BERKSHIRE HATHAWAY ENERGY CO (Form: 10-Q, Received: 08/05/2016 16:40:33)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

[ ] 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

001-5152	PACIFICORP	93-0246090
	(An Oregon Corporation)
	825 N.E. Multnomah Street
	Portland, Oregon 97232
	503-813-5645

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

333-206980	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 and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Registrant	Large Accelerated Filer	Accelerated filer	Non-accelerated Filer	Smaller Reporting 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

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 July 31, 2016 , 77,391,144 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 July 31, 2016 , 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 July 31, 2016 .

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 July 31, 2016 , 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 July 31, 2016 , 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 July 31, 2016 , 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



Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	151
Item 4.	Controls and Procedures	151

PART II



Item 1.	Legal Proceedings	152
Item 1A.	Risk Factors	152
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	152
Item 3.	Defaults Upon Senior Securities	152
Item 4.	Mine Safety Disclosures	152
Item 5.	Other Information	152
Item 6.	Exhibits	152
Signatures		153
Exhibit Index		154

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, 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.
Topaz		Topaz Solar Farms LLC
Topaz Project		550-megawatt solar project in California
Jumbo Road		Jumbo Road Holdings, LLC
Jumbo Road Project		300-megawatt wind-powered generating facility in Texas
Solar Star Funding		Solar Star Funding, LLC
Solar Star Projects		A combined 586-megawatt solar project in California

Certain Industry Terms
AESO		Alberta Electric System Operator
AFUDC		Allowance for Funds Used During Construction
AUC		Alberta Utilities Commission
CPUC		California Public Utilities Commission
GTA		General Tariff Application
EPA		United States Environmental Protection Agency
FERC		Federal Energy Regulatory Commission
GHG		Greenhouse Gases



GWh		Gigawatt Hours
IPUC		Idaho Public Utilities Commission
IUB		Iowa Utilities Board
kV		Kilovolt
MW		Megawatts
MWh		Megawatt Hours
OPUC		Oregon Public Utility Commission
PUCN		Public Utilities Commission of Nevada
REC		Renewable Energy Credit
RPS		Renewable Portfolio Standards
SEC		United States Securities and Exchange Commission
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 reliability and safety standards, affecting the Registrants' 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 rate cases and other proceedings conducted by regulatory commissions or other governmental and legal bodies and the Registrants' 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 distributed generation measures and programs, that could affect customer growth and usage, electricity and natural gas supply or the Registrants' ability to obtain long-term contracts with customers and suppliers;


•	performance, availability and ongoing operation of the Registrants' 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;


•	a high degree of variance between actual and forecasted load or generation that could impact the Registrants' 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 Registrants' significant customers and suppliers;


•	changes in business strategy or development plans;


•	availability, terms and deployment of capital, including reductions in demand for investment-grade commercial paper, debt securities and other sources of debt financing and volatility in the London Interbank Offered Rate, the base interest rate for the Registrants' credit facilities;


•	changes in the Registrant's respective credit ratings;

iii


•	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 and mortgage industries and regulations that could affect brokerage and mortgage transactions;


•	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;


•	the ability to successfully integrate future acquired operations into its business;


•	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 storms, floods, fires, earthquakes, explosions, landslides, mining accidents, litigation, wars, terrorism, and embargoes; 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.


Item 1.	Financial Statements



Berkshire Hathaway Energy Company and its subsidiaries
Report of Independent Registered Public Accounting Firm		4
Consolidated Balance Sheets		5
Consolidated Statements of Operations		7
Consolidated Statements of Comprehensive Income		8
Consolidated Statements of Changes in Equity		9
Consolidated Statements of Cash Flows		10
Notes to Consolidated Financial Statements		11
PacifiCorp and its subsidiaries
Report of Independent Registered Public Accounting Firm		52
Consolidated Balance Sheets		53
Consolidated Statements of Operations		55
Consolidated Statements of Changes in Shareholders' Equity		56
Consolidated Statements of Cash Flows		57
Notes to Consolidated Financial Statements		58
MidAmerican Energy Company
Report of Independent Registered Public Accounting Firm		75
Balance Sheets		76
Statements of Operations		78
Statements of Comprehensive Income		79
Statements of Changes in Equity		80
Statements of Cash Flows		81
Notes to Financial Statements		82
MidAmerican Funding, LLC and its subsidiaries
Report of Independent Registered Public Accounting Firm		93
Consolidated Balance Sheets		94
Consolidated Statements of Operations		96
Consolidated Statements of Comprehensive Income		97
Consolidated Statements of Changes in Equity		98
Consolidated Statements of Cash Flows		99
Notes to Consolidated Financial Statements		100
Nevada Power Company and its subsidiaries
Report of Independent Registered Public Accounting Firm		114
Consolidated Balance Sheets		115
Consolidated Statements of Operations		116
Consolidated Statements of Changes in Shareholder's Equity		117
Consolidated Statements of Cash Flows		118
Notes to Consolidated Financial Statements		119
Sierra Pacific Power Company and its subsidiaries
Report of Independent Registered Public Accounting Firm		133
Consolidated Balance Sheets		134
Consolidated Statements of Operations		135
Consolidated Statements of Changes in Shareholder's Equity		136
Consolidated Statements of Cash Flows		137
Notes to Consolidated Financial Statements		138


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



Berkshire Hathaway Energy Company and its subsidiaries		30
PacifiCorp and its subsidiaries		67
MidAmerican Funding, LLC and its subsidiaries and MidAmerican Energy Company		104
Nevada Power Company and its subsidiaries		126
Sierra Pacific Power Company and its subsidiaries		145

Berkshire Hathaway Energy Company and its subsidiaries

Consolidated Financial Section

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

Des Moines, Iowa

We have reviewed the accompanying consolidated balance sheet of Berkshire Hathaway Energy Company and subsidiaries (the "Company") as of June 30, 2016 , and the related consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2016 and 2015 , and of changes in equity and cash flows for the six-month periods ended June 30, 2016 and 2015 . These interim financial statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Berkshire Hathaway Energy Company and subsidiaries as of December 31, 2015 , 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 26, 2016 , 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, 2015 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

Des Moines, Iowa

August 5, 2016

BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in millions)



	As of
	June 30,		December 31,
	2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	778	$	1,108
Trade receivables, net	1,814		1,785
Income taxes receivable	53		319
Inventories	933		882
Mortgage loans held for sale	543		335
Other current assets	840		814
Total current assets	4,961		5,243

Property, plant and equipment, net	61,449		60,769
Goodwill	9,139		9,076
Regulatory assets	4,193		4,155
Investments and restricted cash and investments	3,794		3,367
Other assets	1,071		1,008

Total assets	$	84,607	$	83,618

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

BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)

(Amounts in millions)



	As of
	June 30,			December 31,
	2016			2015
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	1,432		$	1,564
Accrued interest	464			469
Accrued property, income and other taxes	643			372
Accrued employee expenses	322			264
Regulatory liabilities	396			402
Short-term debt	1,469			974
Current portion of long-term debt	886			1,148
Other current liabilities	929			896
Total current liabilities	6,541			6,089

Regulatory liabilities	2,665			2,631
BHE senior debt	7,416			7,814
BHE junior subordinated debentures	1,944			2,944
Subsidiary debt	26,635			26,066
Deferred income taxes	13,118			12,685
Other long-term liabilities	2,789			2,854
Total liabilities	61,108			61,083

Commitments and contingencies (Note 12)

Equity:
BHE shareholders' equity:
Common stock - 115 shares authorized, no par value, 77 shares issued and outstanding	—			—
Additional paid-in capital	6,404			6,403
Retained earnings	17,932			16,906
Accumulated other comprehensive loss, net	(979		)	(908		)
Total BHE shareholders' equity	23,357			22,401
Noncontrolling interests	142			134
Total equity	23,499			22,535

Total liabilities and equity	$	84,607		$	83,618

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

BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in millions)



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Operating revenue:
Energy	$	3,280		$	3,690		$	6,830		$	7,463
Real estate	841			758			1,332			1,206
Total operating revenue	4,121			4,448			8,162			8,669

Operating costs and expenses:
Energy:
Cost of sales	970			1,229			2,065			2,583
Operating expense	909			935			1,791			1,841
Depreciation and amortization	640			604			1,259			1,185
Real estate	748			673			1,240			1,123
Total operating costs and expenses	3,267			3,441			6,355			6,732

Operating income	854			1,007			1,807			1,937

Other income (expense):
Interest expense	(468		)	(476		)	(941		)	(948		)
Capitalized interest	103			22			114			51
Allowance for equity funds	115			30			130			61
Interest and dividend income	27			26			54			52
Other, net	1			10			11			36
Total other income (expense)	(222		)	(388		)	(632		)	(748		)

Income before income tax expense and equity income	632			619			1,175			1,189
Income tax expense	121			82			195			205
Equity income	34			30			60			56
Net income	545			567			1,040			1,040
Net income attributable to noncontrolling interests	9			9			14			13
Net income attributable to BHE shareholders	$	536		$	558		$	1,026		$	1,027

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

BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Amounts in millions)



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Net income	$	545		$	567		$	1,040		$	1,040

Other comprehensive (loss) income, net of tax:
Unrecognized amounts on retirement benefits, net of tax of $13, $(11), $19 and $(3)	40			(28		)	62			(6		)
Foreign currency translation adjustment	(272		)	263			(205		)	(161		)
Unrealized gains on available-for-sale securities, net of tax of $14, $77, $36 and $190	38			116			71			282
Unrealized gains (losses) on cash flow hedges, net of tax of $16, $(4), $2 and $(3)	24			(7		)	1			(6		)
Total other comprehensive (loss) income, net of tax	(170		)	344			(71		)	109

Comprehensive income	375			911			969			1,149
Comprehensive income attributable to noncontrolling interests	9			9			14			13
Comprehensive income attributable to BHE shareholders	$	366		$	902		$	955		$	1,136

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

BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(Amounts in millions)



	BHE Shareholders' Equity
										Accumulated
				Additional						Other
	Common			Paid-in			Retained			Comprehensive			Noncontrolling			Total
	Shares	Stock		Capital			Earnings			Loss, Net			Interests			Equity

Balance, December 31, 2014	77	$	—	$	6,423		$	14,513		$	(494	)	$	131		$	20,573
Adoption of ASC 853	—	—		—			56			—			11			67
Net income	—	—		—			1,027			—			8			1,035
Other comprehensive income	—	—		—			—			109			—			109
Distributions	—	—		—			—			—			(10		)	(10		)
Common stock purchases	—	—		(3		)	(33		)	—			—			(36		)
Balance, June 30, 2015	77	$	—	$	6,420		$	15,563		$	(385	)	$	140		$	21,738

Balance, December 31, 2015	77	$	—	$	6,403		$	16,906		$	(908	)	$	134		$	22,535
Net income	—	—		—			1,026			—			8			1,034
Other comprehensive loss	—	—		—			—			(71		)	—			(71		)
Distributions	—	—		—			—			—			(9		)	(9		)
Other equity transactions	—	—		1			—			—			9			10
Balance, June 30, 2016	77	$	—	$	6,404		$	17,932		$	(979	)	$	142		$	23,499

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

BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in millions)



	Six-Month Periods
	Ended June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	1,040		$	1,040
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	1,274			1,197
Allowance for equity funds	(130		)	(61		)
Equity income, net of distributions	(44		)	(20		)
Changes in regulatory assets and liabilities	(1		)	243
Deferred income taxes and amortization of investment tax credits	291			390
Other, net	(72		)	13
Changes in other operating assets and liabilities, net of effects from acquisitions:
Trade receivables and other assets	(252		)	(418		)
Derivative collateral, net	23			5
Pension and other postretirement benefit plans	(9		)	(7		)
Accrued property, income and other taxes	557			1,199
Accounts payable and other liabilities	94			(48		)
Net cash flows from operating activities	2,771			3,533

Cash flows from investing activities:
Capital expenditures	(2,103		)	(2,624		)
Acquisitions, net of cash acquired	(66		)	(59		)
Decrease in restricted cash and investments	9			20
Purchases of available-for-sale securities	(55		)	(102		)
Proceeds from sales of available-for-sale securities	88			95
Equity method investments	(282		)	(18		)
Other, net	(46		)	43
Net cash flows from investing activities	(2,455		)	(2,645		)

Cash flows from financing activities:
Repayments of BHE junior subordinated debentures	(1,000		)	(600		)
Common stock purchases	—			(36		)
Proceeds from subsidiary debt	1,461			1,238
Repayments of subsidiary debt	(1,529		)	(527		)
Net proceeds from (repayments of) short-term debt	465			(405		)
Other, net	(39		)	(43		)
Net cash flows from financing activities	(642		)	(373		)

Effect of exchange rate changes	(4		)	—

Net change in cash and cash equivalents	(330		)	515
Cash and cash equivalents at beginning of period	1,108			617
Cash and cash equivalents at end of period	$	778		$	1,132

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

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 subsidiaries principally engaged in energy businesses (collectively with its subsidiaries, the "Company"). BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").

The Company's operations are organized and managed 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 and HomeServices of America, Inc. (collectively with its subsidiaries, "HomeServices"). The Company, through these 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 selling power generated from solar, wind, geothermal and hydroelectric sources under long-term contracts, 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 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, 2015 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 six-month period ended June 30, 2016 .

( 2 ) New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, which creates FASB Accounting Standards Codification ("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. 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 is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, which amends FASB ASC Subtopic 825-10, "Financial Instruments - Overall." The amendments in this guidance address 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. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption not permitted, and is required to be adopted prospectively by means of a cumulative-effect adjustment to the balance sheet 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 May 2014, the FASB issued ASU No. 2014-09, which creates FASB ASC Topic 606, "Revenue from Contracts with Customers" and supersedes ASC Topic 605, "Revenue Recognition." The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017. During 2016, the FASB issued several ASUs that clarify the implementation guidance for ASU No. 2014-09 but do not change the core principle of the guidance. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. 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.


( 3 )	Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):



		As of
	Depreciable	June 30,			December 31,
	Life	2016			2015
Regulated assets:
Utility generation, transmission and distribution systems	5-80 years	$	69,955		$	69,248
Interstate natural gas pipeline assets	3-80 years	6,835			6,755
		76,790			76,003
Accumulated depreciation and amortization		(22,982		)	(22,682		)
Regulated assets, net		53,808			53,321

Nonregulated assets:
Independent power plants	5-30 years	4,923			4,751
Other assets	3-30 years	959			875
		5,882			5,626
Accumulated depreciation and amortization		(942		)	(805		)
Nonregulated assets, net		4,940			4,821

Net operating assets		58,748			58,142
Construction work-in-progress		2,701			2,627
Property, plant and equipment, net		$	61,449		$	60,769

Construction work-in-progress includes $2.2 billion as of June 30, 2016 and $2.3 billion as of December 31, 2015 , related to the construction of regulated assets.


( 4 )	Regulatory Matters

In November 2014, ALP filed a general tariff application ("GTA") asking the Alberta Utilities Commission ("AUC") to approve revenue requirements of C$811 million for 2015 and C$1.0 billion for 2016, primarily due to continued investment in capital projects as directed by the Alberta Electric System Operator. ALP amended the GTA in June 2015 to propose additional transmission tariff relief measures for customers and modifications to its capital structure. ALP also amended the GTA in October 2015 resulting in revenue requirements of C$672 million for 2015 and C$704 million for 2016. In May 2016, the AUC issued Decision 3524-D01-2016 pertaining to the 2015-2016 GTA. ALP filed its 2015-2016 GTA compliance filing in July 2016 in response to the AUC's decision pertaining to the 2015-2016 GTA. Following the AUC's assessment of whether the refiling complies with the decision, final transmission tariff rates for the 2015 and 2016 test years will be set, subject to further adjustment through the deferral account reconciliation process.

The compliance filing asks the AUC to approve revenue requirements of C$599 million for 2015 and C$685 million for 2016. The decreased revenue requirements requested in the compliance filing, as compared to the original 2015-2016 GTA filing in November 2014, were based on changes to several key components considered in Decision 3524-D01-2016. Among other things, the AUC approved ALP's proposed immediate tariff relief of C$415 million for customers for 2015 and 2016, through (i) the discontinuance of construction work-in-progress ("CWIP") in rate base and the return to allowance for funds used during construction ("AFUDC") accounting effective January 1, 2015, resulting in a C$82 million reduction of revenue requirement and the refund of C$277 million previously collected as CWIP in rate base as part of ALP's transmission tariffs during 2011-2014 less related returns of C$12 million and (ii) the continued application of the future income tax method for calculating income taxes for 2015 and a change to the flow through method for calculating income taxes for 2016, resulting in further tariff relief of C$68 million .

In July 2016, ALP also submitted a separate transmission tariff application requesting approval from the AUC to reduce the 2016 interim refundable tariff from C$61 million per month to C$12 million per month, for the period August 1, 2016 to December 31, 2016, in alignment with its compliance filing. The AUC previously approved in December 2015 ALP's request to continue its C$61 million monthly 2015 interim transmission tariff for the 2016 year.

Operating revenue for the three- and six-month periods ended June 30, 2016, included one-time reductions totaling $225 million from the 2015-2016 GTA decision received in May 2016 at ALP. The decision requires ALP to refund $200 million to customers by the end of 2016 through reduced monthly billings for the change from receiving cash during construction for the return on CWIP in rate base to recording allowance for borrowed and equity funds used during construction related to construction expenditures during the 2011 to 2014 time period. This amount is offset in capitalized interest and allowance for equity funds in the Consolidated Statements of Operations. In addition, the decision requires ALP to change to the flow through method of recognizing income tax expense effective January 1, 2016. This change reduced operating revenue by $25 million for the three- and six-month periods ended June 30, 2016 with an offsetting impact to income tax expense in the Consolidated Statements of Operations.


( 5 )	Investments and Restricted Cash and Investments

Investments and restricted cash and investments consists of the following (in millions):



	As of
	June 30,		December 31,
	2016		2015
Investments:
BYD Company Limited common stock	$	1,347	$	1,238
Rabbi trusts	389		380
Other	157		130
Total investments	1,893		1,748

Equity method investments:
Electric Transmission Texas, LLC	637		585
BHE Renewables tax equity investments	425		168
Bridger Coal Company	200		190
Other	148		160
Total equity method investments	1,410		1,103

Restricted cash and investments:
Quad Cities Station nuclear decommissioning trust funds	444		429
Solar Star and Topaz Projects	63		95
Other	146		129
Total restricted cash and investments	653		653

Total investments and restricted cash and investments	$	3,956	$	3,504

Reflected as:
Current assets	$	162	$	137
Noncurrent assets	3,794		3,367
Total investments and restricted cash and investments	$	3,956	$	3,504

Investments

BHE's investment in BYD Company Limited common stock is accounted for as an available-for-sale security with changes in fair value recognized in accumulated other comprehensive income (loss) ("AOCI"). The fair value of BHE's investment in BYD Company Limited common stock reflects a pre-tax unrealized gain of $1.1 billion and $1.0 billion as of June 30, 2016 and December 31, 2015 , respectively.


( 6 )	Recent Financing Transactions

Long-Term Debt

In June 2016, BHE repaid at par value $500 million , plus accrued interest, of its junior subordinated debentures due December 2044 and in March 2016, BHE repaid at par value $500 million , plus accrued interest, of its junior subordinated debentures due December 2043.

In June 2016, Marshall Wind Energy, LLC issued a $95 million Term Loan due June 2026 with principal payments beginning December 2016. The Term Loan has an underlying variable interest rate based on London Interbank Offered Rate ("LIBOR") plus a fixed credit spread with a one-time increase during the term of the loan. The Company has entered into interest rate swaps that fix the underlying interest rate on 100% of the outstanding debt.

In May 2016, ALP issued C$350 million of its 2.747% Series 2016-1 Medium-Term Notes due May 2026. The net proceeds were used to repay short-term debt.

In May 2016, Sierra Pacific issued $205 million of its variable-rate tax-exempt Revenue Bonds due 2029-2036 and $139 million of its 1.25% - 3.00% Revenue Bonds due 2029-2036. Sierra Pacific also purchased $125 million of the variable-rate tax-exempt Revenue Bonds due 2029-2036 on their date of issuance to hold for its own account and potential remarketing to the public at a future date. To provide collateral security for its obligations, Sierra Pacific issued its General and Refunding Securities, Series V, Nos. V-1, V-2 and V-3, in the collective amount of $344 million . The collective proceeds from the tax-exempt bond issuances were used in April and May 2016 to refund at par value, plus accrued interest, $349 million of tax-exempt Revenue Bonds due 2029-2036 previously issued on behalf of Sierra Pacific.

In April 2016, Sierra Pacific issued $400 million of its 2.60% General and Refunding Securities, Series U, due May 2026. The net proceeds were used, together with cash on hand, to pay at maturity the $450 million principal amount of 6.00% General and Refunding Securities, Series M, in May 2016.

Credit Facilities

In June 2016, BHE replaced its $1.4 billion and $600 million unsecured revolving credit facilities, which had been set to expire in June 2017, with a $2.0 billion unsecured credit facility with a stated maturity of June 2019 and two one-year extension options subject to bank consent. The new credit facility, which is for general corporate purposes and also supports BHE's commercial paper program and provides for the issuance of letters of credit, has a variable interest rate based on the LIBOR or a base rate, at BHE's option, plus a spread that varies based on BHE's senior unsecured long-term debt credit ratings. The credit facility requires that BHE's ratio of consolidated debt, including current maturities, to total capitalization not exceed 0.70 to 1.0 as of the last day of each quarter.

In June 2016, PacifiCorp replaced its $600 million unsecured revolving credit facility, which had been set to expire in June 2017, with a $400 million unsecured credit facility with a stated maturity of June 2019 and two one-year extension options subject to bank consent. The new credit facility, which supports PacifiCorp's commercial paper program, certain series of its tax-exempt bond obligations and provides for the issuance of letters of credit, has a variable interest rate based on the LIBOR or a base rate, at PacifiCorp's option, plus a spread that varies based on PacifiCorp's credit ratings for its senior unsecured long-term debt securities. The credit facility requires that PacifiCorp's ratio of consolidated debt, including current maturities, to total capitalization not exceed 0.65 to 1.0 as of the last day of each quarter. As of June 30, 2016, PacifiCorp had no borrowings outstanding or letters of credit issued under this credit facility.

In March 2016, Solar Star Funding, LLC amended its $320 million letter of credit facility reducing the amount available to $301 million and extending the maturity date to March 2026. As of June 30, 2016 , Solar Star Funding, LLC had $284 million of letters of credit issued under this facility.


( 7 )	Income Taxes

A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax expense is as follows:



	Three-Month Periods				Six-Month Periods
	Ended June 30,				Ended June 30,
	2016		2015		2016		2015

Federal statutory income tax rate	35	%	35	%	35	%	35	%
Income tax credits	(12	)	(13	)	(13	)	(12	)
State income tax, net of federal income tax benefit	1		1		(1	)	1
Income tax effect of foreign income	(6	)	(8	)	(5	)	(6	)
Equity income	2		2		2		2
Other, net	(1	)	(4	)	(1	)	(3	)
Effective income tax rate	19	%	13	%	17	%	17	%

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.

Berkshire Hathaway includes the Company in its United States federal income tax return. For the six-month periods ended June 30, 2016 and 2015 , the Company received net cash payments for income taxes from Berkshire Hathaway totaling $658 million and $1.4 billion , respectively.


( 8 )	Employee Benefit Plans

Domestic Operations

Net periodic benefit cost for the domestic pension and other postretirement benefit plans included the following components (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Pension:
Service cost	$	7		$	8		$	15		$	16
Interest cost	32			31			63			61
Expected return on plan assets	(41		)	(43		)	(81		)	(85		)
Net amortization	13			15			24			28
Net periodic benefit cost	$	11		$	11		$	21		$	20

Other postretirement:
Service cost	$	2		$	2		$	5		$	6
Interest cost	8			9			16			16
Expected return on plan assets	(10		)	(11		)	(21		)	(23		)
Net amortization	(4		)	(3		)	(7		)	(6		)
Net periodic benefit credit	$	(4	)	$	(3	)	$	(7	)	$	(7	)

Employer contributions to the domestic pension and other postretirement benefit plans are expected to be $34 million and $1 million , respectively, during 2016 . As of June 30, 2016 , $6 million and $- million of contributions had been made to the domestic pension and other postretirement benefit plans, respectively.

Foreign Operations

Net periodic benefit cost for the United Kingdom pension plan included the following components (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Service cost	$	6		$	6		$	11		$	12
Interest cost	19			20			38			40
Expected return on plan assets	(29		)	(29		)	(58		)	(58		)
Net amortization	11			16			23			32
Net periodic benefit cost	$	7		$	13		$	14		$	26

Employer contributions to the United Kingdom pension plan are expected to be £41 million during 2016 . As of June 30, 2016 , £22 million , or $31 million , of contributions had been made to the United Kingdom pension plan.

( 9 ) Asset Retirement Obligation

MidAmerican Energy estimates its asset retirement obligation ("ARO") liabilities based upon detailed engineering calculations of the amount and timing of the future cash spending for a third party to perform the required work. Spending estimates are escalated for inflation and then discounted at a credit-adjusted, risk-free rate. Changes in estimates could occur for a number of reasons, including changes in laws and regulations, plan revisions, inflation and changes in the amount and timing of the expected work. During the three-month period ended June 30, 2016, MidAmerican Energy recorded an increase of $69 million to its ARO liability for the decommissioning of Quad Cities Generating Station Units 1 and 2 as a result of an updated decommissioning study reflecting changes in the estimated amount and timing of cash flow.


( 10 )	Risk Management and Hedging Activities

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

Each of the Company's business platforms has established a risk management process that is designed to identify, assess, manage, mitigate, monitor and report each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, the Company uses commodity derivative contracts, which may include forwards, futures, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. The Company manages its interest rate risk by limiting its exposure to variable interest rates primarily through the issuance of fixed-rate long-term debt and by monitoring market changes in interest rates. Additionally, the Company may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, forward sale commitments, or mortgage interest rate lock commitments, to mitigate the Company's exposure to interest rate risk. The Company does not hedge all of its commodity price, interest rate and foreign currency exchange rate risks, thereby exposing the unhedged portion to changes in market prices.

There have been no significant changes in the Company's accounting policies related to derivatives. Refer to Note 11 for additional information on derivative contracts.

