20050817Legislative (marked) revised pages.pdf

REVISED PAGES TO
JOINT APPLICATION
Marked Version
REVISED 8/17/05
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property located in Idaho used in the generation, transmission, distribution or supply of electric
power or energy to the public may merge, sell, lease, assign or transfer, directly or indirectly,
such property, or the operation, management or control thereof.
TIME FOR PROCESSING THE APPLICATION
MERC and PacifiCorp respectfully request completion of all state reviews by
February 28 2006, in order to complete the acquisition on or before March 31, 2006. MERC'
proposed acquisition ofPacifiCorp is an important transaction for PacifiCorp customers
employees and communities. In order to mitigate the ill effects of uncertainty associated with
the sale ofPacifiCorp, and expedite the delivery of important benefits, Applicants respectfully
request that the Commission schedule review of the Application in a manner that will facilitate
an order by February 28, 2006.
Closing on or before March 31 , 2006, will facilitate the transition ofPacifiCorp
financial reporting from a fiscal year ending March 31 , which is the Scottish Power pIc
ScottishPower ) approach, to a calendar fiscal year consistent with MERC's financial
statements. Calendar year reporting is consistent with regulatory reporting, which should enable
the Commission to utilize a single year s audited financial statements rather than have regulatory
reporting span across two fiscal years.
In connection 'Nith-:ApfHicants' request for a Commission ordef-by-February 28 2006, it
is note\yorthy-thaHhe Securities and~hange Commission ~C"
) '
vill not act in advance of
appro'/als-from the respective state pHblic utility commissions. The-8EC's policy in this respeet
is-founded on its desire to avoid-pressuring the states to act in a particular manner, to avoid
readering decisions on theoretical transactions, and to avoid impacting share prices and-valae-by
ha'/ing an extended-period-behveen approval-aftd..elosing. Thus, ruling on the .Application shook!
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_he Commission not to delay its ruling on tl1e--Awlication on this ground-.
APPLICANT INFORMATION
The exact name and address ofMEHC's principal business office is as follows:
MidAmerican Energy Holdings Company
666 Grand Avenue, Suite 2900
Des Moines, Iowa 50309
MEHC is an Iowa corporation, whose ownership, as of January 31 , 2005, is as follows:
Berkshire Hathaway Inc. (83.75% economic interest); Walter Scott, Jr., including family
interests, (15.89% economic interest); David Sokol (0.25% economic interest); and Greg Abel
(0.11 % economic interest). On a diluted basis the economic interests would be as follows:
Berkshire Hathaway Inc. (80.48% economic interest); Walter Scott, Jr., including family
interests, (15.27% economic interest); David Sokol (2.91 % economic interest); and Greg Abel
(1.35% economic interest).1 Further detail concerning the ownership ofMEHC may be found
page 108 ofMEHC's 2004 annual report on Form 10-K attached to MEHC witness Pat
Goodman s testimony.
Berkshire Hathaway currently holds 9.9% of the voting stock ownership ofMEHC and
263 395 shares ofMEHC's zero coupon convertible preferred stock.2 This preferred stock is
convertible into MEHC common shares at the option of Berkshire Hathaway under specific
1 The voting stock ownership of these four investors is as follows: (1) Walter Scott
including family interests, holds an 88.1 % voting interest; (2) Berkshire Hathaway, Inc. holds a
9% voting interest; (3) David Sokol holds a 1.4% voting interest; and (4) Greg Abel holds a
6% voting interest.
While the convertible preferred stock does not vote with the common stock in the
election of directors, the convertible preferred stock gives Berkshire Hathaway the right to elect
20% ofMEHC's Board of Directors (currently two of the ten members of the MEHC Board of
Directors). Additionally, the prior approval of Berkshire Hathaway, as the holder of convertible
preferred stock, is required for certain fundamental transactions by MEHC, as further discussed
in Mr. Goodman s testimony.
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circumstances, as discussed more fully in Mr. Goodman s testimony. One such circumstance is
the repeal or amendment of the Public Utility Holding Company Act of 1935 and any successor
legislation ("PUHCA") such that the conversion of preferred stock would not cause Berkshire
Hathaway (or any affiliate of Berkshire Hathaway) to become regulated as a registered holding
company. On or after Februarv 8.2006. the effective date of repeal ofPUHCA.MmIG
anticipates that-Berkshire Hathaway will exercise its right to convert the zero coupon convertible
preferred stock in the event this circumstance occurs, whereupon Berkshire Hathaway s voting
interest willeWd correspond to its ownership interest.
Persons authorized on behalf ofMEHC to receive notices and communications with
respect to this Application are:
Douglas L. Anderson
Senior Vice President & General Counsel
MidAmerican Energy Holdings Company
302 S. 36th Street, Suite 400
Omaha, Nebraska 68131
Phone: [phone]
Fax: [phone]
danderson(fpmidamerican. com
Mark C. Moench
Senior Vice President - Law
MidAmerican Energy Holdings Company
201 South Main. Suite 23002755 E.
Cotton'Nood-PaRC\vay, Suite 300
Salt Lake City, Utah 841 1171 0400
Phone: [phone] 6059
Fax: [phone] 6155
mcmo ench(fpmidameric an. com
Persons authorized on behalf ofPacifiCorp to receive notices and communications with
respect to this Application are:
Andrea L. Kelly
Managing Director - Strategy
PacifiCorp
825 NE Multnomah, Suite 956
Portland, Oregon 97232
Phone: [phone]
Fax: [phone]
andrea.kell y(fppacifi corp. com
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DESCRIPTION OF TRANSACTION
On May 23 2005 , ScottishPower and PacifiCorp Holdings, Inc. ("PHI"), its wholly
owned subsidiary directly holding PacifiCorp s common stock, reached a definitive agreement
Stock Purchase Agreement"), providing for the sale of all PacifiCorp common stock, held by
PHI, to MEHC for a value of approximately $9.4 billion, consisting of approximately $5.
billion in cash plus approximately $4.3 billion in net debt and preferred stock, which will remain
outstanding at PacifiCorp. The Stock Purchase Agreement is included as Appendix 2.
A limited liability company referred to as PPW Holdings LLC ("Holdings ) has been
established as a direct subsidiary of MEHC. Holdings will receive an equity infusion
approximately $5.1 billion raised by MEHC through the sale of either common stock or zero
couDon convertible preferred stock to Berkshire Hathaway and the issuance of long-term senior
notes, preferred stock, or other securities with equity characteristics, to third parties. However
the transaction is not conditioned on such financing and if funds were not available from third
parties, Berkshire Hathaway is expected to provide any required funding. Finally, Holdings will
have no debt of its own for this transaction. Holdings will, as provided in the Stock Purchase
Agreement, pay PHI $5.1 billion in cash at closing in exchange for 100% of the common stock
ofPacifiCorp. In addition, it is projected that the approximately $4.3 billion in net debt and
preferred stock currently outstanding at PacifiCorp will remain outstanding as liabilities of
PacifiCorp. The acquisition is subject to customary closing conditions, including approval of the
transaction by the shareholders of ScottishPower and the receipt of required state and federal
regulatory approvals.
The sale ofPacifiCorp s common stock to MEHC will also include transfer of control
of the following PacifiCorp subsidiaries, which consist primarily of mining companies and
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Financial Strength" section concerning MEHC.
PacifiCorp will continue to be charged for certain common services provided to it as part
of a larger organization. Under MEHC's ownership, these services will be limited to
management services (e., board of directors support, corporate tax, financial planning and
analysis, financial reporting) and will be provided by a service company ("ServCo ) subsidiat=y
ef.MEHC, as well as MEC. In connection with this transaction, MEHC is making a commitment
to cap such charges at $9 million per annum for a five (5) year period, compared to the
$15 million PacifiCorp is expected to incur from ScottishPower in FY 2006. See testimony on
shared service charges from MEHC witness Specketer.
PacifiCorp s headquarters will remain in Portland, Oregon. All PacifiCorp financial
books and records will be kept in Portland, Oregon, and will continue to be available to the
Commission, upon request, at PacifiCorp s offices in Portland and Salt Lake City, and elsewhere
in accordance with current practice. There are no plans for a reduction in workforce as a result
of this transaction. MEHC will also renew and extend the commitments that have been
previously made by PacifiCorp as set forth in Exhibit No. - (BEG-I) in the testimony of
MEHC witness Gale, and as discussed in the testimonies ofMEHC witnesses Abel, Goodman
Gale and Specketer.
As the foregoing demonstrates, PacifiCorp s customers, communities and regulators are
not likely to notice significant changes in PacifiCorp s business practices as a result of the
proposed transaction. To the contrary, customers, communities, and regulators will see benefits
from an owner ofPacifiCorp with significant financial strength, expertise in utility operations
and business planning, and a focus on improving reliability and business operations over the long
term.
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$75 million investment in the Asset Risk Program;
$69 million investment in local transmission risk projects in all states;
at least a 10 basis point reduction for five years ($6.3 million) in the cost of
PacifiCorp s issuances of long-term debt;
at least a $30 million reduction (over five years) in corporate overhead costs;
consideration of reduced-emissions coal technologies such as IGCC and super-
critical;
affirmation of PacifiCorp s goal of 1400 MW of cost-effective renewable resources,
including 100 MW of new wind energy within one year of the close of the
transaction and up to 400 MW of new wind energy after the transmission line
projects are completed;
reduction in sulfur hexafluoride emissions;
$1 million shareholder-funded system-wide study designed to further demand-side
management and energy efficiency programs where cost effective;
a 2-year extension of the customer service standards and performance guarantees;
a commitment of MEHC's resources and involvement, in cooperation with the
PacifiCorp states, to look into transmission projects beneficial to the region, such as
the Rocky Mountain Area Transmission Study ("RMA TS") and the Frontier
transmission line project;
uniform application of the commitments from the prior PacifiCorp transaction in
all six states; and
offering a utility ownloperate option for consideration in renewable energy RFPs.
