20140815Notice of Affiliate Transaction.pdf

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August 15,2014
VA OVERNIGHT DELIWRY
Idaho Public Utilities Commission
472West Washington
Boise,ID 83702-5983
Attention: Jean D. Jewell
Commission Secretary
Re: PacifiCorp Notice of Affiliate Transaction
Case No. PAC-E-05-8
Dear Ms. Jewell:
R. Jeff Richards
Vice President and General Counsel
201 S, Main Street, Suite 2400
salt Lake cia, uT 84IIl
801-2204734 Offtce
801-220-4058 Fax
j elf , r i c h ar ds@1t a c iJi c o rp. c o m
This letter will serve as notice pursuant to Commitment I l7(2), incorporated in the
Idaho Public Utilities Commission Order No. 29973 issued February 13,2006, as supplemented
by Order No. 29998 March 14, 2006, in the above-referenced proceeding, approving the
acquisition of PacifiCorp by MidAmerican Energy Holdings Company (MEHC)I, of an affiliate
interest transaction with Wells Fargo Bank, N.A. (Wells Fargo) for natural gas hedging products.
A copy of the International Swap Dealers Association (ISDA) Master Agreement, as amended by
the First Amendment to ISDA Master Agreement, the Amendment Adopting, Incorporating and
Amending the ISDA August ZDl2Dodd-Frank (DF) Supplement and the Amendment Adopting,
Incorporating and Amending the ISDA March 2013 DF Supplement is included with this Notice
as Confidential Attachment A. Throughout this Notice, PacifiCorp will refer to the Master
Agreement and Amendments collectively as the "ISDA Agreement." The ISDA Agreement
contains commercially-sensitive terms and conditions, the disclosure of which could erode
PacifiCorp's bargaining power in the future. Accordingly, the ISDA Agreement is submitted
under seal, and PacifiCorp requests that it be made confidential. PacifiCorp is required under the
ISDA Agreement to maintain the confidentiality of the entire agreement.
PacifiCorp is a wholly-owned indirect subsidiary of Berkshire Hathaway Energy
Company (BHE). BHE is a subsidiary of Berkshire Hathaway, Inc. (Berkshire Hathaway). As of
March 31,2010, Waren E. Buffet (an individual who may be deemed to control Berkshire
Hathaway), Berkshire Hathaway, various subsidiaries of Berkshire Hathaway and various
employee benefit plans of Berkshire Hathaway subsidiaries together held an interest in excess of
5 percent in Wells Fargo. Therefore, Berkshire Hathaway's ownership interest in Wells Fargo
may create an affiliated interest in some PacifiCorp jurisdictions.
Wells Fargo is a publicly traded company with diverse operations, including, among
other things, oflering natural gas hedging products and other financial instruments. PacifiCorp
I As of April 30,2014, MEHC was renamed Berkshire Hathaway Energy.
Idaho Public Utilities Commission
August 15,2014
Page2
entered into the ISDA Agreement with Wells Fargo in2004, prior to the existence of an affrliate
relationship. Additionally, PacifiCorp has been reporting transactions under the ISDA
Agreement in the annual affiliate interest transaction report since 2009. To ensure the
appropriate transparency into PacifiCorp's transactions with affiliates and to ensure consistent
treatment of affiliate contracts, PacifiCorp now provides notice of the ISDA Agreement with the
Commission.
The ISDA Agreement is the master agreement under which PacifiCorp and Wells Fargo
enter into commodity derivative transactions with each other. In the recent past, PacifiCorp has
entered into natural gas financial hedge transactions with Wells Fargo under the ISDA
Agreement. The First Amendment to the ISDA Master Agreement was an ordinary course
revision, amending the threshold amounts for collateral posting requirements for such
transactions. The Amendment Adopting, Incorporating and Amending the ISDA August 2012
DF Supplement and the Amendment Adopting, Incorporating and Amending the ISDA March
2013 DF Supplement added certain compliance-related representations and obligations of the
parties relating to regulations promulgated by the Commodity Futures Trading Commission
under the federal Dodd Frank Act of 2010.
The ISDA Agreement itself is a master trading enabling agreement that does not,
standing alone, represent an exchange of cash flows, goods or services; rather, individual
transactions are entered into under the master trading enabling agreement umbrella of the ISDA
Agreement. This allows the parties to integrate the multiple individual transactions of their
entire swap trading relationship into a single agreement, so that in the event of a business failure
of the counterparty, the agreement would be required to be assumed or rejected in whole under
the Bankruptcy Code. This prevents the counterparty from choosing to perform only the
transactions that are profitable to it, while rejecting those transactions that are not profitable to it.
By unifying and allowing netting and setoff across the entire swap trading business relationship,
the ISDA Agreement is an important and useful risk mitigation tool.
As noted above, in the recent past, PacifiCorp has used the ISDA Agreement to enter into
natural gas commodity swaps with Wells Fargo to hedge/mitigate against potential significant
increases in natural gas prices. Wells Fargo is just one of many counterparties with whom
PacifiCorp, like the many other utilities similarly situated, can transact in financial hedging
products. Before transacting with Wells Fargo under the ISDA Agreement, PacifiCorp first seeks
bids and otherwise reviews the applicable markets and available counterparties to determine the
desirability of the proposed transaction with Wells Fargo. This review includes confirming that
potential counterparties are approved from a credit standpoint. Once the parties agree to a
transaction, a Confirmation is executed under the ISDA Agreement; the Confirmation sets forth
the terms and prices of the transaction. Individual transactions are competitively priced.
The number of annual transactions under the ISDA Agreement varies. Under the ISDA
Agreement, PacifiCorp to date has entered into transactions with Wells Fargo within short time
frames. Filing notices of each individual transaction under the ISDA Agreement would be
cumbersome and inefficient. The natural gas and energy markets in which PacifiCorp transacts
and would seek hedges through individual transactions with Wells Fargo generally move on a
minute-by-minute basis. A requirement for advance notice of an individual transaction would
effectively be a prohibition on further transactions with Wells Fargo, since the market will have
Idaho Public Utilities Commission
August 15,2014
Page 3
moved away from the available price by the time approval is sought or obtained. Additionally,
filing notice of individual transactions may result in lost opportunities for customers by
removing from being available to PacifiCorp a counterparty that would otherwise be available
for hedging PacifiCorp's risks. To ensure adequate Commission review, PacifiCorp will continue
to report these transactions in its annual affiliate interest report.
The amount PacifiCorp will spend annually for transactions under the ISDA Agreement
varies, depending upon the terms of the individual transactions entered into under the ISDA
Agreement. Depending on the structure of a transaction and the performance of the hedge,
PacifiCorp could either be paying Wells Fargo, or Wells Fargo could be paying PacifiCorp.
The use of the ISDA Agreement represents a valuable risk management tool for
PacifiCorp to use in managing natural gas purchases for generation plants. Hedges enable
PacifiCorp to predict and budget the costs of those operations that it hedges. Without hedging, it
is speculating on those prices, with revenues and budgets varying based on those prices as
opposed to the performance of PacifiCorp and its assets. For PacifiCorp, natural gas hedging
means that its customers have less exposure to the volatility of natural gas market price changes.
Financial hedging products such as those offered by Wells Fargo allow a utility to hedge against
and mitigate price volatility in the natural gas market.
Please do not hesitate to contact me if you have any questions.
Best Regards,
R. JeffRichards
Vice President and General Counsel
PacifiCorp
Enclosures