The following table, which reflects master netting arrangements and excludes contracts that have been designated as normal under the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of the Company's derivative contracts, on a gross basis, and reconciles those amounts to the amounts presented on a net basis on the Consolidated Balance Sheets (in millions):



	Other						Other			Other
	Current			Other			Current			Long-term
	Assets			Assets			Liabilities			Liabilities			Total
As of June 30, 2016
Not designated as hedging contracts:
Commodity assets ⁽¹⁾	$	24		$	75		$	14		$	1		$	114
Commodity liabilities ⁽¹⁾	(4		)	(1		)	(72		)	(156		)	(233		)
Interest rate assets	14			—			—			—			14
Interest rate liabilities	—			—			(11		)	(15		)	(26		)
Total	34			74			(69		)	(170		)	(131		)

Designated as hedging contracts:
Commodity assets	1			—			3			3			7
Commodity liabilities	—			—			(21		)	(11		)	(32		)
Interest rate assets	—			—			—			—			—
Interest rate liabilities	—			—			(5		)	(10		)	(15		)
Total	1			—			(23		)	(18		)	(40		)

Total derivatives	35			74			(92		)	(188		)	(171		)
Cash collateral receivable	—			—			23			58			81
Total derivatives - net basis	$	35		$	74		$	(69	)	$	(130	)	$	(90	)



	Other					Other			Other
	Current			Other		Current			Long-term
	Assets			Assets		Liabilities			Liabilities			Total
As of December 31, 2015
Not designated as hedging contracts:
Commodity assets ⁽¹⁾	$	25		$	72	$	7		$	2		$	106
Commodity liabilities ⁽¹⁾	(4		)	—		(113		)	(175		)	(292		)
Interest rate assets	7			—		—			—			7
Interest rate liabilities	—			—		(3		)	(6		)	(9		)
Total	28			72		(109		)	(179		)	(188		)

Designated as hedging contracts:
Commodity assets	—			—		1			2			3
Commodity liabilities	—			—		(33		)	(17		)	(50		)
Interest rate assets	—			3		—			—			3
Interest rate liabilities	—			—		(4		)	(1		)	(5		)
Total	—			3		(36		)	(16		)	(49		)

Total derivatives	28			75		(145		)	(195		)	(237		)
Cash collateral receivable	—			—		40			63			103
Total derivatives - net basis	$	28		$	75	$	(105	)	$	(132	)	$	(134	)

(1)

The Company's commodity derivatives not designated as hedging contracts are generally included in regulated rates, and as of June 30, 2016 and December 31, 2015 , a net regulatory asset of $185 million and $250 million , respectively, was recorded related to the net derivative liability of $119 million and $186 million , respectively. The difference between the net regulatory asset and the net derivative liability relates primarily to a power purchase agreement derivative at BHE Renewables.

Not Designated as Hedging Contracts

The following table reconciles the beginning and ending balances of the Company's net regulatory assets and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory assets, as well as amounts reclassified to earnings (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Beginning balance	$	253		$	255		$	250		$	223
Changes in fair value recognized in net regulatory assets	(49		)	(3		)	(13		)	57
Net (losses) gains reclassified to operating revenue	(3		)	(2		)	(3		)	7
Net losses reclassified to cost of sales	(16		)	(17		)	(49		)	(54		)
Ending balance	$	185		$	233		$	185		$	233

Designated as Hedging Contracts

The Company uses commodity derivative contracts accounted for as cash flow hedges to hedge electricity and natural gas commodity prices for delivery to nonregulated customers, spring operational sales, natural gas storage and other transactions. Certain commodity derivative contracts have settled and the fair value at the date of settlement remains in AOCI and is recognized in earnings when the forecasted transactions impact earnings. The following table reconciles the beginning and ending balances of the Company's accumulated other comprehensive (income) loss (pre-tax) and summarizes pre-tax gains and losses on commodity derivative contracts designated and qualifying as cash flow hedges recognized in other comprehensive income ("OCI"), as well as amounts reclassified to earnings (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Beginning balance	$	72		$	27		$	46		$	32
Changes in fair value recognized in OCI	(28		)	25			20			17
Net gains reclassified to operating revenue	—			2			—			3
Net losses reclassified to cost of sales	(18		)	(16		)	(40		)	(14		)
Ending balance	$	26		$	38		$	26		$	38

Realized gains and losses on hedges and hedge ineffectiveness are recognized in income as operating revenue, cost of sales, operating expense or interest expense depending upon the nature of the item being hedged. For the three- and six-month periods ended June 30, 2016 and 2015 , hedge ineffectiveness was insignificant. As of June 30, 2016 , the Company had cash flow hedges with expiration dates extending through June 2026 and $22 million of pre-tax unrealized losses are forecasted to be reclassified from AOCI into earnings over the next twelve months as contracts settle.

Derivative Contract Volumes

The following table summarizes the net notional amounts of outstanding derivative contracts with fixed price terms that comprise the mark-to-market values as of (in millions):



	Unit of	June 30,		December 31,
	Measure	2016		2015
Electricity purchases	Megawatt hours	7		10
Natural gas purchases	Decatherms	311		317
Fuel purchases	Gallons	6		11
Interest rate swaps	US$	730		653
Mortgage sale commitments, net	US$	(464	)	(312	)

Credit Risk

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

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain credit support provisions that in part base certain collateral requirements on credit ratings for senior unsecured debt as reported by one or more of the three recognized credit rating agencies. These derivative contracts may either specifically provide bilateral rights to demand cash or other security if credit exposures on a net basis exceed specified rating-dependent threshold levels ("credit-risk-related contingent features") or provide the right for counterparties to demand "adequate assurance," or in some cases terminate the contract, in the event of a material adverse change in creditworthiness. These rights can vary by contract and by counterparty. As of June 30, 2016 , the applicable credit ratings from the three recognized credit rating agencies were investment grade.

The aggregate fair value of the Company's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $219 million and $288 million as of June 30, 2016 and December 31, 2015 , respectively, for which the Company had posted collateral of $68 million and $75 million , respectively, in the form of cash deposits. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of June 30, 2016 and December 31, 2015 , the Company would have been required to post $131 million and $198 million , respectively, of additional collateral. The Company's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors.


( 11 )	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 assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):



	Input Levels for Fair Value Measurements
	Level 1			Level 2			Level 3			Other ⁽¹⁾			Total
As of June 30, 2016
Assets:
Commodity derivatives	$	2		$	38		$	81		$	(26	)	$	95
Interest rate derivatives	—			—			14			—			14
Mortgage loans held for sale	—			510			—			—			510
Money market mutual funds ⁽²⁾	527			—			—			—			527
Debt securities:
United States government obligations	147			—			—			—			147
International government obligations	—			2			—			—			2
Corporate obligations	—			35			—			—			35
Municipal obligations	—			1			—			—			1
Agency, asset and mortgage-backed obligations	—			3			—			—			3
Auction rate securities	—			—			18			—			18
Equity securities:
United States companies	247			—			—			—			247
International companies	1,354			—			—			—			1,354
Investment funds	167			—			—			—			167
	$	2,444		$	589		$	113		$	(26	)	$	3,120
Liabilities:
Commodity derivatives	$	(4	)	$	(224	)	$	(37	)	$	107		$	(158	)
Interest rate derivatives	(1		)	(40		)	—			—			(41		)
	$	(5	)	$	(264	)	$	(37	)	$	107		$	(199	)



As of December 31, 2015
Assets:
Commodity derivatives	$	—		$	16		$	93		$	(16	)	$	93
Interest rate derivatives	—			5			5			—			10
Mortgage loans held for sale	—			327			—			—			327
Money market mutual funds ⁽²⁾	421			—			—			—			421
Debt securities:
United States government obligations	133			—			—			—			133
International government obligations	—			2			—			—			2
Corporate obligations	—			39			—			—			39
Municipal obligations	—			1			—			—			1
Agency, asset and mortgage-backed obligations	—			3			—			—			3
Auction rate securities	—			—			44			—			44
Equity securities:
United States companies	239			—			—			—			239
International companies	1,244			—			—			—			1,244
Investment funds	136			—			—			—			136
	$	2,173		$	393		$	142		$	(16	)	$	2,692
Liabilities:
Commodity derivatives	$	(13	)	$	(283	)	$	(46	)	$	119		$	(223	)
Interest rate derivatives	—			(13		)	(1		)	—			(14		)
	$	(13	)	$	(296	)	$	(47	)	$	119		$	(237	)


(1)	Represents netting under master netting arrangements and a net cash collateral receivable of $81 million and $103 million as of June 30, 2016 and December 31, 2015 , respectively.


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

Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at estimated fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which the Company transacts. When quoted prices for identical contracts are not available, the Company uses forward price curves. Forward price curves represent the Company's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. The Company bases its forward price curves upon market price quotations, when available, or internally developed and commercial models, with internal and external fundamental data inputs. Market price quotations are obtained from independent brokers, exchanges, direct communication with market participants and actual transactions executed by the Company. Market price quotations are generally readily obtainable for the applicable term of the Company's outstanding derivative contracts; therefore, the Company's forward price curves reflect observable market quotes. Market price quotations for certain electricity and natural gas trading hubs are not as readily obtainable due to the length of the contract. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, the Company uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The estimated fair value of these derivative contracts is a function of underlying forward commodity prices, interest rates, currency rates, related volatility, counterparty creditworthiness and duration of contracts. Refer to Note 10 for further discussion regarding the Company's risk management and hedging activities.

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 and are primarily accounted for as available-for-sale securities. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value. In the absence of a quoted market price or net asset value of an identical security, the fair value is determined using pricing models or net asset values based on observable market inputs and quoted market prices of securities with similar characteristics. The fair value of the Company's investments in auction rate securities, where there is no current liquid market, is determined using pricing models based on available observable market data and the Company's judgment about the assumptions, including liquidity and nonperformance risks, which market participants would use when pricing the asset.

The following table reconciles the beginning and ending balances of the Company's assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs (in millions):



	Three-Month Periods									Six-Month Periods
	Ended June 30,									Ended June 30,
				Interest			Auction						Interest			Auction
	Commodity			Rate			Rate			Commodity			Rate			Rate
	Derivatives			Derivatives			Securities			Derivatives			Derivatives			Securities
2016:
Beginning balance	$	58		$	11		$	26		$	47		$	4		$	44
Changes included in earnings	(20		)	29			—			(1		)	54			—
Changes in fair value recognized in OCI	6			—			2			—			—			6
Changes in fair value recognized in net regulatory assets	(5		)	—			—			(11		)	—			—
Redemptions	—			—			(10		)	—			—			(32		)
Settlements	5			(26		)	—			9			(44		)	—
Ending balance	$	44		$	14		$	18		$	44		$	14		$	18



	Three-Month Periods								Six-Month Periods
	Ended June 30,								Ended June 30,
				Interest			Auction					Interest			Auction
	Commodity			Rate			Rate		Commodity			Rate			Rate
	Derivatives			Derivatives			Securities		Derivatives			Derivatives			Securities
2015:
Beginning balance	$	49		$	8		$	44	$	51		$	—		$	45
Changes included in earnings	3			24			—		11			45			—
Changes in fair value recognized in OCI	(4		)	—			1		(3		)	—			—
Changes in fair value recognized in net regulatory assets	(14		)	—			—		(17		)	—			—
Purchases	1			—			—		1			—			—
Settlements	(1		)	(27		)	—		(9		)	(43		)	—
Transfers from Level 2	—			—			—		—			3			—
Ending balance	$	34		$	5		$	45	$	34		$	5		$	45

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



	As of June 30, 2016				As of December 31, 2015
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Long-term debt	$	36,881	$	43,660	$	37,972	$	41,785


( 12 )	Commitments and Contingencies

Legal Matters

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

USA Power

In October 2005, prior to BHE's ownership of PacifiCorp, PacifiCorp was added as a defendant to a lawsuit originally filed in February 2005 in the Third District Court of Salt Lake County, Utah ("Third District Court") by USA Power, LLC, USA Power Partners, LLC and Spring Canyon Energy, LLC (collectively, the "Plaintiff"). The Plaintiff's complaint alleged that PacifiCorp misappropriated confidential proprietary information in violation of Utah's Uniform Trade Secrets Act and accused PacifiCorp of breach of contract and related claims in regard to the Plaintiff's 2002 and 2003 proposals to build a natural gas-fueled generating facility in Juab County, Utah. In October 2007, the Third District Court granted PacifiCorp's motion for summary judgment on all counts and dismissed the Plaintiff's claims in their entirety. In a May 2010 ruling on the Plaintiff's petition for reconsideration, the Utah Supreme Court reversed summary judgment and remanded the case back to the Third District Court for further consideration. In May 2012, a jury awarded damages to the Plaintiff for breach of contract and misappropriation of a trade secret in the amounts of $18 million for actual damages and $113 million for unjust enrichment. After considering various motions filed by the parties to expand or limit damages, interest and attorney's fees, in May 2013, the court entered a final judgment against PacifiCorp in the amount of $115 million , which includes the $113 million of aggregate damages previously awarded and amounts awarded for the Plaintiff's attorneys' fees. The final judgment also ordered that postjudgment interest accrue beginning as of the date of the April 2013 initial judgment. In May 2013, PacifiCorp posted a surety bond issued by a subsidiary of Berkshire Hathaway to secure its estimated obligation. Both PacifiCorp and the Plaintiff filed appeals with the Utah Supreme Court. The Utah Supreme Court affirmed the district court's decision and denied the issues appealed by all parties. In May 2016, PacifiCorp paid $123 million for the final judgment and postjudgment interest.

Environmental Laws and Regulations

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

Hydroelectric Relicensing

PacifiCorp's Klamath hydroelectric system is currently operating under annual licenses with the Federal Energy Regulatory Commission ("FERC"). In February 2010, PacifiCorp, the United States Department of the Interior, the United States Department of Commerce, the state of California, the state of Oregon and various other governmental and non-governmental settlement parties signed the Klamath Hydroelectric Settlement Agreement ("KHSA"). Among other things, the KHSA provided that the United States Department of the Interior would conduct scientific and engineering studies to assess whether removal of the Klamath hydroelectric system's mainstem dams was in the public interest and would advance restoration of the Klamath Basin's salmonid fisheries. If it was determined that dam removal should proceed, dam removal would have begun no earlier than 2020.

Under the KHSA, PacifiCorp and its customers were protected from uncapped dam removal costs and liabilities. For dam removal to occur, federal legislation consistent with the KHSA was required to provide, among other things, protection for PacifiCorp from all liabilities associated with dam removal activities. As of December 31, 2015, no federal legislation had been enacted, and several parties to the KHSA initiated a dispute resolution process.

In February 2016, the principal parties to the KHSA (PacifiCorp, the states of California and Oregon and the United States Departments of the Interior and Commerce) executed an agreement in principle committing to explore potential amendment of the KHSA to facilitate removal of the Klamath dams through a FERC process without the need for federal legislation. Since that time, PacifiCorp, the states of California and Oregon, and the United States Departments of the Interior and Commerce have negotiated an amendment to the KHSA that was signed on April 6, 2016. Under the amended KHSA, PacifiCorp will file an application with the FERC to transfer the license for the four mainstem Klamath River hydroelectric generating facilities to a newly formed private entity, the Klamath River Renewal Corporation ("KRRC"). The KRRC will file an application with the FERC to surrender the license and decommission the facilities.

The amended KHSA provides PacifiCorp with liability protections comparable to the KHSA. The amended KHSA also limits PacifiCorp's contribution to facilities removal costs to no more than $200 million , of which up to $184 million would be collected from PacifiCorp's Oregon customers with the remainder to be collected from PacifiCorp's California customers. Additional funding of up to $250 million for facilities removal costs is to be provided by the state of California. California voters approved a water bond measure in November 2014 from which the state of California's contribution toward facilities removal costs will be drawn. If facilities removal costs exceed the combined funding that will be available from PacifiCorp's Oregon and California customers and the state of California, sufficient funds would need to be provided by the KRRC or an entity other than PacifiCorp in order for facilities removal to proceed.

If certain conditions in the amended KHSA are not satisfied and the license does not transfer to the KRRC, PacifiCorp will resume relicensing with the FERC.

Guarantees

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


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

The following table shows the change in AOCI attributable to BHE shareholders by each component of OCI, net of applicable income taxes (in millions):



							Unrealized
	Unrecognized			Foreign			Gains on		Unrealized			AOCI
	Amounts on			Currency			Available-		(Losses) Gains			Attributable
	Retirement			Translation			For-Sale		on Cash			To BHE
	Benefits			Adjustment			Securities		Flow Hedges			Shareholders, Net

Balance, December 31, 2014	$	(490	)	$	(412	)	$	390	$	18		$	(494	)
Other comprehensive (loss) income	(6		)	(161		)	282		(6		)	109
Balance, June 30, 2015	$	(496	)	$	(573	)	$	672	$	12		$	(385	)

Balance, December 31, 2015	$	(438	)	$	(1,092	)	$	615	$	7		$	(908	)
Other comprehensive income (loss)	62			(205		)	71		1			(71		)
Balance, June 30, 2016	$	(376	)	$	(1,297	)	$	686	$	8		$	(979	)

Reclassifications from AOCI to net income for the periods ended June 30, 2016 and 2015 were insignificant. For information regarding cash flow hedge reclassifications from AOCI to net income in their entirety, refer to Note 10 . Additionally, refer to the "Foreign Operations" discussion in Note 8 for information about unrecognized amounts on retirement benefits reclassifications from AOCI that do not impact net income in their entirety.


( 14 )	Segment Information

The Company's reportable segments with foreign operations include Northern Powergrid , whose business is principally in the United Kingdom, BHE Transmission , whose business includes operations in Canada, and BHE Renewables , whose business includes operations in the Philippines. Intersegment eliminations and adjustments, including the allocation of goodwill, have been made. Effective January 1, 2016, MidAmerican Energy transferred the assets and liabilities of its unregulated retail services business to MidAmerican Energy Services, LLC, a subsidiary of BHE . Prior period amounts have been changed to reflect this activity in BHE and Other . Information related to the Company's reportable segments is shown below (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Operating revenue:
PacifiCorp	$	1,233		$	1,269		$	2,485		$	2,519
MidAmerican Funding	585			576			1,211			1,303
NV Energy	707			835			1,322			1,541
Northern Powergrid	249			263			528			587
BHE Pipeline Group	188			208			503			540
BHE Transmission ⁽¹⁾	(18		)	150			140			275
BHE Renewables	170			190			309			314
HomeServices	841			758			1,332			1,206
BHE and Other ⁽²⁾	166			199			332			384
Total operating revenue	$	4,121		$	4,448		$	8,162		$	8,669

Depreciation and amortization:
PacifiCorp	$	199		$	196		$	396		$	390
MidAmerican Funding	110			99			220			199
NV Energy	105			103			209			204
Northern Powergrid	50			50			100			98
BHE Pipeline Group	54			50			107			100
BHE Transmission	66			53			116			91
BHE Renewables	56			56			112			105
HomeServices	9			6			15			12
BHE and Other ⁽²⁾	(1		)	(3		)	(1		)	(2		)
Total depreciation and amortization	$	648		$	610		$	1,274		$	1,197



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Operating income:
PacifiCorp	$	339		$	327		$	663		$	600
MidAmerican Funding	140			112			240			213
NV Energy	173			178			262			299
Northern Powergrid	125			130			283			323
BHE Pipeline Group	60			56			252			256
BHE Transmission ⁽¹⁾	(122		)	58			(46		)	104
BHE Renewables	52			66			76			72
HomeServices	93			85			92			83
BHE and Other ⁽²⁾	(6		)	(5		)	(15		)	(13		)
Total operating income	854			1,007			1,807			1,937
Interest expense	(468		)	(476		)	(941		)	(948		)
Capitalized interest ⁽¹⁾	103			22			114			51
Allowance for equity funds ⁽¹⁾	115			30			130			61
Interest and dividend income	27			26			54			52
Other, net	1			10			11			36
Total income before income tax expense and equity income	$	632		$	619		$	1,175		$	1,189



Interest expense:
PacifiCorp	$	96	$	95	$	191	$	190
MidAmerican Funding	55		50		109		100
NV Energy	63		65		130		128
Northern Powergrid	36		36		72		71
BHE Pipeline Group	13		17		26		35
BHE Transmission	38		37		74		73
BHE Renewables	48		49		97		95
HomeServices	—		1		1		2
BHE and Other ⁽²⁾	119		126		241		254
Total interest expense	$	468	$	476	$	941	$	948



Operating revenue by country:
United States	$	3,889		$	4,032	$	7,488	$	7,801
United Kingdom	249			263		528		587
Canada ⁽¹⁾	(17		)	153		143		280
Philippines and other	—			—		3		1
Total operating revenue by country	$	4,121		$	4,448	$	8,162	$	8,669



Income before income tax expense and equity income by country:
United States	$	498	$	465	$	856	$	823
United Kingdom	91		102		210		266
Canada	28		43		71		78
Philippines and other	15		9		38		22
Total income before income tax expense and equity income by country	$	632	$	619	$	1,175	$	1,189



	As of
	June 30,		December 31,
	2016		2015
Total assets:
PacifiCorp	$	23,471	$	23,550
MidAmerican Funding	16,643		16,315
NV Energy	14,227		14,656
Northern Powergrid	6,832		7,317
BHE Pipeline Group	5,075		4,953
BHE Transmission	8,583		7,553
BHE Renewables	6,273		5,892
HomeServices	2,079		1,705
BHE and Other ⁽²⁾	1,424		1,677
Total assets	$	84,607	$	83,618


(1)	Refer to Note 4 for information regarding certain regulatory matters impacting AltaLink's financial results for the three- and six-month periods ended June 30, 2016 .


(2)	The differences between the reportable segment amounts and the consolidated amounts, described as BHE and Other , relate principally to other entities, corporate functions and intersegment eliminations.

The following table shows the change in the carrying amount of goodwill by reportable segment for the six-month period ended June 30, 2016 (in millions):



										BHE									BHE
			MidAmerican		NV		Northern			Pipeline			BHE		BHE		Home-		and
	PacifiCorp		Funding		Energy		Powergrid			Group			Transmission		Renewables		Services		Other		Total

December 31, 2015	$	1,129	$	2,102	$	2,369	$	1,056		$	101		$	1,428	$	95	$	794	$	2	$	9,076
Acquisitions	—		—		—		—			—			5		—		45		—		50
Foreign currency translation	—		—		—		(75		)	—			100		—		—		1		26
Other	—		—		—		—			(13		)	—		—		—		—		(13		)
June 30, 2016	$	1,129	$	2,102	$	2,369	$	981		$	88		$	1,533	$	95	$	839	$	3	$	9,139


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

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

The Company's operations are organized and managed as eight business segments: PacifiCorp, MidAmerican Funding (which primarily consists of MidAmerican Energy), NV Energy (which primarily consists of Nevada Power and Sierra Pacific), Northern Powergrid (which primarily consists of Northern Powergrid (Northeast) Limited and Northern Powergrid (Yorkshire) plc), BHE Pipeline Group (which consists of Northern Natural Gas and Kern River), BHE Transmission (which consists of AltaLink and BHE U.S. Transmission), BHE Renewables and HomeServices. BHE , through these 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 selling power generated from solar, wind, geothermal and hydroelectric sources under long-term contracts, 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 reportable segment financial information includes all necessary adjustments and eliminations needed to conform to the Company's significant accounting policies. The differences between the reportable segment amounts and the consolidated amounts, described as BHE and Other , relate principally to other entities, corporate functions and intersegment eliminations. Effective January 1, 2016, MidAmerican Energy transferred the assets and liabilities of its unregulated retail services business to MidAmerican Energy Services, LLC, a subsidiary of BHE . Prior period amounts have been changed to reflect this activity in BHE and Other .

Results of Operations for the Second Quarter and First Six Months of 2016 and 2015

Overview

Net income for the Company's reportable segments is summarized as follows (in millions):



	Second Quarter											First Six Months
	2016			2015			Change					2016			2015			Change
Net income attributable to BHE shareholders:
PacifiCorp	$	177		$	172		$	5		3	%	$	342		$	306		$	36		12	%
MidAmerican Funding	127			124			3			2		200			219			(19		)	(9	)
NV Energy	76			78			(2		)	(3	)	97			122			(25		)	(20	)
Northern Powergrid	70			77			(7		)	(9	)	168			204			(36		)	(18	)
BHE Pipeline Group	30			24			6			25		139			136			3			2
BHE Transmission	68			48			20			42		116			91			25			27
BHE Renewables	32			35			(3		)	(9	)	44			35			9			26
HomeServices	55			49			6			12		56			47			9			19
BHE and Other	(99		)	(49		)	(50		)	*		(136		)	(133		)	(3		)	(2	)
Total net income attributable to BHE shareholders	$	536		$	558		$	(22	)	(4	)	$	1,026		$	1,027		$	(1	)	—

* Not meaningful

Net income attributable to BHE shareholders decreased $22 million for the second quarter of 2016 compared to 2015 due to the following.

•

PacifiCorp's net income increased primarily due to higher margins of $11 million. Margins increased primarily due to lower coal costs, higher retail rates and lower purchased electricity, partially offset by lower retail customer load and lower wholesale electricity revenue from lower volumes. Retail customer load decreased by 3.2% due to the impacts of lower industrial and commercial customer usage and the impacts of weather on residential customer load, partially offset by higher residential customer usage and an increase in the average number of residential and commercial customers primarily in Utah.

•

MidAmerican Funding's net income increased due to higher electric margins of $34 million, lower fossil-fueled generation maintenance of $3 million and higher recognized production tax credits of $2 million, substantially offset by lower other income tax benefits of $20 million due primarily to the effects of ratemaking, higher depreciation and amortization of $11 million due to wind-powered generation and other plant placed in-service and higher interest expense of $5 million primarily due to the issuance of first mortgage bonds in October 2015. Electric margins reflect higher retail sales volumes, lower energy costs, higher retail rates in Iowa and higher transmission revenue, partially offset by lower recoveries through bill riders and lower wholesale revenue.


•	NV Energy's net income decreased due to higher underlying operating expense of $5 million due to higher property and other taxes and higher depreciation and amortization of $2 million due to higher plant in-service, partially offset by higher electric margins of $7 million. Electric margins increased primarily due to the impacts of weather and customer growth.


•	Northern Powergrid's net income decreased largely due to the stronger United States dollar of $5 million. Higher tariff rates were more than offset by the recovery in 2015 of the December 2013 customer rebate, unfavorable movements in regulatory provisions and lower units distributed.


•	BHE Pipeline Group's net income increased due to lower operating expenses from the timing of overhauls and pipeline integrity projects, higher transportation revenues from expansion projects and lower interest expense due to the early redemption in December 2015 of the 6.676% Senior Notes at Kern River, partially offset by higher depreciation expense.

•

BHE Transmission's net income increased $20 million from higher earnings at AltaLink of $15 million primarily due to additional assets placed in-service, changes in contingent liabilities in 2016 and the 2015-2016 GTA decision received in May 2016, partially offset by the stronger United States dollar of $2 million, and $5 million due to higher equity earnings at Electric Transmission Texas, LLC from continued investment and additional plant placed in-service.


•	BHE Renewables' net income decreased primarily due to unfavorable changes in the valuations of a power purchase agreement derivative and interest rate swaps and lower revenue at Imperial Valley and the Solar Star projects, partially offset by higher production tax credits of $12 million, lower geothermal maintenance costs and lower project acquisition costs.


•	HomeServices' net income increased due to higher earnings at mortgage businesses from improved revenues and results from acquisitions, partially offset by lower earnings at existing brokerage businesses due to higher operating expenses.


•	BHE and Other net loss increased due primarily to higher than normal income tax benefits received on foreign earnings in 2015, a decrease in federal income tax credits recognized on a consolidated basis and lower earnings of $3 million at MidAmerican Energy Services, LLC, partially offset by lower interest expense.

Net income attributable to BHE shareholders decreased $1 million for the first six months of 2016 compared to 2015 due to the following:

•

PacifiCorp's net income increased due to higher margins of $62 million, partially offset by lower AFUDC of $7 million. Margins increased primarily due to lower coal costs, higher retail rates, lower purchased electricity and lower natural gas costs, partially offset by lower wholesale electricity revenue from lower volumes, and lower retail customer load. Retail customer load decreased by 1.1% due to the impacts of lower industrial and commercial customer usage, partially offset by higher residential customer usage, including the impact of weather, and an increase in the average number of residential and commercial customers primarily in Utah and Oregon.

•

MidAmerican Funding's net income decreased due to higher depreciation and amortization of $21 million from wind-powered generation and other plant placed in-service, a pre-tax gain of $13 million in 2015 on the sale of a generating facility lease, higher interest expense of $9 million primarily due to the issuance of first mortgage bonds in October 2015, lower recognized production tax credits of $6 million, lower allowance for borrowed and equity funds of $4 million and lower natural gas margins of $3 million due to warmer winter temperatures in 2016, partially offset by higher electric margins of $37 million, lower fossil-fueled generation maintenance of $7 million and lower electric distribution costs of $5 million. Electric margins reflect lower energy costs, higher retail rates in Iowa, higher retail sales volumes and higher transmission revenue, partially offset by lower wholesale revenue and lower recoveries through bill riders.

