10-Q 1 bhe33120form10-q.htm 3.31.20 FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2020
or
[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to _______
 
 
Exact name of registrant as specified in its charter
 
 
 
 
State or other jurisdiction of incorporation or organization
 
 
Commission
 
Address of principal executive offices
 
IRS Employer
File Number
 
Registrant's telephone number, including area code
 
Identification No.
001-14881
 
BERKSHIRE HATHAWAY ENERGY COMPANY
 
94-2213782
 
 
(An Iowa Corporation)
 
 
 
 
666 Grand Avenue, Suite 500
 
 
 
 
Des Moines, Iowa 50309-2580
 
 
 
 
515-242-4300
 
 
 
 
 
 
 
001-05152
 
PACIFICORP
 
93-0246090
 
 
(An Oregon Corporation)
 
 
 
 
825 N.E. Multnomah Street
 
 
 
 
Portland, Oregon 97232
 
 
 
 
888-221-7070
 
 
 
 
 
 
 
333-90553
 
MIDAMERICAN FUNDING, LLC
 
47-0819200
 
 
(An Iowa Limited Liability Company)
 
 
 
 
666 Grand Avenue, Suite 500
 
 
 
 
Des Moines, Iowa 50309-2580
 
 
 
 
515-242-4300
 
 
 
 
 
 
 
333-15387
 
MIDAMERICAN ENERGY COMPANY
 
42-1425214
 
 
(An Iowa Corporation)
 
 
 
 
666 Grand Avenue, Suite 500
 
 
 
 
Des Moines, Iowa 50309-2580
 
 
 
 
515-242-4300
 
 
 
 
 
 
 
000-52378
 
NEVADA POWER COMPANY
 
88-0420104
 
 
(A Nevada Corporation)
 
 
 
 
6226 West Sahara Avenue
 
 
 
 
Las Vegas, Nevada 89146
 
 
 
 
702-402-5000
 
 
 
 
 
 
 
000-00508
 
SIERRA PACIFIC POWER COMPANY
 
88-0044418
 
 
(A Nevada Corporation)
 
 
 
 
6100 Neil Road
 
 
 
 
Reno, Nevada 89511
 
 
 
 
775-834-4011
 
 
 
 
 
 
 
 
 
N/A
 
 
 
 
(Former name or former address, if changed from last report)
 
 



Registrant
Securities registered pursuant to Section 12(b) of the Act:
BERKSHIRE HATHAWAY ENERGY COMPANY
None
PACIFICORP
None
MIDAMERICAN FUNDING, LLC
None
MIDAMERICAN ENERGY COMPANY
None
NEVADA POWER COMPANY
None
SIERRA PACIFIC POWER COMPANY
None
Registrant
Name of exchange on which registered:
BERKSHIRE HATHAWAY ENERGY COMPANY
None
PACIFICORP
None
MIDAMERICAN FUNDING, LLC
None
MIDAMERICAN ENERGY COMPANY
None
NEVADA POWER COMPANY
None
SIERRA PACIFIC POWER COMPANY
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Registrant
Yes
No
BERKSHIRE HATHAWAY ENERGY COMPANY
X
 
PACIFICORP
X
 
MIDAMERICAN FUNDING, LLC
 
X
MIDAMERICAN ENERGY COMPANY
X
 
NEVADA POWER COMPANY
X
 
SIERRA PACIFIC POWER COMPANY
X
 
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Registrant
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
BERKSHIRE HATHAWAY ENERGY COMPANY
 
 
X
 
 
PACIFICORP
 
 
X
 
 
MIDAMERICAN FUNDING, LLC
 
 
X
 
 
MIDAMERICAN ENERGY COMPANY
 
 
X
 
 
NEVADA POWER COMPANY
 
 
X
 
 
SIERRA PACIFIC POWER COMPANY
 
 
X
 
 
If an emerging growth company, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o  No  x



All shares of outstanding common stock of Berkshire Hathaway Energy Company are privately held by a limited group of investors. As of April 30, 2020, 76,368,874 shares of common stock, no par value, were outstanding.
All shares of outstanding common stock of PacifiCorp are indirectly owned by Berkshire Hathaway Energy Company. As of April 30, 2020, 357,060,915 shares of common stock, no par value, were outstanding.
All of the member's equity of MidAmerican Funding, LLC is held by its parent company, Berkshire Hathaway Energy Company, as of April 30, 2020.
All shares of outstanding common stock of MidAmerican Energy Company are owned by its parent company, MHC Inc., which is a direct, wholly owned subsidiary of MidAmerican Funding, LLC. As of April 30, 2020, 70,980,203 shares of common stock, no par value, were outstanding.
All shares of outstanding common stock of Nevada Power Company are owned by its parent company, NV Energy, Inc., which is an indirect, wholly owned subsidiary of Berkshire Hathaway Energy Company. As of April 30, 2020, 1,000 shares of common stock, $1.00 stated value, were outstanding.
All shares of outstanding common stock of Sierra Pacific Power Company are owned by its parent company, NV Energy, Inc. As of April 30, 2020, 1,000 shares of common stock, $3.75 par value, were outstanding.
This combined Form 10-Q is separately filed by Berkshire Hathaway Energy Company, PacifiCorp, MidAmerican Funding, LLC, MidAmerican Energy Company, Nevada Power Company and Sierra Pacific Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.




TABLE OF CONTENTS
 
PART I
 
 
PART II
 


i


Definition of Abbreviations and Industry Terms

When used in Forward-Looking Statements, Part I - Items 2 through 3, and Part II - Items 1 through 6, the following terms have the definitions indicated.
Berkshire Hathaway Energy Company and Related Entities
BHE
 
Berkshire Hathaway Energy Company
Berkshire Hathaway
 
Berkshire Hathaway Inc.
Berkshire Hathaway Energy or the Company
 
Berkshire Hathaway Energy Company and its subsidiaries
PacifiCorp
 
PacifiCorp and its subsidiaries
MidAmerican Funding
 
MidAmerican Funding, LLC and its subsidiaries
MidAmerican Energy
 
MidAmerican Energy Company
NV Energy
 
NV Energy, Inc. and its subsidiaries
Nevada Power
 
Nevada Power Company and its subsidiaries
Sierra Pacific
 
Sierra Pacific Power Company
Nevada Utilities
 
Nevada Power Company and Sierra Pacific Power Company
Registrants
 
Berkshire Hathaway Energy Company, PacifiCorp, MidAmerican Funding, MidAmerican Energy, Nevada Power and Sierra Pacific
Northern Powergrid
 
Northern Powergrid Holdings Company
BHE Pipeline Group
 
Northern Natural Gas and Kern River
Northern Natural Gas
 
Northern Natural Gas Company
Kern River
 
Kern River Gas Transmission Company
BHE Transmission
 
BHE Canada Holdings Corporation and BHE U.S. Transmission
BHE Canada
 
BHE Canada Holdings Corporation
AltaLink
 
AltaLink, L.P.
BHE U.S. Transmission
 
BHE U.S. Transmission, LLC
BHE Renewables
 
BHE Renewables, LLC and CalEnergy Philippines
HomeServices
 
HomeServices of America, Inc. and its subsidiaries
Utilities
 
PacifiCorp, MidAmerican Energy Company, Nevada Power Company and Sierra Pacific Power Company
Domestic Regulated Businesses
 
PacifiCorp, MidAmerican Energy Company, Nevada Power Company, Sierra Pacific Power Company, Northern Natural Gas Company and Kern River Gas Transmission Company
Topaz
 
Topaz Solar Farms LLC
Agua Caliente
 
Agua Caliente Solar, LLC
 
 
 
Certain Industry Terms
 
 
2017 Tax Reform
 
The Tax Cuts and Jobs Act enacted on December 22, 2017, effective January 1, 2018
AB 1054
 
California Assembly Bill 1054
AESO
 
Alberta Electric System Operator
AFUDC
 
Allowance for Funds Used During Construction
AUC
 
Alberta Utilities Commission
COVID-19
 
Coronavirus Disease 2019
CPUC
 
California Public Utilities Commission
DEAA
 
Deferred Energy Accounting Adjustment
Dth
 
Decatherm
EBA
 
Energy Balancing Account
ECAM
 
Energy Cost Adjustment Mechanism
EPA
 
United States Environmental Protection Agency

ii


FERC
 
Federal Energy Regulatory Commission
GAAP
 
Accounting principles generally accepted in the United States of America
GEMA
 
Gas and Electricity Markets Authority
GWh
 
Gigawatt Hour
GTA
 
General Tariff Application
IPUC
 
Idaho Public Utilities Commission
ICC
 
Illinois Commerce Commission
IRP
 
Integrated Resource Plan
kV
 
Kilovolt
MATS
 
Mercury and Air Toxics Standards
MW
 
Megawatt
MWh
 
Megawatt Hour
OATT
 
Open Access Transmission Tariff
Ofgem
 
Office of Gas and Electric Markets
OPUC
 
Oregon Public Utility Commission
PTC
 
Production Tax Credit
PUCN
 
Public Utilities Commission of Nevada
RAC
 
Renewable Adjustment Clause
REC
 
Renewable Energy Credit
RPS
 
Renewable Portfolio Standards
RRA
 
Renewable Energy Credit and Sulfur Dioxide Revenue Adjustment Mechanism
SEC
 
United States Securities and Exchange Commission
SIP
 
State Implementation Plan
TAM
 
Transition Adjustment Mechanism
UPSC
 
Utah Public Service Commission
WPSC
 
Wyoming Public Service Commission
WUTC
 
Washington Utilities and Transportation Commission


iii


Forward-Looking Statements

This report contains statements that do not directly or exclusively relate to historical facts. These statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can typically be identified by the use of forward-looking words, such as "will," "may," "could," "project," "believe," "anticipate," "expect," "estimate," "continue," "intend," "potential," "plan," "forecast" and similar terms. These statements are based upon the relevant Registrant's current intentions, assumptions, expectations and beliefs and are subject to risks, uncertainties and other important factors. Many of these factors are outside the control of each Registrant and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include, among others:
•
general economic, political and business conditions, as well as changes in, and compliance with, laws and regulations, including income tax reform, initiatives regarding deregulation and restructuring of the utility industry, and reliability and safety standards, affecting the respective Registrant's operations or related industries;
•
changes in, and compliance with, environmental laws, regulations, decisions and policies that could, among other items, increase operating and capital costs, reduce facility output, accelerate facility retirements or delay facility construction or acquisition;
•
the outcome of regulatory rate reviews and other proceedings conducted by regulatory agencies or other governmental and legal bodies and the respective Registrant's ability to recover costs through rates in a timely manner;
•
changes in economic, industry, competition or weather conditions, as well as demographic trends, new technologies and various conservation, energy efficiency and private generation measures and programs, that could affect customer growth and usage, electricity and natural gas supply or the respective Registrant's ability to obtain long-term contracts with customers and suppliers;
•
performance, availability and ongoing operation of the respective Registrant's facilities, including facilities not operated by the Registrants, due to the impacts of market conditions, outages and repairs, transmission constraints, weather, including wind, solar and hydroelectric conditions, and operating conditions;
•
the effects of catastrophic and other unforeseen events, which may be caused by factors beyond the control of each respective Registrant or by a breakdown or failure of the Registrants' operating assets, including severe storms, floods, fires, earthquakes, explosions, landslides, an electromagnetic pulse, mining incidents, litigation, wars, terrorism, pandemics (including potentially in relation to COVID-19), embargoes, and cyber security attacks, data security breaches, disruptions, or other malicious acts;
•
a high degree of variance between actual and forecasted load or generation that could impact a Registrant's hedging strategy and the cost of balancing its generation resources with its retail load obligations;
•
changes in prices, availability and demand for wholesale electricity, coal, natural gas, other fuel sources and fuel transportation that could have a significant impact on generating capacity and energy costs;
•
the financial condition, creditworthiness and operational stability of the respective Registrant's significant customers and suppliers;
•
changes in business strategy or development plans;
•
availability, terms and deployment of capital, including reductions in demand for investment-grade commercial paper, debt securities and other sources of debt financing and volatility in interest rates;
•
changes in the respective Registrant's credit ratings;
•
risks relating to nuclear generation, including unique operational, closure and decommissioning risks;
•
hydroelectric conditions and the cost, feasibility and eventual outcome of hydroelectric relicensing proceedings;
•
the impact of certain contracts used to mitigate or manage volume, price and interest rate risk, including increased collateral requirements, and changes in commodity prices, interest rates and other conditions that affect the fair value of certain contracts;
•
the impact of inflation on costs and the ability of the respective Registrants to recover such costs in regulated rates;
•
fluctuations in foreign currency exchange rates, primarily the British pound and the Canadian dollar;
•
increases in employee healthcare costs;

iv


•
the impact of investment performance and changes in interest rates, legislation, healthcare cost trends, mortality and morbidity on pension and other postretirement benefits expense and funding requirements;
•
changes in the residential real estate brokerage, mortgage and franchising industries and regulations that could affect brokerage, mortgage and franchising transactions;
•
the ability to successfully integrate future acquired operations into a Registrant's business;
•
unanticipated construction delays, changes in costs, receipt of required permits and authorizations, ability to fund capital projects and other factors that could affect future facilities and infrastructure additions;
•
the availability and price of natural gas in applicable geographic regions and demand for natural gas supply;
•
the impact of new accounting guidance or changes in current accounting estimates and assumptions on the financial results of the respective Registrants; and
•
other business or investment considerations that may be disclosed from time to time in the Registrants' filings with the SEC or in other publicly disseminated written documents.
 
Further details of the potential risks and uncertainties affecting the Registrants are described in the Registrants' filings with the SEC, including Part II, Item 1A and other discussions contained in this Form 10-Q. Each Registrant undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing factors should not be construed as exclusive.


v


Item 1.
Financial Statements
Berkshire Hathaway Energy Company and its subsidiaries
 
 
 
 
 
 
 
 
 
PacifiCorp and its subsidiaries
 
 
 
 
 
 
 
 
MidAmerican Energy Company
 
 
 
 
 
 
 
 
MidAmerican Funding, LLC and its subsidiaries
 
 
 
 
 
 
 
 
Nevada Power Company and its subsidiaries
 
 
 
 
 
 
 
 
Sierra Pacific Power Company
 
 
 
 
 
 
 
 



1


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations



2


Berkshire Hathaway Energy Company and its subsidiaries
Consolidated Financial Section


3


PART I
Item 1.
Financial Statements


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
Berkshire Hathaway Energy Company

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated balance sheet of Berkshire Hathaway Energy Company and subsidiaries (the "Company") as of March 31, 2020, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding changes in accounting principles. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ Deloitte & Touche LLP


Des Moines, Iowa
May 1, 2020

4


BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,071

 
$
1,040

Restricted cash and cash equivalents
217

 
212

Trade receivables, net
1,772

 
1,910

Inventories
912

 
873

Mortgage loans held for sale
1,183

 
1,039

Other current assets
1,229

 
839

Total current assets
7,384

 
5,913

 
 

 
 

Property, plant and equipment, net
72,664

 
73,305

Goodwill
9,562

 
9,722

Regulatory assets
2,834

 
2,766

Investments and restricted cash and cash equivalents and investments
6,293

 
6,255

Other assets
2,069

 
2,090

 
 
 
 

Total assets
$
100,806

 
$
100,051


The accompanying notes are an integral part of these consolidated financial statements.


5


BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)
(Amounts in millions)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
1,542

 
$
1,839

Accrued interest
514

 
493

Accrued property, income and other taxes
417

 
537

Accrued employee expenses
296

 
285

Short-term debt
2,088

 
3,214

Current portion of long-term debt
1,324

 
2,539

Other current liabilities
1,634

 
1,350

Total current liabilities
7,815

 
10,257

 
 

 
 

BHE senior debt
11,010

 
8,231

BHE junior subordinated debentures
100

 
100

Subsidiary debt
29,061

 
28,483

Regulatory liabilities
6,957

 
7,100

Deferred income taxes
9,677

 
9,653

Other long-term liabilities
3,614

 
3,649

Total liabilities
68,234

 
67,473

 
 

 
 

Commitments and contingencies (Note 8)
 
 


 
 

 
 

Equity:
 

 
 

BHE shareholders' equity:
 

 
 

Common stock - 115 shares authorized, no par value, 76 and 77 shares issued and outstanding
—

 
—

Additional paid-in capital
6,382

 
6,389

Long-term income tax receivable
(530
)
 
(530
)
Retained earnings
28,846

 
28,296

Accumulated other comprehensive loss, net
(2,253
)
 
(1,706
)
Total BHE shareholders' equity
32,445

 
32,449

Noncontrolling interests
127

 
129

Total equity
32,572

 
32,578

 
 
 
 

Total liabilities and equity
$
100,806

 
$
100,051


The accompanying notes are an integral part of these consolidated financial statements.


6


BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
Energy
$
3,634

 
$
3,825

Real estate
893

 
785

Total operating revenue
4,527

 
4,610

 
 
 
 
Operating expenses:
 
 
 
Energy:
 
 
 
Cost of sales
1,038

 
1,214

Operations and maintenance
737

 
802

Depreciation and amortization
809

 
720

Property and other taxes
151

 
149

Real estate
873

 
806

Total operating expenses
3,608

 
3,691

 
 
 
 
Operating income
919

 
919

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(483
)
 
(477
)
Capitalized interest
17

 
16

Allowance for equity funds
34

 
32

Interest and dividend income
20

 
30

Gains (losses) on marketable securities, net
27

 
(68
)
Other, net
(27
)
 
35

Total other income (expense)
(412
)
 
(432
)
 
 
 
 
Income before income tax benefit and equity loss
507

 
487

Income tax benefit
(184
)
 
(148
)
Equity loss
(18
)
 
(10
)
Net income
673

 
625

Net income attributable to noncontrolling interests
3

 
3

Net income attributable to BHE shareholders
$
670

 
$
622


The accompanying notes are an integral part of these consolidated financial statements.
 

7


BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Net income
$
673

 
$
625

 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
Unrecognized amounts on retirement benefits, net of tax of $11 and $(7)
34

 
(32
)
Foreign currency translation adjustment
(548
)
 
155

Unrealized losses on cash flow hedges, net of tax of $(10) and $(2)
(33
)
 
(8
)
Total other comprehensive (loss) income, net of tax
(547
)
 
115

 
 

 
 

Comprehensive income
126

 
740

Comprehensive income attributable to noncontrolling interests
3

 
3

Comprehensive income attributable to BHE shareholders
$
123

 
$
737


The accompanying notes are an integral part of these consolidated financial statements.


8


BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(Amounts in millions)
 
BHE Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
Long-term
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
Income
 
 
 
Other
 
 
 
 
 
Common
 
Paid-in
 
Tax
 
Retained
 
Comprehensive
 
Noncontrolling
 
Total
 
Shares
 
Stock
 
Capital
 
Receivable
 
Earnings
 
Loss, Net
 
Interests
 
Equity
Balance, December 31, 2018
77

 
$
—

 
$
6,371

 
$
(457
)
 
$
25,624

 
$
(1,945
)
 
$
130

 
$
29,723

Net income
—

 
—

 
—

 
—

 
622

 
—

 
3

 
625

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
115

 
—

 
115

Common stock purchases
—

 
—

 
(16
)
 
—

 
(277
)
 
—

 
—

 
(293
)
Distributions
—

 
—

 
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Other equity transactions
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
(1
)
Balance, March 31, 2019
77

 
$
—

 
$
6,355

 
$
(457
)
 
$
25,968

 
$
(1,830
)
 
$
126

 
$
30,162

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Balance, December 31, 2019
77

 
$
—

 
$
6,389

 
$
(530
)
 
$
28,296

 
$
(1,706
)
 
$
129

 
$
32,578

Net income
—

 
—

 
—

 
—

 
670

 
—

 
3

 
673

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(547
)
 
—

 
(547
)
Common stock purchases
(1
)
 
—

 
(6
)
 
—

 
(120
)
 
—

 
—

 
(126
)
Distributions
—

 
—

 
—

 
—

 
—

 
—

 
(5
)
 
(5
)
Other equity transactions
—

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
(1
)
Balance, March 31, 2020
76

 
$
—

 
$
6,382

 
$
(530
)
 
$
28,846

 
$
(2,253
)
 
$
127

 
$
32,572


The accompanying notes are an integral part of these consolidated financial statements.

9


BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
673

 
$
625

Adjustments to reconcile net income to net cash flows from operating activities:
 

 
 

(Gains) losses on marketable securities, net
(27
)
 
68

Depreciation and amortization
821

 
733

Allowance for equity funds
(34
)
 
(32
)
Equity loss, net of distributions
29

 
26

Changes in regulatory assets and liabilities
—

 
(52
)
Deferred income taxes and amortization of investment tax credits
47

 
(21
)
Other, net
63

 
1

Changes in other operating assets and liabilities, net of effects from acquisitions:
 
 
 
Trade receivables and other assets
(118
)
 
144

Derivative collateral, net
(19
)
 
(3
)
Pension and other postretirement benefit plans
(23
)
 
(21
)
Accrued property, income and other taxes, net
(364
)
 
(48
)
Accounts payable and other liabilities
117

 
68

Net cash flows from operating activities
1,165

 
1,488

 
 

 
 

Cash flows from investing activities:
 

 
 

Capital expenditures
(1,356
)
 
(1,393
)
Acquisitions, net of cash acquired
—

 
(26
)
Purchases of marketable securities
(188
)
 
(159
)
Proceeds from sales of marketable securities
180

 
153

Equity method investments
(153
)
 
(7
)
Other, net
43

 
17

Net cash flows from investing activities
(1,474
)
 
(1,415
)
 
 

 
 

Cash flows from financing activities:
 

 
 

Proceeds from BHE senior debt
3,231

 
—

Repayments of BHE senior debt
(350
)
 
—

Common stock purchases
(126
)
 
(293
)
Proceeds from subsidiary debt
1,093

 
2,945

Repayments of subsidiary debt
(1,347
)
 
(1,420
)
Net repayments of short-term debt
(1,109
)
 
(311
)
Other, net
(34
)
 
(21
)
Net cash flows from financing activities
1,358

 
900

 
 

 
 

Effect of exchange rate changes
(13
)
 
1

 
 

 
 

Net change in cash and cash equivalents and restricted cash and cash equivalents
1,036

 
974

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
1,268

 
883

Cash and cash equivalents and restricted cash and cash equivalents at end of period
$
2,304

 
$
1,857


The accompanying notes are an integral part of these consolidated financial statements.

10


BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
General

Berkshire Hathaway Energy Company ("BHE") is a holding company that owns a highly diversified portfolio of locally managed businesses principally engaged in the energy industry (collectively with its subsidiaries, the "Company") and is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").

The Company's operations are organized as eight business segments: PacifiCorp, MidAmerican Funding, LLC ("MidAmerican Funding") (which primarily consists of MidAmerican Energy Company ("MidAmerican Energy")), NV Energy, Inc. ("NV Energy") (which primarily consists of Nevada Power Company ("Nevada Power") and Sierra Pacific Power Company ("Sierra Pacific")), Northern Powergrid Holdings Company ("Northern Powergrid") (which primarily consists of Northern Powergrid (Northeast) Limited and Northern Powergrid (Yorkshire) plc), BHE Pipeline Group (which primarily consists of Northern Natural Gas Company ("Northern Natural Gas") and Kern River Gas Transmission Company ("Kern River")), BHE Transmission (which consists of BHE Canada Holdings Corporation ("BHE Canada") (which primarily consists of AltaLink, L.P. ("AltaLink")) and BHE U.S. Transmission, LLC), BHE Renewables (which primarily consists of BHE Renewables, LLC and CalEnergy Philippines) and HomeServices of America, Inc. (collectively with its subsidiaries, "HomeServices"). The Company, through these locally managed and operated businesses, owns four utility companies in the United States serving customers in 11 states, two electricity distribution companies in Great Britain, two interstate natural gas pipeline companies in the United States, an electric transmission business in Canada, interests in electric transmission businesses in the United States, a renewable energy business primarily investing in wind, solar, geothermal and hydroelectric projects, the largest residential real estate brokerage firm in the United States and one of the largest residential real estate brokerage franchise networks in the United States.

The unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Consolidated Financial Statements as of March 31, 2020 and for the three-month periods ended March 31, 2020 and 2019. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in the Company's assumptions regarding significant accounting estimates and policies during the three-month period ended March 31, 2020.

Coronavirus Disease 2019 ("COVID-19")

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by the Company. While the rapid outbreak of COVID-19 has not had a material impact on the Company's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. The duration and extent of COVID-19 and its future impact on the Company's businesses cannot be reasonably estimated at this time. Accordingly, significant estimates used in the preparation of the Company's unaudited Consolidated Financial Statements, including those associated with evaluations of certain long-lived assets, goodwill and other intangible assets for impairment, expected credit losses on amounts owed to the Company and potential regulatory deferral or recovery of certain costs may be subject to significant adjustments in future periods.


11


(2)
Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):
 
 
 
As of
 
Depreciable
 
March 31,
 
December 31,
 
Life
 
2020
 
2019
Regulated assets:
 
 
 
 
 
Utility generation, transmission and distribution systems
5-80 years
 
$
80,530

 
$
81,127

Interstate natural gas pipeline assets
3-80 years
 
8,181

 
8,165

 
 
 
88,711

 
89,292

Accumulated depreciation and amortization
 
 
(26,414
)
 
(26,353
)
Regulated assets, net
 
 
62,297

 
62,939

 
 
 
 

 
 

Nonregulated assets:
 
 
 

 
 

Independent power plants
5-30 years
 
6,994

 
6,983

Other assets
3-30 years
 
1,798

 
1,834

 
 
 
8,792

 
8,817

Accumulated depreciation and amortization
 
 
(2,244
)
 
(2,183
)
Nonregulated assets, net
 
 
6,548

 
6,634

 
 
 
 

 
 

Net operating assets
 
 
68,845

 
69,573

Construction work-in-progress
 
 
3,819

 
3,732

Property, plant and equipment, net
 
 
$
72,664

 
$
73,305


Construction work-in-progress includes $3.7 billion as of March 31, 2020 and $3.6 billion as of December 31, 2019, related to the construction of regulated assets.


12


(3)
Investments and Restricted Cash and Cash Equivalents and Investments

Investments and restricted cash and cash equivalents and investments consists of the following (in millions):
 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Investments:
 
 
 
BYD Company Limited common stock
$
1,176

 
$
1,122

Rabbi trusts
364

 
410

Other
171

 
187

Total investments
1,711

 
1,719

 
 

 
 

Equity method investments:
 
 
 
BHE Renewables tax equity investments
3,232

 
3,130

Electric Transmission Texas, LLC
562

 
555

Bridger Coal Company
77

 
81

Other
182

 
181

Total equity method investments
4,053

 
3,947

 
 
 
 
Restricted cash and cash equivalents and investments:
 

 
 

Quad Cities Station nuclear decommissioning trust funds
541

 
599

Other restricted cash and cash equivalents
233

 
230

Total restricted cash and cash equivalents and investments
774

 
829

 
 

 
 

Total investments and restricted cash and cash equivalents and investments
$
6,538

 
$
6,495

 
 
 
 
Reflected as:
 
 
 
Current assets
$
245

 
$
240

Noncurrent assets
6,293

 
6,255

Total investments and restricted cash and cash equivalents and investments
$
6,538

 
$
6,495


Investments

Gains (losses) on marketable securities, net recognized during the period consists of the following (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Unrealized gains (losses) recognized on marketable securities still held at the reporting date
$
25

 
$
(68
)
Net gains recognized on marketable securities sold during the period
2

 
—

Gains (losses) on marketable securities, net
$
27

 
$
(68
)


13


Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash equivalents consist of funds invested in money market mutual funds, United States Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, consist substantially of funds restricted for the purpose of constructing solid waste facilities under tax-exempt bond obligation agreements and debt service obligations for certain of the Company's nonregulated renewable energy projects. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Cash and cash equivalents
$
2,071

 
$
1,040

Restricted cash and cash equivalents
217

 
212

Investments and restricted cash and cash equivalents and investments
16

 
16

Total cash and cash equivalents and restricted cash and cash equivalents
$
2,304

 
$
1,268


(4)
Recent Financing Transactions

Long-Term Debt

In April 2020, PacifiCorp issued $400 million of its 2.70% First Mortgage Bonds due 2030 and $600 million of its 3.30% First Mortgage Bonds due 2051. PacifiCorp intends to use the net proceeds to fund capital expenditures, primarily for renewable resources and associated transmission projects, and for general corporate purposes.

In March 2020, BHE issued $1.25 billion of its 4.05% Senior Notes due 2025, $1.1 billion of its 3.70% Senior Notes due 2030 and $900 million of its 4.25% Senior Notes due 2050. BHE used the net proceeds to refinance a portion of the Company's short-term indebtedness and for general corporate purposes.

In January 2020, Nevada Power issued $425 million of its 2.40% General and Refunding Mortgage Notes, Series DD, due 2030 and $300 million of its 3.125% General and Refunding Mortgage Notes, Series EE, due 2050. Nevada Power used the net proceeds for the early redemption of $575 million of its 2.75% General and Refunding Mortgage Notes, Series BB, due April 2020 and for general corporate purposes.

In January 2020, Pinyon Pines I and II issued $382 million of fifteen year variable-rate term loans due 2034 with a portion of the proceeds used to repay $284 million of existing variable-rate term loans due April 2020. The new term loans amortize semiannually and have variable interest rates based on LIBOR plus a margin that varies during the terms of the agreements. The Company has entered into interest rate swaps that fix the interest rate on 100% of the new term loans. The variable interest rate as of March 31, 2020 was 2.61% while the fixed interest rate as of March 31, 2020 was 3.23%.


14


(5)
Income Taxes

A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax benefit is as follows:
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Federal statutory income tax rate
21
 %
 
21
 %
Income tax credits
(46
)
 
(29
)
State income tax, net of federal income tax benefit
—

 
(17
)
Income tax effect of foreign income
(3
)
 
(3
)
Effects of ratemaking
(8
)
 
(3
)
Equity income
(1
)
 
(1
)
Other, net
1


2

Effective income tax rate
(36
)%
 
(30
)%

Income tax credits relate primarily to production tax credits ("PTCs") from wind-powered generating facilities owned by MidAmerican Energy, PacifiCorp and BHE Renewables. Federal renewable electricity PTCs are earned as energy from qualifying wind-powered generating facilities is produced and sold and are based on a per-kilowatt hour rate pursuant to the applicable federal income tax law. Wind-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service.

The Company's provision for income taxes has been computed on a stand-alone basis. Berkshire Hathaway includes the Company in its consolidated United States federal and Iowa state income tax returns and the majority of the Company's United States federal income tax is remitted to or received from Berkshire Hathaway. For the three-month periods ended March 31, 2020 and 2019, the Company made payments for federal income taxes to Berkshire Hathaway totaling $100 million and $- million, respectively.

(6)
Employee Benefit Plans

Domestic Operations

Net periodic benefit cost (credit) for the domestic pension and other postretirement benefit plans included the following components (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Pension:
 
 
 
Service cost
$
3

 
$
4

Interest cost
23

 
27

Expected return on plan assets
(35
)
 
(38
)
Net amortization
9

 
9

Net periodic benefit cost
$
—

 
$
2

 
 
 
 
Other postretirement:
 
 
 
Service cost
$
1

 
$
2

Interest cost
6

 
6

Expected return on plan assets
(9
)
 
(10
)
Net amortization
(1
)
 
(2
)
Net periodic benefit credit
$
(3
)
 
$
(4
)


15


Amounts other than the service cost for pension and other postretirement benefit plans are recorded in Other, net in the Consolidated Statements of Operations. Employer contributions to the domestic pension and other postretirement benefit plans are expected to be $13 million and $1 million, respectively, during 2020. As of March 31, 2020, $3 million and $- million of contributions had been made to the domestic pension and other postretirement benefit plans, respectively.

Foreign Operations

Net periodic benefit (credit) cost for the United Kingdom pension plan included the following components (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Service cost
$
4

 
$
4

Interest cost
10

 
13

Expected return on plan assets
(25
)
 
(25
)
Net amortization
10

 
9

Net periodic benefit (credit) cost
$
(1
)
 
$
1


Amounts other than the service cost for the United Kingdom pension plan are recorded in Other, net in the Consolidated Statements of Operations. Employer contributions to the United Kingdom pension plan are expected to be £43 million during 2020. As of March 31, 2020, £11 million, or $14 million, of contributions had been made to the United Kingdom pension plan.

(7)
Fair Value Measurements

The carrying value of the Company's cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. The Company has various financial assets and liabilities that are measured at fair value on the Consolidated Financial Statements using inputs from the three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

•
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•
Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•
Level 3 — Unobservable inputs reflect the Company's judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. The Company develops these inputs based on the best information available, including its own data.


16


The following table presents the Company's financial assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):
 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of March 31, 2020
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
1

 
$
38

 
$
105

 
$
(20
)
 
$
124

Interest rate derivatives
 
—

 
5

 
51

 
—

 
56

Mortgage loans held for sale
 
—

 
1,183

 
—

 
—

 
1,183

Money market mutual funds(2)
 
1,750

 
—

 
—

 
—

 
1,750

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
154

 
—

 
—

 
—

 
154

International government obligations
 
—

 
4

 
—

 
—

 
4

Corporate obligations
 
—

 
66

 
—

 
—

 
66

Municipal obligations
 
—

 
3

 
—

 
—

 
3

Agency, asset and mortgage-backed obligations
 
—

 
1

 
—

 
—

 
1

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
300

 
—

 
—

 
—

 
300

International companies
 
1,185

 
—

 
—

 
—

 
1,185

Investment funds
 
172

 
—

 
—

 
—

 
172

 
 
$
3,562


$
1,300


$
156


$
(20
)
 
$
4,998

Liabilities:
 
 

 
 

 
 

 
 

 
 

Commodity derivatives
 
$
(3
)

$
(167
)

$
(53
)

$
112

 
$
(111
)
Interest rate derivatives
 
(4
)
 
(65
)
 
(6
)
 
—

 
(75
)
 
 
$
(7
)
 
$
(232
)
 
$
(59
)
 
$
112

 
$
(186
)
 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of December 31, 2019
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
—

 
$
45

 
$
108

 
$
(24
)
 
$
129

Interest rate derivatives
 
—

 
2

 
14

 
—

 
16

Mortgage loans held for sale
 
—

 
1,039

 
—

 
—

 
1,039

Money market mutual funds(2)
 
824

 
—

 
—

 
—

 
824

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
189

 
—

 
—

 
—

 
189

International government obligations
 
—

 
4

 
—

 
—

 
4

Corporate obligations
 
—

 
58

 
—

 
—

 
58

Municipal obligations
 
—

 
1

 
—

 
—

 
1

Agency, asset and mortgage-backed obligations
 
—

 
1

 
—

 
—

 
1

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
336

 
—

 
—

 
—

 
336

International companies
 
1,131

 
—

 
—

 
—

 
1,131

Investment funds
 
169

 
—

 
—

 
—

 
169

 
 
$
2,649

 
$
1,150

 
$
122

 
$
(24
)
 
$
3,897

Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
(4
)
 
$
(143
)
 
$
(11
)
 
$
103

 
$
(55
)
Interest rate derivatives
 
(2
)
 
(19
)
 
—

 
—

 
(21
)
 
 
$
(6
)
 
$
(162
)
 
$
(11
)
 
$
103

 
$
(76
)

17



(1)
Represents netting under master netting arrangements and a net cash collateral receivable of $92 million and $79 million as of March 31, 2020 and December 31, 2019, respectively.
(2)
Amounts are included in cash and cash equivalents; other current assets; and noncurrent investments and restricted cash and investments on the Consolidated Balance Sheets. The fair value of these money market mutual funds approximates cost.
Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at estimated fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which the Company transacts. When quoted prices for identical contracts are not available, the Company uses forward price curves. Forward price curves represent the Company's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. The Company bases its forward price curves upon market price quotations, when available, or internally developed and commercial models, with internal and external fundamental data inputs. Market price quotations are obtained from independent brokers, exchanges, direct communication with market participants and actual transactions executed by the Company. Market price quotations are generally readily obtainable for the applicable term of the Company's outstanding derivative contracts; therefore, the Company's forward price curves reflect observable market quotes. Market price quotations for certain electricity and natural gas trading hubs are not as readily obtainable due to the length of the contract. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, the Company uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The estimated fair value of these derivative contracts is a function of underlying forward commodity prices, interest rates, currency rates, related volatility, counterparty creditworthiness and duration of contracts.

The Company's mortgage loans held for sale are valued based on independent quoted market prices, where available, or the prices of other mortgage whole loans with similar characteristics. As necessary, these prices are adjusted for typical securitization activities, including servicing value, portfolio composition, market conditions and liquidity.

The Company's investments in money market mutual funds and debt and equity securities are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value. In the absence of a quoted market price or net asset value of an identical security, the fair value is determined using pricing models or net asset values based on observable market inputs and quoted market prices of securities with similar characteristics.

The following table reconciles the beginning and ending balances of the Company's assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs (in millions):
 
Three-Month Periods
 
Ended March 31,
 
 
 
Interest
 
Commodity
 
Rate
 
Derivatives
 
Derivatives
2020:
 
 
 
Beginning balance
$
97

 
$
14

Changes included in earnings
(3
)
 
72

Changes in fair value recognized in net regulatory assets
(40
)
 
—

Purchases
2

 
—

Settlements
(4
)
 
(41
)
Ending balance
$
52

 
$
45

2019:
 
 
 
Beginning balance
$
99

 
$
10

Changes included in earnings
(3
)
 
53

Changes in fair value recognized in net regulatory assets
(11
)
 
—

Purchases
1

 
—

Settlements
—

 
(45
)
Ending balance
$
86

 
$
18


18



The Company's long-term debt is carried at cost, including fair value adjustments and unamortized premiums, discounts and debt issuance costs as applicable, on the Consolidated Balance Sheets. The fair value of the Company's long-term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of the Company's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of the Company's long-term debt (in millions):
 
As of March 31, 2020
 
As of December 31, 2019
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
 
 
 
 
 
 
 
 
Long-term debt
$
41,495

 
$
47,220

 
$
39,353

 
$
46,004


(8)
Commitments and Contingencies

Construction Commitments

During the three-month period ended March 31, 2020, MidAmerican Energy entered into firm construction commitments totaling $269 million for the remainder of 2020 through 2021 related to the construction of wind-powered generating facilities in Iowa.