The above-mentioned benefits will be of substantial value to PacifiCorp s customers
communities and employees in future years, as will MEHC's long-term commitment to assist
PacifiCorp to meetexecute on its projected future capital needs, including long-term investment
in PacifiCorp s integrated energy infrastructure.
MEHC believes the chiefbenefit from the proposed transaction is MEHC's willingness
and ability to deploy capital to meet PacifiCorp s significant infrastructure needs. MEHC has
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focused on investments in the energy industry and is uniquely positioned to invest significant
capital in the industry. Thus, MEHC is exceptionally well-matched to utilities, such as
PacifiCorp, with a need for significant capital investment. This is particularly true when one
considers the further advantage that arises from the reduced cost of debt that results from
association with Berkshire Hathaway. As noted in the testimony ofMEHC witness Goodman
the savings from this effect are substantial. The energy business is very capital intensive. With
an owner like MEHC, that is well-positioned to undertake the efficient raising of capital
PacifiCorp will possess a key ingredient for successfully meeting its customers' current and
future demands for energy. This is especially so since MEHC is free from the quarterly demand
for shareholder dividends. It is MEHC's expectation that it will be the last owner ofPacifiCorp,
because MEHC invests for the long term. MEHC believes this will be to the benefit of
PacifiCorp s customers, communities and employees. Knowing that MEHC intends to own
PacifiCorp for the long-term will, MEHC believes, enhance customer and community confidence
in PacifiCorp and its energy infrastructure that is so important to economic development.
MEHC's long-term focus should also enhance the confidence ofPacifiCorp s employees and
management, enabling them to devote their full focus on exceeding customer expectations.
OTHER REGULATORY APPROVALS
PYHC.L ~ is in legislation cUlTently-before a joint House Senate conference committee of--the
S. Congress; ho\vever repeal is not necessary for completion of-the transaction.
Based-eft-discussions vlitft-SEC staf.f-aBd-the assessments of-legal counsel vie expect the
transaction to be authorized-by-the-8EC under4he terms and precedents of...pgJIC.L ~. Vl e believe
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the acquisition \vill satisfy-the standaffis under Section 1-()..efp.yHC.L that require a utility
acquisition to be-for reasonable and-fair consideration, to not undWy concentrate control-ef
f*l&lic utilities, to not undWy complicate the capital structure oHffility systems, and to tend
to'(.var~ment of an integrated-fmlHic utility system. See the testimony ofMBHG
MEHC and PacifiCorp will seek approval of the Federal Energy Regulatory Commission
FERC"), pursuant to Section 203 of the Federal Power Act ("FP A"), for the proposed
transaction, inasmuch as it will result in the indirect transfer, to MEHC, of control of the
)urisdictional facilities" ofPacifiCorp. PacifiCorp and MEC will also seek FERC approval
pursuant to Section 205 of the FP A of~ any revisions to their respective Open Access
Transmission Tariffs;
MEC analysis of opportunities to increase efficiencies
MEHC and PacifiCorp will make notification filings pursuant to the Hart-Scott-Rodino
Antitrust Improvement Act of 1976 ("HSR Act"
).
The proposed transaction cannot be
consummated until the waiting periods prescribed in the HSR Act lapse.
As a non-operating owner of2.5% of the Trojan nuclear power plant, which is in the later
stages of decommissioning, PacifiCorp and MEHC must seek approval from the Nuclear
Regulatory Commission ("NRC") for an indirect transfer of the spent nuclear fuel license
resulting from the change in control of the licensee. The applicants must assure the NRC that
there will be no adverse impact on its ability to meet its financial obligations under the license
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protections MEHC will employ. He also will provide information regarding Berkshire
Hathaway.
Tom Specketer, Vice President of U.S. Regulatory Accounting and Controller ofMEC
will testify about the costs of formation of a service company to pro'lide-certain common
services to be urovided to PacifiCorp, MEC and other MEHC subsidiaries. Mr.
Specketer will describe the service company,the procedures for sharing services between
MEHC and its affiliates, the joint administrative services agreement applicable to MEHC
and its affiliates, and the implications and benefits for PacifiCorp customers. He will also
sponsor some of the regulatory oversight commitments being offered by MEHC and
Pacifi Corp.
HJeff Cust, 'lice President of.Energy Supply-Management of-MEC, 'vill testify regarding the
transmission path-that is planned to connect PaeifiCorp 'Nith-MEC and--the-JeiBt
Gperating i\.greement that \vill govern certain aspects of.the use of-that transmission path-.
CONCLUSION
MEHC has made more than 60 commitments to the public interest, customers and states
served by PacifiCorp. Included in these commitments are reductions in PacifiCorp' s costs
totaling more than $36 million over five years and more than $75 million over a longer period.
MEHC shareholders will also absorb $1 million of costs of a system-wide demand side
management study. In addition to these readily quantifiable benefits, MEHC is committing to
$1.3 billion of infrastructure investment in PacifiCorp s system.
MEHC looks forward to being able to invest in the future ofPacifiCorp, focusing upon
our identified objectives of customer satisfaction, reliable service, employee safety,
environmental stewardship and regulatory/legislative credibility. This application and testimony
demonstrate that it is committed to extending customer service standards and performance
guarantees, investing to improve transmission reliability and import capability, investing to
enhance wind power development, investing to reduce emissions from coal plants, and furthering
demand side management and energy efficiency. This will be done while maintaining our focus
on exceeding customer expectations. Lastly, but perhaps most importantly, we believe that
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Thomas B. Specketer, MEC's Vice President of U.S. Regulatory
Accounting and Controller, will testify about the costs of formation of-a
service company to provide-certain common services to be urovided to
PacifiCorp, MEC and other MEHC subsidiaries. Mr. Specketer will
describe-the service company, the procedures for sharing services between
MEHC and its affiliates, the joint administrative services agreement
applicable to MEHC and its affiliates, and the implications and benefits
for PacifiCorp customers. He will also sponsor some of the regulatory
oversight commitments being offered by MEHC and PacifiCorp.
-.Jeffefy--J. Gust, MEC's Vice President of.Energy Supply-Management, \yill
testify regarding the transmission patlHhat is planned to connect
Paei-fiCorp \vith-MEC and-the-Joint Operating .Agreement that '.vill govern
certain aspects of-the use of.that transmission path-.
In addition to each of the above-mentioned MEHC witnesses, Judi Johansen
President and CEO ofPacifiCorp, will testify regarding PacifiCorp s support for
the transaction and the reasons for the sale ofPacifiCorp by Scottish Power pic
ScottishPower
MEHC And Its Business Activities
Please explain the business activities of MEHC.
MEHC is a privately-held global company engaged primarily in the production
and delivery of energy from a variety of fuel sources - including coal, natural gas
geothermal, hydroelectric, nuclear, wind and biomass. MEHC has access to
significant financial and managerial resources through its relationship with
Berkshire Hathaway. The other three owners ofMEHC are Walter Scott, Jr.
(including family interests), David Sokol (Chairman and CEO ofMEHC) and me.
MEHC's global assets total approximately $20 billion, and its 2004 revenues
totaled $6.6 billion. MEHC's six major business platforms are as follows:
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offers significant benefits for PacifiCorp customers, employees and communities.
MEHC is uniquely suited to undertake the infrastructure investments
PacifiCorp faces in the coming years since it is privately-held and not subject to
shareholder expectations of regular, quarterly dividends and relatively high
returns on investments. MEHC's investors are focused on increasing value
through significant, long-term investment in well-operated energy companies that
offer predictable, reasonable returns.
MEHC's business strategy should provide PacifiCorp customers
employees, communities, and regulators with valuable stability. Indeed, they
would be justified in expecting that MEHC will be the last owner ofPacifiCorp.
As a result, PacifiCorp s management and employees will be able to focus on
exceeding customer expectations.
The opportunities for a successful transaction and transition are enhanced
by the significant similarities between PacifiCorp and MEC. As discussed by
MEHC witness Gale, the utilities ' similarities include: comparable service
territories
(~,
multi-state areas with relatively low population density and few
large urban centers); a mix of retail-access and traditionally regulated utility
business; a focus on customer satisfaction and employee safety; use of renewable
energy technologies; use of low-sulfur, Western-basin coals; a long history of
providing DSM and energy efficiency programs; and use of collaborative
processes to develop environmental, DSM and energy efficiency programs.
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over the post-acquisition five-year period. MEHC witness Goodman will
testify regarding this benefit in greater detail.
Corporate Overhead Charees:MEHC commits that the corporate
charges to PacifiCorp from MEHC the service company and MEC will not
exceed $9 million annually for a period of five years after the closing on
the proposed transaction. (In FY2006, ScottishPower s net cross-charges
to PacifiCorp are projected to be $15 million.MEHC witness Specketer
testifies regarding this benefit in greater detail.