•

NV Energy's net income decreased due to higher underlying operating expense of $31 million and higher depreciation and amortization of $5 million due to higher plant in-service, partially offset by higher electric margins of $6 million. Operating expense increased due to benefits from changes in contingent liabilities in 2015, higher planned maintenance and other generating costs and higher property and other taxes. Electric margins increased primarily due to the impacts of weather and customer growth.


•	Northern Powergrid's net income decreased due to lower distribution revenues mainly reflecting the impact of the new price control period effective April 1, 2015, the stronger United States dollar of $10 million and higher distribution related costs, partially offset by lower pension costs.


•	BHE Pipeline Group's net income increased due to lower operating expenses from the timing of overhauls and pipeline integrity projects and lower interest expense due to the early redemption in December 2015 of the 6.676% Senior Notes at Kern River, partially offset by lower transportation revenues due to lower volumes and rates and higher depreciation expense.

•

BHE Transmission's net income increased $25 million from higher earnings at AltaLink of $19 million primarily due to additional assets placed in-service, changes in contingent liabilities in 2016, and the 2015-2016 GTA decision received in May 2016, partially offset by the stronger United States dollar of $6 million, and $6 million due to higher equity earnings at Electric Transmission Texas, LLC from continued investment and additional plant placed in-service.

•

BHE Renewables' net income increased due to lower operating expense and higher production tax credits of $21 million from the additional wind capacity placed in service, partially offset by lower geothermal revenues, higher interest expense and lower capitalized interest at the Solar Star project, higher depreciation expense due to additional capacity placed in service and unfavorable changes in the valuations of the interest rate swaps and a power purchase agreement derivative. Operating expense decreased due to the scope and timing of maintenance at certain geothermal plants and lower project acquisition costs, partially offset by additional solar and wind capacity placed in-service.


•	HomeServices' net income increased due to higher earnings at mortgage businesses from improved revenues and results from acquisitions and a $2 million gain in 2016 from the acquisition of interests in equity method investments, partially offset by lower earnings at existing brokerage businesses due to higher operating expenses.


•	BHE and Other net loss increased due primarily to higher than normal income tax benefits received on foreign earnings in 2015, a decrease in federal income tax credits recognized on a consolidated basis and lower earnings of $7 million at MidAmerican Energy Services, LLC, partially offset by favorable deferred state income tax benefits and lower interest expense.

Reportable Segment Results

Operating revenue and operating income for the Company's reportable segments are summarized as follows (in millions):



	Second Quarter										First Six Months
	2016			2015		Change					2016		2015		Change
Operating revenue:
PacifiCorp	$	1,233		$	1,269	$	(36	)	(3	)%	$	2,485	$	2,519	$	(34	)	(1	)%
MidAmerican Funding	585			576		9			2		1,211		1,303		(92		)	(7	)
NV Energy	707			835		(128		)	(15	)	1,322		1,541		(219		)	(14	)
Northern Powergrid	249			263		(14		)	(5	)	528		587		(59		)	(10	)
BHE Pipeline Group	188			208		(20		)	(10	)	503		540		(37		)	(7	)
BHE Transmission	(18		)	150		(168		)	*		140		275		(135		)	(49	)
BHE Renewables	170			190		(20		)	(11	)	309		314		(5		)	(2	)
HomeServices	841			758		83			11		1,332		1,206		126			10
BHE and Other	166			199		(33		)	(17	)	332		384		(52		)	(14	)
Total operating revenue	$	4,121		$	4,448	$	(327	)	(7	)	$	8,162	$	8,669	$	(507	)	(6	)



Operating income:
PacifiCorp	$	339		$	327		$	12		4	%	$	663		$	600		$	63		11	%
MidAmerican Funding	140			112			28			25		240			213			27			13
NV Energy	173			178			(5		)	(3	)	262			299			(37		)	(12	)
Northern Powergrid	125			130			(5		)	(4	)	283			323			(40		)	(12	)
BHE Pipeline Group	60			56			4			7		252			256			(4		)	(2	)
BHE Transmission	(122		)	58			(180		)	*		(46		)	104			(150		)	*
BHE Renewables	52			66			(14		)	(21	)	76			72			4			6
HomeServices	93			85			8			9		92			83			9			11
BHE and Other	(6		)	(5		)	(1		)	(20	)	(15		)	(13		)	(2		)	(15	)
Total operating income	$	854		$	1,007		$	(153	)	(15	)	$	1,807		$	1,937		$	(130	)	(7	)

* Not meaningful

PacifiCorp

Operating revenue decreased $36 million for the second quarter of 2016 compared to 2015 due to lower wholesale and other revenue of $19 million and lower retail revenue of $17 million. Wholesale and other revenue decreased due to lower wholesale volumes of $26 million, partially offset by higher average wholesale prices of $5 million. The decrease in retail revenue was due to lower retail customer load of $27 million, partially offset by higher retail rates of $10 million. Retail customer load decreased by 3.2% due to the impacts of lower industrial and commercial customer usage and the impacts of weather on residential customer load, partially offset by higher residential customer usage and an increase in the average number of residential and commercial customers primarily in Utah.

Operating income increased $12 million for the second quarter of 2016 compared to 2015 due to higher margins of $10 million. Margins increased due to lower energy costs of $47 million, partially offset by lower operating revenue. Energy costs decreased due to lower coal-fueled generation, lower purchased electricity prices and lower average cost of natural gas, partially offset by higher purchased electricity volumes, and a higher average cost of coal.

Operating revenue decreased $34 million for the first six months of 2016 compared to 2015 due to lower wholesale and other revenue of $61 million, partially offset by higher retail revenue of $27 million. Wholesale and other revenue decreased primarily due to lower wholesale volumes of $63 million. The increase in retail revenue was due to higher retail rates of $31 million, partially offset by lower retail customer load of $4 million. Retail customer load decreased by 1.1% due to the impacts of lower industrial and commercial customer usage, partially offset by higher residential customer usage, including the impacts of weather, and an increase in the average number of residential and commercial customers primarily in Utah.

Operating income increased $63 million for the first six months of 2016 compared to 2015 due to higher margins of $62 million. Margins increased due to lower energy costs of $96 million, partially offset by lower operating revenue. Energy costs decreased due to lower coal-fueled generation, lower purchased electricity prices and lower average cost of natural gas, partially offset by higher natural gas-fueled generation, higher purchased electricity volumes and higher average cost of coal.

MidAmerican Funding

Operating revenue increased $9 million for the second quarter of 2016 compared to 2015 due to higher electric operating revenue of $20 million, partially offset by lower natural gas operating revenue of $8 million and lower other operating revenue of $3 million. Electric operating revenue increased due to higher retail revenue of $31 million, partially offset by lower wholesale and other revenue of $11 million. Retail revenue increased $19 million from the impact of warmer second quarter cooling season temperatures in 2016, $11 million from higher electric rates in Iowa effective January 1, 2016, and $9 million from non-weather usage factors, partially offset by $8 million from lower recoveries through bill riders, which are substantially offset by cost of sales, operating expense and production tax credits. Electric retail customer load increased 5.6% from the favorable impact of temperatures and strong industrial growth. Electric wholesale and other revenue decreased primarily due to lower wholesale volumes of $15 million, partially offset by higher transmission revenue of $3 million related to Multi-Value Projects, which are expected to increase as projects are constructed over the next two years. Natural gas operating revenue decreased due to a lower average per-unit cost of gas sold of $14 million, which is offset in cost of sales, partially offset by 4.9% higher retail sales volumes, primarily from cooler second quarter heating season temperatures in 2016, and 12.2% higher wholesale volumes.

Operating income increased $28 million for the second quarter of 2016 compared to 2015 due to higher electric operating income. Electric operating income increased due to the higher operating revenue, lower energy costs of $14 million from lower coal-fueled generation in part due to greater wind-powered generation and a lower price for purchased power and lower fossil-fueled generation maintenance of $3 million from planned outages in 2015, partially offset by higher depreciation and amortization of $11 million due to wind generation and other plant placed in-service.

Operating revenue decreased $92 million for the first six months of 2016 compared to 2015 due to lower natural gas operating revenue of $77 million, lower other operating revenue of $8 million and lower electric operating revenue of $7 million. Natural gas operating revenue decreased due to a lower average per-unit cost of gas sold of $62 million, which is offset in cost of sales, and 7.2% lower retail sales volumes, primarily from warmer winter temperatures in 2016, partially offset by 1.9% higher wholesale volumes. Other operating revenue decreased primarily due to the completion of major projects of a nonregulated utility construction subsidiary in 2015. Electric operating revenue decreased due to lower wholesale and other revenue of $22 million, partially offset by higher retail revenue of $15 million. Electric wholesale and other revenue decreased due to lower wholesale volumes of $33 million, partially offset by higher wholesale prices of $3 million and higher transmission revenue of $7 million related to Multi-Value Projects, which are expected to increase as projects are constructed over the next two years. Retail revenue increased $21 million from higher electric rates in Iowa effective January 1, 2016, $12 million from warmer cooling season temperatures, net of warmer winter temperatures, in 2016, and $10 million from non-weather usage factors, partially offset by $28 million from lower recoveries through bill riders, which are substantially offset by cost of sales, operating expense and production tax credits. Electric retail customer load increased 2.4% from the favorable impact of temperatures and strong industrial growth.

Operating income increased $27 million for the first six months of 2016 compared to 2015 due to higher electric operating income of $31 million, partially offset by lower natural gas operating income of $4 million. Electric operating income increased due to lower energy costs of $44 million from lower coal-fueled generation in part due to greater wind-powered generation and a lower price for purchased power, lower fossil-fueled generation maintenance of $7 million from planned outages in 2015 and lower electric distribution costs of $5 million, partially offset by higher depreciation and amortization of $21 million due to wind generation and other plant placed in-service and the lower operating revenue. Natural gas operating income decreased due to the lower retail sales volumes in the first quarter of 2016.

NV Energy

Operating revenue decreased $128 million for the second quarter of 2016 compared to 2015 due to lower electric operating revenue of $121 million and lower natural gas operating revenue of $7 million primarily due to lower energy rates. Electric operating revenue decreased due to lower retail revenue of $109 million and lower wholesale and other revenue of $12 million primarily due to lower transmission revenue. Retail revenue decreased due to $128 million from lower retail rates primarily from lower energy costs which are passed on to customers through deferred energy adjustment mechanisms, partially offset by $16 million from higher customer growth and usage primarily due to the impacts of weather and $4 million from higher energy efficiency rate revenue, which is offset in operating expense. Electric retail customer load increased 2.6% compared to 2015.

Operating income decreased $5 million for the second quarter of 2016 compared to 2015 due to higher operating expense of $9 million, due to higher energy efficiency program costs, which is offset in operating revenue, and property and other taxes, and higher depreciation and amortization of $2 million due to higher plant in-service, partially offset by higher electric margins of $7 million. The change in electric margins is due to lower electric operating revenue, partially offset by lower energy costs of $128 million. Energy costs decreased due to lower net deferred power costs of $104 million and a lower average cost of fuel for generation of $38 million, partially offset by higher purchased power costs of $14 million.

Operating revenue decreased $219 million for the first six months of 2016 compared to 2015 due to lower electric operating revenue of $208 million and lower natural gas operating revenue of $10 million primarily due to lower energy rates, partially offset by higher customer usage. Electric operating revenue decreased due to lower retail revenue of $192 million and lower wholesale and other revenue of $16 million primarily due to lower transmission revenue. Retail revenue decreased due to $217 million from lower retail rates primarily from lower energy costs which are passed on to customers through deferred energy adjustment mechanisms, partially offset by $18 million from higher customer growth and usage primarily due to the impacts of weather and $6 million of higher energy efficiency rate revenue, which is offset in operating expense. Electric retail customer load increased 1.3% compared to 2015.

Operating income decreased $37 million for the first six months of 2016 compared to 2015 due to higher operating expense of $37 million, related to benefits from changes in contingent liabilities in 2015, higher energy efficiency program costs, which is offset in operating revenue, higher planned maintenance and other generating costs and higher property and other taxes, and higher depreciation and amortization of $5 million due to higher plant in-service, partially offset by higher electric margins of $6 million. The change in electric margins is due to lower electric operating revenue, partially offset by lower energy costs of $213 million. Energy costs decreased due to lower net deferred power costs of $174 million and a lower average cost of fuel for generation of $67 million, partially offset by higher purchased power costs of $28 million.

Northern Powergrid

Operating revenue decreased $14 million for the second quarter of 2016 compared to 2015 due to the stronger United States dollar of $17 million and lower distribution revenue of $1 million, partially offset by higher smart meter revenue of $4 million. Distribution revenue decreased due to the recovery in 2015 of the December 2013 customer rebate of $11 million, unfavorable movements in regulatory provisions of $5 million and lower units distributed of $3 million, partially offset by higher tariff rates of $18 million. Operating income decreased $5 million for the second quarter of 2016 compared to 2015 due to the stronger United States dollar of $9 million and higher distribution related costs of $3 million, partially offset by lower pension costs of $4 million.

Operating revenue decreased $59 million for the first six months of 2016 compared to 2015 due to the stronger United States dollar of $33 million and lower distribution revenues of $32 million, partially offset by higher smart meter revenue of $7 million. Distribution revenue decreased due to lower tariff rates of $29 million, mainly reflecting the impact of the new price control period effective April 1, 2015, and lower units distributed of $4 million. Operating income decreased $40 million for the first six months of 2016 compared to 2015 due to the lower distribution revenue, the stronger United States dollar of $17 million and higher distribution related costs of $8 million, partially offset by lower pension costs of $9 million.

BHE Pipeline Group

Operating revenue decreased $20 million for the second quarter of 2016 compared to 2015 due to lower gas sales of $24 million at Northern Natural Gas related to system balancing activities, which is largely offset in cost of sales. Operating income increased $4 million for the second quarter of 2016 compared to 2015 due to lower operating expenses due to the timing of overhauls and pipeline integrity projects, partially offset by higher depreciation.

Operating revenue decreased $37 million for the first six months of 2016 compared to 2015 due to lower gas sales of $27 million at Northern Natural Gas related to system balancing activities, which is largely offset in cost of sales, and lower transportation revenues at Northern Natural Gas from lower volumes and rates due to mild temperatures. Operating income decreased $4 million for the first six months of 2016 compared to 2015 due to the lower transportation revenues and higher depreciation, partially offset by lower operating expenses due to the timing of overhauls and pipeline integrity projects.

BHE Transmission

Operating revenue decreased $168 million for the second quarter of 2016 compared to 2015 due to one-time reductions totaling $225 million from the 2015-2016 GTA decision received in May 2016 at AltaLink. The decision requires AltaLink to refund $200 million to customers by the end of 2016 through reduced monthly billings for the change from receiving cash during construction for the return on construction work-in-progress in rate base to recording allowance for borrowed and equity funds used during construction related to construction expenditures during the 2011 to 2014 time period. This amount is offset in capitalized interest and allowance for equity funds. In addition, the decision requires AltaLink to change to the flow through method of recognizing income tax expense effective January 1, 2016. This change reduced operating revenue by $25 million with an offsetting impact to income tax expense. These one-time items were partially offset by $55 million from additional assets placed in-service and recovery of higher costs. Operating income decreased $180 million for the second quarter of 2016 compared to 2015 due to the lower operating revenues at AltaLink.

Operating revenue decreased $135 million for the first six months of 2016 compared to 2015 due to one-time reductions totaling $225 million from the 2015-2016 GTA decision received in May 2016 at AltaLink and $16 million due to the stronger United States dollar, partially offset by $106 million from additional assets placed in-service and recovery of higher costs. Operating income decreased $150 million for the first six months of 2016 compared to 2015 due to the lower operating revenue.

BHE Renewables

Operating revenue decreased $20 million for the second quarter of 2016 compared to 2015 due to an unfavorable change in the valuation of a power purchase agreement derivative of $14 million, lower geothermal generation of $7 million and lower solar generation of $4 million at the Solar Star Project, partially offset by higher wind generation at the Pinyon Pines and Jumbo Road projects of $4 million. Operating income decreased $14 million for the second quarter of 2016 compared to 2015 due to the decrease in operating revenue, partially offset by a $7 million decrease in operating expense due to the scope and timing of maintenance at certain geothermal plants and lower project acquisition costs.

Operating revenue decreased $5 million for the first six months of 2016 compared to 2015 due to lower geothermal generation of $13 million, lower solar generation of $4 million at the Topaz Project and an unfavorable change in the valuation of a power purchase agreement derivative of $5 million, partially offset by higher wind generation at the Pinyon Pines and Jumbo Road projects of $15 million. Operating income increased $4 million for the first six months of 2016 compared to 2015 due to lower operating expense of $15 million, partially offset by higher depreciation and amortization of $7 million from additional solar and wind capacity placed in-service and the lower operating revenue of $4 million. Operating expense decreased due to the scope and timing of maintenance at certain geothermal plants and lower project acquisition costs, partially offset by additional solar and wind capacity placed in-service.

HomeServices

Operating revenue increased $83 million for the second quarter 2016 compared to 2015 due to an 11.5% increase in closed brokerage units. The increase in operating revenue was due to an increase from existing businesses totaling $29 million and an increase in acquired businesses totaling $54 million. The increase in existing businesses reflects a 1.9% increase in closed brokerage units, a 1.4% increase in average home sales prices and $9 million of higher mortgage revenue. Operating income increased $8 million for the second quarter of 2016 compared to 2015 due to the higher revenues at existing and acquired businesses, partially offset by higher cost of sales and operating expense, primarily commission expense, at existing and acquired businesses.

Operating revenue increased $126 million for the first six months of 2016 compared to 2015 due to a 10.6% increase in closed brokerage units and a 1.5% increase in average home sales prices. The increase in operating revenue was due to an increase from existing businesses totaling $48 million and an increase in acquired businesses totaling $78 million. The increase in existing businesses reflects a 2.1% increase in closed brokerage units, a 2.7% increase in average home sales prices and $13 million of higher mortgage revenue. Operating income increased $9 million for the first six months of 2016 compared to 2015 due to the higher revenues at existing and acquired businesses, partially offset by higher cost of sales and operating expense, primarily commission expense, at existing and acquired businesses.

BHE and Other

Operating revenue decreased $33 million for the second quarter of 2016 compared to 2015 due to lower electricity volumes and natural gas prices and volumes, at MidAmerican Energy Services, LLC. Operating loss increased $1 million for the second quarter of 2016 compared to 2015 due to higher operating expenses at MidAmerican Energy Services, LLC.

Operating revenue decreased $52 million for the first six months of 2016 compared to 2015 due to lower electricity volumes and natural gas prices and volumes, partially offset by higher electricity prices, at MidAmerican Energy Services, LLC. Operating loss increased $2 million for the first six months of 2016 compared to 2015 due to lower margins of $7 million and higher operating expenses at MidAmerican Energy Services, LLC, partially offset by lower other operating expenses.

Consolidated Other Income and Expense Items

Interest Expense

Interest expense is summarized as follows (in millions):



	Second Quarter									First Six Months
	2016		2015		Change					2016		2015		Change

Subsidiary debt	$	347	$	346	$	1		—	%	$	697	$	687	$	10		1	%
BHE senior debt and other	103		101		2			2		204		204		—			—
BHE junior subordinated debentures	18		29		(11		)	(38	)	40		57		(17		)	(30	)
Total interest expense	$	468	$	476	$	(8	)	(2	)	$	941	$	948	$	(7	)	(1	)

Interest expense on subsidiary debt increased $1 million for the second quarter of 2016 compared to 2015 and $10 million for the first six months of 2016 compared to 2015 due to debt issuances at MidAmerican Funding, NV Energy, Northern Powergrid, AltaLink and BHE Renewables, partially offset by scheduled maturities and principal payments and the impact of foreign currency exchange rate movements of $4 million and $10 million, respectively.

Interest expense on BHE junior subordinated debentures decreased $11 million for the second quarter of 2016 compared to 2015 and $17 million for the first six months of 2016 compared to 2015 due to repayments totaling $500 million in June 2016, $500 million in March 2016, $250 million in December 2015 and $600 million in June 2015.

Capitalized Interest

Capitalized interest increased $81 million for the second quarter of 2016 compared to 2015 and $63 million for the first six months of 2016 compared to 2015 due to $96 million recorded in the second quarter of 2016 from the 2015-2016 GTA decision received in May 2016 at AltaLink, which is offset in operating revenue, partially offset by lower construction work-in-progress balances at AltaLink, BHE Renewables, PacifiCorp and MidAmerican Energy.

Allowance for Equity Funds

Allowance for equity funds increased $85 million for the second quarter of 2016 compared to 2015 and $69 million for the first six months of 2016 compared to 2015 due to $104 million recorded in the second quarter of 2016 from the 2015-2016 GTA decision received in May 2016 at AltaLink, which is offset in operating revenue, partially offset by lower construction work-in-progress balances at AltaLink, PacifiCorp and MidAmerican Energy.

Other, net

Other, net decreased $9 million for the second quarter of 2016 compared to 2015 primarily due to unfavorable movements in the Pinyon Pines interest rate swaps of $7 million.

Other, net decreased $25 million for the first six months of 2016 compared to 2015 primarily due to a $13 million gain at MidAmerican Funding on the sale of a generating facility lease in 2015 and unfavorable movements in the Pinyon Pines interest rate swaps of $11 million.

Income Tax Expense

Income tax expense increased $39 million for the second quarter of 2016 compared to 2015 and the effective tax rate was 19% for 2016 and 13% for 2015 . The effective tax rate increased due to favorable United States income taxes on foreign earnings in 2015 of $36 million.

Income tax expense decreased $10 million for the first six months of 2016 compared to 2015 and the effective tax rate was 17% for both 2016 and 2015 . The effective tax rate remained unchanged as favorable deferred state income tax benefits, higher production tax credits recognized of $8 million and favorable impacts of rate making of $6 million were offset by favorable United States income taxes on foreign earnings in 2015 of $30 million.

Equity Income

Equity income increased $4 million for the second quarter of 2016 compared to 2015 due to higher equity earnings of $8 million at Electric Transmission Texas, LLC from continued investment and additional plant placed in-service, partially offset by a loss of $3 million from tax equity investments at BHE Renewables.

Equity income increased $4 million for the first six months of 2016 compared to 2015 due to higher equity earnings of $9 million at Electric Transmission Texas, LLC from continued investment and additional plant placed in-service, partially offset by a loss of $6 million from tax equity investments at BHE Renewables.

Liquidity and Capital Resources

Each of BHE 's direct and indirect subsidiaries is organized as a legal entity separate and apart from BHE and its other subsidiaries. It should not be assumed that the assets of any subsidiary will be available to satisfy BHE 's obligations or the obligations of its other subsidiaries. However, unrestricted cash or other assets that are available for distribution may, subject to applicable law, regulatory commitments and the terms of financing and ring-fencing arrangements for such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to BHE or affiliates thereof. Refer to Note 17 of Notes to Consolidated Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion regarding the limitation of distributions from BHE 's subsidiaries.

The Company's long-term debt may include provisions that allow BHE or its subsidiaries to redeem such debt in whole or in part at any time. These provisions generally include make-whole premiums.

As of June 30, 2016 , the Company's total net liquidity was as follows (in millions):



							MidAmerican			NV			Northern
	BHE			PacifiCorp			Funding			Energy			Powergrid		AltaLink			Other			Total

Cash and cash equivalents	$	10		$	59		$	204		$	177		$	32	$	15		$	281		$	778

Credit facilities	2,000			1,000			609			650			200		870			1,003			6,332
Less:
Short-term debt	(533		)	—			—			—			—		(321		)	(615		)	(1,469		)
Tax-exempt bond support and letters of credit	(11		)	(150		)	(190		)	(80		)	—		(7		)	—			(438		)
Net credit facilities	1,456			850			419			570			200		542			388			4,425

Total net liquidity	$	1,466		$	909		$	623		$	747		$	232	$	557		$	669		$	5,203
Credit facilities:
Maturity dates	2019			2018, 2019			2017, 2018			2018			2020		2017, 2020			2016, 2017, 2018

Operating Activities

Net cash flows from operating activities for the six-month periods ended June 30, 2016 and 2015 were $2.8 billion and $3.5 billion , respectively. The change was primarily due to lower income tax receipts of $733 million and payment for the USA Power final judgment and postjudgment interest of $123 million.

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") was signed into law, extending bonus depreciation for qualifying property acquired and placed in-service before January 1, 2020 (bonus depreciation rates will be 50% in 2015-2017, 40% in 2018, and 30% in 2019), with an additional year for certain longer lived assets. Production tax credits were extended and phased-out for wind power and other forms of non-solar renewable energy projects that begin construction before the end of 2019. Production tax credits are maintained at full value through 2016, at 80% of value in 2017, at 60% of value in 2018, and 40% of value in 2019. Investment tax credits were extended and phased-down for solar projects that are under construction before the end of 2021 (investment tax credit rates are 30% through 2019, 26% in 2020 and 22% in 2021; they revert to the statutory rate of 10% thereafter). As a result of PATH, the Company's cash flows from operations are expected to benefit in 2016 and beyond due to bonus depreciation on qualifying assets placed in-service and production tax credits and investment tax credits earned on qualifying wind and solar projects, respectively.

Investing Activities

Net cash flows from investing activities for the six-month periods ended June 30, 2016 and 2015 were $(2.5) billion and $(2.6) billion , respectively. The change was primarily due to lower capital expenditures of $521 million, partially offset by a $264 million tax equity investment in 2016.

Financing Activities

Net cash flows from financing activities for the six-month period ended June 30, 2016 was $(642) million . Uses of cash totaled $2.6 billion and consisted mainly of repayment of BHE junior subordinated debentures of $1.0 billion and repayments of subsidiary debt totaling $1.5 billion . Sources of cash totaled $1.9 billion related to $1.5 billion of proceeds from subsidiary debt issuances and $465 million net proceeds from short-term debt.

For a discussion of recent financing transactions, refer to Note 6 of Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Net cash flows from financing activities for the six-month period ended June 30, 2015 was $(373) million . Uses of cash totaled $1.6 billion and consisted mainly of repayment of BHE junior subordinated debentures of $600 million, repayments of subsidiary debt totaling $527 million, net repayments of short-term debt of $405 million and repurchases of common stock totaling $36 million. Sources of cash totaled $1.2 billion related to proceeds from subsidiary debt issuances.

Future Uses of Cash

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

Capital Expenditures

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

The Company's historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items are as follows (in millions):



	Six-Month Periods				Annual
	Ended June 30,				Forecast
	2015		2016		2016
Capital expenditures by business :
PacifiCorp	$	419	$	415	$	778
MidAmerican Funding	428		506		1,164
NV Energy	223		274		573
Northern Powergrid	382		307		637
BHE Pipeline Group	88		74		275
BHE Transmission	516		272		408
BHE Renewables	556		242		572
HomeServices	5		8		25
BHE and Other	7		5		26
Total	$	2,624	$	2,103	$	4,458



Capital expenditures by type:
Wind generation	$	358	$	370	$	1,171
Solar generation	428		9		32
Electric transmission	549		234		630
Environmental	62		31		94
Other development projects	22		16		137
Electric distribution and other operating	1,205		1,443		2,394
Total	$	2,624	$	2,103	$	4,458

The Company's historical and forecast capital expenditures consisted mainly of the following:

• Wind generation includes the following:

◦

Construction of wind-powered generating facilities at MidAmerican Energy totaling $172 million and $236 million for the six-month periods ended June 30, 2016 and 2015 , respectively. MidAmerican Energy anticipates costs for wind-powered generating facilities will total an additional $516 million for 2016 . MidAmerican Energy is constructing 599 MW (nominal ratings) that are expected to be placed in-service in 2016, of which 48 MW (nominal ratings) had been placed in-service as of June 30, 2016 .