Easements

During the three-month period ended March 31, 2020, MidAmerican Energy entered into non-cancelable easements with minimum payment commitments totaling $95 million through 2060 for land in Iowa on which some of its wind-powered generating facilities will be located.

Maintenance and Service Contracts

During the three-month period ended March 31, 2020, MidAmerican Energy entered into non-cancelable maintenance and service contracts related to wind-powered generating facilities with minimum payment commitments totaling $72 million through 2031.


19


BHE Renewables' Counterparty Risk

On January 29, 2019, PG&E Corporation and Pacific Gas and Electric Company (the "PG&E Utility") (together "PG&E") filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California ("PG&E Bankruptcy Filing"). The Company owns 100% of Topaz Solar Farm LLC ("Topaz") and owns a 49% interest in Agua Caliente Solar, LLC ("Agua Caliente"). Topaz is a 550-MW solar photovoltaic electric power generating facility located in California. Topaz sells 100% of its energy, capacity and renewable energy credits ("RECs") generated from the facility to PG&E Utility under a 25-year wholesale power purchase agreement ("PPA") that is in effect until October 2039. As of March 31, 2020, the Company's consolidated balance sheet includes $1.0 billion of property, plant and equipment, net and $0.8 billion of non-recourse project debt related to Topaz. Agua Caliente is a 290-MW solar photovoltaic electric power generating facility located in Arizona. Agua Caliente sells 100% of its energy, capacity and RECs generated from the facility to PG&E Utility under a 25-year wholesale PPA that is in effect until June 2039. As of March 31, 2020, the Company's equity investment in Agua Caliente totals $76 million and the project has $0.7 billion of non-recourse project debt owed to the United States Department of Energy. The PG&E Bankruptcy Filing is an event of default under the Topaz PPA ("PPA Default"). PG&E has paid in full all amounts invoiced to date for post-petition energy deliveries for both Topaz and Agua Caliente. PG&E has not paid for the power delivered from January 1 through January 28, 2019. The Company continues to perform on its obligations and deliver renewable energy to the PG&E Utility, and PG&E has publicly stated it will pay suppliers in full under normal terms for post-petition goods and services received. The Company maintains that, in light of the current facts and circumstances, the PPA Default could not reasonably be expected to result in a material adverse effect under the Topaz indenture and, therefore, no default has occurred under the Topaz indenture. In July 2019, the California Governor signed California Assembly Bill 1054 ("AB 1054") into law. AB 1054 is comprehensive legislation addressing wildfire risk in the state of California that, among other items, authorizes a wildfire fund which would operate as an insurance fund to support the creditworthiness of electrical utilities, if certain utilities, including PG&E, participate by making the required contributions, among other things. In July 2019, PG&E notified the California Public Utilities Commission ("CPUC") of its intent to participate in the insurance fund and such participation requires, among other items, PG&E to exit bankruptcy by June 30, 2020. The Company believes it is more likely than not that no impairment exists and current debt obligations will be met, as post-petition contractual revenue payments are expected to be paid by PG&E Utility to the Topaz and Agua Caliente projects. The Company will continue to monitor the situation, including continued receipt of future PG&E payments and the future risk of the PPAs being rejected or modified through the bankruptcy process.

Legal Matters

The Company is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company does not believe that such normal and routine litigation will have a material impact on its consolidated financial results. The Company is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties and other costs in substantial amounts and are described below.

Environmental Laws and Regulations

The Company is subject to federal, state, local and foreign laws and regulations regarding climate change, renewable portfolio standards, air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact the Company's current and future operations. The Company believes it is in material compliance with all applicable laws and regulations.


20


Hydroelectric Relicensing

PacifiCorp is a party to the 2016 amended Klamath Hydroelectric Settlement Agreement ("KHSA"), which is intended to resolve disputes surrounding PacifiCorp's efforts to relicense the Klamath Hydroelectric Project. The KHSA does not guarantee dam removal. Instead, it establishes a process for PacifiCorp, the states of Oregon and California ("States") and other stakeholders to assess whether dam removal can occur consistent with the settlement's terms. For PacifiCorp, the key elements of the settlement include: (1) a contribution from PacifiCorp's Oregon and California customers capped at $200 million plus $250 million in California bond funds; (2) complete indemnification from harms associated with dam removal; (3) transfer of the Federal Energy Regulatory Commission ("FERC") license to a third-party dam removal entity, the Klamath River Renewal Corporation ("KRRC"), who would conduct dam removal; and (4) ability for PacifiCorp to operate the facilities for the benefit of customers until dam removal commences.

In September 2016, the KRRC and PacifiCorp filed a joint application with the FERC to transfer the license for the four main-stem Klamath dams from PacifiCorp to the KRRC. Over the past two years, the KRRC has been supplementing the application with additional information about its financial, technical, and legal capacity to become the licensee. In July 2019, the KRRC provided the FERC with additional information about its financial capacity to become a licensee, including updated cost estimates, and its insurance, bonding and liability transfer package. The FERC is evaluating the KRRC's information and the proposed license transfer. The KRRC will continue to refine its insurance, bonding and liability transfer package, and PacifiCorp will review the KRRC's capacity to fulfill its indemnity obligation under the KHSA. If certain conditions in the amended KHSA are not satisfied (e.g., inadequate funding or inability of KRRC to satisfy its indemnification obligation) and the license does not transfer to the KRRC, PacifiCorp will resume relicensing with the FERC.

The United States Court of Appeals for the District of Columbia Circuit issued a decision in the Hoopa Valley Tribe v. FERC litigation, in January 2019, finding that the states of California and Oregon have waived their Clean Water Act, Section 401, water quality certification authority over the Klamath hydroelectric project relicensing. This decision has the potential to limit the ability of the States to impose water quality conditions on new and relicensed projects. Environmental interests, supported by California, Oregon and other states, asked the court to rehear the case, which was denied. Subsequently, environmental groups, supported by numerous states, filed a petition for certiorari before the United States Supreme Court, which was denied on December 9, 2019, thereby allowing the circuit court opinion to stand as a final and unappealable decision.

Guarantees

The Company has entered into guarantees as part of the normal course of business and the sale of certain assets. These guarantees are not expected to have a material impact on the Company's consolidated financial results.



21


(9)
Revenue from Contracts with Customers

Energy Products and Services

The following table summarizes the Company's energy products and services revenue from contracts with customers ("Customer Revenue") by regulated energy and nonregulated energy, with further disaggregation of regulated energy by customer class and line of business, including a reconciliation to the Company's reportable segment information included in Note 12 (in millions):
 
 
For the Three-Month Period Ended March 31, 2020
 
 
PacifiCorp
 
MidAmerican Funding
 
NV Energy
 
Northern Powergrid
 
BHE Pipeline Group
 
BHE Transmission
 
BHE Renewables
 
BHE and
Other(1)
 
Total
Customer Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Regulated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail electric
 
$
1,122

 
$
410

 
$
529

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,061

Retail gas
 
—

 
187

 
47

 
—

 
—

 
—

 
—

 
—

 
234

Wholesale
 
—

 
64

 
14

 
—

 
—

 
—

 
—

 
(1
)
 
77

Transmission and
   distribution
 
22

 
15

 
23

 
233

 
—

 
169

 
—

 
—

 
462

Interstate pipeline
 
—

 
—

 
—

 
—

 
400

 
—

 
—

 
(48
)
 
352

Other
 
26

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
27

Total Regulated
 
1,170

 
676

 
614

 
233

 
400

 
169

 
—

 
(49
)
 
3,213

Nonregulated
 
—

 
6

 
1

 
7

 
—

 
3

 
159

 
127

 
303

Total Customer Revenue
 
1,170

 
682

 
615

 
240

 
400

 
172

 
159

 
78

 
3,516

Other revenue
 
36

 
4

 
7

 
26

 
1

 
—

 
19

 
25

 
118

Total
 
$
1,206

 
$
686

 
$
622

 
$
266

 
$
401

 
$
172

 
$
178

 
$
103

 
$
3,634


 
 
For the Three-Month Period Ended March 31, 2019
 
 
PacifiCorp
 
MidAmerican Funding
 
NV Energy
 
Northern Powergrid
 
BHE Pipeline Group
 
BHE Transmission
 
BHE Renewables
 
BHE and
Other(1)
 
Total
Customer Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Regulated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail electric
 
$
1,186

 
$
443

 
$
527

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,156

Retail gas
 
—

 
260

 
37

 
—

 
—

 
—

 
—

 
—

 
297

Wholesale
 
28

 
110

 
18

 
—

 
—

 
—

 
—

 
—

 
156

Transmission and
   distribution
 
25

 
16

 
24

 
230

 
—

 
167

 
—

 
—

 
462

Interstate pipeline
 
—

 
—

 
—

 
—

 
372

 
—

 
—

 
(37
)
 
335

Other
 
—

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
1

Total Regulated
 
1,239

 
829

 
607

 
230

 
372

 
167

 
—

 
(37
)
 
3,407

Nonregulated
 
—

 
6

 
—

 
8

 
—

 
1

 
126

 
139

 
280

Total Customer Revenue
 
1,239

 
835

 
607

 
238

 
372

 
168

 
126

 
102

 
3,687

Other revenue(2)
 
20

 
7

 
7

 
25

 
(1
)
 
—

 
41

 
39

 
138

Total
 
$
1,259

 
$
842

 
$
614

 
$
263

 
$
371

 
$
168

 
$
167

 
$
141

 
$
3,825



(1)
The BHE and Other reportable segment represents amounts related principally to other entities, corporate functions and intersegment eliminations.

(2)
Includes net payments to counterparties for the financial settlement of certain derivative contracts at BHE Pipeline Group.


22


Real Estate Services

The following table summarizes the Company's real estate services Customer Revenue by line of business (in millions):

 
HomeServices
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Customer Revenue:
 
 
 
Brokerage
$
777

 
$
711

Franchise
16

 
14

Total Customer Revenue
793

 
725

Other revenue
100

 
60

Total
$
893

 
$
785


Remaining Performance Obligations

The following table summarizes the Company's revenue it expects to recognize in future periods related to significant unsatisfied remaining performance obligations for fixed contracts with expected durations in excess of one year as of March 31, 2020, by reportable segment (in millions):
 
Performance obligations expected to be satisfied:
 
 
 
Less than 12 months
 
More than 12 months
 
Total
BHE Pipeline Group
$
888

 
$
4,882

 
$
5,770


(10)
BHE Shareholders' Equity

For the three-month periods ended March 31, 2020 and 2019, BHE repurchased 180,358 shares of its common stock for $126 million and 447,712 shares of its common stock for $293 million, respectively.

(11)
Components of Other Comprehensive Income (Loss), Net

The following table shows the change in AOCI attributable to BHE shareholders by each component of OCI, net of applicable income tax (in millions):
 
 
Unrecognized
 
Foreign
 
Unrealized
 
AOCI
 
 
Amounts on
 
Currency
 
Gains (Losses)
 
Attributable
 
 
Retirement
 
Translation
 
on Cash
 
To BHE
 
 
Benefits
 
Adjustment
 
Flow Hedges
 
Shareholders, Net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
$
(358
)
 
$
(1,623
)
 
$
36

 
$
(1,945
)
Other comprehensive (loss) income
 
(32
)
 
155

 
(8
)
 
115

Balance, March 31, 2019
 
$
(390
)
 
$
(1,468
)
 
$
28

 
$
(1,830
)
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
 
$
(417
)
 
$
(1,296
)
 
$
7

 
$
(1,706
)
Other comprehensive income (loss)
 
34

 
(548
)
 
(33
)
 
(547
)
Balance, March 31, 2020
 
$
(383
)
 
$
(1,844
)
 
$
(26
)
 
$
(2,253
)


23


(12)
Segment Information

The Company's reportable segments with foreign operations include Northern Powergrid, whose business is principally in the United Kingdom, BHE Transmission, whose business includes operations in Canada, and BHE Renewables, whose business includes operations in the Philippines. Intersegment eliminations and adjustments, including the allocation of goodwill, have been made. Information related to the Company's reportable segments is shown below (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
PacifiCorp
$
1,206

 
$
1,259

MidAmerican Funding
686

 
842

NV Energy
622

 
614

Northern Powergrid
266

 
263

BHE Pipeline Group
401

 
371

BHE Transmission
172

 
168

BHE Renewables
178

 
167

HomeServices
893

 
785

BHE and Other(1)
103

 
141

Total operating revenue
$
4,527

 
$
4,610

Depreciation and amortization:
 
 
 
PacifiCorp
$
252

 
$
205

MidAmerican Funding
176

 
177

NV Energy
124

 
120

Northern Powergrid
63

 
63

BHE Pipeline Group
64

 
28

BHE Transmission
60

 
58

BHE Renewables
71

 
70

HomeServices
11

 
13

BHE and Other(1)
—

 
(1
)
Total depreciation and amortization
$
821

 
$
733



24


 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating income:
 
 
 
PacifiCorp
$
234

 
$
284

MidAmerican Funding
102

 
116

NV Energy
79

 
84

Northern Powergrid
132

 
129

BHE Pipeline Group
249

 
243

BHE Transmission
76

 
76

BHE Renewables
17

 
18

HomeServices
20

 
(21
)
BHE and Other(1)
10

 
(10
)
Total operating income
919


919

Interest expense
(483
)
 
(477
)
Capitalized interest
17

 
16

Allowance for equity funds
34

 
32

Interest and dividend income
20

 
30

Gains (losses) on marketable securities, net
27

 
(68
)
Other, net
(27
)
 
35

Total income before income tax expense and equity income
$
507


$
487

Interest expense:
 
 
 
PacifiCorp
$
102

 
$
96

MidAmerican Funding
81

 
75

NV Energy
58

 
62

Northern Powergrid
32

 
34

BHE Pipeline Group
14

 
12

BHE Transmission
38

 
39

BHE Renewables
42

 
44

HomeServices
5

 
7

BHE and Other(1)
111

 
108

Total interest expense
$
483


$
477

Operating revenue by country:
 
 
 
United States
$
4,089

 
$
4,177

United Kingdom
266

 
263

Canada
171

 
168

Philippines and other
1

 
2

Total operating revenue by country
$
4,527

 
$
4,610

Income before income tax benefit and equity loss by country:
 
 
 
United States
$
354

 
$
336

United Kingdom
109

 
103

Canada
40

 
40

Philippines and other
4

 
8

Total income before income tax benefit and equity loss by country
$
507

 
$
487



25


 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Assets:
 
 
 
PacifiCorp
$
24,953

 
$
24,861

MidAmerican Funding
22,693

 
22,664

NV Energy
14,283

 
14,128

Northern Powergrid
7,686

 
8,385

BHE Pipeline Group
6,127

 
6,100

BHE Transmission
8,186

 
8,776

BHE Renewables
10,139

 
9,961

HomeServices
4,144

 
3,846

BHE and Other(1)
2,595

 
1,330

Total assets
$
100,806

 
$
100,051


(1)
The differences between the reportable segment amounts and the consolidated amounts, described as BHE and Other, relate principally to other entities, including MidAmerican Energy Services, LLC, corporate functions and intersegment eliminations.

The following table shows the change in the carrying amount of goodwill by reportable segment for the three-month period ended March 31, 2020 (in millions):
 
 
 
 
 
 
 
 
 
BHE Pipeline Group
 
 
 
 
 
 
 
 
 
PacifiCorp
 
MidAmerican Funding
 
NV Energy
 
Northern Powergrid
 
 
BHE Transmission
 
BHE Renewables
 
HomeServices
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
$
1,129

 
$
2,102

 
$
2,369

 
$
978

 
$
73

 
$
1,520

 
$
95

 
$
1,456

 
$
9,722

Foreign currency translation
—

 
—

 
—

 
(44
)
 
—

 
(116
)
 
—

 
—

 
(160
)
March 31, 2020
$
1,129

 
$
2,102

 
$
2,369

 
$
934

 
$
73

 
$
1,404

 
$
95

 
$
1,456

 
$
9,562


26


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of certain significant factors that have affected the consolidated financial condition and results of operations of the Company during the periods included herein. Explanations include management's best estimate of the impact of weather, customer growth, usage trends and other factors. This discussion should be read in conjunction with the Company's historical unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. The Company's actual results in the future could differ significantly from the historical results.

Berkshire Hathaway Energy's operations are organized as eight business segments: PacifiCorp, MidAmerican Funding (which primarily consists of MidAmerican Energy), NV Energy (which primarily consists of Nevada Power and Sierra Pacific), Northern Powergrid (which primarily consists of Northern Powergrid (Northeast) Limited and Northern Powergrid (Yorkshire) plc), BHE Pipeline Group (which primarily consists of Northern Natural Gas and Kern River), BHE Transmission (which consists of BHE Canada (which primarily consists of AltaLink) and BHE U.S. Transmission), BHE Renewables and HomeServices. BHE, through these locally managed and operated businesses, owns four utility companies in the United States serving customers in 11 states, two electricity distribution companies in Great Britain, two interstate natural gas pipeline companies in the United States, an electric transmission business in Canada, interests in electric transmission businesses in the United States, a renewable energy business primarily investing in wind, solar, geothermal and hydroelectric projects, the largest residential real estate brokerage firm in the United States and one of the largest residential real estate brokerage franchise networks in the United States. The reportable segment financial information includes all necessary adjustments and eliminations needed to conform to the Company's significant accounting policies. The differences between the reportable segment amounts and the consolidated amounts, described as BHE and Other, relate principally to other entities, corporate functions and intersegment eliminations.

Results of Operations for the First Quarter of 2020 and 2019

Overview

Net income for the Company's reportable segments is summarized as follows (in millions):
 
First Quarter
 
2020
 
2019
 
Change
Net income attributable to BHE shareholders:
 
 
 
 
 
 
 
PacifiCorp
$
176

 
$
180

 
$
(4
)
 
(2
)%
MidAmerican Funding
150

 
190

 
(40
)
 
(21
)
NV Energy
20

 
29

 
(9
)
 
(31
)
Northern Powergrid
87

 
80

 
7

 
9

BHE Pipeline Group
179

 
181

 
(2
)
 
(1
)
BHE Transmission
55

 
56

 
(1
)
 
(2
)
BHE Renewables
95

 
48

 
47

 
98

HomeServices
10

 
(22
)
 
32

 
*

BHE and Other
(102
)
 
(120
)
 
18

 
15

Total net income attributable to BHE shareholders
$
670

 
$
622

 
$
48

 
8
 %

*    Not meaningful

Net income attributable to BHE shareholders increased $48 million for the first quarter of 2020 compared to 2019. The first quarter of 2020 included a pre-tax unrealized gain of $54 million ($39 million after-tax) compared to a pre-tax unrealized loss in the first quarter of 2019 of $79 million ($58 million after-tax), respectively, on the Company's investment in BYD Company Limited. Excluding the impact of this item, adjusted net income attributable to BHE shareholders for the first quarter of 2020 was $631 million, a decrease of $49 million, or 7%, compared to adjusted net income attributable to BHE shareholders in the first quarter of 2019 of $680 million.


27


The increase in net income attributable to BHE shareholders for the first quarter of 2020 compared to 2019 was due to the following:

•
PacifiCorp's net income decreased $4 million, primarily due to lower utility margin, lower cash surrender value of corporate-owned life insurance policies and $6 million of higher interest expense, partially offset by higher allowances for equity and borrowed funds used during construction of $10 million and higher PTCs recognized of $8 million, primarily due to repowering certain wind-powered generating facilities. Utility margin decreased primarily due to lower average retail rates, unfavorable retail customer volumes, lower wholesale volumes and lower net deferrals of incurred net power costs in accordance with established adjustment mechanisms, partially offset by lower coal-fueled and natural gas-fueled generation costs. Retail customer volumes decreased 1.7%, primarily due to the unfavorable impact of weather and lower customer usage, partially offset by an increase in the average number of customers.
•
MidAmerican Funding's net income decreased $40 million, primarily due to lower electric and natural gas utility margins, lower cash surrender value of corporate-owned life insurance policies, lower allowances for equity and borrowed funds used during construction of $10 million and higher interest expense of $6 million, partially offset by higher PTCs recognized of $22 million from higher wind generation, which was driven by repowering and new wind projects placed in-service, and lower operations and maintenance expense. Electric utility margin decreased primarily due to lower recoveries through bill riders, lower wholesale revenue, unfavorable average retail rates and lower retail customer volumes, partially offset by lower generation and purchased power costs. Electric retail customer volumes decreased 0.7%, primarily due to the unfavorable impact of weather, largely offset by higher industrial volumes of 7.7%. Natural gas utility margin decreased due to lower retail customer volumes of 16.2%, primarily due to the unfavorable impact of weather.
•
NV Energy's net income decreased $9 million, primarily due to lower cash surrender value of corporate-owned life insurance policies and higher depreciation and amortization expense of $4 million from higher plant placed in-service, partially offset by lower interest expense of $4 million. Electric utility margin was relatively unchanged as electric retail customer volumes, including distribution only service customers, increased 0.2%, primarily due to an increase in the average number of customers.
•
Northern Powergrid's net income increased $7 million, primarily due to higher distribution revenue of $8 million, mainly from increased tariff rates offset by lower units distributed, which decreased 1.8%. The United Kingdom enacted corporate income tax rate was scheduled to decrease from 19% to 17% effective April 1, 2020; however, the rate will be maintained at 19% through amended legislation, which, when enacted, will result in a deferred income tax charge related to the remeasurement of Northern Powergrid's net deferred income tax liabilities.
•
BHE Pipeline Group's net income decreased $2 million, primarily due to higher operations and maintenance expense and $2 million of increased interest expense, partially offset by higher transportation revenue from expansion projects at Northern Natural Gas.
•
BHE Renewables' net income increased $47 million, primarily due to higher wind earnings of $50 million and higher solar earnings of $9 million due to higher generation and lower operations and maintenance expense, partially offset by lower geothermal earnings of $7 million, primarily due to higher operations and maintenance expense, and lower natural gas earnings of $4 million, primarily due to lower margins. Wind earnings were higher primarily due to favorable tax equity investment earnings of $46 million, which improved due to $37 million of earnings from projects reaching commercial operation and $9 million of higher earnings from existing projects, primarily due to favorable operating results and derates caused by turbine blade repairs in 2019.
•
HomeServices' net income increased $32 million, primarily due to higher earnings at mortgage, brokerage and settlement services in large part due to higher refinance activity and higher closed brokerage, title and escrow units from a favorable interest rate environment, partially offset by higher operating expenses.
•
BHE and Other's net loss improved $18 million, primarily due to the change in the after-tax unrealized position of the Company's investment in BYD Company Limited of $97 million, partially offset by consolidated state income tax benefits recognized in 2019 and lower cash surrender value of corporate-owned life insurance policies.




28


Reportable Segment Results

Operating revenue and operating income for the Company's reportable segments are summarized as follows (in millions):
 
First Quarter
 
2020
 
2019
 
Change
Operating revenue:
 
 
 
 
 
 
 
PacifiCorp
$
1,206

 
$
1,259

 
$
(53
)
 
(4
)%
MidAmerican Funding
686

 
842

 
(156
)
 
(19
)
NV Energy
622

 
614

 
8

 
1

Northern Powergrid
266

 
263

 
3

 
1

BHE Pipeline Group
401

 
371

 
30

 
8

BHE Transmission
172

 
168

 
4

 
2

BHE Renewables
178

 
167

 
11

 
7

HomeServices
893

 
785

 
108

 
14

BHE and Other
103

 
141

 
(38
)
 
(27
)
Total operating revenue
$
4,527

 
$
4,610

 
$
(83
)
 
(2
)%
 
Operating income:
 
 
 
 
 
 
 
PacifiCorp
$
234

 
$
284

 
$
(50
)
 
(18
)%
MidAmerican Funding
102

 
116

 
(14
)
 
(12
)
NV Energy
79

 
84

 
(5
)
 
(6
)
Northern Powergrid
132

 
129

 
3

 
2

BHE Pipeline Group
249

 
243

 
6

 
2

BHE Transmission
76

 
76

 
—

 
—

BHE Renewables
17

 
18

 
(1
)
 
(6
)
HomeServices
20

 
(21
)
 
41

 
*

BHE and Other
10

 
(10
)
 
20

 
*

Total operating income
$
919

 
$
919

 
$
—

 
—
 %

*    Not meaningful

PacifiCorp

Operating revenue decreased $53 million for the first quarter of 2020 compared to 2019, primarily due to lower retail revenue of $48 million and lower wholesale revenue of $12 million from decreased volumes. Retail revenue decreased due to lower average rates of $25 million from sales mix and lower customer volumes of $23 million. Retail customer volumes decreased 1.7%, primarily due to the unfavorable impact of weather and lower customer usage, partially offset by an increase in the average number of customers.

Operating income decreased $50 million for the first quarter of 2020 compared to 2019, primarily due to an increase in depreciation and amortization expense of $47 million and lower utility margin. The increase in depreciation and amortization expense reflects accelerated depreciation of Oregon’s share of certain retired wind equipment due to repowering projects that were placed into service in 2020 of $47 million (offset in income tax expense) as ordered by the Oregon Public Utilities Commission. Utility margin decreased primarily due to lower average retail rates, unfavorable retail customer volumes, lower wholesale volumes and lower net deferrals of incurred net power costs in accordance with established adjustment mechanisms, partially offset by lower coal-fueled and natural gas-fueled generation costs.


29


MidAmerican Funding

Operating revenue decreased $156 million for the first quarter of 2020 compared to 2019, primarily due to lower natural gas operating revenue of $76 million, lower electric operating revenue of $52 million and lower electric and natural gas energy efficiency program revenue of $29 million (offset in operations and maintenance expense). Natural gas operating revenue decreased from lower recoveries through the purchased gas adjustment clause due to a lower average per-unit cost of natural gas sold of $65 million (offset in cost of sales) and a 16.2% decrease in retail customer volumes, primarily due to the unfavorable impact of weather. Electric operating revenue decreased due to lower wholesale and other revenue of $40 million and lower retail revenue of $12 million. Electric wholesale and other revenue decreased due to a 25.7% decrease in wholesale volumes and $17 million from lower average per-unit prices. Electric retail revenue decreased from lower average rates of $15 million due to sales mix and $10 million from the unfavorable impact of weather, partially offset by higher customer usage of $15 million. Electric retail customer volumes decreased 0.7%, primarily due to the unfavorable impact of weather, largely offset by higher industrial volumes of 7.7%.

Operating income decreased $14 million for the first quarter of 2020 compared to 2019, primarily due to lower electric and natural gas utility margins, partially offset by lower operations and maintenance expense not recovered through energy efficiency programs. Electric utility margin decreased primarily due to lower recoveries through bill riders, lower wholesale revenue, unfavorable average retail rates and lower retail customer volumes, partially offset by lower generation and purchased power costs. Natural gas utility margin decreased due to lower retail customer volumes. Operations and maintenance expense decreased mainly due to lower employee-related costs, partially offset by higher wind-powered generation costs, primarily due to new and repowered generating facilities. Depreciation and amortization expense reflects lower Iowa revenue sharing accruals of $27 million, substantially offset by an increase related to new wind-powered generating facilities and other plant placed in-service.

NV Energy

Operating revenue increased $8 million for the first quarter of 2020 compared to 2019, primarily due to higher natural gas operating revenue of $11 million, primarily due to a higher average per-unit cost of natural gas sold of $11 million (offset in cost of sales).

Operating income decreased $5 million for the first quarter of 2020 compared to 2019, primarily due to higher depreciation and amortization expense of $4 million from higher plant placed in-service. Electric utility margin was relatively unchanged as electric retail customer volumes, including distribution only service customers, increased 0.2%, primarily due to an increase in the average number of customers.

Northern Powergrid

Operating revenue increased $3 million for the first quarter of 2020 compared to 2019, primarily due to higher distribution revenue of $8 million from increased tariff rates of $10 million, partially offset by the stronger United States dollar of $4 million and lower distributed units of 1.8%. Operating income increased $3 million for the first quarter of 2020 compared to 2019, primarily due to the higher distribution revenue, partially offset by higher operations and maintenance expense and the stronger United States dollar of $2 million.

BHE Pipeline Group

Operating revenue increased $30 million for the first quarter of 2020 compared to 2019, primarily due to higher transportation revenue related to the Northern Natural Gas Section 4 rate case, with interim rates effective January 1, 2020, subject to refund, and from expansion projects at Northern Natural Gas, partially offset by lower gas sales of $14 million at Northern Natural Gas related to system balancing activities (largely offset in cost of sales). Operating income increased $6 million for the first quarter of 2020 compared to 2019, primarily due to the higher transportation revenue from expansion projects, partially offset by higher operations and maintenance expense.

BHE Renewables

Operating revenue increased $11 million for the first quarter of 2020 compared to 2019, primarily due to higher solar revenues of $7 million and higher natural gas revenues of $6 million, each from higher generation. Operating income decreased $1 million for the first quarter of 2020 compared to 2019, primarily due to higher operations and maintenance expense of $6 million at the geothermal projects and lower margin of $5 million at the natural gas facilities, partially offset by the higher solar operating revenue of $7 million and lower operations and maintenance expense of $4 million at the solar projects.


30


HomeServices

Operating revenue increased $108 million for the first quarter of 2020 compared to 2019, primarily due to increases in brokerage revenue of $58 million and mortgage revenue of $40 million, largely from a 5% increase in closed brokerage units and a 60% increase in closed mortgage units. Operating income increased $41 million for the first quarter of 2020 compared to 2019, primarily due to favorable operating performance at mortgage, brokerage and settlement services in large part due to higher refinance activity and higher closed brokerage, title and escrow units from a favorable interest rate environment, partially offset by higher operating expenses.

BHE and Other

Operating revenue decreased $38 million for the first quarter of 2020 compared to 2019, primarily due to lower electricity and natural gas volumes and rates at MidAmerican Energy Services, LLC. Operating income increased $20 million for the first quarter of 2020 compared to 2019, primarily due to lower operations and maintenance expense, partially offset by lower margin of $4 million at MidAmerican Energy Services, LLC.

Consolidated Other Income and Expense Items

Interest expense

Interest expense is summarized as follows (in millions):
 
First Quarter
 
2020
 
2019
 
Change
 
 
 
 
 
 
 
 
Subsidiary debt
$
371

 
$
368

 
$
3

 
1
%
BHE senior debt and other
111

 
108

 
3

 
3

BHE junior subordinated debentures
1

 
1

 
—

 
—

Total interest expense
$
483

 
$
477

 
$
6

 
1
%

Interest expense increased $6 million for the first quarter of 2020 compared to 2019, primarily due to higher average long-term debt balances at BHE, PacifiCorp, MidAmerican Energy and BHE Pipeline Group.

Capitalized interest

Capitalized interest increased $1 million for the first quarter of 2020 compared to 2019, primarily due to higher construction work-in-progress balances at PacifiCorp, largely offset by lower construction work-in-progress balances at MidAmerican Energy.

Allowance for equity funds

Allowance for equity funds increased $2 million for the first quarter of 2020 compared to 2019, primarily due to higher construction work-in-progress balances at PacifiCorp, largely offset by lower construction work-in-progress balances at MidAmerican Energy.

Interest and dividend income

Interest and dividend income decreased $10 million for the first quarter of 2020 compared to 2019, primarily due to lower cash balances at PacifiCorp, MidAmerican Energy and NV Energy and a declining financial asset balance at the Casecnan project.

Gains (losses) on marketable securities, net

Gains (losses) on marketable securities, net was favorable $95 million for the first quarter of 2020 compared to 2019, primarily due to the change in the unrealized position on the Company's investment in BYD Company Limited of $133 million, partially offset by unfavorable changes in other marketable securities.


31


Other, net

Other, net was unfavorable $62 million for the first quarter of 2020 compared to 2019, primarily due to lower cash surrender value of corporate-owned life insurance policies.

Income tax benefit

Income tax benefit increased $36 million for the first quarter of 2020 compared to 2019 and the effective tax rate was (36)% for the first quarter of 2020 and (30)% for the first quarter of 2019. The effective tax rate decreased primarily due to higher PTCs recognized of $97 million and the favorable impacts of ratemaking of $12 million, partially offset by the higher income before taxes from the Company's investment in BYD Company Limited and consolidated state income tax benefits recognized in 2019.

PTCs are recognized in earnings for interim periods based on the application of an estimated annual effective tax rate to pretax earnings. Federal renewable electricity PTCs are earned as energy from qualifying wind-powered generating facilities is produced and sold based on a per-kilowatt rate as prescribed pursuant to the applicable federal income tax law and are eligible for the credit for 10 years from the date the qualifying generating facilities are placed in-service. PTCs recognized in 2020 were $233 million, or $97 million higher than 2019, while PTCs earned in 2020 were $281 million, or $95 million higher than 2019. The difference between PTCs recognized and earned of $48 million as of March 31, 2020, will be reflected in earnings over the remainder of 2020.

Equity loss

Equity loss was unfavorable $8 million for the first quarter of 2020 compared to 2019, primarily due to higher pre-tax equity losses from tax equity investments at BHE Renewables. PTCs and other income tax benefits from these projects are recognized in income tax expense.


32


Liquidity and Capital Resources

Each of BHE's direct and indirect subsidiaries is organized as a legal entity separate and apart from BHE and its other subsidiaries. It should not be assumed that the assets of any subsidiary will be available to satisfy BHE's obligations or the obligations of its other subsidiaries. However, unrestricted cash or other assets that are available for distribution may, subject to applicable law, regulatory commitments and the terms of financing and ring-fencing arrangements for such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to BHE or affiliates thereof. The Company's long-term debt may include provisions that allow BHE or its subsidiaries to redeem such debt in whole or in part at any time. These provisions generally include make-whole premiums. Refer to Note 18 of Notes to Consolidated Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion regarding the limitation of distributions from BHE's subsidiaries.

As of March 31, 2020, the Company's total net liquidity was as follows (in millions):
 
 
 
 
 
MidAmerican
 
NV
 
Northern
 
BHE
 
 
 
 
 
BHE
 
PacifiCorp
 
Funding
 
Energy
 
Powergrid
 
Canada
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,396

 
$
53

 
$
100

 
$
153

 
$
22

 
$
83

 
$
264

 
$
2,071

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit facilities(1)
3,500

 
1,200

 
1,309

 
650

 
205

 
622

 
1,990

 
9,476

Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
(210
)
 
(56
)
 
(50
)
 
—

 
(32
)
 
(275
)
 
(1,465
)
 
(2,088
)
Tax-exempt bond support and letters of credit
—

 
(256
)
 
(370
)
 
—

 
—

 
(2
)
 
—

 
(628
)
Net credit facilities
3,290

 
888

 
889

 
650

 
173

 
345

 
525

 
6,760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total net liquidity
$
4,686

 
$
941

 
$
989

 
$
803

 
$
195

 
$
428

 
$
789

 
$
8,831

Credit facilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity dates
2022

 
2022

 
2020, 2022

 
2022

 
2022

 
2024

 
2020, 2021, 2022

 
 

(1) 
Includes drawn uncommitted credit facilities totaling $19 million at Northern Powergrid.

Operating Activities

Net cash flows from operating activities for the three-month periods ended March 31, 2020 and 2019 were $1.2 billion and $1.5 billion, respectively. The decrease was primarily due to unfavorable income tax cash flows and changes in working capital.

The timing of the Company's income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods and assumptions used for each payment date.

Investing Activities

Net cash flows from investing activities for the three-month periods ended March 31, 2020 and 2019 were $(1.5) billion and $(1.4) billion, respectively. The change was primarily due to higher funding of tax equity investments, partially offset by lower capital expenditures of $35 million. Refer to "Future Uses of Cash" for further discussion of capital expenditures.


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Financing Activities

Net cash flows from financing activities for the three-month period ended March 31, 2020 was $1.4 billion. Sources of cash totaled $4.3 billion and consisted of proceeds from BHE senior debt issuances totaling $3.2 billion and subsidiary debt issuances totaling $1.1 billion. Uses of cash totaled $3.0 billion and consisted mainly of repayments of subsidiary debt totaling $1.3 billion, net repayments of short-term debt totaling $1.1 billion, repayments of BHE senior debt totaling $350 million and common stock repurchases totaling $126 million.

For a discussion of recent financing transactions, refer to Note 4 of Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Net cash flows from financing activities for the three-month period ended March 31, 2019 was $900 million. Sources of cash totaled $2.9 billion and consisted of proceeds from subsidiary debt issuances. Uses of cash totaled $2.0 billion and consisted mainly of repayments of subsidiary debt totaling $1.4 billion, net repayments of short-term debt totaling $311 million and common stock repurchases totaling $293 million.

The Company may from time to time seek to acquire its outstanding debt securities through cash purchases in the open market, privately negotiated transactions or otherwise. Any debt securities repurchased by the Company may be reissued or resold by the Company from time to time and will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Future Uses of Cash

The Company has available a variety of sources of liquidity and capital resources, both internal and external, including net cash flows from operating activities, public and private debt offerings, the issuance of commercial paper, the use of unsecured revolving credit facilities, the issuance of equity and other sources. These sources are expected to provide funds required for current operations, capital expenditures, acquisitions, investments, debt retirements and other capital requirements. The availability and terms under which BHE and each subsidiary has access to external financing depends on a variety of factors, including regulatory approvals, its credit ratings, investors' judgment of risk and conditions in the overall capital markets, including the condition of the utility industry and project finance markets, among other items.

Capital Expenditures

The Company has significant future capital requirements. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of these reviews, which may consider, among other factors, impacts to customers' rates; changes in environmental and other rules and regulations; outcomes of regulatory proceedings; changes in income tax laws; general business conditions; load projections; system reliability standards; the cost and efficiency of construction labor, equipment and materials; commodity prices; and the cost and availability of capital. Expenditures for certain assets may ultimately include acquisitions of existing assets.


