10-Q 1 mehc63011form10-q.htm MIDAMERICAN ENERGY HOLDINGS COMPANY FORM 10-Q 6.30.2011 MEHC 6.30.11 Form 10-Q


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 June 30, 2011

or

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to _______

Commission
File Number
 
Exact name of registrant as specified in its charter;
State or other jurisdiction of incorporation or organization
 
IRS Employer
Identification No.
 
 
 
 
 
001-14881
 
MIDAMERICAN ENERGY HOLDINGS COMPANY
 
94-2213782
 
 
(An Iowa Corporation)
 
 
 
 
666 Grand Avenue, Suite 500
 
 
 
 
Des Moines, Iowa 50309-2580
 
 
 
 
515-242-4300
 
 
 
 
 
 
 
 
 
N/A
 
 
(Former name, former address and former fiscal year, if changed since last report)

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. Yes  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 registrant was required to submit and post 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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o  No  x

All of the shares of common equity of MidAmerican Energy Holdings Company are privately held by a limited group of investors. As of July 29, 2011, 74,609,001 shares of common stock were outstanding.



TABLE OF CONTENTS
 
PART I
 
 
PART II
 


i



Definition of Abbreviations and Industry Terms

When used in Part I, Items 2 through 4, and Part II, Items 1 through 6, the following terms have the definitions indicated.
MidAmerican Energy Holdings Company and Related Entities
MEHC
 
MidAmerican Energy Holdings Company
Company
 
MidAmerican Energy Holdings Company and its subsidiaries
MidAmerican Funding
 
MidAmerican Funding, LLC
MidAmerican Energy
 
MidAmerican Energy Company
Northern Natural Gas
 
Northern Natural Gas Company
Kern River
 
Kern River Gas Transmission Company
CE Electric UK
 
CE Electric UK Funding Company
Northern Electric
 
Northern Electric Distribution Limited
Yorkshire Electricity
 
Yorkshire Electricity Distribution plc
CE Casecnan
 
CE Casecnan Water and Energy Company, Inc.
HomeServices
 
HomeServices of America, Inc. and its subsidiaries
ETT
 
Electric Transmission Texas, LLC
Utilities
 
PacifiCorp and MidAmerican Energy Company
 
 
 
Certain Industry Terms
 
 
AFUDC
 
Allowance for Funds Used During Construction
CSAPR
 
Cross-State Air Pollution Rule
EBA
 
Energy Balancing Account
ECAM
 
Energy Cost Adjustment Mechanism
EPA
 
United States Environmental Protection Agency
ERCOT
 
Electric Reliability Council of Texas
FERC
 
Federal Energy Regulatory Commission
GHG
 
Greenhouse Gases
GHG Reporting
 
Greenhouse Gases Reporting
IPUC
 
Idaho Public Utilities Commission
IUB
 
Iowa Utilities Board
kV
 
Kilovolt
Mine Safety Act
 
Federal Mine Safety and Health Act of 1977
MISO
 
Midwest Independent Transmission System Operator, Inc.
MSHA
 
Federal Mine Safety and Health Administration
MW
 
Megawatts
NRC
 
Nuclear Regulatory Commission
OPUC
 
Oregon Public Utility Commission
PCAM
 
Power Cost Adjustment Mechanism
RCRA
 
Resource Conservation and Recovery Act
REC
 
Renewable Energy Credit
RPS
 
Renewable Portfolio Standards
SIP
 
State Implementation Plan
TAM
 
Transition Adjustment Mechanism
UPSC
 
Utah Public Service Commission
WPSC
 
Wyoming Public Service Commission
WUTC
 
Washington Utilities and Transportation Commission


ii



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 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 Company'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 the Company 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 laws and regulations affecting the Company'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 generating facility output, accelerate generating facility retirements or delay generating facility construction or acquisition;
the outcome of general rate cases and other proceedings conducted by regulatory commissions or other governmental and legal bodies;
changes in economic, industry, competition or weather conditions, as well as demographic trends, that could affect customer growth and usage, electricity and natural gas supply or the Company's ability to obtain long-term contracts with customers and suppliers;
a high degree of variance between actual and forecasted load that could impact the Company's hedging strategy and the cost of balancing its generation resources and wholesale activities with its retail load obligations;
performance and availability of the Company's generating facilities, including the impacts of outages and repairs, transmission constraints, weather and operating conditions;
changes in prices, availability and demand for both purchases and sales of 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 and creditworthiness of the Company'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 the London Interbank Offered Rate, the base interest rate for MEHC's and its subsidiaries' credit facilities;
changes in MEHC's and its subsidiaries' credit ratings;
risks relating to nuclear generation;
the impact of derivative 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 derivative contracts;
the impact of inflation on costs and our ability to recover such costs in regulated rates;
increases in employee healthcare costs;
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 and mortgage industries and regulations that could affect brokerage and mortgage transaction levels;
unanticipated construction delays, changes in costs, receipt of required permits and authorizations, ability to fund capital projects and other factors that could affect future generating facilities and infrastructure additions;
the availability and price of natural gas in applicable geographic regions;
the impact of new accounting guidance or changes in current accounting estimates and assumptions on the Company's consolidated financial results;
the Company's ability to successfully integrate future acquired operations into its business;

iii



other risks or unforeseen events, including the effects of storms, floods, litigation, wars, terrorism, embargoes and other catastrophic events; and
other business or investment considerations that may be disclosed from time to time in MEHC's filings with the United States Securities and Exchange Commission or in other publicly disseminated written documents.
 
Further details of the potential risks and uncertainties affecting the Company are described in MEHC's filings with the United States Securities and Exchange Commission, including Part II, Item 1A and other discussions contained in this Form 10-Q. The Company 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 review of factors should not be construed as exclusive.


iv



PART I

Item 1.
Financial Statements


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
MidAmerican Energy Holdings Company
Des Moines, Iowa

We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Holdings Company and subsidiaries (the "Company") as of June 30, 2011, and the related consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2011 and 2010, and of cash flows and changes in equity for the six-month periods ended June 30, 2011 and 2010. These interim financial statements are the responsibility of the Company's management.

