) | Represents the dollar value of restricted stock shares awarded under the PacifiCorp Stock Incentive Plan prior to PacifiCorp’s acquisition by ScottishPower that vested and were distributed to the named officer in the form of ScottishPower American Depository Shares. |
| (f) | Represents the number of ScottishPower American Depository Shares contingently granted in 2004, 2003 and 2002 that can be earned under the terms of the ScottishPower LTIP. |
| (g) | Amounts shown for the year ended March 31, 2004 include: |
| (i) | Company contributions to the PacifiCorp K Plus Employee Savings and Stock Ownership Plan were $12,083 for Ms. Johansen, $10,179 for Mr. Haller, $10,156 for Mr. Pittman, $10,421 for Mr. Walje and $10,000 for Mr. Klein. |
| (ii) | Portions of premiums on term life insurance policies that PacifiCorp paid in the amounts of $1,800 for Ms. Johansen, $986 for Mr. Haller, $941 for Mr. Pittman, $903 for Mr. Walje and $795 for Mr. Klein. These benefits are available to all employees. |
| (iii) | This column also includes vehicle allowances paid to Ms. Johansen and Messrs. Haller, Pittman, Walje and Klein in the amounts of $9,000 each. |
Option Grants in Last Fiscal Year
The following table sets forth information regarding options to purchase ScottishPower American Depository Shares granted to each named executive officer under the ScottishPower ExSOP. All options become exercisable for one-third of the shares covered by the option on each of the first three anniversaries of the grant date.
| | Individual Grants | |
| |
| |
Name | | Number of
Securities
Underlying
Options
Granted | | % of Total
Options
Granted to
Employees in
Fiscal Year | | Exercise or
Base Price
($/Sh) | | Expiration
Date | | Potential Realizable
Value at Assumed
Annual Rates of
Stock Price Appreciation
for Option Term | |
| |
5% | | 10% | |
| |
| |
| |
| |
| |
| |
| |
Judith A. Johansen | | 61,475 | | 7.87 | % | $ | 24.40 | | May 9, 2013 | | $ | 943,336 | | $ | 2,390,598 | |
Andrew P. Haller | | 13,530 | | 1.73 | | | 24.40 | | May 9, 2013 | | | 207,618 | | | 526,145 | |
Michael J. Pittman | | 38,729 | | 4.96 | | | 24.40 | | May 9, 2013 | | | 594,298 | | | 1,506,067 | |
A. Richard Walje | | 17,751 | | 2.27 | | | 24.40 | | May 9, 2013 | | | 272,390 | | | 690,289 | |
Robert A. Klein | | 10,860 | | 1.39 | | | 24.40 | | May 9, 2013 | | | 166,647 | | | 422,316 | |
| | | | | | | | | | | | | | | | |
Aggregated Option Exercises at March 31, 2004 and Year-End Option Values
The following table sets forth information regarding the aggregate options exercised during the past fiscal year and the option values at the fiscal year ended March 31, 2004, for each of the named executive officers. All options are for ScottishPower American Depository Shares and include options granted under the PacifiCorp Stock Incentive Plan and the ExSOP.
| | | | | | Number of
Securities Underlying
Unexercised Options at
March 31, 2004 | | Value of Unexercised
In-the-Money Options at
March 31, 2004 | |
| | | | | |
| |
| |
Name | | Shares
Acquired on
Exercise | | Value
Realized | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
| |
| |
| |
| |
| |
| |
| |
Judith A. Johansen | | 13,500 | | $ | 23,760 | | 97,539 | | 126,961 | | $ | 329,245 | | $ | 517,327 | |
Andrew P. Haller | | 98,925 | | | 219,475 | | — | | 47,370 | | | — | | | 175,641 | |
Michael J. Pittman | | — | | | — | | 193,325 | | 81,445 | | | 104,380 | | | 349,156 | |
A. Richard Walje | | — | | | — | | 154,922 | | 41,738 | | | 71,257 | | | 175,637 | |
Robert A. Klein | | — | | | — | | 10,245 | | 25,326 | | | 33,945 | | | 104,916 | |
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Employment Agreement
On September 29, 2003, Ms. Johansen and PacifiCorp executed an employment agreement providing for a base salary of $700,000 and a maximum annual incentive award of 75.0% of base salary. Under the agreement, she is eligible for participation, as defined by the plan rules, in the LTIP, ExSOP and retirement plan referred to below, in addition to other benefit plans available for senior level executives of PacifiCorp. The employment agreement renews annually unless either party terminates the agreement. Ms. Johansen or PacifiCorp may terminate the employment agreement at any time for any reason. However, if Ms. Johansen resigns from PacifiCorp due to a material alteration in compensation or assignment or following a company-initiated relocation, or if PacifiCorp terminates Ms. Johansen without cause, then Ms. Johansen will be entitled to one year’s base salary, car allowance and bonus (as modified pursuant to the terms of the employment agreement). Additionally, as part of the regular terms and conditions, Ms. Johansen agreed to confidentiality, non-competition and non-solicitation terms.