Future Generation Options:In Exhibit No., MEHC and
PacifiCorp adopt a commitment to source future PacifiCorp generation
resources consistent with the then current rules and regulations of each
state. In addition to that commitment, for the next ten years, MEHC and
PacifiCorp commit that they will submit as part of any RFPs --including
renewable energy RFPs --a 100 MW or more utility "own/operate
proposal for the particular resource. It is not the intent or objective that
such proposals be favored over other options. Rather, the option for
PacifiCorp to own and operate the resource which is the subject of the
RFP will enable comparison and evaluation of that option against other
alternatives. In addition to providing regulators and interested parties with
an additional viable option for assessment, it can be expected that this
commitment will enhance PacifiCorp s ability to increase the proportion
of cost-effective renewable energy in its generation portfolio, based upon
the actual experience of MEC and the "Renewable Energy" commitment
offered below.
Renewable Enerev:MEHC reaffirms PacifiCorp s commitment to
acquire 1400 MW of new cost-effective renewable resources, representing
approximately 7% of PacifiCorp s load. MEHC and PacifiCorp commit
work with developers and bidders to bring at least 100 MW of cost-
effective wind resources in service within one year of the close of the
transaction.
MEHC and PacifiCorp expect that the commitment to build the Walla-
Walla and Path C transmission lines will facilitate up to 400 MW of
renewable resource projects with an expected in-service date of2008 -
2010. MEHC and PacifiCorp commit to actively work with developers to
identify other transmission improvements that can facilitate the delivery of
wind energy in PacifiCorp s service area.
In addition, MEHC and PPW commit to work constructively with states to
implement renewable energy action plans so as to enable achievement of
PacifiCorp s 1400 MW commitment.
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The commitments by MEHC and PacifiCorp, coupled with the continued
ability of PacifiCorp management to make state policy and business decisions
will allow PacifiCorp to continue its efforts to expand energy efficiency system-
wide, and take advantage of its increased financial resources to upgrade its current
institutional capacities to acquire cost-effective savings.
Are there other benefits that will accrue to customers as a result of the
proposed transaction?
Yes. Benefits also result from making the commitments contained in Exhibit No.
2 uniform across all states. With the exception of a few state-specific
commitments noted in that exhibit, the commitments will be applied in all six
states. This will enable regulators to have a consistent and readily identifiable set
of commitments and simplify administration for PacifiCorp. Because the
previous commitments were not uniform across the states, uniform application of
the commitments will mean that every state will be receiving some additional
commitments that were not previously applicable to it.
We also believe that the benefit ofMEHC's long-term ability and
willingness to invest in energy infrastructure is significant and real but not readily
capable of quantification. Similarly, the stability of ownership of MEHC and
Berkshire Hathaway provides security for customers, employees and the states
served.
i n Paeifiearp Operations Post TrasaetioR
How will PacifiCorp operate after completion of the transaction?
PacifiCorp will operate very much like it does today. PacifiCorp will become a
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EXHIBIT NO.
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Exhibit No.1, Page 2 of 6
CASE NO. P AC-O5-
Witness: Gregory E. Abel
the Mid-Columbia (at Vantage). Either of these projects presents
opportunities to enhance PacifiCorp s ability to accept the output
from wind generators and balance the system cost effectively in a
regional environment.
Other Transmission and Distribution Matters:MEHC and PacifiCorp
make the following commitments to improve system reliability:
investment in the Asset Risk Program of$75 million over the three
years, 2007-2009
investment in local transmission risk proj ects across all states of
$69 million over eight years after the close of the transaction
0 & M expense for the Accelerated Distribution Circuit Fusing
Program across all states will be increased by $1.5 million per year
for five years after the close of the transaction, and
extension of the O&M investment across all states for the Saving
SAID I Initiative for three additional years at an estimated cost of
$2 million per year.
MEHC and PacifiCorp will also support the Bonneville Power
Administration in its development of short-term products such as
conditional firm and redispatch products. PacifiCorp will also initiate a
process to collaboratively design similar products at PacifiCorp.
Reduced Cost of Debt:MEHC believes that PacifiCorp s incremental
cost of long-term debt will be reduced as a result of the proposed
transaction, due to the association with Berkshire Hathaway. Historically,
MEHC's utility subsidiaries have been able to issue long-term debt at
levels below their peers with similar credit ratings. MEHC commits that
over the next five years it will demonstrate that PacifiCorp s incremental
long-term debt issuances will be at a yield ten basis points below its
similarly rated peers. Ifit is unsuccessful in demonstrating that PacifiCorp
has done so, PacifiCorp will accept up to a ten (10) basis point reduction
to the yield it actually incurred on any incremental long-term debt
issuances for any revenue requirement calculation effective for the five-
year period subsequent to the approval of the proposed acquisition. It is
projected that this benefit will yield a value roughly equal to $6.3 million
over the post-acquisition five-year period. MEHC witness Goodman will
testify regarding this benefit in greater detail.
Corporate Overhead Charees:MEHC commits that the corporate
charges to PacifiCorp from the service companyMEHC and MEC will not
exceed $9 million annually for a period of five years after the closing on
the proposed transaction. (In FY2006, ScottishPower s net cross-charges
to PacifiCorp are projected to be $15 million.MEHC witness Specketer
testifies regarding this benefit in greater detail.
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19 MEHCMECH and PacifiCorp Commitments
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PacifiCorp will become a separate business platform under MEHC, with
its own business plan, its own management, its own state policies, and the
responsibility for making decisions that achieve the objectives identified
in the testimony ofMEHC witness Mr. Abel (i., customer satisfaction
reliable service, employee safety, environmental stewardship, and
regulatoryllegislative credibility).
The many similarities between MEC and PacifiCorp will facilitate an easy
transition ofPacifiCorp as a separate subsidiary ofMEHC.
MEC's operations, as a subsidiary ofMEHC, provide demonstrable
evidence that PacifiCorp will have the ability to continue its emphasis on
key utility performance areas such as: customer service; safety; integrated
resource planning; a balanced mix of generating resources, including
renewable generation; use of energy efficiency and demand-side
management ("DSM"); investment in environmental emission control
technology; and collaborative processes.
Please explain the uniform set of commitments you referenced.
MEHC and PacifiCorp have reviewed the commitments required by the six states
in the Scottish Power pIc ("ScottishPower ) transaction. We have also met with
numerous groups that may have an interest in this transaction and asked them to
identify the risks and concerns that they have at this time.
Exhibit No.2 responds to the risks and concerns addressed in the previous
PacifiCorp transaction and to many of the risks and concerns that have been
raised in the meetings with interested groups. This Exhibit identifies MEHC'
and PacifiCorp s commitments to address these risks and concerns. The new
commitments sponsored by MEHC witness Mr. Abel address other concerns
expressed in the meetings with interested groups. MEHC and PacifiCorp propose
that the commitments in this Exhibit and those in MEHC witness Mr. Abel'
Exhibit No., supersede prior commitments and apply upon the close of the
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and practicable; such conditions include ice, floods, tornados, storms and
snow.
Regulated delivery and electric supply services are provided in multiple
state jurisdictions, with at least one state having competitive retail electric
supply access.
The economy of the service area is significantly tied to the land
(agriculture, forestry, and mining).
On the whole, the area served has a comparatively low-density population
except for a few major population centers.
The maps attached to Exhibit No.3 provide some additional information
regarding the similarities.
MidAmerican Energy Company
Please provide some historical background on MEC.
MEC and its predecessor corporations (~., Iowa Power Inc., Iowa-Illinois Gas
and Electric Company, Iowa Public Service Company and their respective
predecessors) have been uroviding electric service in Iowa, Illinois and South
Dakota for approximately 100 years. MEC is the product of a merger between
Midwest Power Systems Inc. and Iowa-Illinois Gas and Electric Company in
1995. Midwest Power Systems Inc., in turn, was the result ofa prior merger
between Iowa Power Inc. and Iowa Public Service Company1 in 1992. In 1999
MEC was acquired by CalEnergy Company Inc. (subsequently known as
MidAmerican Energy Holdings Company" or "MEHC"), and in 2000, MEHC
and an investor group comprised of Berkshire Hathaway Inc, Walter Scott, Jr. (a
director ofMEHC), David Sokol (Chairman and Chief Executive Officer of
1 The utilities ' parent holding companies (non-registered , exempt holding companies),
Iowa Resources Inc. and Midwest Energy Company, were previously merged in 1990 creating a
new holding company (also a non-registered, exempt holding company) called Midwest
Resources Inc.
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increase in the percentage discussed in PacifiCorp witness Johansen s testimony.
Please also note the commitment, Revenue Requirements Impacts B , of Exhibit
No.
Review and Approval of the Transaction
Please describe the various reviews andlor approvals of the transaction that
MEHC anticipates.
Following are the shareholder and regulatory reviews anticipated with respect to
the proposed transaction:
approval of the shareholders of ScottishPower;
approval and/or waiver from the public utility commissions in the states of
California, Idaho, Oregon, Utah, Washington, and Wyoming;
approval of the transfer of the Trojan spent fuel storage license by the U.