◦

Construction of wind-powered generating facilities at BHE Renewables totaling $198 million and $122 million for the six-month periods ended June 30, 2016 and 2015 , respectively. The Marshall Wind Project with a total capacity of 72 MW achieved commercial operation in April 2016 and the Jumbo Road Project with a total capacity of 300 MW achieved commercial operation in April 2015. BHE Renewables anticipates costs for wind-powered generating facilities will total an additional $265 million for 2016 . BHE Renewables is developing and constructing up to 400 MW of wind-powered generating facilities in Nebraska.


•	Solar generation includes the following:


◦	Construction of the Topaz Project totaling $- million and $49 million for the six-month periods ended June 30, 2016 and 2015 , respectively. Final completion under the engineering, procurement and construction agreement occurred February 28, 2015, and project completion was achieved under the financing documents on March 30, 2015.

◦

Construction of the Solar Star Projects totaling $9 million and $362 million for the six-month periods ended June 30, 2016 and 2015 , respectively. Both projects declared July 1, 2015 as the commercial operation date in accordance with the power purchase agreements. Final completion under the engineering, procurement and construction agreements occurred November 30, 2015 and project completion was achieved under the financing documents on December 15, 2015.


•	Electric transmission includes investments for ALP's transmission system including directly assigned projects from the AESO, PacifiCorp's costs primarily associated with main grid reinforcement and the Energy Gateway Transmission Expansion Program and MidAmerican Energy's MVPs approved by the MISO for the construction of 245 miles of 345 kV transmission line located in Iowa and Illinois.

•

Environmental includes the installation of new or the replacement of existing emissions control equipment at certain generating facilities at the Utilities , including installation or upgrade of selective catalytic reduction control systems and low nitrogen oxide burners to reduce nitrogen oxides, particulate matter control systems, sulfur dioxide emissions control systems and mercury emissions control systems, as well as expenditures for the management of coal combustion residuals.


•	Electric distribution and other operating includes ongoing distribution systems infrastructure needed at the Utilities and Northern Powergrid and investments in routine expenditures for transmission, generation and other infrastructure needed to serve existing and expected demand.

MidAmerican Energy Wind

In April 2016, MidAmerican Energy filed with the IUB an application for ratemaking principles related to the construction of up to 2,000 MW (nominal ratings) of additional wind-powered generating facilities expected to be placed in service in 2017 through 2019. The filing, which is subject to IUB approval, establishes a cost cap of $3.6 billion, including AFUDC, and provides for a fixed rate of return on equity of 11.5% over the proposed 40-year useful lives of those facilities in any future Iowa rate proceeding. The cost cap ensures that as long as total costs are below the cap, the investment will be deemed prudent in any future Iowa rate proceeding. Additionally, the filing proposes modifications to the revenue sharing mechanism currently in effect. The proposed sharing mechanism would be effective in 2018 and would be triggered each year by actual equity returns if they are above the weighted average return on equity for MidAmerican Energy calculated annually. Pursuant to the proposed change in revenue sharing, MidAmerican Energy would share 100% of the revenue in excess of this trigger with customers. Such revenue sharing would reduce coal and nuclear generation rate base, which is intended to mitigate future base rate increases. MidAmerican Energy has requested IUB approval by the end of the third quarter of 2016. If approved by the IUB, MidAmerican Energy expects to incur approximately $300 million of additional capital expenditures in 2016, which are not reflected in the current 2016 forecast.

In July 2016, MidAmerican Energy filed with the IUB a settlement agreement between MidAmerican Energy and the intervenors in the ratemaking principles proceeding that resolves all contested issues associated with MidAmerican Energy’s application. All of the major terms of the application discussed above remain unchanged other than the fixed rate of return on equity over the 40‑year useful life of the facilities, which the settlement agreement modifies to 11.0%. The settlement agreement is subject to approval by the IUB.

Other Renewable Investments

The Company has invested in projects sponsored by third parties, commonly referred to as tax equity investments. Under the terms of these tax equity investments, the Company has entered into equity capital contribution agreements with the project sponsors that require contributions. The Company has made contributions of approximately $170 million in 2015, $264 million through June 30, 2016 and expects to contribute $406 million for the remainder of 2016 pursuant to these equity capital contribution agreements as the various projects achieve commercial operation. Once a project achieves commercial operation, the Company will enter into a partnership agreement with the project sponsor that directs and allocates the operating profits and tax benefits generated by the project.

Contractual Obligations

As of June 30, 2016 , there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2015 other than the 2016 debt issuances and the renewable tax equity investments previously discussed.

Quad Cities Station Operating Status

Exelon Generation Company, LLC ("Exelon Generation"), the operator of Quad Cities Generating Station Units 1 and 2 ("Quad Cities Station") of which MidAmerican Energy has a 25% ownership interest, announced on June 2, 2016, its intention to shut down Quad Cities Station on June 1, 2018, as a result of Illinois not passing adequate legislation and Quad Cities Station not clearing the 2019-2020 PJM Interconnection, L.L.C. capacity auction. MidAmerican Energy has expressed to Exelon Generation its desire for the continued operation of the facility through the end of its operating license in 2032 and continues to work with Exelon Generation for solutions to that end. An early shutdown of Quad Cities Station before the end of its operating license would require an evaluation of MidAmerican Energy's legal rights pursuant to the Quad Cities Station agreements with Exelon Generation. In addition, the carrying value and classification of assets and liabilities related to Quad Cities Station on MidAmerican Energy's balance sheets would need to be evaluated, and a determination made of the sufficiency of the nuclear decommissioning trust fund to fund decommissioning costs at an earlier retirement date. If the trust fund is determined to be deficient, MidAmerican Energy may be required to contribute additional assets to the trust fund or directly pay certain decommissioning costs.

Regulatory Matters

BHE's regulated subsidiaries and certain affiliates are subject to comprehensive regulation. The discussion below contains material developments to those matters disclosed in Item 1 of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2015 , and new regulatory matters occurring in 2016 .

Wholesale Electricity and Capacity

The FERC regulates the Utilities' rates charged to wholesale customers for electricity and transmission capacity and related services. Most of the Utilities' wholesale electricity sales and purchases occur under market-based pricing allowed by the FERC and are therefore subject to market volatility.

The Utilities' and BHE Renewables' authority to sell electricity in wholesale electricity markets at market-based rates is subject to triennial reviews conducted by the FERC. Accordingly, the Utilities and BHE Renewables are required to submit triennial filings to the FERC that demonstrate a lack of market power over sales of wholesale electricity and electric generation capacity in their respective market areas. In June 2016, BHE Renewables submitted a triennial filing to the FERC for the southwest region and PacifiCorp and NV Energy submitted a triennial filing for the northwest region. These filings are pending at the FERC. On December 9, 2014, the FERC issued an order requesting that the BHE subsidiaries having authority to sell power and energy at market-based rates, including the Utilities, show cause why their market-based rate authority remains just and reasonable following BHE's acquisition of NV Energy. In June 2016, the FERC issued an order for all BHE subsidiaries, including the Utilities, with market-based rates to amend their respective market-based tariffs to preclude them from selling in the PacifiCorp East, PacifiCorp West, Idaho Power Company and NorthWestern Corporation balancing authority areas (the "Mitigated BAAs") at market-based rates. These tariff amendments have been filed. In addition, the specified BHE subsidiaries were ordered to issue refunds for market-based wholesale electricity sales in the Mitigated BAAs for the period from January 2015 through April 2016, to the extent such sales were priced above cost-based rates. Such refunds, totaling less than $1 million, were made by PacifiCorp, Nevada Power and Sierra Pacific in July 2016. MidAmerican Energy and BHE Renewables do not transact in the Mitigated BAAs. In July 2016, the specified BHE subsidiaries affected in the order filed a request for rehearing and clarification. The specified BHE subsidiaries affected in the order do not believe the order will have a material impact on their respective consolidated financial statements.

PacifiCorp

Utah

In March 2016, PacifiCorp filed its annual Energy Balancing Account ("EBA") with the UPSC requesting recovery of $19 million in deferred net power costs for the period January 1, 2015 through December 31, 2015. If approved by the UPSC, the new rates will be effective November 2016.

In March 2016, PacifiCorp filed its annual Renewable Energy Credit ("REC") balancing account application with the UPSC requesting recovery of $7 million for the period January 1, 2015 through December 31, 2015. The UPSC approved interim rates effective June 2016, until a final order is issued.

The Utah Sustainable Transportation and Energy Plan was signed into law in March 2016. The legislation establishes a five-year pilot program to provide up to $10 million annually of mandated funding for electric vehicle infrastructure and clean coal research, and authorizes funding at the commission's discretion for solar development, utility-scale battery storage, and other innovative technology, economic development and air quality initiatives. The legislation allows PacifiCorp to change its regulatory accounting for energy efficiency services and programs from expense to capital, to be amortized over a ten-year period. The difference between amounts collected in rates for energy efficiency services and programs and the annual amount of cost amortization will result in a regulatory liability that may be used for depreciation of its coal-fired plants, as determined by the commission. Beginning June 1, 2016, the legislation mandates full recovery of Utah's share of incremental fuel, purchased power and other variable supply costs through the EBA that are not fully in base rates rather than the prior recovery of 70%. The legislation also allows for the approval by the UPSC of a renewable energy tariff that would allow qualifying customers to receive 100% renewable energy from PacifiCorp. In June 2016, PacifiCorp filed an application seeking approval of its proposed renewable energy tariff.

Oregon

In April 2016, PacifiCorp submitted its initial filing for the annual Transition Adjustment Mechanism filing in Oregon requesting an annual increase of $20 million, or an average price increase of 2%, based on forecasted net power costs and loads for calendar year 2017. Consistent with the passage of Oregon Senate Bill 1547-B ("SB 1547-B"), the filing includes the impact of expiring production tax credits, which account for $5 million of the requested increase. The filing will be updated for changes in contracts and market conditions in November 2016, before final rates become effective in January 2017.

Wyoming

In March 2016, PacifiCorp filed its annual Energy Cost Adjustment Mechanism ("ECAM") and Renewable Energy Credit and Sulfur Dioxide Revenue Adjustment Mechanism ("RRA") applications with the WPSC. The ECAM filing requests approval to recover $12 million in deferred net power costs for the period January 1, 2015 through December 31, 2015, and the RRA application requests approval to refund $1 million to customers. In May 2016, the WPSC approved ECAM and RRA rates on an interim basis until a final order is issued by the WPSC.

Washington

In December 2013, the WUTC approved an annual increase of $17 million, or an average price increase of 6%, effective December 2013 related to a general rate case filed in January 2013 requesting $37 million, or an average price increase of 12%. In January 2014, PacifiCorp filed a petition for judicial review of certain findings of the WUTC's December 2013 order. In April 2016, the Washington Court of Appeals issued its order in the appeal of the general rate case. The two issues before the court were the WUTC's decisions to: (1) re-price power purchase agreements with California and Oregon qualifying facilities at market prices; and (2) the cost of capital, including use of a hypothetical capital structure. The court affirmed the WUTC, deferring to the WUTC's discretion in ratemaking and concluding that it did not abuse that discretion.

In May and June 2016, the WUTC held evidentiary hearings in PacifiCorp's November 2015 rate filing, two-year rate plan and decoupling mechanism proceeding. PacifiCorp's rebuttal filing requests a revenue increase of $9 million, or an average price increase of 3%, effective in mid-2016, and a second step revenue increase of $10 million, or an average price increase of 3%, effective in mid-2017. As part of the proposed rate plan, PacifiCorp is proposing to not file a general rate case in Washington with rates effective earlier than mid-2018. A final decision is expected in August 2016.

Idaho

In February 2016, PacifiCorp filed its annual ECAM application with the IPUC requesting recovery of $17 million, consisting primarily of $7 million for deferred net power costs, $6 million for the difference between REC revenues included in base rates and actual REC revenues and $4 million for a Lake Side 2 resource adder. In March 2016, the IPUC approved recovery of $17 million effective April 2016.

California

In March 2016, the CPUC approved PacifiCorp's application to recover a $1 million revenue requirement associated with drought-related fire hazard mitigation costs recorded in its catastrophic events memorandum account in 2014.

NV Energy (Nevada Power and Sierra Pacific)

Chapter 704B Applications

In November 2014, one Nevada Power retail electric customer filed an application with the PUCN to purchase energy from a provider of a new electric resource and become a distribution only service customer, as allowed by Chapter 704B of the Nevada Revised Statutes. Chapter 704B allows retail electric customers with an average annual load of one MW or more to file a letter of intent and application with the PUCN to acquire electric energy and ancillary services from another energy supplier. The application was denied in June 2015 and the customer subsequently filed a petition for reconsideration. In July 2015, the PUCN approved a settlement between the customer and Nevada Power. In October 2015, the PUCN approved a separate green energy agreement between Nevada Power and the customer and tariff changes embedded in the settlement agreement. The customer withdrew its petition for reconsideration in November 2015.

In May 2015, three additional Nevada Power customers filed applications to purchase energy from a provider of a new electric resource and become a distribution only service customer. In December 2015, the PUCN granted the applications of the three customers subject to conditions, including paying an impact fee, on-going charges and receiving approval for specific alternative energy providers and terms. The costs associated with the impact fee and on-going charges were assessed to reimburse Nevada Power for the customers’ share of previously committed investments and long-term renewable contracts. The impact fee is set at a level designed to insure remaining customers are not subjected to increased costs. In December 2015, the customers filed petitions for reconsideration. In January 2016, the PUCN granted reconsiderations and updated some of the terms, removing a limitation related to energy purchased indirectly from NV Energy. One of the customers subsequently filed a petition for judicial review and a complaint for declaratory relief in state district court. In June 2016, two of the customers made the required compliance filings and the PUCN issued orders allowing the customers to acquire electric energy and ancillary services from another energy supplier and become a distribution only service customer of Nevada Power. The two customers have subsequently each filed a Notice of Intent to Proceed with the PUCN. The third customer did not make its compliance filing before the required deadline. There are no applications pursuant to Chapter 704B pending before the PUCN in Nevada Power's respective service territory.

In July 2016, one Sierra Pacific retail electric customer filed an application with the PUCN to acquire electric energy and ancillary services from another energy supplier and become a distribution only service customer.

Net Metering

Nevada enacted Senate Bill 374 ("SB 374") on June 5, 2015. The legislation required the Nevada Utilities to prepare cost-of-service studies and propose new rules and rates for customers who install distributed, renewable generating resources. In July 2015, the Nevada Utilities made filings in compliance with SB 374 and the PUCN issued final orders December 23, 2015.

The final orders issued by the PUCN establish separate rate classes for customers who install distributed, renewable generating facilities. The establishment of separate rate classes recognizes the unique characteristics, costs and services received by these partial requirements customers. The PUCN also established new, cost-based rates or prices for these new customer classes, including increases in the basic service charge and related reductions in energy charges. Finally, the PUCN established a separate value for compensating customers who produce and deliver excess energy to the Nevada Utilities. The valuation will consider eleven factors, including alternatives available to the Nevada Utilities. The PUCN established a gradual, five-step process for transition over four years to the new, cost-based rates.

In January 2016, the PUCN denied requests to stay the order issued December 23, 2015. The PUCN also voted to reopen the evidentiary proceeding to address the application of new net metering rules for customers who applied for net metering service before the issuance of the final order. In February 2016, the PUCN affirmed most of the provisions of the December 23, 2015 order and adopted a twelve-year transition plan for changing rates for net metering customers to cost-based rates for utility services and value-based pricing for excess energy. Subsequently, two solar industry interest groups filed petitions for judicial review of the PUCN order issued in February 2016. The petitions request that the court either modify the PUCN order or direct the PUCN to modify its decision in a manner that would maintain rates and rules of service applicable to net metering as existed prior to the December 23, 2015 order of the PUCN. Two of the three petitions filed by the solar industry interest groups have been dismissed and a third remains pending before a state district court. In addition, a referendum has been filed in Nevada to modify the statutes applicable to net metering. This referendum was challenged in Nevada state district court and the court determined the referendum was not consistent with the Nevada Constitution. The Nevada state district court decision was appealed to the Nevada Supreme Court. In August 2016, the Nevada Supreme Court upheld the Nevada state district court decision.

General Rate Cases

In June 2016, Sierra Pacific filed an electric general rate case with the PUCN. The filing requests no incremental annual revenue relief. An order is expected by the end of 2016 and, if approved, would be effective January 1, 2017.

In June 2016, Sierra Pacific filed a gas general rate case with the PUCN. The filing requests a slight decrease in its incremental annual revenue requirement. An order is expected by the end of 2016 and, if approved, would be effective January 1, 2017.

ALP

General Tariff Applications

In November 2014, ALP filed a GTA asking the AUC to approve revenue requirements of C$811 million for 2015 and C$1.0 billion for 2016, primarily due to continued investment in capital projects as directed by the AESO. ALP amended the GTA in June 2015 to propose additional transmission tariff relief measures for customers and modifications to its capital structure. ALP also amended the GTA in October 2015 resulting in revenue requirements of C$672 million for 2015 and C$704 million for 2016. In May 2016, the AUC issued Decision 3524-D01-2016 pertaining to the 2015-2016 GTA. ALP filed its 2015-2016 GTA compliance filing in July 2016 in response to the AUC's decision pertaining to the 2015-2016 GTA. Following the AUC's assessment of whether the refiling complies with the decision, final transmission tariff rates for the 2015 and 2016 test years will be set, subject to further adjustment through the deferral account reconciliation process.

•

Approved ALP's proposed immediate tariff relief of C$415 million for customers for 2015 and 2016, through (i) the discontinuance of construction work-in-progress in rate base and the return to AFUDC accounting effective January 1, 2015, resulting in a C$82 million reduction of revenue requirement and the refund of C$277 million previously collected as construction work-in-progress ("CWIP") in rate base as part of ALP's transmission tariffs during 2011-2014 less related returns of C$12 million and (ii) the continued application of the future income tax method for calculating income taxes for 2015 and a change to the flow through method for calculating income taxes for 2016, resulting in further tariff relief of C$68 million;


•	Denied ALP's request for increases in its common equity ratio of 3% in 2015 and 1% in 2016;


•	Deferred to the generic cost of capital proceeding ALP's request for changes to its capital structure, including an additional 2% increase in the common equity ratio in 2016 as a result of its non-taxable status; and


•	Approved ALP's depreciation rates as filed, but reduced most of ALP's salvage rates to 2014 levels, which resulted in a reduction of revenue of about C$87 million over two years.

In Decision 3524-D01-2016, the AUC also approved the capital forecasts substantially as filed, but directed ALP to use as part of its refiling the actual amount of capital additions for direct assign projects brought into service in 2015, and ALP's revised capital additions forecast for 2016, which were approximately C$2.9 billion and C$0.7 billion, respectively.

ALP updated and refiled its 2017-2018 GTA in August 2016 to reflect the findings and conclusions of the AUC presented in the 2015-2016 GTA decision issued in May 2016. The updated GTA asks the AUC to approve ALP's revenue requirement of C$886 million for 2017 and C$912 million for 2018.

The total tariff relief proposed in the 2015-2016 GTA and the 2017-2018 GTA for ALP's customers is approximately C$597 million over the 2015-2018 period.

2016 Generic Cost of Capital Proceeding

In April 2015, the AUC opened a new generic cost of capital proceeding to set the deemed capital structure and generic returns for 2016 and 2017. ALP filed evidence in January 2016. ALP's external rate of return expert evidence proposes 9% to 10.5% return on equity, on a recommended equity component of 40%, compared to the placeholder return on equity of 8.3% on a 36% equity component. The fair return and equity thickness recommended reflect the concerns noted by rating agencies and other members of the financial community regarding the increased business risks of utilities in Alberta.

In March 2016, intervenors filed their expert evidence proposing a range of 7% to 7.5% return on equity, on a recommended equity component of 35%, for ALP. The oral hearing took place during May and June 2016 and a decision is expected later in 2016.

Appeals of Recent AUC Decisions

In March 2015, the AUC issued its decision regarding cost of capital matters applicable to all electricity and natural gas utilities under its jurisdiction, including ALP. In its decision, which was retroactively applied to January 1, 2013, the AUC decreased the generic rate of return on common equity applicable to all utilities to 8.30% from the previously approved placeholder rate of 8.75% and decreased ALP's common equity ratio from 37% to 36% for the years 2013, 2014 and 2015. The approved common equity ratio and generic rate of return on common equity will remain in effect on an interim basis for 2016 and beyond, until changed by the AUC. ALP and other utilities had applied to the Alberta Court of Appeal for leave to appeal this decision; however, a decision not to proceed was made in the first quarter of 2016.

In November 2013, the AUC issued its Utility Asset Disposition ("UAD") decision in which it concluded, among other things, that in the case of the extraordinary retirement of an asset before it is fully depreciated, under or over recovery of capital investment on an extraordinary retirement should be borne by the utility and its shareholders. ALP and other utilities appealed the AUC's UAD decision to the Alberta Court of Appeal, which was dismissed in September 2015. In November 2015, ALP, Epcor and Enmax, filed a joint leave application to the Supreme Court of Canada for appeal of the Alberta Court of Appeal's UAD decision. The Supreme Court of Canada dismissed the appeal in April 2016.

In its November 2013 decision pertaining to ALP's 2013-2014 GTA, the AUC directed ALP to re-forecast the capital project expenditures for 2013 and 2014 Engineering, Procurement and Construction Management ("EPCM") services to reflect a two times labor multiplier and other approved mark-ups. ALP requested approval of the capital project expenditures, including the new competitively bid EPCM rates, in its 2012-2013 direct assigned capital deferral account filing. The AUC approved the EPCM rates applied for as part of that filing as prudent in June 2016.

Environmental Laws and Regulations

Each Registrant is subject to federal, state, local and foreign laws and regulations regarding air and water quality, renewable portfolio standards, emissions performance standards, climate change, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters that have the potential to impact each Registrant's current and future operations. In addition to imposing continuing compliance obligations, these laws and regulations provide regulators with the authority to levy substantial penalties for noncompliance including fines, injunctive relief and other sanctions. These laws and regulations are administered by the EPA and various state, local and international agencies. Each Registrant believes it is in material compliance with all applicable laws and regulations, although many laws and regulations are subject to interpretation that may ultimately be resolved by the courts. Refer to "Liquidity and Capital Resources" of each respective Registrant in Part I, Item 2 of this Form 10-Q for discussion of each Registrant's forecast environmental-related capital expenditures. The discussion below contains material developments to those matters disclosed in Item 1 of each Registrants' Annual Report on Form 10-K for the year ended December 31, 2015 .

Clean Air Act Regulations

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

National Ambient Air Quality Standards

Under the authority of the Clean Air Act, the EPA sets minimum national ambient air quality standards for six principal pollutants, consisting of carbon monoxide, lead, nitrogen oxides, particulate matter, ozone and sulfur dioxide, considered harmful to public health and the environment. Areas that achieve the standards, as determined by ambient air quality monitoring, are characterized as being in attainment, while those that fail to meet the standards are designated as being nonattainment areas. Generally, sources of emissions in a nonattainment area that are determined to contribute to the nonattainment are required to reduce emissions. Most air quality standards require measurement over a defined period of time to determine the average concentration of the pollutant present.

The Sierra Club filed a lawsuit against the EPA in August 2013 with respect to the one-hour sulfur dioxide standards and its failure to make certain attainment designations in a timely manner. In March 2015, the United States District Court for the Northern District of California ("Northern District of California") accepted as an enforceable order an agreement between the EPA and Sierra Club to resolve litigation concerning the deadline for completing the designations. The Northern District of California's order directed the EPA to complete designations in three phases: the first phase by July 2, 2016; the second phase by December 31, 2017; and the final phase by December 31, 2020. The first phase of the designations require the EPA to designate two groups of areas: 1) areas that have newly monitored violations of the 2010 sulfur dioxide standard; and 2) areas that contain any stationary source that, according to the EPA's data, either emitted more than 16,000 tons of sulfur dioxide in 2012 or emitted more than 2,600 tons of sulfur dioxide and had an emission rate of at least 0.45 lbs/sulfur dioxide per million British thermal unit in 2012 and, as of March 2, 2015, had not been announced for retirement. MidAmerican Energy's George Neal Unit 4 and the Ottumwa Generating Station (in which MidAmerican Energy has a majority ownership interest, but does not operate), are included as units subject to the first phase of the designations, having emitted more than 2,600 tons of sulfur dioxide and having an emission rate of at least 0.45 lbs/sulfur dioxide per million British thermal unit in 2012. States may submit to the EPA updated recommendations and supporting information for the EPA to consider in making its determinations. Iowa has assembled technical support documents demonstrating that all facilities affected by the first phase of designations have attained the standard, but has not yet submitted the information to the EPA. The EPA issued final sulfur dioxide area designations in the first phase on June 30, 2016; none of the areas in which the Registrants own or operate facilities were designated as being in non-attainment.

Mercury and Air Toxics Standards

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

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

Regional Haze

The EPA's Regional Haze Rule, finalized in 1999, requires states to develop and implement plans to improve visibility in designated federally protected areas ("Class I areas"). Some of PacifiCorp's coal-fueled generating facilities in Utah, Wyoming, Arizona and Colorado and certain of Nevada Power's and Sierra Pacific's fossil-fueled generating facilities are subject to the Clean Air Visibility Rules. In accordance with the federal requirements, states are required to submit SIPs that address emissions from sources subject to best available retrofit technology ("BART") requirements and demonstrate progress towards achieving natural visibility requirements in Class I areas by 2064.

The state of Utah issued a regional haze SIP requiring the installation of sulfur dioxide, nitrogen oxides and particulate matter controls on Hunter Units 1 and 2, and Huntington Units 1 and 2. In December 2012, the EPA approved the sulfur dioxide portion of the Utah regional haze SIP and disapproved the nitrogen oxides and particulate matter portions. Certain groups appealed the EPA's approval of the sulfur dioxide portion and oral argument was heard before the United States Court of Appeals for the Tenth Circuit ("Tenth Circuit") in March 2014. In October 2014, the Tenth Circuit upheld the EPA's approval of the sulfur dioxide portion of the SIP. The state of Utah and PacifiCorp filed petitions for administrative and judicial review of the EPA's final rule on the BART determinations for the nitrogen oxides and particulate matter portions of Utah's regional haze SIP in March 2013. In

May 2014, the Tenth Circuit dismissed the petition on jurisdictional grounds. In addition, and separate from the EPA's approval process and related litigation, the Utah Division of Air Quality completed an alternative BART analysis for Hunter Units 1 and 2, and Huntington Units 1 and 2. The alternative BART analysis and revised regional haze SIP were submitted in June 2015 to the EPA for review and proposed action after a public comment period. The revised regional haze SIP included a state-enforceable requirement to cease operation of the Carbon Facility by August 15, 2015. PacifiCorp retired the Carbon Facility in December 2015. In January 2016, the EPA published two alternative proposals to either approve the Utah SIP as written or reject the Utah SIP relating to nitrogen oxides controls and require the installation of selective catalytic reduction ("SCR") controls at Hunter Units 1 and 2 and Huntington Units 1 and 2 within five years. The EPA took final action on the Utah regional haze SIP with an effective date of August 4, 2016. The EPA approved in part and disapproved in part the Utah regional haze SIP and issued a federal implementation plan ("FIP"), requiring the installation of SCR controls at Hunter Units 1 and 2 and Huntington Units 1 and 2 within five years of the effective date of the rule. PacifiCorp is evaluating the impacts of the EPA's decision and has until September 6, 2016 to appeal the ruling.