34


The Company's historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, are as follows (in millions):
 
Three-Month Periods
 
Annual
 
Ended March 31,
 
Forecast
 
2019
 
2020
 
2020
Capital expenditures by business:
 
 
 
 
 
PacifiCorp
$
337

 
$
366

 
$
2,768

MidAmerican Funding
573

 
472

 
1,903

NV Energy
165

 
163

 
645

Northern Powergrid
126

 
159

 
675

BHE Pipeline Group
72

 
120

 
584

BHE Transmission
61

 
56

 
666

BHE Renewables
46

 
12

 
110

HomeServices
10

 
7

 
25

BHE and Other
3

 
1

 
21

Total
$
1,393

 
$
1,356

 
$
7,397


Capital expenditures by type:
 
 
 
 
 
Wind generation
$
255

 
$
267

 
$
2,382

Electric transmission
97

 
95

 
852

Other growth
113

 
154

 
789

Operating
928

 
840

 
3,374

Total
$
1,393

 
$
1,356

 
$
7,397


The Company's historical and forecast capital expenditures consisted mainly of the following:
•Wind generation includes the following:
◦
Construction of wind-powered generating facilities at MidAmerican Energy totaling $154 million and $159 million for the three-month periods ended March 31, 2020 and 2019, respectively. MidAmerican Energy anticipates costs associated with the construction of wind-powered generating facilities will total an additional $636 million for 2020. Wind XI, a 2,000-MW project constructed over several years, was completed in January 2020. Wind XII is a 592-MW project, including 202 MWs placed in-service as of March 31, 2020, with the remaining facilities expected to be placed in-service by the end of 2020. MidAmerican Energy obtained pre-approved ratemaking principles for both of these projects and expects all of these wind-powered generating facilities to qualify for 100% of federal PTCs available. PTCs from these projects are excluded from MidAmerican Energy's Iowa energy adjustment clause until these generation assets are reflected in base rates. Additionally, MidAmerican Energy continues to evaluate wind-powered and other renewable generating facilities that would not be subject to pre-approved ratemaking principles. MidAmerican Energy currently has two such wind-powered generation projects under construction totaling 319 MWs that are expected to be placed in-service by the end of 2020 and to qualify for 100% of federal PTCs available.
◦
Repowering certain existing wind-powered generating facilities at MidAmerican Energy totaling $6 million and $27 million for the three-month periods ended March 31, 2020 and 2019, respectively. The repowering projects entail the replacement of significant components of older turbines. Planned spending for the repowered generating facilities totals $151 million for the remainder of 2020. Of the 1,001 MWs of current repowering projects not in-service as of March 31, 2020, 594 MWs are currently expected to qualify for 80% of the federal PTCs available for ten years following each facility's return to service and 407 MWs are expected to qualify for 60% of such credits.
◦
Construction of wind-powered generating facilities at PacifiCorp totaling $89 million and $55 million for the three-month periods ended March 31, 2020 and 2019, respectively. Construction includes the 1,190 MWs of new wind-powered generating facilities that are expected to be placed in-service in 2020 and the energy production is expected to qualify for 100% of the federal PTCs available for ten years once the equipment is placed in-service. PacifiCorp anticipates costs associated with the construction of wind-powered generating facilities will total an additional $1.2 billion for 2020.

35


◦
Repowering certain existing wind-powered generating facilities at PacifiCorp totaling $16 million and $4 million for the three-month periods ended March 31, 2020 and 2019, respectively. The repowering projects entail the replacement of significant components of older turbines. Certain repowering projects were placed in service in 2019 and the remaining repowering projects are expected to be placed in-service at various dates in 2020. Planned spending for the repowered generating facilities totals $87 million for the remainder of 2020. The energy production from such repowered facilities is expected to qualify for 100% of the federal PTCs available for ten years following each facility's return to service.
•
Electric transmission includes PacifiCorp's costs for the 140-mile 500-kV Aeolus-Bridger/Anticline transmission line, which is a major segment of PacifiCorp's Energy Gateway Transmission expansion program expected to be placed in service in 2020, additional Energy Gateway Transmission segments expected to be placed in service in 2023 and AltaLink's directly assigned projects from the AESO.
•
Other growth includes projects to deliver power and services to new markets, new customer connections, enhancements to existing customer connections and investments in solar generation.
•
Operating includes ongoing distribution systems infrastructure needed at the Utilities and Northern Powergrid, investments in routine expenditures for generation, transmission, distribution and other infrastructure needed to serve existing and expected demand, and environmental spending relating to emissions control equipment and the management of coal combustion residuals.

Other Renewable Investments

The Company has invested in projects sponsored by third parties, commonly referred to as tax equity investments. Under the terms of these tax equity investments, the Company has entered into equity capital contribution agreements with the project sponsors that require contributions. The Company has made contributions of $148 million for the three-month period ended March 31, 2020, and has commitments as of March 31, 2020, subject to satisfaction of certain specified conditions, to provide equity contributions of $2.3 billion for the remainder of 2020 pursuant to these equity capital contribution agreements as the various projects achieve commercial operation. Once a project achieves commercial operation, the Company enters into a partnership agreement with the project sponsor that directs and allocates the operating profits and tax benefits from the project.

Contractual Obligations

As of March 31, 2020, there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 other than the recent financing transactions and renewable tax equity investments previously discussed.


36


COVID-19

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by the Company. While the rapid outbreak of COVID-19 has not had a material impact on the Company's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. Most jurisdictions in which the Company operates have instituted varying levels of "stay-at-home" orders and other measures, which have collectively impacted most of the Company's retail electric and natural gas customers and, therefore, their needs for electricity and natural gas. As the impacts of COVID-19 and related customer and governmental responses are uncertain, a reduction in the consumption of electricity or natural gas, and related operating revenue, may occur, particularly in the commercial and industrial classes. Due to regulatory requirements and voluntary actions taken by the Utilities and Northern Powergrid related to customer collection activity and suspension of disconnections for non-payment, the Utilities and Northern Powergrid could see delays or reductions in cash receipts, including potentially higher than normal bad debt expense, from retail customers related to the impacts of COVID-19. The amount of such reductions in cash receipts is unknown at this time. Regulatory jurisdictions may allow for the deferral or recovery of certain costs incurred in responding to COVID-19. Refer to "Regulatory Matters" in Part I, Item 2 of this Form 10-Q for further discussion. A reduction in residential property transactions, and related operating revenue, may also occur at HomeServices due to existing "stay-at-home" orders, other measures and general economic uncertainty.

PacifiCorp and MidAmerican Energy have construction and repowering of wind-powered generation projects in progress. While PacifiCorp and MidAmerican Energy do not currently anticipate any delays that would jeopardize the completion of these projects, potential delays could result in their completion past certain in-service date guidance provided by the Internal Revenue Service in order to qualify the investments in such wind-powered generation facilities for the maximum federal PTCs. Such disruptions could adversely affect the Company's future financial results.

Several of the Company's businesses have been deemed essential and their employees have been identified as "critical infrastructure employees" allowing them to move within communities and across jurisdictional boundaries as necessary to maintain the electric generation, transmission and distribution systems and the natural gas transportation and distribution systems. In response to the effects of COVID-19, the Company has implemented various business continuity plans to protect its employees and customers. Such plans include a variety of actions, including situational use of personal protective equipment by employees when interacting with customers and implementing practices to enhance social distancing at the workplace. Such practices have included work-from-home, staggered work schedules, rotational work location assignments, increased cleaning and sanitation of work spaces and providing general health reminders intended to help lower the risk of spreading COVID-19.


37


BHE Renewables' Counterparty Risk

On January 29, 2019, PG&E Corporation and Pacific Gas and Electric Company (the "PG&E Utility") (together "PG&E") filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California ("PG&E Bankruptcy Filing"). The Company owns 100% of Topaz and owns a 49% interest in Agua Caliente. Topaz is a 550-MW solar photovoltaic electric power generating facility located in California. Topaz sells 100% of its energy, capacity and RECs generated from the facility to PG&E Utility under a 25-year wholesale PPA that is in effect until October 2039. As of March 31, 2020, the Company's consolidated balance sheet includes $1.0 billion of property, plant and equipment, net and $0.8 billion of non-recourse project debt related to Topaz. Agua Caliente is a 290-MW solar photovoltaic electric power generating facility located in Arizona. Agua Caliente sells 100% of its energy, capacity and RECs generated from the facility to PG&E Utility under a 25-year wholesale PPA that is in effect until June 2039. As of March 31, 2020, the Company's equity investment in Agua Caliente totals $76 million and the project has $0.7 billion of non-recourse project debt owed to the United States Department of Energy. The PG&E Bankruptcy Filing is an event of default under the Topaz PPA ("PPA Default"). PG&E has paid in full all amounts invoiced to date for post-petition energy deliveries for both Topaz and Agua Caliente. PG&E has not paid for the power delivered from January 1 through January 28, 2019. The Company continues to perform on its obligations and deliver renewable energy to the PG&E Utility, and PG&E has publicly stated it will pay suppliers in full under normal terms for post-petition goods and services received. The Company maintains that, in light of the current facts and circumstances, the PPA Default could not reasonably be expected to result in a material adverse effect under the Topaz indenture and, therefore, no default has occurred under the Topaz indenture. In July 2019, the California Governor signed AB 1054 into law. AB 1054 is comprehensive legislation addressing wildfire risk in the state of California that, among other items, authorizes a wildfire fund which would operate as an insurance fund to support the creditworthiness of electrical utilities, if certain utilities, including PG&E, participate by making the required contributions, among other things. In July 2019, PG&E notified the CPUC of its intent to participate in the insurance fund and such participation requires, among other items, PG&E to exit bankruptcy by June 30, 2020. The Company believes it is more likely than not that no impairment exists and current debt obligations will be met, as post-petition contractual revenue payments are expected to be paid by PG&E Utility to the Topaz and Agua Caliente projects. The Company will continue to monitor the situation, including continued receipt of future PG&E payments and the future risk of the PPAs being rejected or modified through the bankruptcy process.

Quad Cities Generating Station Operating Status

Exelon Generation Company, LLC ("Exelon Generation"), the operator of Quad Cities Generating Station Units 1 and 2 ("Quad Cities Station") of which MidAmerican Energy has a 25% ownership interest, announced on June 2, 2016, its intention to shut down Quad Cities Station on June 1, 2018. In December 2016, Illinois passed legislation creating a zero emission standard, which went into effect June 1, 2017. The zero emission standard requires the Illinois Power Agency to purchase zero emission credits ("ZECs") and recover the costs from certain ratepayers in Illinois, subject to certain limitations. The proceeds from the ZECs will provide Exelon Generation additional revenue through 2027 as an incentive for continued operation of Quad Cities Station. MidAmerican Energy will not receive additional revenue from the subsidy.

The PJM Interconnection, L.L.C. ("PJM") capacity market includes a Minimum Offer Price Rule ("MOPR"). If a generation resource is subjected to a MOPR, its offer price in the market is adjusted to effectively remove the revenues it receives through a government-provided financial support program, resulting in a higher offer that may not clear the capacity market. Prior to December 19, 2019, the PJM MOPR applied only to certain new gas-fired resources. An expanded PJM MOPR to include existing resources would require exclusion of ZEC compensation when bidding into future capacity auctions, resulting in an increased risk of Quad Cities Station not receiving capacity revenues in future auctions.

On December 19, 2019, the FERC issued an order in the PJM MOPR proceeding that broadly applies the MOPR to all new and existing resources, including nuclear, greatly expanding the breadth and scope of PJM's MOPR, effective as of PJM's next capacity auction. While the FERC included some limited exemptions in its order, no exemptions were available to state-supported nuclear resources, such as Quad Cities Station. In addition, the FERC provided no new mechanism for accommodating state-supported resources other than the existing Fixed Resource Requirement ("FRR") mechanism under which an entire utility zone would be removed from PJM's capacity auction along with sufficient resources to support the load in such zone. The FERC directed the PJM to make a compliance filing within 90 days. In its filing made March 18, 2020, the PJM proposed tariff language reflecting the FERC's directives and proposed a schedule for resuming capacity auctions that is contingent on the timing of the FERC's action on the compliance filing. The FERC has no deadline for such action, and could accept, reject or direct further revisions to all or part of the PJM's proposed tariff revisions and auction schedule. In addition, on April 16, 2020, the FERC issued orders largely denying requests for rehearing of the FERC's December 2019 order and another order in this proceeding. In those orders, the FERC also granted a few clarifications that will require an additional PJM compliance filing, which could also delay the timing for the FERC to issue its compliance order(s) and the PJM to resume its capacity auctions.


38


Exelon Generation is currently working with the PJM and other stakeholders to pursue the FRR option prior to the next capacity auction in the PJM. If Illinois implements the FRR option, Quad Cities Station could be removed from the PJM's capacity auction and instead supply capacity and be compensated under the FRR program. If Illinois cannot implement an FRR program in its PJM zones, then the MOPR will apply to Quad Cities Station, resulting in higher offers for its units that may not clear the capacity market. Implementing the FRR program in Illinois will require both legislative and regulatory changes. MidAmerican Energy cannot predict whether such legislative and regulatory changes can be implemented prior to the next capacity auction in the PJM or their potential impact on the continued operation of Quad Cities Station.

Regulatory Matters

BHE's regulated subsidiaries and certain affiliates are subject to comprehensive regulation. The discussion below contains material developments to those matters disclosed in Item 1 of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2019, and new regulatory matters occurring in 2020.

PacifiCorp

Multi-State Process

In November 2019, PacifiCorp completed negotiations with the Multi-State Process Workgroup, resulting in a new cost allocation agreement, the 2020 Protocol. The agreement establishes a common allocation method to be used in Utah, Oregon, Wyoming, Idaho and California through 2023, and a separate method for Washington during the same time period that is based on a system approach for cost allocations and provides a path forward for Washington to achieve compliance with Washington's newly-enacted Clean Energy Transformation Act. The agreement establishes a process for the 2020 Protocol signatories to resolve remaining outstanding cost-allocations to be implemented in a new, permanent and long-term allocation method at the end of the four years. In December 2019, PacifiCorp submitted the 2020 Protocol to the UPSC, the OPUC, the WPSC and the IPUC for approval. WUTC approval of the agreement is being sought in the general rate case filing submitted in December 2019, and CPUC approval will be requested in a future rate case. In January 2020, the OPUC issued an order adopting the 2020 Protocol. The WPSC held a hearing and issued a bench decision approving the 2020 Protocol in March 2020. In April 2020, the UPSC and the IPUC issued orders approving the 2020 Protocol.

Depreciation Rate Study

In September 2018, PacifiCorp filed applications for depreciation rate changes with the UPSC, the OPUC, the WPSC, the WUTC and the IPUC based on PacifiCorp's 2018 depreciation rate study, requesting the rates become effective January 1, 2021. Based on the proposed depreciation rates, annual depreciation expense would increase approximately $300 million. Parties to the applications in each state have since evaluated the study and updates provided by PacifiCorp and have participated in multi-party discussions. Updates since September 2018 include the filing of PacifiCorp's 2020 decommissioning studies in which a third party consultant was engaged to estimate decommissioning costs associated with coal-fueled generating facilities. In December 2019, PacifiCorp incorporated the depreciation rate study into its general rate case filing with the WUTC, which was later updated to incorporate the 2020 decommissioning studies.

In March 2020, PacifiCorp filed a partial settlement stipulation with the UPSC to which all but one intervening party agreed. The partial settlement adopts certain aspects of the 2018 depreciation rate study as-filed for coal-fueled generating facilities and proposes a secondary phase to the proceeding be established in order to address decommissioning costs for PacifiCorp’s coal‑fueled generating facilities and equipment replaced as a result of PacifiCorp's wind repowering projects. The stipulation provides for the treatment of Cholla Unit 4 to be addressed in PacifiCorp's next general rate case. In April 2020, the UPSC approved the stipulation as filed.

In March 2020, PacifiCorp filed motions with the OPUC to remove matters associated with its coal-fueled generating facilities from the depreciation rate study and instead expand its general rate case to address depreciation rates and decommissioning costs associated with its coal-fueled generating facilities. In April 2020, the motions were granted by the OPUC.

In April 2020, PacifiCorp filed a stipulation with the WPSC resolving all issues addressed in PacifiCorp’s depreciation rate study application with ratemaking treatment of certain matters to be addressed in PacifiCorp’s general rate case. The general rate case will determine ratemaking treatment of Cholla Unit No. 4; Wyoming’s share of coal-fueled generating facilities, including additional decommissioning costs identified in PacifiCorp’s 2020 decommissioning studies; and certain matters related to the repowering of PacifiCorp’s wind-powered generating facilities. The stipulation is subject to the WPSC’s approval.


39


Retirement Plan Settlement Charge

During 2018, the PacifiCorp Retirement Plan incurred a settlement charge as a result of excess lump sum distributions over the defined threshold for the year ended December 31, 2018. In December 2018, PacifiCorp submitted filings with the UPSC, the OPUC, the WPSC and the WUTC seeking approval to defer the settlement charge. Also in December 2018, an advice letter was filed with the CPUC requesting a memorandum account to track the costs associated with pension and postretirement settlements and curtailments. In October 2019, the request for a memorandum account was re-filed as an application with the CPUC. In 2019, the WUTC approved the requested deferral, while the UPSC and the WPSC denied the request. In January 2020, the OPUC issued an order denying PacifiCorp's request. In April 2020, the CPUC approved the request to establish a memorandum account effective December 31, 2018.

COVID-19

In March and April 2020, PacifiCorp filed applications requesting authorization to defer costs associated with COVID‑19 with the UPSC, the OPUC, the WPSC, the WUTC and the IPUC. In April 2020, as ordered by the CPUC, PacifiCorp filed to establish the COVID‑19 Pandemic Protections Memorandum Account. In April 2020, the WPSC approved PacifiCorp's application to defer costs associated with COVID-19. PacifiCorp may incur significant costs as a result of COVID-19, including higher bad debt expense associated with the suspension of disconnections across its service territory and suspension of late payment fees in certain jurisdictions implemented to assist customers facing unprecedented economic pressures. PacifiCorp also expects to incur additional costs that cannot currently be predicted given the unprecedented nature of COVID‑19.

Utah

In March 2019, PacifiCorp filed its annual EBA application with the UPSC requesting recovery of $24 million, or 1.1%, of deferred net power costs from customers for the period January 1, 2018 through December 31, 2018, reflecting the difference between base and actual net power costs in the 2018 deferral period. The rate change was approved by the UPSC effective May 1, 2019 on an interim basis. Following a decision from the Utah Supreme Court in June 2019 that found the UPSC did not have authority to approve interim rates in conjunction with the EBA, the UPSC directed PacifiCorp to terminate the interim rate change pending final approval in the proceeding. The hearing on final approval was held in February 2020, and the UPSC issued an order approving full recovery of the 2018 deferred costs beginning April 1, 2020.

In May 2019, Utah House Bill 411 went into effect. The legislation, among other things, authorizes the UPSC to approve a renewable energy program for communities seeking 100% renewable electricity. Participating cities were required to adopt a resolution with a goal to be on 100% renewable electricity by 2030 before December 31, 2019. Twenty-four communities in Utah, including Salt Lake City, passed the resolution before December 31, 2019. Customers within a participating community may opt out of the program and maintain existing rates. Rates approved for the program may not result in any shift of costs or benefits to nonparticipating customers. The program details, including costs, are being developed with the communities for a future filing with the UPSC.

In March 2020, PacifiCorp filed its annual EBA application with the UPSC requesting recovery of $37 million, or 1.0%, of deferred power costs from customers for the period January 1, 2019 through December 31, 2019, reflecting the difference between base and actual net power costs in the 2019 deferral period. Hearings are scheduled for January 2021 for rates effective March 1, 2021.

In March 2020, Utah's governor signed Utah House Bill 66, Wildland Fire Planning and Cost Recovery Amendments, which requires PacifiCorp to prepare a wildfire protection plan to be approved by the UPSC. All investments, including the cost of capital, made to implement an approved plan are recoverable in rates. The bill also provides a potential liability safe harbor if PacifiCorp is in compliance with its approved wildfire mitigation plan. In addition, the legislation clarifies the standard for real property losses and eliminates the current standard of treble damages awarded for tree losses. The first wildland fire protection plan must be filed with the UPSC by June 1, 2020.

In March 2020, Utah's governor signed Utah House Bill 396, Electric Vehicle Charging Infrastructure Amendments, which directs the UPSC to enable PacifiCorp to recover in rates up to $50 million of electric vehicle infrastructure. The legislation also prohibits a third party from generating electricity onsite to directly resell to customers through electric vehicle charging infrastructure.


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Oregon

In December 2018, PacifiCorp filed a 2019 RAC application requesting recovery of costs associated with repowering of approximately 900 MWs of company-owned and installed wind facilities expected to be completed in 2019. The associated net power cost and PTC benefits were previously included in the 2019 TAM. An all-party settlement was approved by the OPUC in September 2019, providing for a total rate increase of $24 million, or 1.8%, subject to final cost updates with rates to be increased as the repowering projects are completed. The first rate increase of $9 million, or 0.7%, was effective October 1, 2019 for four repowered facilities, the second rate increase of $1 million, or 0.1%, was effective December 1, 2019 for one repowered facility and the third rate increase of $5 million, or 0.4%, was effective January 1, 2020 for two repowered facilities. A final rate increase of $5 million, or 0.4%, was effective April 1, 2020 for the two remaining repowered facilities that were placed in service by the end of March 2020. As part of the settlement, parties agreed that the Oregon‑allocated net book value of certain undepreciated equipment replaced as a result of the applicable repowerings would be depreciated and offset with excess deferred income taxes resulting from 2017 Tax Reform. During the three-month period ended March 31, 2020, accelerated depreciation of $40 million and offsetting amortization of excess deferred income taxes was recognized associated with the two remaining repowered facilities included in the 2019 RAC.

In November 2019, PacifiCorp filed a 2020 RAC application requesting an annual increase in rates of $1 million, or 0.1%, associated with repowering the Glenrock III wind facility effective April 1, 2020 and an annual increase in rates of $3 million, or 0.3%, associated with repowering the Dunlap wind facility effective October 15, 2020. As part of its application, PacifiCorp proposed to offset the Oregon-allocated net book value of the replaced wind equipment in this filing with PacifiCorp's OATT revenue related deferral from 2017 through 2019. An all-party settlement was filed in January 2020 supporting the filed request, and was approved by the OPUC in March 2020. Based on a final cost update for the Glenrock III wind facility, and including the net power cost and PTC benefits, a 0.02% rate decrease became effective April 1, 2020. A final rate change is expected to be effective October 15, 2020, after the repowered Dunlap wind facility is placed in service. As a result of the settlement, accelerated depreciation of $7 million and offsetting amortization of PacifiCorp’s OATT deferral was recognized during the three-month period ended March 31, 2020 associated with undepreciated equipment replaced as a result of the repowering of Glenrock III. The settlement provides for accelerated depreciation of the equipment replaced at Dunlap to also be offset with PacifiCorp’s OATT deferral once placed in-service.

In November 2019 PacifiCorp requested authorization to establish an automatic adjustment clause and rate schedule for the costs and revenues related to the Oregon Corporate Activity Tax ("OCAT") that applies to tax years beginning on or after January 1, 2020. Concurrent with this filing, PacifiCorp also requested authorization to defer the OCAT expense. In January 2020, the OPUC authorized the automatic adjustment clause, rate schedule and application for deferral. PacifiCorp is authorized to begin recovering the estimated OCAT expense effective February 1, 2020. The recovery adjustment for 2020 is 0.41% and the rate is being applied as a percentage surcharge on customers' bills.

In February 2020, PacifiCorp filed a general rate case in Oregon requesting a total rate increase of $71 million, or 5.4%, effective January 1, 2021. The rate case includes a separate tariff rider to recover costs associated with the early retirement of Cholla Unit 4 for an increase of $17 million annually from January 2021 through April 2025 and an annual credit to customers of $25 million for amortization of remaining deferred income tax benefits associated with 2017 Tax Reform over a three-year period beginning January 2021. The request for the increase in base rates reflects recovery of Energy Vision 2020 investments, updated depreciation rates and rate design modernization proposals.

In February 2020, PacifiCorp submitted its annual TAM filing in Oregon requesting a decrease of $49 million, or 3.7%, effective January 1, 2021, based on forecast net power costs and loads for the calendar year 2021. The filing includes the customer benefits of new and repowered wind resources, including an increase in PTCs.

Wyoming

In July 2019, Wyoming Senate Enrolled Act No. 74 ("SEA 74") went into effect. The legislation, among other things, requires electric utilities to make a good faith effort to sell a coal-fueled generation facility in Wyoming before it can receive recovery in rates for capital costs associated with new generation facilities built, in whole or in part, to replace the retiring coal-fueled generation facility. The electric utility is obligated to purchase the electricity from the facility through a power purchase agreement at a price that is no greater than the utility's avoided cost as determined by the WPSC. Costs associated with an approved power purchase agreement are expected to be recoverable in rates from Wyoming customers. In March 2020, the Wyoming governor signed Senate Enrolled Act No. 23, which allows a 1 MW or greater customer to purchase electricity from a coal-fueled generation facility purchased from an electric utility under SEA 74. PacifiCorp is working with the WPSC and other stakeholders on rules to implement the legislation. The overall impacts of this legislation cannot be determined at this time.


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In March 2020, PacifiCorp filed a general rate case with the WPSC requesting an increase in base rates of $7 million, or 1.1%, effective January 1, 2021. The increase reflects recovery of Energy Vision 2020 investments, updated depreciation rates and rate design modernization proposals. The application also requests a revision to the ECAM to eliminate the sharing band and requests authorization to discontinue operations and recover costs associated with the early retirement of Cholla Unit 4. The proposed increase reflects several rate mitigation measures that include use of the remaining 2017 Tax Reform benefits to buy down plant balances, including Cholla Unit 4, and spreading the recovery of the depreciation of certain coal-fueled generation units over time periods that extend beyond the depreciable lives proposed in the depreciation rate study.

In March 2020, the Wyoming governor signed House of Representatives Enrolled Act No. 79, which requires the WPSC to adopt a standard to specify a percentage of an electric utility's electricity to be generated from coal‑fueled generation utilizing carbon capture technology by no later than 2030. The bill allows electric utilities to implement a surcharge not to exceed 2% of customer bills to recover costs to comply with the standard.
 
In April 2020, PacifiCorp filed its annual ECAM and RRA application with the WPSC requesting recovery of $7 million, or 1.0% of deferred net power costs from customers for the period January 1, 2019 through December 31, 2019, reflecting the difference between base and actual net power costs in the 2019 deferral period. The rate change will go into effect on an interim basis June 15, 2020. This increase will be offset in part by continued rate credits associated with 2017 Tax Reform benefits and bonus depreciation for which minor adjustments are proposed to go into effect in the same timeframe.

Washington

In November 2019, PacifiCorp submitted its 2019 decoupling filing with the WUTC for the twelve months ended June 30, 2019. In January 2020, the WUTC approved PacifiCorp's 2019 decoupling filing, which resulted in a $12 million surcredit to customers effective February 1, 2020.

In December 2019, PacifiCorp submitted its 2021 Washington general rate case requesting an overall decrease to rates of $4 million, or 1.1%, effective January 1, 2021. The case includes an increase in revenue requirement of $3 million, offset by a proposed ten-year annual surcredit of $7 million, including interest, to customers primarily associated with the amortization of excess deferred income taxes from 2017 Tax Reform. The case includes a request for approval of a new cost allocation methodology, updated depreciation rates, recovery of Energy Vision 2020 investments, and rate design modernization proposals. In April 2020, PacifiCorp submitted supplemental testimony and exhibits to incorporate the impacts of the recently completed decommissioning studies for PacifiCorp’s coal-fueled generating resources and update net power costs. The updated request results in an overall increase to rates of $11 million, or 3.2%.

Idaho

In April 2020, PacifiCorp filed its annual ECAM application with the IPUC requesting recovery of $21 million, or 3.0%, for deferred costs in 2019. This filing includes recovery of the difference in actual net power costs to the base level in rates, an adder for recovery of the Lake Side 2 resource, changes in PTCs, RECs, and a resource tracking mechanism to match costs with the benefits of wind repowering projects until they are reflected in base rates. This deferral is partially offset by $3 million related to amortization of excess deferred income taxes stemming from 2017 Tax Reform and net of recovery for a regulatory asset related to the prior depreciation study.

California

In April 2018, PacifiCorp filed a general rate case with the CPUC for an overall rate increase of $1 million, or 0.9%, effective January 1, 2019. A CPUC decision was issued in February 2020, resulting in a $6 million, or 5.1%, rate decrease effective February 6, 2020. The CPUC's final order also resulted in an additional rate decrease of $6 million, or 5.1%, over the next three years due to the amortization of excess deferred income taxes attributed to 2017 Tax Reform.

California Senate Bill 901 requires electric utilities to prepare and submit wildfire mitigation plans that describe the utilities' plans to prevent, combat and respond to wildfires affecting their service territories. In January 2020, the CPUC approved the resolution establishing procedural rules for the review and disposition of 2020 Wildfire Mitigation Plans. PacifiCorp submitted its 2020 Wildfire Mitigation Plan in February 2020, and in May 2020 the CPUC is expected to issue a decision regarding the 2020 Plan.


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In December 2019, PacifiCorp filed an application notifying the CPUC of the early retirement of the Cholla Unit 4 generating facility and requesting authorization to establish a memorandum account associated with the retirement and decommissioning of Cholla Unit 4. The proposed memorandum account would track costs associated with the unrecovered plant balance, decommissioning and other closure-related costs. PacifiCorp requested an effective date of December 27, 2019 for the proposed memorandum account.

NV Energy (Nevada Power and Sierra Pacific)

Regulatory Rate Review

In June 2019, Sierra Pacific filed an electric regulatory rate review with the PUCN. The filing supported an annual revenue increase of $5 million but requested an annual revenue reduction of $5 million. In September 2019, Sierra Pacific filed an all-party settlement for the electric regulatory rate review. The settlement resolved all cost of capital and revenue requirement issues and provided for an annual revenue reduction of $5 million and required Sierra Pacific to share 50% of regulatory earnings above 9.7% with its customers. The rate design portion of the regulatory rate review was not a part of the settlement and a hearing on rate design was held in November 2019. In December 2019, the PUCN issued an order approving the stipulation but made some adjustments to the methodology for the weather normalization component of historical sales in rates, which resulted in an additional annual revenue reduction of $3 million. The new rates were effective January 1, 2020. In January 2020, Sierra Pacific filed a petition for rehearing challenging the PUCN's adjustments to the weather normalization methodology. In February 2020, the PUCN issued an order granting the petition for rehearing. In April 2020, the PUCN issued a final order approving a weather normalization methodology that changed the additional annual revenue reduction from $3 million to $2 million with an effective date of January 1, 2020.
 
2017 Tax Reform

In February 2018, the Nevada Utilities made filings with the PUCN proposing a tax rate reduction rider for the lower annual income tax expense anticipated to result from 2017 Tax Reform for 2018 and beyond. In March 2018, the PUCN issued an order approving the rate reduction proposed by the Nevada Utilities. The new rates were effective April 1, 2018. The order extended the procedural schedule to allow parties additional discovery relevant to 2017 Tax Reform and a hearing was held in July 2018. In September 2018, the PUCN issued an order directing the Nevada Utilities to record the amortization of any excess protected accumulated deferred income tax arising from the 2017 Tax Reform as a regulatory liability effective January 1, 2018. Subsequently, the Nevada Utilities filed a petition for reconsideration relating to the amortization of protected excess accumulated deferred income tax balances resulting from the 2017 Tax Reform. In November 2018, the PUCN issued an order granting reconsideration and reaffirming the September 2018 order. In December 2018, the Nevada Utilities filed a petition for judicial review. The judicial review occurred in January 2020 and the district court issued an order in March 2020 denying the petition and affirming the PUCN's order.

Customer Price Stability Tariff

In November 2018, the Nevada Utilities made filings with the PUCN to implement the Customer Price Stability Tariff ("CPST"). The Nevada Utilities have designed the CPST to provide certain customers, namely those eligible to file an application pursuant to Chapter 704B of the Nevada Revised Statutes, with a market-based pricing option that is based on renewable resources. The CPST provides for an energy rate that would replace the base tariff energy rate and DEAA. The goal is to have an energy rate that yields an all-in effective rate that is competitive with market options available to such customers. In February 2019, the PUCN granted several intervenors the ability to participate in the proceeding. In June 2019, the Nevada Utilities withdrew their filings but plan to refile a modified tariff in 2020 that incorporates the considerations raised by intervenors.

Natural Disaster Protection Plan

In May 2019, Senate Bill 329 ("SB 329"), Natural Disaster Mitigation Measures, was signed into law, which requires the Nevada Utilities to submit a natural disaster protection plan to the PUCN. The PUCN adopted natural disaster protection plan regulations in January 2020, that require the Nevada Utilities to file their natural disaster protection plan for approval on or before March 1 of every third year, with the first filing due on March 1, 2020. The regulations also require annual updates to be filed on or before September 1 of the second and third years of the plan. The plan must include procedures, protocols and other certain information as it relates to the efforts of the Nevada Utilities to prevent or respond to a fire or other natural disaster. The expenditures incurred by the Nevada Utilities in developing and implementing the natural disaster protection plan are required to be held in a regulatory asset account, with the Nevada Utilities filing an application for recovery on or before March 1 of each year. The Nevada Utilities submitted their initial natural disaster protection plan to the PUCN and filed their first application seeking recovery of 2019 expenditures in February 2020. The hearings are scheduled for June 2020.

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COVID-19

In March 2020, the PUCN issued an emergency order for the Nevada Utilities to establish regulatory asset accounts related to the costs of maintaining service to customers affected by COVID-19 whose services would have been terminated or disconnected under normally-applicable terms of service. The Nevada Utilities may incur significant costs as a result of COVID-19, including, but not limited to, higher credit loss expenses resulting from a higher than average level of write-offs of uncollectible accounts associated with the suspension of disconnections and late payment fees to assist customers facing unprecedented economic pressures. The Nevada Utilities also expect to incur additional costs that cannot currently be predicted given the unprecedented nature of COVID-19.

Northern Powergrid Distribution Companies

GEMA, through the Ofgem, published its RIIO-2 sector methodology decision in May 2019, continuing the process of developing the next set of price control arrangements that will be implemented for transmission and gas distribution networks in Great Britain. Ofgem explicitly stated that this decision did not apply for Northern Powergrid's next price control, ("ED2"), which will begin in April 2023. However, it also stated that some of the proposals may be capable of application to that price control and, in December 2019, published a decision on the framework for ED2 that confirmed the same overall approach will apply.

Regarding allowed return on capital, Ofgem has stated that it currently considers that a cost of equity of 4.3% (plus inflation calculated using the United Kingdom's consumer prices index including owner occupiers' housing costs) would be appropriate for energy networks, which is approximately 220 basis points lower than the current comparable cost of equity. This cost of equity assumption is based on a proposed debt capitalization assumption for the next price control of 60%, which is lower than the 65% debt capitalization assumption for the current price control.

In respect of ED1, GEMA published a decision in October 2019 to make allowance for certain additional costs totaling £12 million, plus RPI inflation from 2012-13, that it judged to be beyond the control of the licensees, beyond the routine adjustments for such costs that occur annually. The adjustments, which reflect additional costs, for the licensees will flow into allowed revenues through the standard price control mechanisms and do not affect Northern Powergrid's overall financial position compared to when the current price control was set.

BHE Pipeline Group

Northern Natural Gas

In July 2018, the FERC issued a final rule adopting procedures for determining whether natural gas pipelines were collecting unjust and unreasonable rates in light of the reduction in the federal corporate tax rate from 2017 Tax Reform. Pursuant to the final rule, in October 2018, Northern Natural Gas filed an informational filing on FERC Form No. 501-G and a Statement Demonstrating Why No Rate Adjustment is Necessary. In January 2019, the FERC initiated a Section 5 investigation to determine whether the rates currently charged by Northern Natural Gas are just and reasonable. As required by the FERC Section 5 order, Northern Natural Gas filed a cost and revenue study in April 2019. In July 2019, Northern Natural Gas filed a Section 4 rate case requesting increases in its transportation and storage rates. The rate filing provided evidence in support of a $300 million increase to Northern Natural Gas' annual revenue requirement. The rate increase is primarily attributed to the capital investment made by Northern Natural Gas since the last rate case, an increase in Northern Natural Gas' depreciation rates, the addition of negative salvage and increased return on equity. In September 2019, the FERC consolidated the Section 5 investigation and the Section 4 rate case into one procedural process set for hearing commencing June 2020. In January 2020, the FERC approved Northern Natural Gas' filing to implement its interim rates, including an increase of 77% from its current Market Area transmission reservation rate, subject to refund, effective January 1, 2020.

BHE Transmission

AltaLink

General Tariff Application

In August 2018, AltaLink filed its 2019-2021 GTA with the AUC, delivering on the first three years of its commitment to keep rates lower or flat at the approved 2018 revenue requirement of C$904 million for customers for the next five years. In addition, AltaLink proposes to provide a further tariff reduction over the three years by refunding previously collected accumulated depreciation surplus of an additional C$31 million.

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In April 2019, AltaLink filed an update to its 2019-2021 GTA primarily to reflect its 2018 actual results and the impact of the AUC's decision on AltaLink's 2014-2015 Deferral Account Reconciliation Application. The application requests the approval of revised revenue requirements of C$879 million, C$882 million and C$885 million for 2019, 2020 and 2021, respectively. The forecast revenue requirement is based on an 8.5% return on equity and 37% deemed equity as approved by the AUC for 2019 and 2020.

In July 2019, AltaLink filed a 2019-2021 partial negotiated settlement application with the AUC. The application consisted of negotiated reductions totaling a C$38 million net decrease to the three-year total revenue requirement applied for in AltaLink's 2019-2021 GTA updated in April 2019. However, this may be partially offset by AltaLink's request for an additional C$20 million of forecast transmission line clearance capital as part of an excluded matter. The 2019-2021 negotiated settlement agreement excluded certain matters related to the new salvage study and salvage recovery approach, additional capital spending and incremental asset retirements. AltaLink's salvage proposal is estimated to save customers C$267 million between 2019 and 2023. Excluded matters were examined by the AUC in a hearing held in November 2019. In November 2019, a hearing to examine the excluded matters was completed and written arguments were filed in January 2020.