Nuclear Regulatory Commission;
approval of the transfer of jurisdictional facilities by the Federal Energy
Regulatory Commission ("FERC") under Section 203 of the Federal
Power Act;
approval by FERC of revisions to the open access transmission tariffs of
PacifiCorp and MEC and-approval-ef.their joint operating agreement
under Section 205 of the Federal Power Act;
aathorization By-the U.S. Securities and--B*Sl1ange Commission ("
efMBHC's acquisition (and ScottishPo\ver sa~Corp;
as a registered--hekling company system and engage in ongoing financing
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REVISED 8/17/05
aBd investment activities and-ether transactions fello'liing registration of
HeMing Company ct of.-l935 (~Cf~
review of the proposed transaction by the U.S. Department of Justice
under the Hart-Scott-Rodino Act; and
approval by the Federal Communications Commission of the change of
control with respect to certain communication licenses held by PacifiCorp.
Is-this traBsaetioB eoBtiBgeBt upon repea~
No.
Do you expeet the proposed Requisition to be autheffied..-by the SEC under
PUHC~s.
Yes Based-eft-discussions 'NitR-SEC staff.aB&-the assessments of-legal counsel-,
lie expect the transaction to be authorized-by-the-8EC under4he terms and
precedents of...pgJIC.L ... 'If e 6elieve lie can demonstrate that-the acquisition ,tVill
satisfy-the stand-affis under Section 1-()..efp.yHC.L that require a utility acquisition
te-be-for reasona91e and-fair consideration, to not undWy concentrate control-ef
f*l&lic utilities, to not undWy complicate the capital structure of-atility systems
aBd to tend tov/ards-tl1e-dEwelopment of an integrated-fmlHic utility system.
+he consideration fer-the transaction vias the result-ef anTIS leftgth
bargaining. The acquisition does not create an undaly-large utility company
compared to many others in the U., particulafly in terms of number of
customers served-:---+he transaction does not result in a complicated-eapital
Gale, Di - 30
PacifiCorp
.L
...
.L
REVISED 8/17/05
must be eapa~ntereonneetion and eoordinated operations and be ,vithin
discussed-ffi-MBHC v/itness Gust's testimony, the companies plan to obtain a
contract patlHhat \vi1l-permit them to transfer pO'Ner betv/een themselves. Mf-.
Gust also explains the joint operating agreement that ~NiY-allov/ coordinated
eperations.
We-belie'le the integrated system also 'Nill satisfy-the so called single area
or region requirement of-POOC.L ~. The utilities operate in contiguous states, in
contrast to many approved--and pending transactions invol'/ing PYHC.A registered
a region characterized-by relati'le~ation density and-looal economies
~ agriculture, forestry, and mining). 'Ihe region is alse
eharacterized-by a preponderance of-tmblic poy/er entities and-large transmission
systems relative to lead. See ~o. 3. There are other-factors V/hieh
support our opinion, and-these 'Nill-be set f-efth in our SBG-4Hing V/hieh-will-be
. . .
transmission path benveen PaeifiCorp and MEC?
MBHC v/oukl continue to pursue acquisition of a transmission patlHf it vlere
economically justifted-.
Gale, Di - 31
PacifiCorp
.L
...
REVISED 8/17/05
How will--tke eosts of-the transmission serviees assoeiated--witk the path be
costs of-the transmission services associated-witlHhe patlriH-PaeifiCorp s rates
except to the extent that-beBefits to customers can Be-shov/n to offset-the costs.
MEHC's organmmon as a registered-hekling eompany undeF-PYIICA will
fter-the transaction, MBHC '.vill-be a registered-hekling company, subject to the
full regulatory regime of-PYHC.A. MBHC '.vill-form a shared services company
ServCo )--that 'Ni~orm a small number of management services ferMBHG
sOOsidiaries. MBHC 'vitness Specketer addresses the ServCo in greater detail-ffi:
his testimony. Othef\vise, MBHC's status as a registered-hekling company \yill
have minimal impact on PaeifiCorp, \vhieh-will operate as a stand..alefle-business
Market Monitor and Transmission Services Coordinator
Please describe the Market Monitor Proposal that MEHC has put forward in
connection with its proposed acquisition of PacifiCorp.
Under the proposal, MEC and PacifiCorp would each contract with a market
monitor to assure nondiscrimination in the management of each company
transmission systems commencing on the day of the closing of the acquisition.
market monitor is an independent organization retained to review, on an after-the-
fact basis, transmission system operations necessary to ensure the transmission
Gale, Di - 32
PacifiCorp
REVISED 8/17/05
TSC. Ultimately, the TSC may provide transmission services to an area abutting
that of Grid West. At such time, it may be appropriate to put into place a seams
agreement between the TSC and Grid West to enhance transmission system
coordination among transmission users in the states served by PacifiCorp and
MEC.
Proposed Schedule
When does MEHC expect to complete the process of obtaining all of the
foregoing approvals and reviews?
We very much want to complete all of the state approvals by February 28 2006
in time to close on the transaction on or before March 31 , 2006. This is an
important transaction for PacifiCorp customers, employees and communities. In
order to mitigate the ill effects of uncertainty and expedite the delivery of
important benefits, we respectfully request that the Commission act in a manner
that will facilitate an order by February 28 2006.
Closing on that date will also facilitate the transition ofPacifiCorp
financial reporting from a fiscal year ending March 31 as used by Scottish Power
to a calendar fiscal year consistent with how MEHC companies report their
financial statements. Such calendar year reporting is also consistent with
regulatory reporting, which should enable regulators to utilize a single year
audited financial statements rather than have regulatory reporting span two fiscal
years.
it '.vill not act in ad'/ance of approvals-from the respective state public utility
Gale, Di - 34
PacifiCorp
REVISED 8/17/05
commISSIons.
pressuring the states to act in a particular manner, to a'loid rendering decisions on
theoretical transactions, and to a'/oid impacting share-prices an~aving
ask-the Commission not to delay its ruling on the acquisition in
SEC v/ill-mle first.
Does this conclude your testimony?
Yes, it does.
Gale, Di - 35
PacifiCorp
REVISED PAGE TO GALE
EXHIBIT NO.
Marked Version
REVISED 8/17/05
REVISED 8/17/05 PacifiCorp
Exhibit No.2, Page 2 of 8
CASE NO. P AC-O5-
Witness: Brent E. Gale
PacifiCorp and MEHC will not cross-subsidize between the regulated and
non-regulated businesses or between any regulated businesses, and shall
comply with the Commission s then-existing practice with respect to such
matters. (Witness Specketer)
Due to P CA re eal neither Berkshire Hathawa nor MEHC will be
registered uublic utilitv holding comuanies under PUHCA. Thus. no
waiver bv Berkshire Hathawav or MEHC of anv defenses to which they~Ohio Power Co. v. FERC. 95~ 779 (p.C. CiL1
cert. denied sub nom. A,rcadia v. Ohio Power Co.. 506 U.S.
Ohio Power is necessar to maintain the Commission s re lation of
MEHC and PacifiCom. However. while PUHCA is in effect. Berkshire
l!&hawav and~C waive suc~enses
::!:
not assert in any future Commission proceeding that-the-provisions of.the
Pualic Utility-HeMing Company .Act of-l935 or the-related-Ghieo'Ner v
FBRC case preempHhe Commission s jurisdiction o'ler af4iHated interest
proceedings. hHhe e'/ent t~C.L is repealeE:l or modHiea-,
PaeifiCorp and-MBHC agree not to seek any preemption under any
. (Witness Specketer)
Any diversified holdings and investments
(~,
non-utility business or
foreign utilities) ofMEHC and PacifiCorp following approval of the
transaction will be held in a separate company(ies) other than PacifiCorp,
the entity for utility operations. Ring-fencing provisions (i., measures
providing for separate financial and accounting treatment) will be
provided for each of these diversified activities, including but not limited
to provisions protecting the regulated utility from the liabilities or
financial distress ofMEHC. This condition will not prohibit the holding
of diversified businesses. (Witness Goodman)
PacifiCorp or MEHC will notify the Commission subsequent to MEHC'
board approval and as soon as practicable following any public
announcement of: (1) any acquisition of a regulated or unregulated
business representing 5 percent or more of the capitalization ofMEHC; or
(2) the change in effective control or acquisition of any material part or all
ofPacifiCorp by any other firm, whether by merger, combination, transfer
of stock or assets.
Within 30 days of receiving all necessary state and federal regulatory
approvals of the final corporate and affiliate cost allocation methodology,
a written document setting forth the final corporate and affiliate cost
methodology will be submitted to the Commission. On an on-going basis
the Commission will also be notified of anticipated or mandated changes
to the corporate and affiliate cost allocation methodologies. (Witness
Specketer)
Any proposed cost allocation methodology for the allocation of corporate
and affiliate investments, expenses, and overheads, required by law or rule
to be submitted to the Commission for approval, will comply with the
following principles:(a) For services rendered to PacifiCorp or each cost category subject
to allocation to PacifiCorp by MEHC or any of its affiliates
MEHC must be able to demonstrate that such service or cost
category is necessary to PacifiCorp for the performance of its
regulated operations, is not duplicative of services already being
performed within PacifiCorp, and is reasonable and prudent.
Cost allocations to PacifiCorp and its subsidiaries will be based on
generally accepted accounting standards; that is, in general, direct
costs will be charged to specific subsidiaries whenever possible
and shared or indirect costs will be allocated based upon the
primary cost-driving factors.
MEHC will have in place time reporting systems adequate to
support the allocation of costs of executives and other relevant
personnel to PacifiCorp.
An audit trail will be maintained such that all costs subject to
allocation can be specifically identified, particularly with respect to
their origin. In addition, the audit trail must be adequately
supported. Failure to adequately support any allocated cost may
result in denial of its recovery in rates.