The state of Arizona issued a regional haze SIP requiring, among other things, the installation of sulfur dioxide, nitrogen oxides and particulate matter controls on Cholla Unit 4. The EPA approved in part, and disapproved in part, the Arizona SIP and issued a FIP for the disapproved portions requiring SCR controls on Cholla Unit 4. PacifiCorp filed an appeal in the United States Court of Appeals for the Ninth Circuit ("Ninth Circuit") regarding the FIP as it relates to Cholla Unit 4, and the Arizona Department of Environmental Quality and other affected Arizona utilities filed separate appeals of the FIP as it relates to their interests. The Ninth Circuit issued an order in February 2015, holding the matter in abeyance relating to PacifiCorp and Arizona Public Service Company as they work with state and federal agencies on an alternate compliance approach for Cholla Unit 4. In January 2015, permit applications and studies were submitted to amend the Cholla Title V permit, and subsequently the Arizona SIP to convert Cholla Unit 4 to a natural gas-fueled unit in 2025. The Arizona Department of Environmental Quality prepared a draft permit and a revision to the Arizona regional haze SIP, held two public hearings in July 2015 and, after considering the comments received during the public comment period that closed on July 14, 2015, submitted the final proposals to the EPA for review, public comment and final action. The EPA issued its proposed action to approve amendments to the Arizona regional haze SIP, which were published in the Federal Register in July 2016, opening the proposal for a 45-day public comment period. The EPA’s final action is expected by late 2016.

Climate Change

In December 2015, an international agreement was negotiated by 195 nations to create a universal framework for coordinated action on climate change in what is referred to as the Paris Agreement. The Paris Agreement reaffirms the goal of limiting global temperature increase well below 2 degrees Celsius, while urging efforts to limit the increase to 1.5 degrees Celsius; establishes commitments by all parties to make nationally determined contributions and pursue domestic measures aimed at achieving the commitments; commits all countries to submit emissions inventories and report regularly on their emissions and progress made in implementing and achieving their nationally determined commitments; and commits all countries to submit new commitments every five years, with the expectation that the commitments will get more aggressive. In the context of the Paris Agreement, the United States agreed to reduce greenhouse gas emissions 26% to 28% by 2025 from 2005 levels. The cornerstone of the United States' commitment is the Clean Power Plan which was finalized by the EPA in 2015 but is currently stayed by the U.S. Supreme Court pending the outcome of litigation on the rule. The Paris Agreement was signed by more than 170 countries in April 2016, and will become effective once 55 countries representing 55% of the world’s greenhouse gas emissions ratify the agreement.

Renewable Portfolio Standards

In March 2016, Oregon Senate Bill 1547-B, the Clean Electricity and Coal Transition Plan, was signed into law. SB 1547-B requires that coal-fueled resources are eliminated from Oregon's allocation of electricity by January 1, 2030, and increases the current renewable portfolio standards ("RPS") target from 25% in 2025 to 50% by 2040. SB 1547-B also implements new REC banking provisions, as well as the following interim RPS targets: 27% in 2025 through 2029, 35% in 2030 through 2034, 45% in 2035 through 2039, and 50% by 2040 and subsequent years.

New Accounting Pronouncements

For a discussion of new accounting pronouncements affecting the Company, refer to Note 2 of Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Consolidated Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of goodwill and long-lived assets, pension and other postretirement benefits, income taxes and revenue recognition - unbilled revenue. For additional discussion of the Company's critical accounting estimates, see Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2015 . There have been no significant changes in the Company's assumptions regarding critical accounting estimates since December 31, 2015 .

PacifiCorp and its subsidiaries

Consolidated Financial Section

PART I


Item 1.	Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

PacifiCorp

Portland, Oregon

We have reviewed the accompanying consolidated balance sheet of PacifiCorp and subsidiaries ("PacifiCorp") as of June 30, 2016 , and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2016 and 2015 , and of changes in shareholders' equity and cash flows for the six-month periods ended June 30, 2016 and 2015 . These interim financial statements are the responsibility of PacifiCorp's management.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PacifiCorp and subsidiaries as of December 31, 2015 , and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2016 , 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, 2015 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

Portland, Oregon

August 5, 2016

PACIFICORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in millions)



	As of
	June 30,		December 31,
	2016		2015
ASSETS

Current assets:
Cash and cash equivalents	$	59	$	12
Accounts receivable, net	662		740
Income taxes receivable	3		17
Inventories:
Materials and supplies	229		233
Fuel	231		192
Regulatory assets	85		102
Other current assets	67		81
Total current assets	1,336		1,377

Property, plant and equipment, net	19,064		19,026
Regulatory assets	1,488		1,583
Other assets	415		381

Total assets	$	22,303	$	22,367

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

PACIFICORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)

(Amounts in millions)



	As of
	June 30,			December 31,
	2016			2015
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	399		$	473
Income taxes payable	13			—
Accrued employee expenses	107			70
Accrued interest	115			115
Accrued property and other taxes	97			62
Short-term debt	—			20
Current portion of long-term debt and capital lease obligations	66			68
Regulatory liabilities	36			34
Other current liabilities	190			229
Total current liabilities	1,023			1,071

Regulatory liabilities	962			938
Long-term debt and capital lease obligations	7,026			7,078
Deferred income taxes	4,810			4,750
Other long-term liabilities	888			1,027
Total liabilities	14,709			14,864

Commitments and contingencies (Note 8)

Shareholders' equity:
Preferred stock	2			2
Common stock - 750 shares authorized, no par value, 357 shares issued and outstanding	—			—
Additional paid-in capital	4,479			4,479
Retained earnings	3,124			3,033
Accumulated other comprehensive loss, net	(11		)	(11		)
Total shareholders' equity	7,594			7,503

Total liabilities and shareholders' equity	$	22,303		$	22,367

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

PACIFICORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in millions)



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Operating revenue	$	1,233		$	1,269		$	2,485		$	2,519

Operating costs and expenses:
Energy costs	390			437			817			913
Operations and maintenance	265			272			528			540
Depreciation and amortization	193			190			383			379
Taxes, other than income taxes	46			45			94			90
Total operating costs and expenses	894			944			1,822			1,922

Operating income	339			325			663			597

Other income (expense):
Interest expense	(95		)	(94		)	(190		)	(188		)
Allowance for borrowed funds	4			4			8			10
Allowance for equity funds	7			9			14			19
Other, net	3			2			6			5
Total other income (expense)	(81		)	(79		)	(162		)	(154		)

Income before income tax expense	258			246			501			443
Income tax expense	82			75			160			138
Net income	$	176		$	171		$	341		$	305

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

PACIFICORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

(Amounts in millions)



										Accumulated
					Additional					Other			Total
	Preferred		Common		Paid-in		Retained			Comprehensive			Shareholders'
	Stock		Stock		Capital		Earnings			Loss, Net			Equity

Balance, December 31, 2014	$	2	$	—	$	4,479	$	3,288		$	(13	)	$	7,756
Net income	—		—		—		305			—			305
Common stock dividends declared	—		—		—		(700		)	—			(700		)
Balance, June 30, 2015	$	2	$	—	$	4,479	$	2,893		$	(13	)	$	7,361

Balance, December 31, 2015	$	2	$	—	$	4,479	$	3,033		$	(11	)	$	7,503
Net income	—		—		—		341			—			341
Common stock dividends declared	—		—		—		(250		)	—			(250		)
Balance, June 30, 2016	$	2	$	—	$	4,479	$	3,124		$	(11	)	$	7,594

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

PACIFICORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in millions)



	Six-Month Periods
	Ended June 30,
	2016			2015

Cash flows from operating activities:
Net income	$	341		$	305
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	383			379
Allowance for equity funds	(14		)	(19		)
Deferred income taxes and amortization of investment tax credits	67			9
Changes in regulatory assets and liabilities	53			18
Other, net	—			3
Changes in other operating assets and liabilities:
Accounts receivable and other assets	55			19
Derivative collateral, net	7			(30		)
Inventories	(38		)	(5		)
Income taxes	27			216
Accounts payable and other liabilities	(84		)	92
Net cash flows from operating activities	797			987

Cash flows from investing activities:
Capital expenditures	(415		)	(419		)
Other, net	(9		)	(22		)
Net cash flows from investing activities	(424		)	(441		)

Cash flows from financing activities:
Proceeds from long-term debt	—			250
Repayments of long-term debt and capital lease obligations	(55		)	(1		)
Net repayments of short-term debt	(20		)	(20		)
Common stock dividends	(250		)	(700		)
Other, net	(1		)	(2		)
Net cash flows from financing activities	(326		)	(473		)

Net change in cash and cash equivalents	47			73
Cash and cash equivalents at beginning of period	12			23
Cash and cash equivalents at end of period	$	59		$	96

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

PACIFICORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

( 1 ) General

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

The unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Consolidated Financial Statements as of June 30, 2016 and for the three- and six-month periods ended June 30, 2016 and 2015 . The Consolidated Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the three- and six-month periods ended June 30, 2016 and 2015 . The results of operations for the three- and six-month periods ended June 30, 2016 and 2015 are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in PacifiCorp's Annual Report on Form 10-K for the year ended December 31, 2015 describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in PacifiCorp's assumptions regarding significant accounting estimates and policies during the six-month period ended June 30, 2016 .

( 2 ) New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, which creates FASB Accounting Standards Codification ("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. 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. PacifiCorp is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, which amends FASB ASC Subtopic 825-10, "Financial Instruments - Overall." The amendments in this guidance address 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. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption not permitted, and is required to be adopted prospectively by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. PacifiCorp is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB ASC Topic 606, "Revenue from Contracts with Customers" and supersedes ASC Topic 605, "Revenue Recognition." The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017. During 2016, the FASB issued several ASUs that clarify the implementation guidance for ASU No. 2014-09 but do not change the core principle of the guidance. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. PacifiCorp is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

( 3 ) Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):



		As of
		June 30,			December 31,
	Depreciable Life	2016			2015

Property, plant and equipment in-service	5-75 years	$	26,957		$	26,757
Accumulated depreciation and amortization		(8,528		)	(8,360		)
Net property, plant and equipment in-service		18,429			18,397
Construction work-in-progress		635			629
Total property, plant and equipment, net		$	19,064		$	19,026

( 4 ) Recent Financing Transactions

In June 2016, PacifiCorp replaced its $600 million unsecured revolving credit facility, which had been set to expire in June 2017, with a $400 million unsecured credit facility with a stated maturity of June 2019 and two one-year extension options subject to bank consent. The new credit facility, which supports PacifiCorp's commercial paper program, certain series of its tax-exempt bond obligations and provides for the issuance of letters of credit, has a variable interest rate based on the London Interbank Offered Rate ("LIBOR") or a base rate, at PacifiCorp's option, plus a spread that varies based on PacifiCorp's credit ratings for its senior unsecured long-term debt securities. The credit facility requires that PacifiCorp's ratio of consolidated debt, including current maturities, to total capitalization not exceed 0.65 to 1.0 as of the last day of each quarter. As of June 30, 2016 , PacifiCorp had no borrowings outstanding or letters of credit issued under this credit facility.

( 5 ) Employee Benefit Plans

Net periodic benefit cost for the pension and other postretirement benefit plans included the following components (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Pension:
Service cost	$	1		$	1		$	2		$	2
Interest cost	13			14			27			27
Expected return on plan assets	(19		)	(20		)	(38		)	(39		)
Net amortization	9			11			17			21
Net periodic benefit cost	$	4		$	6		$	8		$	11

Other postretirement:
Service cost	$	—		$	1		$	1		$	2
Interest cost	4			4			8			8
Expected return on plan assets	(5		)	(6		)	(11		)	(12		)
Net amortization	(2		)	(1		)	(3		)	(2		)
Net periodic benefit credit	$	(3	)	$	(2	)	$	(5	)	$	(4	)

Employer contributions to the pension and other postretirement benefit plans are expected to be $4 million and $- million, respectively, during 2016 . As of June 30, 2016 , $2 million and $- million of contributions had been made to the pension and other postretirement benefit plans, respectively.

( 6 ) Risk Management and Hedging Activities

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

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

There have been no significant changes in PacifiCorp's accounting policies related to derivatives. Refer to Note 7 for additional information on derivative contracts.

The following table, which reflects master netting arrangements and excludes contracts that have been designated as normal under the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of PacifiCorp's derivative contracts, on a gross basis, and reconciles those amounts to the amounts presented on a net basis on the Consolidated Balance Sheets (in millions):



	Other					Other			Other
	Current			Other		Current			Long-term
	Assets			Assets		Liabilities			Liabilities			Total

As of June 30, 2016
Not designated as hedging contracts ⁽¹⁾ :
Commodity assets	$	10		$	3	$	9		$	—		$	22
Commodity liabilities	(2		)	—		(34		)	(79		)	(115		)
Total	8			3		(25		)	(79		)	(93		)

Total derivatives	8			3		(25		)	(79		)	(93		)
Cash collateral receivable	—			—		13			55			68
Total derivatives - net basis	$	8		$	3	$	(12	)	$	(24	)	$	(25	)

As of December 31, 2015
Not designated as hedging contracts ⁽¹⁾ :
Commodity assets	$	10		$	—	$	2		$	—		$	12
Commodity liabilities	(1		)	—		(58		)	(89		)	(148		)
Total	9			—		(56		)	(89		)	(136		)

Total derivatives	9			—		(56		)	(89		)	(136		)
Cash collateral receivable	—			—		18			57			75
Total derivatives - net basis	$	9		$	—	$	(38	)	$	(32	)	$	(61	)


(1)	PacifiCorp's commodity derivatives are generally included in rates and as of June 30, 2016 and December 31, 2015 , a regulatory asset of $89 million and $133 million , respectively, was recorded related to the net derivative liability of $93 million and $136 million , respectively.

Not Designated as Hedging Contracts

The following table reconciles the beginning and ending balances of PacifiCorp's net regulatory assets and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory assets, as well as amounts reclassified to earnings (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Beginning balance	$	144		$	130		$	133		$	85
Changes in fair value recognized in net regulatory assets	(45		)	(21		)	(19		)	27
Net gains reclassified to operating revenue	2			3			10			28
Net losses reclassified to energy costs	(12		)	(13		)	(35		)	(41		)
Ending balance	$	89		$	99		$	89		$	99

Derivative Contract Volumes

The following table summarizes the net notional amounts of outstanding commodity derivative contracts with fixed price terms that comprise the mark-to-market values as of (in millions):



	Unit of	June 30,		December 31,
	Measure	2016		2015
Electricity (sales) purchases	Megawatt hours	(2	)	1
Natural gas purchases	Decatherms	98		111
Fuel oil purchases	Gallons	6		11

Credit Risk

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

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain credit support provisions that in part base certain collateral requirements on credit ratings for senior unsecured debt as reported by one or more of the three recognized credit rating agencies. These derivative contracts may either specifically provide bilateral rights to demand cash or other security if credit exposures on a net basis exceed specified rating-dependent threshold levels ("credit-risk-related contingent features") or provide the right for counterparties to demand "adequate assurance," or in some cases terminate the contract, in the event of a material adverse change in PacifiCorp's creditworthiness. These rights can vary by contract and by counterparty. As of June 30, 2016 , PacifiCorp's credit ratings from the three recognized credit rating agencies were investment grade.

The aggregate fair value of PacifiCorp's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $109 million and $142 million as of June 30, 2016 and December 31, 2015 , respectively, for which PacifiCorp had posted collateral of $68 million and $75 million , respectively, in the form of cash deposits. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of June 30, 2016 and December 31, 2015 , PacifiCorp would have been required to post $28 million and $64 million , respectively, of additional collateral. PacifiCorp's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors.

( 7 ) Fair Value Measurements

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


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

•

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


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

The following table presents PacifiCorp's assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):



	Input Levels for Fair Value Measurements
	Level 1		Level 2			Level 3		Other ⁽¹⁾			Total
As of June 30, 2016
Assets:
Commodity derivatives	$	—	$	22		$	—	$	(11	)	$	11
Money market mutual funds ⁽²⁾	62		—			—		—			62
Investment funds	16		—			—		—			16
	$	78	$	22		$	—	$	(11	)	$	89

Liabilities - Commodity derivatives	$	—	$	(115	)	$	—	$	79		$	(36	)

As of December 31, 2015
Assets:
Commodity derivatives	$	—	$	9		$	3	$	(3	)	$	9
Money market mutual funds ⁽²⁾	13		—			—		—			13
Investment funds	15		—			—		—			15
	$	28	$	9		$	3	$	(3	)	$	37

Liabilities - Commodity derivatives	$	—	$	(148	)	$	—	$	78		$	(70	)


(1)	Represents netting under master netting arrangements and a net cash collateral receivable of $68 million and $75 million as of June 30, 2016 and December 31, 2015 , respectively.


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

Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at estimated fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which PacifiCorp transacts. When quoted prices for identical contracts are not available, PacifiCorp uses forward price curves. Forward price curves represent PacifiCorp's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. PacifiCorp bases its forward price curves upon market price quotations, when available, or internally developed and commercial models, with internal and external fundamental data inputs. Market price quotations are obtained from independent energy brokers, exchanges, direct communication with market participants and actual transactions executed by PacifiCorp. Market price quotations for certain major electricity and natural gas trading hubs are generally readily obtainable for the first six years; therefore, PacifiCorp's forward price curves for those locations and periods reflect observable market quotes. Market price quotations for other electricity and natural gas trading hubs are not as readily obtainable for the first six years. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, PacifiCorp uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The estimated fair value of these derivative contracts is a function of underlying forward commodity prices, interest rates, currency rates, related volatility, counterparty creditworthiness and duration of contracts. Refer to Note 6 for further discussion regarding PacifiCorp's risk management and hedging activities.

PacifiCorp's investments in money market mutual funds and investment funds are stated at fair value and are primarily accounted for as available-for-sale securities. When available, PacifiCorp uses 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.

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



	As of June 30, 2016				As of December 31, 2015
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Long-term debt	$	7,062	$	8,740	$	7,114	$	8,210

( 8 ) Commitments and Contingencies

Legal Matters

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

USA Power

Sanpete County, Utah Rangeland Fire

In June 2012, a major rangeland fire occurred in Sanpete County, Utah. Certain parties allege that contact between two of PacifiCorp's transmission lines may have triggered a ground fault that led to the fire. PacifiCorp has engaged experts to review the cause and origin of the fire, as well as to assess the damages. PacifiCorp has accrued its best estimate of the potential loss and expected insurance recovery. PacifiCorp believes it is reasonably possible it may incur additional loss beyond the amount accrued, but does not believe the potential additional loss will have a material impact on its consolidated financial results.

Environmental Laws and Regulations

Hydroelectric Relicensing

If certain conditions in the amended KHSA are not satisfied and the license does not transfer to the KRRC, PacifiCorp will resume relicensing with the FERC.

Guarantees

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

( 9 ) Related Party Transactions

Berkshire Hathaway includes BHE and its subsidiaries in its United States federal income tax return. Consistent with established regulatory practice, PacifiCorp's provision for income taxes has been computed on a stand-alone basis, and substantially all of its currently payable or receivable income taxes are remitted to or received from BHE. For the six-month period ended June 30, 2016 , PacifiCorp made net cash payments for federal and state income taxes to BHE totaling $65 million . For the six-month period ended June 30, 2015 , PacifiCorp received net cash payments for federal and state income taxes from BHE totaling $87 million .


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

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

Results of Operations for the Second Quarter and First Six Months of 2016 and 2015

Overview

Net income for the second quarter of 2016 was $176 million, an increase of $5 million, or 3%, compared to 2015. Net income increased primarily due to higher margins of $11 million. Margins increased primarily due to lower coal costs, higher retail rates, and lower purchased electricity, partially offset by lower retail customer load and lower wholesale electricity revenue from lower volumes. Retail customer load decreased by 3.2% due to the impacts of lower industrial and commercial customer usage and the impacts of weather on residential customer load, partially offset by higher residential customer usage and an increase in the average number of residential and commercial customers primarily in Utah. Energy generated decreased 18% for the second quarter of 2016 compared to 2015 due to lower coal-fueled generation, partially offset by higher natural gas-fueled, hydroelectric and wind-powered generation. Purchased electricity volumes increased 57% and wholesale electricity sales volumes decreased 33%.

Net income for the first six months of 2016 was $341 million, an increase of $36 million, or 12%, compared to 2015. Net income increased due to higher margins of $62 million, partially offset by lower AFUDC of $7 million. Margins increased primarily due to lower coal costs, higher retail rates, lower purchased electricity and lower natural gas costs, partially offset by lower wholesale electricity revenue from lower volumes, and lower retail customer load. Retail customer load decreased by 1.1% due to the impacts of lower industrial and commercial customer usage, partially offset by higher residential customer usage, including the impact of weather, and an increase in the average number of residential and commercial customers primarily in Utah and Oregon. Energy generated decreased 11% for the first six months of 2016 compared to 2015 due to lower coal-fueled generation, partially offset by higher natural gas-fueled, hydroelectric and wind-powered generation. Purchased electricity volumes increased 19% and wholesale electricity sales volumes decreased 30%.

Operating revenue and energy costs are the key drivers of PacifiCorp's results of operations as they encompass retail and wholesale electricity revenue and the direct costs associated with providing electricity to customers. PacifiCorp believes that a discussion of gross margin, representing operating revenue less energy costs, is therefore meaningful.

A comparison of PacifiCorp's key operating results is as follows:



	Second Quarter									First Six Months
	2016		2015		Change					2016		2015		Change

Gross margin (in millions):
Operating revenue	$	1,233	$	1,269	$	(36	)	(3	)%	$	2,485	$	2,519	$	(34	)	(1	)%
Energy costs	390		437		(47		)	(11	)	817		913		(96		)	(11	)
Gross margin	$	843	$	832	$	11		1		$	1,668	$	1,606	$	62		4

Sales (GWh):
Residential	3,502		3,394		108			3	%	7,762		7,387		375			5	%
Commercial	4,063		4,253		(190		)	(4	)	8,154		8,283		(129		)	(2	)
Industrial and irrigation	5,271		5,634		(363		)	(6	)	10,093		10,671		(578		)	(5	)
Other	116		105		11			10		237		209		28			13
Total retail	12,952		13,386		(434		)	(3	)	26,246		26,550		(304		)	(1	)
Wholesale	1,086		1,614		(528		)	(33	)	2,980		4,268		(1,288		)	(30	)
Total sales	14,038		15,000		(962		)	(6	)	29,226		30,818		(1,592		)	(5	)

Average number of retail customers
(in thousands)	1,837		1,810		27			1	%	1,835		1,805		30			2	%

Average revenue per MWh:
Retail	$	89.96	$	88.32	$	1.64		2	%	$	88.96	$	86.91	$	2.05		2	%
Wholesale	$	22.89	$	28.65	$	(5.76	)	(20	)%	$	23.93	$	31.86	$	(7.93	)	(25	)%

Sources of energy (GWh) ⁽¹⁾ :
Coal	7,130		10,324		(3,194		)	(31	)%	15,862		20,676		(4,814		)	(23	)%
Natural gas	2,573		2,180		393			18		4,899		3,854		1,045			27
Hydroelectric ⁽²⁾	887		657		230			35		2,231		1,681		550			33
Wind and other ⁽²⁾	681		583		98			17		1,690		1,383		307			22
Total energy generated	11,271		13,744		(2,473		)	(18	)	24,682		27,594		(2,912		)	(11	)
Energy purchased	3,663		2,332		1,331			57		6,489		5,453		1,036			19
Total	14,934		16,076		(1,142		)	(7	)	31,171		33,047		(1,876		)	(6	)

Average cost of energy per MWh:
Energy generated ⁽³⁾	$	19.18	$	19.55	$	(0.37	)	(2	)%	$	18.48	$	19.63	$	(1.15	)	(6	)%
Energy purchased	$	34.18	$	55.94	$	(21.76	)	(39	)%	$	40.42	$	51.04	$	(10.62	)	(21	)%


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


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


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

Gross margin increased $11 million, or 1%, for the second quarter of 2016 compared to 2015 primarily due to:


•	$48 million of lower coal costs due to lower volumes, partially offset by higher average unit costs;


•	$10 million of increases mainly from higher retail rates; and


•	$5 million of lower purchased electricity due to $58 million of lower average market prices, partially offset by $53 million of higher volumes.

The increases above were partially offset by:

•

$27 million of lower retail revenues from a 3.2% decrease in retail customer load primarily due to a 3.0% decline in industrial and commercial customer usage across the service territory, partially offset by higher residential customer usage in Utah and Oregon. Lower retail customer load also reflects a 0.9% decrease due to the impacts of weather and a 0.7% increase in the average number of residential and commercial customers; and


•	$21 million of lower wholesale revenue primarily due to reduced volumes.

Operations and maintenance decreased $7 million, or 3%, for the second quarter of 2016 compared to 2015 primarily due to insurance recoveries expected from a prior period claim and lower material and supply expenses.

Depreciation and amortization increased $3 million, or 2%, for the second quarter of 2016 compared to 2015 primarily due to higher plant-in-service.

Income tax expense increased $7 million, or 9%, for the second quarter of 2016 compared to 2015 and the effective tax rate was 32% and 30% for the second quarter of 2016 and 2015, respectively. The increase in income tax expense was primarily due to higher pre-tax book income.

Gross margin increased $62 million, or 4%, for the first six months of 2016 compared to 2015 primarily due to:


•	$78 million of lower coal costs due to decreased generation, including the idling of the Carbon Facility in April 2015, partially offset by higher average unit costs;


•	$31 million of increases mainly from higher retail rates;


•	$16 million of lower purchased electricity due to $67 million of lower average market prices, partially offset by $51 million of higher volumes; and


•	$7 million of lower natural gas costs due to $58 million of lower average unit costs, partially offset by $51 million of increased generation primarily as a result of increased availability.

The increases above were partially offset by:


•	$65 million of lower wholesale revenue primarily due to reduced volumes.

Operations and maintenance decreased $12 million, or 2%, for the first six months of 2016 compared to 2015 due to lower chemical costs, fuel costs and insurance recoveries expected from a prior period claim.

Depreciation and amortization increased $4 million, or 1%, for the first six months of 2016 compared to 2015 primarily due to higher plant-in-service, partially offset by the idling of the Carbon Facility in April 2015.

Taxes, other than income taxes increased $4 million, or 4%, for the first six months of 2016 compared to 2015 due to higher assessed property values.

Allowance for borrowed and equity funds decreased $7 million, or 24%, for the first six months of 2016 compared to 2015 primarily due lower qualified construction work-in-progress balances.

Income tax expense increased $22 million, or 16%, for the first six months of 2016 compared to 2015 and the effective tax rate was 32% and 31% for the first six months of 2016 and 2015, respectively. The increase in income tax expense was primarily due to higher pre-tax book income, partially offset by higher production tax credits associated with PacifiCorp's wind-powered generating facilities.