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

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, cash flows, changes in equity, and comprehensive income for the year then ended (not presented herein); and in our report dated February 28, 2011, 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, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ Deloitte & Touche LLP


Des Moines, Iowa
August 5, 2011

1



MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)

 
As of
 
June 30,
 
December 31,
 
2011
 
2010
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,021

 
$
470

Trade receivables, net
1,095

 
1,225

Income taxes receivable
134

 
396

Inventories
613

 
585

Derivative contracts
57

 
131

Investments and restricted cash and investments
52

 
44

Other current assets
385

 
437

Total current assets
3,357

 
3,288

 
 

 
 

Property, plant and equipment, net
32,744

 
31,899

Goodwill
5,035

 
5,025

Investments and restricted cash and investments
1,447

 
1,881

Regulatory assets
2,459

 
2,497

Derivative contracts
10

 
13

Other assets
1,089

 
1,065

 
 

 
 

Total assets
$
46,141

 
$
45,668


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


2



MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)
(Amounts in millions)

 
As of
 
June 30,
 
December 31,
 
2011
 
2010
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
802

 
$
827

Accrued employee expenses
213

 
159

Accrued interest
351

 
341

Accrued property, income and other taxes
328

 
287

Derivative contracts
109

 
158

Short-term debt

 
320

Current portion of long-term debt
843

 
1,286

Other current liabilities
530

 
424

Total current liabilities
3,176

 
3,802

 
 

 
 

Regulatory liabilities
1,681

 
1,664

Derivative contracts
354

 
458

MEHC senior debt
5,371

 
5,371

MEHC subordinated debt
151

 
172

Subsidiary debt
13,538

 
12,662

Deferred income taxes
6,412

 
6,298

Other long-term liabilities
1,671

 
1,833

Total liabilities
32,354

 
32,260

 
 

 
 

Commitments and contingencies (Note 12)


 


 
 

 
 

Equity:
 

 
 

MEHC shareholders' equity:
 

 
 

Common stock - 115 shares authorized, no par value, 75 shares issued and outstanding

 

Additional paid-in capital
5,423

 
5,427

Retained earnings
8,546

 
7,979

Accumulated other comprehensive loss, net
(355
)
 
(174
)
Total MEHC shareholders' equity
13,614

 
13,232

Noncontrolling interests
173

 
176

Total equity
13,787

 
13,408

 
 

 
 

Total liabilities and equity
$
46,141

 
$
45,668


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


3



MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Operating revenue:
 
 
 
 
 
 
 
Energy
$
2,356

 
$
2,289

 
$
5,011

 
$
5,027

Real estate
290

 
341

 
479

 
540

Total operating revenue
2,646

 
2,630

 
5,490

 
5,567

 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
Energy:
 
 
 
 
 
 
 
Cost of sales
840

 
818

 
1,812

 
1,980

Operating expense
626

 
607

 
1,261

 
1,222

Depreciation and amortization
332

 
312

 
664

 
623

Real estate
271

 
313

 
472

 
523

Total operating costs and expenses
2,069

 
2,050

 
4,209

 
4,348

 
 
 
 
 
 
 
 
Operating income
577

 
580

 
1,281

 
1,219

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(303
)
 
(306
)
 
(606
)
 
(614
)
Capitalized interest
9

 
14

 
18

 
28

Interest and dividend income
6

 
14

 
9

 
20

Other, net
20

 
19

 
46

 
56

Total other income (expense)
(268
)
 
(259
)
 
(533
)
 
(510
)
 
 
 
 
 
 
 
 
Income before income tax expense and equity income
309

 
321

 
748

 
709

Income tax expense
76

 
71

 
187

 
127

Equity income
7

 
8

 
14

 
5

Net income
240

 
258

 
575

 
587

Net income attributable to noncontrolling interests
4

 
5

 
8

 
92

Net income attributable to MEHC
$
236

 
$
253

 
$
567

 
$
495


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

4



MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Six-Month Periods
 
Ended June 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
575

 
$
587

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

 
 

Depreciation and amortization
670

 
630

Changes in regulatory assets and liabilities
(8
)
 
22

Deferred income taxes and amortization of investment tax credits
276

 
150

Other, net
(27
)
 
(14
)
Changes in other operating assets and liabilities:
 
 
 
Trade receivables and other assets
163

 
273

Derivative collateral, net
13

 
(44
)
Contributions to pension and other postretirement benefit plans, net
(85
)
 
(119
)
Accounts payable and other liabilities
262

 
(80
)
Net cash flows from operating activities
1,839

 
1,405

 
 

 
 

Cash flows from investing activities:
 

 
 

Capital expenditures
(1,176
)
 
(1,278
)
Purchases of available-for-sale securities
(88
)
 
(54
)
Proceeds from sales of available-for-sale securities
87

 
55

Proceeds from sale of assets
5

 
80

Other, net
(41
)
 
(34
)
Net cash flows from investing activities
(1,213
)
 
(1,231
)
 
 

 
 

Cash flows from financing activities:
 

 
 

Repayments of MEHC subordinated debt
(22
)
 
(67
)
Proceeds from subsidiary debt
790

 

Repayments of subsidiary debt
(502
)
 
(119
)
Net (repayments of) proceeds from short-term debt
(320
)
 
127

Net purchases of common stock

 
(56
)
Other, net
(20
)
 
(14
)
Net cash flows from financing activities
(74
)
 
(129
)
 
 

 
 

Effect of exchange rate changes
(1
)
 
(3
)
 
 

 
 

Net change in cash and cash equivalents
551

 
42

Cash and cash equivalents at beginning of period
470

 
429

Cash and cash equivalents at end of period
$
1,021

 
$
471


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

5



MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
 (Amounts in millions)

 
MEHC Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Comprehensive
 
 
 
 
 