Costs which would have been denied recovery in rates had they
been incurred by PacifiCorp regulated operations will likewise be
denied recovery whether they are allocated directly or indirectly
through subsidiaries in the MEHC group.
Any corporate cost allocation methodology used for rate setting,
and subsequent changes thereto, will be submitted to the
Commission for approval if required by law or rule. (Witness
Specketer)
(b)
(c)
(d)
(e)
REVISED 8/17/05 PacifiCorp
Exhibit No., Page 3 of 8
CASE NO. PAC-O5-
Witness: Brent E. Gale
(f)
ef repeal, commence discussions \yitlHhe Commission regarding any
impact of repeal on state regulation.
Financial Integrity
PacifiCorp will maintain separate debt and, if outstanding, preferred stock
ratings. PacifiCorp will maintain its own corporate credit rating, as well
as ratings for each long-term debt and preferred stock (if any) issuance.
(Witness Goodman)
MEHC and PacifiCorp will exclude all costs of the transaction from
PacifiCorp s utility accounts. Within 90 days following completion of the
transaction, MEHC will provide a preliminary accounting of these costs.
Further, MEHC will provide the Commission with a final accounting of
these costs within 30 days of the accounting close. (Witness Goodman)
REVISED 8/17/05 PacifiCorp
Exhibit No.2, Page 4 of 8
CASE NO. P AC-O5-
Witness: Brent E. Gale
The premium paid by MEHC for PacifiCorp will be recorded in the
accounts of the acquisition company and not in the utility accounts of
PacifiCorp. MEHC and PacifiCorp will not propose to recover the
acquisition premium in PacifiCorp s regulated retail rates; provided
however, that if the Commission in a rate order issued subsequent to the
closing of the transaction reduces PacifiCorp s retail revenue requirement
through the imputation of benefits (other than those benefits committed to
in this transaction) accruing from the acquisition company (PPW Holdings
LLC), Berkshire Hathawav.or MEHC, MEHC and PacifiCorp will have
the right to propose upon rehearing and in subsequent cases a symmetrical
adjustment to recognize the acquisition premium in retail revenue
requirement. (Witness Goodman)
MEHC and PacifiCorp will provide the Commission with unrestricted
access to all written information provided to credit rating agencies that
pertains to PacifiCorp. (Witness Goodman)
PacifiCorp will not make any distribution to PPW Holdings LLC or
MEHC that will reduce PacifiCorp s common equity capital below 40
percent of its total capital without Commission approval. PacifiCorp
total capital is defined as common equity, preferred equity and long-term
debt. Long-term debt is defined as debt with a term of one year or more.
The Commission and PacifiCorp may reexamine this minimum common
equity percentage as financial conditions or accounting standards change
and may request that it be adjusted. (Witness Goodman)
The capital requirements ofPacifiCorp, as determined to be necessary to
meet its obligation to serve the public, will be given a high priority by the
Board of Directors ofMEHC and PacifiCorp. (Witness Goodman)
PacifiCorp will not, without the approval of the Commission, assume any
obligation or liability as guarantor, endorser, surety or otherwise for
MEHC or its affiliates, provided that this condition will not prevent
PacifiCorp from assuming any obligation or liability on behalf of a
subsidiary ofPacifiCorp. MEHC will not pledge any of the assets of the
regulated business ofPacifiCorp as backing for any securities which
MEHC or its affiliates (but excluding PacifiCorp and its subsidiaries) may
issue. (Witness Goodman)
Revenue Requirement Impacts
MEHC and PacifiCorp, in future Commission proceedings, will not seek a
higher cost of capital than that which PacifiCorp would have sought if the
transaction had not occurred. Specifically, no capital financing costs
should increase by virtue of the fact that PacifiCorp was acquired by
MEHC.
MEHC and PacifiCorp guarantee that the customers ofPacifiCorp will be
held harmless if the transaction between MEHC and PacifiCorp results in
a higher revenue requirement for PacifiCorp than if the transaction had not
REVISED 8/17/05 PacifiCorp
Exhibit No., Page 5 of 8
CASE NO. PAC-O5-
Witness: Brent E. Gale
occurred. However, this hold harmless provision shall not apply to
incremental costs associated with cost-effective investments in renewable
and thermal generation, energy efficiency programs, demand-side
management programs, environmental measures, and transmission and
distribution facilities approved by the Commission.
Environment
PacifiCorp will continue its Blue Sky tariff offering in all states.
PacifiCorp will continue its commitment to gather outside input on
environmental matters, such as through the Environmental Forum.
PacifiCorp will continue to have environmental management systems in
place that are self-certified to ISO 14001 standards at all PacifiCorp
operated thermal generation plants.
Communities
MEHC will maintain the existing level ofPacifiCorp s community-related
contributions, both in terms of monetary and in-kind contributions.
MEHC will continue to consult with regional advisory boards to ensure
local perspectives are heard regarding community issues.
Employees
MEHC will honor existing labor contracts with all levels of staff.
MEHC and PacifiCorp will make no changes to employee benefit plans
for at least two (2) years following the effective date of the Stock Purchase
Agreement.
Planning
PacifiCorp will continue to produce Resource Plans every two years
according to the then current schedule and the then current Commission
rules.
When acquiring new generation resources in excess of 100 MW
PacifiCorp and MEHC will issue Requests for Proposals (RFPs) oraaa
otherwise comply with state laws, regulations and orders that pertain to
procurement of new generation resources.
REVISED PAGES TO GOODMAN
DIRECT TESTIMONY
Marked Version
REVISED 8/17/05
REVISED 8/17/05
remaining subsidiaries of PHI, including PPM Energy, Inc., will remain with
ScottishPower.
MEHC1\fECH Corporate Structure
Please discuss MEHC's corporate structure and PacifiCorp s place in that
structure.
Upon completion of the transaction, PacifiCorp will be an indirect wholly-owned
subsidiary of MEHC as illustrated in the simplified MEHC organizational chart
provided with my testimony as Exhibit No.1 O. This structure will help facilitate
the implementation of the "ring-fencing" concept that is addressed later in my
testimony.
~MEHC Captial Structure
Please describe MEHC's capital structure.
Table 1 below illustrates the pre-transaction capitalizations ofMEHC and
PacifiCorp, followed by the pro forma, combined capitalization of MEHC after
the proposed transaction occurs. At this point I would direct your attention to the
MEHC capitalization prior to the acquisition. It can be seen that MEHC'
stockholder s equity is composed of five items:
zero coupon convertible preferred stock
common stock
additional paid-in capital
retained earnings, and
accumulated other comprehensive loss, net.
Goodman, Di - 3
PacifiCorp
REVISED 8/17/05
Table 1
l\-fi€l~nelirall Energy Holdings CoIDlumy
Ulla\ulite(l Pro fonna Collsolidate(l LOllg- T enn CalJitalizatioll
As ofMarck31,2005
(In millions)
Pro Fonna
MEIIC PacifiCol1l Adjustments MEIIC Pro Fonna
Long-tenn Debt:
Parent company senior debt 773.1 19.709.(1) $482.19.
Parent company subordinated debt(2)586.11.586.
Subsidiarv and project debt 358.45.629.987.43.
T otal10ng- tenn debt 718.3 77.1%629.709.057.1 70.
Preferred securities of subsidiaries 89.3 52.41.3 (3)183.1
Stockholders' equity:
Zero coupon convertible preferred stock, no par value
Preferred stock, $100 stated value 41.3 (41.(3)
Conunon stock, no par value
Additional paid-in capital 950.894.1 (2,894.1)(4)370.
3,419.(1)
Retained earnings 309.3 446.4 (446.(4)309.3
Accumulated other comprehensive loss. net (166.(4.(4)(166.3)
Total stockholders' equity 093.22.377.1 42.513.4 28.
Totallo:ne: - tenn capitalization 901.3 100.$ 7 058.793.$ 22 753.100.
For the purposes of the pro Forma long-term capitalization table, it has been assumed that the acquisition was completed on March 31, 2005. Consequently, the total long-term capitalization of
PaciFiCorp does not reFlect the Following:
the additional equity inllestment by ScottishPower in P aciFiCorp of $500.0 million during the Fiscal year ended March 31, 2006;
eHpected dillidends, totaling $214.8 million, to be paid to ScottishPower by PaciFiCorp For the Fiscal year ending March 31. 2006;-
eHpected earnings, debt issuances and debt retirements of P aciFiCorp For the Fiscal year ending March 31, 2006; and
eHpected earnings, debt issuance and debt retirement of MEHC and its current subsidiaries For the period ending March 31, 2006.
Certain reclassiFications halle been made to PaciFiCorp's historical presentation in order to conForm to MEHC's historical presentation.
(1) Pursuant to terms of the Stock Purchase Agreement, MEHC will pay ScottishPower $5.1 billion in cash in e"change For100X of PaciFiCorp's common stock. The total estimated purchase
price of the acquisition is as Follows (in millions):
Common "took or~.iiero coupon conllertible non-lloting preFerred stock of MEHC $ 3,419.
Long-term senior unsecured debt of MEHC
Total estimated purchase price
(2) Parent company subordinated debt consists of the Following at March 31, 2005:
Berkshire trust preFerred securities
Other trust preFerred securities
Total parent company subordinated debt
17098
!I I?!! !I
1.289.