Severance Arrangements
PacifiCorp’s Executive Severance Plan provides severance benefits to certain executive-level employees who are designated by the Board of Directors of PacifiCorp, including the executive officers named in the Summary Compensation Table (other than Ms. Johansen).
Severance benefits are payable by PacifiCorp for voluntary terminations as a result of a certain material alterations in position or compensation that have a detrimental impact on the executive’s employment or involuntary terminations (including a PacifiCorp-initiated resignation) for reasons other than cause. Severance payments generally equal one or two times the executive’s annual cash compensation, three months of health insurance benefits and outplacement services.
The Executive Severance Plan also provides enhanced severance benefits in the event of certain terminations during the 24-month period following a qualifying change-in-control transaction. Executives designated by the Board of Directors of PacifiCorp are eligible for change-in-control benefits resulting from either a PacifiCorp-initiated termination without cause or a resignation generally within two months after certain material alterations in position or compensation. If qualified for the enhanced severance benefits, an executive would receive severance pay in an amount equal to either two, two and one-half or three times the annual cash compensation of the executive, depending on the level set by the Board of Directors of PacifiCorp. PacifiCorp is required to make an additional payment to compensate the executive for the effect of any excise tax. The executive would also receive continuation of subsidized health insurance from six to 24 months, depending on length of service, and outplacement services.
Retirement Plans
PacifiCorp has adopted non-contributory defined benefit retirement plans for its employees, other than employees subject to collective bargaining agreements that do not provide for coverage. Certain executive officers, including the executive officers named in the Summary Compensation Table, are also eligible to participate in PacifiCorp’s non-qualified supplemental executive retirement plan. The following description assumes participation in both the retirement plans and the supplemental plan. Participants receive benefits at retirement payable for life based on length of service with PacifiCorp and average pay in the 60 consecutive months of highest pay out of the last 120 months, and pay for this purpose would include salary and annual incentive plan payments reflected in the Summary Compensation Table above. Benefits are based on 50.0% of final average pay plus up to an additional 15.0% of final average pay depending upon whether PacifiCorp meets certain performance goals set for each fiscal year by the Board of Directors of PacifiCorp. Participants may also elect actuarially equivalent alternative forms of benefits. Retirement benefits are reduced to reflect social security benefits as well as certain prior employer retirement benefits. Participants are entitled to receive full benefits upon retirement after age 60 with at least 15 years of service. Participants are also entitled to receive reduced benefits upon early retirement after age 55 or after age 50 with at least 15 years of service and five years of participation in the supplemental plan.
The following table shows the estimated annual retirement benefit payable upon retirement at age 60 as of March 31, 2004. Amounts in the table reflect payments from the retirement plan and the supplemental plan combined.
108
Estimated Annual Pension at Retirement (a)
| | Years of Service (b) | |
| |
| |
Annual Pay at
Retirement Date | | | 5 | | 15 | | 25 | | 30 | |
| | |
| |
| |
| |
| |
$ | 200,000 | | | | $ | 43,333 | | $ | 130,000 | | $ | 130,000 | | $ | 130,000 | |
| 400,000 | | | | | 86,667 | | | 260,000 | | | 260,000 | | | 260,000 | |
| 600,000 | | | | | 130,000 | | | 390,000 | | | 390,000 | | | 390,000 | |
| 800,000 | | | | | 173,333 | | | 520,000 | | | 520,000 | | | 520,000 | |
| 1,000,000 | | | | | 216,667 | | | 650,000 | | | 650,000 | | | 650,000 | |
| (a) | The benefits shown in this table assume that the individual will remain in the employ of PacifiCorp until retirement at age 60, that the plans will continue in their present form and that PacifiCorp achieves its performance goals under the supplemental plan in all years. |
| (b) | The number of credited years of service used to compute benefits under the plans are three for Ms. Johansen, three for Mr. Haller, 24 for Mr. Pittman, 18 for Mr. Walje, and three for Mr. Klein. |
Retention Agreements
To retain executives who would otherwise have had the right to resign for any reason between 12 and 14 months following the ScottishPower Merger and qualify for the enhanced change-in-control supplemental retirement benefits, PacifiCorp entered into retention agreements with qualifying executives (Messrs. Pittman and Walje). Those retention agreements provided for the same enhanced supplemental retirement benefits if the qualifying executives satisfied the retention criteria. Qualifying executives were required to waive their rights to unilaterally resign and receive the enhanced supplemental retirement benefits, but they are now eligible to receive these same enhancements since they have continued employment through the established retention date of December 1, 2002.
