10-Q 1 bhe93018form10-q.htm 9.30.18 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 September 30, 2018
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
 
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)
 
 




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 October 31, 2018, 76,996,944 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 October 31, 2018, 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 October 31, 2018.
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 October 31, 2018, 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 October 31, 2018, 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 October 31, 2018, 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 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 and its subsidiaries
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
Subsidiary Registrants
 
PacifiCorp, MidAmerican Funding, MidAmerican Energy, Nevada Power and Sierra Pacific
Northern Powergrid
 
Northern Powergrid Holdings Company
Northern Natural Gas
 
Northern Natural Gas Company
Kern River
 
Kern River Gas Transmission Company
AltaLink
 
BHE Canada Holdings Corporation
ALP
 
AltaLink, L.P.
BHE U.S. Transmission
 
BHE U.S. Transmission, LLC
HomeServices
 
HomeServices of America, Inc. and its subsidiaries
BHE Pipeline Group or Pipeline Companies
 
Consists of Northern Natural Gas and Kern River
BHE Transmission
 
Consists of AltaLink and BHE U.S. Transmission
BHE Renewables
 
Consists of BHE Renewables, LLC and CalEnergy Philippines
Utilities
 
PacifiCorp, MidAmerican Energy Company, Nevada Power Company and Sierra Pacific Power Company
Berkshire Hathaway
 
Berkshire Hathaway Inc.
 
 
 
Certain Industry Terms
 
 
AESO
 
Alberta Electric System Operator
AFUDC
 
Allowance for Funds Used During Construction
AUC
 
Alberta Utilities Commission
CPUC
 
California Public Utilities Commission
Dth
 
Decatherms
EBA
 
Energy Balancing Account
ECAM
 
Energy Cost Adjustment Mechanism
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
GHG
 
Greenhouse Gases
GWh
 
Gigawatt Hours
GTA
 
General Tariff Application
IPUC
 
Idaho Public Utilities Commission
IUB
 
Iowa Utilities Board

ii



kV
 
Kilovolt
MW
 
Megawatts
MWh
 
Megawatt Hours
OPUC
 
Oregon Public Utility Commission
PCAM
 
Power Cost Adjustment Mechanism
PUCN
 
Public Utilities Commission of Nevada
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

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, 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 and creditworthiness of the respective Registrant's significant customers and suppliers;

iii



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;
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 consolidated 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.


iv



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 and its subsidiaries
 
 
 
 
 
 
 
 



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 September 30, 2018, the related consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2018 and 2017, and of changes in equity and cash flows for the nine-month periods ended September 30, 2018 and 2017, 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, 2017, 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 23, 2018, 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, 2017 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 the 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
November 2, 2018

4



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

 
As of
 
September 30,
 
December 31,
 
2018
 
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,016

 
$
935

Restricted cash and cash equivalents
358

 
327

Trade receivables, net
2,198

 
2,014

Income tax receivable

 
334

Inventories
851

 
888

Mortgage loans held for sale
501

 
465

Other current assets
860

 
815

Total current assets
5,784

 
5,778

 
 

 
 

Property, plant and equipment, net
67,587

 
65,871

Goodwill
9,683

 
9,678

Regulatory assets
2,778

 
2,761

Investments and restricted cash and cash equivalents and investments
4,754

 
4,872

Other assets
1,276

 
1,248

 
 
 
 

Total assets
$
91,862

 
$
90,208


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
 
September 30,
 
December 31,
 
2018
 
2017
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
1,331

 
$
1,519

Accrued interest
518

 
488

Accrued property, income and other taxes
543

 
354

Accrued employee expenses
414

 
274

Short-term debt
1,784

 
4,488

Current portion of long-term debt
2,205

 
3,431

Other current liabilities
1,026

 
1,049

Total current liabilities
7,821

 
11,603

 
 

 
 

BHE senior debt
8,620

 
5,452

BHE junior subordinated debentures
100

 
100

Subsidiary debt
26,633

 
26,210

Regulatory liabilities
7,553

 
7,309

Deferred income taxes
8,895

 
8,242

Other long-term liabilities
2,552

 
2,984

Total liabilities
62,174

 
61,900

 
 