2972
l"A~4
(3) Pursuant to the terms of the Stock Purchase Agreement, PaciFiCorps preFerred stock which is classiFied in PaciFiCorp s March 31, 2005 balance sheet as part of stockholders equity will
remain outstanding. For purposes of the pro Forma capitalization table the preFerred stock, totaling $41.3 million, was reclassiFied to preFerred securities of subsidiaries.
(4) Represents the pro Forma adjustments to eliminate the historical stockholders' equity of PaciFiCorp.
Goodman, Di - 5
PacifiCorp
REVISED 8/17/05
Table 2
Credit Ratings - July 2005
Standard & Poor Moody s Investor Fi tchRatings
Service
Berkshire Hathaway AAA Aaa AAA
MidAmerican
Energy Holdings BBB-Baa3 BBB
Company
MidAmerican
Energy Company
Northern Natural
Gas Company
Kern River Gas
TransmIssion Co.
Northern Electric
Distribution Ltd BBB+
Yorkshire Electricity
Distribution pIc BBB+
Financing and Mechanics of the Transaction
Please describe the steps that will be taken to effectuate the transaction.
A limited liability company ("LLC"), PPW Holdings LLC, has been established
as a direct subsidiary of MEHC. This LLC will receive, as an equity infusion
$5.1 billion raised by MEHC through the sale of either common stock or zero
coupon convertible preferred stock to Berkshire Hathaway and the issuance of
long-term senior notes, preferred stock, or other securities with equity
characteristics to third parties. However, the LLC will have no debt of its own.
The LLC will, as provided in the Stock Purchase Agreement, pay PHI $5.1 billion
in cash, at closing, in exchange for 100 percent of the common stock of
PacifiCorp. In addition, it is projected that approximately $4.3 billion in net debt
and preferred stock ofPacifiCorp will remain outstanding as obligations of
PacifiCorp.
Goodman, Di - 7
PacifiCorp
REVISED 8/17/05
Prior to the expected closing date of March 31 , 2006, ScottishPower has
agreed to make $500 million in additional capital contributions to PacifiCorp, and
PacifiCorp is expected to pay $214.8 million of dividends to ScottishPower.
Provision for additional capital contributions have been made in the Stock
Purchase Agreement if the acquisition has not closed by that date.
Please describe how the acquisition of PacifiCorp by MEHC will be financed.
As described above, MEHC expects to fund the transaction with the proceeds
from an investment by Berkshire Hathaway of approximately $3.4 billion in either
common stock or zero coupon non-voting convertible preferred stock of MEHC
and the issuance by MEHC to third parties of approximately $1.7 billion of long-
term senior notes, preferred stock, or other securities with equity characteristics.
However, the transaction is not conditioned on such financing and if funds were
not available from third parties, Berkshire Hathaway is expected to provide any
required funding. The pro forma capital structure ofMEHC after the acquisition
is shown in Table 1 above, assuming $1.7 billion of long-term debt is issued by
MEHC. The nro forma schedule is unaffected if. ultimatelv. either common stock
or zero couuon convertible nreferred stock is issued.The timing and composition
of these financings are flexible and subject to modification as market conditions
change. It is not anticipated that there would be any restrictive covenants
associated with the proposed financing different from those typical of an
investment grade financing.
Are you aware of any benefits to PacifiCorp due to MEHC's relationship
with Berkshire Hathaway?
Goodman, Di - 8
PacifiCorp
Premium Paid
Rating Agency Presentations
Minimum Common Equity
Ratio
Capital Requirements to Meet
Obligation to Serve
Assuming Liabilities/Pledging
Assets
REVISED 8/17/05
the accounting close.
The premium paid by MEHC for PacifiCorp
will be recorded in the accounts of the
acquisition company and not in the utility
accounts ofPacifiCorp. MEHC and PacifiCorp
will not propose to recover the acquisition
premium in PacifiCorp s regulated retail rates;
provided, however, that if the CommissIon in a
rate order issued subsequent to the closing of
the transaction reduces PacifiCorp s retail
revenue requirement through the imputation of
benefits (other than those benefits committed to
in this transaction) accruing from the
acquisition company (PPW Holdings LLC),
Berkshire Hathawa or MEHC, MEHC and
PacifiCorp will have the right to propose upon
rehearing and in subsequent cases a
symmetrical adjustment to recognize the
acquisition premium in retail revenue
requirement.
MEHC and PacifiCorp will provide the
Commission with unrestricted access to all
written information provided to credit rating
agencies that pertains to PacifiCorp.
PacifiCorp will not make any distribution to
PPW Holdings LLC or MEHC that will reduce
PacifiCorp s common equity capital below 40
percent of its total capital without Commission
approval. PacifiCorp s total capital is defined
as common equity, preferred equity and long-
term debt. Long-term debt is defined as debt
with a term of one year or more. The
Commission and PacifiCorp may reexamine this
minimum common equity percentage as
financial conditions or accounting standards
change, and may request that it be adjusted.
The capital requirements of PacifiCorp, as
determined to be necessary to meet its
obligation to serve the public, will be given a
high priority by the Board of Directors of
MEHC and PacifiCorp.
PacifiCorp will not, without the approval of the
Commission, assume any obligation or liability
as guarantor, endorser, surety or otherwise for
MEHC or its affiliates, provided that this
condition will not prevent PacifiCo PaeifGefp
Goodman, Di - 15
Pacifi Corp
REVISED 8/17/05
Second, in the event ofMEHC's involuntary or voluntary liquidation, dissolution
recapitalization, winding-up or termination or a merger, consolidation or sale of
all or substantially all ofMEHC's assets.
Please describe the rights Berkshire Hathaway will have upon conversion of
the zero coupon convertible preferred stock of MEHC
:!:
Upon conversion Berkshire Hathaway would have the rights of a common
stockholder and the ability to elect nine of the ten members ofMEHC's board of
directors. The additional $3.4 billion of common shares associated with the
~Com transac~zero coupon convertible preferred steek-stock. if issued
~hen conve~ ill increase Berkshire Hathaway s proportion of ownership
but would otherwise not affect any of the rights Berkshire Hathaway had without
the additional investment.
Why have you provided this information regarding Berkshire Hathaway
conversion rights?
On or shortl after the effective date of
reDeal of PUHCA.Berkshire Hathaway will exercise its conversion rights. This
willv/ould create a technical change in control of MEHC.
conversion will occur Drior to the close of this transaction.Pursuant to the
, MEHC and PacifiCorp
wish toweWd provide the Commission with this notice of the conversion which is
associated with the re eal ofPUHCA
required
Goodman, Di - 20
PacifiCorp
REVISED 8/17/05
ApDrovals are required from FERC. the Nuclear Rewlatorv Commission. the
Iowa Utilities Board and the Illinois Commerce Commission. A filing will also
be required with the U.S. DeDartment of JusticeIFederal Trade Commission
Dursuant to the Hart-Scott-Rodino Act. As of the date of this testimonv. all filings
had been made exceDt the Hart-Scott-Rodino. All required approvals are
exDected before vear-end 2005.
Will Berkshire Hathaway have any involvement in the day to day operations
, it will not. Prior to conversion. Mr. Scott and associated familv interests had
the right to elect a majority of the members of the MEHC Board of Directors, and
Berkshire Hathawa had the ri t to elect 200 of the Board. Neither Mr. Scott
nor Berkshire Hathawav had any influence or involvement in the dav-to-dav
operations of the business units ofMEHC. That is not exnected to change when
Berkshire Hathawav is able to elect a maioritv of the Board.
steek, including the--faB6amental transactions l-discussed-previously, are not
Neither MEHC nor PacifiCom is or will be required to borrow from Berkshire
Hathawav. However. MEHC mav choose to request debt or eQuitv funds from
Goodman, Di - 21
PacifiCorp
REVISED 8/17/05
Berkshire Hathawav. for examDle. if it Dursues additional acquisitions.
As a eneral rule subsidiaries of MEH includin PacifiCo if this
DroDosedj:ransaction is aDDrovedj are exDec~o oDera~onomous~
MEHC and Berkshire Hathawav. This includes arranging their own financing and
being responsible for maintaining and/or imDroving their credit standing.
Conclusion
Does this conclude your direct testimony?
Yes, it does.
Goodman, Di - 22
PacifiCorp
REVISED PAGE TO GOODMAN
EXHIBIT NO.
Marked Version
REVISED 8/17/05
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REVISED PAGES TO SPECKETER
DIRECT TESTIMONY
Marked Version
REVISED 8/17/05
REVISED 8/17/05
Please state your name, employer and business address.
My name is Thomas B. Specketer, MidAmerican Energy Company ("MEC"), 666
Grand Avenue, Suite 2900, Des Moines, Iowa 50309.
What is your position in the company and your previous work experience?
I am currently vice president U.S. regulatory accounting and MEC controller.
primary duties include responsibility for all accounting, financial reporting,
regulatory reporting, tax and budgeting activities for MEC, and regulatory
accounting oversight for all domestic regulated entities in the MidAmerican
Energy Holdings Company ("MEHC") group. I have been employed by MEC , or
one of its predecessor companies, for over 25 years. During this time, I have held
various staff and managerial positions within the accounting, tax and finance
organizati ons.
What is your educational background and your involvement in professional
associations?
I received a Bachelor of Science degree in mathematics from Morningside
College. In addition to formal education, I have also attended various
educational, professional and electric industry related seminars during my career
at MEC. I am a member of Edison Electric Institute s Chief Accounting Officers
Committee and a past member of the Tax Executives Institute, Iowa Association
of Tax Representatives and Institute of Management Accountants.