Common
 
Paid-in
 
Retained
 
Income (Loss),
 
Noncontrolling
 
Total
 
Shares
 
Stock
 
Capital
 
Earnings
 
Net
 
Interests
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2009
75

 
$

 
$
5,453

 
$
6,788

 
$
335

 
$
267

 
$
12,843

Deconsolidation of Bridger Coal

 

 

 

 

 
(84
)
 
(84
)
Net income

 

 

 
495

 

 
92

 
587

Other comprehensive loss

 

 

 

 
(348
)
 

 
(348
)
Common stock purchases

 

 
(9
)
 
(47
)
 

 

 
(56
)
Distributions

 

 

 

 

 
(13
)
 
(13
)
Other equity transactions

 

 

 

 

 
(38
)
 
(38
)
Balance at June 30, 2010
75

 
$

 
$
5,444

 
$
7,236

 
$
(13
)
 
$
224

 
$
12,891

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2010
75

 
$

 
$
5,427

 
$
7,979

 
$
(174
)
 
$
176

 
$
13,408

Net income

 

 

 
567

 

 
8

 
575

Other comprehensive loss

 

 

 

 
(181
)
 

 
(181
)
Distributions

 

 

 

 

 
(13
)
 
(13
)
Other equity transactions

 

 
(4
)
 

 

 
2

 
(2
)
Balance at June 30, 2011
75

 
$

 
$
5,423

 
$
8,546

 
$
(355
)
 
$
173

 
$
13,787


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


6



MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Net income
$
240

 
$
258

 
$
575

 
$
587

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrecognized amounts on retirement benefits, net of tax of $2, $5, $- and $18
5

 
13

 

 
46

Foreign currency translation adjustment
2

 
(37
)
 
78

 
(209
)
Unrealized gains on cash flow hedges, net of tax of $7, $14, $8 and $2
11

 
22

 
12

 
3

Unrealized losses on available-for-sale securities, net of tax of $(53), $(225), $(180) and $(124)
(82
)
 
(338
)
 
(271
)
 
(188
)
Total other comprehensive income (loss), net of tax
(64
)
 
(340
)
 
(181
)
 
(348
)
 
 

 
 

 
 

 
 

Comprehensive income (loss)
176

 
(82
)
 
394

 
239

Comprehensive income attributable to noncontrolling interests
4

 
5

 
8

 
92

Comprehensive income (loss) attributable to MEHC
$
172

 
$
(87
)
 
$
386

 
$
147


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


7



MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
General

MidAmerican Energy Holdings Company ("MEHC") is a holding company that owns subsidiaries principally engaged in energy businesses (collectively with its subsidiaries, the "Company"). MEHC is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway"). The balance of MEHC's common stock is owned by Mr. Walter Scott, Jr. (along with family members and related entities), a member of MEHC's Board of Directors, and Mr. Gregory E. Abel, a member of MEHC's Board of Directors and MEHC's Chairman, President and Chief Executive Officer. As of June 30, 2011, Berkshire Hathaway, Mr. Scott (along with family members and related entities) and Mr. Abel owned 89.8%, 9.4% and 0.8%, respectively, of MEHC's voting common stock.

The Company's operations are organized and managed as eight distinct platforms: PacifiCorp, MidAmerican Funding, LLC ("MidAmerican Funding") (which primarily consists of MidAmerican Energy Company ("MidAmerican Energy")), Northern Natural Gas Company ("Northern Natural Gas"), Kern River Gas Transmission Company ("Kern River"), CE Electric UK Funding Company ("CE Electric UK") (which primarily consists of Northern Electric Distribution Limited ("Northern Electric") and Yorkshire Electricity Distribution plc ("Yorkshire Electricity")), CalEnergy Philippines (which owns a majority interest in the Casecnan project in the Philippines), CalEnergy U.S. (which owns interests in independent power projects in the United States), and HomeServices of America, Inc. (collectively with its subsidiaries, "HomeServices"). Through these platforms, the Company owns and operates an electric utility company in the Western United States, an electric and natural gas utility company in the Midwestern United States, two interstate natural gas pipeline companies in the United States, two electricity distribution companies in Great Britain, a diversified portfolio of independent power projects and the second largest residential real estate brokerage firm 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 Consolidated Financial Statements as of June 30, 2011 and for the three- and six-month periods ended June 30, 2011 and 2010. The results of operations for the three- and six-month periods ended June 30, 2011 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 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, 2010 describes the most significant accounting policies used in the preparation of the Consolidated Financial Statements. There have been no significant changes in the Company's assumptions regarding significant accounting estimates and policies during the six-month period ended June 30, 2011.

(2)
New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, which amends FASB Accounting Standards Codification ("ASC") Topic 220, "Comprehensive Income." ASU No. 2011-05 provides an entity with the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of the option chosen, this guidance also requires presentation of items on the face of the financial statements that are reclassified from other comprehensive income to net income. This guidance does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income or how tax effects of each item of other comprehensive income are presented. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating which presentation option will be implemented.


8



In May 2011, the FASB issued ASU No. 2011-04, which amends FASB ASC Topic 820, "Fair Value Measurements and Disclosures." The amendments in this guidance are not intended to result in a change in current accounting. ASU No. 2011-04 requires additional disclosures relating to fair value measurements categorized within Level 3 of the fair value hierarchy, including quantitative information about unobservable inputs, the valuation process used by the entity and the sensitivity of unobservable input measurements. Additionally, entities are required to disclose the level of the fair value hierarchy for assets and liabilities that are not measured at fair value in the balance sheet, but for which disclosure of the fair value is required.This guidance is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact of adopting this guidance on its disclosures included within Notes to Consolidated Financial Statements.

In January 2010, the FASB issued ASU No. 2010-06, which amends FASB ASC Topic 820, "Fair Value Measurements and Disclosures." ASU No. 2010-06 requires disclosure of (a) the amount of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and the reasons for those transfers and (b) gross presentation of purchases, sales, issuances and settlements in the Level 3 fair value measurement rollforward. This guidance clarifies that existing fair value measurement disclosures should be presented for each class of assets and liabilities. The existing disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements have also been clarified to ensure such disclosures are presented for the Levels 2 and 3 fair value measurements. The Company adopted this guidance as of January 1, 2010, with the exception of the disclosure requirement to present purchases, sales, issuances and settlements gross in the Level 3 fair value measurement rollforward, which the Company adopted as of January 1, 2011. The adoption of this guidance did not have a material impact on the Company's disclosures included within Notes to Consolidated Financial Statements.