 
 

Commitments and contingencies (Note 10)
 
 


 
 

 
 

Equity:
 

 
 

BHE shareholders' equity:
 

 
 

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

 

Additional paid-in capital
6,357

 
6,368

Long-term income tax receivable
(494
)
 

Retained earnings
25,361

 
22,206

Accumulated other comprehensive loss, net
(1,667
)
 
(398
)
Total BHE shareholders' equity
29,557

 
28,176

Noncontrolling interests
131

 
132

Total equity
29,688

 
28,308

 
 
 
 

Total liabilities and equity
$
91,862

 
$
90,208


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
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating revenue:
 
 
 
 
 
 
 
Energy
$
4,419

 
$
4,322

 
$
11,818

 
$
11,501

Real estate
1,218

 
961

 
3,252

 
2,502

Total operating revenue
5,637

 
5,283

 
15,070

 
14,003

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Energy:
 
 
 
 
 
 
 
Cost of sales
1,271

 
1,212

 
3,565

 
3,380

Operations and maintenance
901

 
772

 
2,534

 
2,334

Depreciation and amortization
667

 
635

 
2,110

 
1,905

Property and other taxes
142

 
142

 
428

 
421

Real estate
1,133

 
882

 
3,067

 
2,311

Total operating expenses
4,114

 
3,643

 
11,704

 
10,351

 
 
 
 
 
 
 
 
Operating income
1,523

 
1,640

 
3,366

 
3,652

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(453
)
 
(464
)
 
(1,380
)
 
(1,379
)
Capitalized interest
17

 
14

 
44

 
34

Allowance for equity funds
30

 
24

 
75

 
59

Interest and dividend income
27

 
32

 
85

 
85

Gains (losses) on marketable securities, net
260

 
3

 
(336
)
 
8

Other, net
19

 
(17
)
 
50

 
8

Total other income (expense)
(100
)
 
(408
)
 
(1,462
)
 
(1,185
)
 
 
 
 
 
 
 
 
Income before income tax expense (benefit) and equity income
1,423

 
1,232

 
1,904

 
2,467

Income tax expense (benefit)
23

 
184

 
(366
)
 
319

Equity income
9

 
30

 
35

 
80

Net income
1,409

 
1,078

 
2,305

 
2,228

Net income attributable to noncontrolling interests
8

 
10

 
19

 
30

Net income attributable to BHE shareholders
$
1,401

 
$
1,068

 
$
2,286

 
$
2,198


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
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
1,409

 
$
1,078

 
$
2,305

 
$
2,228

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrecognized amounts on retirement benefits, net of tax of $-, $1, $12 and $(3)
(1
)
 
15

 
50

 
16

Foreign currency translation adjustment
(2
)
 
227

 
(236
)
 
535

Unrealized gains on marketable securities, net of tax of $-, $284, $- and $355

 
423

 

 
542

Unrealized gains (losses) on cash flow hedges, net of tax of $(1), $1, $(1) and $(3)
1

 
1

 
2

 
(5
)
Total other comprehensive (loss) income, net of tax
(2
)
 
666

 
(184
)
 
1,088

 
 

 
 

 
 

 
 

Comprehensive income
1,407

 
1,744

 
2,121

 
3,316

Comprehensive income attributable to noncontrolling interests
8

 
10

 
19

 
30

Comprehensive income attributable to BHE shareholders
$
1,399

 
$
1,734

 
$
2,102

 
$
3,286


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, 2016
77

 
$

 
$
6,390

 
$

 
$
19,448

 
$
(1,511
)
 
$
136

 
$
24,463

Net income

 

 

 

 
2,198

 

 
14

 
2,212

Other comprehensive income

 

 

 

 

 
1,088

 

 
1,088

Common stock purchases

 

 
(1
)
 

 
(18
)
 

 

 
(19
)
Common stock exchange

 

 
(6
)
 

 
(94
)
 

 

 
(100
)
Distributions

 

 

 

 

 

 
(16
)
 
(16
)
Other equity transactions

 

 
(21
)
 

 

 

 
(3
)
 
(24
)
Balance, September 30, 2017
77

 
$

 
$
6,362

 
$

 
$
21,534

 
$
(423
)
 