These retention agreements also require qualifying executives to waive any rights to executive severance benefits, which they may have otherwise claimed due to material alterations in their positions as of the date of the retention agreement. Unless there is a subsequent “involuntarily termination” or “material alteration” in position as defined in the Severance Plan, this waiver of severance benefits applies to these executives through November 28, 2004. The executives’ waiver of severance benefits was in exchange for the enhanced supplemental retirement benefits described above, retention bonuses determined individually in PacifiCorp’s discretion for each executive and special stock option awards that vest over a three-year retention period at 25.0% for each of the first two years and 50.0% in the third year.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All common shares of PacifiCorp are indirectly owned by Scottish Power plc, 1 Atlantic Quay, Glasgow, G2 8SP, Scotland. PacifiCorp has no compensation plans under which equity securities of PacifiCorp are authorized to be issued.
The following table sets forth certain information as of March 31, 2004 regarding the beneficial ownership of ScottishPower Ordinary Shares by (1) each of the executive officers named in the Summary Compensation Table under Item 11. Executive Compensation above, (2) each director of PacifiCorp as detailed under Item 10. Directors and Executive Officers of the Registrant, and (3) all executive officers and directors as a group. As of March 31, 2004, each of the directors and executive officers identified above and all directors and executive officers of PacifiCorp as a group owned less than 1% of the outstanding Ordinary Shares of ScottishPower.
| | Amount and Nature of Beneficial Ownership | |
| |
| |
Beneficial Owner | | Direct and
Indirect (a) | | Options (b) | | Total | |
| |
| |
| |
| |
Judith A. Johansen | | 88,960 | | 610,416 | | 699,376 | |
Michael J. Pittman | | 112,212 | | 893,888 | | 1,006,100 | |
Andrew P. Haller | | 53,280 | | 110,812 | | 164,092 | |
A. Richard Walje | | 83,200 | | 684,104 | | 767,304 | |
Ian M. Russell | | 127,440 | | 45,000 | | 172,440 | |
Barry G. Cunningham | | 58,718 | | 468,932 | | 527,650 | |
Robert A. Klein | | 724 | | 82,184 | | 82,908 | |
Nolan E. Karras | | 33,601 | | — | | 33,601 | |
William D. Landels (c) | | 23,601 | | 188,764 | | 212,365 | |
Andrew N. MacRitchie | | 12,448 | | 6,634 | | 19,082 | |
Richard D. Peach | | 5,323 | | 6,331 | | 11,654 | |
Matthew R. Wright | | 8,331 | | 4,615 | | 12,946 | |
All executive officers and directors as a group (16 persons) (d) | | 737,591 | | 4,015,348 | | 4,752,939 | |
| (a) | Includes ownership of (i) shares held by family members even though beneficial ownership of such shares may be disclaimed and (ii) shares held for the account of such persons pursuant to PacifiCorp’s Compensation Reduction Plan and PacifiCorp’s K Plus Savings and Stock Ownership Plan. |
| (b) | Includes Ordinary Shares that each person has the right to acquire through options that become exercisable within 60 days after March 31, 2004. Options granted in ScottishPower American Depository Shares under PacifiCorp’s Stock Incentive Plan have been converted into options in Ordinary Shares. One American Depository Share equates to four Ordinary Shares. |
| (c) | Includes 188,764 of Ordinary Shares subject to options that became exercisable upon Mr. Landels’ retirement in April 2004. |
| (d) | Includes 62,748 of Ordinary Shares subject to options that became exercisable upon Mr. Moir’s retirement in March 2004. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED TRANSACTIONS
According to the terms of Andrew Haller’s offer letter, PacifiCorp made a $200,000 loan to Mr. Haller on May 21, 2001 for the repayment of obligations to his former employer. Mr. Haller has repaid $82,314.26 of the loan amount. As of March 31, 2004, the outstanding loan balance was $121,873.29, including accrued interest, payable in four additional equal payments of $32,988.56, including interest, on June 30 in each year from 2004 to 2007.
See Note 4 of Notes to the Consolidated Financial Statements for other information on related-party transactions.