(3)
Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):
 
 
 
As of
 
Depreciable
 
June 30,
 
December 31,
 
Life
 
2011
 
2010
Regulated assets:
 
 
 
 
 
Utility generation, distribution and transmission system
5-85 years
 
$
38,542

 
$
37,643

Interstate pipeline assets
3-67 years
 
5,940

 
5,906

 
 
 
44,482

 
43,549

Accumulated depreciation and amortization
 
 
(14,094
)
 
(13,711
)
Regulated assets, net
 
 
30,388

 
29,838

 
 
 
 

 
 

Nonregulated assets:
 
 
 

 
 

Independent power plants
10-30 years
 
678

 
678

Other assets
3-30 years
 
422

 
419

 
 
 
1,100

 
1,097

Accumulated depreciation and amortization
 
 
(513
)
 
(492
)
Nonregulated assets, net
 
 
587

 
605

 
 
 
 

 
 

Net operating assets
 
 
30,975

 
30,443

Construction work-in-progress
 
 
1,769

 
1,456

Property, plant and equipment, net
 
 
$
32,744

 
$
31,899


Substantially all of the construction work-in-progress as of June 30, 2011 and December 31, 2010 relates to the construction of regulated assets.


9



(4)
Regulatory Matters

The following are updates to regulatory matters based upon material changes that occurred subsequent to December 31, 2010.

Rate Matters

Kern River Rate Case

In December 2009, the Federal Energy Regulatory Commission ("FERC") issued an order establishing rates for the period of Kern River's current long-term contracts ("Period One rates") and required that rates be levelized for shippers that elect to continue to take service following the expiration of their current contracts ("Period Two rates"). The FERC set all other issues related to Period Two rates for hearing. In November 2010, the FERC issued an order that denied all requests for rehearing from the FERC's December 2009 order and established that Kern River is entitled to a 100% equity capital structure in its Period Two rates. In January 2011, Kern River filed a motion for clarification on certain depreciation issues with the FERC and also filed a petition for review of the orders regarding Period One rates in the United States Court of Appeals for the District of Columbia Circuit. In March 2011, the petition was dismissed upon request of Kern River and the FERC without prejudice to Kern River's refiling at the end of the Period Two rates proceeding.

In April 2011, the presiding administrative law judge issued an initial decision regarding Kern River's Period Two rates. Among other items, the administrative law judge determined the Period Two rates should be based on a return on equity of 11.55%, a capital structure of 100% equity, and a levelization period that coincides with each shipper group's uniform contract length of 10 or 15 years. The administrative law judge also determined that Kern River's regulatory asset associated with compressor engines and general plant replacements can only be recovered in a future rate case and may not be incorporated into Period Two rates at this time. Kern River filed its initial brief on exceptions in May 2011 and its brief opposing exceptions in June 2011. In July 2011, the FERC issued its order substantially adopting the presiding administrative law judge's initial decision. One or more parties, including Kern River, are expected to request a rehearing or clarification of the order.

(5)
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.


10



The following table presents the Company'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
 
Other(1)
 
Total
As of June 30, 2011
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
3

 
$
188

 
$
11

 
$
(135
)
 
$
67

Investments in available-for-sale securities:
 
 
 
 
 
 
 
 
 
 

Money market mutual funds(2)
 
771

 

 

 

 
771

Debt securities
 
79

 
56

 
37

 

 
172

Equity securities
 
972

 

 

 

 
972

 
 
$
1,825

 
$
244

 
$
48

 
$
(135
)
 
$
1,982

 
 
 

 
 

 
 

 
 

 
 

Liabilities - Commodity derivatives
 
$
(5
)
 
$
(464
)
 
$
(244
)
 
$
250

 
$
(463
)
 
As of December 31, 2010
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
3

 
$
293

 
$
23

 
$
(175
)
 
$
144

Investments in available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
Money market mutual funds(2)
 
301

 

 

 

 
301

Debt securities
 
74

 
53

 
50

 

 
177

Equity securities
 
1,412

 

 

 

 
1,412

 
 
$
1,790

 
$
346

 
$
73

 
$
(175
)
 
$
2,034

 
 
 
 
 
 
 
 
 
 
 
Liabilities - Commodity derivatives
 
$
(10
)
 
$
(568
)
 
$
(354
)
 
$
316

 
$
(616
)

(1)
Represents netting under master netting arrangements and a net cash collateral receivable of $115 million and $141 million as of June 30, 2011 and December 31, 2010, respectively.
(2)
Amounts are included in cash and cash equivalents; current investments and restricted cash and investments; 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 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 energy brokers, exchanges, direct communication with market participants and actual transactions executed by the Company. Market price quotations for certain major electricity and natural gas trading hubs are generally readily obtainable for the applicable term of the Company's outstanding derivative contracts; therefore, the Company'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 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. Refer to Note 6 for further discussion regarding the Company's risk management and hedging activities.


11



Contracts with explicit or embedded optionality are valued by separating each contract into its physical and financial forward, swap and option components. Forward and swap components are valued against the appropriate forward price curve. Option components are valued using Black-Scholes-type models, such as European option, spread option and best-of option, with the appropriate forward price curve and other inputs.

The Company's investments in money market mutual funds and debt and equity securities are accounted for as available-for-sale securities and 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 fair value of the Company's investments in auction rate securities, where there is no current liquid market, is determined using pricing models based on available observable market data and the Company's judgment about the assumptions, including liquidity and nonperformance risks, which market participants would use when pricing the asset.