In October 2019, AltaLink filed a letter with the AUC to request the continuation of the monthly interim refundable transmission tariff effective January 1, 2020, until a final tariff is approved. In October 2019, the AUC confirmed the interim refundable transmission tariff at C$74 million per month, until otherwise directed by the AUC.

In April 2020, the AUC issued its decision with respect to AltaLink's 2019-2021 GTA. The AUC approved the negotiated settlement agreement as filed and rendered its decision and directions on the excluded matters. The AUC denied AltaLink's proposed salvage methodology, but indicated it will initiate a generic proceeding to review the matter on an industry-wide basis. Reverting the salvage method back to the traditional pre-collection approach will increase the amount of salvage collected by approximately C$82 million, resulting in an increase to AltaLink’s cash transmission tariffs collected from customers for the 2019-2021 period by approximately C$77 million. The AUC approved C$13 million of AltaLink's requested additional C$20 million of forecast transmission line clearance capital on placeholder basis and will further review the remaining C$7 million capital investment in AltaLink's subsequent compliance filing. Also, C$3 million of forecast operating expenses and C$4 million of forecast capital investment were approved to reduce the risk of fires, with a further C$31 million of capital subject to further review in the compliance filing. Finally, the AUC approved C$6 million of retirements for towers and fixtures. AltaLink is directed to file a compliance filing within 45 days of the date of the decision.

Subject to the yet to be filed compliance filing and final AUC approval, AltaLink's revised revenue requirements are estimated to be C$895 million for 2019, C$895 million for 2020 and C$899 million for 2021.

2021 Generic Cost of Capital Proceeding

In December 2018, the AUC initiated the 2021 GCOC proceeding to consider returning to a formula-based approach in determining the return on equity for a given year, starting with 2021. In April 2019, after receiving comments from interested parties, the AUC expanded the scope of the proceeding to include a traditional non-formulaic GCOC inquiry as well as the consideration of returning to a formula-based approach.

In January 2020, AltaLink filed company and expert evidence, recommending a range of 8.75% to 10.5% return on equity, on a recommended equity ratio of 40% for 2021 and 2022. The Consumers' Coalition of Alberta, the Utilities Consumer Advocate and the City of Calgary filed intervenor evidence recommending a range of 5.0% to 6.9% return on equity, and an AltaLink common equity ratio of 35% to 37% for 2021 and 2022.
In March 2020, as a result of COVID-19, the AUC suspended the proceeding for an indefinite period. This decision will be subject to review and reassessment by the AUC every 30 to 60 days.


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2014-2015 Deferral Account Reconciliation Application

In December 2018 and January 2019, the AUC issued decisions approving C$3,833 million out of the C$4,017 million capital project additions, included in the application. Project costs of C$155 million were deferred to a future hearing. The AUC disallowed capital additions of approximately C$29 million including applicable AFUDC, pending receipt of additional supporting documentation for certain items.

AltaLink filed compliance filings in February and September 2019 reflecting the AUC's directives and AUC approval was received in November 2019. However, the AUC had previously ruled that it will put in placeholder amounts for the approved costs of the assets in the 2014-2015 Deferral Account Reconciliation Application proceeding until the AUC-initiated proceeding to consider the issue of transmission asset utilization.

2016-2018 Deferral Account Reconciliation Application

In July 2019, AltaLink filed its 2016-2018 Deferral Account Reconciliation Application with the AUC. The application includes 116 projects with total gross capital additions, including AFUDC, of C$976 million. In December 2019, the AUC announced a series of technical meetings to address AltaLink's responses to certain information requests.

In March 2020, the AUC issued a letter indicating that it will provide further process steps after AltaLink submits its remaining responses to information requests and the Consumers' Coalition of Alberta files its intervener evidence in April 2020.

Alberta Electric System Operator Tariff Decision

In September 2019, the AUC issued its decision with respect to the 2018 AESO tariff. As part of this decision, the AUC approved AltaLink's proposal to refund contributions made by distribution facility owners relative to transmission projects built and owned by transmission facility owners. The proposal will benefit distribution customers by flowing through the lower cost of capital of the transmission facility owner rather than the higher cost of capital of the distribution facility owner. As directed by the AUC, AltaLink would pay FortisAlberta the unamortized contribution balance of approximately C$375 million and add the amount to AltaLink's rate base if the decision is upheld. The AUC directed the AESO to consult with AltaLink to provide a joint proposal to implement AltaLink's contribution proposal. In September 2019, FortisAlberta filed a review and variance application with the AUC requesting the AUC re-evaluate its findings with respect to AltaLink's customer contribution proposal relative to distribution facility owners. In October 2019, the AUC granted FortisAlberta's request to proceed to a review and variance with the record closed in November 2019, after submissions from FortisAlberta, AltaLink, and other interested parties. FortisAlberta also filed for permission to appeal the decision with the Court of Appeal, which will not be heard until after the AUC’s review proceeding.

In December 2019, the AUC reopened the record of the review and variance proceeding and, in January 2020, issued specific information requests to each of FortisAlberta and AltaLink to clarify the evidence previously filed. AltaLink and FortisAlberta filed responses to the AUC information requests in January 2020. In February 2020, FortisAlberta filed a motion with the AUC requesting the appointment of a review panel to convene an oral hearing.

In March 2020, as a result of COVID-19, the AUC advised that it would be immediately deferring all public hearings, consultations or information sessions until further notice and requested FortisAlberta to advise the AUC whether it wishes to amend its motion. In April 2020, FortisAlberta filed its response requesting an oral hearing, to commence in 105 days.

Environmental Laws and Regulations

Each Registrant is subject to federal, state, local and foreign laws and regulations regarding climate change, RPS, air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact each Registrant's current and future operations. In addition to imposing continuing compliance obligations, these laws and regulations provide regulators with the authority to levy substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. These laws and regulations are administered by various federal, state, local and international agencies. Each Registrant believes it is in material compliance with all applicable laws and regulations, although many laws and regulations are subject to interpretation that may ultimately be resolved by the courts. The discussion below contains material developments to those matters disclosed in Item 1 of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2019, and new environmental matters occurring in 2020.

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Clean Air Act Regulations

The Clean Air Act is a federal law administered by the EPA that provides a framework for protecting and improving the nation's air quality and controlling sources of air emissions. The implementation of new standards is generally outlined in SIPs, which are a collection of regulations, programs and policies to be followed. SIPs vary by state and are subject to public hearings and EPA approval. Some states may adopt additional or more stringent requirements than those implemented by the EPA.

Mercury and Air Toxics Standards

In March 2011, the EPA proposed a rule that requires coal-fueled generating facilities to reduce mercury emissions and other hazardous air pollutants through the establishment of "Maximum Achievable Control Technology" standards. The final MATS became effective on April 16, 2012, and required that new and existing coal-fueled generating facilities achieve emission standards for mercury, acid gases and other non-mercury hazardous air pollutants. Existing sources were required to comply with the new standards by April 16, 2015 with the potential for individual sources to obtain an extension of up to one additional year, at the discretion of the Title V permitting authority, to complete installation of controls or for transmission system reliability reasons. The relevant Registrants have completed emission reduction projects to comply with the final rule's standards for acid gases and non-mercury metallic hazardous air pollutants.

MidAmerican Energy retired certain coal-fueled generating units as the least-cost alternative to comply with the MATS. Walter Scott, Jr. Energy Center Units 1 and 2 were retired in 2015, and George Neal Energy Center Units 1 and 2 were retired in April 2016. A fifth unit, Riverside Generating Station, was limited to natural gas combustion in March 2015.

Numerous lawsuits have been filed in the D.C. Circuit challenging the MATS. In April 2014, the D.C. Circuit upheld the MATS requirements. In November 2014, the United States Supreme Court agreed to hear the MATS appeal on the limited issue of whether the EPA unreasonably refused to consider costs in determining whether it is appropriate to regulate hazardous air pollutants emitted by electric utilities. Oral argument in the case was held before the United States Supreme Court in March 2015, and a decision was issued by the United States Supreme Court in June 2015, which reversed and remanded the MATS rule to the D.C. Circuit for further action. The United States Supreme Court held that the EPA had acted unreasonably when it deemed cost irrelevant to the decision to regulate generating facilities, and that cost, including costs of compliance, must be considered before deciding whether regulation is necessary and appropriate. The United States Supreme Court's decision did not vacate or stay implementation of the MATS rule. In December 2015, the D.C. Circuit issued an order remanding the rule to the EPA, without vacating the rule. As a result, the relevant Registrants continue to have a legal obligation under the MATS rule and the respective permits issued by the states in which each respective Registrant operates to comply with the MATS rule, including operating all emissions controls or otherwise complying with the MATS requirements.

On December 27, 2018, the EPA issued a proposed revised supplemental cost finding for the MATS, as well as the required risk and technology review under Clean Air Act Section 112. The EPA proposed to determine that it is not appropriate and necessary to regulate hazardous air pollutant emissions from power plants under Section 112; however, the EPA proposed to retain the emission standards and other requirements of the MATS rule, because the EPA did not propose to remove coal- and oil-fueled power plants from the list of sources regulated under Section 112. On April 16, 2020 the EPA finalized its decision to repeal the appropriate and necessary findings in the MATS rule and retain the overall emission standards. The rule will take effect 60 days after publication in the Federal Register. Until litigation over the rule is exhausted, the relevant Registrants cannot fully determine the impacts of the changes to the MATS rule.

On March 13, 2020, the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") issued an opinion in Chesapeake Climate Action Network v. EPA regarding consolidated challenges to the EPA's startup and shutdown provisions contained in the 2012 MATS rule. The MATS rule's provisions governing startup and shutdown require electric generating units comply with work practice standards as opposed to numerical limits during these periods. The EPA denied petitions for reconsideration of these provisions in 2016 and environmentalists challenged this denial. The D.C. Circuit vacated the reconsideration denials, remanding the petition to the EPA for further action. The court did not make a determination on the merits of the arguments concerning the EPA's legal authority to set work practice standards. The existing work practice standards and the alternate definition for when startup ends continue to be applicable. Until the EPA finalizes action to respond to the court's order, the relevant Registrants cannot fully determine the impacts of the remand.

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Coal Combustion Byproduct Disposal

In May 2010, the EPA released a proposed rule to regulate the management and disposal of coal combustion byproducts under the RCRA. The final rule was released by the EPA on December 19, 2014, was published in the Federal Register on April 17, 2015 and was effective on October 19, 2015. The final rule regulates coal combustion byproducts as non-hazardous waste under RCRA Subtitle D and establishes minimum nationwide standards for the disposal of coal combustion residuals. Under the final rule, surface impoundments and landfills utilized for coal combustion byproducts may need to be closed unless they can meet the more stringent regulatory requirements. The final rule requires regulated entities to post annual groundwater monitoring and corrective action reports. The first of these reports was posted to the respective Registrant's coal combustion rule compliance data and information websites in March 2018. Based on the results in those reports, additional action may be required under the rule.

At the time the rule was published in April 2015, PacifiCorp operated 18 surface impoundments and seven landfills that contained coal combustion byproducts. Prior to the effective date of the rule in October 2015, nine surface impoundments and three landfills were either closed or repurposed to no longer receive coal combustion byproducts and hence are not subject to the final rule. As PacifiCorp proceeded to implement the final coal combustion rule, it was determined that two surface impoundments located at the Dave Johnston generating facility were hydraulically connected and effectively constitute a single impoundment. In November 2017, a new surface impoundment was placed into service at the Naughton Generating Station. At the time the rule was published in April 2015, MidAmerican Energy owned or operated nine surface impoundments and four landfills that contain coal combustion byproducts. Prior to the effective date of the rule in October 2015, MidAmerican Energy closed or repurposed six surface impoundments to no longer receive coal combustion byproducts. Five of these surface impoundments were closed on or before December 21, 2017 and the sixth is undergoing closure. At the time the rule was published in April 2015, the Nevada Utilities operated ten evaporative surface impoundments and two landfills that contained coal combustion byproducts. Prior to the effective date of the rule in October 2015, the Nevada Utilities closed four of the surface impoundments, four impoundments discontinued receipt of coal combustion byproducts making them inactive and two surface impoundments remain active and subject to the final rule. The two landfills remain active and subject to the final rule.

Multiple parties filed challenges over various aspects of the final rule in the D.C. Circuit in 2015, resulting in settlement of some of the issues and subsequent regulatory action by the EPA, including subjecting inactive surface impoundments to regulation. Oral argument was held by the D.C. Circuit on November 20, 2017 over certain portions of the 2015 rule that had not been settled or otherwise remanded. On August 21, 2018, the D.C. Circuit issued its opinion in Utility Solid Waste Activities Group v. EPA, finding it was arbitrary and capricious for the EPA to allow unlined ash ponds to continue operating until some unknown point in the future when groundwater contamination could be detected. The D.C. Circuit vacated the closure section of the CCR rule and remanded the issue of unlined ponds to the EPA for reconsideration with specific instructions to consider harm to the environment, not just to human health. The D.C. Circuit also held the EPA's decision to not regulate legacy ponds was arbitrary and capricious. While the D.C. Circuit's decision was pending, the EPA, on March 15, 2018, issued a proposal to address provisions of the final coal combustion residuals rule that were remanded back to the agency on June 14, 2016, by the D.C. Circuit. The proposal included provisions that establish alternative performance standards for owners and operators of coal combustion residuals units located in states that have approved permit programs or are otherwise subject to oversight through a permit program administered by the EPA. The EPA finalized the first phase of the coal combustion residuals rule amendments on July 30, 2018, with an effective date of August 28, 2018 (the "Phase 1, Part 1 rule"). In addition to adopting alternative performance standards and revising groundwater performance standards for certain constituents, the EPA extended the deadline by which facilities must initiate closure of unlined ash ponds exceeding a groundwater protection standard and impoundments that do not meet the rule's aquifer location restrictions to October 31, 2020. Following submittal of competing motions from environmental groups and the EPA to stay or remand this deadline extension, on March 13, 2019, the D.C. Circuit granted the EPA's request to remand the rule and left the October 31, 2020 deadline in place while the agency undertakes a new rulemaking establishing a new deadline for initiating closure. On August 14, 2019, the EPA released its "Phase 2" proposal, which contains targeted amendments to the coal combustion residuals rule in response to court remands and the EPA settlement agreements, as well as issues raised in a rulemaking petition. The Phase 2 proposal modifies the definition of "beneficial use" by replacing a mass-based threshold with new location-based criteria for triggering the need to conduct an environmental demonstration; establishes a definition of "CCR storage pile" to address the temporary storage of coal combustion residuals on the ground, depending on whether the material is destined for disposal or beneficial use; makes certain changes to the rule's annual groundwater monitoring and corrective action reports to make it easier for the public to see and understand the data contained within the reports; modifies the requirements related to facilities' publicly available coal combustion residual rule websites to make the information more readily available; and establishes a risk-based groundwater monitoring protection standard for boron in the event the EPA decides to add boron to Appendix IV in the coal combustion residuals rule. The EPA accepted comments on the Phase 2 proposal through October 15, 2019.


48


On December 2, 2019, the EPA proposed additional changes to the CCR rule in its Holistic Approach to Closure: Part A rule. This proposal addressed the D.C. Circuit's revocation of the provisions that allow unlined impoundments to continue receiving ash and establishes a new deadline of August 31, 2020, by which all unlined surface impoundments (including clay lined impoundments that do not otherwise meet the definition of "lined") must initiate closure. The proposal also identifies and clarifies several opportunities to extend the closure deadlines for lack of alternative capacity or closure of the coal-fueled operating unit by a certain date. Comments on the proposal were accepted through January 31, 2020. On March 3, 2020, the EPA proposed the Holistic Approach to Closure: Part B rule, which sets forth procedures for owners and operators of unlined ash ponds to demonstrate that the liner systems or underlying soils for these units perform as well as the liner criteria in the CCR rule and to request approval to continue operating such units. The proposal also includes revisions of the rule's closure provisions, including options that would allow the use of CCR for purposes of closing a CCR unit subject to forced closure; an additional closure option for units that are closing by removal of CCR but cannot complete groundwater corrective action within the rule's prescribed closure timeframes; and a new requirement for annual closure progress reports. The EPA accepted comment on the proposal through April 17, 2020.

On February 20, 2020, the EPA proposed a federal coal combustion residuals permit program as required by the Water Infrastructure Improvements for the Nation Act of 2016. The proposal would require permits for all CCR units in nonparticipating states and in Indian country. The proposal would establish three types of permits (individual, general and permit-by-rule); establish a tiered schedule for permit application deadlines, beginning with facilities that have at least one existing CCR impoundment that is classified as having "high hazard potential;" and postpone timelines for permit application deadlines for all other CCR facilities to be established at a later date. All CCR units would remain subject to the federal self-implementing rule until a state or federal permit is issued. The EPA is accepting comments on this proposal through May 20, 2020. Until the proposals are finalized and fully litigated, the Registrants cannot determine whether additional action may be required.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Consolidated Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of goodwill and long-lived assets, pension and other postretirement benefits, income taxes and revenue recognition - unbilled revenue. For additional discussion of the Company's critical accounting estimates, see Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in the Company's assumptions regarding critical accounting estimates since December 31, 2019.


49


PacifiCorp and its subsidiaries
Consolidated Financial Section


50


PART I
Item 1.
Financial Statements


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
PacifiCorp

Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated balance sheet of PacifiCorp and subsidiaries ("PacifiCorp") as of March 31, 2020, the related consolidated statements of operations and changes in shareholders' equity for the three-month periods ended March 31, 2020 and 2019, and of cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of PacifiCorp as of December 31, 2019, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results
This interim financial information is the responsibility of PacifiCorp's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to PacifiCorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP

 
Portland, Oregon
May 1, 2020


51


PACIFICORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)

 
 
As of
 
 
March 31,
 
December 31,
 
 
2020
 
2019
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
53

 
$
30

Trade receivables, net
 
572

 
644

Other receivables, net
 
43

 
70

Inventories
 
420

 
394

Regulatory assets
 
72

 
63

Prepaid expenses
 
64

 
61

Other current assets
 
21

 
28

Total current assets
 
1,245

 
1,290

 
 
 
 
 
Property, plant and equipment, net
 
21,099

 
20,973

Regulatory assets
 
1,086

 
1,060

Other assets
 
362

 
374

 
 
 
 
 
Total assets
 
$
23,792

 
$
23,697


The accompanying notes are an integral part of these consolidated financial statements.

52


PACIFICORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)
(Amounts in millions)

 
 
As of
 
 
March 31,
 
December 31,
 
 
2020
 
2019
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 
 
 
 
Accounts payable
 
$
660

 
$
679

Accrued interest
 
112

 
116

Accrued property, income and other taxes
 
114

 
96

Accrued employee expenses
 
99

 
75

Short-term debt
 
56

 
130

Current portion of long-term debt
 
38

 
38

Regulatory liabilities
 
89

 
56

Other current liabilities
 
195

 
170

Total current liabilities
 
1,363

 
1,360

 
 
 
 
 
Long-term debt
 
7,621

 
7,620

Regulatory liabilities
 
2,830

 
2,913

Deferred income taxes
 
2,579

 
2,563

Other long-term liabilities
 
785

 
804

Total liabilities
 
15,178

 
15,260

 
 
 
 
 
Commitments and contingencies (Note 9)
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
Preferred stock
 
2

 
2

Common stock - 750 shares authorized, no par value, 357 shares issued and outstanding
 
—

 
—

Additional paid-in capital
 
4,479

 
4,479

Retained earnings
 
4,148

 
3,972

Accumulated other comprehensive loss, net
 
(15
)
 
(16
)
Total shareholders' equity
 
8,614

 
8,437

 
 
 
 
 
Total liabilities and shareholders' equity
 
$
23,792

 
$
23,697


The accompanying notes are an integral part of these consolidated financial statements.


53


PACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Operating revenue
$
1,206

 
$
1,259

 
 

 
 
Operating expenses:
 
 
 
Cost of fuel and energy
417

 
465

Operations and maintenance
254

 
256

Depreciation and amortization
252

 
205

Property and other taxes
49

 
49

Total operating expenses
972

 
975

 
 

 
 
Operating income
234

 
284

 
 

 
 
Other income (expense):
 

 
 
Interest expense
(102
)
 
(96
)
Allowance for borrowed funds
10

 
7

Allowance for equity funds
21

 
14

Interest and dividend income
3

 
5

Other, net
(4
)
 
7

Total other income (expense)
(72
)
 
(63
)
 
 

 
 
Income before income tax (benefit) expense
162

 
221

Income tax (benefit) expense
(14
)
 
42

Net income
$
176

 
$
179


The accompanying notes are an integral part of these consolidated financial statements.


54


PACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Amounts in millions)

 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Total
 
 
Preferred
 
Common
 
Paid-in
 
Retained
 
Comprehensive
 
Shareholders'
 
 
Stock
 
Stock
 
Capital
 
Earnings
 
Loss, Net
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
$
2

 
$
—

 
$
4,479

 
$
3,377

 
$
(13
)
 
$
7,845

Net income
 
—

 
—

 
—

 
179

 
—

 
179

Other comprehensive income
 
—

 
—

 
—

 
—

 
1

 
1

Common stock dividends declared
 
—

 
—

 
—

 
(175
)
 
—

 
(175
)
Balance, March 31, 2019
 
$
2

 
$
—

 
$
4,479

 
$
3,381

 
$
(12
)
 
$
7,850

 
 
 

 
 

 
 

 
 

 
 

 
 

Balance, December 31, 2019
 
$
2

 
$
—

 
$
4,479

 
$
3,972

 
$
(16
)
 
$
8,437

Net income
 
—

 
—

 
—

 
176

 
—

 
176

Other comprehensive income
 
—

 
—

 
—

 
—

 
1

 
1

Balance, March 31, 2020
 
$
2

 
$
—

 
$
4,479

 
$
4,148

 
$
(15
)
 
$
8,614


The accompanying notes are an integral part of these consolidated financial statements.


55


PACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
176

 
$
179

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
252

 
205

Allowance for equity funds
(21
)
 
(14
)
Changes in regulatory assets and liabilities
(16
)
 
(35
)
Deferred income taxes and amortization of investment tax credits
(30
)
 
5

Other, net
6

 
(1
)
Changes in other operating assets and liabilities:
 
 
 

Trade receivables, other receivables and other assets
85

 
32

Inventories
(26
)
 
11

Derivative collateral, net
(1
)
 
7

Prepaid expenses
(3
)
 
(4
)
Accrued property, income and other taxes, net
18

 
68

Accounts payable and other liabilities
(3
)
 
41

Net cash flows from operating activities
437

 
494

 
 
 
 

Cash flows from investing activities:
 
 
 

Capital expenditures
(366
)
 
(337
)
Other, net
27

 
1

Net cash flows from investing activities
(339
)
 
(336
)
 
 
 
 

Cash flows from financing activities:
 
 
 

Proceeds from long-term debt
—

 
990

Repayments of long-term debt
—

 
(350
)
Net repayments of short-term debt
(74
)
 
—

Dividends paid
—

 
(175
)
Other, net
—

 
(31
)
Net cash flows from financing activities
(74
)
 
434

 
 
 
 

Net change in cash and cash equivalents and restricted cash and cash equivalents
24

 
592

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
36

 
92

Cash and cash equivalents and restricted cash and cash equivalents at end of period
$
60

 
$
684

 
The accompanying notes are an integral part of these consolidated financial statements.


56


PACIFICORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
General

PacifiCorp, which includes PacifiCorp and its subsidiaries, is a United States regulated electric utility company serving retail customers, including residential, commercial, industrial, irrigation and other customers in portions of Utah, Oregon, Wyoming, Washington, Idaho and California. PacifiCorp owns, or has interests in, a number of thermal, hydroelectric, wind-powered and geothermal generating facilities, as well as electric transmission and distribution assets. PacifiCorp also buys and sells electricity on the wholesale market with other utilities, energy marketing companies, financial institutions and other market participants. PacifiCorp is subject to comprehensive state and federal regulation. PacifiCorp's subsidiaries support its electric utility operations by providing coal mining services. PacifiCorp is an indirect subsidiary of Berkshire Hathaway Energy Company ("BHE"), a holding company based in Des Moines, Iowa that owns subsidiaries principally engaged in energy businesses. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").

The unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Consolidated Financial Statements as of March 31, 2020 and for the three-month periods ended March 31, 2020 and 2019. The Consolidated Statements of Comprehensive Income have been omitted as net income materially equals comprehensive income for the three-month periods ended March 31, 2020 and 2019. The results of operations for the three-month periods ended March 31, 2020 and 2019 are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in PacifiCorp's Annual Report on Form 10-K for the year ended December 31, 2019 describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in PacifiCorp's assumptions regarding significant accounting estimates and policies during the three-month period ended March 31, 2020.

Coronavirus Disease 2019 ("COVID-19")

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by PacifiCorp. While the rapid outbreak of COVID-19 has not had a material impact on PacifiCorp's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. Such impacts may include, among others, higher bad debt expense associated with the suspension of disconnections across PacifiCorp's service territory and suspension of late payment fees in certain jurisdictions implemented to assist customers facing unprecedented economic pressures and increased retirement plan contributions due to reductions in the market value of retirement plan assets. The duration and extent of COVID-19 and its future impact on PacifiCorp's business cannot be reasonably estimated at this time. Accordingly, significant estimates used in the preparation of PacifiCorp's unaudited Consolidated Financial Statements, including those associated with evaluations of certain long-lived assets for impairment, expected credit losses on amounts owed to PacifiCorp and potential regulatory deferral or recovery of certain costs may be subject to significant adjustments in future periods.

In March and April 2020, PacifiCorp filed applications requesting authorization to defer costs associated with COVID‑19 with the Utah Public Service Commission, the Oregon Public Utility Commission, the Wyoming Public Service Commission ("WPSC"), the Washington Utilities and Transportation Commission and the Idaho Public Utilities Commission. In April 2020, as ordered by the California Public Utilities Commission, PacifiCorp filed to establish the COVID‑19 Pandemic Protections Memorandum Account. In April 2020, the WPSC approved PacifiCorp's application to defer costs associated with COVID-19.


57


(2)
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash equivalents consist of funds invested in money market mutual funds, United States Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist substantially of funds representing escrow accounts for disputes, vendor retention, custodial and nuclear decommissioning funds. Restricted amounts are included in other current assets and other assets on the Consolidated Balance Sheets. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Cash and cash equivalents
$
53

 
$
30

Restricted cash included in other current assets
5

 
4

Restricted cash included in other assets
2

 
2

Total cash and cash equivalents and restricted cash and cash equivalents
$
60

 
$
36


(3)
Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):
 
 
 
As of
 
 
 
March 31,
 
December 31,
 
Depreciable Life
 
2020
 
2019
Utility Plant:
 
 
 
 
 
Generation
14 - 67 years
 
$
12,468

 
$
12,509

Transmission
58 - 75 years
 
6,513

 
6,482

Distribution
20 - 70 years
 
7,359

 
7,307

Intangible plant(1)
5 - 75 years
 
1,018

 
1,016

Other
5 - 60 years
 
1,463

 
1,449

Utility plant in service
 
 
28,821

 
28,763

Accumulated depreciation and amortization
 
 
(9,739
)
 
(9,803
)
Utility plant in-service, net
 
 
19,082

 
18,960

Other non-regulated, net of accumulated depreciation and amortization
59 years
 
9

 
10

Plant, net
 
 
19,091

 
18,970

Construction work-in-progress
 
 
2,008

 
2,003

Property, plant and equipment, net
 
 
$
21,099

 
$
20,973


(1)
Computer software costs included in intangible plant are initially assigned a depreciable life of 5 to 10 years.

In March 2020, PacifiCorp acquired wind turbines from BHE Wind, LLC, an indirect wholly owned subsidiary of BHE, for $47 million. The wind turbines will be installed as part of newly constructed wind-powered generating facilities that are planned to be placed in service in 2020.

(4)
Recent Financing Transactions

Long-Term Debt

In April 2020, PacifiCorp issued $400 million of its 2.70% First Mortgage Bonds due 2030 and $600 million of its 3.30% First Mortgage Bonds due 2051. PacifiCorp intends to use the net proceeds to fund capital expenditures, primarily for renewable resources and associated transmission projects, and for general corporate purposes.


58


(5)
Income Taxes

A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax expense is as follows:
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Federal statutory income tax rate
21
 %
 
21
 %
State income tax, net of federal income tax benefit
3

 
3

Federal income tax credits
(11
)
 
(4
)
Effects of ratemaking
(2
)
 
(1
)
Amortization of excess deferred income taxes
(20
)
 
—

Effective income tax rate
(9
)%
 
19
 %

Income tax credits relate primarily to production tax credits ("PTCs") earned by PacifiCorp's wind-powered generating facilities. Federal renewable electricity PTCs are earned as energy from qualifying wind-powered generating facilities is produced and sold and are based on a per-kilowatt hour rate pursuant to the applicable federal income tax law. Wind-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service.

Amortization of excess deferred income taxes is primarily attributable to the amortization of $30 million of Oregon allocated excess deferred income taxes pursuant to the Oregon Renewable Adjustment Clause settlement, whereby a portion of Oregon allocated excess deferred income taxes was used to accelerate depreciation on Oregon's share of certain repowered wind facilities.

Berkshire Hathaway includes BHE and its subsidiaries in its United States federal income tax return. Consistent with established regulatory practice, PacifiCorp's provision for federal and state income tax has been computed on a stand-alone basis, and substantially all of its currently payable or receivable income tax is remitted to or received from BHE. For the three-month periods ended March 31, 2020 and 2019, PacifiCorp made net cash payments for federal and state income tax to BHE totaling $26 million and $- million, respectively.

(6)
Employee Benefit Plans

Net periodic benefit credit for the pension and other postretirement benefit plans included the following components (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Pension:
 
 
 
Service cost
$
—

 
$
—

Interest cost
9

 
11

Expected return on plan assets
(14
)
 
(17
)
Net amortization
5

 
3

Net periodic benefit cost (credit)
$
—

 
$
(3
)
 
 
 
 
Other postretirement:
 
 
 
Service cost
$
—

 
$
—

Interest cost
3

 
3

Expected return on plan assets
(4
)
 
(5
)
Net amortization
—

 
—

Net periodic benefit credit
$
(1
)
 
$
(2
)


59


Amounts other than the service cost for pension and other postretirement benefit plans are recorded in Other, net in the Consolidated Statements of Operations. Employer contributions to the pension and other postretirement benefit plans are expected to be $4 million and $- million, respectively, during 2020. As of March 31, 2020, $1 million and $- million of contributions had been made to the pension and other postretirement benefit plans, respectively.

(7)
Risk Management and Hedging Activities

PacifiCorp is exposed to the impact of market fluctuations in commodity prices and interest rates. PacifiCorp is principally exposed to electricity, natural gas, coal and fuel oil commodity price risk as it has an obligation to serve retail customer load in its regulated service territories. PacifiCorp's load and generating facilities represent substantial underlying commodity positions. Exposures to commodity prices consist mainly of variations in the price of fuel required to generate electricity and wholesale electricity that is purchased and sold. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, geopolitical factors, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists on variable-rate debt and future debt issuances. PacifiCorp does not engage in a material amount of proprietary trading activities.

PacifiCorp has established a risk management process that is designed to identify, assess, manage, mitigate, monitor and report each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, PacifiCorp uses commodity derivative contracts, which may include forwards, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. PacifiCorp manages its interest rate risk by limiting its exposure to variable interest rates primarily through the issuance of fixed-rate long-term debt and by monitoring market changes in interest rates. Additionally, PacifiCorp may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate PacifiCorp's exposure to interest rate risk. No interest rate derivatives were in place during the periods presented. PacifiCorp does not hedge all of its commodity price and interest rate risks, thereby exposing the unhedged portion to changes in market prices.

There have been no significant changes in PacifiCorp's accounting policies related to derivatives. Refer to Note 8 for additional information on derivative contracts.


60


The following table, which reflects master netting arrangements and excludes contracts that have been designated as normal under the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of PacifiCorp's derivative contracts, on a gross basis, and reconciles those amounts to the amounts presented on a net basis on the Consolidated Balance Sheets (in millions):
 
Other
 
 
 
Other
 
Other
 
 
 
Current
 
Other
 
Current
 
Long-term
 
 
 
Assets
 
Assets
 
Liabilities
 
Liabilities
 
Total
 
 
 
 
 
 
 
 
 
 
As of March 31, 2020
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1):
 
 
 
 
 
 
 
 
 
Commodity assets
$
10

 
$
4

 
$
2

 
$
—

 
$
16

Commodity liabilities
(4
)
 
—

 
(50
)
 
(47
)
 
(101
)
Total
6

 
4

 
(48
)
 
(47
)
 
(85
)
 
 

 
 

 
 

 
 

 
 

Total derivatives
6

 
4

 
(48
)
 
(47
)
 
(85
)
Cash collateral (payable) receivable
(1
)
 
—

 
21

 
28

 
48

Total derivatives - net basis
$
5

 
$
4

 
$
(27
)
 
$
(19
)
 
$
(37
)
 
 
 
 
 
 
 
 
 
 
As of December 31, 2019
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1):
 
 
 
 
 
 
 
 
 
Commodity assets
$
15

 
$
2

 
$
4

 
$
—

 
$
21

Commodity liabilities
(3
)
 
—

 
(31
)
 
(50
)
 
(84
)
Total
12

 
2

 
(27
)
 
(50
)
 
(63
)
 
 
 
 
 
 
 
 
 
 
Total derivatives
12

 
2

 
(27
)
 
(50
)
 
(63
)
Cash collateral receivable
—

 
—

 
20

 
27

 
47

Total derivatives - net basis
$
12

 
$
2

 
$
(7
)
 
$
(23
)
 
$
(16
)

(1)
PacifiCorp's commodity derivatives are generally included in rates and as of March 31, 2020 and December 31, 2019, a regulatory asset of $84 million and $62 million, respectively, was recorded related to the net derivative liability of $85 million and $63 million, respectively.

The following table reconciles the beginning and ending balances of PacifiCorp's net regulatory assets and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory assets, as well as amounts reclassified to earnings (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Beginning balance
$
62

 
$
96

Changes in fair value
34

 
(54
)
Net losses reclassified to operating revenue
8

 
(22
)
Net (losses) gains reclassified to cost of fuel and energy
(20
)
 
58

Ending balance
$
84

 
$
78



61


Derivative Contract Volumes

The following table summarizes the net notional amounts of outstanding commodity derivative contracts with fixed price terms that comprise the mark-to-market values as of (in millions):
 
Unit of
 
March 31,
 
December 31,
 
Measure
 
2020
 
2019
 
 
 
 
 
 
Electricity sales, net
Megawatt hours
 
(1
)
 
(2
)
Natural gas purchases
Decatherms
 
129

 
129


Credit Risk

PacifiCorp is exposed to counterparty credit risk associated with wholesale energy supply and marketing activities with other utilities, energy marketing companies, financial institutions and other market participants. Credit risk may be concentrated to the extent PacifiCorp's counterparties have similar economic, industry or other characteristics and due to direct or indirect relationships among the counterparties. Before entering into a transaction, PacifiCorp analyzes the financial condition of each significant wholesale counterparty, establishes limits on the amount of unsecured credit to be extended to each counterparty and evaluates the appropriateness of unsecured credit limits on an ongoing basis. To further mitigate wholesale counterparty credit risk, PacifiCorp enters into netting and collateral arrangements that may include margining and cross-product netting agreements and obtains third-party guarantees, letters of credit and cash deposits. If required, PacifiCorp exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain credit support provisions that in part base certain collateral requirements on credit ratings for senior unsecured debt as reported by one or more of the three recognized credit rating agencies. These derivative contracts may either specifically provide bilateral rights to demand cash or other security if credit exposures on a net basis exceed specified rating-dependent threshold levels ("credit-risk-related contingent features") or provide the right for counterparties to demand "adequate assurance," or in some cases terminate the contract, in the event of a material adverse change in PacifiCorp's creditworthiness. These rights can vary by contract and by counterparty. As of March 31, 2020, PacifiCorp's credit ratings for its senior secured debt and its issuer credit ratings for senior unsecured debt by Moody's Investor Service and Standard & Poor's Rating Services were investment grade.

The aggregate fair value of PacifiCorp's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $95 million and $80 million as of March 31, 2020 and December 31, 2019, respectively, for which PacifiCorp had posted collateral of $49 million and $47 million, respectively, in the form of cash deposits. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of March 31, 2020 and December 31, 2019, PacifiCorp would have been required to post $37 million and $27 million, respectively, of additional collateral. PacifiCorp's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors.


62


(8)
Fair Value Measurements

The carrying value of PacifiCorp's cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. PacifiCorp has various financial assets and liabilities that are measured at fair value on the Consolidated Financial Statements using inputs from the three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

•
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that PacifiCorp has the ability to access at the measurement date.

•
Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

•
Level 3 — Unobservable inputs reflect PacifiCorp's judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. PacifiCorp develops these inputs based on the best information available, including its own data.
 
The following table presents PacifiCorp's financial assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):
 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1) 
 
Total
As of March 31, 2020
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
—

 
$
16

 
$
—

 
$
(7
)
 
$
9

Money market mutual funds(2)
 
37

 
—

 
—

 
—

 
37

Investment funds
 
25

 
—

 
—

 
—

 
25

 
 
$
62

 
$
16

 
$
—

 
$
(7
)
 
$
71

 
 
 
 
 
 
 
 
 
 
 
Liabilities - Commodity derivatives
 
$
—

 
$
(101
)
 
$
—

 
$
55

 
$
(46
)
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2019
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
—

 
$
21

 
$
—

 
$
(7
)
 
$
14

Money market mutual funds(2)
 
23

 
—

 
—

 
—

 
23

Investment funds
 
25

 
—

 
—

 
—

 
25

 
 
$
48

 
$
21

 
$
—

 
$
(7
)
 
$
62

 
 
 
 
 
 
 
 
 
 
 
Liabilities - Commodity derivatives
 
$
—

 
$
(84
)
 
$
—

 
$
54

 
$
(30
)

(1)
Represents netting under master netting arrangements and a net cash collateral receivable of $48 million and $47 million as of March 31, 2020 and December 31, 2019, respectively.