$
131

 
$
27,604

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Balance, December 31, 2017
77

 
$

 
$
6,368

 
$

 
$
22,206

 
$
(398
)
 
$
132

 
$
28,308

Adoption of ASU 2016-01

 

 

 

 
1,085

 
(1,085
)
 

 

Net income

 

 

 

 
2,286

 

 
16

 
2,302

Other comprehensive loss

 

 

 

 

 
(184
)
 

 
(184
)
Reclassification of long-term
income tax receivable

 

 

 
(609
)
 

 

 

 
(609
)
Long-term income tax
receivable adjustments

 

 

 
115

 
(115
)
 

 

 

Common stock purchases

 

 
(6
)
 

 
(101
)
 

 

 
(107
)
Distributions

 

 

 

 

 

 
(17
)
 
(17
)
Other equity transactions

 

 
(5
)
 

 

 

 

 
(5
)
Balance, September 30, 2018
77

 
$

 
$
6,357

 
$
(494
)
 
$
25,361

 
$
(1,667
)
 
$
131

 
$
29,688


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)

 
Nine-Month Periods
 
Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
2,305

 
$
2,228

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

 
 

Losses (gains) on marketable securities, net
336

 
(8
)
Depreciation and amortization
2,147

 
1,943

Allowance for equity funds
(75
)
 
(59
)
Equity income, net of distributions
17

 
(14
)
Changes in regulatory assets and liabilities
263

 
17

Deferred income taxes and amortization of investment tax credits
(116
)
 
573

Other, net
40

 
21

Changes in other operating assets and liabilities, net of effects from acquisitions:
 
 
 
Trade receivables and other assets
(192
)
 
(82
)
Derivative collateral, net
9

 
(16
)
Pension and other postretirement benefit plans
(61
)
 
(29
)
Accrued property, income and other taxes, net
190

 
390

Accounts payable and other liabilities
168

 
170

Net cash flows from operating activities
5,031

 
5,134

 
 

 
 

Cash flows from investing activities:
 

 
 

Capital expenditures
(4,203
)
 
(3,179
)
Acquisitions, net of cash acquired
(105
)
 
(1,102
)
Purchases of marketable securities
(287
)
 
(167
)
Proceeds from sales of marketable securities
266

 
186

Equity method investments
(236
)
 
(80
)
Other, net
48

 
(12
)
Net cash flows from investing activities
(4,517
)
 
(4,354
)
 
 

 
 

Cash flows from financing activities:
 

 
 

Proceeds from BHE senior debt
3,166

 

Repayments of BHE senior debt and junior subordinated debentures
(650
)
 
(1,344
)
Common stock purchases
(107
)
 
(19
)
Proceeds from subsidiary debt
2,353

 
1,562

Repayments of subsidiary debt
(2,297
)
 
(834
)
Net (repayments of) proceeds from short-term debt
(2,694
)
 
365

Purchase of redeemable noncontrolling interest
(131
)
 

Other, net
(32
)
 
(60
)
Net cash flows from financing activities
(392
)
 
(330
)
 
 

 
 

Effect of exchange rate changes
(3
)
 
6

 
 

 
 

Net change in cash and cash equivalents and restricted cash and cash equivalents
119

 
456

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
1,283

 
1,003

Cash and cash equivalents and restricted cash and cash equivalents at end of period
$
1,402

 
$
1,459


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 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 ("AltaLink") (which primarily consists of AltaLink, L.P. ("ALP")) 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 solar, wind, geothermal and hydroelectric projects, the second 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 September 30, 2018 and for the three- and nine-month periods ended September 30, 2018 and 2017. The results of operations for the three- and nine-month periods ended September 30, 2018 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, 2017 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 nine-month period ended September 30, 2018.

(2)
New Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-14, which amends FASB Accounting Standards Codification ("ASC") Topic 715, "Compensation - Retirement Benefits." The amendments in this guidance modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this guidance remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. The updated disclosure requirements make a number of changes to improve the effectiveness of disclosures in the notes to the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2020, with early adoption permitted, and is required to be adopted retrospectively. The adoption of ASU No. 2018-14 will not have a material impact on the Company's Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.