Liquidity and Capital Resources

As of June 30, 2016 , PacifiCorp's total net liquidity was as follows (in millions):



Cash and cash equivalents	$	59

Credit facilities	1,000
Less:
Short-term debt	—
Tax-exempt bond support and letters of credit	(150		)
Net credit facilities	850

Total net liquidity	$	909

Credit facilities:
Maturity dates	2018, 2019

Operating Activities

Net cash flows from operating activities for the six-month periods ended June 30, 2016 and 2015 were $797 million and $987 million , respectively. The change was primarily due to cash paid for income taxes in the current year compared to cash received for income taxes in the prior year, payment for USA Power final judgment and postjudgment interest and lower receipts from wholesale electricity sales, partially offset by lower fuel payments, higher receipts from retail customers, lower cash collateral posted for derivative contracts and lower purchased electricity payments.

Investing Activities

Net cash flows from investing activities for the six-month periods ended June 30, 2016 and 2015 were $(424) million and $(441) million , respectively. The change was related to a prior year service territory acquisition of $(23) million and lower capital expenditures of $4 million . Refer to "Future Uses of Cash" for discussion of capital expenditures.

Financing Activities

Net cash flows from financing activities for the six-month period ended June 30, 2016 was $(326) million . Uses of cash consisted substantially of $250 million for common stock dividends paid to PPW Holdings LLC, $54 million for the repayment of long-term debt and $20 million for the repayment of short-term debt.

Net cash flows from financing activities for the six-month period ended June 30, 2015 was $(473) million . Uses of cash consisted substantially of $700 million for common stock dividends paid to PPW Holdings LLC and $20 million for the repayment of short-term debt. Sources of cash consisted of proceeds from the issuance of long-term debt of $250 million.

Short-term Debt

Regulatory authorities limit PacifiCorp to $1.5 billion of short-term debt. As of June 30, 2016 , PacifiCorp had no short-term debt outstanding. As of December 31, 2015 , PacifiCorp had $20 million of short-term debt outstanding at a weighted average interest rate of 0.65%.

Long-term Debt

PacifiCorp currently has regulatory authority from the OPUC and the IPUC to issue an additional $1.325 billion of long-term debt. PacifiCorp must make a notice filing with the WUTC prior to any future issuance.

Future Uses of Cash

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

Capital Expenditures

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

Historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, are as follows (in millions):



	Six-Month Periods				Annual
	Ended June 30,				Forecast
	2015		2016		2016

Transmission system investment	$	64	$	48	$	94
Environmental	51		26		64
Operating and other	304		341		620
Total	$	419	$	415	$	778

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


•	Transmission system investment includes main grid reinforcement costs, construction costs for the 170-mile single-circuit 345-kV Sigurd-Red Butte transmission line that was placed in-service in May 2015 and initial development costs for several other long-term projects.


•	Environmental includes the installation of new or the replacement of existing emissions control equipment at certain generating facilities, including installation or upgrade of selective catalytic reduction control systems.


•	Remaining investments relate to operating projects that consist of routine expenditures for transmission, distribution, generation and other infrastructure needed to serve existing and expected demand.

Integrated Resource Plan

In March 2015, PacifiCorp filed its 2015 Integrated Resource Plan ("IRP") with the state commissions. In 2015 the WPSC accepted the 2015 IRP into its files and the UPSC, IPUC and WUTC acknowledged the 2015 IRP. In February 2016, the OPUC acknowledged the 2015 IRP with one exception. In March 2016, PacifiCorp filed its update to the 2015 IRP with the state commissions.

Request for Proposals

PacifiCorp issues individual Request for Proposals ("RFP"), each of which typically focuses on a specific category of generation resources consistent with the IRP or other customer-driven demands. The IRP and the RFPs provide for the identification and staged procurement of resources to meet load requirements and/or to meet renewable portfolio standard requirements. Depending upon the specific RFP, applicable laws and regulations may require PacifiCorp to file draft RFPs with the UPSC, the OPUC and the WUTC. Approval by the UPSC, the OPUC or the WUTC may be required depending on the nature of the RFPs.

PacifiCorp issued renewable resource and renewable energy credit RFPs to the market on April 11, 2016. The RFPs were issued to seek cost-effective renewable resources and RECs that can take full advantage of federal income tax incentives and that can be used to meet renewable portfolio standard requirements in Oregon, Washington, and California. PacifiCorp has established a final shortlist that includes bids for RECs from 13 renewable projects having an aggregate capacity of 218 MW. PacifiCorp anticipates completing negotiations with final shortlist bidders and executing REC agreements in August 2016.

Contractual Obligations

As of June 30, 2016 , there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of PacifiCorp's Annual Report on Form 10-K for the year ended December 31, 2015 .

Regulatory Matters

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

Environmental Laws and Regulations

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

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

New Accounting Pronouncements

For a discussion of new accounting pronouncements affecting PacifiCorp, refer to Note 2 of Notes to Consolidated Financial Statements in Part I, Item 1 of the Form 10-Q.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Consolidated Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, pension and other postretirement benefits, income taxes and revenue recognition-unbilled revenue. For additional discussion of PacifiCorp's critical accounting estimates, see Item 7 of PacifiCorp's Annual Report on Form 10-K for the year ended December 31, 2015 . There have been no significant changes in PacifiCorp's assumptions regarding critical accounting estimates since December 31, 2015 .

MidAmerican Funding, LLC and its subsidiaries and MidAmerican Energy Company

Consolidated Financial Section

PART I


Item 1.	Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

MidAmerican Energy Company

Des Moines, Iowa

We have reviewed the accompanying balance sheet of MidAmerican Energy Company ("MidAmerican Energy") as of June 30, 2016 , and the related statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2016 and 2015 , and of changes in equity and cash flows for the six-month periods ended June 30, 2016 and 2015 . These interim financial statements are the responsibility of MidAmerican Energy's management.

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of MidAmerican Energy Company as of December 31, 2015 , and the related statements of operations, comprehensive income, changes in equity and cash flows for the year then ended (not presented herein) prior to reclassification for the discontinued operations described in Note 3 to the accompanying financial information; and in our report dated February 26, 2016 , we expressed an unqualified opinion on those financial statements. We also audited the adjustments described in Note 3 to reclassify the December 31, 2015 balance sheet of MidAmerican Energy Company for discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied to the previously issued financial statements in deriving the accompanying retrospectively adjusted financial information as of December 31, 2015 .

/s/ Deloitte & Touche LLP

Des Moines, Iowa

August 5, 2016

MIDAMERICAN ENERGY COMPANY

BALANCE SHEETS

(Amounts in millions)



	As of
	June 30,		December 31,
	2016		2015

ASSETS
Current assets:
Cash and cash equivalents	$	203	$	103
Receivables, net	256		342
Income taxes receivable	3		104
Inventories	256		238
Other current assets	26		58
Total current assets	744		845

Property, plant and equipment, net	11,873		11,723
Regulatory assets	1,099		1,044
Investments and restricted cash and investments	649		634
Other assets	161		139

Total assets	$	14,526	$	14,385

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

MIDAMERICAN ENERGY COMPANY

BALANCE SHEETS (continued)

(Amounts in millions)



	As of
	June 30,			December 31,
	2016			2015

LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	191		$	426
Accrued interest	45			46
Accrued property, income and other taxes	240			125
Current portion of long-term debt	34			34
Other current liabilities	153			166
Total current liabilities	663			797

Long-term debt	4,234			4,237
Deferred income taxes	3,194			3,061
Regulatory liabilities	790			831
Asset retirement obligations	563			488
Other long-term liabilities	259			266
Total liabilities	9,703			9,680

Commitments and contingencies (Note 10)

Shareholder's equity:
Common stock - 350 shares authorized, no par value, 71 shares issued and outstanding	—			—
Additional paid-in capital	561			561
Retained earnings	4,263			4,174
Accumulated other comprehensive loss, net	(1		)	(30		)
Total shareholder's equity	4,823			4,705

Total liabilities and shareholder's equity	$	14,526		$	14,385

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

MIDAMERICAN ENERGY COMPANY

STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in millions)



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Operating revenue:
Regulated electric	$	481		$	461		$	880		$	887
Regulated gas and other	103			111			329			407
Total operating revenue	584			572			1,209			1,294

Operating costs and expenses:
Cost of fuel, energy and capacity	90			104			182			226
Cost of gas sold and other	47			55			182			256
Operations and maintenance	170			174			330			344
Depreciation and amortization	110			99			220			199
Property and other taxes	28			28			56			57
Total operating costs and expenses	445			460			970			1,082

Operating income	139			112			239			212

Other income and (expense):
Interest expense	(48		)	(45		)	(97		)	(89		)
Allowance for borrowed funds	2			2			3			4
Allowance for equity funds	4			6			8			11
Other, net	2			2			5			5
Total other income and (expense)	(40		)	(35		)	(81		)	(69		)

Income before income tax benefit	99			77			158			143
Income tax benefit	(32		)	(49		)	(49		)	(73		)

Income from continuing operations	131			126			207			216

Discontinued operations (Note 3):
Income from discontinued operations	—			9			—			16
Income tax expense	—			4			—			7
Income on discontinued operations	—			5			—			9

Net income	$	131		$	131		$	207		$	225

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

MIDAMERICAN ENERGY COMPANY

STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Amounts in millions)



	Three-Month Periods					Six-Month Periods
	Ended June 30,					Ended June 30,
	2016		2015			2016		2015

Net income	$	131	$	131		$	207	$	225

Other comprehensive income (loss), net of tax:
Unrealized gains on available-for-sale securities, net of tax of $1, $-, $1 and $-	1		1			2		1
Unrealized losses on cash flow hedges, net of tax of $-, $(3), $- and $(1)	—		(6		)	—		(4		)
Total other comprehensive income (loss), net of tax	1		(5		)	2		(3		)

Comprehensive income	$	132	$	126		$	209	$	222

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

MIDAMERICAN ENERGY COMPANY

STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(Amounts in millions)



	Common Stock		Retained Earnings			Accumulated Other Comprehensive Loss, Net			Total Equity

Balance, December 31, 2014	$	561	$	3,712		$	(23	)	$	4,250
Net income	—		225			—			225
Other comprehensive loss	—		—			(3		)	(3		)
Balance, June 30, 2015	$	561	$	3,937		$	(26	)	$	4,472

Balance, December 31, 2015	$	561	$	4,174		$	(30	)	$	4,705
Net income	—		207			—			207
Other comprehensive income	—		—			2			2
Dividend (Note 3)	—		(117		)	27			(90		)
Other equity transactions	—		(1		)	—			(1		)
Balance, June 30, 2016	$	561	$	4,263		$	(1	)	$	4,823

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

MIDAMERICAN ENERGY COMPANY

STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in millions)



	Six-Month Periods
	Ended June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	207		$	225
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	220			199
Deferred income taxes and amortization of investment tax credits	45			4
Changes in other assets and liabilities	21			24
Other, net	(24		)	5
Changes in other operating assets and liabilities:
Receivables, net	(30		)	40
Inventories	(18		)	4
Derivative collateral, net	3			35
Contributions to pension and other postretirement benefit plans, net	(3		)	(4		)
Accounts payable	(33		)	(103		)
Accrued property, income and other taxes, net	213			308
Other current assets and liabilities	8			16
Net cash flows from operating activities	609			753

Cash flows from investing activities:
Utility construction expenditures	(506		)	(428		)
Purchases of available-for-sale securities	(54		)	(61		)
Proceeds from sales of available-for-sale securities	55			56
Other, net	—			3
Net cash flows from investing activities	(505		)	(430		)

Cash flows from financing activities:
Repayments of long-term debt	(4		)	—
Net repayments of short-term debt	—			(50		)
Net cash flows from financing activities	(4		)	(50		)

Net change in cash and cash equivalents	100			273
Cash and cash equivalents at beginning of period	103			29
Cash and cash equivalents at end of period	$	203		$	302

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

MIDAMERICAN ENERGY COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)


( 1 )	General

MidAmerican Energy Company ("MidAmerican Energy") is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc. ("MHC"). MHC is a holding company that conducts no business other than the ownership of its subsidiaries and related corporate services. MHC's nonregulated subsidiaries include Midwest Capital Group, Inc. and MEC Construction Services Co. MHC is the direct, wholly owned subsidiary of MidAmerican Funding, LLC ("MidAmerican Funding"), which is an Iowa limited liability company with Berkshire Hathaway Energy Company ("BHE") as its sole member. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").

The unaudited Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Financial Statements as of June 30, 2016 , and for the three- and six-month periods ended June 30, 2016 and 2015 . Certain amounts in the prior period Financial Statements have been reclassified to conform to the current period presentation. Such reclassifications did not impact previously reported operating income, net income or retained earnings. The results of operations for the three- and six-month periods ended June 30, 2016 , are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Financial Statements. Note 2 of Notes to Financial Statements included in MidAmerican Energy's Annual Report on Form 10-K for the year ended December 31, 2015 , describes the most significant accounting policies used in the preparation of the unaudited Financial Statements. There have been no significant changes in MidAmerican Energy's assumptions regarding significant accounting estimates and policies during the six-month period ended June 30, 2016 .


( 2 )	New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, which creates FASB Accounting Standards Codification ("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. 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. MidAmerican Energy is currently evaluating the impact of adopting this guidance on its Financial Statements and disclosures included within Notes to Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, which amends FASB ASC Subtopic 825-10, "Financial Instruments - Overall." The amendments in this guidance address 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. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption not permitted, and is required to be adopted prospectively by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. MidAmerican Energy is currently evaluating the impact of adopting this guidance on its Financial Statements and disclosures included within Notes to Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB ASC Topic 606, "Revenue from Contracts with Customers" and supersedes ASC Topic 605, "Revenue Recognition." The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. In August 2015, the FASB issued ASU No.2015-14, which defers the effective date of ASU No. 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017. During 2016, the FASB issued several ASUs that clarify the implementation guidance for ASU No. 2014-09 but do not change the core principle of the guidance. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. MidAmerican Energy is currently evaluating the impact of adopting this guidance on its Financial Statements and disclosures included within Notes to Financial Statements.


( 3 )	Discontinued Operations

On January 1, 2016, MidAmerican Energy transferred the assets and liabilities of its unregulated retail services business to a subsidiary of BHE. The transfer was made at MidAmerican Energy’s carrying value of the assets and liabilities as of December 31, 2015, and was recorded by MidAmerican Energy as a noncash dividend as summarized in the table below. Financial results of the unregulated retail services business for the three- and six-month periods ended June 30, 2015 , have been reclassified to discontinued operations in the Statements of Operations. Operating revenue and cost of sales of the unregulated retail services business for the three-month period ended June 30, 2015 , totaled $221 million and $204 million , respectively. Operating revenue and cost of sales of the unregulated retail services business for the six-month period ended June 30, 2015 , totaled $445 million and $416 million , respectively. Cash flows from operating activities of the unregulated retail services business totaled $26 million for the six-month period ended June 30, 2015 , and are reflected in the Statement of Cash Flows. Assets, liabilities and equity of the unregulated retail services business reflected in the Balance Sheet as of December 31, 2015, are as follows (in millions):



Receivables	$	115
Derivative assets	41
Deferred income taxes	21
Accounts payable	(49		)
Derivative liabilities	(42		)
Other assets and liabilities, net	4
Dividend, excluding accumulated other comprehensive loss, net	90
Accumulated other comprehensive loss, net	27
Dividend, including accumulated other comprehensive loss, net	$	117


( 4 )	Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):



		As of
		June 30,			December 31,
	Depreciable Life	2016			2015
Utility plant in service, net:
Generation	20-70 years	$	10,396		$	10,404
Transmission	52-70 years	1,457			1,305
Electric distribution	20-70 years	3,108			3,059
Gas distribution	28-70 years	1,530			1,507
Utility plant in service		16,491			16,275
Accumulated depreciation and amortization		(5,277		)	(5,229		)
Utility plant in service, net		11,214			11,046
Nonregulated property, net:
Nonregulated property gross	5-45 years	7			15
Accumulated depreciation and amortization		(1		)	(5		)
Nonregulated property, net		6			10
		11,220			11,056
Construction work in progress		653			667
Property, plant and equipment, net		$	11,873		$	11,723


( 5 )	Income Taxes

A reconciliation of the federal statutory income tax rate to MidAmerican Energy's effective income tax rate applicable to income before income tax benefit from continuing operations is as follows:



	Three-Month Periods				Six-Month Periods
	Ended June 30,				Ended June 30,
	2016		2015		2016		2015

Federal statutory income tax rate	35	%	35	%	35	%	35	%
Income tax credits	(60	)	(74	)	(59	)	(69	)
State income tax, net of federal income tax benefit	(5	)	(10	)	(1	)	(4	)
Effects of ratemaking	(2	)	(14	)	(6	)	(13	)
Other, net	—		(1	)	—		—
Effective income tax rate	(32	)%	(64	)%	(31	)%	(51	)%

Income tax credits relate primarily to production tax credits from MidAmerican Energy's wind-powered generating facilities. 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.

Berkshire Hathaway includes BHE and subsidiaries in its United States federal income tax return. Consistent with established regulatory practice, MidAmerican Energy's provision for income taxes has been computed on a stand-alone basis, and substantially all of its currently payable or receivable income taxes are remitted to or received from BHE. MidAmerican Energy received net cash payments for income taxes from BHE totaling $308 million and $373 million for the six-month periods ended June 30, 2016 and 2015 , respectively.


( 6 )	Employee Benefit Plans

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

Net periodic benefit cost (credit) for the plans of MidAmerican Energy and the aforementioned affiliates included the following components (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Pension:
Service cost	$	2		$	3		$	5		$	6
Interest cost	9			8			17			16
Expected return on plan assets	(11		)	(12		)	(22		)	(23		)
Net amortization	1			1			1			1
Net periodic benefit cost	$	1		$	—		$	1		$	—

Other postretirement:
Service cost	$	2		$	1		$	3		$	3
Interest cost	3			3			5			5
Expected return on plan assets	(4		)	(3		)	(7		)	(7		)
Net amortization	(1		)	(1		)	(2		)	(2		)
Net periodic benefit credit	$	—		$	—		$	(1	)	$	(1	)

Employer contributions to the pension and other postretirement benefit plans are expected to be $8 million and $1 million , respectively, during 2016 . As of June 30, 2016 , $4 million and $- million of contributions had been made to the pension and other postretirement benefit plans, respectively.


( 7 )	Asset Retirement Obligations

MidAmerican Energy estimates its asset retirement obligation ("ARO") liabilities based upon detailed engineering calculations of the amount and timing of the future cash spending for a third party to perform the required work. Spending estimates are escalated for inflation and then discounted at a credit-adjusted, risk-free rate. Changes in estimates could occur for a number of reasons, including changes in laws and regulations, plan revisions, inflation and changes in the amount and timing of the expected work. During the three-month and six-month periods ended June 30, 2016, MidAmerican Energy recorded an increase of $69 million to its ARO liability for the decommissioning of Quad Cities Generating Station Units 1 and 2 as a result of an updated decommissioning study reflecting changes in the estimated amount and timing of cash flow.


( 8 )	Risk Management and Hedging Activities

MidAmerican Energy is exposed to the impact of market fluctuations in commodity prices and interest rates. MidAmerican Energy is principally exposed to electricity, natural gas, coal and fuel oil commodity price risk as it has an obligation to serve retail customer load in its regulated service territory. Prior to January 1, 2016, MidAmerican Energy also provided nonregulated retail electricity and natural gas services in competitive markets, which created contractual obligations to provide electric and natural gas services. MidAmerican Energy's load and generating facilities represent substantial underlying commodity positions. Exposures to commodity prices consist mainly of variations in the price of fuel required to generate electricity, wholesale electricity that is purchased and sold, and natural gas supply for retail customers. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather; market liquidity; generating facility availability; customer usage; storage; and transmission and transportation constraints. Interest rate risk exists on variable-rate debt and future debt issuances. MidAmerican Energy does not engage in a material amount of proprietary trading activities.

MidAmerican Energy has established a risk management process that is designed to identify, assess, manage, mitigate, monitor and report each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, MidAmerican Energy uses commodity derivative contracts, which may include forwards, futures, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. MidAmerican Energy manages its interest rate risk by limiting its exposure to variable interest rates primarily through the issuance of fixed-rate long-term debt and by monitoring market changes in interest rates. Additionally, MidAmerican Energy may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate its exposure to interest rate risk. MidAmerican Energy does not hedge all of its commodity price and interest rate risks, thereby exposing the unhedged portion to changes in market prices.

There have been no significant changes in MidAmerican Energy's accounting policies related to derivatives. Refer to Note 9 for additional information on derivative contracts and to Note 3 for a discussion of discontinued operations.

The following table, which reflects master netting arrangements and excludes contracts that have been designated as normal under the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of MidAmerican Energy's derivative contracts, on a gross basis, and reconciles those amounts to the amounts presented on a net basis on the Balance Sheets (in millions):



	Other Current Assets		Other Assets		Other Current Liabilities			Other Long-term Liabilities			Total
As of June 30, 2016:
Not designated as hedging contracts ⁽¹⁾⁽²⁾ :
Commodity assets	$	6	$	—	$	2		$	—		$	8
Commodity liabilities	—		—		(8		)	(1		)	(9		)
Total	6		—		(6		)	(1		)	(1		)

Designated as hedging contracts ⁽²⁾ :
Commodity assets	—		—		—			—			—
Commodity liabilities	—		—		—			—			—
Total	—		—		—			—			—

Total derivatives	6		—		(6		)	(1		)	(1		)
Cash collateral receivable	—		—		4			—			4
Total derivatives - net basis	$	6	$	—	$	(2	)	$	(1	)	$	3



As of December 31, 2015:
Not designated as hedging contracts ⁽¹⁾ :
Commodity assets	$	12		$	4	$	5		$	2		$	23
Commodity liabilities	(3		)	—		(36		)	(10		)	(49		)
Total	9			4		(31		)	(8		)	(26		)

Designated as hedging contracts:
Commodity assets	—			—		1			2			3
Commodity liabilities	—			—		(32		)	(17		)	(49		)
Total	—			—		(31		)	(15		)	(46		)

Total derivatives	9			4		(62		)	(23		)	(72		)
Cash collateral receivable	—			—		22			6			28
Total derivatives - net basis	$	9		$	4	$	(40	)	$	(17	)	$	(44	)


(1)	MidAmerican Energy's commodity derivatives not designated as hedging contracts are generally included in regulated rates, and as of June 30, 2016 and December 31, 2015 , a net regulatory asset of $3 million and $20 million , respectively, was recorded related to the net derivative liability of $1 million and $26 million , respectively.


(2)	The changes in derivative values from December 31, 2015, are substantially due to the transfer of MidAmerican Energy's unregulated retail services business to a subsidiary of BHE.

Not Designated as Hedging Contracts

The following table reconciles the beginning and ending balances of MidAmerican Energy's net regulatory assets and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory assets, as well as amounts reclassified to earnings (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Beginning balance	$	11		$	18		$	20		$	38
Changes in fair value recognized in net regulatory assets	(3		)	17			3			19
Net losses reclassified to operating revenue	(5		)	(6		)	(13		)	(22		)
Net losses reclassified to cost of gas sold	—			(1		)	(7		)	(7		)
Ending balance	$	3		$	28		$	3		$	28

Designated as Hedging Contracts

MidAmerican Energy used commodity derivative contracts accounted for as cash flow hedges to hedge electricity and natural gas commodity prices related to its unregulated retail services business, which was transferred to a subsidiary of BHE. The following table reconciles the beginning and ending balances of MidAmerican Energy's accumulated other comprehensive loss (pre-tax) and summarizes pre-tax gains and losses on commodity derivative contracts designated and qualifying as cash flow hedges recognized in other comprehensive income ("OCI"), as well as amounts reclassified to earnings (in millions):



	Three-Month Periods					Six-Month Periods
	Ended June 30,					Ended June 30,
	2016		2015			2016			2015

Beginning balance	$	—	$	30		$	45		$	34
Transfer to affiliate	—		—			(45		)	—
Changes in fair value recognized in OCI	—		25			—			19
Net gains reclassified to nonregulated cost of sales	—		(16		)	—			(14		)
Ending balance	$	—	$	39		$	—		$	39

Derivative Contract Volumes

The following table summarizes the net notional amounts of outstanding commodity derivative contracts with fixed price terms that comprise the mark-to-market values as of (in millions):



	Unit of	June 30,	December 31,
	Measure	2016	2015

Electricity purchases	Megawatt hours	—	15
Natural gas purchases	Decatherms	13	17

Credit Risk

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

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain credit support provisions that in part base MidAmerican Energy's collateral requirements on its credit ratings for senior unsecured debt as reported by one or more of the three recognized credit rating agencies. These derivative contracts may either specifically provide bilateral rights to demand cash or other security if credit exposures on a net basis exceed specified rating-dependent threshold levels ("credit-risk-related contingent features") or provide the right for counterparties to demand "adequate assurance," or in some cases terminate the contract, in the event of a material adverse change in MidAmerican Energy's creditworthiness. These rights can vary by contract and by counterparty. As of June 30, 2016 , MidAmerican Energy's credit ratings from the three recognized credit rating agencies were investment grade.

The aggregate fair value of MidAmerican Energy's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $5 million and $66 million as of June 30, 2016 and December 31, 2015 , respectively, for which MidAmerican Energy had posted collateral of $- million at each date. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of June 30, 2016 and December 31, 2015 , MidAmerican Energy would have been required to post $4 million and $55 million , respectively, of additional collateral. MidAmerican Energy's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors. MidAmerican Energy's exposure to contingent features declined significantly as a result of the transfer of its unregulated retail services business to a subsidiary of BHE.


( 9 )	Fair Value Measurements

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


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

•


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

The following table presents MidAmerican Energy's assets and liabilities recognized on the Balance Sheets and measured at fair value on a recurring basis (in millions):



	Input Levels for Fair Value Measurements
	Level 1			Level 2			Level 3			Other ⁽¹⁾			Total
As of June 30, 2016:
Assets:
Commodity derivatives	$	—		$	6		$	2		$	(2	)	$	6
Money market mutual funds ⁽²⁾	177			—			—			—			177
Debt securities:
United States government obligations	147			—			—			—			147
International government obligations	—			2			—			—			2
Corporate obligations	—			35			—			—			35
Municipal obligations	—			1			—			—			1
Agency, asset and mortgage-backed obligations	—			3			—			—			3
Auction rate securities	—			—			18			—			18
Equity securities:
United States companies	247			—			—			—			247
International companies	7			—			—			—			7
Investment funds	9			—			—			—			9
	$	587		$	47		$	20		$	(2	)	$	652

Liabilities - commodity derivatives	$	(2	)	$	(3	)	$	(4	)	$	6		$	(3	)



As of December 31, 2015:
Assets:
Commodity derivatives	$	—		$	8		$	18		$	(13	)	$	13
Money market mutual funds ⁽²⁾	56			—			—			—			56
Debt securities:
United States government obligations	133			—			—			—			133
International government obligations	—			2			—			—			2
Corporate obligations	—			39			—			—			39
Municipal obligations	—			1			—			—			1
Agency, asset and mortgage-backed obligations	—			3			—			—			3
Auction rate securities	—			—			26			—			26
Equity securities:
United States companies	239			—			—			—			239
International companies	6			—			—			—			6
Investment funds	4			—			—			—			4
	$	438		$	53		$	44		$	(13	)	$	522

Liabilities - commodity derivatives	$	(13	)	$	(61	)	$	(24	)	$	41		$	(57	)


(1)	Represents netting under master netting arrangements and a net cash collateral receivable of $4 million and $28 million as of June 30, 2016 and December 31, 2015 , respectively.