Please describe the purpose of your testimony.
The chief purpose of my testimony is to provide an overview of the process by
which shared services costs will be distributed to PacifiCorp and other MEHC
Specketer, Di -
PacifiCorp
REVISED 8/17/05
subsidiaries after completion of the proposed transaction. Therefore, my
testimony will address the creation of-a-shared services entity,allocation
methodologies expected to be employed, the service agreement contract that will
govern the shared services to be rendered, and the expected costs to PacifiCorp of
shared services under MEHC ownership, in contrast to those PacifiCorp
experienced under Scottish Power pic ("ScottishPower ) ownership.
Additionally, I will address other accounting issues pertinent to this transaction
that may be of interest to the Commission and sponsor some of the commitments
in MEHC witness Gale s Exhibit No.
Accounting Changes
Please discuss accounting changes brought about by this transaction.
PacifiCorp will operate very much as it does today. Upon the closing of the
transaction, however, it is MEHC's intent to transition PacifiCorp to a calendar
year-end in contrast to its present March 31 fiscal year-end. The change in year-
end will assure greater consistency in information supplied to PacifiCorp
various regulatory bodies and investors, and assure that financial information
provided to MEHC is on a basis consistent with other MEHC subsidiaries.
Shared Services~
What cost changes will occur as a result of this transaction?
As mentioned previously, PacifiCorp will operate very much as it does today and
accordingly, most costs incurred by PacifiCorp will not change as a result of this
transaction. One exception is the cost of corporate shared services. With the
change in ownership, PacifiCorp will no longer incur shared services costs from
Specketer, Di - 2
PacifiCorp
REVISED 8/17/05
ScottishPower, but will incur costs of a similar nature from certain subsffiiaries of
MEH C and MEC.
If the Public Utilitv Holding ComDanv Act of 1935 had remained in effect. shared
comorate services would have been Drovided bv a new service comDanv. With
the repeal of that law. there is no need to form a new comDanv. The DeoDle who
are MEHC emDlovees Droviding shared comorate services can continue to remain
holding comDanv emDlovees. MEHC will have the same svstems in Dlace that a
service comvanv would have had to ensure that costs are caDtured and DroDerlv
billed and/or allocated to all entities in the MEHC grOUV that benefit from the
services Drovided. including MEHC. PacifiCorp and MEC.
Please describe how shared costs, common to multiple subsidiaries of MEHC,
will be charged to PacifiCorp.
Common costs ofMEHC will originate in two entities: in MEHC itself. and in
nevI shared services company ("ServCo )--aBd-MEC. MEC, a vertically integrated
utility owned by MEHC, serves regulated and unregulated electric and gas
customers primarily in Iowa, Illinois, South Dakota and Nebraska. MEC is
described in more detail by MEHC witness Gale.
Please describe the ne,v shared ~services
MEHCeompan)'
EmDlovees of ServCo 'Nill-be created as a direct subsidiary of-MEHC include
senior executives whoef
MBHG-aad provide strategic management, coordination and corporate
Specketer, Di - 3
PacifiCorp
.L
REVISED 8/17/05
governance services to all MEHC subsidiaries, including board of directors
support, strategic planning, financial planning and analysis, insurance
environmental compliance, financial reporting, human resources, legal
accounting and other administrative services.
Will any PacifiCorp employees be transferred to MEHCtke ServCo
No.
MBHC is forming a ServCo to ensure that costs are capture-
Please describe the services that will be provided by MEC.
MEC employees will also coordinate certain administrative services on behalf of
MEHC, including budgeting and forecasting, human resources, and tax
compliance. Amounts to be charged to PacifiCorp from MEC are not expected to
exceed $4.0 million per year.
Will any other incidental services between MEC and PacifiCorp be
provided?
For operational reasons, such as a storm restoration, it may be necessary and
beneficial to send crews of one utility to the other s service territory to assist in
restoration efforts. In addition, other operational expertise may be requested from
time to time to take advantage of specific expertise that exists at each of the
utilities. Services such as these would also be provided at cost.
Specketer, Di - 4
PacifiCorp
REVISED 8/17/05
How will costs from these two sources ServCo and MEC) flow to
PacifiCorp?
Cost assignments to PacifiCorp will be based on generally accepted cost
assignment practices. As described in more detail below, direct costs for the
MEHCServCo and MEC services will be billed to the entity benefiting from the
service provided. All other costs related to the services provided, including
indirect costs, will be fully allocated to MEHC and all benefiting subsidiaries.
Could you give an example of what you mean by direct and indirect costs?
Direct costs arise from services that are specifically attributable to a single entity.
For example, if I'm researching an accounting issue for an affiliate , I would
directly bill that entity for the time spent researching the issue. However, the cost
of the reference material purchased to research accounting issues would benefit
more than one entity, so the cost of the reference material would be an indirect
cost and allocated to all entities that benefit from the materials.
Please describe the service agreement that will govern the shared services to
be provided.
The services will be governed by the existing Intercompany Administrative
Services Agreement ("IASA") that has been executed by MEHC and its
subsidiaries. The IASA is used to govern the provision of certain administrative
services between MEHC and affiliates. The existing IASA is attached as Exhibit
No. 12. This agreement outlines the terms and conditions of the shared services
arrangement between MEHC and its subsidiaries, which will eventually include
the ServCo and PacifiCorp.
Specketer, Di - 5
P acifi Corp
REVISED 8/17/05
Please describe the system of accounts that will be used to capture and bill
shared costs.
Costs and billings originating at MEHCServCo will be accounted for using
MEHC's existinga system of accounts The MEHC svstem of accounts Drovides
details on the tvue of cost activitv involved and the area resDonsible for incurred
the charge. -prescribed-by-the-U.S. Securities and-&ehange Commission
Energy Regulatory Commission' s ("~orm system of accounts.As a
regulated public utility, MEC is required to use and account for costs using the
FERC uniform system of accounts. In addition to the FERC primary accounts.
MEC utilizes+herefore, the system of accounts used to capture and-bHl-shared
costs by-beth-the ServCo and-MEC 'Nill-be very similar. Such accounts 'Nill-have
an additional three-digit "sub-account" field to provide more descriptive detail of
the type of cost activity involved. Both MEHC and MEC utilize J.\lso
responsibility center field in the code block to will-establish budgetary control of
amounts charged and rovide an audit trail to the
department originally incurring the charges. Other segments of the code block te
be-used bv MEC will-capture cost elements (descriptive of the nature of costs
~, labor, payables, etc.) and project numbers. Both +he-the MEHC and MEC
code block~ used vlill accommodate a high degree of flexibility and capability in
tracking and reporting costs.
How will MEC segregate shared costs from costs it incurs on its own behalf
or directly on behalf of other MEHC subsidiaries?
Specketer, Di - 6
PacifiCorp
REVISED 8/17/05
A separate "business unit" will be established within MEC's accounting system
which will be structured to capture the costs of functions providing shared
services. Expenses originating in this "business unit" will allocate to all
benefiting MEHC entities, instead of merely to MEC operations, to the extent that
costs are not directly billed to MEC or to other MEHC subsidiaries. MEC has
employed this kind of accounting system in order to allocate costs for state
jurisdictional reporting purposes, and this methodology has been utilized in Iowa
Illinois, and South Dakota for a number of years as the basis for rate filings. The
allocation process utilizes well-established controls, and an audit trail is
maintained such that all costs subject to allocation can be specifically identified
back to their origin.
On what basis will shared services be charged?
Shared services, whether directly billed or allocated, will be charged at fully
loaded actual cost. This means that only the actual cost of providing the service
with no markup for profit, will be charged. Labor, for example, will include such
items as loadings for benefits, paid absences and payroll taxes attributable to such
labor for actual time spent providing the service. Non-labor costs will be directly
billed or allocated at actual amounts incurred by MEHC ServCo and MEC.
Will this result in any cross-subsidization between MEHC entities?
No. To the contrary, billing at cost will eliminate any potential cross-
subsidization between entities and ensure that only actual costs are reflected in
rates charged to both MEC customers and PacifiCorp customers.
Will 8ervCo own assets used for shared services?
Specketer, Di - 7
PacifiCorp
REVISED 8/17/05
Yes, it will own assets used for providing shared services, but 'Nill not ovm
eperating assets or investments in operating entities. Assets used for shared
services will be billedeharged, based on utilization of the asset, at an fixed amount
that recovers the fixed costs of amounts feHlepreciation, property taxes and cost
ef capital associated-with the asset.
profit-eBtity ?
MEHC ServCo will not earn have neithef-profit~ on such servicesnor losses
All such shared services costs incurred by MEHC ServCo, net of any income
earned will be directly charged when the benefiting organization can be
specifically identified, and any residual indirect amounts will be allocated each
month to MBHG-and-all benefiting subsidiaries. Shared services costs incurred
by MEC on behalf ofMEHC subsidiaries will also be fully allocated, to the extent
not directly charged.
Will an
Yes. Costs attributable to activities not aDDroDriatelv billed or allocated to MEHC
subsidiaries. such as general merger and acQuisition costs. and interest exnense
MEHC. will be Daid for and remain at MEHC. MEHC's share of indirect costs
will also remain at MEHC.
Will any costs, other than the shared costs mentioned above, be charged to
PacifiCorp from any other affiliates of MEHC?