11



In February 2018, the FASB issued ASU No. 2018-02, which amends FASB ASC Topic 220, "Income Statement - Reporting Comprehensive Income." The amendments in this guidance require a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects that were created from the Tax Cuts and Jobs Act enacted on December 22, 2017 ("2017 Tax Reform"). The reclassification is the difference between the historical income tax rates and the enacted rate for the items previously recorded in accumulated other comprehensive income. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and is required to be adopted retrospectively to each period in which the effect of the change in 2017 Tax Reform is recognized. Considering the significant components of the Company's accumulated other comprehensive income relate to (a) unrecognized amounts on retirement benefits of foreign pension plans and (b) unrealized gains on available-for-sale securities, which were reclassified as required by ASU No. 2016-01 that was adopted on January 1, 2018, the adoption of ASU No. 2018-02 did not have a material impact on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, which amends FASB ASC Topic 815, "Derivatives and Hedging." The amendments in this guidance update the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements, expands an entity's ability to hedge non-financial and financial risk components and reduces complexity in fair value hedges of interest rate risk. In addition, it eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item and also eases certain documentation and assessment requirements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and is required to be adopted using a modified retrospective approach by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, which creates FASB ASC Topic 842, "Leases" and supersedes Topic 840 "Leases." This guidance increases transparency and comparability among entities by recording lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous guidance. During 2018, the FASB issued several ASUs that clarified the implementation guidance and provided optional transition practical expedients for ASU No. 2016-02 including ASU No. 2018-01 that allows companies to forgo evaluating existing land easements if they were not previously accounted for under ASC Topic 840, "Leases" and ASU No. 2018-11 that allows companies to apply the new guidance at the adoption date with the cumulative-effect adjustment to the opening balance of retained earnings recognized in the period of adoption. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and is required to be adopted using a modified retrospective approach. The Company plans to adopt this guidance effective January 1, 2019 and is currently in the process of evaluating the impact on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

(3)
Business Acquisitions

The Company completed various acquisitions totaling $105 million, net of cash acquired, for the nine-month period ended September 30, 2018. The purchase price for each acquisition was allocated to the assets acquired and liabilities assumed, which primarily related to residential real estate brokerage businesses. There were no other material assets acquired or liabilities assumed. Additionally, in April 2018, HomeServices acquired the remaining 33.3% interest in a real estate brokerage franchise business from the noncontrolling interest member at a contractually determined option exercise price totaling $131 million.

The Company completed various acquisitions totaling $1.1 billion, net of cash acquired, for the nine-month period ended September 30, 2017. The purchase price for each acquisition was allocated to the assets acquired and liabilities assumed, which primarily related to residential real estate brokerage businesses, development and construction costs for the 110-megawatt Alamo 6 solar project and the 50-megawatt Pearl solar project, and the remaining 25% interest in the Silverhawk natural gas-fueled generation facility at Nevada Power. As a result of the various acquisitions, the Company acquired assets of $1.1 billion, assumed liabilities of $476 million and recognized goodwill of $522 million.



12



(4)
Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):
 
 
 
As of
 
Depreciable
 
September 30,
 
December 31,
 
Life
 
2018
 
2017
Regulated assets:
 
 
 
 
 
Utility generation, transmission and distribution systems
5-80 years
 
$
75,751

 
$
74,660

Interstate natural gas pipeline assets
3-80 years
 
7,295

 
7,176

 
 
 
83,046

 
81,836

Accumulated depreciation and amortization
 
 
(25,566
)
 
(24,478
)
Regulated assets, net
 
 
57,480

 
57,358

 
 
 
 

 
 

Nonregulated assets:
 
 
 

 
 

Independent power plants
5-30 years
 
6,551

 
6,010

Other assets
3-30 years
 
1,605

 
1,489

 
 
 
8,156

 
7,499

Accumulated depreciation and amortization
 
 
(1,773
)
 
(1,542
)
Nonregulated assets, net
 
 
6,383

 
5,957

 
 
 
 

 
 

Net operating assets
 
 
63,863

 
63,315

Construction work-in-progress
 
 
3,724

 
2,556

Property, plant and equipment, net
 
 
$
67,587

 
$
65,871


Construction work-in-progress includes $3.2 billion as of September 30, 2018 and $2.2 billion as of December 31, 2017, related to the construction of regulated assets.