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 Period
 
Six-Month Period
 
Ended June 30,
 
Ended June 30,
 
Commodity
 
Debt
 
Commodity
 
Debt
 
Derivatives
 
Securities
 
Derivatives
 
Securities
 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
Beginning balance
$
(341
)
 
$
39

 
$
(331
)
 
$
50

Changes included in earnings(1)
2

 

 
4

 

Changes in fair value recognized in other comprehensive income

 

 

 
2

Changes in fair value recognized in net regulatory assets
96

 

 
83

 

Sales

 
(2
)
 

 
(15
)
Settlements
10

 

 
11

 

Ending balance
$
(233
)
 
$
37

 
$
(233
)
 
$
37


2010
 
 
 
 
 
 
 
Beginning balance
$
(382
)
 
$
43

 
$
(359
)
 
$
46

Changes included in earnings(1)
(4
)
 

 
5

 

Changes in fair value recognized in other comprehensive income

 
(2
)
 

 
(5
)
Changes in fair value recognized in net regulatory assets
(21
)
 

 
(49
)
 

Purchases, sales, issuances and settlements
17

 

 
13

 

Ending balance
$
(390
)
 
$
41

 
$
(390
)
 
$
41


(1)
Changes included in earnings are reported as operating revenue on the Consolidated Statements of Operations. For commodity derivatives held as of June 30, 2011 and 2010, net unrealized gains (losses) included in earnings for the three-month periods ended June 30, 2011 and 2010 totaled $2 million and $(4) million, respectively, and for the six-month periods ended June 30, 2011 and 2010 totaled $1 million and $5 million, respectively.

12



The Company's long-term debt is carried at cost on the Consolidated Financial Statements. The fair value of the Company's long-term debt 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 June 30, 2011
 
As of December 31, 2010
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
 
 
 
 
 
 
 
 
Long-term debt
$
19,903

 
$
21,949

 
$
19,491

 
$
21,637


(6)
Risk Management and Hedging Activities

The Company is exposed to the impact of market fluctuations in commodity prices, interest rates and foreign currency exchange rates. The Company is principally exposed to electricity, natural gas, coal and fuel oil commodity price risk primarily through MEHC's ownership of the Utilities as they have an obligation to serve retail customer load in their regulated service territories. MidAmerican Energy also provides nonregulated retail electricity and natural gas services in competitive markets. The Utilities' 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, wholesale electricity that is purchased and sold, and natural gas supply for regulated and nonregulated retail customers. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists on variable-rate debt and future debt issuances. Additionally, the Company is exposed to foreign currency exchange rate risk from its business operations and investments in Great Britain. The Company does not engage in a material amount of proprietary trading activities.

Each of the Company's business platforms has established a risk management process that is designed to identify, assess, monitor, report, manage and mitigate each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, the Company uses commodity derivative contracts, including forwards, futures, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. The Company 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, the Company may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate the Company's exposure to interest rate risk. The Company does not hedge all of its commodity price, interest rate and foreign currency exchange rate risks, thereby exposing the unhedged portion to changes in market prices.

There have been no significant changes in the Company's accounting policies related to derivatives. Refer to Note 5 for additional information on derivative contracts.


13



The following table, which excludes contracts that qualify for the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of the Company'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):
 
Derivative Assets
 
Derivative Liabilities 
 
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
 
Total
As of June 30, 2011
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1)(2):
 
 
 
 
 
 
 
 
 
Commodity assets
$
84

 
$
13

 
$
68

 
$
27

 
$
192

Commodity liabilities
(25
)
 
(5
)
 
(261
)
 
(397
)
 
(688
)
Total
59

 
8

 
(193
)
 
(370
)
 
(496
)
 
 

 
 

 
 

 
 

 
 
Designated as hedging contracts(1):
 

 
 

 
 

 
 

 
 
Commodity assets
4

 
3

 
1

 
2

 
10

Commodity liabilities
(4
)
 
(1
)
 
(15
)
 
(5
)
 
(25
)
Total

 
2

 
(14
)
 
(3
)
 
(15
)
 
 

 
 

 
 

 
 

 
 
Total derivatives
59

 
10

 
(207
)
 
(373
)
 
(511
)
Cash collateral (payable) receivable
(2
)
 

 
98

 
19

 
115

Total derivatives - net basis
$
57

 
$
10

 
$
(109
)
 
$
(354
)
 
$
(396
)
 
As of December 31, 2010
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1)(2):
 
 
 
 
 
 
 
 
 
Commodity assets
$
204

 
$
18

 
$
47

 
$
38

 
$
307

Commodity liabilities
(64
)
 
(6
)
 
(269
)
 
(533
)
 
(872
)
Total
140

 
12

 
(222
)
 
(495
)
 
(565
)
 
 
 
 
 
 
 
 
 
 
Designated as hedging contracts(1):
 
 
 
 
 
 
 
 
 
Commodity assets
1

 
2

 
8

 
1

 
12

Commodity liabilities
(1
)
 
(1
)
 
(50
)
 
(8
)
 
(60
)
Total

 
1

 
(42
)
 
(7
)
 
(48
)
 
 
 
 
 
 
 
 
 
 
Total derivatives
140

 
13

 
(264
)
 
(502
)
 
(613
)
Cash collateral (payable) receivable
(9
)
 

 
106

 
44

 
141

Total derivatives - net basis
$
131

 
$
13

 
$
(158
)
 
$
(458
)
 
$
(472
)
 
(1)
Derivative contracts within these categories subject to master netting arrangements are presented on a net basis on the Consolidated Balance Sheets.
(2)
The Company's commodity derivatives not designated as hedging contracts are generally included in regulated rates, and as of June 30, 2011 and December 31, 2010, a net regulatory asset of $498 million and $564 million, respectively, was recorded related to the net derivative liability of $496 million and $565 million, respectively.