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

Derivative contracts are recorded on the 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 MidAmerican Energy transacts. When quoted prices for identical contracts are not available, MidAmerican Energy uses forward price curves. Forward price curves represent MidAmerican Energy's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. MidAmerican Energy 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 MidAmerican Energy. Market price quotations are generally readily obtainable for the applicable term of MidAmerican Energy's outstanding derivative contracts; therefore, MidAmerican Energy'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, MidAmerican Energy 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, related volatility, counterparty creditworthiness and duration of contracts. Refer to Note 8 for further discussion regarding MidAmerican Energy's risk management and hedging activities.

MidAmerican Energy's investments in money market mutual funds and debt and equity securities are stated at fair value and are primarily accounted for as available-for-sale securities. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value. In the absence of a quoted market price or net asset value of an identical security, the fair value is determined using pricing models or net asset values based on observable market inputs and quoted market prices of securities with similar characteristics. The fair value of MidAmerican Energy's investments in auction rate securities, where there is no current liquid market, is determined using pricing models based on available observable market data and MidAmerican Energy's judgment about the assumptions, including liquidity and nonperformance risks, which market participants would use when pricing the asset.

The following table reconciles the beginning and ending balances of MidAmerican Energy's assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	Commodity Derivatives			Auction Rate Securities			Commodity Derivatives			Auction Rate Securities
2016:
Beginning balance	$	(4	)	$	26		$	(6	)	$	26
Transfer to affiliate	—			—			(4		)	—
Changes in fair value recognized in OCI	—			2			—			3
Changes in fair value recognized in net regulatory assets	(3		)	—			(4		)	—
Sales	—			(10		)	—			(11		)
Settlements	5			—			12			—
Ending balance	$	(2	)	$	18		$	(2	)	$	18

2015:
Beginning balance	$	9		$	26		$	12		$	26
Changes included in earnings	2			—			4			—
Changes in fair value recognized in OCI	(4		)	1			(3		)	1
Changes in fair value recognized in net regulatory assets	(15		)	—			(15		)	—
Purchases	1			—			1			—
Settlements	—			—			(6		)	—
Ending balance	$	(7	)	$	27		$	(7	)	$	27

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



	As of June 30, 2016				As of December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value

Long-term debt	$	4,268	$	5,024	$	4,271	$	4,636


( 10 )	Commitments and Contingencies

Legal Matters

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

Environmental Laws and Regulations


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

The following table shows the change in accumulated other comprehensive income (loss), net ("AOCI") by each component of other comprehensive income, net of applicable income taxes (in millions):



	Unrealized			Unrealized			Accumulated
	Losses on			Losses			Other
	Available-For-Sale			on Cash Flow			Comprehensive
	Securities			Hedges			Loss, Net

Balance, December 31, 2014	$	(3	)	$	(20	)	$	(23	)
Other comprehensive income (loss)	1			(4		)	(3		)
Balance at June 30, 2015	$	(2	)	$	(24	)	$	(26	)

Balance, December 31, 2015	$	(3	)	$	(27	)	$	(30	)
Other comprehensive income	2			—			2
Dividend (Note 3)	—			27			27
Balance, June 30, 2016	$	(1	)	$	—		$	(1	)

For information regarding cash flow hedge reclassifications from AOCI to net income in their entirety, refer to Note 8 .


( 12 )	Segment Information

MidAmerican Energy has identified two reportable segments: regulated electric and regulated gas. The previously reported nonregulated energy segment consisted substantially of MidAmerican Energy's unregulated retail services business, which was transferred to a subsidiary of BHE and is excluded from the information presented below. Refer to Note 3 for further discussion. The regulated electric segment derives most of its revenue from regulated retail sales of electricity to residential, commercial, and industrial customers and from wholesale sales. The regulated gas segment derives most of its revenue from regulated retail sales of natural gas to residential, commercial, and industrial customers and also obtains revenue by transporting gas owned by others through its distribution system. Pricing for regulated electric and regulated gas sales are established separately by regulatory agencies; therefore, management also reviews each segment separately to make decisions regarding allocation of resources and in evaluating performance. Common operating costs, interest income, interest expense and income tax expense are allocated to each segment based on certain factors, which primarily relate to the nature of the cost. "Other" in the tables below consists of the financial results and assets of remaining nonregulated operations.

The following tables provide information on a reportable segment basis (in millions):



	Three-Month Periods				Six-Month Periods
	Ended June 30,				Ended June 30,
	2016		2015		2016		2015
Operating revenue:
Regulated electric	$	481	$	461	$	880	$	887
Regulated gas	102		110		328		405
Other	1		1		1		2
Total operating revenue	$	584	$	572	$	1,209	$	1,294

Depreciation and amortization:
Regulated electric	$	100	$	89	$	199	$	179
Regulated gas	10		10		21		20
Total depreciation and amortization	$	110	$	99	$	220	$	199

Operating income:
Regulated electric	$	135	$	108	$	192	$	161
Regulated gas	4		4		47		51
Total operating income	$	139	$	112	$	239	$	212



	As of
	June 30, 2016		December 31, 2015
Total assets:
Regulated electric	$	13,325	$	12,970
Regulated gas	1,200		1,251
Other ⁽¹⁾	1		164
Total assets	$	14,526	$	14,385


(1)	Other total assets for December 31, 2015, includes amounts for MidAmerican Energy's unregulated retail services business transferred to a subsidiary of BHE.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Managers and Member of

MidAmerican Funding, LLC

Des Moines, Iowa

We have reviewed the accompanying consolidated balance sheet of MidAmerican Funding, LLC and subsidiaries ("MidAmerican Funding") as of June 30, 2016 , and the related consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2016 and 2015 , and of changes in equity and cash flows for the six-month periods ended June 30, 2016 and 2015 . These interim financial statements are the responsibility of MidAmerican Funding's management.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MidAmerican Funding, LLC and subsidiaries as of December 31, 2015 , and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for the year then ended (not presented herein) prior to reclassification for the discontinued operations described in Note 3 to the accompanying financial information; and in our report dated February 26, 2016 , we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 3 to reclassify the December 31, 2015 balance sheet of MidAmerican Funding, LLC and subsidiaries for discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied to the previously issued financial statements in deriving the accompanying retrospectively adjusted financial information as of December 31, 2015 .

/s/ Deloitte & Touche LLP

Des Moines, Iowa

August 5, 2016

MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in millions)



	As of
	June 30,		December 31,
	2016		2015

ASSETS
Current assets:
Cash and cash equivalents	$	204	$	103
Receivables, net	259		346
Income taxes receivable	4		104
Inventories	256		238
Other current assets	26		58
Total current assets	749		849

Property, plant and equipment, net	11,886		11,737
Goodwill	1,270		1,270
Regulatory assets	1,099		1,044
Investments and restricted cash and investments	651		636
Other assets	161		138

Total assets	$	15,816	$	15,674

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

MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(Amounts in millions)



	As of
	June 30,			December 31,
	2016			2015

LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Accounts payable	$	191		$	427
Accrued interest	52			53
Accrued property, income and other taxes	240			125
Note payable to affiliate	29			139
Current portion of long-term debt	34			34
Other current liabilities	154			166
Total current liabilities	700			944

Long-term debt	4,560			4,563
Deferred income taxes	3,190			3,056
Regulatory liabilities	790			831
Asset retirement obligations	563			488
Other long-term liabilities	259			267
Total liabilities	10,062			10,149

Commitments and contingencies (Note 10)

Member's equity:
Paid-in capital	1,679			1,679
Retained earnings	4,076			3,876
Accumulated other comprehensive loss, net	(1		)	(30		)
Total member's equity	5,754			5,525

Total liabilities and member's equity	$	15,816		$	15,674

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

MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in millions)



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Operating revenue:
Regulated electric	$	481		$	461		$	880		$	887
Regulated gas and other	104			115			331			416
Total operating revenue	585			576			1,211			1,303

Operating costs and expenses:
Cost of fuel, energy and capacity	90			104			182			226
Cost of gas sold and other	48			58			183			263
Operations and maintenance	169			175			330			345
Depreciation and amortization	110			99			220			199
Property and other taxes	28			28			56			57
Total operating costs and expenses	445			464			971			1,090

Operating income	140			112			240			213

Other income and (expense):
Interest expense	(55		)	(50		)	(109		)	(100		)
Allowance for borrowed funds	2			2			3			4
Allowance for equity funds	4			6			8			11
Other, net	3			3			6			19
Total other income and (expense)	(46		)	(39		)	(92		)	(66		)

Income before income tax benefit	94			73			148			147
Income tax benefit	(33		)	(51		)	(52		)	(72		)

Income from continuing operations	127			124			200			219

Discontinued operations (Note 3):
Income from discontinued operations	—			9			—			16
Income tax expense	—			4			—			7
Income on discontinued operations	—			5			—			9

Net income	$	127		$	129		$	200		$	228

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

MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Amounts in millions)



	Three-Month Periods					Six-Month Periods
	Ended June 30,					Ended June 30,
	2016		2015			2016		2015

Net income	$	127	$	129		$	200	$	228

Other comprehensive income (loss), net of tax:
Unrealized gains on available-for-sale securities, net of tax of $1, $-, $1 and $-	1		1			2		1
Unrealized losses on cash flow hedges, net of tax of $-, $(3), $- and $(1)	—		(6		)	—		(4		)
Total other comprehensive income (loss), net of tax	1		(5		)	2		(3		)

Comprehensive income	$	128	$	124		$	202	$	225

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

MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(Amounts in millions)



	Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss, Net			Total Equity

Balance, December 31, 2014	$	1,679	$	3,417	$	(23	)	$	5,073
Net income	—		228		—			228
Other comprehensive loss	—		—		(3		)	(3		)
Balance, June 30, 2015	$	1,679	$	3,645	$	(26	)	$	5,298

Balance, December 31, 2015	$	1,679	$	3,876	$	(30	)	$	5,525
Net income	—		200		—			200
Other comprehensive income	—		—		2			2
Transfer to affiliate (Note 3)	—		—		27			27
Balance, June 30, 2016	$	1,679	$	4,076	$	(1	)	$	5,754

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

MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in millions)



	Six-Month Periods
	Ended June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	200		$	228
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	220			199
Deferred income taxes and amortization of investment tax credits	45			4
Changes in other assets and liabilities	21			24
Other, net	(23		)	(9		)
Changes in other operating assets and liabilities:
Receivables, net	(30		)	42
Inventories	(18		)	4
Derivative collateral, net	3			35
Contributions to pension and other postretirement benefit plans, net	(3		)	(4		)
Accounts payable	(33		)	(103		)
Accrued property, income and other taxes, net	213			310
Other current assets and liabilities	9			16
Net cash flows from operating activities	604			746

Cash flows from investing activities:
Utility construction expenditures	(506		)	(428		)
Purchases of available-for-sale securities	(54		)	(61		)
Proceeds from sales of available-for-sale securities	55			56
Proceeds from sale of investment	—			13
Other, net	—			3
Net cash flows from investing activities	(505		)	(417		)

Cash flows from financing activities:
Repayments of long-term debt	(4		)	—
Net change in note payable to affiliate	6			(6		)
Net repayments of short-term debt	—			(50		)
Net cash flows from financing activities	2			(56		)

Net change in cash and cash equivalents	101			273
Cash and cash equivalents at beginning of period	103			30
Cash and cash equivalents at end of period	$	204		$	303

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

MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


( 1 )	General

MidAmerican Funding, LLC ("MidAmerican Funding") is an Iowa limited liability company with Berkshire Hathaway Energy Company ("BHE") as its sole member. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway"). MidAmerican Funding's direct, wholly owned subsidiary is MHC Inc. ("MHC"), which constitutes substantially all of MidAmerican Funding's assets, liabilities and business activities except those related to MidAmerican Funding's long-term debt securities. MHC conducts no business other than the ownership of its subsidiaries and related corporate services. MHC's principal subsidiary is MidAmerican Energy Company ("MidAmerican Energy"), a public utility with electric and natural gas operations. Direct, wholly owned nonregulated subsidiaries of MHC are Midwest Capital Group, Inc. and MEC Construction Services Co.

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 June 30, 2016 , and for the three- and six-month periods ended June 30, 2016 and 2015 . Certain amounts in the prior period Consolidated Financial Statements have been reclassified to conform to the current period presentation. Such reclassifications did not impact previously reported operating income, net income or retained earnings. The results of operations for the three- and six-month periods ended June 30, 2016 , are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in MidAmerican Funding's Annual Report on Form 10-K for the year ended December 31, 2015 , describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in MidAmerican Funding's assumptions regarding significant accounting estimates and policies during the six-month period ended June 30, 2016 .


( 2 )	New Accounting Pronouncements

Refer to Note 2 of MidAmerican Energy's Notes to Financial Statements.


( 3 )	Discontinued Operations

Refer to Note 3 of MidAmerican Energy's Notes to Financial Statements. The transfer of MidAmerican Energy's unregulated retail services business to a subsidiary of BHE repaid a portion of MHC's note payable to BHE.


( 4 )	Property, Plant and Equipment, Net

Refer to Note 4 of MidAmerican Energy's Notes to Financial Statements. In addition to MidAmerican Energy's property, plant and equipment, net, MidAmerican Funding had nonregulated property gross of $22 million as of June 30, 2016 and December 31, 2015 , and related accumulated depreciation and amortization of $9 million and $8 million as of June 30, 2016 and December 31, 2015 , respectively, which consisted primarily of a corporate aircraft owned by MHC.

100


( 5 )	Income Taxes

A reconciliation of the federal statutory income tax rate to MidAmerican Funding's effective income tax rate applicable to income before income tax benefit from continuing operations is as follows:



	Three-Month Periods				Six-Month Periods
	Ended June 30,				Ended June 30,
	2016		2015		2016		2015

Federal statutory income tax rate	35	%	35	%	35	%	35	%
Income tax credits	(63	)	(79	)	(63	)	(67	)
State income tax, net of federal income tax benefit	(5	)	(11	)	(2	)	(4	)
Effects of ratemaking	(2	)	(15	)	(6	)	(13	)
Other, net	—		—		1		—
Effective income tax rate	(35	)%	(70	)%	(35	)%	(49	)%

Berkshire Hathaway includes BHE and subsidiaries in its United States federal income tax return. Consistent with established regulatory practice, MidAmerican Funding's and MidAmerican Energy's provisions for income taxes have been computed on a stand-alone basis, and substantially all of their currently payable or receivable income taxes are remitted to or received from BHE. MidAmerican Funding received net cash payments for income taxes from BHE totaling $313 million and $374 million for the six-month periods ended June 30, 2016 and 2015 , respectively.


( 6 )	Employee Benefit Plans

Refer to Note 6 of MidAmerican Energy's Notes to Financial Statements.


( 7 )	Asset Retirement Obligations

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


( 8 )	Risk Management and Hedging Activities

Refer to Note 8 of MidAmerican Energy's Notes to Financial Statements.


( 9 )	Fair Value Measurements

Refer to Note 9 of MidAmerican Energy's Notes to Financial Statements. MidAmerican Funding's long-term debt is carried at cost on the Consolidated Financial Statements. The fair value of MidAmerican Funding's long-term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of MidAmerican Funding's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of MidAmerican Funding's long-term debt (in millions):



	As of June 30, 2016				As of December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value

Long-term debt	$	4,594	$	5,484	$	4,597	$	5,051

101

( 10 ) Commitments and Contingencies

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

Refer to Note 10 of MidAmerican Energy's Notes to Financial Statements.


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

Refer to Note 11 of MidAmerican Energy's Notes to Financial Statements.

( 12 ) Segment Information

MidAmerican Funding has identified two reportable segments: regulated electric and regulated gas. The previously reported nonregulated energy segment consisted substantially of MidAmerican Energy's unregulated retail services business, which was transferred to a subsidiary of BHE and is excluded from the information presented below. Refer to Note 3 for further discussion. The regulated electric segment derives most of its revenue from regulated retail sales of electricity to residential, commercial, and industrial customers and from wholesale sales. The regulated gas segment derives most of its revenue from regulated retail sales of natural gas to residential, commercial, and industrial customers and also obtains revenue by transporting gas owned by others through its distribution system. Pricing for regulated electric and regulated gas sales are established separately by regulatory agencies; therefore, management also reviews each segment separately to make decisions regarding allocation of resources and in evaluating performance. Common operating costs, interest income, interest expense and income tax expense are allocated to each segment based on certain factors, which primarily relate to the nature of the cost. "Other" in the tables below consists of the financial results and assets of nonregulated operations, MHC and MidAmerican Funding.

The following tables provide information on a reportable segment basis (in millions):



	Three-Month Periods				Six-Month Periods
	Ended June 30,				Ended June 30,
	2016		2015		2016		2015
Operating revenue:
Regulated electric	$	481	$	461	$	880	$	887
Regulated gas	102		110		328		405
Other	2		5		3		11
Total operating revenue	$	585	$	576	$	1,211	$	1,303

Depreciation and amortization:
Regulated electric	$	100	$	89	$	199	$	179
Regulated gas	10		10		21		20
Total depreciation and amortization	$	110	$	99	$	220	$	199

Operating income:
Regulated electric	$	135	$	108	$	192	$	161
Regulated gas	4		4		47		51
Other	1		—		1		1
Total operating income	$	140	$	112	$	240	$	213

102



	As of
	June 30, 2016		December 31, 2015
Total assets ⁽¹⁾ :
Regulated electric	$	14,516	$	14,161
Regulated gas	1,279		1,330
Other	21		183
Total assets	$	15,816	$	15,674



(1)	Total assets by reportable segment reflect the assignment of goodwill to applicable reporting units. Other total assets for December 31, 2015, includes amounts for MidAmerican Energy's unregulated retail services business transferred to a subsidiary of BHE.

103


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

MidAmerican Funding is an Iowa limited liability company whose sole member is BHE. MidAmerican Funding owns all of the outstanding common stock of MHC Inc., which owns all of the common stock of MidAmerican Energy, Midwest Capital Group, Inc. and MEC Construction Services Co. MidAmerican Energy is a public utility company headquartered in Des Moines, Iowa. MHC Inc., MidAmerican Funding and BHE are also headquartered in Des Moines, Iowa.

The following is management's discussion and analysis of certain significant factors that have affected the consolidated financial condition and results of operations of MidAmerican Funding and its subsidiaries and MidAmerican Energy as presented in this joint filing. Information in Management's Discussion and Analysis related to MidAmerican Energy, whether or not segregated, also relates to MidAmerican Funding. Information related to other subsidiaries of MidAmerican Funding pertains only to the discussion of the financial condition and results of operations of MidAmerican Funding. Where necessary, discussions have been segregated under the heading "MidAmerican Funding" to allow the reader to identify information applicable only to MidAmerican Funding. Explanations include management's best estimate of the impact of weather, customer growth and other factors. This discussion should be read in conjunction with the historical unaudited Financial Statements and Notes to Financial Statements in Part I, Item 1 of this Form 10-Q. Refer to Note 3 of those Notes to Financial Statements for a discussion of the transfer of MidAmerican Energy's unregulated retail services business to a subsidiary of BHE on January 1, 2016. MidAmerican Energy's and MidAmerican Funding's actual results in the future could differ significantly from the historical results.

Results of Operations for the Second Quarter and First Six Months of 2016 and 2015

Overview

MidAmerican Energy -

MidAmerican Energy's income from continuing operations for the second quarter of 2016 was $131 million , an increase of $5 million , or 4% , compared to 2015 due to higher electric margins of $34 million and lower fossil-fueled generation maintenance of $3 million, substantially offset by lower income tax benefits of $17 million due primarily to the effects of ratemaking, higher depreciation and amortization of $11 million due to wind-powered generation and other plant placed in-service and higher interest expense of $3 million primarily due to the issuance of first mortgage bonds in October 2015. Electric margins reflect higher retail sales volumes, lower energy costs, higher retail rates in Iowa and higher transmission revenue, partially offset by lower recoveries through bill riders and lower wholesale revenue.

MidAmerican Energy's income from continuing operations for the first six months of 2016 was $207 million , a decrease of $9 million , or 4% , compared to 2015 due to higher depreciation and amortization of $21 million from wind-powered generation and other plant placed in-service, higher interest expense of $8 million primarily due to the issuance of first mortgage bonds in October 2015, lower recognized production tax credits of $6 million, lower allowance for borrowed and equity funds of $4 million and lower natural gas margins of $3 million due to warmer winter temperatures in 2016, partially offset by higher electric margins of $37 million, lower fossil-fueled generation maintenance of $7 million and lower electric distribution costs of $5 million. Electric margins reflect lower energy costs, higher retail rates in Iowa, higher retail sales volumes and higher transmission revenue, partially offset by lower wholesale revenue and lower recoveries through bill riders.

MidAmerican Funding -

MidAmerican Funding's income from continuing operations for the second quarter of 2016 was $127 million , an increase of $3 million , or 2% , compared to 2015 and, for the first six months of 2016 , was $200 million , a decrease of $19 million , or 9% , compared to 2015 . In addition to the changes in MidAmerican Energy's earnings discussed above, MidAmerican Funding recognized an $8 million after-tax gain on the sale of an investment in a generating facility lease in the first quarter of 2015 .

104

Regulated Electric Gross Margin

A comparison of key operating results related to regulated electric gross margin is as follows:



	Second Quarter									First Six Months
	2016		2015		Change					2016		2015		Change
Gross margin (in millions):
Operating revenue	$	481	$	461	$	20		4	%	$	880	$	887	$	(7	)	(1	)%
Cost of fuel, energy and capacity	90		104		(14		)	(13	)	182		226		(44		)	(19	)
Gross margin	$	391	$	357	$	34		10		$	698	$	661	$	37		6

Electricity Sales (GWh):
Residential	1,417		1,223		194			16	%	3,049		2,966		83			3	%
Small general service	888		872		16			2		1,836		1,868		(32		)	(2	)
Large general service	3,073		2,981		92			3		5,893		5,673		220			4
Other	385		382		3			1		786		782		4			1
Total retail	5,763		5,458		305			6		11,564		11,289		275			2
Wholesale	1,565		2,171		(606		)	(28	)	3,583		5,021		(1,438		)	(29	)
Total sales	7,328		7,629		(301		)	(4	)	15,147		16,310		(1,163		)	(7	)

Average number of retail customers (in thousands)	759		751		8			1	%	758		751		7			1	%

Average revenue per MWh:
Retail	$	75.07	$	73.59	$	1.48		2	%	$	67.01	$	67.22	$	(0.21	)	—	%
Wholesale	$	20.80	$	20.87	$	(0.07	)	—	%	$	19.83	$	20.08	$	(0.25	)	(1	)%

Heating degree days	519		468		51			11	%	3,361		3,797		(436		)	(11	)%
Cooling degree days	428		292		136			47	%	429		294		135			46	%

Sources of energy (GWh) ⁽¹⁾ :
Coal	2,378		3,815		(1,437		)	(38	)%	5,289		8,377		(3,088		)	(37	)%
Nuclear	948		988		(40		)	(4	)	1,884		1,864		20			1
Natural gas	180		5		175			*		208		—		208			*
Wind and other ⁽²⁾	2,900		2,184		716			33		6,031		4,825		1,206			25
Total energy generated	6,406		6,992		(586		)	(8	)	13,412		15,066		(1,654		)	(11	)
Energy purchased	1,148		744		404			54		2,114		1,437		677			47
Total	7,554		7,736		(182		)	(2	)	15,526		16,503		(977		)	(6	)


*	Not meaningful.


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


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

105

Regulated electric gross margin increased $34 million for the second quarter of 2016 compared to 2015 primarily due to:


(1)	Higher retail gross margin of $33 million due to -


•	an increase of $17 million from the impact of temperatures;


•	an increase of $11 million from higher electric rates in Iowa effective January 1, 2016;


•	an increase of $6 million from lower retail energy costs primarily due to a lower average cost of fuel for generation and lower purchased power costs;


•	an increase of $7 million primarily from non-weather-related usage factors; and


•	a decrease of $8 million from lower recoveries through bill riders;


(2)	Higher Multi-Value Projects ("MVPs") transmission revenue of $3 million, which is expected to increase as projects are constructed over the next two years; partially offset by


(3)	Lower wholesale gross margin of $2 million due to lower sales volumes and lower margins per unit.

Regulated electric gross margin increased $37 million for the first six months of 2016 compared to 2015 primarily due to:


(1)	Higher retail gross margin of $28 million due to -


•	an increase of $21 million from higher electric rates in Iowa effective January 1, 2016;


•	an increase of $15 million from lower retail energy costs primarily due to a lower average cost of fuel for generation and lower purchased power costs;


•	an increase of $11 million from the impact of temperatures;


•	an increase of $9 million primarily from non-weather-related usage factors; and


•	a decrease of $28 million from lower recoveries through bill riders;


(2)	Higher MVPs transmission revenue of $7 million, which is expected to increase as projects are constructed over the next two years; and


(3)	Higher wholesale gross margin of $2 million due to higher margins per unit due to greater availability of lower cost generation for wholesale purposes and lower coal-fueled generation and prices;

106

Regulated Gas Gross Margin

A comparison of key operating results related to regulated gas gross margin is as follows:



	Second Quarter									First Six Months
	2016		2015		Change					2016		2015		Change
Gross margin (in millions):
Operating revenue	$	102	$	110	$	(8	)	(7)	%	$	328	$	405	$	(77	)	(19)	%
Cost of gas sold	47		55		(8		)	(15	)	182		256		(74		)	(29	)
Gross margin	$	55	$	55	$	—		—		$	146	$	149	$	(3	)	(2	)

Natural gas throughput (000's Dth):
Residential	5,973		5,617		356			6	%	28,301		30,648		(2,347		)	(8)	%
Small general service	3,067		2,962		105			4		13,889		15,070		(1,181		)	(8	)
Large general service	1,057		1,048		9			1		2,652		2,591		61			2
Other	6		5		1			20		25		27		(2		)	(7	)
Total retail sales	10,103		9,632		471			5		44,867		48,336		(3,469		)	(7	)
Wholesale sales	8,264		7,366		898			12		20,047		19,683		364			2
Total sales	18,367		16,998		1,369			8		64,914		68,019		(3,105		)	(5	)
Gas transportation service	17,965		17,779		186			1		42,030		41,748		282			1
Total gas throughput	36,332		34,777		1,555			4		106,944		109,767		(2,823		)	(3	)

Average number of retail customers (in thousands)	738		729		9			1	%	739		731		8			1	%
Average revenue per retail Dth sold	$	7.80	$	8.68	$	(0.88	)	(10)	%	$	6.06	$	6.81	$	(0.75	)	(11)	%
Average cost of natural gas per retail Dth sold	$	3.10	$	3.72	$	(0.62	)	(17)	%	$	3.19	$	4.09	$	(0.90	)	(22)	%

Combined retail and wholesale average cost of natural gas per Dth sold	$	2.59	$	3.25	$	(0.66	)	(20)	%	$	2.81	$	3.76	$	(0.95	)	(25)	%

Heating degree days	573		503		70			14	%	3,545		3,951		(406		)	(10)	%

Regulated gas revenue includes purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. Consequently, fluctuations in the cost of gas sold do not directly affect gross margin or net income because regulated gas revenue reflects comparable fluctuations through the purchased gas adjustment clauses. For the second quarter of 2016 , MidAmerican Energy's combined retail and wholesale average per-unit cost of gas sold decreased 20%, resulting in a decrease of $14 million in gas revenue and cost of gas sold compared to 2015 . For the first six months of 2016 , MidAmerican Energy's combined retail and wholesale average per-unit cost of gas sold decreased 25%, resulting in a decrease of $62 million in gas revenue and cost of gas sold compared to 2015 .

Regulated gas gross margin was unchanged for the second quarter of 2016 compared to 2015 due to:


(1)	Higher DSM recoveries of $2 million;


(2)	Higher retail sales volumes reflecting cooler second quarter heating season temperatures in 2016; offset by


(3)	A decrease from non-weather-related usage factors.