(2)
Amounts are included in cash and cash equivalents, other current assets and other assets on the Consolidated Balance Sheets. The fair value of these money market mutual funds approximates cost.


63


Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at estimated fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which PacifiCorp transacts. When quoted prices for identical contracts are not available, PacifiCorp uses forward price curves. Forward price curves represent PacifiCorp's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. PacifiCorp bases its forward price curves upon market price quotations, when available, or internally developed and commercial models, with internal and external fundamental data inputs. Market price quotations are obtained from independent energy brokers, exchanges, direct communication with market participants and actual transactions executed by PacifiCorp. Market price quotations for certain major electricity and natural gas trading hubs are generally readily obtainable for the first three years; therefore, PacifiCorp's forward price curves for those locations and periods reflect observable market quotes. Market price quotations for other electricity and natural gas trading hubs are not as readily obtainable for the first three years. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, PacifiCorp uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The estimated fair value of these derivative contracts is a function of underlying forward commodity prices, interest rates, currency rates, related volatility, counterparty creditworthiness and duration of contracts. Refer to Note 7 for further discussion regarding PacifiCorp's risk management and hedging activities.

PacifiCorp's investments in money market mutual funds and investment funds are stated at fair value. When available, PacifiCorp uses a readily observable quoted market price or net asset value of an identical security in an active market to record the fair value. In the absence of a quoted market price or net asset value of an identical security, the fair value is determined using pricing models or net asset values based on observable market inputs and quoted market prices of securities with similar characteristics.

PacifiCorp's long-term debt is carried at cost on the Consolidated Balance Sheets. The fair value of PacifiCorp's long-term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of PacifiCorp's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of PacifiCorp's long-term debt (in millions):
 
 
As of March 31, 2020
 
As of December 31, 2019
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Value
 
Value
 
Value
 
Value
 
 
 
 
 
 
 
 
 
Long-term debt
 
$
7,659

 
$
9,042

 
$
7,658

 
$
9,280


(9)
Commitments and Contingencies

Legal Matters

PacifiCorp is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. PacifiCorp does not believe that such normal and routine litigation will have a material impact on its consolidated financial results.

Environmental Laws and Regulations

PacifiCorp is subject to federal, state and local laws and regulations regarding climate change, renewable portfolio standards, air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact PacifiCorp's current and future operations. PacifiCorp believes it is in material compliance with all applicable laws and regulations.


64


Hydroelectric Relicensing

PacifiCorp is a party to the 2016 amended Klamath Hydroelectric Settlement Agreement ("KHSA"), which is intended to resolve disputes surrounding PacifiCorp's efforts to relicense the Klamath Hydroelectric Project. The KHSA does not guarantee dam removal. Instead, it establishes a process for PacifiCorp, the states of Oregon and California ("States") and other stakeholders to assess whether dam removal can occur consistent with the settlement's terms. For PacifiCorp, the key elements of the settlement include: (1) a contribution from PacifiCorp's Oregon and California customers capped at $200 million plus $250 million in California bond funds; (2) complete indemnification from harms associated with dam removal; (3) transfer of the Federal Energy Regulatory Commission ("FERC") license to a third-party dam removal entity, the Klamath River Renewal Corporation ("KRRC"), who would conduct dam removal; and (4) ability for PacifiCorp to operate the facilities for the benefit of customers until dam removal commences.

In September 2016, the KRRC and PacifiCorp filed a joint application with the FERC to transfer the license for the four main-stem Klamath dams from PacifiCorp to the KRRC. Over the past two years, the KRRC has been supplementing the application with additional information about its financial, technical, and legal capacity to become the licensee. In July 2019 and February 2020, the KRRC provided the FERC with additional information about its financial capacity to become a licensee, including updated cost estimates, and further information about its insurance, bonding and liability transfer package. The FERC is evaluating the KRRC's information and the proposed license transfer. The KRRC will continue to refine its insurance, bonding and liability transfer package, and PacifiCorp will review the KRRC's capacity to fulfill its indemnity obligation under the KHSA. If certain conditions in the amended KHSA are not satisfied (e.g., inadequate funding or inability of KRRC to satisfy its indemnification obligation) and the license does not transfer to the KRRC, PacifiCorp will resume relicensing with the FERC.

The United States Court of Appeals for the District of Columbia Circuit issued a decision in the Hoopa Valley Tribe v. FERC litigation, in January 2019, finding that the states of California and Oregon have waived their Clean Water Act, Section 401, water quality certification authority over the Klamath hydroelectric project relicensing. This decision has the potential to limit the ability of the States to impose water quality conditions on new and relicensed projects. Environmental interests, supported by California, Oregon and other states, asked the court to rehear the case, which was denied. Subsequently, environmental groups, supported by numerous states, filed a petition for certiorari before the United States Supreme Court, which was denied on December 9, 2019, thereby allowing the circuit court opinion to stand as a final and unappealable decision.

Guarantees

PacifiCorp has entered into guarantees as part of the normal course of business and the sale of certain assets. These guarantees are not expected to have a material impact on PacifiCorp's consolidated financial results.


65


(10)
Revenue from Contracts with Customers

The following table summarizes PacifiCorp's revenue from contracts with customers ("Customer Revenue") by customer class (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Customer Revenue:
 
 
 
Retail:
 
 
 
Residential
$
460

 
$
489

Commercial
358

 
360

Industrial
277

 
292

Other retail
27

 
29

Total retail
1,122

 
1,170

Wholesale (1)
—

 
28

Transmission
22

 
25

Other Customer Revenue
26

 
16

Total Customer Revenue
1,170

 
1,239

Other revenue
36

 
20

Total operating revenue
$
1,206

 
$
1,259


(1)
Includes net payments to counterparties for the financial settlement of certain non-derivative forward contracts for energy sales.


66


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of certain significant factors that have affected the consolidated financial condition and results of operations of PacifiCorp during the periods included herein. Explanations include management's best estimate of the impact of weather, customer growth, usage trends and other factors. This discussion should be read in conjunction with PacifiCorp's historical unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10‑Q. PacifiCorp's actual results in the future could differ significantly from the historical results.

Results of Operations for the First Quarter of 2020 and 2019

Overview

Net income for the first quarter of 2020 was $176 million, a decrease of $3 million, or 2%, compared to 2019. Net income decreased primarily due to lower utility margin of $12 million, excluding impacts of the Oregon RAC settlement of $7 million (offset in depreciation expense), lower cash surrender value of corporate-owned life insurance policies and $6 million of higher interest expense, partially offset by higher allowances for equity and borrowed funds used during construction of $10 million, and higher PTCs of $8 million, primarily due to repowering of certain of PacifiCorp’s wind-powered generating facilities. Utility margin decreased primarily due to lower retail prices, lower retail customer volumes, lower wholesale volumes and lower net deferrals of incurred net power costs in accordance with established adjustment mechanisms, partially offset by lower coal-fueled and natural gas-fueled generation costs. Retail customer volumes decreased 1.7% primarily due to unfavorable impact of weather (heating degree days were lower by 10%) and lower customer usage, partially offset by an increase in the average number of customers. Energy generated decreased 11% for the first quarter of 2020 compared to 2019 primarily due to lower coal-fueled generation, partially offset by higher wind-powered and hydroelectric generation. Wholesale electricity sales volumes decreased 32% and purchased electricity volumes increased 20%.

Non-GAAP Financial Measure

Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as utility margin, to help evaluate results of operations. Utility margin is calculated as operating revenue less cost of fuel and energy, which are captions presented on the Consolidated Statements of Operations.

PacifiCorp's cost of fuel and energy is directly recovered from its customers through regulatory recovery mechanisms and as a result, changes in PacifiCorp's revenue are comparable to changes in such expenses. As such, management believes utility margin more appropriately and concisely explains profitability rather than a discussion of revenue and cost of fuel and energy separately. Management believes the presentation of utility margin provides meaningful and valuable insight into the information management considers important to running the business and a measure of comparability to others in the industry.
Utility margin is not a measure calculated in accordance with GAAP and should be viewed as a supplement to and not a substitute for operating income which is the most comparable financial measure prepared in accordance with GAAP. The following table provides a reconciliation of utility margin to operating income (in millions):
 
First Quarter
 
2020
 
2019
 
Change
Utility margin:
 
 
 
 
 
 
 
Operating revenue
$
1,206

 
$
1,259

 
$
(53
)
 
(4
)%
Cost of fuel and energy
417

 
465

 
(48
)
 
(10
)
Utility margin
789

 
794

 
(5
)
 
(1
)
Operations and maintenance
254

 
256

 
(2
)
 
(1
)
Depreciation and amortization
252

 
205

 
47

 
23

Property and other taxes
49

 
49

 
—

 
—

Operating income
$
234

 
$
284

 
$
(50
)
 
(18
)%

67



A comparison of PacifiCorp's key operating results is as follows:
 
First Quarter
 
2020
 
2019
 
Change
Utility margin (in millions):
 
 
 
 
 
 
 
Operating revenue
$
1,206

 
$
1,259

 
$
(53
)
 
(4
)%
Cost of fuel and energy
417

 
465

 
(48
)
 
(10
)
Utility margin
$
789

 
$
794

 
$
(5
)
 
(1
)%
 
 
 
 
 
 
 
 
Sales (GWhs):
 
 
 
 
 
 
 
Residential
4,421

 
4,608

 
(187
)
 
(4
)%
Commercial
4,410

 
4,445

 
(35
)
 
(1
)
Industrial, irrigation and other
4,702

 
4,710

 
(8
)
 
—

Total retail
13,533

 
13,763

 
(230
)
 
(2
)
Wholesale
1,281

 
1,887

 
(606
)
 
(32
)
Total sales
14,814

 
15,650

 
(836
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of retail customers (in thousands)
1,955

 
1,921

 
34

 
2
 %
 
 
 
 
 
 
 
 
Average revenue per MWh:
 
 
 
 
 
 
 
Retail
$
82.97

 
$
85.08

 
$
(2.11
)
 
(2
)%
Wholesale
$
26.35

 
$
24.26

 
$
2.09

 
9
 %
 
 
 
 
 
 
 
 
Heating degree days
4,605

 
5,092

 
(487
)
 
(10
)%
 
 
 
 
 
 
 
 
Sources of energy (GWhs)(1):
 
 
 
 
 
 
 
Coal
7,228

 
9,486

 
(2,258
)
 
(24
)%
Natural gas
3,041

 
3,061

 
(20
)
 
(1
)
Hydroelectric(2)
1,046

 
717

 
329

 
46

Wind and other(2)
1,112

 
760

 
352

 
46

Total energy generated
12,427

 
14,024

 
(1,597
)
 
(11
)
Energy purchased
3,391

 
2,836

 
555

 
20

Total
15,818

 
16,860

 
(1,042
)
 
(6
)%
 
 
 
 
 
 
 
 
Average cost of energy per MWh:
 
 
 
 
 
 
 
Energy generated(3)
$
17.80

 
$
21.09

 
$
(3.29
)
 
(16
)%
Energy purchased
$
47.41

 
$
57.89

 
$
(10.48
)
 
(18
)%

(1)
GWh amounts are net of energy used by the related generating facilities.

(2)
All or some of the renewable energy attributes associated with generation from these sources may be: (a) used in future years to comply with RPS or other regulatory requirements or (b) sold to third parties in the form of RECs or other environmental commodities.

(3)
The average cost per MWh of energy generated includes only the cost of fuel associated with the generating facilities.

68



Utility margin decreased $5 million for the first quarter of 2020 compared to 2019 primarily due to:
•
$48 million of lower retail revenue from lower average prices and volumes. Retail customer volumes decreased 1.7% primarily due to the unfavorable impact of weather and lower customer usage, partially offset by an increase in the average number of customers; and
•
$31 million of lower net deferrals of incurred net power costs in accordance with established adjustment mechanisms; and
•
$12 million of lower wholesale revenue due to lower volumes, partially offset by higher average market prices.
The decreases above were partially offset by:
•
$63 million of lower coal-fueled generation costs primarily due to lower volumes;
•
$14 million of lower natural gas-fueled generation costs primarily due to lower natural gas prices;
•
$7 million of higher other revenue due to impacts of the Oregon RAC settlement (offset in depreciation expense); and
•
$4 million of lower purchased electricity costs due to lower average market prices, partially offset by higher volumes.
Operations and maintenance decreased $2 million, or 1%, for the first quarter of 2020 compared to 2019 primarily due to lower employee related expenses.

Depreciation and amortization increased $47 million, or 23%, for the first quarter of 2020 compared to 2019 due to accelerated depreciation of $47 million ($7 million offset in other revenue and $40 million offset in income tax expense) for Oregon's share of certain retired wind equipment due to repowering.

Interest expense increased $6 million, or 6% for the first quarter of 2020 compared to 2019 primarily due to higher average long-term debt balances.

Allowance for borrowed and equity funds increased $10 million, or 48%, for the first quarter of 2020 compared to 2019 primarily due to higher qualified construction work-in-progress balances.

Other, net decreased $11 million to an expense of $4 million for the first quarter of 2020 compared to income of $7 million for the first quarter of 2019 primarily due to lower cash surrender value of corporate-owned life insurance policies and higher non-service cost components of pension and other postretirement expense.

Income tax (benefit) expense decreased $56 million, or 133%, to a benefit of $14 million for the first quarter of 2020 compared to an expense of $42 million for the first quarter of 2019. The effective tax rate was (9)% for 2020 and 19% for 2019. The effective tax rate decreased primarily due to the amortization of Oregon's allocated excess deferred income taxes pursuant to the Oregon RAC settlement, whereby a portion of Oregon's allocated excess deferred income taxes was used to accelerate depreciation for Oregon's share of certain retired wind equipment due to repowering and due to increased PTCs from PacifiCorp's wind-powered generating facilities.


69


Liquidity and Capital Resources
 
As of March 31, 2020, PacifiCorp's total net liquidity was as follows (in millions):
Cash and cash equivalents
 
$
53

 
 
 
Credit facilities
 
1,200

Less:
 
 
Short-term debt
 
(56
)
Tax-exempt bond support
 
(256
)
Net credit facilities
 
888

 
 
 
Total net liquidity
 
$
941

 
 
 
Credit facilities:
 
 
Maturity dates
 
2022

Operating Activities

Net cash flows from operating activities for the three-month periods ended March 31, 2020 and 2019 were $437 million and $494 million, respectively. The change was primarily due to lower collections from wholesale and retail customers and higher cash paid for income taxes, partially offset by lower cost of fuel related payments.

The timing of PacifiCorp's income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods and assumptions for each payment date.

Investing Activities

Net cash flows from investing activities for the three-month periods ended March 31, 2020 and 2019 were $(339) million and $(336) million, respectively. The change is primarily due to an increase in capital expenditures of $29 million, partially offset by proceeds from the settlement of notes receivable of $25 million associated with the sale of certain Utah mining assets in 2015. Refer to "Future Uses of Cash" for discussion of capital expenditures.

Financing Activities

Net cash flows from financing activities for the three-month period ended March 31, 2020 was $(74) million. Uses of cash consisted of $74 million for the repayment of short-term debt.

Net cash flows from financing activities for the three-month period ended March 31, 2019 was $434 million. Sources of cash consisted of net proceeds from the issuance of long term debt of $990 million. Uses of cash consisted substantially of $350 million for the repayment of long-term debt, $175 million for common stock dividends paid to PPW Holdings LLC and $30 million for the repayment of short-term debt.
    
Short-term Debt

Regulatory authorities limit PacifiCorp to $1.5 billion of short-term debt. As of March 31, 2020, PacifiCorp had $56 million of short-term debt outstanding at a weighted average interest rate of 3.22%. As of December 31, 2019, PacifiCorp had $130 million of short-term debt outstanding at a weighted average interest rate of 2.05%.

Long-term Debt
 
In April 2020, PacifiCorp issued $400 million of its 2.70% First Mortgage Bonds due 2030 and $600 million of its 3.30% First Mortgage Bonds due 2051. PacifiCorp intends to use the net proceeds to fund capital expenditures, primarily for renewable resource and associated transmission projects, and for general corporate purposes.


70



Future Uses of Cash

PacifiCorp has available a variety of sources of liquidity and capital resources, both internal and external, including net cash flows from operating activities, public and private debt offerings, the issuance of commercial paper, the use of unsecured revolving credit facilities, capital contributions and other sources. These sources are expected to provide funds required for current operations, capital expenditures, debt retirements and other capital requirements. The availability and terms under which PacifiCorp has access to external financing depends on a variety of factors, including regulatory approvals, PacifiCorp's credit ratings, investors' judgment of risk and conditions in the overall capital markets, including the condition of the utility industry.

Capital Expenditures

PacifiCorp has significant future capital requirements. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of these reviews, which may consider, among other factors, impacts to customers' rates; changes in environmental and other rules and regulations; outcomes of regulatory proceedings; changes in income tax laws; general business conditions; load projections; system reliability standards; the cost and efficiency of construction labor, equipment and materials; commodity prices; and the cost and availability of capital.

Historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, are as follows (in millions):
 
Three-Month Periods
 
Annual
 
Ended March 31,
 
Forecast
 
2019
 
2020
 
2020
 
 
 
 
 
 
Transmission system investment
$
73

 
$
53

 
$
302

Wind investment
59

 
105

 
1,396

Operating and other
205

 
208

 
1,070

Total
$
337

 
$
366

 
$
2,768


PacifiCorp's historical and forecast capital expenditures include the following:

•
Transmission system investment primarily reflects initial costs for the 140-mile 500-kV Aeolus-Bridger/Anticline transmission line, a major segment of PacifiCorp's Energy Gateway Transmission expansion program expected to be placed in-service in 2020 and investment in additional Energy Gateway Transmission segments expected to be placed in service in 2023. Forecast spending for the Aeolus-Bridger/Anticline line totals $154 million in 2020.

•
Wind investment includes the following:

◦
Construction of wind-powered generating facilities at PacifiCorp totaling $89 million and $55 million for the three-month periods ended March 31, 2020 and 2019, respectively. Construction includes the 1,190 MWs of new wind-powered generating facilities that are expected to be placed in-service in 2020 and the energy production is expected to qualify for 100% of the federal PTCs available for ten years once the equipment is placed in-service. PacifiCorp anticipates costs associated with the construction of wind-powered generating facilities will total an additional $1.2 billion for 2020.

◦
Repowering existing wind-powered generating facilities at PacifiCorp totaling $16 million and $4 million for the three-month periods ended March 31, 2020 and 2019, respectively. Certain repowering projects were placed in service in 2019 and the remaining repowering projects are expected to be placed in-service at various dates in 2020. The energy production from such repowered facilities is expected to qualify for 100% of the federal renewable electricity PTCs available for 10 years following each facility's return to service. PacifiCorp anticipates costs for these activities will total an additional $87 million for 2020.

•
Remaining investments relate to operating projects that consist of advanced meter infrastructure costs, routine expenditures for generation, transmission and distribution, planned spend for wildfire mitigation and other infrastructure needed to serve existing and expected demand.


71


Energy Supply Planning

As required by certain state regulations, PacifiCorp uses an IRP to develop a long-term resource plan to ensure that PacifiCorp can continue to provide reliable and cost-effective electric service to its customers while maintaining compliance with existing and evolving environmental laws and regulations.

In October 2019, PacifiCorp filed its 2019 IRP with its state commissions. Commission review of the 2019 IRP is ongoing.

Requests for Proposals

PacifiCorp issues individual requests for proposals ("RFP"), each of which typically focuses on a specific category of generation resources consistent with the IRP or other customer-driven demands. The IRP and the RFPs provide for the identification and staged procurement of resources to meet load or RPS requirements. Depending upon the specific RFP, applicable laws and regulations may require PacifiCorp to file draft RFPs with the UPSC, the OPUC and the WUTC. Approval by the UPSC, the OPUC or the WUTC may be required depending on the nature of the RFPs. PacifiCorp is not currently administering active resource RFPs.

PacifiCorp is preparing an all resource RFP, the 2020AS RFP. The 2020AS RFP will seek bids for resources capable of coming online by the end of 2024 up to the level of resources identified in PacifiCorp’s 2019 IRP. The 2019 IRP preferred portfolio includes 1,823 MWs of solar resources collocated with 595 MWs of battery energy storage systems and 1,920 MWs of new wind resources coming online by the end of 2024. The resources included in the IRP are enabled by new transmission investments, including Energy Gateway South, a 400-mile, 500-kV transmission line connecting southeastern Wyoming to northern Utah. A draft of the 2020AS RFP was filed for approval with the UPSC and the OPUC in April 2020. The 2020AS RFP is on schedule to be released to the market in July 2020.

Contractual Obligations

As of March 31, 2020, there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of PacifiCorp's Annual Report on Form 10-K for the year ended December 31, 2019.


72


COVID-19

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by PacifiCorp. While the rapid outbreak of COVID-19 has not had a material impact on PacifiCorp's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. All states in which PacifiCorp operates have instituted varying levels of "stay-at-home" orders and other measures, which have collectively impacted PacifiCorp's customers and, therefore, their needs for electricity. As the impacts of COVID-19 and related customer and governmental responses are uncertain, a reduction in the consumption of electricity, and related operating revenue, may occur, particularly in the commercial and industrial classes. Due to regulatory requirements and voluntary actions taken by PacifiCorp related to customer collection activity and suspension of disconnections for non-payment, PacifiCorp could see delays or reductions in cash receipts, including potentially higher than normal bad debt expense, from retail customers related to the impacts of COVID-19. The amount of such reductions in cash receipts is unknown at this time. Regulatory jurisdictions may allow for deferral or recovery of certain costs incurred in responding to COVID-19. Refer to "Regulatory Matters" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for further discussion.

PacifiCorp has construction and repowering of wind-powered generation projects in progress. While PacifiCorp does not currently anticipate any delays that would jeopardize the completion of these projects, potential delays could result in their completion past certain in-service date guidance provided by the Internal Revenue Service in order to qualify the investments in such wind-powered generation facilities for the maximum federal PTCs. Such disruptions could adversely affect PacifiCorp's future financial results. In addition, the market value of retirement plan assets has also been impacted by COVID-19, which may lead to increased contributions to PacifiCorp's retirement plans.

PacifiCorp's business has been deemed essential and its employees have been identified as "critical infrastructure employees" allowing them to move within communities and across jurisdictional boundaries as necessary to maintain its electric generation, transmission and distribution system. In response to the effects of COVID-19, PacifiCorp has implemented its business continuity plan to protect its employees and customers. Such plans include a variety of actions, including situational use of personal protective equipment by employees when interacting with customers and implementing practices to enhance social distancing at the workplace. Such practices have included work-from-home, staggered work schedules, rotational work location assignments, increased cleaning and sanitation of work spaces and providing general health reminders intended to help lower the risk of spreading COVID-19.

Regulatory Matters

PacifiCorp is subject to comprehensive regulation. Refer to "Regulatory Matters" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for discussion regarding PacifiCorp's current regulatory matters.

Environmental Laws and Regulations

PacifiCorp is subject to federal, state and local regulations regarding climate change, RPS, air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact PacifiCorp's current and future operations. In addition to imposing continuing compliance obligations, these laws and regulations provide regulators with the authority to levy substantial penalties for noncompliance including fines, injunctive relief and other sanctions. These laws and regulations are administered by the EPA and various state and local agencies. All such laws and regulations are subject to a range of interpretation, which may ultimately be resolved by the courts. Environmental laws and regulations continue to evolve, and PacifiCorp is unable to predict the impact of the changing laws and regulations on its operations and financial results. PacifiCorp believes it is in material compliance with all applicable laws and regulations.

Refer to "Environmental Laws and Regulations" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for additional information regarding environmental laws.


73


Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Consolidated Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, pension and other postretirement benefits, income taxes and revenue recognition-unbilled revenue. For additional discussion of PacifiCorp's critical accounting estimates, see Item 7 of PacifiCorp's Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in PacifiCorp's assumptions regarding critical accounting estimates since December 31, 2019.


74


MidAmerican Funding, LLC and its subsidiaries and MidAmerican Energy Company
Consolidated Financial Section


75


PART I
Item 1.
Financial Statements


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholder of
MidAmerican Energy Company

Results of Review of Interim Financial Information

We have reviewed the accompanying balance sheet of MidAmerican Energy Company ("MidAmerican Energy") as of March 31, 2020, the related statements of operations, changes in shareholder's equity and cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheet of MidAmerican Energy as of December 31, 2019, and the related statements of operations, changes in shareholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of MidAmerican Energy's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to MidAmerican Energy in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ Deloitte & Touche LLP


Des Moines, Iowa
May 1, 2020


76


MIDAMERICAN ENERGY COMPANY
BALANCE SHEETS (Unaudited)
(Amounts in millions)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
100

 
$
287

Trade receivables, net
265

 
291

Income tax receivable
178

 
—

Inventories
232

 
226

Other current assets
86

 
90

Total current assets
861

 
894

 
 
 
 
Property, plant and equipment, net
18,502

 
18,375

Regulatory assets
301

 
289

Investments and restricted investments
739

 
818

Other assets
188

 
188

 
 
 
 
Total assets
$
20,591

 
$
20,564


The accompanying notes are an integral part of these financial statements.

77


MIDAMERICAN ENERGY COMPANY
BALANCE SHEETS (Unaudited) (continued)
(Amounts in millions)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
 
 
 
Accounts payable
$
440

 
$
519

Accrued interest
85

 
78

Accrued property, income and other taxes
118

 
225

Short-term debt
50

 
—

Other current liabilities
212

 
219

Total current liabilities
905

 
1,041

 
 
 
 
Long-term debt
7,209

 
7,208

Regulatory liabilities
1,365

 
1,406

Deferred income taxes
2,677

 
2,626

Asset retirement obligations
720

 
704

Other long-term liabilities
324

 
339

Total liabilities
13,200

 
13,324

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Shareholder's equity:
 
 
 
Common stock - 350 shares authorized, no par value, 71 shares issued and outstanding
—

 
—

Additional paid-in capital
561

 
561

Retained earnings
6,830

 
6,679

Total shareholder's equity
7,391

 
7,240

 
 
 
 
Total liabilities and shareholder's equity
$
20,591

 
$
20,564


The accompanying notes are an integral part of these financial statements.


78


MIDAMERICAN ENERGY COMPANY
STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
Regulated electric
$
471

 
$
542

Regulated natural gas and other
210

 
300

Total operating revenue
681

 
842

 
 
 
 
Operating expenses:
 
 
 
Cost of fuel and energy
80

 
114

Cost of natural gas purchased for resale and other
128

 
195

Operations and maintenance
165

 
207

Depreciation and amortization
176

 
177

Property and other taxes
34

 
34

Total operating expenses
583

 
727

 
 
 
 
Operating income
98

 
115

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(76
)
 
(69
)
Allowance for borrowed funds
3

 
6

Allowance for equity funds
8

 
15

Other, net
(5
)
 
20

Total other income (expense)
(70
)
 
(28
)
 
 
 
 
Income before income tax benefit
28

 
87

Income tax benefit
(123
)
 
(106
)
 
 
 
 
Net income
$
151

 
$
193


The accompanying notes are an integral part of these financial statements.


79


MIDAMERICAN ENERGY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
(Amounts in millions)

 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Total Shareholder's
Equity
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
—

 
$
561

 
$
5,885

 
$
6,446

Net income
—

 
—

 
193

 
193

Balance, March 31, 2019
$
—

 
$
561

 
$
6,078

 
$
6,639

 
 
 
 
 
 
 
 
Balance, December 31, 2019
$
—

 
$
561

 
$
6,679

 
$
7,240

Net income
—

 
—

 
151

 
151

Balance, March 31, 2020
$
—

 
$
561

 
$
6,830

 
$
7,391


The accompanying notes are an integral part of these financial statements.


80


MIDAMERICAN ENERGY COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
151

 
$
193

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
176

 
177

Amortization of utility plant to other operating expenses
9

 
8

Allowance for equity funds
(8
)
 
(15
)
Deferred income taxes and amortization of investment tax credits
91

 
31

Other, net
13

 
3

Changes in other operating assets and liabilities:
 
 
 
Trade receivables and other assets
15

 
(30
)
Inventories
(6
)
 
55

Pension and other postretirement benefit plans
(6
)
 
(3
)
Accrued property, income and other taxes, net
(286
)
 
(159
)
Accounts payable and other liabilities
70

 
18

Net cash flows from operating activities
219

 
278

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(472
)
 
(573
)
Purchases of marketable securities
(127
)
 
(71
)
Proceeds from sales of marketable securities
124

 
68

Other, net
5

 
1

Net cash flows from investing activities
(470
)
 
(575
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
—

 
1,460

Repayments of long-term debt
—

 
(500
)
Net proceeds from (repayments of) short-term debt
50

 
(240
)
Other, net
(1
)
 
—

Net cash flows from financing activities
49

 
720

 
 
 
 
Net change in cash and cash equivalents and restricted cash and cash equivalents
(202
)
 
423

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
330

 
56

Cash and cash equivalents and restricted cash and cash equivalents at end of period
$
128

 
$
479


The accompanying notes are an integral part of these financial statements.


81


MIDAMERICAN ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

(1)
General

MidAmerican Energy Company ("MidAmerican Energy") is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc. ("MHC"). MHC is a holding company that conducts no business other than the ownership of its subsidiaries. MHC's nonregulated subsidiary is Midwest Capital Group, Inc. MHC is the direct, wholly owned subsidiary of MidAmerican Funding, LLC ("MidAmerican Funding"), which is an Iowa limited liability company with Berkshire Hathaway Energy Company ("BHE") as its sole member. BHE is a holding company based in Des Moines, Iowa that owns subsidiaries principally engaged in energy businesses. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").

The unaudited Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Financial Statements as of March 31, 2020, and for the three-month periods ended March 31, 2020 and 2019. The Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the three-month period ended March 31, 2020 and 2019. The results of operations for the three-month periods ended March 31, 2020, are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Financial Statements. Note 2 of Notes to Financial Statements included in MidAmerican Energy's Annual Report on Form 10-K for the year ended December 31, 2019, describes the most significant accounting policies used in the preparation of the unaudited Financial Statements. There have been no significant changes in MidAmerican Energy's assumptions regarding significant accounting estimates and policies during the three-month period ended March 31, 2020.

Coronavirus Disease 2019 ("COVID-19")

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by MidAmerican Energy. While the rapid outbreak of COVID-19 has not had a material impact on MidAmerican Energy's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. The duration and extent of COVID-19 and its future impact on MidAmerican Energy's business cannot be reasonably estimated at this time. Accordingly, significant estimates used in the preparation of MidAmerican Energy's unaudited Financial Statements, including those associated with evaluations of certain long-lived assets for impairment, expected credit losses on amounts owed to MidAmerican Energy and potential regulatory recovery of certain costs may be subject to significant adjustments in future periods.



82


(2)
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash equivalents consist of funds invested in money market mutual funds, United States Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, consist substantially of funds restricted for the purpose of constructing solid waste facilities under tax-exempt bond obligation agreements and for wildlife preservation. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, as presented in the Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Balance Sheets (in millions):
 
As of
 
March 31,
 
December 31
 
2020
 
2019
 
 
 
 
Cash and cash equivalents
$
100

 
$
287

Restricted cash and cash equivalents in other current assets
28

 
43

Total cash and cash equivalents and restricted cash and cash equivalents
$
128

 
$
330


(3)
Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):
 
 
 
As of
 
 
 
March 31,
 
December 31,
 
Depreciable Life
 
2020
 
2019
Utility plant in service, net:
 
 
 
 
 
Generation
20-70 years
 
$
15,776

 
$
15,687

Transmission
52-75 years
 
2,138

 
2,124

Electric distribution
20-75 years
 
4,131

 
4,095

Natural gas distribution
29-75 years
 
1,833

 
1,820

Utility plant in service
 
 
23,878

 
23,726

Accumulated depreciation and amortization
 
 
(6,233
)
 
(6,139
)
Utility plant in service, net
 
 
17,645

 
17,587

Nonregulated property, net:
 
 
 
 
 
Nonregulated property gross
20-50 years
 
7

 
7

Accumulated depreciation and amortization
 
 
(1
)
 
(1
)
Nonregulated property, net
 
 
6

 
6

 
 
 
17,651

 
17,593

Construction work-in-progress
 
 
851

 
782

Property, plant and equipment, net
 
 
$
18,502

 
$
18,375



83


(4)
Income Taxes

A reconciliation of the federal statutory income tax rate to MidAmerican Energy's effective income tax rate applicable to income before income tax benefit is as follows:
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Federal statutory income tax rate
21
 %
 
21
 %
Income tax credits
(430
)
 
(113
)
State income tax, net of federal income tax benefit
(28
)
 
(21
)
Effects of ratemaking
(3
)
 
(8
)
Other, net
1

 
(1
)
Effective income tax rate
(439
)%
 
(122
)%

Income tax credits relate primarily to PTCs from MidAmerican Energy's wind-powered generating facilities. Federal renewable electricity PTCs are earned as energy from qualifying wind-powered generating facilities is produced and sold and are based on a per-kilowatt hour rate pursuant to the applicable federal income tax law. MidAmerican Energy recognizes its renewable electricity PTCs throughout the year based on when the credits are earned and excludes them from the annual effective tax rate that is the basis for the interim recognition of other income tax expense. Wind-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service.

Berkshire Hathaway includes BHE and subsidiaries in its United States federal and Iowa state income tax returns. Consistent with established regulatory practice, MidAmerican Energy's provision for income tax has been computed on a stand-alone basis, and substantially all of its currently payable or receivable income tax is remitted to or received from BHE. MidAmerican Energy made net cash payments for income tax to BHE totaling $46 million and $- million for the three-month periods ended March 31, 2020 and 2019, respectively.

(5)
Employee Benefit Plans

MidAmerican Energy sponsors a noncontributory defined benefit pension plan covering a majority of all employees of BHE and its domestic energy subsidiaries other than PacifiCorp and NV Energy, Inc. MidAmerican Energy also sponsors certain postretirement healthcare and life insurance benefits covering substantially all retired employees of BHE and its domestic energy subsidiaries other than PacifiCorp and NV Energy, Inc.

Net periodic benefit credit for the plans of MidAmerican Energy and the aforementioned affiliates included the following components (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Pension:
 
 
 
Service cost
$
1

 
$
2

Interest cost
6

 
7

Expected return on plan assets
(10
)
 
(10
)
Net periodic benefit credit
$
(3
)
 
$
(1
)
 
 
 
 
Other postretirement:
 
 
 
Service cost
$
1

 
$
1

Interest cost
2

 
2

Expected return on plan assets
(3
)
 
(3
)
Net amortization
(1
)
 
(1
)
Net periodic benefit credit
$
(1
)
 
$
(1
)


84


Amounts other than the service cost for pension and other postretirement benefit plans are recorded in Other, net in the Statements of Operations. Employer contributions to the pension and other postretirement benefit plans are expected to be $7 million and $1 million, respectively, during 2020. As of March 31, 2020, $2 million and $- million of contributions had been made to the pension and other postretirement benefit plans, respectively.

(6)
Fair Value Measurements

The carrying value of MidAmerican Energy's cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. MidAmerican Energy has various financial assets and liabilities that are measured at fair value on the Financial Statements using inputs from the three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

•
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that MidAmerican Energy has the ability to access at the measurement date.

•
Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

•
Level 3 — Unobservable inputs reflect MidAmerican Energy's judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. MidAmerican Energy develops these inputs based on the best information available, including its own data.

The following table presents MidAmerican Energy's financial assets and liabilities recognized on the Balance Sheets and measured at fair value on a recurring basis (in millions):
 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of March 31, 2020:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
1

 
$
—

 
$
1

 
$
(1
)
 
$
1

Money market mutual funds(2)
 
46

 
—

 
—

 
—

 
46

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
154

 
—

 
—

 
—

 
154

International government obligations
 
—

 
4

 
—

 
—

 
4

Corporate obligations
 
—

 
66

 
—

 
—

 
66

Municipal obligations
 
—

 
3

 
—

 
—

 
3

Agency, asset and mortgage-backed obligations
 
—

 
1

 
—

 
—

 
1

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
300

 
—

 
—

 
—

 
300

International companies
 
9

 
—

 
—

 
—

 
9

Investment funds
 
18

 
—

 
—

 
—

 
18

 
 
$
528

 
$
74

 
$
1

 
$
(1
)
 
$
602

 
 
 
 
 
 
 
 
 
 
 
Liabilities - commodity derivatives
 
$
—

 
$
(8
)
 
$
(1
)
 
$
1

 
$
(8
)


85


 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of December 31, 2019:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
—

 
$
2

 
$
1

 
$
(1
)
 
$
2

Money market mutual funds(2)
 
274

 
—

 
—

 
—

 
274

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
189

 
—

 
—

 
—

 
189

International government obligations
 
—

 
4

 
—

 
—

 
4

Corporate obligations
 
—

 
58

 
—

 
—

 
58

Municipal obligations
 
—

 
1

 
—

 
—

 
1

Agency, asset and mortgage-backed obligations
 
—

 
1

 
—

 
—

 
1

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
336

 
—

 
—

 
—

 
336

International companies
 
9

 
—

 
—

 
—

 
9

Investment funds
 
15

 
—

 
—

 
—

 
15

 
 
$
823

 
$
66

 
$
1

 
$
(1
)
 
$
889

 
 
 
 
 
 
 
 
 
 
 
Liabilities - commodity derivatives
 
$
—

 
$
(9
)
 
$
—

 
$
2

 
$
(7
)

(1)
Represents netting under master netting arrangements and a net cash collateral receivable of $- million and $1 million as of March 31, 2020 and December 31, 2019, respectively.
(2)
Amounts are included in cash and cash equivalents and investments and restricted investments on the Balance Sheets. The fair value of these money market mutual funds approximates cost.
MidAmerican Energy's investments in money market mutual funds and debt and equity securities are stated at fair value, with debt securities accounted for as available-for-sale securities. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value. In the absence of a quoted market price or net asset value of an identical security, the fair value is determined using pricing models or net asset values based on observable market inputs and quoted market prices of securities with similar characteristics.