14



Not Designated as Hedging Contracts

For the Company's commodity derivatives not designated as hedging contracts, the settled amount is generally included in regulated rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of inclusion in regulated rates are recorded as net regulatory assets. The following table reconciles the beginning and ending balances of the Company'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
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Beginning balance
$
543

 
$
401

 
$
564

 
$
353

Changes in fair value recognized in net regulatory assets
(40
)
 
56

 
(62
)
 
71

Net gains reclassified to operating revenue

 
27

 
8

 
49

Net (losses) gains reclassified to cost of sales
(5
)
 
(5
)
 
(12
)
 
6

Ending balance
$
498

 
$
479

 
$
498

 
$
479


For the Company's derivatives not designated as hedging contracts and for which changes in fair value are not recorded as a net regulatory asset or liability, unrealized gains and losses are recognized on the Consolidated Statements of Operations as operating revenue for sales contracts; cost of sales and operating expense for purchase contracts and electricity, natural gas and fuel swap contracts; and interest expense for the interest rate derivative. The following table summarizes the pre-tax gains (losses) included on the Consolidated Statements of Operations associated with the Company's derivative contracts not designated as hedging contracts and not recorded as a net regulatory asset or liability (in millions):
 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
Commodity derivatives:
 
 
 
 
 
 
 
Operating revenue
$
3

 
$
2

 
$
4

 
$
12

Cost of sales

 
(9
)
 
(1
)
 
(13
)
Operating expense

 
(2
)
 
2

 
(1
)
Interest rate derivative - Interest expense

 
4

 

 
4

Total
$
3

 
$
(5
)
 
$
5

 
$
2


Designated as Hedging Contracts

The Company uses commodity derivative contracts accounted for as cash flow hedges to hedge electricity and natural gas commodity prices for delivery to nonregulated customers, spring operational sales, natural gas storage and other transactions. The Company's commodity derivative contracts designated as fair value hedges were not significant.

The following table reconciles the beginning and ending balances of the Company's accumulated other comprehensive loss (pre-tax) and summarizes pre-tax gains and losses on commodity derivative contracts designated and qualifying as cash flow hedges recognized in other comprehensive income ("OCI"), as well as amounts reclassified to earnings (in millions):
 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Beginning balance(1)
$
34

 
$
119

 
$
37

 
$
81

Changes in fair value recognized in OCI
(16
)
 
(32
)
 
(14
)
 
18

Net gains reclassified to operating revenue
1

 
4

 
1

 
5

Net losses reclassified to cost of sales
(4
)
 
(15
)
 
(9
)
 
(28
)
Ending balance(1)
$
15

 
$
76

 
$
15

 
$
76

 

15




(1)
Certain derivative contracts, principally interest rate locks, have settled and the fair value at the date of settlement remains in accumulated other comprehensive income ("AOCI") and is recognized in earnings when the forecasted transactions impact earnings.

Realized gains and losses on hedges and hedge ineffectiveness are recognized in income as operating revenue, cost of sales or operating expense depending upon the nature of the item being hedged. For the three- and six-month periods ended June 30, 2011 and 2010, hedge ineffectiveness was insignificant. As of June 30, 2011, the Company had cash flow hedges with expiration dates extending through December 2014 and $13 million of pre-tax net unrealized losses are forecasted to be reclassified from AOCI into earnings over the next twelve months as contracts settle.
 
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
 
June 30,
 
December 31,
 
Measure
 
2011
 
2010
Electricity sales
Megawatt hours
 
(5
)
 
(11
)
Natural gas purchases
Decatherms
 
205

 
239

Fuel purchases
Gallons
 
10

 
20


Credit Risk

The Utilities extend unsecured credit to other utilities, energy marketing companies, financial institutions and other market participants in conjunction with their wholesale energy supply and marketing activities. Credit risk relates to the risk of loss that might occur as a result of nonperformance by counterparties on their contractual obligations to make or take delivery of electricity, natural gas or other commodities and to make financial settlements of these obligations. Credit risk may be concentrated to the extent that one or more groups of counterparties have similar economic, industry or other characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in market or other conditions. In addition, credit risk includes not only the risk that a counterparty may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances involving other market participants that have a direct or indirect relationship with the counterparty.

The Utilities analyze the financial condition of each significant wholesale counterparty before entering into any transactions, establish limits on the amount of unsecured credit to be extended to each counterparty and evaluate the appropriateness of unsecured credit limits on an ongoing basis. To mitigate exposure to the financial risks of wholesale counterparties, the Utilities enter into netting and collateral arrangements that may include margining and cross-product netting agreements and obtain third-party guarantees, letters of credit and cash deposits. Counterparties may be assessed fees for delayed payments. If required, the Utilities exercise rights under these arrangements, including calling on the counterparty's credit support arrangement.

MidAmerican Energy also has potential indirect credit exposure to other market participants in the regional transmission organization ("RTO") markets where it actively participates, including the Midwest Independent Transmission System Operator, Inc. and the PJM Interconnection, L.L.C. In the event of a default by a RTO market participant on its market-related obligations, losses are allocated among all other market participants in proportion to each participant's share of overall market activity during the period of time the loss was incurred, diversifying MidAmerican Energy's exposure to credit losses from individual participants. Transactional activities of MidAmerican Energy and other participants in organized RTO markets are governed by credit policies specified in each respective RTO's governing tariff or related business practices. Credit policies of RTO's, which have been developed through extensive stakeholder participation, generally seek to minimize potential loss in the event of a market participant default without unnecessarily inhibiting access to the marketplace. MidAmerican Energy's share of historical losses from defaults by other RTO market participants has not been material.

16




Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain provisions that require MEHC's subsidiaries, principally the Utilities, to maintain specific credit ratings from one or more of the major credit rating agencies on their unsecured debt. 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" in the event of a material adverse change in the subsidiary's creditworthiness. These rights can vary by contract and by counterparty. As of June 30, 2011, these subsidiary's credit ratings from the three recognized credit rating agencies were investment grade.

The aggregate fair value of the Company's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $506 million and $603 million as of June 30, 2011 and December 31, 2010, respectively, for which the Company had posted collateral of $111 million and $136 million, respectively. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of June 30, 2011 and December 31, 2010, the Company would have been required to post $248 million and $261 million, respectively, of additional collateral. The Company's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors.