110
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The ScottishPower Audit Committee retained PricewaterhouseCoopers LLP, independent certified public accountants, as PacifiCorp’s independent registered public accounting firm for the year ended March 31, 2004 and the year ending March 31, 2005.
Fees and Pre-Approval Policy
During the year ended March 31, 2004, the ScottishPower Audit Committee adopted a pre-approval policy for PricewaterhouseCoopers’ services and fees. This policy details the services that can be provided by the independent auditors, and requires that where the initial fee value for any services permitted in accordance with the policy exceeds £100,000 (or its United States dollar equivalent), the assignment must be reviewed and authorized by both the Chairman of the ScottishPower Audit Committee with the concurrence of the ScottishPower Finance Director. Any services authorized by the Chairman are reported to the ScottishPower Audit Committee at its next scheduled meeting, and fees paid to the independent auditors are reported regularly to the ScottishPower Audit Committee. The PacifiCorp Board of Directors has not adopted any pre-approval policy that is in addition to or different than the ScottishPower Audit Committee’s pre-approval policy.
The following table presents fees paid to PricewaterhouseCoopers for the fiscal years ended March 31, 2004 and 2003.
| | Year Ended March 31, | |
| |
| |
(Millions of dollars) | | 2004 | | 2003 | |
| |
| |
| |
Audit fees | | $ | 1.4 | | 28.6 | % | $ | 1.4 | | | 17.3 | % |
Audit-related fees | | | 0.1 | | 2.0 | | | 0.1 | | | 1.2 | |
Tax fees | | | 3.3 | | 67.4 | | | 6.3 | | | 77.8 | |
Other fees | | | 0.1 | | 2.0 | | | 0.3 | | | 3.7 | |
| |
|
| |
| |
|
| | |
| |
Total | | $ | 4.9 | | 100.0 | % | $ | 8.1 | | | 100.0 | % |
| |
|
| |
| |
|
| | |
| |
Audit fees are for the audit and review of PacifiCorp’s financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), including comfort letters, statutory and regulatory audits, consents and services related to SEC matters.
Audit-related fees are for assurance and related services that are related to the audit or review of PacifiCorp’s financial statements, including employee benefit plan audits, due diligence services and financial accounting and reporting consultation.
Tax fees are fees for tax compliance services and related costs.
Other fees are mainly for services rendered in connection with requests from state regulatory commissions and for regulatory matters.
111
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) | 1. The list of all financial statements filed as a part of this report is included in Item 8. Financial Statements and Supplementary Data. |
| |
| 2. Schedules:* |
| |
| * All schedules have been omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements included under Item 8. Financial Statements and Supplementary Data. |
| |
| 3. Exhibits: |
Exhibit
Number | Exhibit Title |
| |
2.1(a)* | Agreement and Plan of Merger, dated as of December 6, 1998, by and among Scottish Power plc, NA General Partnership, Scottish Power NA 1 Limited and Scottish Power NA 2 Limited. (Exhibit 1 to the Form 6-K, dated December 11, 1998, filed by Scottish Power plc, File No. 1-14676). |
| |
2.1(b)* | Amended and Restated Agreement and Plan of Merger, dated as of December 6, 1998, as amended as of January 29, 1999 and February 9, 1999, and amended and restated as of February 23, 1999, by and among New Scottish Power PLC, Scottish Power plc, NA General Partnership and PacifiCorp (Exhibit (2)b, Form 10-K for year ended December 31, 1998, File No. 1-5152). |
| |
3.1* | Third Restated Articles of Incorporation of PacifiCorp (Exhibit (3)b, Form 10-K for the year ended December 31, 1996, File No. 1-5152). |
| |
3.2* | Bylaws of PacifiCorp effective November 29, 1999 (Exhibit (3)b, Form 10-K for the year ended March 31, 2000, File No. 1-5152). |
| |
4.1* | Mortgage and Deed of Trust dated as of January 9, 1989, between PacifiCorp and Morgan Guaranty Trust Company of New York (The Chase Manhattan Bank, successor), Trustee, Ex. 4-E, Form 8-B, File No. 1-5152 as supplemented and modified by fourteen Supplemental Indentures as follows: |
Exhibit
Number | | File Type | | File Date | | File Number |
| | | | | | |
(4)(b) | | | | | | 33-31861 |
(4)(a) | | 8-K | | January 9, 1990 | | 1-5152 |
4(a) | | 8-K | | September 11, 1991 | | 1-5152 |
4(a) | | 8-K | | January 7, 1992 | | 1-5152 |
4(a) | | 10-Q | | Quarter ended March 31, 1992 | | 1-5152 |
4(a) | | 10-Q | | Quarter ended September 30, 1992 | | 1-5152 |
4(a) | | 8-K | | April 1, 1993 | | 1-5152 |
4(a) | | 10-Q | | Quarter ended September 30, 1992 | | 1-5152 |
4(a) | | 10-Q | | Quarter ended September 30, 1993 | | 1-5152 |
(4)b | | 10-K | | Quarter ended June 30, 1994 | | 1-5152 |
(4)b | | 10-K | | Quarter ended December 31, 1994 | | 1-5152 |
(4)b | | 10-K | | Quarter ended December 31, 1995 | | 1-5152 |
(4)b | | 10-K | | Quarter ended December 31, 1996 | | 1-5152 |
99(a) | | 8-K | | November 21, 2001 | | 1-5152 |
99 | | 8-K | | September 8, 2003 | | 1-5152 |
4.2* | Third Restated Articles of Incorporation and Bylaws. See 3.1 and 3.2 above. |
112
In reliance upon item 601(4)(iii) of Regulation S-K, various instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries are not being filed because the total amount authorized under each such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request.