MidAmerican Energy's long-term debt is carried at cost on the Balance Sheets. The fair value of MidAmerican Energy's long-term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of MidAmerican Energy's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of MidAmerican Energy's long-term debt (in millions):
 
As of March 31, 2020
 
As of December 31, 2019
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
 
 
 
 
 
 
Long-term debt
$
7,209

 
$
8,282

 
$
7,208

 
$
8,283



86


(7)
Commitments and Contingencies

Construction Commitments

During the three-month period ended March 31, 2020, MidAmerican Energy entered into firm construction commitments totaling $269 million for the remainder of 2020 through 2021 related to the construction of wind-powered generating facilities in Iowa.

Easements

During the three-month period ended March 31, 2020, MidAmerican Energy entered into non-cancelable easements with minimum payment commitments totaling $95 million through 2060 for land in Iowa on which some of its wind-powered generating facilities will be located.

Maintenance and Service Contracts

During the three-month period ended March 31, 2020, MidAmerican Energy entered into non-cancelable maintenance and service contracts related to wind-powered generating facilities with minimum payment commitments totaling $72 million through 2031.

Legal Matters

MidAmerican Energy is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. MidAmerican Energy does not believe that such normal and routine litigation will have a material impact on its financial results.

Environmental Laws and Regulations

MidAmerican Energy is subject to federal, state and local laws and regulations regarding climate change, renewable portfolio standards ("RPS"), air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact its current and future operations. MidAmerican Energy believes it is in material compliance with all applicable laws and regulations.

Transmission Rates

MidAmerican Energy's wholesale transmission rates are set annually using FERC-approved formula rates subject to true-up for actual cost of service. MidAmerican Energy is authorized by the FERC to include a 0.50% adder beyond the base ROE effective January 2015. Prior to September 2016, the rates in effect were based on a 12.38% return on equity ("ROE"). In November 2013 and February 2015, a coalition of intervenors filed successive complaints with the FERC requesting that the 12.38% ROE no longer be found just and reasonable and sought to reduce the base ROE to 9.15% and 8.67%, respectively. In September 2016, the FERC issued an order for the first complaint, which reduces the base ROE to 10.32% and required refunds, plus interest, for the period from November 2013 through February 2015. Customer refunds relative to the first complaint occurred in February 2017. In November 2019, the FERC issued an order addressing the second complaint and issues on appeal in the first complaint. The order established an ROE of 9.88% (10.38% including the 0.50% adder) for the 15-month refund period of the first complaint and prospectively from September 2016 forward. The order indicated no refunds were necessary for the period February 2015 through September 2016. The order has been appealed, and as of March 31, 2020, MidAmerican Energy has accrued a $16 million liability for refunds of amounts collected under the higher ROE during the periods covered by both complaints.


87


(8)
Revenue from Contracts with Customers

The following table summarizes MidAmerican Energy's revenue from contracts with customers ("Customer Revenue") by line of business and customer class, including a reconciliation to MidAmerican Energy's reportable segment information included in Note 9, (in millions):
 
For the Three-Month Periods Ended March 31,
 
2020
 
2019
 
Electric
 
Natural Gas
 
Other
 
Total
 
Electric
 
Natural Gas
 
Other
 
Total
Customer Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
148

 
$
128

 
$
—

 
$
276

 
$
171

 
$
175

 
$
—

 
$
346

Commercial
70

 
43

 
—

 
113

 
75

 
66

 
—

 
141

Industrial
163

 
4

 
—

 
167

 
163

 
6

 
—

 
169

Natural gas transportation services
—

 
11

 
—

 
11

 
—

 
12

 
—

 
12

Other retail(1)
29

 
—

 
—

 
29

 
35

 
1

 
—

 
36

Total retail
410

 
186

 
—

 
596

 
444

 
260

 
—

 
704

Wholesale
42

 
22

 
—

 
64

 
76

 
34

 
—

 
110

Multi-value transmission projects
16

 
—

 
—

 
16

 
16

 
—

 
—

 
16

Other Customer Revenue
—

 
—

 
1

 
1

 
—

 
—

 
5

 
5

Total Customer Revenue
468

 
208

 
1

 
677

 
536

 
294

 
5

 
835

Other revenue
3

 
1

 
—

 
4

 
6

 
1

 
—

 
7

Total operating revenue
$
471

 
$
209

 
$
1

 
$
681

 
$
542

 
$
295

 
$
5

 
$
842


(1)
Other retail includes provisions for rate refunds, for which any actual refunds will be reflected in the applicable customer classes upon resolution of the related regulatory proceeding.

(9)
Segment Information

MidAmerican Energy has identified two reportable segments: regulated electric and regulated natural gas. The regulated electric segment derives most of its revenue from regulated retail sales of electricity to residential, commercial, and industrial customers and from wholesale sales. The regulated natural gas segment derives most of its revenue from regulated retail sales of natural gas to residential, commercial, and industrial customers and also obtains revenue by transporting natural gas owned by others through its distribution system. Pricing for regulated electric and regulated natural gas sales are established separately by regulatory agencies; therefore, management also reviews each segment separately to make decisions regarding allocation of resources and in evaluating performance. Common operating costs, interest income, interest expense and income tax expense are allocated to each segment based on certain factors, which primarily relate to the nature of the cost.


88


The following tables provide information on a reportable segment basis (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
Regulated electric
$
471

 
$
542

Regulated natural gas
209

 
295

Other
1

 
5

Total operating revenue
$
681

 
$
842

 
 
 
 
Operating income:
 
 
 
Regulated electric
$
59

 
$
66

Regulated natural gas
39

 
48

Other
—

 
1

Total operating income
98

 
115

Interest expense
(76
)
 
(69
)
Allowance for borrowed funds
3

 
6

Allowance for equity funds
8

 
15

Other, net
(5
)
 
20

Income before income tax benefit
$
28

 
$
87


 
As of
 
March 31,
2020
 
December 31,
2019
Assets:
 
 
 
Regulated electric
$
19,184

 
$
19,093

Regulated natural gas
1,407

 
1,468

Other
—

 
3

Total assets
$
20,591

 
$
20,564




89




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Managers and Member of
MidAmerican Funding, LLC

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated balance sheet of MidAmerican Funding, LLC and subsidiaries ("MidAmerican Funding") as of March 31, 2020, the related consolidated statements of operations, changes in member's equity and cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of MidAmerican Funding as of December 31, 2019, and the related consolidated statements of operations, changes in member's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of MidAmerican Funding's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to MidAmerican Funding in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB and with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB and with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ Deloitte & Touche LLP


Des Moines, Iowa
May 1, 2020


90


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
100

 
$
288

Trade receivables, net
265

 
291

Income tax receivable
181

 
—

Inventories
232

 
226

Other current assets
86

 
91

Total current assets
864

 
896

 
 
 
 
Property, plant and equipment, net
18,503

 
18,377

Goodwill
1,270

 
1,270

Regulatory assets
301

 
289

Investments and restricted investments
741

 
820

Other assets
187

 
188

 
 
 
 
Total assets
$
21,866

 
$
21,840


The accompanying notes are an integral part of these consolidated financial statements.

91


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)
(Amounts in millions)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
 
 
 
Accounts payable
$
440

 
$
520

Accrued interest
87

 
84

Accrued property, income and other taxes
118

 
226

Note payable to affiliate
175

 
171

Short-term debt
50

 
—

Other current liabilities
212

 
219

Total current liabilities
1,082

 
1,220

 
 
 
 
Long-term debt
7,449

 
7,448

Regulatory liabilities
1,365

 
1,406

Deferred income taxes
2,675

 
2,621

Asset retirement obligations
720

 
704

Other long-term liabilities
324

 
340

Total liabilities
13,615

 
13,739

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Member's equity:
 
 
 
Paid-in capital
1,679

 
1,679

Retained earnings
6,572

 
6,422

Total member's equity
8,251

 
8,101

 
 
 
 
Total liabilities and member's equity
$
21,866

 
$
21,840


The accompanying notes are an integral part of these consolidated financial statements.


92


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
Regulated electric
$
471

 
$
542

Regulated natural gas and other
215

 
300

Total operating revenue
686

 
842

 
 
 
 
Operating expenses:
 
 
 
Cost of fuel and energy
80

 
114

Cost of natural gas purchased for resale and other
129

 
194

Operations and maintenance
165

 
207

Depreciation and amortization
176

 
177

Property and other taxes
34

 
34

Total operating expenses
584

 
726

 
 
 
 
Operating income
102

 
116

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(81
)
 
(75
)
Allowance for borrowed funds
3

 
6

Allowance for equity funds
8

 
15

Other, net
(6
)
 
21

Total other income (expense)
(76
)
 
(33
)
 
 
 
 
Income before income tax benefit
26

 
83

Income tax benefit
(124
)
 
(107
)
 
 
 
 
Net income
$
150

 
$
190


The accompanying notes are an integral part of these consolidated financial statements.


93


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY (Unaudited)
(Amounts in millions)

 
Paid-in
Capital
 
Retained
Earnings
 
Total Member's
Equity
 
 
 
 
 
 
Balance, December 31, 2018
$
1,679

 
$
5,650

 
$
7,329

Net income
—

 
190

 
190

Balance, March 31, 2019
$
1,679

 
$
5,840

 
$
7,519

 
 
 
 
 
 
Balance, December 31, 2019
$
1,679

 
$
6,422

 
$
8,101

Net income
—

 
150

 
150

Balance, March 31, 2020
$
1,679

 
$
6,572

 
$
8,251


The accompanying notes are an integral part of these consolidated financial statements.


94


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
150

 
$
190

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
176

 
177

Amortization of utility plant to other operating expenses
9

 
8

Allowance for equity funds
(8
)
 
(15
)
Deferred income taxes and amortization of investment tax credits
93

 
31

Other, net
14

 
4

Changes in other operating assets and liabilities:
 
 
 
Trade receivables and other assets
16

 
(33
)
Inventories
(6
)
 
55

Pension and other postretirement benefit plans
(6
)
 
(3
)
Accrued property, income and other taxes, net
(290
)
 
(160
)
Accounts payable and other liabilities
66

 
14

Net cash flows from operating activities
214

 
268

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(472
)
 
(573
)
Purchases of marketable securities
(127
)
 
(71
)
Proceeds from sales of marketable securities
124

 
68

Other, net
6

 
—

Net cash flows from investing activities
(469
)
 
(576
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
—

 
1,460

Repayments of long-term debt
—

 
(500
)
Net change in note payable to affiliate
3

 
11

Net proceeds from (repayments of) short-term debt
50

 
(240
)
Other, net
(1
)
 
—

Net cash flows from financing activities
52

 
731

 
 
 
 
Net change in cash and cash equivalents and restricted cash and cash equivalents
(203
)
 
423

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
331

 
57

Cash and cash equivalents and restricted cash and cash equivalents at end of period
$
128

 
$
480


The accompanying notes are an integral part of these consolidated financial statements.


95


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
General

MidAmerican Funding, LLC ("MidAmerican Funding") is an Iowa limited liability company with Berkshire Hathaway Energy Company ("BHE") as its sole member. BHE is a holding company based in Des Moines, Iowa that owns subsidiaries principally engaged in energy businesses. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway"). MidAmerican Funding's direct, wholly owned subsidiary is MHC Inc. ("MHC"), which constitutes substantially all of MidAmerican Funding's assets, liabilities and business activities except those related to MidAmerican Funding's long-term debt securities. MHC conducts no business other than the ownership of its subsidiaries. MHC's principal subsidiary is MidAmerican Energy Company ("MidAmerican Energy"), a public utility with electric and natural gas operations, and its direct, wholly owned nonregulated subsidiary is Midwest Capital Group, Inc.

The unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Consolidated Financial Statements as of March 31, 2020, and for the three-month periods ended March 31, 2020 and 2019. The Consolidated Statements of Comprehensive Income have been omitted as net income materially equals comprehensive income for the three-month period ended March 31, 2020 and 2019. The results of operations for the three-month periods ended March 31, 2020, are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in MidAmerican Funding's Annual Report on Form 10-K for the year ended December 31, 2019, describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in MidAmerican Funding's assumptions regarding significant accounting estimates and policies during the three-month period ended March 31, 2020.

Coronavirus Disease 2019 ("COVID-19")

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by MidAmerican Funding. While the rapid outbreak of COVID-19 has not had a material impact on MidAmerican Funding's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. The duration and extent of COVID-19 and its future impact on MidAmerican Funding's business cannot be reasonably estimated at this time. Accordingly, significant estimates used in the preparation of MidAmerican Funding's unaudited Consolidated Financial Statements, including those associated with evaluations of certain long-lived assets and goodwill for impairment, expected credit losses on amounts owed to MidAmerican Funding and potential regulatory recovery of certain costs may be subject to significant adjustments in future periods.


96


(2)
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash equivalents consist of funds invested in money market mutual funds, United States Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, consist substantially of funds restricted for the purpose of constructing solid waste facilities under tax-exempt bond obligation agreements and for wildlife preservation. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
 
As of
 
March 31
 
December 31
 
2020
 
2019
 
 
 
 
Cash and cash equivalents
$
100

 
$
288

Restricted cash and cash equivalents in other current assets
28

 
43

Total cash and cash equivalents and restricted cash and cash equivalents
$
128

 
$
331


(3)
Property, Plant and Equipment, Net

Refer to Note 3 of MidAmerican Energy's Notes to Financial Statements. In addition to MidAmerican Energy's property, plant and equipment, net, MidAmerican Funding had as of March 31, 2020 and December 31, 2019, nonregulated property gross of $1 million and $3 million, respectively, and related accumulated depreciation and amortization of $- million and $1 million, respectively.

(4)
Income Taxes

A reconciliation of the federal statutory income tax rate to MidAmerican Funding's effective income tax rate applicable to income before income tax benefit is as follows:
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Federal statutory income tax rate
21
 %
 
21
 %
Income tax credits
(463
)
 
(118
)
State income tax, net of federal income tax benefit
(31
)
 
(22
)
Effects of ratemaking
(3
)
 
(9
)
Other, net
(1
)
 
(1
)
Effective income tax rate
(477
)%
 
(129
)%

Income tax credits relate primarily to production tax credits ("PTCs") from MidAmerican Energy's wind-powered generating facilities. Federal renewable electricity PTCs are earned as energy from qualifying wind-powered generating facilities is produced and sold and are based on a per-kilowatt hour rate pursuant to the applicable federal income tax law. MidAmerican Energy recognizes its renewable electricity PTCs throughout the year based on when the credits are earned and excludes them from the annual effective tax rate that is the basis for the interim recognition of other income tax expense. Wind-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service.

Berkshire Hathaway includes BHE and subsidiaries in its United States federal and Iowa state income tax returns. Consistent with established regulatory practice, MidAmerican Funding's and MidAmerican Energy's provisions for income tax have been computed on a stand-alone basis, and substantially all of their currently payable or receivable income tax is remitted to or received from BHE. MidAmerican Funding made net cash payments for income tax to BHE totaling $47 million and $- million for the three-month period ended March 31, 2020 and 2019, respectively.


97


(5)
Employee Benefit Plans

Refer to Note 5 of MidAmerican Energy's Notes to Financial Statements.

(6)
Fair Value Measurements

Refer to Note 6 of MidAmerican Energy's Notes to Financial Statements. MidAmerican Funding's long-term debt is carried at cost on the Consolidated Financial Statements. The fair value of MidAmerican Funding's long-term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of MidAmerican Funding's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of MidAmerican Funding's long-term debt (in millions):
 
As of March 31, 2020
 
As of December 31, 2019
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
 
 
 
 
 
 
Long-term debt
$
7,449

 
$
8,590

 
$
7,448

 
$
8,599


(7)
Commitments and Contingencies

MidAmerican Funding is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. MidAmerican Funding does not believe that such normal and routine litigation will have a material impact on its consolidated financial results.

Refer to Note 7 of MidAmerican Energy's Notes to Financial Statements.

(8)
Revenue from Contracts with Customers

Refer to Note 8 of MidAmerican Energy's Notes to Financial Statements. Additionally, MidAmerican Funding had other Accounting Standards Codification Topic 606 revenue of $5 million and $- million for the three-month periods ended March 31, 2020 and 2019, respectively.

(9)
Segment Information

MidAmerican Funding has identified two reportable segments: regulated electric and regulated natural gas. The regulated electric segment derives most of its revenue from regulated retail sales of electricity to residential, commercial, and industrial customers and from wholesale sales. The regulated natural gas segment derives most of its revenue from regulated retail sales of natural gas to residential, commercial, and industrial customers and also obtains revenue by transporting natural gas owned by others through its distribution system. Pricing for regulated electric and regulated natural gas sales are established separately by regulatory agencies; therefore, management also reviews each segment separately to make decisions regarding allocation of resources and in evaluating performance. Common operating costs, interest income, interest expense and income tax expense are allocated to each segment based on certain factors, which primarily relate to the nature of the cost. "Other" in the tables below consists of the financial results and assets of nonregulated operations, MHC and MidAmerican Funding.


98


The following tables provide information on a reportable segment basis (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
Regulated electric
$
471

 
$
542

Regulated natural gas
209

 
295

Other
6

 
5

Total operating revenue
$
686

 
$
842

 
 
 
 
Operating income:
 
 
 
Regulated electric
$
59

 
$
66

Regulated natural gas
39

 
48

Other
4

 
2

Total operating income
102

 
116

Interest expense
(81
)
 
(75
)
Allowance for borrowed funds
3

 
6

Allowance for equity funds
8

 
15

Other, net
(6
)
 
21

Income before income tax benefit
$
26

 
$
83


 
As of
 
March 31,
2020
 
December 31,
2019
Assets(1):
 
 
 
Regulated electric
$
20,375

 
$
20,284

Regulated natural gas
1,486

 
1,547

Other
5

 
9

Total assets
$
21,866

 
$
21,840

(1)
Assets by reportable segment reflect the assignment of goodwill to applicable reporting units.


99


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of certain significant factors that have affected the consolidated financial condition and results of operations of MidAmerican Funding and its subsidiaries and MidAmerican Energy during the periods included herein. Information in Management's Discussion and Analysis related to MidAmerican Energy, whether or not segregated, also relates to MidAmerican Funding. Information related to other subsidiaries of MidAmerican Funding pertains only to the discussion of the financial condition and results of operations of MidAmerican Funding. Where necessary, discussions have been segregated under the heading "MidAmerican Funding" to allow the reader to identify information applicable only to MidAmerican Funding. Explanations include management's best estimate of the impact of weather, customer growth, usage trends and other factors. This discussion should be read in conjunction with MidAmerican Funding's historical unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements and MidAmerican Energy's historical unaudited Financial Statements and Notes to Financial Statements in Part I, Item 1 of this Form 10-Q. MidAmerican Funding's and MidAmerican Energy's actual results in the future could differ significantly from the historical results.

Results of Operations for the First Quarter of 2020 and 2019

Overview

MidAmerican Energy -

MidAmerican Energy's net income for the first quarter of 2020 was $151 million, a decrease of $42 million, or 22%, compared to 2019 primarily due to lower electric and natural gas utility margins, lower cash surrender value of corporate-owned life insurance policies, lower allowances for equity and borrowed funds of $10 million and higher interest expense of $7 million, partially offset by higher income tax benefit of $17 million due to a $22 million increase in PTCs, partially offset by the effects of ratemaking, and lower operations and maintenance expense. Electric utility margin decreased primarily due to lower recoveries through bill riders (substantially offset in cost of fuel and energy, operations and maintenance expense and income tax expense), lower wholesale revenue and lower average retail rates, partially offset by lower generation and purchased power costs. Electric retail customer volumes decreased 0.7% from lower residential and commercial volumes due to the unfavorable impact of weather, substantially offset by higher industrial volumes of 7.7%. Natural gas utility margin decreased due to lower energy efficiency program revenue (offset in operations and maintenance expense) and lower retail customer volumes of 16.2% primarily due to the unfavorable impact of weather.

MidAmerican Funding -

MidAmerican Funding's net income for the first quarter of 2020 was $150 million, a decrease of $40 million, or 21%, compared to 2019. The decrease was primarily due to the changes in MidAmerican Energy's earnings discussed above.

Non-GAAP Financial Measure

Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as, electric utility margin and natural gas utility margin, to help evaluate results of operations. Electric utility margin is calculated as regulated electric operating revenue less cost of fuel and energy, which are captions presented on the Statements of Operations. Natural gas utility margin is calculated as regulated natural gas operating revenue less regulated cost of natural gas purchased for resale, which are included in regulated natural gas and other and cost of natural gas purchased for resale and other, respectively, on the Statements of Operations.

MidAmerican Energy's cost of fuel and energy and cost of natural gas purchased for resale are generally recovered from its retail customers through regulatory recovery mechanisms, and as a result, changes in MidAmerican Energy's expense included regulatory recovery mechanisms result in comparable changes to revenue. As such, management believes electric utility margin and natural gas utility margin more appropriately and concisely explain profitability rather than a discussion of revenue and cost of sales separately. Management believes the presentation of electric utility margin and natural gas utility margin provides meaningful and valuable insight into the information management considers important to running the business and a measure of comparability to others in the industry.


100


Electric utility margin and natural gas utility margin are not measures calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute, for operating income, which is the most comparable financial measure prepared in accordance with GAAP. The following table provides a reconciliation of utility margin to MidAmerican Energy's operating income (in millions):
 
 
First Quarter
 
 
2020
 
2019
 
Change
Electric utility margin:
 
 
 
 
 
 
 
Operating revenue
 
$
471

 
$
542

 
$
(71
)
(13
)%
Cost of fuel and energy
 
80

 
114

 
(34
)
(30
)
Electric utility margin
 
391

 
428

 
(37
)
(9
)%
 
 
 
 
 
 
 
 
Natural gas utility margin:
 
 
 
 
 
 
 
Operating revenue
 
209

 
295

 
(86
)
(29
)%
Natural gas purchased for resale
 
128

 
193

 
(65
)
(34
)
Natural gas utility margin
 
81

 
102

 
(21
)
(21
)%
 
 
 
 
 
 
 
 
Utility margin
 
472

 
530

 
(58
)
(11
)%
 
 
 
 
 
 
 
 
Other operating revenue
 
1

 
5

 
(4
)
(80
)%
Other cost of sales
 
—

 
2

 
(2
)
*
Operations and maintenance
 
165

 
207

 
(42
)
(20
)
Depreciation and amortization
 
176

 
177

 
(1
)
(1
)
Property and other taxes
 
34

 
34

 
—

—

Operating income
 
$
98

 
$
115

 
$
(17
)
(15
)%

*    Not meaningful.


101


Electric Utility Margin

A comparison of key operating results related to electric utility margin is as follows:
 
First Quarter
 
2020
 
2019
 
Change
Utility margin (in millions):
 
 
 
 
 
 
 
Operating revenue
$
471

 
$
542

 
$
(71
)
 
(13
)%
Cost of fuel and energy
80

 
114

 
(34
)
 
(30
)
Utility margin
$
391

 
$
428

 
$
(37
)
 
(9
)%
 
 
 
 
 
 
 
 
Sales (GWhs):
 
 
 
 
 
 
 
Residential
1,668

 
1,885

 
(217
)
 
(12
)%
Commercial
969

 
1,040

 
(71
)
 
(7
)
Industrial
3,524

 
3,271

 
253

 
8

Other
385

 
399

 
(14
)
 
(4
)
Total retail
6,546

 
6,595

 
(49
)
 
(1
)
Wholesale
2,434

 
3,276

 
(842
)
 
(26
)
Total sales
8,980

 
9,871

 
(891
)
 
(9
)%
 
 
 
 
 
 
 
 
Average number of retail customers (in thousands)
792

 
785

 
7

 
1
 %
 
 
 
 
 
 
 
 
Average revenue per MWh:
 
 
 
 
 
 
 
Retail
$
62.75

 
$
67.22

 
$
(4.47
)
 
(7
)%
Wholesale
$
15.71

 
$
23.37

 
$
(7.66
)
 
(33
)%
 
 
 
 
 
 
 
 
Heating degree days
2,952

 
3,601

 
(649
)
 
(18
)%
 
 
 
 
 
 
 
 
Sources of energy (GWhs)(1):
 
 
 
 
 
 
 
Coal
1,573

 
3,903

 
(2,330
)
 
(60
)%
Nuclear
993

 
916

 
77

 
8

Natural gas
116

 
18

 
98

 
*
Wind and other(2)
4,846

 
4,344

 
502

 
12

Total energy generated
7,528

 
9,181

 
(1,653
)
 
(18
)
Energy purchased
1,643

 
849

 
794

 
94

Total
9,171

 
10,030

 
(859
)
 
(9
)%
 
 
 
 
 
 
 
 
Average cost of energy per MWh:
 
 
 
 
 
 
 
Energy generated(3)
$
5.00

 
$
8.55

 
$
(3.55
)
 
(42
)%
Energy purchased
$
25.59

 
$
42.33

 
$
(16.74
)
 
(40
)%

*    Not meaningful.

(1)
GWh amounts are net of energy used by the related generating facilities.

(2)
All or some of the renewable energy attributes associated with generation from these generating facilities may be: (a) used in future years to comply with RPS or other regulatory requirements or (b) sold to third parties in the form of RECs or other environmental commodities.

(3)
The average cost per MWh of energy generated includes only the cost of fuel associated with the generating facilities.

102


Electric utility margin decreased $37 million for the first quarter of 2020 compared to 2019 primarily due to:
(1)
Lower wholesale utility margin of $10 million due to lower sales volumes of 25.7%; and
(2)
Lower retail utility margin of $26 million due to -
•
a decrease of $15 million in average revenue rates due to sales mix;
•
a decrease of $14 million, net of energy costs, from lower recoveries through bill riders, primarily due to a decrease of $19 million in electric energy efficiency program revenue, partially offset by recoveries related to transmission costs (both offset in operations and maintenance expense);
•
a decrease of $10 million from the unfavorable impact of weather;
•
a decrease of $2 million from other revenue; and
•
an increase of $15 million from non-weather-related sales growth, due to higher industrial usage, partially offset by lower residential usage.

Natural Gas Utility Margin

A comparison of key operating results related to natural gas utility margin is as follows:
 
First Quarter
 
2020
 
2019
 
Change
Utility margin (in millions):
 
 
 
 
 
 
 
Operating revenue
$
209

 
$
295

 
$
(86
)
 
(29)
 %
Natural gas purchased for resale
128

 
193

 
(65
)
 
(34
)
Utility margin
$
81

 
$
102

 
$
(21
)
 
(21)
 %
 
 
 
 
 
 
 
 
Throughput (000's Dths):
 
 
 
 
 
 
 
Residential
23,910

 
28,569

 
(4,659
)
 
(16)
 %
Commercial
10,951

 
13,284

 
(2,333
)
 
(18
)
Industrial
1,512

 
1,546

 
(34
)
 
(2
)
Other
35

 
35

 
—

 
—
Total retail sales
36,408

 
43,434

 
(7,026
)
 
(16
)
Wholesale sales
12,910

 
11,555

 
1,355

 
12

Total sales
49,318

 
54,989

 
(5,671
)
 
(10
)
Natural gas transportation service
34,954

 
30,543

 
4,411

 
14

Total throughput
84,272

 
85,532

 
(1,260
)
 
(1)
 %
 
 
 
 
 
 
 
 
Average number of retail customers (in thousands)
770

 
763

 
7

 
1
 %
 
 
 
 
 
 
 
 
Average revenue per retail Dth sold
$
4.85

 
$
5.72

 
$
(0.87
)
 
(15)
 %
 
 
 
 
 
 
 
 
Heating degree days
3,067

 
3,726

 
(659
)
 
(18)
 %
 
 
 
 
 
 
 
 
Average cost of natural gas per retail Dth sold
$
2.91

 
$
3.65

 
$
(0.74
)
 
(20)
 %
 
 
 
 
 
 
 
 
Combined retail and wholesale average cost of natural gas per Dth sold
$
2.60

 
$
3.50

 
$
(0.90
)
 
(26)
 %


Natural gas utility margin decreased $21 million for the first quarter of 2020 compared to 2019 primarily due to:
(1)
A decrease of $10 million from lower natural gas energy efficiency program revenue (offset in operations and maintenance expense);
(2)
A decrease of $8 million from the unfavorable impact of weather; and
(3)
A decrease of $2 million from non-weather rate and usage variances, in part due to sales mix.


103


Operating Expenses

MidAmerican Energy -

Operations and maintenance decreased $42 million for the first quarter of 2020 compared to 2019 primarily due to lower energy efficiency program expense of $29 million (offset in operating revenue), lower employee-related expenses of $7 million, a nuclear property insurance premium refund of $5 million and lower electric distribution and other operations expenses, partially offset by higher wind-powered generation operations and maintenance of $8 million due to additional wind turbines and easements.

Depreciation and amortization for the first quarter of 2020 decreased $1 million compared to 2019 primarily due to lower Iowa revenue sharing accruals of $27 million, substantially offset by an increase related to new and repowered wind-powered generating facilities and other plant placed in-service.

Other Income (Expense)

MidAmerican Energy -

Interest expense increased $7 million for the first quarter of 2020 compared to 2019 primarily due to higher average long-term debt balances.

Allowance for borrowed and equity funds decreased $10 million for the first quarter of 2020 compared to 2019 primarily due to lower construction work-in-progress balances related to wind-powered generation.

Other, net decreased $25 million for the first quarter of 2020 compared to 2019 primarily due to lower cash surrender value of corporate-owned life insurance policies.

Income Tax Benefit

MidAmerican Energy -

MidAmerican Energy's income tax benefit increased $17 million for the first quarter of 2020 compared to 2019, and the effective tax rate was (439)% for 2020 and (122)% for 2019. The change in the effective tax rates for 2020 compared to 2019 was due to the higher PTCs and lower pretax income, partially offset by state income tax and the effects of ratemaking.

Federal renewable electricity PTCs are earned as energy from qualifying wind-powered generating facilities is produced and sold and are based on a per-kilowatt hour rate pursuant to the applicable federal income tax law. Wind-powered generating facilities, including those facilities where a significant portion of the equipment was replaced, commonly referred to as repowered facilities, are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service. PTCs for the three-month periods ended March 31, 2020 and 2019 totaled $120 million and $98 million, respectively.

MidAmerican Funding -

MidAmerican Funding's income tax benefit increased $17 million for the first quarter of 2020 compared to 2019, and the effective tax rate was (477)% for 2020 and (129)% for 2019. The changes in the effective tax rates were principally due to the factors discussed for MidAmerican Energy.

104



Liquidity and Capital Resources

As of March 31, 2020, MidAmerican Energy's and MidAmerican Funding's total net liquidity were as follows (in millions):

MidAmerican Energy:
 
 
Cash and cash equivalents
 
$
100

 
 
 
Credit facilities, maturing 2020 and 2022
 
1,305

Less:
 
 
Short-term debt outstanding
 
(50
)
Tax-exempt bond support
 
(370
)
Net credit facilities
 
885

MidAmerican Energy total net liquidity
 
$
985

 
 
 
MidAmerican Funding:
 
 
MidAmerican Energy total net liquidity
 
$
985

Cash and cash equivalents
 
—

MHC, Inc. credit facility, maturing 2020
 
4

MidAmerican Funding total net liquidity
 
$
989


Operating Activities

MidAmerican Energy's net cash flows from operating activities for the three-month periods ended March 31, 2020 and 2019, were $219 million and $278 million, respectively. MidAmerican Funding's net cash flows from operating activities for the three-month periods ended March 31, 2020 and 2019, were $214 million and $268 million, respectively. Cash flows from operating activities decreased primarily due to MidAmerican Energy's income tax cash flows with BHE, lower cash margins for MidAmerican Energy's regulated electric and natural gas businesses and higher interest paid due to long-term debt issued in October 2019, partially offset by lower payments to vendors. MidAmerican Energy's income tax cash flows with BHE totaled cash payments of $46 million and $- million in 2020 and 2019, respectively. The timing of MidAmerican Energy's income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods and assumptions for each payment date.

Investing Activities

MidAmerican Energy's net cash flows from investing activities for the three-month periods ended March 31, 2020 and 2019, were $(470) million and $(575) million, respectively. MidAmerican Funding's net cash flows from investing activities for the three-month periods ended March 31, 2020 and 2019, were $(469) million and $(576) million, respectively. Net cash flows from investing activities consist almost entirely of capital expenditures, which decreased due to lower wind-powered generating facility construction and repowering expenditures. Purchases and proceeds related to marketable securities substantially consist of activity within the Quad Cities Generating Station nuclear decommissioning trust and other trust investments.

Financing Activities

MidAmerican Energy's net cash flows from financing activities for the three-month periods ended March 31, 2020 and 2019 were $49 million and $720 million, respectively. MidAmerican Funding's net cash flows from financing activities for the three-month periods ended March 31, 2020 and 2019, were $52 million and $731 million, respectively. In January 2019, MidAmerican Energy issued $600 million of its 3.65% First Mortgage Bonds due April 2029 and $900 million of its 4.25% First Mortgage Bonds due July 2049. In February 2019, MidAmerican Energy redeemed $500 million of its 2.40% First Mortgage Bonds due in March 2019 at a redemption price of 100% of the principal amount plus accrued interest. Through its commercial paper program, MidAmerican Energy received $50 million in 2020 and paid $240 million in 2019. MidAmerican Funding received $3 million and $11 million in 2020 and 2019, respectively, through its note payable with BHE.


105


Debt Authorizations and Related Matters

MidAmerican Energy has authority from the FERC to issue, through April 2, 2022, commercial paper and bank notes aggregating $1.5 billion at interest rates not to exceed the applicable London Interbank Offered Rate plus a spread of 400 basis points. MidAmerican Energy has a $900 million unsecured credit facility expiring in June 2022. The credit facility, which supports MidAmerican Energy's commercial paper program and its variable-rate tax-exempt bond obligations and provides for the issuance of letters of credit, has a variable interest rate based on the Eurodollar rate or a base rate, at MidAmerican Energy's option, plus a spread that varies based on MidAmerican Energy's credit ratings for senior unsecured long-term debt securities. MidAmerican Energy has a $400 million unsecured credit facility, which expires in August 2020 and has a variable interest rate based on the Eurodollar rate or a base rate, at MidAmerican Energy's option, plus a spread. Additionally, MidAmerican Energy has a $5 million unsecured credit facility for general corporate purposes.

MidAmerican Energy currently has an effective automatic shelf registration statement with the SEC to issue an indeterminate amount of long-term debt securities through June 26, 2021. Additionally, MidAmerican Energy has authorization from the FERC to issue, through June 30, 2021, long-term debt securities up to an aggregate of $850 million at interest rates not to exceed the applicable United States Treasury rate plus a spread of 175 basis points and preferred stock up to an aggregate of $500 million and from the ICC to issue long-term debt securities up to an aggregate of $850 million through August 20, 2022, and preferred stock up to an aggregate of $500 million through November 1, 2020.

Future Uses of Cash

MidAmerican Energy and MidAmerican Funding have available a variety of sources of liquidity and capital resources, both internal and external, including net cash flows from operating activities, public and private debt offerings, the issuance of commercial paper, the use of unsecured revolving credit facilities and other sources. These sources are expected to provide funds required for current operations, capital expenditures, debt retirements and other capital requirements. The availability and terms under which MidAmerican Energy and MidAmerican Funding have access to external financing depends on a variety of factors, including regulatory approvals, their credit ratings, investors' judgment of risk and conditions in the overall capital markets, including the condition of the utility industry.

Capital Expenditures

MidAmerican Energy has significant future capital requirements. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of these reviews, which may consider, among other factors, impacts to customers' rates; changes in environmental and other rules and regulations; outcomes of regulatory proceedings; changes in income tax laws; general business conditions; load projections; system reliability standards; the cost and efficiency of construction labor, equipment and materials; commodity prices; and the cost and availability of capital.

MidAmerican Energy's historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, are as follows (in millions):
 
Three-Month Periods
 
Annual
 
Ended March 31,
 
Forecast
 
2019
 
2020
 
2020
 
 
 
 
 
 
Wind-powered generation under ratemaking principles
$
159

 
$
71

 
$
377

Renewable generation not under ratemaking principles
—

 
83

 
420

Wind-powered generation repowering
27

 
6

 
157

Other
387

 
312

 
949

Total
$
573

 
$
472

 
$
1,903



106


MidAmerican Energy's historical and forecast capital expenditures for 2020 include the following:

•
The construction of wind-powered generating facilities in Iowa. Wind XI, a 2,000-MW project constructed over several years, was completed in January 2020. Wind XII is a 592-MW project, including 202 MWs placed in-service as of March 31, 2020 and facilities expected to be placed in-service by the end of 2020. MidAmerican Energy obtained pre-approved ratemaking principles for both of these projects and expects all of these wind-powered generating facilities to qualify for 100% of PTCs available. PTCs from these projects are excluded from MidAmerican Energy's Iowa energy adjustment clause until these generation assets are reflected in base rates.
Additionally, MidAmerican Energy continues to evaluate wind-powered and other renewable generating facilities that will not be subject to pre-approved ratemaking principles. MidAmerican Energy currently has two such wind-powered generation projects under construction totaling 319 MWs that are expected to be placed in-service by the end of 2020 and to qualify for 100% of PTCs available. In the three-month period ended March 31, 2020, MidAmerican Energy purchased 80 MWs (nominal ratings) of wind-powered generating facilities that began commercial operation in 2012 and are not eligible for PTCs.
•
The repowering of the oldest of MidAmerican Energy's wind-powered generating facilities in Iowa. The repowering projects entail the replacement of significant components of the facilities, which is expected to qualify such facilities for the re-establishment of PTCs for ten years following each facility's return to service at rates that depend upon the year in which construction begins. Of the 1,001 MWs of current repowering projects not in-service as of March 31, 2020, 594 MWs are currently expected to qualify for 80% of the PTCs available for ten years following each facility's return to service and 407 MWs are expected to qualify for 60% of such credits.
•
Remaining costs primarily relate to routine expenditures for generation, transmission, distribution and other infrastructure needed to serve existing and expected demand.

Contractual Obligations

As of March 31, 2020, there have been no material changes outside the normal course of business in MidAmerican Energy's and MidAmerican Funding's contractual obligations from the information provided in Item 7 of their Annual Report on Form 10-K for the year ended December 31, 2019.