(7)
Investments and Restricted Cash and Investments

Investments and restricted cash and investments consists of the following (in millions):
 
As of
 
June 30,
 
December 31,
 
2011
 
2010
Investments:
 
 
 
BYD common stock
$
727

 
$
1,182

Rabbi trusts
292

 
284

Other
102

 
105

Total investments
1,121

 
1,571

 
 

 
 

Restricted cash and investments:
 

 
 

Nuclear decommissioning trust funds
308

 
295

Other
70

 
59

Total restricted cash and investments
378

 
354

 
 

 
 

Total investments and restricted cash and investments
1,499

 
1,925

Less current portion
(52
)
 
(44
)
Noncurrent portion
$
1,447

 
$
1,881


MEHC's investment in BYD Company Limited ("BYD") common stock is accounted for as an available-for-sale security with changes in fair value recognized in AOCI. As of June 30, 2011 and December 31, 2010, the fair value of MEHC's investment in BYD common stock was $727 million and $1.182 billion, respectively, which resulted in a pre-tax unrealized gain of $495 million and $950 million as of June 30, 2011 and December 31, 2010, respectively.

The Company's restricted cash and investments as of June 30, 2011 and December 31, 2010 are primarily related to (a) funds held in trust for nuclear decommissioning and (b) debt service reserve requirements for certain projects. The debt service funds are restricted by their respective project debt agreements to be used only for the related project.


17



(8)
Recent Debt Transactions

In conjunction with the construction of wind-powered generating facilities, MidAmerican Energy has accrued as construction work-in-progress certain amounts for which it is not contractually obligated to pay until December 2013. The amounts ultimately payable are discounted at 1.46% and recognized upon delivery of the equipment as long-term debt. The discount is amortized as interest expense over the period until payment is due using the effective interest method. As of June 30, 2011, $94 million of such debt, net of associated discount, was outstanding.

In May 2011, PacifiCorp issued $400 million of 3.85% First Mortgage Bonds due June 15, 2021. The net proceeds are being used to fund capital expenditures, for the repayment of short-term debt and for general corporate purposes.

In April 2011, Northern Natural Gas issued $200 million of 4.25% Senior Notes due June 1, 2021. The net proceeds were used to partially repay its $250 million, 7.0% Senior Notes due June 1, 2011.

In January and February 2011, Northern Electric issued £119 million of notes with maturity dates ranging from 2018 to 2020 at interest rates ranging from 3.901% to 4.586% under its finance contract with the European Investment Bank.

(9)
Related Party Transactions

As of June 30, 2011 and December 31, 2010, Berkshire Hathaway and its affiliates held 11% mandatory redeemable preferred securities due from certain wholly-owned subsidiary trusts of MEHC of $143 million and $165 million, respectively. Interest expense on these securities totaled $4 million and $8 million for the three-month periods ended June 30, 2011 and 2010, respectively, and $9 million and $18 million for the six-month periods ended June 30, 2011 and 2010, respectively.

Berkshire Hathaway includes the Company in its United States federal income tax return. As of June 30, 2011 and December 31, 2010, income taxes receivable from Berkshire Hathaway totaled $118 million and $396 million, respectively. For the six-month periods ended June 30, 2011 and 2010, the Company received net cash payments for income taxes from Berkshire Hathaway totaling $399 million and $65 million, respectively.

(10)
Employee Benefit Plans

Domestic Operations

Net periodic benefit cost for the domestic pension and other postretirement benefit plans included the following components (in millions):
 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
Pension:
 
 
 
 
 
 
 
Service cost
$
8

 
$
7

 
$
14

 
$
14

Interest cost
27

 
26

 
52

 
53

Expected return on plan assets
(32
)
 
(30
)
 
(59
)
 
(57
)
Net amortization
4

 
4

 
9

 
7

Net periodic benefit cost
$
7

 
$
7

 
$
16

 
$
17

 
 
 
 
 
 
 
 
Other postretirement:
 
 
 
 
 
 
 
Service cost
$
3

 
$
3

 
$
5

 
$
5

Interest cost
10

 
10

 
21

 
21

Expected return on plan assets
(11
)
 
(11
)
 
(21
)
 
(21
)
Net amortization
5

 
2

 
8

 
6

Net periodic benefit cost
$
7

 
$
4

 
$
13

 
$
11



18



Employer contributions to the domestic pension and other postretirement benefit plans are expected to be $127 million and $28 million, respectively, during 2011. As of June 30, 2011, $105 million and $14 million of contributions had been made to the domestic pension and other postretirement benefit plans, respectively.

United Kingdom Operations

Net periodic benefit cost for the UK pension plan included the following components (in millions):
 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Service cost
$
5

 
$
3

 
$
10

 
$
7

Interest cost
23

 
22

 
46

 
44

Expected return on plan assets
(29
)
 
(24
)
 
(58
)
 
(50
)
Net amortization
9

 
7

 
18

 
15

Net periodic benefit cost
$
8

 
$
8

 
$
16

 
$
16


Employer contributions to the UK pension plan are expected to be £50 million during 2011. As of June 30, 2011, £8 million, or $13 million, of contributions had been made to the UK pension plan.

(11)
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
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Federal statutory income tax rate
35
 %
 
35
 %
 
35
 %
 
35
 %
Federal and state income tax credits
(10
)
 
(9
)
 
(10
)
 
(10
)
State income tax, net of federal income tax benefit
1

 
3

 
1

 
3

Income tax method changes

 
(2
)
 

 
(1
)
Effects of ratemaking
(1
)
 
(4
)
 
(1
)
 
(3
)
Income tax effect of foreign income
(2
)
 
(2
)
 
(2
)
 
(3
)
Noncontrolling interest dispute

 

 

 
(3
)
Other, net
2

 
1

 
2

 

Effective income tax rate
25
 %
 
22
 %
 
25
 %
 
18
 %

Federal and state income tax credits primarily relate to production tax credits at the Utilities. The Utilities' wind-powered generating facilities are eligible for federal renewable electricity production tax credits for 10 years from the date the facilities were placed in service.


19



(12)
Commitments and Contingencies

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.