13



(5)
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
 
September 30,
 
December 31,
 
2018
 
2017
Investments:
 
 
 
BYD Company Limited common stock
$
1,616

 
$
1,961

Rabbi trusts
398

 
441

Other
186

 
124

Total investments
2,200

 
2,526

 
 

 
 

Equity method investments:
 
 
 
BHE Renewables tax equity investments
1,221

 
1,025

Electric Transmission Texas, LLC
530

 
524

Bridger Coal Company
116

 
137

Other
163

 
148

Total equity method investments
2,030

 
1,834

 
 
 
 
Restricted cash and cash equivalents and investments:
 

 
 

Quad Cities Station nuclear decommissioning trust funds
543

 
515

Restricted cash and cash equivalents
385

 
348

Total restricted cash and cash equivalents and investments
928

 
863

 
 

 
 

Total investments and restricted cash and cash equivalents and investments
$
5,158

 
$
5,223

 
 
 
 
Reflected as:
 
 
 
Current assets
$
404

 
$
351

Noncurrent assets
4,754

 
4,872

Total investments and restricted cash and cash equivalents and investments
$
5,158

 
$
5,223


Investments

In January 2016, the FASB issued ASU 2016-01 which amended FASB ASC Subtopic 825-10, "Financial Instruments - Overall." The amendments in this guidance addressed certain aspects of recognition, measurement, presentation and disclosure of financial instruments including a requirement that all investments in equity securities that do not qualify for equity method accounting or result in consolidation of the investee be measured at fair value with changes in fair value recognized in net income. The Company adopted this guidance effective January 1, 2018 with a cumulative-effect increase to retained earnings of $1,085 million and a corresponding decrease to accumulated other comprehensive income (loss) ("AOCI").

The portion of unrealized losses related to investments still held as of September 30, 2018 is calculated as follows (in millions):
 
Three-Month Period
 
Nine-Month Period
 
Ended September 30,
 
Ended September 30,
 
2018
 
2018
Gains (losses) on marketable securities recognized during the period
$
260

 
$
(336
)
Less: Net gains recognized during the period on marketable securities sold during the period

 
1

Unrealized gains (losses) recognized during the period on marketable securities still held at the reporting date
$
260

 
$
(337
)


14



Equity Method Investments

In August 2016, the FASB issued ASU No. 2016-15, which amends FASB ASC Topic 230, "Statement of Cash Flows." The amendments in this guidance address the classification of eight specific cash flow issues within the statement of cash flows with the objective of reducing the existing diversity in practice. The Company adopted this guidance retrospectively effective January 1, 2018 which resulted in the reclassification of certain cash distributions received from equity method investees of $26 million previously recognized within investing cash flows to operating cash flows for the nine-month period ended September 30, 2017.

Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

In November 2016, the FASB issued ASU No. 2016-18, which amends FASB ASC Subtopic 230-10, "Statement of Cash Flows - Overall." The amendments in this guidance require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this guidance January 1, 2018.

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 September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, 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
 
September 30,
 
December 31,
 
2018
 
2017
Cash and cash equivalents
$
1,016

 
$
935

Restricted cash and cash equivalents
358

 
327

Investments and restricted cash and cash equivalents and investments
28

 
21

Total cash and cash equivalents and restricted cash and cash equivalents
$
1,402

 
$
1,283


(6)
Recent Financing Transactions

Long-Term Debt

In July 2018, BHE issued $1.0 billion of its 4.45% Senior Notes due 2049. BHE used the net proceeds to refinance a portion of the Company's short-term indebtedness and for general corporate purposes.

In July 2018, Northern Natural Gas issued $450 million of its 4.30% Senior Bonds due 2049. Northern Natural Gas used the net proceeds to repay at maturity all of its $200 million 5.75% Senior Notes due July 2018 and for general corporate purposes.

In July 2018, PacifiCorp issued $600 million of its 4.125% First Mortgage Bonds due 2049. PacifiCorp used a portion of the net proceeds to repay all of its $500 million 5.65% First Mortgage Bonds due July 2018 and intends to use the remaining net proceeds to fund capital expenditures and for general corporate purposes.