107


COVID-19

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by MidAmerican Energy. While the rapid outbreak of COVID-19 has not had a material impact on MidAmerican Energy's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. All states in which MidAmerican Energy operates have instituted varying levels of "stay-at-home" orders and other measures, which have collectively impacted MidAmerican Energy's customers and, therefore, their needs for electricity and natural gas. As the impacts of COVID-19 and related customer and governmental responses are uncertain, a reduction in the consumption of electricity or natural gas, and related operating revenue, may occur, particularly in the commercial and industrial classes. Due to regulatory requirements and voluntary actions taken by MidAmerican Energy related to customer collection activity and suspension of disconnections for non-payment, MidAmerican Energy could see delays or reductions in cash receipts, including potentially higher than normal bad debt expense, from retail customers related to the impacts of COVID-19. The amount of such reductions in cash receipts is unknown at this time. Regulatory jurisdictions may allow for recovery of certain costs incurred in responding to COVID-19.

MidAmerican Energy has construction and repowering of wind-powered generation projects in progress. While MidAmerican Energy does not currently anticipate any delays that would jeopardize the completion of these projects, potential delays could result in their completion past certain in-service date guidance provided by the Internal Revenue Service in order to qualify the investments in such wind-powered generation facilities for the maximum federal PTCs. Such disruptions could adversely affect MidAmerican Energy's future financial results.

MidAmerican Energy's business has been deemed essential and its employees have been identified as "critical infrastructure employees" allowing them to move within communities and across jurisdictional boundaries as necessary to maintain its electric generation, transmission and distribution system and its natural gas distribution system. In response to the effects of COVID-19, MidAmerican Energy has implemented its business continuity plan to protect its employees and customers. Such plans include a variety of actions, including situational use of personal protective equipment by employees when interacting with customers and implementing practices to enhance social distancing at the workplace. Such practices have included work-from-home, staggered work schedules, rotational work location assignments, increased cleaning and sanitation of work spaces and providing general health reminders intended to help lower the risk of spreading COVID-19.

Quad Cities Generating Station Operating Status

Exelon Generation Company, LLC ("Exelon Generation"), the operator of Quad Cities Generating Station Units 1 and 2 ("Quad Cities Station") of which MidAmerican Energy has a 25% ownership interest, announced on June 2, 2016, its intention to shut down Quad Cities Station on June 1, 2018. In December 2016, Illinois passed legislation creating a zero emission standard, which went into effect June 1, 2017. The zero emission standard requires the Illinois Power Agency to purchase zero emission credits ("ZECs") and recover the costs from certain ratepayers in Illinois, subject to certain limitations. The proceeds from the ZECs will provide Exelon Generation additional revenue through 2027 as an incentive for continued operation of Quad Cities Station. MidAmerican Energy will not receive additional revenue from the subsidy.

The PJM Interconnection, L.L.C. ("PJM") capacity market includes a Minimum Offer Price Rule ("MOPR"). If a generation resource is subjected to a MOPR, its offer price in the market is adjusted to effectively remove the revenues it receives through a government-provided financial support program, resulting in a higher offer that may not clear the capacity market. Prior to December 19, 2019, the PJM MOPR applied only to certain new gas-fired resources. An expanded PJM MOPR to include existing resources would require exclusion of ZEC compensation when bidding into future capacity auctions, resulting in an increased risk of Quad Cities Station not receiving capacity revenues in future auctions.


108


On December 19, 2019, the FERC issued an order in the PJM MOPR proceeding that broadly applies the MOPR to all new and existing resources, including nuclear, greatly expanding the breadth and scope of PJM's MOPR, effective as of PJM's next capacity auction. While the FERC included some limited exemptions in its order, no exemptions were available to state-supported nuclear resources, such as Quad Cities Station. In addition, the FERC provided no new mechanism for accommodating state-supported resources other than the existing Fixed Resource Requirement ("FRR") mechanism under which an entire utility zone would be removed from PJM's capacity auction along with sufficient resources to support the load in such zone. The FERC directed the PJM to make a compliance filing within 90 days. In its filing made March 18, 2020, the PJM proposed tariff language reflecting the FERC's directives and proposed a schedule for resuming capacity auctions that is contingent on the timing of the FERC's action on the compliance filing. The FERC has no deadline for such action, and could accept, reject or direct further revisions to all or part of the PJM's proposed tariff revisions and auction schedule. In addition, on April 16, 2020, the FERC issued orders largely denying requests for rehearing of the FERC's December 2019 order and another order in this proceeding. In those orders, the FERC also granted a few clarifications that will require an additional PJM compliance filing, which could also delay the timing for the FERC to issue its compliance order(s) and the PJM to resume its capacity auctions.

Exelon Generation is currently working with the PJM and other stakeholders to pursue the FRR option prior to the next capacity auction in the PJM. If Illinois implements the FRR option, Quad Cities Station could be removed from the PJM's capacity auction and instead supply capacity and be compensated under the FRR program. If Illinois cannot implement an FRR program in its PJM zones, then the MOPR will apply to Quad Cities Station, resulting in higher offers for its units that may not clear the capacity market. Implementing the FRR program in Illinois will require both legislative and regulatory changes. MidAmerican Energy cannot predict whether such legislative and regulatory changes can be implemented prior to the next capacity auction in the PJM or their potential impact on the continued operation of Quad Cities Station.

Regulatory Matters

MidAmerican Energy is subject to comprehensive regulation. Refer to "Regulatory Matters" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for discussion regarding MidAmerican Energy's current regulatory matters.

Environmental Laws and Regulations

MidAmerican Energy is subject to federal, state and local laws and regulations regarding climate change, RPS, air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact its current and future operations. In addition to imposing continuing compliance obligations and capital expenditure requirements, these laws and regulations provide regulators with the authority to levy substantial penalties for noncompliance including fines, injunctive relief and other sanctions. These laws and regulations are administered by the EPA and various state and local agencies. All such laws and regulations are subject to a range of interpretation, which may ultimately be resolved by the courts. Environmental laws and regulations continue to evolve, and MidAmerican Energy is unable to predict the impact of the changing laws and regulations on its operations and consolidated financial results. MidAmerican Energy believes it is in material compliance with all applicable laws and regulations.

Refer to "Environmental Laws and Regulations" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for additional information regarding environmental laws and regulations.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of goodwill and long-lived assets, pension and other postretirement benefits, income taxes and revenue recognition - unbilled revenue. For additional discussion of MidAmerican Energy's and MidAmerican Funding's critical accounting estimates, see Item 7 of their Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in MidAmerican Energy's and MidAmerican Funding's assumptions regarding critical accounting estimates since December 31, 2019.

109


Nevada Power Company and its subsidiaries
Consolidated Financial Section


110


PART I
Item 1.
Financial Statements


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholder of
Nevada Power Company

Results of Review of Interim Financial Information

We have reviewed the accompanying consolidated balance sheet of Nevada Power Company and subsidiaries ("Nevada Power") as of March 31, 2020, the related consolidated statements of operations and changes in shareholder's equity for the three-month periods ended March 31, 2020 and 2019, and of cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of Nevada Power as of December 31, 2019, and the related consolidated statements of operations, changes in shareholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of Nevada Power's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Nevada Power in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ Deloitte & Touche LLP


Las Vegas, Nevada
May 1, 2020


111


NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions, except share data)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
121

 
$
15

Trade receivables, net
169

 
215

Inventories
62

 
62

Prepayments
57

 
42

Other current assets
32

 
30

Total current assets
441

 
364

 
 
 
 
Property, plant and equipment, net
6,585

 
6,538

Finance lease right of use assets, net
440

 
441

Regulatory assets
819

 
800

Other assets
61

 
59

 
 
 
 
Total assets
$
8,346

 
$
8,202

 
 
 
 
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
 
 
 
Accounts payable
$
150

 
$
194

Accrued interest
35

 
30

Accrued property, income and other taxes
25

 
25

Current portion of long-term debt
—

 
575

Regulatory liabilities
95

 
93

Customer deposits
63

 
62

Derivative contracts
30

 
5

Other current liabilities
59

 
53

Total current liabilities
457

 
1,037

 
 
 
 
Long-term debt
2,495

 
1,776

Finance lease obligations
430

 
430

Regulatory liabilities
1,173

 
1,163

Deferred income taxes
710

 
714

Other long-term liabilities
287

 
285

Total liabilities
5,552

 
5,405

 
 
 
 
Commitments and contingencies (Note 8)

 

 
 
 
 
Shareholder's equity:
 
 
 
Common stock - $1.00 stated value; 1,000 shares authorized, issued and outstanding
—

 
—

Additional paid-in capital
2,308

 
2,308

Retained earnings
490

 
493

Accumulated other comprehensive loss, net
(4
)
 
(4
)
Total shareholder's equity
2,794

 
2,797

 
 
 
 
Total liabilities and shareholder's equity
$
8,346

 
$
8,202

 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.

112


NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Operating revenue
$
389

 
$
395

 
 
 
 
Operating expenses:
 
 
 
Cost of fuel and energy
170

 
173

Operations and maintenance
82

 
76

Depreciation and amortization
90

 
89

Property and other taxes
12

 
12

Total operating expenses
354

 
350

 
 
 
 
Operating income
35

 
45

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(42
)
 
(47
)
Allowance for borrowed funds
1

 
1

Allowance for equity funds
2

 
1

Other, net
(1
)
 
8

Total other income (expense)
(40
)
 
(37
)
 
 
 
 
(Loss) income before income tax expense
(5
)
 
8

Income tax (benefit) expense
(1
)
 
2

Net (loss) income
$
(4
)
 
$
6

 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 


113


NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
(Amounts in millions, except shares)

 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Total
 
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Shareholder's
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss, Net
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
1,000

 
$
—

 
$
2,308

 
$
600

 
$
(4
)
 
$
2,904

Net income
 
—

 
—

 
—

 
6

 
—

 
6

Dividends declared
 
—

 
—

 
—

 
(75
)
 
—

 
(75
)
Balance, March 31, 2019
 
1,000

 
$
—

 
$
2,308

 
$
531

 
$
(4
)
 
$
2,835

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
 
1,000

 
$
—

 
$
2,308

 
$
493

 
$
(4
)
 
$
2,797

Net loss
 
—

 
—

 
—

 
(4
)
 
—

 
(4
)
Other equity transactions
 
—

 
—

 
—

 
1

 
—

 
1

Balance, March 31, 2020
 
1,000

 
$
—

 
$
2,308

 
$
490

 
$
(4
)
 
$
2,794

 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.


114


NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
(4
)
 
$
6

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
90

 
89

Allowance for equity funds
(2
)
 
(1
)
Changes in regulatory assets and liabilities
3

 
28

Deferred income taxes and amortization of investment tax credits
(4
)
 
2

Deferred energy
4

 
(33
)
Amortization of deferred energy
—

 
3

Other, net
8

 
(5
)
Changes in other operating assets and liabilities:
 
 
 
Trade receivables and other assets
32

 
48

Inventories
(1
)
 
(2
)
Accrued property, income and other taxes
(6
)
 
(11
)
Accounts payable and other liabilities
(41
)
 
11

Net cash flows from operating activities
79

 
135

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(111
)
 
(113
)
Other, net
—

 
2

Net cash flows from investing activities
(111
)
 
(111
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
719

 
495

Repayments of long-term debt
(575
)
 
(500
)
Dividends paid
—

 
(75
)
Other, net
(4
)
 
(3
)
Net cash flows from financing activities
140

 
(83
)
 
 
 
 
Net change in cash and cash equivalents and restricted cash and cash equivalents
108

 
(59
)
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
25

 
121

Cash and cash equivalents and restricted cash and cash equivalents at end of period
$
133

 
$
62

 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.


115


NEVADA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
General

Nevada Power Company, together with its subsidiaries ("Nevada Power"), is a wholly owned subsidiary of NV Energy, Inc. ("NV Energy"), a holding company that also owns Sierra Pacific Power Company ("Sierra Pacific") and certain other subsidiaries. Nevada Power is a United States regulated electric utility company serving retail customers, including residential, commercial and industrial customers, primarily in the Las Vegas, North Las Vegas, Henderson and adjoining areas. NV Energy is an indirect wholly owned subsidiary of Berkshire Hathaway Energy Company ("BHE"). BHE is a holding company based in Des Moines, Iowa that owns subsidiaries principally engaged in energy businesses. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").

The unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Consolidated Financial Statements as of March 31, 2020 and for the three-month periods ended March 31, 2020 and 2019. The Consolidated Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the three-month periods ended March 31, 2020 and 2019. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in Nevada Power's Annual Report on Form 10-K for the year ended December 31, 2019 describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in Nevada Power's assumptions regarding significant accounting estimates and policies during the three-month period ended March 31, 2020.

Coronavirus Disease 2019 ("COVID-19")

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by Nevada Power. While the rapid outbreak of COVID-19 has not had a material impact on Nevada Power's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. Such impacts may include, among others, potential declines in operating revenue from reductions in the consumption of electricity by retail utility customers as the longer-term impacts of COVID-19 and related customer and governmental responses are uncertain, including the duration of casino closures, which is evidenced by the reduction experienced by Nevada Power in April 2020 compared to the same period in 2019, and higher credit loss expenses resulting from a higher than average level of write-offs of uncollectible accounts associated with the suspension of disconnections and late payment fees to assist customers facing unprecedented economic pressures. The duration and extent of COVID-19 and its future impact on Nevada Power's business cannot be reasonably estimated at this time. Accordingly, significant estimates used in the preparation of Nevada Power's unaudited Consolidated Financial Statements, including those associated with evaluations of certain long-lived assets for impairment, expected credit losses on amounts owed to Nevada Power and potential regulatory recovery of certain costs may be subject to significant adjustments in future periods.

In March 2020, the PUCN issued an emergency order for Nevada Power to establish a regulatory asset account related to the costs of maintaining service to customers affected by COVID-19 whose services would have been terminated or disconnected under normally-applicable terms of service.


116


(2)
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash equivalents consist of funds invested in money market mutual funds, United States Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, consist of funds restricted by the Public Utilities Commission of Nevada ("PUCN") for a certain renewable energy contract. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Cash and cash equivalents
$
121

 
$
15

Restricted cash and cash equivalents included in other current assets
12

 
10

Total cash and cash equivalents and restricted cash and cash equivalents
$
133

 
$
25


(3)
Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):
 
 
 
As of
 
Depreciable Life
 
March 31,
 
December 31,
 
 
2020
 
2019
Utility plant:
 
 
 
 
 
Generation
30 - 55 years
 
$
3,551

 
$
3,541

Transmission
45 - 70 years
 
1,456

 
1,444

Distribution
20 - 65 years
 
3,603

 
3,567

General and intangible plant
5 - 65 years
 
744

 
741

Utility plant
 
 
9,354

 
9,293

Accumulated depreciation and amortization
 
 
(3,020
)
 
(2,951
)
Utility plant, net
 
 
6,334

 
6,342

Other non-regulated, net of accumulated depreciation and amortization
45 years
 
1

 
1

Plant, net
 
 
6,335

 
6,343

Construction work-in-progress
 
 
250

 
195

Property, plant and equipment, net
 
 
$
6,585

 
$
6,538



117


(4)
Regulatory Matters

Deferred Energy

Nevada statutes permit regulated utilities to adopt deferred energy accounting procedures. The intent of these procedures is to ease the effect on customers of fluctuations in the cost of purchased natural gas, fuel and electricity and are subject to annual prudency review by the PUCN. Under deferred energy accounting, to the extent actual fuel and purchased power costs exceed fuel and purchased power costs recoverable through current rates that excess is not recorded as a current expense on the Consolidated Statements of Operations but rather is deferred and recorded as a regulatory asset on the Consolidated Balance Sheets. Conversely, a regulatory liability is recorded to the extent fuel and purchased power costs recoverable through current rates exceed actual fuel and purchased power costs. These excess amounts are reflected in quarterly adjustments to rates and recorded as cost of fuel and energy in future time periods.

2017 Tax Reform

In February 2018, Nevada Power made a filing with the PUCN proposing a tax rate reduction rider for the lower annual income tax expense anticipated to result from 2017 Tax Reform for 2018 and beyond. In March 2018, the PUCN issued an order approving the rate reduction proposed by Nevada Power. The new rates were effective April 1, 2018. The order extended the procedural schedule to allow parties additional discovery relevant to 2017 Tax Reform and a hearing was held in July 2018. In September 2018, the PUCN issued an order directing Nevada Power to record the amortization of any excess protected accumulated deferred income tax arising from the 2017 Tax Reform as a regulatory liability effective January 1, 2018. Subsequently, Nevada Power filed a petition for reconsideration relating to the amortization of protected excess accumulated deferred income tax balances resulting from the 2017 Tax Reform. In November 2018, the PUCN issued an order granting reconsideration and reaffirming the September 2018 order. In December 2018, Nevada Power filed a petition for judicial review. The judicial review occurred in January 2020 and the district court issued an order in March 2020 denying the petition and affirming the PUCN's order.

Natural Disaster Protection Plan

In May 2019, Senate Bill 329 ("SB 329"), Natural Disaster Mitigation Measures, was signed into law, which requires Nevada Power to submit a natural disaster protection plan to the PUCN. The PUCN adopted natural disaster protection plan regulations in January 2020, that require Nevada Power to file their natural disaster protection plan for approval on or before March 1 of every third year, with the first filing due on March 1, 2020. The regulations also require annual updates to be filed on or before September 1 of the second and third years of the plan. The plan must include procedures, protocols and other certain information as it relates to the efforts of Nevada Power to prevent or respond to a fire or other natural disaster. The expenditures incurred by Nevada Power in developing and implementing the natural disaster protection plan are required to be held in a regulatory asset account, with Nevada Power filing an application for recovery on or before March 1 of each year. Nevada Power submitted their initial natural disaster protection plan to the PUCN and filed their first application seeking recovery of 2019 expenditures in February 2020. The hearings are scheduled for June 2020.

(5)
Recent Financing Transactions

Long-Term Debt

In January 2020, Nevada Power issued $425 million of 2.40% General and Refunding Mortgage Notes, Series DD, due 2030 and $300 million of its 3.125% General and Refunding Mortgage Notes, Series EE, due 2050. Nevada Power used the net proceeds for the early redemption of $575 million of its 2.75% General and Refunding Mortgage Notes, Series BB, due April 2020 and for general corporate purposes.

(6)    Employee Benefit Plans

Nevada Power is a participant in benefit plans sponsored by NV Energy. The NV Energy Retirement Plan includes a qualified pension plan ("Qualified Pension Plan") and a supplemental executive retirement plan and a restoration plan (collectively, "Non‑Qualified Pension Plans") that provide pension benefits for eligible employees. The NV Energy Comprehensive Welfare Benefit and Cafeteria Plan provides certain postretirement health care and life insurance benefits for eligible retirees ("Other Postretirement Plans") on behalf of Nevada Power. Amounts attributable to Nevada Power were allocated from NV Energy based upon the current, or in the case of retirees, previous, employment location. Offsetting regulatory assets and liabilities have been recorded related to the amounts not yet recognized as a component of net periodic benefit costs that will be included in regulated rates. Net periodic benefit costs not included in regulated rates are included in accumulated other comprehensive loss, net.


118


Amounts payable to NV Energy are included on the Consolidated Balance Sheets and consist of the following (in millions):
 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Qualified Pension Plan:
 
 
 
Other long-term liabilities
$
18

 
$
18

 
 
 
 
Non-Qualified Pension Plans:
 
 
 
Other current liabilities
1

 
1

Other long-term liabilities
9

 
9

 
 
 
 
Other Postretirement Plans:
 
 
 
Other long-term liabilities
2

 
2


(7)
Fair Value Measurements

The carrying value of Nevada Power's cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. Nevada Power has various financial assets and liabilities that are measured at fair value on the Consolidated Balance Sheets using inputs from the three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

•
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that Nevada Power has the ability to access at the measurement date.
•
Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•
Level 3 — Unobservable inputs reflect Nevada Power's judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. Nevada Power develops these inputs based on the best information available, including its own data.

119



The following table presents Nevada Power's assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):
 
Input Levels for Fair Value Measurements
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
As of March 31, 2020
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market mutual funds(1)
$
117

 
$
—

 
$
—

 
$
117

Investment funds
2

 
—

 
—

 
2

 
$
119

 
$
—

 
$
—

 
$
119

 
 
 
 
 
 
 
 
Liabilities - commodity derivatives
$
—

 
$
—

 
$
(38
)
 
$
(38
)
 
 
 
 
 
 
 
 
As of December 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market mutual funds(1)
$
10

 
$
—

 
$
—

 
$
10

Investment funds
2

 
—

 
—

 
2

 
$
12

 
$
—

 
$
—

 
$
12

 
 
 
 
 
 
 
 
Liabilities - commodity derivatives
$
—

 
$
—

 
$
(8
)
 
$
(8
)

(1)
Amounts are included in cash and cash equivalents on the Consolidated Balance Sheets. The fair value of these money market mutual funds approximates cost.

Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at estimated fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which Nevada Power transacts. When quoted prices for identical contracts are not available, Nevada Power uses forward price curves. Forward price curves represent Nevada Power's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. Nevada Power bases its forward price curves upon internally developed models, with internal and external fundamental data inputs. Market price quotations for certain electricity and natural gas trading hubs are not as readily obtainable due to markets that are not active. Given that limited market data exists for these contracts, Nevada Power uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The model incorporates a mid-market pricing convention (the mid‑point price between bid and ask prices) as a practical expedient for valuing its assets and liabilities measured and reported at fair value. The determination of the fair value for derivative contracts not only includes counterparty risk, but also the impact of Nevada Power's nonperformance risk on its liabilities, which as of March 31, 2020 and December 31, 2019, had an immaterial impact to the fair value of its derivative contracts. As such, Nevada Power considers its derivative contracts to be valued using Level 3 inputs.

Nevada Power's investments in money market mutual funds and equity securities are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value.


120


The following table reconciles the beginning and ending balances of Nevada Power's commodity derivative assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Beginning balance
$
(8
)
 
3

Changes in fair value recognized in regulatory assets
(31
)
 
(9
)
Settlements
1

 
1

Ending balance
$
(38
)
 
$
(5
)

Nevada Power's long-term debt is carried at cost on the Consolidated Balance Sheets. The fair value of Nevada Power's long‑term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of Nevada Power's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of Nevada Power's long‑term debt (in millions):
 
As of March 31, 2020
 
As of December 31, 2019
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
 
 
 
 
 
 
 
 
Long-term debt
$
2,495

 
$
2,837

 
$
2,351

 
$
2,848


(8)
Commitments and Contingencies

Legal Matters

Nevada Power is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. Nevada Power does not believe that such normal and routine litigation will have a material impact on its consolidated financial results. Nevada Power is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties and other costs in substantial amounts.

Environmental Laws and Regulations

Nevada Power is subject to federal, state and local laws and regulations regarding climate change, renewable portfolio standards ("RPS"), air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact Nevada Power's current and future operations. Nevada Power believes it is in material compliance with all applicable laws and regulations.


121


(9)
Revenue from Contracts with Customers

The following table summarizes Nevada Power's revenue from contracts with customers ("Customer Revenue") by customer class (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Customer Revenue:
 
 
 
Retail:
 
 
 
Residential
$
193

 
$
200

Commercial
94

 
90

Industrial
70

 
70

Other
3

 
5

Total fully bundled
360

 
365

Distribution only service
7

 
7

Total retail
367

 
372

Wholesale, transmission and other
16

 
17

Total Customer Revenue
383

 
389

Other revenue
6

 
6

Total revenue
$
389

 
$
395




122


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations 

The following is management's discussion and analysis of certain significant factors that have affected the consolidated financial condition and results of operations of Nevada Power during the periods included herein. Explanations include management's best estimate of the impact of weather, customer growth, usage trends and other factors. This discussion should be read in conjunction with Nevada Power's historical unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. Nevada Power's actual results in the future could differ significantly from the historical results.

Results of Operations for the First Quarter of 2020 and 2019

Overview

Net loss for the first quarter of 2020 was $4 million, a decrease of $10 million, compared to 2019 primarily due to $6 million of higher operations and maintenance, primarily due to regulatory-directed deferrals relating to the retirement of the Navajo generating station in 2019 of $5 million, $3 million of lower utility margin and $3 million of unfavorable other income (expense), partially offset by $3 million of lower income tax expense due to lower income before income tax expense.

Non-GAAP Financial Measure

Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as, utility margin, to help evaluate results of operations. Utility margin is calculated as electric operating revenue less cost of fuel and energy, which are captions presented on the Consolidated Statements of Operations.

Nevada Power's cost of fuel and energy are directly recovered from its customers through regulatory recovery mechanisms and as a result, changes in Nevada Power's expenses result in comparable changes to revenue. As such, management believes utility margin more appropriately and concisely explains profitability rather than a discussion of revenue and cost of sales separately. Management believes the presentation of utility margin provides meaningful and valuable insight into the information management considers important to running the business and a measure of comparability to others in the industry.

Utility margin is not a measure calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, operating income which is the most directly comparable financial measure prepared in accordance with GAAP. The following table provides a reconciliation of utility margin to operating income (in millions):
 
 
First Quarter
 
 
2020
 
2019
 
Change
Utility margin:
 
 
 
 
 
 
 
Operating revenue
 
$
389

 
$
395

 
$
(6
)
(2
)%
Cost of fuel and energy
 
170

 
173

 
(3
)
(2
)
Utility margin
 
219

 
222

 
(3
)
(1
)
Operations and maintenance
 
82

 
76

 
6

8

Depreciation and amortization
 
90

 
89

 
1

1

Property and other taxes
 
12

 
12

 
—

—

Operating income
 
$
35

 
$
45

 
$
(10
)
(22
)


123


A comparison of Nevada Power's key operating results is as follows:
 
 
First Quarter
 
 
2020
 
2019
 
Change
Utility margin (in millions):
 
 
 
 
 
 
 
Operating revenue
 
$
389

 
$
395

 
$
(6
)
(2
)%
Cost of fuel and energy
 
170

 
173

 
(3
)
(2
)
Utility margin
 
$
219

 
$
222

 
$
(3
)
(1
)%
 
 
 
 
 
 
 
 
Sales (GWhs):
 
 
 
 
 
 
 
Residential
 
1,544

 
1,608

 
(64
)
(4
)%
Commercial
 
1,011

 
992

 
19

2

Industrial
 
1,151

 
1,160

 
(9
)
(1
)
Other
 
48

 
47

 
1

2

Total fully bundled(1)
 
3,754

 
3,807

 
(53
)
(1
)
Distribution only service
 
611

 
528

 
83

16

Total retail
 
4,365

 
4,335

 
30

1

Wholesale
 
153

 
144

 
9

6

Total GWhs sold
 
4,518

 
4,479

 
39

1
 %
 
 
 
 
 
 
 
 
Average number of retail customers (in thousands)
 
961

 
945

 
16

2
 %
 
 
 
 
 
 
 
 
Average revenue per MWh:
 
 
 
 
 
 
 
Retail - fully bundled(1)
 
$
96.01

 
$
95.87

 
$
0.14

—
 %
Wholesale
 
$
31.58

 
$
42.27

 
$
(10.69
)
(25
)%
 
 
 
 
 
 
 
 
Heating degree days
 
942

 
1,083

 
(141
)
(13
)%
Cooling degree days
 
2

 
12

 
(10
)
(83
)%
 
 
 
 
 
 
 
 
Sources of energy (GWhs)(2)(3):
 
 
 
 
 
 
 
Natural gas
 
2,622

 
2,169

 
453

21
 %
Coal
 
—

 
342

 
(342
)
*
Renewables
 
16

 
12

 
4

33

Total energy generated
 
2,638

 
2,523

 
115

5

Energy purchased
 
1,240

 
1,475

 
(235
)
(16
)
Total
 
3,878

 
3,998

 
(120
)
(3
)%
 
 
 
 
 
 
 
 
Average total cost of energy per MWh(4)
 
$
43.89

 
$
43.32

 
$
0.57

1
 %
*    Not meaningful
(1)
Fully bundled includes sales to customers for combined energy, transmission and distribution services.
(2)
The average total cost of energy per MWh and sources of energy excludes - and 81 GWhs of coal and 710 and 497 GWhs of gas generated energy that is purchased at cost by related parties for the first quarter of 2020 and 2019, respectively.
(3)
GWh amounts are net of energy used by the related generating facilities.
(4)
The average total cost of energy per MWh includes the cost of fuel, purchased power and deferrals and does not include other costs.

124


Utility margin decreased $3 million, or 1%, for the first quarter of 2020 compared to 2019 primarily due to $3 million of lower customer volumes primarily from unfavorable impacts of weather and $2 million of higher revenue reductions related to customer service agreements, offset by $2 million of higher wholesale revenue.

Operations and maintenance increased $6 million, or 8%, for the first quarter of 2020 compared to 2019 primarily due to higher regulatory-directed debits relating to the deferral of the non-labor cost saving from the Navajo generating station retirement in 2019 of $5 million and regulatory-directed debits relating to the deferral of costs for the ON Line lease to be returned to customers (offset in other income (expense)) of $2 million, partially offset by a lower accrual for earnings sharing of $1 million.

Other income (expense) is unfavorable $3 million, or 8%, for the first quarter of 2020 compared to 2019 primarily due to lower cash surrender value of corporate-owned life insurance policies of $7 million and lower other income due to a licensing agreement with a third party in 2019 of $2 million, offset by lower interest expense on long-term debt of $4 million due to lower interest rates and lower interest expense on the ON Line finance lease due to the regulatory-directed reallocation of costs between Nevada Power and Sierra Pacific (offset in operations and maintenance) of $2 million.

Income tax expense decreased $3 million, or 150%, for the first quarter of 2020 compared to 2019 due to lower pre-tax income. The effective tax rate was 20% in 2020 and 21% in 2019.

Liquidity and Capital Resources

As of March 31, 2020, Nevada Power's total net liquidity was as follows (in millions):

Cash and cash equivalents
 
$
121

Credit facility
 
400

Total net liquidity
 
$
521

Credit facility:
 
 
Maturity date
 
2022


Operating Activities

Net cash flows from operating activities for the three-month periods ended March 31, 2020 and 2019 were $79 million and $135 million, respectively. The change was primarily due to the timing of payments for operating costs, higher payments for generation long-term service agreements, lower collections from customers due to the unfavorable impacts of weather, lower proceeds from a licensing agreement with a third party in 2019, decreased collections of customer advances and higher payments of customer service agreements, partially offset by a decrease in payments for fuel costs and lower interest payments for long-term debt.

Investing Activities

Net cash flows from investing activities for the three-month periods ended March 31, 2020 and 2019 were $(111) million and $(111) million, respectively. Refer to "Future Uses of Cash" for further discussion of capital expenditures.

Financing Activities

Net cash flows from financing activities for the three-month periods ended March 31, 2020 and 2019 were $140 million and $(83) million, respectively. The change was primarily due to greater proceeds from the issuance of long-term debt and lower dividends paid to NV Energy, Inc., partially offset by higher repayments of long-term debt.



125


Long-Term Debt

In January 2020, Nevada Power issued $425 million of 2.40% General and Refunding Mortgage Notes, Series DD, due 2030 and $300 million of 3.125% General and Refunding Mortgage Notes, Series EE, due 2050. Nevada Power used the net proceeds for the early redemption of $575 million of its 2.75% General and Refunding Mortgage Notes, Series BB, due April 2020 and for general corporate purposes.

Debt Authorizations

Nevada Power currently has financing authority from the PUCN consisting of the ability to: (1) establish debt issuances limited to a debt ceiling of $3.2 billion (excluding borrowings under Nevada Power's $400 million secured credit facility); and (2) maintain a revolving credit facility of up to $1.3 billion. Nevada Power currently has an effective automatic shelf registration statement with the SEC to issue an indeterminate amount of general and refunding mortgage securities through October 2022.

Future Uses of Cash

Nevada Power has available a variety of sources of liquidity and capital resources, both internal and external, including net cash flows from operating activities, public and private debt offerings, the use of its secured revolving credit facility, capital contributions and other sources. These sources are expected to provide funds required for current operations, capital expenditures, debt retirements and other capital requirements. The availability and terms under which Nevada Power has access to external financing depends on a variety of factors, including regulatory approvals, Nevada Power's credit ratings, investors' judgment of risk and conditions in the overall capital markets, including the condition of the utility industry.

Capital Expenditures

Capital expenditure needs are reviewed regularly by management and may change significantly as a result of these reviews, which may consider, among other factors, changes in environmental and other rules and regulations; impacts to customers' rates; outcomes of regulatory proceedings; changes in income tax laws; general business conditions; load projections; system reliability standards; the cost and efficiency of construction labor, equipment and materials; commodity prices; and the cost and availability of capital. Prudently incurred expenditures for compliance-related items such as pollution control technologies, replacement generation and associated operating costs are generally incorporated into Nevada Power's regulated retail rates. Expenditures for certain assets may ultimately include acquisition of existing assets.

Historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items are as follows (in millions):
 
Three-Month Periods
 
Annual
 
Ended March 31,
 
Forecast
 
2019
 
2020
 
2020
 
 
 
 
 
 
Generation development
$
—

 
$
11

 
$
20

Distribution
43

 
64

 
210

Transmission system investment
4

 
4

 
23

Other
66

 
32

 
199

Total
$
113

 
$
111

 
$
452


Nevada Power's forecast capital expenditures include investments related to operating projects that consist of routine expenditures for generation, transmission, distribution and other infrastructure needed to serve existing and expected demand.

Contractual Obligations

As of March 31, 2020, there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of Nevada Power's Annual Report on Form 10-K for the year ended December 31, 2019.


126


COVID-19

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by Nevada Power. While the rapid outbreak of COVID-19 has not had a material impact on Nevada Power's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. The state of Nevada has instituted a "stay-at-home" order, which has impacted Nevada Power's customers and, therefore, their needs for electricity. As the impacts of COVID-19 and related customer and governmental responses are uncertain, including the duration of casino closures, a reduction in the consumption of electricity, and related operating revenue, may occur, particularly in the commercial and industrial classes as well as distribution only service customers, as evidenced by the reduction experienced by Nevada Power in April 2020 compared to the same period in 2019. Due to regulatory requirements and voluntary actions taken by Nevada Power related to customer collection activity and suspension of disconnections for non-payment, Nevada Power could see delays or reductions in cash receipts, including potentially higher than normal bad debt expense, from retail customers related to the impacts of COVID-19. The amount of such reductions in cash receipts is unknown at this time. The PUCN has approved recovery of certain costs incurred in responding to COVID-19. Refer to "Regulatory Matters" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for further discussion.

Nevada Power's business has been deemed essential and its employees have been identified as "critical infrastructure employees" allowing them to move within communities and across jurisdictional boundaries as necessary to maintain its electric generation, transmission and distribution system. In response to the effects of COVID-19, Nevada Power has implemented its business continuity plan to protect its employees and customers. Such plans include a variety of actions, including situational use of personal protective equipment by employees when interacting with customers and implementing practices to enhance social distancing at the workplace. Such practices have included work-from-home, staggered work schedules, rotational work location assignments, increased cleaning and sanitation of work spaces and providing general health reminders intended to help lower the risk of spreading COVID-19.

Regulatory Matters

Nevada Power is subject to comprehensive regulation. Refer to "Regulatory Matters" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for discussion regarding Nevada Power's current regulatory matters.

Environmental Laws and Regulations

Nevada Power is subject to federal, state and local laws and regulations regarding climate change, RPS, air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact Nevada Power's current and future operations. In addition to imposing continuing compliance obligations and capital expenditure requirements, these laws and regulations provide regulators with the authority to levy substantial penalties for noncompliance including fines, injunctive relief and other sanctions. These laws and regulations are administered by the EPA and various state and local agencies. All such laws and regulations are subject to a range of interpretation, which may ultimately be resolved by the courts. Environmental laws and regulations continue to evolve, and Nevada Power is unable to predict the impact of the changing laws and regulations on its operations and consolidated financial results. Nevada Power believes it is in material compliance with all applicable laws and regulations.

Refer to "Environmental Laws and Regulations" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for additional information regarding environmental laws and regulations.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Consolidated Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of long-lived assets, income taxes and revenue recognition - unbilled revenue. For additional discussion of Nevada Power's critical accounting estimates, see Item 7 of Nevada Power's Annual Report on Form 10‑K for the year ended December 31, 2019. There have been no significant changes in Nevada Power's assumptions regarding critical accounting estimates since December 31, 2019.

127


Sierra Pacific Power Company
Financial Section


128


PART I
Item 1.
Financial Statements


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholder of
Sierra Pacific Power Company

Results of Review of Interim Financial Information

We have reviewed the accompanying balance sheet of Sierra Pacific Power Company ("Sierra Pacific") as of March 31, 2020, the related statements of operations and changes in shareholder's equity for the three-month periods ended March 31, 2020 and 2019, and of cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheet of Sierra Pacific as of December 31, 2019, and the related statements of operations, changes in shareholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of Sierra Pacific's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Sierra Pacific in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ Deloitte & Touche LLP


Las Vegas, Nevada
May 1, 2020


129


SIERRA PACIFIC POWER COMPANY
BALANCE SHEETS (Unaudited)
(Amounts in millions, except share data)

 
As of
 
March 31,
 
December 31,
 
2020
 
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
27

 
$
27

Trade receivables, net
97

 
109

Income taxes receivable
7

 
14

Inventories
60

 
57

Regulatory assets
18

 
12

Other current assets
27

 
20

Total current assets
236

 
239

 
 
 
 
Property, plant and equipment, net
3,075

 
3,075

Regulatory assets
295

 
283

Other assets
80

 
74

 
 
 
 
Total assets
$
3,686

 
$
3,671

 
 
 
 
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
 
 
 
Accounts payable
$
93

 
$
103

Accrued interest
11

 
14

Accrued property, income and other taxes
14

 
12

Regulatory liabilities
64

 
49

Customer deposits
20

 
21

Other current liabilities
32

 
21

Total current liabilities
234

 
220

 
 
 
 
Long-term debt
1,135

 
1,135

Regulatory liabilities
463

 
489

Deferred income taxes
348

 
347

Other long-term liabilities
161

 
160

Total liabilities
2,341

 
2,351

 
 
 
 
Commitments and contingencies (Note 8)

 

 
 
 
 
Shareholder's equity:
 
 
 
Common stock - $3.75 stated value, 20,000,000 shares authorized and 1,000 issued and outstanding
—

 
—

Additional paid-in capital
1,111

 
1,111

Retained earnings
235

 
210

Accumulated other comprehensive loss, net
(1
)
 
(1
)
Total shareholder's equity
1,345

 
1,320

 
 
 
 
Total liabilities and shareholder's equity
$
3,686

 
$
3,671

 
 
 
 
The accompanying notes are an integral part of the financial statements.