Environmental Laws and Regulations

The Company is subject to federal, state, local and foreign laws and regulations regarding air and water quality, renewable portfolio standards, emissions performance standards, climate change, 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.

Hydroelectric Relicensing

PacifiCorp's hydroelectric portfolio consists of 46 generating facilities with an aggregate facility net owned capacity of 1,161 megawatts. The FERC regulates 98% of the net capacity of this portfolio through 16 individual licenses, which typically have terms of 30 to 50 years. PacifiCorp expects to incur ongoing operating and maintenance expense and capital expenditures associated with the terms of its renewed hydroelectric licenses and settlement agreements, including natural resource enhancements. PacifiCorp's Klamath hydroelectric system is currently operating under annual licenses. Substantially all of PacifiCorp's remaining hydroelectric generating facilities are operating under licenses that expire between 2030 and 2058.

In February 2010, PacifiCorp, the United States Department of the Interior, the United States Department of Commerce, the State of California, the State of Oregon and various other governmental and non-governmental settlement parties signed the Klamath Hydroelectric Settlement Agreement ("KHSA"). Among other things, the KHSA provides that the United States Department of the Interior conduct scientific and engineering studies to assess whether removal of the Klamath hydroelectric system's four mainstem dams is in the public interest and will advance restoration of the Klamath Basin's salmonid fisheries. If it is determined that dam removal should proceed, dam removal is expected to commence no earlier than 2020.

Under the KHSA, PacifiCorp and its customers are protected from uncapped dam removal costs and liabilities. For dam removal to occur, federal legislation consistent with the KHSA must be enacted to provide, among other things, protection for PacifiCorp from all liabilities associated with dam removal activities. If Congress does not enact legislation, then PacifiCorp will resume relicensing at the FERC. In addition, the KHSA limits PacifiCorp's contribution to dam removal costs to no more than $200 million, of which up to $184 million would be collected from PacifiCorp's Oregon customers with the remainder to be collected from PacifiCorp's California customers. An additional $250 million for dam removal costs is expected to be raised through a California bond measure or other appropriate State of California financing mechanism. If dam removal costs exceed $200 million and if the State of California is unable to raise the additional funds necessary for dam removal costs, sufficient funds would need to be provided by an entity other than PacifiCorp in order for the KHSA and dam removal to proceed.

PacifiCorp has begun collection of surcharges from Oregon customers for their share of dam removal costs, as approved by the Oregon Public Utility Commission ("OPUC"), and is depositing the proceeds in a trust account maintained by the OPUC. In May 2011, the California Public Utilities Commission ("CPUC") approved the collection of surcharges from California customers beginning at a future date to be determined through a tariff filing. In June 2011, the tariff filing was completed and new rates will be effective upon establishment of two trust accounts.

As of June 30, 2011 and December 31, 2010, the net book value of PacifiCorp's Klamath hydroelectric system's four mainstem dams and the associated relicensing and settlement costs was $121 million and $125 million, respectively. During 2010 and 2011, PacifiCorp received approvals from the OPUC, the CPUC and the Wyoming Public Service Commission to depreciate the Klamath hydroelectric system's four mainstem dams and the associated relicensing and settlement costs through the expected dam removal date. The depreciation rate changes were effective January 1, 2011 and will allow for full depreciation of the assets by December 2019. PacifiCorp is seeking similar approval in Idaho and expects to seek approval in the next Washington general rate case. As part of the July 2011 Utah general rate case settlement stipulation, PacifiCorp and the other parties to the settlement stipulation have proposed to defer a decision regarding the acceleration of the depreciation rates for the Klamath hydroelectric system's four mainstem dams to a future rate proceeding, at which time the associated relicensing and settlement costs would be addressed. The Utah Public Service Commission is expected to make a final decision regarding the settlement stipulation not later than September 2011.


20



Purchase Obligations

In May 2011, PacifiCorp issued a notice to proceed with the engineering, procurement and construction contract for the 637-MW Lake Side 2 combined-cycle natural gas-fired generating facility. The notice to proceed resulted in purchase obligations for the years ending December 31 of approximately $181 million in 2011, $206 million in 2012, $126 million in 2013 and $8 million in 2014.

In May 2011, MidAmerican Energy signed contracts totaling $427 million for the construction of emissions control equipment at two of its jointly owned generating facilities to address air quality requirements. These contracts resulted in purchase obligations for the years ending December 31 of approximately $143 million in 2012, $194 million in 2013 and $90 million in 2014. As a joint owner of the generating facilities, MidAmerican Energy's share is $238 million.

(13)
Components of Accumulated Other Comprehensive Loss, Net

Accumulated other comprehensive loss attributable to MEHC, net consists of the following components (in millions):
 
As of
 
June 30,
 
December 31,
 
2011
 
2010
 
 
 
 
Unrecognized amounts on retirement benefits, net of tax of $(172) and $(172)
$
(461
)
 
$
(461
)
Foreign currency translation adjustment
(219
)
 
(297
)
Unrealized gains on cash flow hedges, net of tax of $23 and $15
35

 
23

Unrealized gains on available-for-sale securities, net of tax of $195 and $375
290

 
561

Total accumulated other comprehensive loss attributable to MEHC, net
$
(355
)
 
$
(174
)
 

21



(14)
Segment Information

MEHC's reportable segments were determined based on how the Company's strategic units are managed. The Company's foreign reportable segments include CE Electric UK, whose business is principally in Great Britain, and CalEnergy Philippines, whose business is in the Philippines. Intersegment eliminations and adjustments, including the allocation of goodwill, have been made. Information related to the Company's reportable segments is shown below (in millions):
 
Three-Month Periods
 
Six-Month Periods
 
Ended June 30,
 
Ended June 30,
 
2011
 
2010
 
2011
 
2010
Operating revenue:
 
 
 
 
 
 
 
PacifiCorp
$
1,091

 
$
1,052

 
$
2,210

 
$
2,158

MidAmerican Funding
805

 
827

 
1,784

 
1,962

Northern Natural Gas
112

 
98

 
317

 
307

Kern River
90

 
88

 
178