In April 2018, Nevada Power issued $575 million of its 2.75% General and Refunding Mortgage Notes, Series BB, due April 2020. Nevada Power used a portion of the net proceeds to repay all of its $325 million 6.50% General and Refunding Mortgage Notes, Series O, maturing in May 2018. In August 2018, Nevada Power used the remaining net proceeds, together with available cash, to repay all of Nevada Power's $500 million 6.50% General and Refunding Mortgage Notes, Series S, maturing in August 2018.


15



In February 2018, MidAmerican Energy issued $700 million of its 3.65% First Mortgage Bonds due 2048. An amount equal to the net proceeds was used to finance capital expenditures, disbursed during the period from February 2, 2017 to October 31, 2017, with respect to investments in MidAmerican Energy's 2,000-megawatt (nameplate capacity) Wind XI project and the repowering of certain of MidAmerican Energy's existing wind facilities, which were previously financed with MidAmerican Energy's general funds.

In January 2018, BHE issued $450 million of its 2.375% Senior Notes due 2021, $400 million of its 2.80% Senior Notes due 2023, $600 million of its 3.25% Senior Notes due 2028 and $750 million of its 3.80% Senior Notes due 2048. The net proceeds were used to refinance a portion of the Company's short-term indebtedness and for general corporate purposes.

Credit Facilities

In April 2018, BHE terminated its $1.0 billion unsecured credit facility expiring May 2018 and amended and restated, with lender consent, its existing $2.0 billion unsecured credit facility expiring June 2020, increasing the lender commitment to $3.5 billion, extending the expiration date to June 2021 and increasing from one to two, the available one-year extension options, subject to lender consent.

In April 2018, PacifiCorp amended and restated its existing $400 million unsecured credit facility expiring June 2020, increasing the lender commitment to $600 million, extending the expiration date to June 2021 and increasing from one to two, the available one-year extension options, subject to lender consent.

In April 2018, PacifiCorp and MidAmerican Energy amended and restated their existing $600 million and $900 million unsecured credit facilities, respectively, each expiring June 2020, extending the expiration dates to June 2021 and reducing from two to one, the available one-year extension options, subject to lender consent.

In April 2018, Nevada Power and Sierra Pacific amended and restated their existing $400 million and $250 million secured credit facilities, respectively, each expiring June 2020, extending the expiration dates to June 2021 and reducing from two to one, the available one-year extension options, subject to lender consent.

In April 2018, ALP amended its existing C$750 million secured credit facility expiring December 2019, decreasing the lender commitment to C$500 million effective December 2018 and extending the expiration date to December 2022. ALP also amended its C$75 million secured credit facility expiring December 2019, extending the expiration date to December 2022.

(7)
Income Taxes

Tax Cuts and Jobs Act

2017 Tax Reform impacts many areas of income tax law. The most material items include the reduction of the federal corporate tax rate from 35% to 21% effective January 1, 2018, the one-time repatriation tax of foreign earnings and profits and limitations on bonus depreciation for utility property.

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 118 to assist in the implementation process of 2017 Tax Reform by allowing for calculations to be classified as provisional and subject to remeasurement. There are three different classifications for the accounting: (1) completed, (2) not complete but reasonably estimable or (3) not complete and amounts are not reasonably estimable. The Company has recorded the impacts of 2017 Tax Reform and believes all the impacts to be complete with the exception of the repatriation tax on foreign earnings and interpretations of the bonus depreciation rules. The Company has determined the amounts recorded and the interpretations relating to these two items to be provisional and subject to remeasurement during the measurement period upon obtaining the necessary additional information to complete the accounting. The Company believes the estimates for the repatriation tax to be reasonable, however, additional time is required to validate the inputs to the foreign earnings and profits calculation, the basis on which the repatriation tax is determined, and additional guidance is required to determine state income tax implications. The Company also believes its interpretations for bonus depreciation to be reasonable, however, as the guidance is clarified, estimates may change. During the first half of 2018, the Company reduced the liability estimate by $45 million based on additional guidance for certain state income tax implications of the repatriation tax. During the third quarter of 2018, the Company recorded a current tax benefit and deferred tax expense of $37 million following clarified bonus depreciation guidance. As a result of 2017 Tax Reform and the nature of the Company's regulated businesses, the Company reduced the associated deferred income tax liabilities $14 million and increased regulatory liabilities by the same amount. The accounting will be completed by December 2018.