130


SIERRA PACIFIC POWER COMPANY
STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
Regulated electric
$
184

 
$
182

Regulated natural gas
48

 
37

Total operating revenue
232

 
219

 
 
 
 
Operating expenses:
 
 
 
Cost of fuel and energy
80

 
82

Cost of natural gas purchased for resale
30

 
19

Operations and maintenance
42

 
44

Depreciation and amortization
34

 
31

Property and other taxes
6

 
6

Total operating expenses
192

 
182

 
 
 
 
Operating income
40

 
37

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(14
)
 
(12
)
Allowance for equity funds
1

 
1

Other, net
1

 
2

Total other income (expense)
(12
)
 
(9
)
 
 
 
 
Income before income tax expense
28

 
28

Income tax expense
3

 
6

Net income
$
25

 
$
22

 
 
 
 
The accompanying notes are an integral part of these financial statements.


131


SIERRA PACIFIC POWER COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
(Amounts in millions, except shares)

 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Total
 
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Shareholder's
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss, Net
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
1,000

 
$
—

 
$
1,111

 
$
153

 
$
—

 
$
1,264

Net income
 
—

 
—

 
—

 
22

 
—

 
22

Balance, March 31, 2019
 
1,000

 
$
—

 
$
1,111

 
$
175

 
$
—

 
$
1,286

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
 
1,000

 
$
—

 
$
1,111

 
$
210

 
$
(1
)
 
$
1,320

Net income
 
—

 
—

 
—

 
25

 
—

 
25

Balance, March 31, 2020
 
1,000

 
$
—

 
$
1,111

 
$
235

 
$
(1
)
 
$
1,345

 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these financial statements.


132


SIERRA PACIFIC POWER COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
25

 
$
22

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
34

 
31

Allowance for equity funds
(1
)
 
(1
)
Changes in regulatory assets and liabilities
(10
)
 
11

Deferred income taxes and amortization of investment tax credits
(3
)
 
5

Deferred energy
14

 
(22
)
Amortization of deferred energy
4

 
(5
)
Other, net
1

 
(1
)
Changes in other operating assets and liabilities:
 
 
 
Trade receivables and other assets
1

 
7

Inventories
(3
)
 
—

Accrued property, income and other taxes
4

 
(2
)
Accounts payable and other liabilities
(12
)
 
(1
)
Net cash flows from operating activities
54

 
44

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(52
)
 
(52
)
Net cash flows from investing activities
(52
)
 
(52
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Other, net
(1
)
 
—

Net cash flows from financing activities
(1
)
 
—

 
 
 
 
Net change in cash and cash equivalents and restricted cash and cash equivalents
1

 
(8
)
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
32

 
76

Cash and cash equivalents and restricted cash and cash equivalents at end of period
$
33

 
$
68

 
 
 
 
The accompanying notes are an integral part of these financial statements.


133


SIERRA PACIFIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

(1)
General

Sierra Pacific Power Company ("Sierra Pacific"), is a wholly owned subsidiary of NV Energy, Inc. ("NV Energy"), a holding company that also owns Nevada Power Company ("Nevada Power") and certain other subsidiaries. Sierra Pacific is a United States regulated electric utility company serving retail customers, including residential, commercial and industrial customers and regulated retail natural gas customers primarily in northern Nevada. NV Energy is an indirect wholly owned subsidiary of Berkshire Hathaway Energy Company ("BHE"). BHE is a holding company based in Des Moines, Iowa that owns subsidiaries principally engaged in energy businesses. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").

The unaudited Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Financial Statements as of March 31, 2020 and for the three-month periods ended March 31, 2020 and 2019. The Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the three-month periods ended March 31, 2020 and 2019. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Financial Statements. Note 2 of Notes to Financial Statements included in Sierra Pacific's Annual Report on Form 10-K for the year ended December 31, 2019 describes the most significant accounting policies used in the preparation of the unaudited Financial Statements. There have been no significant changes in Sierra Pacific's assumptions regarding significant accounting estimates and policies during the three-month period ended March 31, 2020.

Coronavirus Disease 2019 ("COVID-19")

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by Sierra Pacific. While the rapid outbreak of COVID-19 has not had a material impact on Sierra Pacific's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. Such impacts may include, among others, potential declines in operating revenue from reductions in the consumption of electricity by retail utility customers as the longer-term impacts of COVID-19 and related customer and governmental responses are uncertain, including the duration of casino closures, which is evidenced by the reduction experienced by Sierra Pacific in April 2020 compared to the same period in 2019, and higher credit loss expenses resulting from a higher than average level of write-offs of uncollectible accounts associated with the suspension of disconnections and late payment fees to assist customers facing unprecedented economic pressures. The duration and extent of COVID-19 and its future impact on Sierra Pacific's business cannot be reasonably estimated at this time. Accordingly, significant estimates used in the preparation of Sierra Pacific's unaudited Financial Statements, including those associated with evaluations of certain long-lived assets for impairment, expected credit losses on amounts owed to Sierra Pacific and potential regulatory recovery of certain costs may be subject to significant adjustments in future periods.

In March 2020, the PUCN issued an emergency order for Sierra Pacific to establish a regulatory asset account related to the costs of maintaining service to customers affected by COVID-19 whose services would have been terminated or disconnected under normally-applicable terms of service.


134


(2)
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash equivalents consist of funds invested in money market mutual funds, United States Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, consist of funds restricted by the Public Utilities Commission of Nevada ("PUCN") for a certain renewable energy contract. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of March 31, 2020 and December 31, 2019, as presented in the Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Balance Sheets (in millions):
 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Cash and cash equivalents
$
27

 
$
27

Restricted cash and cash equivalents included in other current assets
6

 
5

Total cash and cash equivalents and restricted cash and cash equivalents
$
33

 
$
32


(3)
Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):
 
 
 
As of
 
Depreciable Life
 
March 31,
 
December 31,
 
 
2020
 
2019
Utility plant:
 
 
 
 
 
Electric generation
25 - 60 years
 
$
1,129

 
$
1,133

Electric transmission
50 - 100 years
 
874

 
840

Electric distribution
20 - 100 years
 
1,690

 
1,669

Electric general and intangible plant
5 - 70 years
 
182

 
178

Natural gas distribution
35 - 70 years
 
421

 
417

Natural gas general and intangible plant
5 - 70 years
 
14

 
14

Common general
5 - 70 years
 
335

 
338

Utility plant
 
 
4,645

 
4,589

Accumulated depreciation and amortization
 
 
(1,673
)
 
(1,629
)
Utility plant, net
 
 
2,972

 
2,960

Other non-regulated, net of accumulated depreciation and amortization
70 years
 
2

 
2

Plant, net
 
 
2,974

 
2,962

Construction work-in-progress
 
 
101

 
113

Property, plant and equipment, net
 
 
$
3,075

 
$
3,075


(4)
Regulatory Matters

Deferred Energy

Nevada statutes permit regulated utilities to adopt deferred energy accounting procedures. The intent of these procedures is to ease the effect on customers of fluctuations in the cost of purchased natural gas, fuel and electricity and are subject to annual prudency review by the PUCN. Under deferred energy accounting, to the extent actual fuel and purchased power costs exceed fuel and purchased power costs recoverable through current rates that excess is not recorded as a current expense on the Statements of Operations but rather is deferred and recorded as a regulatory asset on the Balance Sheets. Conversely, a regulatory liability is recorded to the extent fuel and purchased power costs recoverable through current rates exceed actual fuel and purchased power costs. These excess amounts are reflected in quarterly adjustments to rates and recorded as cost of fuel and energy in future time periods.


135


Regulatory Rate Review

In June 2019, Sierra Pacific filed an electric regulatory rate review with the PUCN. The filing supported an annual revenue increase of $5 million but requested an annual revenue reduction of $5 million. In September 2019, Sierra Pacific filed an all-party settlement for the electric regulatory rate review. The settlement resolved all cost of capital and revenue requirement issues and provided for an annual revenue reduction of $5 million and required Sierra Pacific to share 50% of regulatory earnings above 9.7% with its customers. The rate design portion of the regulatory rate review was not a part of the settlement and a hearing on rate design was held in November 2019. In December 2019, the PUCN issued an order approving the stipulation but made some adjustments to the methodology for the weather normalization component of historical sales in rates, which resulted in an additional annual revenue reduction of $3 million. The new rates were effective January 1, 2020. In January 2020, Sierra Pacific filed a petition for rehearing challenging the PUCN's adjustments to the weather normalization methodology. In February 2020, the PUCN issued an order granting the petition for rehearing. In April 2020, the PUCN issued a final order approving a weather normalization methodology that changed the additional annual revenue reduction from $3 million to $2 million with an effective date of January 1, 2020.

2017 Tax Reform

In February 2018, Sierra Pacific made a filing with the PUCN proposing a tax rate reduction rider for the lower annual income tax expense anticipated to result from 2017 Tax Reform for 2018 and beyond. In March 2018, the PUCN issued an order approving the rate reduction proposed by Sierra Pacific. The new rates were effective April 1, 2018. The order extended the procedural schedule to allow parties additional discovery relevant to 2017 Tax Reform and a hearing was held in July 2018. In September 2018, the PUCN issued an order directing Sierra Pacific to record the amortization of any excess protected accumulated deferred income tax arising from the 2017 Tax Reform as a regulatory liability effective January 1, 2018. Subsequently, Sierra Pacific filed a petition for reconsideration relating to the amortization of protected excess accumulated deferred income tax balances resulting from the 2017 Tax Reform. In November 2018, the PUCN issued an order granting reconsideration and reaffirming the September 2018 order. In December 2018, Sierra Pacific filed a petition for judicial review. The judicial review occurred in January 2020 and the district court issued an order in March 2020 denying the petition and affirming the PUCN's order.

Natural Disaster Protection Plan

In May 2019, Senate Bill 329 ("SB 329"), Natural Disaster Mitigation Measures, was signed into law, which requires Sierra Pacific to submit a natural disaster protection plan to the PUCN. The PUCN adopted natural disaster protection plan regulations in January 2020, that require Sierra Pacific to file their natural disaster protection plan for approval on or before March 1 of every third year, with the first filing due on March 1, 2020. The regulations also require annual updates to be filed on or before September 1 of the second and third years of the plan. The plan must include procedures, protocols and other certain information as it relates to the efforts of Sierra Pacific to prevent or respond to a fire or other natural disaster. The expenditures incurred by Sierra Pacific in developing and implementing the natural disaster protection plan are required to be held in a regulatory asset account, with Sierra Pacific filing an application for recovery on or before March 1 of each year. Sierra Pacific submitted their initial natural disaster protection plan to the PUCN and filed their first application seeking recovery of 2019 expenditures in February 2020. The hearings are scheduled for June 2020.

(5)    Income Taxes

A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax expense is as follows:
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
 
 
 
Federal statutory income tax rate
21
 %
 
21
%
Effects of ratemaking
(8
)
 
—

Other
(2
)
 
—

Effective income tax rate
11
 %
 
21
%

Effects of ratemaking is primarily attributable to the recognition of excess deferred income taxes related to the 2017 Tax Cuts and Jobs Act pursuant to an order issued by the PUCN effective January 1, 2020.

136



(6)
Employee Benefit Plans

Sierra Pacific is a participant in benefit plans sponsored by NV Energy. The NV Energy Retirement Plan includes a qualified pension plan ("Qualified Pension Plan") and a supplemental executive retirement plan and a restoration plan (collectively, "Non‑Qualified Pension Plans") that provide pension benefits for eligible employees. The NV Energy Comprehensive Welfare Benefit and Cafeteria Plan provides certain postretirement health care and life insurance benefits for eligible retirees ("Other Postretirement Plans") on behalf of Sierra Pacific. Amounts attributable to Sierra Pacific were allocated from NV Energy based upon the current, or in the case of retirees, previous, employment location. Offsetting regulatory assets and liabilities have been recorded related to the amounts not yet recognized as a component of net periodic benefit costs that will be included in regulated rates. Net periodic benefit costs not included in regulated rates are included in accumulated other comprehensive loss, net.

Amounts payable to NV Energy are included on the Balance Sheets and consist of the following (in millions):
 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Qualified Pension Plan:
 
 
 
Other long-term liabilities
$
3

 
$
4

 
 
 
 
Non-Qualified Pension Plans:
 
 
 
Other current liabilities
1

 
1

Other long-term liabilities
8

 
8

 
 
 
 
Other Postretirement Plans:
 
 
 
Other long-term liabilities
7

 
7


(7)
Fair Value Measurements

The carrying value of Sierra Pacific's cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. Sierra Pacific has various financial assets and liabilities that are measured at fair value on the Balance Sheets using inputs from the three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

•
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that Sierra Pacific has the ability to access at the measurement date.
•
Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•
Level 3 — Unobservable inputs reflect Sierra Pacific's judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. Sierra Pacific develops these inputs based on the best information available, including its own data.


137


The following table presents Sierra Pacific's assets and liabilities recognized on the Balance Sheets and measured at fair value on a recurring basis (in millions):
 
Input Levels for Fair Value Measurements
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
As of March 31, 2020
 
 
 
 
 
 
 
Assets - money market mutual funds(1)
$
25

 
$
—

 
$
—

 
$
25

 
 
 
 
 
 
 
 
Liabilities - commodity derivatives
$
—

 
$
—

 
$
(9
)
 
$
(9
)
 
 
 
 
 
 
 
 
As of December 31, 2019
 
 
 
 
 
 
 
Assets - money market mutual funds(1)
$
25

 
$
—

 
$
—

 
$
25

 
 
 
 
 
 
 
 
Liabilities - commodity derivatives

$
—

 
$
—

 
$
(1
)
 
$
(1
)

(1)
Amounts are included in cash and cash equivalents on the Balance Sheets. The fair value of these money market mutual funds approximates cost.

Sierra Pacific's investments in money market mutual funds and equity securities are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value.

Sierra Pacific's long-term debt is carried at cost on the Balance Sheets. The fair value of Sierra Pacific's long-term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of Sierra Pacific's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of Sierra Pacific's long-term debt (in millions):
 
As of March 31, 2020
 
As of December 31, 2019
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
 
 
 
 
 
 
 
 
Long-term debt
$
1,135

 
$
1,226

 
$
1,135

 
$
1,258


(8)
Commitments and Contingencies

Legal Matters

Sierra Pacific is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. Sierra Pacific does not believe that such normal and routine litigation will have a material impact on its financial results. Sierra Pacific is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties and other costs in substantial amounts.

Environmental Laws and Regulations

Sierra Pacific is subject to federal, state and local laws and regulations regarding climate change, renewable portfolio standards ("RPS"), air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact Sierra Pacific's current and future operations. Sierra Pacific believes it is in material compliance with all applicable laws and regulations.


138


(9)
Revenue from Contracts with Customers

The following table summarizes Sierra Pacific's revenue from contracts with customers ("Customer Revenue") by customer class, including a reconciliation to Sierra Pacific's reportable segment information included in Note 10 (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
 
Electric

Natural Gas

Total
 
Electric
 
Natural Gas
 
Total
Customer Revenue:





 

 

 
 
Retail:





 

 

 
 
Residential
$
69


$
30


$
99

 
$
68

 
$
24

 
$
92

Commercial
57


13


70

 
54

 
10

 
64

Industrial
41


4


45

 
39

 
3

 
42

Other
1


—


1

 
2

 
—

 
2

Total fully bundled
168


47


215

 
163

 
37

 
200

Distribution only service
1


—


1

 
1

 
—

 
1

Total retail
169


47


216

 
164

 
37

 
201

Wholesale, transmission and other
14


—


14

 
17

 
—

 
17

Total Customer Revenue
183


47


230

 
181

 
37

 
218

Other revenue
1


1


2

 
1

 
—

 
1

Total revenue
$
184


$
48


$
232

 
$
182

 
$
37

 
$
219


(10)
Segment Information

Sierra Pacific has identified two reportable operating segments: regulated electric and regulated natural gas. The regulated electric segment derives most of its revenue from regulated retail sales of electricity to residential, commercial, and industrial customers and from wholesale sales. The regulated natural gas segment derives most of its revenue from regulated retail sales of natural gas to residential, commercial, and industrial customers and also obtains revenue by transporting natural gas owned by others through its distribution system. Pricing for regulated electric and regulated natural gas sales are established separately by the PUCN; therefore, management also reviews each segment separately to make decisions regarding allocation of resources and in evaluating performance.

The following tables provide information on a reportable segment basis (in millions):
 
Three-Month Periods
 
Ended March 31,
 
2020
 
2019
Operating revenue:
 
 
 
Regulated electric
$
184

 
$
182

Regulated natural gas
48

 
37

Total operating revenue
$
232

 
$
219

 
 
 
 
Operating income:
 
 
 
Regulated electric
$
33

 
$
29

Regulated natural gas
7

 
8

Total operating income
40

 
37

Interest expense
(14
)
 
(12
)
Allowance for equity funds
1

 
1

Other, net
1

 
2

Income before income tax expense
$
28

 
$
28


139


 
As of
 
March 31,
 
December 31,
 
2020
 
2019
Assets:
 
 
 
Regulated electric
$
3,332

 
$
3,319

Regulated natural gas
314

 
308

Other(1)
40

 
44

Total assets
$
3,686

 
$
3,671


(1)
Consists principally of cash and cash equivalents not included in either the regulated electric or regulated natural gas segments.

140


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations 

The following is management's discussion and analysis of certain significant factors that have affected the financial condition and results of operations of Sierra Pacific during the periods included herein. Explanations include management's best estimate of the impact of weather, customer growth, usage trends and other factors. This discussion should be read in conjunction with Sierra Pacific's historical unaudited Financial Statements and Notes to Financial Statements in Part I, Item 1 of this Form 10-Q. Sierra Pacific's actual results in the future could differ significantly from the historical results.

Results of Operations for the First Quarter of 2020 and 2019

Overview

Net income for the first quarter of 2020 was $25 million, an increase of $3 million, or 14%, compared to 2019 primarily due to $4 million of higher electric utility margin, primarily due to higher wholesale revenue and residential customer growth and $3 million of lower income tax expense, partially offset higher depreciation and amortization mainly due to higher plant in service.

Non-GAAP Financial Measure
Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as, electric utility margin and natural gas utility margin, to help evaluate results of operations. Electric utility margin is calculated as electric operating revenue less cost of fuel and energy while natural gas utility margin is calculated as natural gas operating revenue less cost of natural gas purchased for resale, which are captions presented on the Statements of Operations.
Sierra Pacific's cost of fuel and energy and cost of natural gas purchased for resale are generally recovered from its customers through regulatory recovery mechanisms and as a result, changes in Sierra Pacific's expenses result in comparable changes to revenue. As such, management believes electric utility margin and natural gas utility margin more appropriately and concisely explain profitability rather than a discussion of revenue and cost of sales separately. Management believes the presentation of electric utility margin and natural gas utility margin provides meaningful and valuable insight into the information management considers important to running the business and a measure of comparability to others in the industry.
Electric utility margin and natural gas utility margin are not measures calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, operating income which is the most directly comparable financial measure prepared in accordance with GAAP. The following table provides a reconciliation of utility margin to operating income (in millions):
 
 
First Quarter
 
 
2020
 
2019
 
Change
Electric utility margin:
 
 
 
 
 
 
 
Operating revenue
 
$
184

 
$
182

 
$
2

1
 %
Cost of fuel and energy
 
80

 
82

 
(2
)
(2
)
Electric utility margin
 
104

 
100

 
4

4

 
 
 
 
 
 
 
 
Natural gas utility margin:
 
 
 
 
 
 
 
Operating revenue
 
48

 
37

 
11

30
 %
Natural gas purchased for resale
 
30

 
19

 
11

58

Natural gas utility margin
 
18

 
18

 
—

—

 
 
 
 
 
 
 
 
Utility margin
 
122

 
118

 
4

3
 %
 
 
 
 
 
 
 
 
Operations and maintenance
 
42

 
44

 
(2
)
(5
)%
Depreciation and amortization
 
34

 
31

 
3

10

Property and other taxes
 
6

 
6

 
—

—

Operating income
 
$
40

 
$
37

 
$
3

8
 %


141


Electric Utility Margin

A comparison of key operating results related to electric utility margin is as follows:
 
 
First Quarter
 
 
2020
 
2019
 
Change
Electric utility margin (in millions):
 
 
 
 
 
 
 
Electric operating revenue
 
$
184

 
$
182

 
$
2

1
 %
Cost of fuel and energy
 
80

 
82

 
(2
)
(2
)
Electric utility margin
 
$
104

 
$
100

 
$
4

4
 %
 
 
 
 
 
 
 
 
Sales (GWhs):
 
 
 
 
 
 
 
Residential
 
635

 
655

 
(20
)
(3
)%
Commercial
 
701

 
700

 
1

—

Industrial
 
909

 
924

 
(15
)
(2
)
Other
 
4

 
4

 
—

—

Total fully bundled(1)
 
2,249

 
2,283

 
(34
)
(1
)
Distribution only service
 
412

 
391

 
21

5

Total retail
 
2,661

 
2,674

 
(13
)
—

Wholesale
 
193

 
219

 
(26
)
(12
)
Total GWhs sold
 
2,854

 
2,893

 
(39
)
(1
)%
 
 
 
 
 
 
 
 
Average number of retail customers (in thousands)
 
356

 
351

 
5

1
 %
 
 
 
 
 
 
 
 
Average revenue per MWh:
 
 
 
 
 
 
 
Retail - fully bundled(1)
 
$
74.76

 
$
71.50

 
$
3.26

5
 %
Wholesale
 
$
49.05

 
$
52.52

 
$
(3.47
)
(7
)%
 
 
 
 
 
 
 
 
Heating degree days
 
2,066

 
2,244

 
(178
)
(8
)%
 
 
 
 
 
 
 
 
Sources of energy (GWhs)(2):
 
 
 
 
 
 
 
Natural gas
 
1,215

 
1,094

 
121

11
 %
Coal
 
66

 
340

 
(274
)
(81
)
Renewables(3)
 
6

 
5

 
1

20

Total energy generated
 
1,287

 
1,439

 
(152
)
(11
)
Energy purchased
 
1,325

 
1,179

 
146

12

Total
 
2,612

 
2,618

 
(6
)
—
 %
 
 
 
 
 
 
 
 
Average total cost of energy per MWh(4)
 
$
30.81

 
$
31.50

 
$
(0.69
)
(2
)%

(1)
Fully bundled includes sales to customers for combined energy, transmission and distribution services.
(2)
GWh amounts are net of energy used by the related generating facilities.
(3)
Includes the Fort Churchill Solar Array which is under lease by Sierra Pacific.
(4)
The average total cost of energy per MWh includes the cost of fuel, purchased power and deferrals and does not include other costs.

142


Natural Gas Utility Margin

A comparison of key operating results related to natural gas utility margin is as follows:

 
 
First Quarter
 
 
2020
 
2019
 
Change
Utility margin (in millions):
 
 
 
 
 
 
 
Operating revenue
 
$
48

 
$
37

 
$
11

30
 %
Natural gas purchased for resale
 
30

 
19

 
11

58

Natural gas utility margin
 
$
18

 
$
18

 
$
—

—
 %
 
 
 
 
 
 
 
 
Sold (000's Dths):
 
 
 
 
 
 
 
Residential
 
4,386

 
5,013

 
(627
)
(13
)%
Commercial
 
2,167

 
2,497

 
(330
)
(13
)
Industrial
 
653

 
670

 
(17
)
(3
)
Total retail
 
7,206

 
8,180

 
(974
)
(12
)%
 
 
 
 
 
 
 
 
Average number of retail customers (in thousands)
 
173

 
169

 
4

2
 %
 
 
 
 
 
 
 
 
Average revenue per retail Dth sold
 
$
6.58

 
$
4.52

 
$
2.06

46
 %
 
 
 
 
 
 
 
 
Heating degree days
 
2,066

 
2,244

 
(178
)
(8
)%
 
 
 
 
 
 
 
 
Average cost of natural gas per retail Dth sold
 
$
4.22

 
$
2.32

 
$
1.90

82
 %

Electric utility margin increased $4 million, or 4%, for the first quarter of 2020 compared to 2019 primarily due to higher wholesale revenue and residential customer growth.

Operations and maintenance decreased $2 million, or 5%, for the first quarter of 2020 compared to 2019 primarily due to regulatory-directed credits relating to the deferral of costs for the ON Line lease to be collected from customers (offset in other income (expense)).

Depreciation and amortization increased $3 million, or 10%, for the first quarter of 2020 compared to 2019 primarily due to higher plant placed in service.

Other income (expense) is unfavorable $3 million, or 33%, for the first quarter of 2020 compared to 2019 primarily due to lower cash surrender value of corporate-owned life insurance policies of $2 million and higher interest expense on the ON Line finance lease due to the regulatory-directed reallocation of costs between Nevada Power and Sierra Pacific (offset in operations and maintenance) of $2 million, offset by lower non-service pension costs of $1 million.

Income tax expense decreased $3 million, or 50%, for the first quarter of 2020 compared to 2019. The effective tax rate was 11% in 2020 and 21% in 2019 and decreased due to the recognition of amortization of excess deferred income taxes related to the 2017 Tax Cuts and Jobs Act following regulatory approval effective January 1, 2020.


143


Liquidity and Capital Resources

As of March 31, 2020, Sierra Pacific's total net liquidity was as follows (in millions):

Cash and cash equivalents
 
$
27

Credit facility
 
250

Total net liquidity
 
$
277

Credit facility:
 
 
Maturity date
 
2022


Operating Activities

Net cash flows from operating activities for the three-month periods ended March 31, 2020 and 2019 were $54 million and $44 million, respectively. The change was primarily due to higher collections from customers and a decrease in payments for fuel costs, partially offset by decreased collections of customer advances, higher inventory purchases, higher payments of customer service agreements and higher payments for operating costs.

Investing Activities

Net cash flows from investing activities for the three-month periods ended March 31, 2020 and 2019 were $(52) million and $(52) million, respectively. Refer to "Future Uses of Cash" for further discussion of capital expenditures.

Financing Activities

Net cash flows from financing activities for the three-month periods ended March 31, 2020 and 2019 remained constant.

Debt Authorizations

Sierra Pacific currently has financing authority from the PUCN consisting of the ability to: (1) establish debt issuances limited to a debt ceiling of $1.6 billion (excluding borrowings under Sierra Pacific's $250 million secured credit facility); and (2) maintain a revolving credit facility of up to $600 million.

Future Uses of Cash

Sierra Pacific has available a variety of sources of liquidity and capital resources, both internal and external, including net cash flows from operating activities, public and private debt offerings, the use of its secured revolving credit facility, capital contributions and other sources. These sources are expected to provide funds required for current operations, capital expenditures, debt retirements and other capital requirements. The availability and terms under which Sierra Pacific has access to external financing depends on a variety of factors, including regulatory approvals, Sierra Pacific's credit ratings, investors' judgment of risk and conditions in the overall capital markets, including the condition of the utility industry.

Capital Expenditures

Capital expenditure needs are reviewed regularly by management and may change significantly as a result of these reviews, which may consider, among other factors, changes in environmental and other rules and regulations; impacts to customers' rates; outcomes of regulatory proceedings; changes in income tax laws; general business conditions; load projections; system reliability standards; the cost and efficiency of construction labor, equipment and materials; commodity prices; and the cost and availability of capital. Prudently incurred expenditures for compliance-related items such as pollution-control technologies, replacement generation and associated operating costs are generally incorporated into Sierra Pacific's regulated retail rates. Expenditures for certain assets may ultimately include acquisition of existing assets.


144


Historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items are as follows (in millions):
 
Three-Month Periods
 
Annual
 
Ended March 31,
 
Forecast
 
2019
 
2020
 
2020
 
 
 
 
 
 
Distribution
$
34

 
$
39

 
$
117

Transmission system investment
2

 
7

 
22

Other
16

 
6

 
54

Total
$
52

 
$
52

 
$
193


Sierra Pacific's forecast capital expenditures include investments related to operating projects that consist of routine expenditures for generation, transmission, distribution and other infrastructure needed to serve existing and expected demand.

Contractual Obligations

As of March 31, 2020, there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of Sierra Pacific's Annual Report on Form 10-K for the year ended December 31, 2019.


145


COVID-19

In March 2020, COVID-19 was declared a global pandemic and containment and mitigation measures were recommended worldwide, which has had an unprecedented impact on society in general and many of the customers served by Sierra Pacific. While the rapid outbreak of COVID-19 has not had a material impact on Sierra Pacific's financial results or operations through March 31, 2020, impacts are likely to occur that affect future financial results. The state of Nevada has instituted a "stay-at-home" order, which has impacted Sierra Pacific's customers and, therefore, their needs for electricity and natural gas. As the impacts of COVID-19 and related customer and governmental responses are uncertain, including the duration of casino closures, a reduction in the consumption of electricity or natural gas, and related operating revenue, may occur, particularly in the commercial and industrial classes as well as distribution only service customers, as evidenced by the reduction experienced by Sierra Pacific in April 2020 compared to the same period in 2019. Due to regulatory requirements and voluntary actions taken by Sierra Pacific related to customer collection activity and suspension of disconnections for non-payment, Sierra Pacific could see delays or reductions in cash receipts, including potentially higher than normal bad debt expense, from retail customers related to the impacts of COVID-19. The amount of such reductions in cash receipts is unknown at this time. The PUCN has approved recovery of certain costs incurred in responding to COVID-19. Refer to "Regulatory Matters" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for further discussion.

Sierra Pacific's business has been deemed essential and its employees have been identified as "critical infrastructure employees" allowing them to move within communities and across jurisdictional boundaries as necessary to maintain its electric generation, transmission and distribution system and its natural gas distribution system. In response to the effects of COVID-19, Sierra Pacific has implemented its business continuity plan to protect its employees and customers. Such plans include a variety of actions, including situational use of personal protective equipment by employees when interacting with customers and implementing practices to enhance social distancing at the workplace. Such practices have included work-from-home, staggered work schedules, rotational work location assignments, increased cleaning and sanitation of work spaces and providing general health reminders intended to help lower the risk of spreading COVID-19.

Regulatory Matters

Sierra Pacific is subject to comprehensive regulation. Refer to "Regulatory Matters" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for discussion regarding Sierra Pacific's current regulatory matters.

Environmental Laws and Regulations

Sierra Pacific is subject to federal, state and local laws and regulations regarding climate change, RPS, air and water quality, emissions performance standards, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact Sierra Pacific's current and future operations. In addition to imposing continuing compliance obligations and capital expenditure requirements, these laws and regulations provide regulators with the authority to levy substantial penalties for noncompliance including fines, injunctive relief and other sanctions. These laws and regulations are administered by the EPA and various state and local agencies. All such laws and regulations are subject to a range of interpretation, which may ultimately be resolved by the courts. Environmental laws and regulations continue to evolve, and Sierra Pacific is unable to predict the impact of the changing laws and regulations on its operations and financial results. Sierra Pacific believes it is in material compliance with all applicable laws and regulations.

Refer to "Environmental Laws and Regulations" in Berkshire Hathaway Energy's Part I, Item 2 of this Form 10-Q for additional information regarding environmental laws and regulations.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of long-lived assets, income taxes and revenue recognition - unbilled revenue. For additional discussion of Sierra Pacific's critical accounting estimates, see Item 7 of Sierra Pacific's Annual Report on Form 10‑K for the year ended December 31, 2019. There have been no significant changes in Sierra Pacific's assumptions regarding critical accounting estimates since December 31, 2019.


146


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting the Registrants, see Item 7A of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2019. Each Registrant's exposure to market risk and its management of such risk has not changed materially since December 31, 2019. Refer to Note 7 of the Notes to Consolidated Financial Statements of PacifiCorp in Part I, Item 1 of this Form 10-Q for disclosure of the respective Registrant's derivative positions as of March 31, 2020.

Item 4.
Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, each of Berkshire Hathaway Energy Company, PacifiCorp, MidAmerican Funding, LLC, MidAmerican Energy Company, Nevada Power Company and Sierra Pacific Power Company carried out separate evaluations, under the supervision and with the participation of each such entity's management, including its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial officer), or persons performing similar functions, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based upon these evaluations, management of each such entity, including its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial officer), or persons performing similar functions, in each case, concluded that the disclosure controls and procedures for such entity were effective to ensure that information required to be disclosed by such entity in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission's rules and forms, and is accumulated and communicated to its management, including its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial officer), or persons performing similar functions, in each case, as appropriate to allow timely decisions regarding required disclosure by it. Each such entity hereby states that there has been no change in its internal control over financial reporting during the quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.


147


PART II

Item 1.
Legal Proceedings

Not applicable.

Item 1A.
Risk Factors

There has been no material change to each Registrant's risk factors from those disclosed in Item 1A of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2019, except as disclosed below.

Each Registrant's business could be adversely affected by COVID-19 or other pathogens, or similar crises.

Each Registrant's business could be adversely affected by the worldwide outbreak of COVID-19 generally and more specifically in the markets in which we operate, including, without limitation, if each Registrant's utility customers experience decreases in demand for their products and services and thereby reduce their consumption of electricity or natural gas that the respective Registrant supplies, or if such Registrant experiences material payment defaults by its customers. For example, if the tourism industry in Nevada experiences a significant and extended decrease as a result of changes in customer behavior, demand for electricity sold by Nevada Power and Sierra Pacific could decrease. In addition, each Registrant's results and financial condition may be adversely affected by federal, state or local legislation related to COVID-19 (or other similar laws, regulations, orders or other governmental or regulatory actions) that would impose a moratorium on terminating electric or natural gas utility services, including related assessment of late fees, due to non-payment or other circumstances. Certain Registrants have already temporarily implemented certain of these measures, either voluntarily or in accordance with requirements of the respective Registrant's public utility commissions. These requirements will likely remain for the duration of the COVID-19 emergency. Additionally, HomeServices' residential real estate brokerage business could experience a decline (which could be significant) in residential property transactions if potential customers elect to defer purchases in reaction to any substantial outbreak, or fear of such outbreak, of COVID-19 or other pathogen, or due to general economic uncertainty such as high unemployment levels, in some or all of the real estate markets in which HomeServices operates. The government and regulators could impose other requirements on each Registrant's business that could have an adverse impact on such Registrant's financial results.

Further, the recent outbreak of COVID-19, or another pathogen, could disrupt supply chains (including supply chains for energy generation, steel or transmission wire) relating to the markets each Registrant serves, which could adversely impact such Registrant's ability to generate or supply power. In addition, such disruptions to the supply chain could delay certain construction and other capital expenditure projects, including construction and repowering of PacifiCorp's and MidAmerican Energy's wind-powered generation projects. Potential delays could result in their completion past certain in-service date guidance provided by the Internal Revenue Service in order to qualify the investments in such wind-powered generation facilities for the maximum federal PTCs. Such disruptions could adversely affect the impacted Registrant's future financial results.

Such declines in demand, any inability to generate or supply power or delays in capital projects could also significantly reduce cash flows at BHE's subsidiaries, thereby reducing the availability of distributions to BHE, which could adversely affect its financial results.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.
Defaults Upon Senior Securities

Not applicable.


148



Item 4.
Mine Safety Disclosures

Information regarding Berkshire Hathaway Energy's and PacifiCorp's mine safety violations and other legal matters disclosed in accordance with Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is included in Exhibit 95 to this Form 10-Q.

Item 5.
Other Information

Not applicable.

Item 6.
Exhibits

The following is a list of exhibits filed as part of this Quarterly Report.


149


Exhibit No.
Description

BERKSHIRE HATHAWAY ENERGY
4.1
4.2
15.1
31.1
31.2
32.1
32.2

PACIFICORP
15.2
31.3
31.4
32.3
32.4

BERKSHIRE HATHAWAY ENERGY AND PACIFICORP
4.3
95

MIDAMERICAN ENERGY
15.3
31.5
31.6
32.5
32.6


150


Exhibit No.
Description

MIDAMERICAN FUNDING
31.7
31.8
32.7
32.8

NEVADA POWER
15.4
31.9
31.10
32.9
32.10

SIERRA PACIFIC
31.11
31.12
32.11
32.12

ALL REGISTRANTS
101
The following financial information from each respective Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, is formatted in XBRL (eXtensible Business Reporting Language) and included herein: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements, tagged in summary and detail.

151


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
BERKSHIRE HATHAWAY ENERGY COMPANY
 
 
Date: May 1, 2020
/s/ Calvin D. Haack
 
Calvin D. Haack
 
Senior Vice President and Chief Financial Officer
 
(principal financial and accounting officer)
 
 
 
PACIFICORP
 
 
Date: May 1, 2020
/s/ Nikki L. Kobliha
 
Nikki L. Kobliha
 
Vice President, Chief Financial Officer and Treasurer
 
(principal financial and accounting officer)
 
 
 
MIDAMERICAN FUNDING, LLC
 
MIDAMERICAN ENERGY COMPANY
 
 
Date: May 1, 2020
/s/ Thomas B. Specketer
 
Thomas B. Specketer
 
Vice President and Controller
 
of MidAmerican Funding, LLC and
 
Vice President and Chief Financial Officer
 
of MidAmerican Energy Company
 
(principal financial and accounting officer)
 
 
 
NEVADA POWER COMPANY
 
 
Date: May 1, 2020
/s/ Michael E. Cole
 
Michael E. Cole
 
Vice President and Chief Financial Officer
 
(principal financial and accounting officer)
 
 
 
SIERRA PACIFIC POWER COMPANY
 
 
Date: May 1, 2020
/s/ Michael E. Cole
 
Michael E. Cole
 
Vice President and Chief Financial Officer
 
(principal financial and accounting officer)

152