10.1** | Engineering, Procurement and Construction Contract between PacifiCorp and Stone & Webster, Inc., dated as of February 10, 2004 |
| |
12.1 | Statements of Computation of Ratio of Earnings to Fixed Charges |
| |
12.2 | Statements of Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| |
23 | Consent of PricewaterhouseCoopers LLP with respect to annual report on Form 10-K. |
| |
24 | Power of Attorney |
| |
31.1 | Section 302 Certification Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
| |
31.2 | Section 302 Certification Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
| |
32.1 | Section 906 Certification Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 |
| |
32.2 | Section 906 Certification Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 |
______________
| * | Incorporated herein by reference. |
| ** | Certain portions of this exhibit have been omitted and filed separately with the SEC based on a request for confidential treatment. |
On Form 8-K, dated March 4, 2004, under Item 5. Other Events, PacifiCorp announced that the Wyoming Public Service Commission (“WPSC”) granted PacifiCorp $22.9 million of additional annual revenues in the general rate case filed May 27, 2003. In addition, the WPSC order provides a return on equity of 10.75%. The new rates are effective March 3, 2004. The order will result in an average overall price increase in Wyoming of approximately 7.2%. For further information regarding this general rate case, please see Item 5. Other Information in PacifiCorp’s Form 10-Q for the quarterly period ended December 31, 2003.
113
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
| | | PacifiCorp
|
| | | | By: |
/s/ JUDITH A. JOHANSEN
|
| | | | |
|
| | | | | Judith A. Johansen
(PRESIDENT AND
CHIEF EXECUTIVE OFFICER) |
Date: May 25, 2004
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE | | TITLE | | DATE |
| | | | |
/s/ IAN M. RUSSELL | | Chairman of the Board of Directors | | May 25, 2004 |
|
Ian M. Russell |
| | | | |
/s/ JUDITH A. JOHANSEN | | President, Chief
Executive Officer
and Director | | May 25, 2004 |
|
Judith A. Johansen |
| | | | |
/s/ RICHARD D. PEACH | | Chief Financial
Officer and Director | | May 25, 2004 |
|
Richard D. Peach |
| | | | |
/s/ DAVID MENDEZ | | Chief Accounting
Officer | | May 25, 2004 |
|
David Mendez |
| | | | |
* NOLAN E. KARRAS | | )
)
) | | |
|
Nolan E. Karras |
| | )
) | | |
/s/ ANDREW N. MacRITCHIE | | )
)
) | | |
|
Andrew N. MacRitchie |
| | | | |
/s/ MICHAEL J. PITTMAN | | )
)
)
) | | |
|
Michael J. Pittman |
| | ) | | |
/s/ A. RICHARD WALJE | | ) Director
)
)
)
) | | May 25, 2004 |
|
A. Richard Walje |
| | ) | | |
114
/s/ MATTHEW R. WRIGHT | | )
)
)
) | | |
|
Matthew R. Wright |
| | ) | | |
/s/ BARRY G. CUNNINGHAM | | )
)
)
) | | |
|
Barry G. Cunningham |
| | ) | | |
/s/ ANDREW P. HALLER | | )
)
)
) | | |
|
Andrew P. Haller |
| | ) | | |
*By: /s/ JUDITH A. JOHANSEN | | )
)
) | | |
|
Judith A. Johansen, as
Attorney-in-Fact for
Nolan E. Karras |
| | | | |
115