It is not expected that any significant administrative costs will originate from any
MEHC affiliate other than MECthe tv/O entities discussed abo'. However, when
Specketer, Di - 8
PacifiCorp
.L
REVISED 8/17/05
specific expertise is needed or available from other MEHC business platforms, the
IASA provides the flexibility for any member of the MEHC group to request
services at cost from other entities in the group. Services of this nature are
situation-specific and not expected to be recurring.
In addition, normal course of business transactions negotiated at arms-
length or subj ect to tariff provisions, such as the existing contracts between
PacifiCorp and MEHC subsidiaries to purchase gas transportation service from
Kern River Gas Transmission Company and steam from Intermountain
Geothermal Company for PacifiCorp s Blundell plant, may be initiated by
PacifiCorp. These services would continue to be subject to the applicable state or
federal regulatory approvals, including existing tariffs.
How ,,'ill ServCo be cap~
The exact form of~lization of ServCo has yet to ee-aetermined:--Ho'le'/er
the cost of-all capita~ocated out of ServCo to the extent that it is
not charged-directly-through-mllings feHhe use of ServCo assets.
What allocation methodology will be used to allocate MEHC..:ServCo and
MEC shared costs not directly billed to MEHC entities?
Indirect costs ofMEHC ServCo and MEC, allocable to MEHC and all
subsidiaries, will be allocated using a two-factor formula comprised of assets and
payroll, each equally weighted. Within thirty (30) days of receiving all necessary
state and federal regulatory approvals of the proposed transaction, a final cost
allocation methodology will be submitted to the Commissions. On an ongoing
basis, the Commission will be notified of anticipated or mandated changes to this
Specketer, Di - 9
PacifiCorp
REVISED 8/17/05
cost allocation methodology. Of course, as specified in commitment 7(f) in Table
1 later in my testimony, the Commission will determine the appropriate corporate
cost allocation for establishing rates.
Why is the two-factor formula appropriate?
This allocation methodology is based on the formula presently approved for use
by MEC and MEHC to allocate indirect common corporate costs. Further, it is
consistent with the IASA that will govern these services, and it has been utilized
by MEC for a number of years as the basis for rate filings in each of the states it
operates. These regulators have recognized that a single allocation factor to
allocate common corporate costs is not reasonable.
How does the two-factor formula compare to the three-factor formula used
by PacifiCorp?
The factors produce similar results. Estimated costs allocated to PacifiCorp using
the two-factor formula are not expected to be materially different than costs
allocated using the three-factor formula.
Will PacifiCorp s inter-jurisdictional cost allocation methodology change as
a result of the MEHC purchase transaction?
No. The methodology described above will only be used to allocate shared
services costs from MEHC ServCo and MEC. PacifiCorp s current methods for
assigning costs jurisdictionally will not change as a result of the transaction.
What is the expected impact on PacifiCorp costs of the shared services
charges from MEHkSenTCa and MEC?
Specketer, Di - 10
PacifiCorp
REVISED 8/17/05
Shared services charges to PacifiCorp are expected to decrease from historical
amounts billed to PacifiCorp from ScottishPower. Exhibit No. 13 presents an
analysis of historical shared services costs from ScottishPower and expected
shared services costs upon MEHC's acquisition ofPacifiCorp. Net cross-charges
to be paid by PacifiCorp to ScottishPower for the fiscal year ending March 31
2006, are projected to be $15.0 million. MEHC estimates that its shared costs to
PacifiCorp would have totaled $9.6 million for the same period. MEHC is
making a commitment that such costs will not exceed $9 million per year for five
(5) years following the close of this transaction.
Will PacifiCorp continue to provide services to its direct subsidiaries?
Yes, such services will continue under existing service agreements.
Please summarize this portion of your testimony regarding the shared
services acquisition commitments that MEHC is undertaking in connection
with the proposed transaction.
Shared services costs will be direct billed or allocated to PacifiCorp, MEHC and
other subsidiaries, primarily from MEHC ServCo or MEC. To the extent costs
are not directly billed and need to be allocated, a two-factor allocator consisting of
assets and labor, each equally weighted, will be used to allocate the costs to each
entity benefiting from the type of cost incurred. The IASA will govern the shared
services to be provided by MEHC ServCo or MEC. MEHC is making a
commitment that shared services costs from MEHC ServCo and MEC will not
exceed $9 million per year for five (5) years following the close of the
transaction.
Specketer, Di -
PacifiCorp
Commitments
REVISED 8/17/05
Are you providing support for some of the commitments in MEHC witness
Gale s Exhibit No.
Yes. I am sponsoring the following financial and structural commitments that
MEHC is undertaking with respect to the proposed transaction.
Table 1
Financial and Structural Commitments that MEHC is Undertaking in Connection
with the Proposed Transaction
lle2ulatory ()versi2ht
Accounting Records
Affiliate Transactions
Affiliate Transactions
Cross-su bsidization
The Commission or its agents may
audit the accounting records ofMEHC
and its subsidiaries that are the bases
for charges to PacifiCorp, to determine
the reasonableness of allocation factors
used by MEHC to assign costs to
PacifiCorp and amounts subject to
allocation or direct charges. MEHC
agrees to cooperate fully with such
CommissIon audits.
MEHC and PacifiCorp will comply
with all existing Commission statutes
and regulations regarding affiliated
interest transactions, including timely
filing of applications and reports.
PacifiCorp will file on an annual basis
an affiliated interest report including an
organization chart, narrative
description of each affiliate, revenue
for each affiliate and transactions with
each affiliate.
PacifiCorp and MEHC will not cross-
subsidize between the regulated and
non-regulated businesses or between
any regulated businesses, and shall
comply with the CommIssion s then-
existing practice with respect to such
matters.
Specketer, Di - 12
PacifiCorp
Affiliate Transactions
Cost Allocations
Cost Allocations
REVISED 8/17/05
Due to PUHCA r eal neither
Berkshire Hathawa nor MEHC will
be re istered ublic utilit holdin
com anies under PUHCA. Thus
waiver b Berkshire Hathawa
MEHC of an defenses to which the
be entitled under Ohio Power Co.
v. FER 779 C. CiL1
cert. denied sub nom. Arcadia v. Ohio
Power 506 U.S. 9
!:::Ohio Power is necessa
maintain the Commission s re lation
ofMEHC and PacifiCo However
while PUHCA is in effec Berkshire
Hathawa and MEHC waive such
defenses.
not assert in any future Commission
FBRC case preem1*-the Commission
jurisdiction over af4iliated interest
any suclHiefense in those proceedings
not to seek any preemption under any
subsequent modification or
PmiGA-.
Within 30 days of receiving all
necessary state and federal regulatory
approvals of the final corporate and
affiliate cost allocation methodology, a
written document setting forth the final
corporate and affiliate cost
methodology will be submitted to the
Commission. On an on-going basis
the Commission will also be notified of
anticipated or mandated changes to the
corporate and affiliate cost allocation
methodologies.
Any proposed cost allocation
methodology for the allocation of
corporate and affiliate investments
expenses, and overheads required by
law or rule to be submitted to the
Specketer, Di - 13
PacifiCorp
Commission for approval, will comply
with the following principles:( a) For services rendered to
PacifiCorp or each cost
category subj ect to
allocation to PacifiCorp by
MEHC or any of its
affiliates, MEHC must be
able to demonstrate that
such service or cost
category is necessary to
PacifiCorp for the
performance of its regulated
operations, is not
duplicative of services
already being performed
within PacifiCorp, and is
reasonable and prudent.
Cost allocations to
PacifiCorp and its
subsidiaries will be based
on generally accepted
accounting standards; that
, in general, direct costs
will be charged to specific
subsidiaries whenever
possible and shared or
indirect costs will be
allocated based upon the
primary cost-driving
factors.
MEHC will have in place
time reporting systems
adequate to support the
allocation of costs of
executives and other
relevant personnel to
PacifiCorp.
An audit trail will be
maintained such that all
costs subj ect to allocation
can be specifically
identified, particularly with
respect to their origin. In
addition, the audit trail must
be adequately supported.
(b)
REVISED 8/17/05
(c)
(d)
Specketer, Di - 14
PacifiCorp
Does this conclude your testimony?
Yes it does.
REVISED 8/17/05
(e)
Failure to adequately
support any allocated cost
may result in denial of its
recovery in rates.
Costs which would have
been denied recovery in
rates had they been incurred
by PacifiCorp regulated
operations will likewise be
denied recovery whether
they are allocated directly
or indirectly through
subsidiaries in the MEHC
group.
Any corporate cost
allocation methodology
used for rate setting, and
subsequent changes thereto
will be submitted to the
Commission for approval if
required by law or rule.
(f)
Specketer, Di - 15
PacifiCorp
REVISED PAGE TO SPECKETER
EXHIBIT NO.
Marked Version
REVISED 8/17/05
REVISED 8/17/05
Description
MidAmerican Energy Holdings Company
Projected Shared Services Costs to PacifiCorp
(OOO'
ServCo~
9333.057Salaries, benefits and bonuses
I Other employee compensation
I Outside services
I Travel costs, incl. corporate aircraft
I Other
Total
I Expected Net Scottish Power charges for Fiscal Year 2006
893-933
453
420
+W-913
MEC
220
655
715
983
652
Diff-erence
CalEnerav
PacifiCorp
Exhibit No. 13
CASE NO. P AC-O5-
Witness: Thomas B. Specketer
Total
123 277
587
168
1 ,403
131
163 566
000
(5,434 )