16




Iowa Senate File 2417

In May 2018, Iowa Senate File 2417 was signed into law, which, among other items, reduces the state of Iowa corporate tax rate from 12% to 9.8% and eliminates corporate federal deductibility, both for tax years starting in 2021. GAAP requires the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. As a result of Iowa Senate File 2417, the Company reduced deferred income tax liabilities $61 million and decreased deferred income tax expense by $2 million. As it is probable the change in deferred taxes for the Company's regulated businesses will be passed back to customers through regulatory mechanisms, the Company increased net regulatory liabilities by $59 million. In connection with Iowa Senate File 2417, the Company determined it was more appropriate to present the deferred income tax assets of $609 million associated with the state of Iowa net operating loss carryforward as a long-term income tax receivable from Berkshire Hathaway as a component of BHE's shareholders' equity. As the Company does not currently expect to receive any income tax amounts from Berkshire Hathaway related to the state of Iowa prior to the 2021 effective date, the Company has remeasured the long-term income tax receivable with Berkshire Hathaway at the enactment date and recorded a decrease to the long-term income tax receivable from Berkshire Hathaway of $115 million for the nine-month period ended September 30, 2018.

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
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Federal statutory income tax rate
21
 %
 
35
 %
 
21
 %
 
35
 %
Income tax credits
(19
)
 
(19
)
 
(29
)
 
(18
)
State income tax, net of federal income tax benefit
1

 

 
(6
)
 
(1
)
Income tax effect of foreign income

 
(3
)
 
(3
)
 
(4
)
Effects of ratemaking
(2
)
 

 
(3
)
 

Equity income

 
1

 

 
1

Other, net
1

 
1

 
1



Effective income tax rate
2
 %
 
15
 %
 
(19
)%
 
13
 %

Income tax credits relate primarily to production tax credits from wind-powered generating facilities owned by MidAmerican Energy, PacifiCorp and BHE Renewables. Federal renewable electricity production tax credits 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 tax has been computed on a stand-alone basis. Berkshire Hathaway includes the Company in its United States federal and Iowa state income tax returns and substantially all of its currently payable or receivable income tax is remitted to or received from Berkshire Hathaway. For the nine-month periods ended September 30, 2018 and 2017, the Company received net cash payments for federal income taxes from Berkshire Hathaway totaling $450 million and $659 million, respectively. As of September 30, 2018, the Company had a long-term income tax receivable from Berkshire Hathaway of $494 million for Iowa state income tax reflected as a component of BHE's shareholders' equity.


17



(8)
Employee Benefit Plans

In March 2017, the FASB issued ASU No. 2017-07, which amends FASB ASC Topic 715, "Compensation - Retirement Benefits." The amendments in this guidance require that an employer disaggregate the service cost component from the other components of net benefit cost and report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of operating income. Additionally, the guidance only allows the service cost component to be eligible for capitalization when applicable. The Company adopted this guidance January 1, 2018 prospectively for the capitalization of the service cost component in the Consolidated Balance Sheets and retrospectively for the presentation of the service cost component and the other components of net benefit cost in the Consolidated Statements of Operations applying the practical expedient to use the amounts previously disclosed in the Notes to Consolidated Financial Statements as the estimation basis for applying the retrospective presentation requirement. As a result, amounts other than the service cost for pension and other postretirement benefit plans for the three- and nine-month periods ended September 30, 2017 of $16 million and $8 million, respectively, have been reclassified to Other, net in the Consolidated Statements of Operations.

Domestic Operations

Net periodic benefit (credit) cost for the domestic pension and other postretirement benefit plans included the following components (in millions):
 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2018
 
2017
 
2018
 
2017
Pension:
 
 
 
 
 
 
 
Service cost
$
5

 
$
6

 
$
15

 
$
18

Interest cost
26

 
29

 
78

 
87

Expected return on plan assets
(41
)
 
(40
)
 
(123
)
 
(120
)
Net amortization
8

 
7

 
23

 
22

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

 
$
(7
)
 
$
7

 
 
 
 
 
 
 
 
Other postretirement:
 
 
 
 
 
 
 
Service cost
$
1

 
$
3

 
$
6

 
$
7

Interest cost
7

 
7

 
19

 
21

Expected return on plan assets
(9
)
 
(9
)
 
(31
)
 
(30
)
Net amortization
(3
)
 
(3
)
 
(9
)
 
(10
)
Net periodic benefit credit
$
(4
)
 
$
(2
)
 
$
(15
)
 
$
(12
)

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 $39 million and $7 million, respectively, during 2018. As of September 30, 2018, $34 million and $6 million of contributions had been made to the domestic pension and other postretirement benefit plans, respectively.


18



Foreign Operations

Net periodic benefit cost for the United Kingdom pension plan included the following components (in millions):
 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Service cost
$
5

 
$
6

 
$
15

 
$
19

Interest cost
14

 
15

 
42

 
44

Expected return on plan assets
(25
)
 
(25
)
 
(78
)
 
(74
)
Settlement
12

 
18

 
36

 
18

Net amortization
9

 
17

 
38

 
50

Net periodic benefit cost
$
15

 
$
31

 
$
53

 
$
57


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 £46 million during 2018. As of September 30, 2018, £35 million, or $47 million, of contributions had been made to the United Kingdom pension plan.

(9)
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.

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):

19



 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
53

 
$
99

 
$
(35
)
 
$
117

Interest rate derivatives
 
3

 
22

 
11

 

 
36

Mortgage loans held for sale
 

 
501

 

 

 
501

Money market mutual funds(2)
 
716

 

 

 

 
716

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
183

 

 

 

 
183

International government obligations
 

 
4

 

 

 
4

Corporate obligations
 

 
47

 

 

 
47

Municipal obligations
 

 
2

 

 

 
2

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
300

 

 

 

 
300

International companies
 
1,622

 

 

 

 
1,622

Investment funds
 
187

 

 

 

 
187

 
 
$
3,011


$
629


$
110


$
(35
)
 
$
3,715

Liabilities:
 
 

 
 

 
 

 
 

 
 

Commodity derivatives
 
$
(1
)

$
(168
)

$
(15
)

$
110

 
$
(74
)
Interest rate derivatives
 

 
(5
)
 
(1
)
 

 
(6
)
 
 
$
(1
)
 
$
(173
)
 
$
(16
)
 
$
110

 
$
(80
)
 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
1

 
$
42

 
$
104

 
$
(29
)
 
$
118

Interest rate derivatives
 

 
15

 
9

 

 
24

Mortgage loans held for sale
 

 
465

 

 

 
465

Money market mutual funds(2)
 
685

 

 

 

 
685

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
176

 

 

 

 
176

International government obligations
 

 
5

 

 

 
5

Corporate obligations
 

 
36

 

 

 
36

Municipal obligations
 

 
2

 

 

 
2

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
288

 

 

 

 
288

International companies
 
1,968

 

 

 

 
1,968

Investment funds
 
178

 

 

 

 
178

 
 
$
3,296

 
$
565

 
$
113

 
$
(29
)
 
$
3,945

Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
(3
)
 
$
(167
)
 
$
(10
)
 
$
105

 
$
(75
)
Interest rate derivatives
 

 
(8
)
 

 

 
(8
)
 
 
$
(3
)
 
$
(175
)
 
$
(10
)
 
$
105

 
$
(83
)

(1)
Represents netting under master netting arrangements and a net cash collateral receivable of $75 million and $76 million as of September 30, 2018 and December 31, 2017, 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.

20




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
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
 
 
Interest
 
 
 
Interest
 
Commodity
 
Rate
 
Commodity
 
Rate
 
Derivatives
 
Derivatives
 
Derivatives
 
Derivatives
2018:
 
 
 
 
 
 
 
Beginning balance
$
83

 
$
17

 
$
94

 
$
9

Changes included in earnings
(1
)
 
54

 
3

 
140

Changes in fair value recognized in OCI
1

 

 
1