Regulated gas gross margin decreased $3 million for the first six months of 2016 compared to 2015 due to:


(1)	Lower retail sales volumes of $6 million reflecting warmer winter temperatures in 2016, partially offset by


(2)	Higher DSM recoveries of $3 million.

107

Operating Costs and Expenses

MidAmerican Energy -

Operations and maintenance decreased $4 million for the second quarter of 2016 compared to 2015 due to lower fossil-fueled generation maintenance of $3 million primarily from planned outages in 2015, lower information technology and other administrative costs, and lower generation operations, partially offset by higher wind-powered generation maintenance, higher demand-side management ("DSM") program costs and higher transmission operations costs from the Midcontinent Independent System Operator, Inc. ("MISO"). DSM program costs and MISO transmission costs are recovered through bill riders.

Operations and maintenance decreased $14 million for the first six months of 2016 compared to 2015 due to $7 million of lower fossil-fueled generation maintenance primarily from planned outages in 2015, lower electric distribution operations and maintenance of $5 million, and lower generation operations, partially offset by higher transmission operations costs from MISO and higher wind-powered generation maintenance.

Depreciation and amortization increased $11 million and $21 million for the second quarter and first six months of 2016, respectively, compared to 2015 due to utility plant additions, including wind-powered generating facilities placed in service in the second half of 2015.

Other Income and (Expense)

MidAmerican Energy -

Interest expense increased $3 million and $8 million for the second quarter and first six months of 2016, respectively, compared to 2015 due to higher interest expense from the issuance of $650 million of first mortgage bonds in October 2015, partially offset by the payment of a $426 million turbine purchase obligation in December 2015.

Allowance for borrowed and equity funds decreased $2 million and $4 million for the second quarter and first six months of 2016, respectively, compared to 2015 primarily due to lower construction work-in-progress balances related to wind-powered generation.

MidAmerican Funding -

In addition to the fluctuations discussed above for MidAmerican Energy, MidAmerican Funding's other, net for the first six months of 2015 reflects a $13 million pre-tax gain on the sale of an investment in a generating facility lease in 2015.

Income Tax Benefit

MidAmerican Energy -

MidAmerican Energy's income tax benefit on continuing operations decreased $17 million for the second quarter of 2016 compared to 2015, and the effective tax rate was (32)% for 2016 and (64)% for 2015. The change in the effective tax rate for the second quarter of 2016 was substantially due to the effects of ratemaking and a higher pre-tax income, partially offset by an increase in recognized production tax credits.

MidAmerican Energy's income tax benefit on continuing operations decreased $24 million for the first six months of 2016 compared to 2015, and the effective tax rate was (31)% for 2016 and (51)% for 2015. The change in the effective tax rate for the first six months of 2016 was substantially due to the effects of ratemaking and a decrease in recognized production tax credits.

Production tax credits are recognized in earnings for interim periods based on the application of an estimated annual effective tax rate to pretax earnings. 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 were placed in service. Production tax credits recognized in the second quarter of 2016 were $59 million, or $2 million higher than the second quarter of 2015, while production tax credits earned in the second quarter of 2016 were $63 million, or $14 million higher than the second quarter of 2015 primarily due to wind-powered generation placed in service in late 2015. Production tax credits recognized in the first six months of 2016 were $92 million, or $6 million lower than the first six months of 2015, while production tax credits earned in the first six months of 2016 were $130 million, or $23 million higher than the first six months of 2015 primarily due to wind-powered generation placed in service in late 2015. The difference between production tax credits recognized and earned of $38 million as of June 30, 2016, will be recorded to earnings over the remainder of 2016.

108

MidAmerican Funding -

MidAmerican Funding's income tax benefit on continuing operations decreased $18 million for the second quarter of 2016 compared to 2015, and the effective tax rate was (35)% for 2016 and (70)% for 2015. MidAmerican Funding's income tax benefit on continuing operations decreased $20 million for the first six months of 2016 compared to 2015, and the effective tax rate was (35)% for 2016 and (49)% for 2015. The change in the effective tax rate was principally due to the factors discussed for MidAmerican Energy. Additionally, income taxes for the first six months of 2015 reflect taxes on a $13 million gain on the sale of an investment in a generating facility lease in the first quarter of 2015.

Liquidity and Capital Resources

As of June 30, 2016 , MidAmerican Energy's total net liquidity was $618 million consisting of $203 million of cash and cash equivalents and $605 million of credit facilities reduced by $190 million of the credit facilities reserved to support MidAmerican Energy's variable-rate tax-exempt bond obligations. As of June 30, 2016 , MidAmerican Funding's total net liquidity was $623 million, including $1 million of additional cash and cash equivalents and MHC Inc.'s $4 million credit facility.

Operating Activities

MidAmerican Energy's net cash flows from operating activities for the six-month periods ended June 30, 2016 and 2015 , were $609 million and $753 million , respectively. MidAmerican Funding's net cash flows from operating activities for the six-month periods ended June 30, 2016 and 2015 , were $604 million and $746 million , respectively. The decreases in cash flows from operating activities were predominantly due to the timing of MidAmerican Energy's income tax cash flows with BHE, lower reimbursements of collateral related to derivative positions, an increase in coal inventory in 2016 and the timing of DSM expenditures and recoveries. MidAmerican Energy's income tax cash flows with BHE totaled net cash payments from BHE of $308 million and $373 million for the first six months of 2016 and 2015, respectively. Income tax cash flows for 2016 reflect the receipt of $106 million of income tax benefits generated in 2015 and for 2015 reflect the receipt of $255 million of income tax benefits generated in 2014. The timing of MidAmerican Energy's income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods and assumptions for each payment date.

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") was signed into law, extending bonus depreciation for qualifying property acquired and placed in service before January 1, 2020 (bonus depreciation rates will be 50% for 2015-2017, 40% in 2018, and 30% in 2019), with an additional year for certain longer lived assets. Production tax credits were extended and phased-out for wind power and other forms of non-solar renewable energy projects that begin construction before the end of 2019. Production tax credits are maintained at the following levels for construction projects whose construction begins before the end of the respective year as follows: at full value for 2016, at 80% of present value for 2017, at 60% of present value for 2018, and 40% of present value for 2019. As a result of PATH, MidAmerican Energy's cash flows from operations are expected to benefit in 2016 and beyond due to bonus depreciation on qualifying assets placed in service and for production tax credits earned on qualifying wind projects.

Investing Activities

MidAmerican Energy's net cash flows from investing activities for the six-month periods ended June 30, 2016 and 2015 , were $(505) million and $(430) million , respectively. MidAmerican Funding's net cash flows from investing activities for the six-month periods ended June 30, 2016 and 2015 , were $(505) million and $(417) million , respectively. Net cash flows from investing activities consist almost entirely of utility construction expenditures, which increased for the first six months of 2016 compared to 2015 due to higher expenditures for wind-powered generation construction. Purchases and proceeds related to available-for-sale securities primarily consist of activity within the Quad Cities Generating Station nuclear decommissioning trust. MidAmerican Funding received $13 million in 2015 related to the sale of an investment in a generating facility lease.

109

Financing Activities

MidAmerican Energy's net cash flows from financing activities for the six-month periods ended June 30, 2016 and 2015 were $(4) million and $(50) million , respectively. MidAmerican Funding's net cash flows from financing activities for the six-month periods ended June 30, 2016 and 2015 , were $2 million and $(56) million , respectively. MidAmerican Energy repaid $50 million of commercial paper in 2015 . MidAmerican Funding received $6 million in 2016 and made payments of $6 million in 2015 through its note payable with BHE.

Debt Authorizations and Related Matters

MidAmerican Energy has authority from the FERC to issue through June 30, 2018, commercial paper and bank notes aggregating $605 million at interest rates not to exceed the applicable London Interbank Offered Rate ("LIBOR") plus a spread of up to 400 basis points. MidAmerican Energy has a $600 million unsecured credit facility expiring in March 2018. MidAmerican Energy may request that the banks extend the credit facility up to two years. The credit facility, which supports MidAmerican Energy's commercial paper program and its variable-rate tax-exempt bond obligations and provides for the issuance of letters of credit, has a variable interest rate based on LIBOR or a base rate, at MidAmerican Energy's option, plus a spread that varies based on MidAmerican Energy's credit ratings for senior unsecured long-term debt securities. Additionally, MidAmerican Energy has a $5 million unsecured credit facility for general corporate purposes.

MidAmerican Energy currently has an effective registration statement with the United States Securities and Exchange Commission to issue an indeterminate amount of long-term debt securities through September 16, 2018. Additionally, MidAmerican Energy has authorization from the FERC to issue through March 31, 2017, long-term securities totaling up to $1.05 billion at interest rates not to exceed the applicable United States Treasury rate plus a spread of 175 basis points and from the Illinois Commerce Commission to issue up to an aggregate of $900 million of additional long-term debt securities, of which $150 million expires December 9, 2016, and $750 million expires September 22, 2018.

In conjunction with the March 1999 merger, MidAmerican Energy committed to the IUB to use commercially reasonable efforts to maintain an investment grade rating on its long-term debt and to maintain its common equity level above 42% of total capitalization unless circumstances beyond its control result in the common equity level decreasing to below 39% of total capitalization. MidAmerican Energy must seek the approval of the IUB of a reasonable utility capital structure if MidAmerican Energy's common equity level decreases below 42% of total capitalization, unless the decrease is beyond the control of MidAmerican Energy. MidAmerican Energy is also required to seek the approval of the IUB if MidAmerican Energy's equity level decreases to below 39%, even if the decrease is due to circumstances beyond the control of MidAmerican Energy. If MidAmerican Energy's common equity level were to drop below the required thresholds, MidAmerican Energy's ability to issue debt could be restricted. As of June 30, 2016 , MidAmerican Energy's common equity ratio was 52% computed on a basis consistent with its commitment.

Future Uses of Cash

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

Utility Construction Expenditures

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

110

MidAmerican Energy's forecast utility construction expenditures, which exclude amounts for non-cash equity AFUDC and other non-cash items, are approximately $1.2 billion for 2016 and include:


•	$688 million primarily for the construction of 599 MW (nominal ratings) of wind-powered generating facilities expected to be placed in service in 2016, of which 48 MW (nominal ratings) had been placed in service as of June 30, 2016 .


•	$125 million for transmission MVP investments. MidAmerican Energy has approval from the Midcontinent Independent System Operator, Inc. for the construction of four MVPs located in Iowa and Illinois, which will add approximately 245 miles of 345 kV transmission line to MidAmerican Energy's transmission system.


•	Remaining costs primarily relate to routine expenditures for distribution, generation, transmission and other infrastructure needed to serve existing and expected demand.

MidAmerican Energy Wind

Contractual Obligations

As of June 30, 2016 , there have been no material changes outside the normal course of business in MidAmerican Energy's and MidAmerican Funding's contractual obligations from the information provided in Item 7 of their Annual Report on Form 10‑K for the year ended December 31, 2015 .

Regulatory Matters

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

Quad Cities Station Operating Status

111

The following significant assets and liabilities associated with Quad Cities Station were included on MidAmerican Energy's balance sheet as of June 30, 2016 (in millions):



Assets:
Net plant in service, including nuclear fuel	$	343
Construction work in progress	10
Inventory	17
Regulatory assets	4

Liabilities:
Asset retirement obligation ⁽¹⁾	365


(1)	The Quad Cities Station asset retirement obligation assumes a 2032 closure. MidAmerican Energy’s nuclear decommissioning trust fund established for the settlement of the Quad Cities Station asset retirement obligation totaled $444 million and an associated regulatory liability for the excess of the trust fund over the asset retirement obligation totaled $79 million as of June 30, 2016 .

Environmental Laws and Regulations

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

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

New Accounting Pronouncements

For a discussion of new accounting pronouncements affecting MidAmerican Energy and MidAmerican Funding, refer to Note 2 of Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of goodwill and long-lived assets, pension and other postretirement benefits, income taxes and revenue recognition - unbilled revenue. For additional discussion of MidAmerican Energy's and MidAmerican Funding's critical accounting estimates, see Item 7 of their Annual Report on Form 10-K for the year ended December 31, 2015 . There have been no significant changes in MidAmerican Energy's and MidAmerican Funding's assumptions regarding critical accounting estimates since December 31, 2015 .

112

Nevada Power Company and its subsidiaries

Consolidated Financial Section

113

PART I


Item 1.	Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Nevada Power Company

Las Vegas, Nevada

We have reviewed the accompanying consolidated balance sheet of Nevada Power Company and subsidiaries ("Nevada Power") as of June 30, 2016 , and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2016 and 2015 , and of changes in shareholder's equity and cash flows for the six-month periods ended June 30, 2016 and 2015 . These interim financial statements are the responsibility of Nevada Power's management.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Nevada Power Company and subsidiaries as of December 31, 2015 , and the related consolidated statements of operations, changes in shareholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2016 , 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, 2015 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

Las Vegas, Nevada

August 5, 2016

114

NEVADA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in millions, except share data)



	As of
	June 30,			December 31,
	2016			2015
ASSETS

Current assets:
Cash and cash equivalents	$	112		$	536
Accounts receivable, net	332			265
Inventories	78			80
Other current assets	46			46
Total current assets	568			927

Property, plant and equipment, net	6,981			6,996
Regulatory assets	1,042			1,057
Other assets	40			37

Total assets	$	8,631		$	9,017

LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	212		$	214
Accrued interest	50			54
Accrued property, income and other taxes	39			30
Regulatory liabilities	161			173
Current portion of long-term debt and financial and capital lease obligations	11			225
Customer deposits	59			58
Other current liabilities	46			28
Total current liabilities	578			782

Long-term debt and financial and capital lease obligations	3,057			3,060
Regulatory liabilities	310			304
Deferred income taxes	1,426			1,405
Other long-term liabilities	298			303
Total liabilities	5,669			5,854

Commitments and contingencies (Note 8)

Shareholder's equity:
Common stock - $1.00 stated value; 1,000 shares authorized, issued and outstanding	—			—
Other paid-in capital	2,308			2,308
Retained earnings	657			858
Accumulated other comprehensive loss, net	(3		)	(3		)
Total shareholder's equity	2,962			3,163

Total liabilities and shareholder's equity	$	8,631		$	9,017

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

115

NEVADA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in millions)



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Operating revenue	$	525		$	607		$	924		$	1,066

Operating costs and expenses:
Cost of fuel, energy and capacity	199			291			367			517
Operating and maintenance	100			97			199			175
Depreciation and amortization	76			74			151			148
Property and other taxes	9			9			20			16
Total operating costs and expenses	384			471			737			856

Operating income	141			136			187			210

Other income (expense):
Interest expense	(47		)	(47		)	(95		)	(93		)
Allowance for borrowed funds	1			—			2			1
Allowance for equity funds	2			1			3			2
Other, net	5			4			10			11
Total other income (expense)	(39		)	(42		)	(80		)	(79		)

Income before income tax expense	102			94			107			131
Income tax expense	36			34			38			47
Net income	$	66		$	60		$	69		$	84

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

116

NEVADA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)

(Amounts in millions, except shares)



									Accumulated
				Other					Other			Total
	Common Stock			Paid-in		Retained			Comprehensive			Shareholder's
	Shares	Amount		Capital		Earnings			Loss, Net			Equity
Balance, December 31, 2014	1,000	$	—	$	2,308	$	583		$	(3	)	$	2,888
Net income	—	—		—		84			—			84
Dividends declared	—	—		—		(13		)	—			(13		)
Balance, June 30, 2015	1,000	$	—	$	2,308	$	654		$	(3	)	$	2,959

Balance, December 31, 2015	1,000	$	—	$	2,308	$	858		$	(3	)	$	3,163
Net income	—	—		—		69			—			69
Dividends declared	—	—		—		(270		)	—			(270		)
Balance, June 30, 2016	1,000	$	—	$	2,308	$	657		$	(3	)	$	2,962

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

117

NEVADA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in millions)



	Six-Month Periods
	Ended June 30,
	2016			2015

Cash flows from operating activities:
Net income	$	69		$	84
Adjustments to reconcile net income to net cash flows from operating activities:
Gain on nonrecurring items	—			(3		)
Depreciation and amortization	151			148
Deferred income taxes and amortization of investment tax credits	25			47
Allowance for equity funds	(3		)	(2		)
Changes in regulatory assets and liabilities	17			(19		)
Deferred energy	31			87
Amortization of deferred energy	(42		)	35
Other, net	4			(15		)
Changes in other operating assets and liabilities:
Accounts receivable and other assets	(70		)	(144		)
Inventories	2			(1		)
Accounts payable and other liabilities	60			40
Net cash flows from operating activities	244			257

Cash flows from investing activities:
Capital expenditures	(181		)	(125		)
Proceeds from sale of assets	—			9
Other, net	—			10
Net cash flows from investing activities	(181		)	(106		)

Cash flows from financing activities:
Repayments of long-term debt and financial and capital lease obligations	(217		)	(252		)
Dividends paid	(270		)	(13		)
Net cash flows from financing activities	(487		)	(265		)

Net change in cash and cash equivalents	(424		)	(114		)
Cash and cash equivalents at beginning of period	536			220
Cash and cash equivalents at end of period	$	112		$	106

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

118

NEVADA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

( 1 ) Organization and Operations

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

The unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the unaudited Consolidated Financial Statements as of June 30, 2016 and for the three- and six-month periods ended June 30, 2016 and 2015 . The Consolidated Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the three- and six-month periods ended June 30, 2016 and 2015 . Certain amounts in the prior period Financial Statements have been reclassified to conform to the current period presentation. Such reclassifications did not impact previously reported operating income, net income or retained earnings. The results of operations for the three- and six-month periods ended June 30, 2016 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 Nevada Power's Item 8 Notes to Consolidated Financial Statements included in BHE's Annual Report on Form 10-K for the year ended December 31, 2015 describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in Nevada Power's assumptions regarding significant accounting estimates and policies during the six-month period ended June 30, 2016 .

( 2 ) New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, which creates FASB Accounting Standards Codification ("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. 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. Nevada Power is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

119

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB ASC Topic 606, "Revenue from Contracts with Customers" and supersedes ASC Topic 605, "Revenue Recognition." The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017. During 2016, the FASB issued several ASUs that clarify the implementation guidance for ASU No. 2014-09 but do not change the core principle of the guidance. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. Nevada Power is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

( 3 ) Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):



		As of
	Depreciable Life	June 30,			December 31,
	Depreciable Life	2016			2015
Utility plant:
Generation	25 - 80 years	$	4,228		$	4,212
Distribution	20 - 65 years	3,185			3,118
Transmission	45 - 65 years	1,828			1,788
General and intangible plant	5 - 65 years	728			694
Utility plant		9,969			9,812
Accumulated depreciation and amortization		(3,094		)	(2,971		)
Utility plant, net		6,875			6,841
Other non-regulated, net of accumulated depreciation and amortization	5 - 65 years	2			2
Plant, net		6,877			6,843
Construction work-in-progress		104			153
Property, plant and equipment, net		$	6,981		$	6,996

( 4 ) Regulatory Matters

Deferred Energy

Nevada statutes permit regulated utilities to adopt deferred energy accounting procedures. The intent of these procedures is to ease the effect on customers of fluctuations in the cost of purchased natural gas, fuel and electricity and are subject to annual prudency review by the Public Utilities Commission of Nevada ("PUCN").

Under deferred energy accounting, to the extent actual fuel and purchased power costs exceed fuel and purchased power costs recoverable through current rates that excess is not recorded as a current expense on the Consolidated Statements of Operations but rather is deferred and recorded as a regulatory asset on the Consolidated Balance Sheets. Conversely, a regulatory liability is recorded to the extent fuel and purchased power costs recoverable through current rates exceed actual fuel and purchased power costs. These excess amounts are reflected in quarterly adjustments to rates and recorded as cost of fuel, energy and capacity in future time periods.

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( 5 ) Employee Benefit Plans

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

Amounts payable to NV Energy are included on the Consolidated Balance Sheets and consist of the following (in millions):



	As of
	June 30,			December 31,
	2016			2015
Qualified Pension Plan -
Other long-term liabilities	$	(41	)	$	(38	)

Non-Qualified Pension Plans:
Other current liabilities	(1		)	(1		)
Other long-term liabilities	(9		)	(9		)

Other Postretirement Plans -
Other long-term liabilities	(5		)	(5		)

( 6 ) Risk Management and Hedging Activities

Nevada Power is exposed to the impact of market fluctuations in commodity prices and interest rates. Nevada Power is principally exposed to electricity, natural gas and coal market fluctuations primarily through Nevada Power's obligation to serve retail customer load in its regulated service territory. Nevada Power's load and generating facilities represent substantial underlying commodity positions. Exposures to commodity prices consist mainly of variations in the price of fuel required to generate electricity and wholesale electricity that is purchased and sold. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. The actual cost of fuel and purchased power is recoverable through the deferred energy mechanism. Interest rate risk exists on variable-rate debt and future debt issuances. Nevada Power does not engage in proprietary trading activities.

Nevada Power has established a risk management process that is designed to identify, assess, manage, mitigate, monitor and report each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, Nevada Power uses commodity derivative contracts, which may include forwards, futures, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. Nevada Power manages its interest rate risk by limiting its exposure to variable interest rates primarily through the issuance of fixed-rate long-term debt and by monitoring market changes in interest rates. Additionally, Nevada Power may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate Nevada Power's exposure to interest rate risk. Nevada Power does not hedge all of its commodity price and interest rate risks, thereby exposing the unhedged portion to changes in market prices.

There have been no significant changes in Nevada Power's accounting policies related to derivatives. Refer to Note 7 for additional information on derivative contracts.

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The following table, which excludes contracts that have been designated as normal under the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of Nevada Power's derivative contracts, on a gross basis, and reconciles those amounts to the amounts presented on a net basis on the Consolidated Balance Sheets (in millions):



	Other			Other
	Current			Long-term
	Liabilities			Liabilities			Total
As of June 30, 2016
Commodity liabilities ⁽¹⁾	$	(9	)	$	(13	)	$	(22	)

As of December 31, 2015
Commodity liabilities ⁽¹⁾	$	(8	)	$	(14	)	$	(22	)


(1)	Nevada Power's commodity derivatives not designated as hedging contracts are included in regulated rates and as of June 30, 2016 and December 31, 2015 , a regulatory asset of $22 million was recorded related to the derivative liability of $22 million .

Derivative Contract Volumes

The following table summarizes the net notional amounts of outstanding derivative contracts with indexed and fixed price terms that comprise the mark-to-market values as of (in millions):



	Unit of	June 30,		December 31,
	Measure	2016		2015
Electricity sales	Megawatt hours	(2	)	(2	)
Natural gas purchases	Decatherms	138		126

Credit Risk

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

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain credit support provisions that in part base certain collateral requirements on credit ratings for unsecured debt as reported by one or more of the three recognized credit rating agencies. These derivative contracts may either specifically provide rights to demand cash or other security in the event of a credit rating downgrade ("credit-risk-related contingent features") or provide the right for counterparties to demand "adequate assurance," in the event of a material adverse change in creditworthiness. These rights can vary by contract and by counterparty. As of June 30, 2016 , credit ratings from the three recognized credit rating agencies were investment grade.

The aggregate fair value of Nevada Power's derivative contracts in liability positions with specific credit-risk-related contingent features was $3 million as of June 30, 2016 and December 31, 2015 , which represents the amount of collateral to be posted if all credit risk related contingent features for derivative contracts in liability positions had been triggered. Nevada Power's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation or other factors.

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( 7 )	Fair Value Measurements

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


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

•


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

The following table presents Nevada Power's assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):



	Input Levels for Fair Value Measurements
	Level 1		Level 2		Level 3			Total
As of June 30, 2016
Assets - investment funds	$	6	$	—	$	—		$	6

Liabilities - commodity derivatives	$	—	$	—	$	(22	)	$	(22	)

As of December 31, 2015
Assets - investment funds	$	5	$	—	$	—		$	5

Liabilities - commodity derivatives	$	—	$	—	$	(22	)	$	(22	)

Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at estimated fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which Nevada Power transacts. When quoted prices for identical contracts are not available, Nevada Power uses forward price curves. Forward price curves represent Nevada Power's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. Nevada Power bases its forward price curves upon internally developed models, with internal and external fundamental data inputs. Market price quotations for certain electricity and natural gas trading hubs are not as readily obtainable due to markets that are not active. Given that limited market data exists for these contracts, Nevada Power uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The model incorporates a mid-market pricing convention (the mid‑point price between bid and ask prices) as a practical expedient for valuing its assets and liabilities measured and reported at fair value. Interest rate swaps are valued using a financial model which utilizes observable inputs for similar instruments based primarily on market price curves. The determination of the fair value for derivative contracts not only includes counterparty risk, but also the impact of Nevada Power's nonperformance risk on its liabilities, which as of June 30, 2016 and December 31, 2015 , had an immaterial impact to the fair value of its derivative contracts. As such, Nevada Power considers its derivative contracts to be valued using Level 3 inputs. Refer to Note 6 for further discussion regarding Nevada Power's risk management and hedging activities.

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

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The following table reconciles the beginning and ending balances of Nevada Power's commodity derivative liabilities measured at fair value on a recurring basis using significant Level 3 inputs (in millions):



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Beginning balance	$	(22	)	$	(32	)	$	(22	)	$	(30	)
Changes in fair value recognized in regulatory assets	(2		)	(1		)	(5		)	(5		)
Settlements	2			—			5			2
Ending balance	$	(22	)	$	(33	)	$	(22	)	$	(33	)

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



	As of June 30, 2016				As of December 31, 2015
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Long-term debt	$	2,579	$	3,209	$	2,788	$	3,240


( 8 )	Commitments and Contingencies

Environmental Laws and Regulations

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

Senate Bill 123

In June 2013, the Nevada State Legislature passed Senate Bill No. 123 ("SB 123"), which included the retirement of coal plants and replacing the capacity with renewable and other generating facilities. In May 2014, Nevada Power filed its Emissions Reduction Capacity Replacement Plan ("ERCR Plan") in compliance with SB 123. In July 2015, Nevada Power filed an amendment to its ERCR Plan with the PUCN which was approved in September 2015. In June 2015, the Nevada State Legislature passed Assembly Bill No. 498, which modified the capacity replacement components of SB 123.

Consistent with direction provided by the PUCN, Nevada Power acquired a 272 -megawatt ("MW") natural gas co-generating facility in 2014, acquired a 210 -MW natural gas peaking facility in 2014, constructed a 15 -MW solar photovoltaic facility in 2015 and contracted two renewable power purchase agreements with 100 -MW solar photovoltaic generating facilities in 2015. In February 2016, Nevada Power solicited proposals to acquire 35 MW of nameplate renewable energy capacity to be owned by Nevada Power. In June 2016 Nevada Power executed a long-term power purchase agreement for 100 MW of nameplate renewable energy capacity in Nevada, which is pending PUCN approval. The solicitation and executed power purchase agreement are related to Nevada Power's final steps to comply with SB 123, resulting in the retirement of 812 MW of coal-fueled generation by 2019.

Legal Matters

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

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Switch, Ltd.

In July 2016, Switch, Ltd. filed a complaint in the United States District Court for the District of Nevada against various parties, including Nevada Power. The complaint alleges that actions by the former general counsel of the PUCN, as well as the PUCN and the PUCN Staff, violated state and federal laws and as a result of those actions Switch was prevented from being able to utilize an alternative energy provider. Switch also alleges that NV Energy was aware of the wrong doing and either participated in the activities or failed to take action to stop the wrong doing, and as a result Nevada Power has been improperly enriched by these activities. Switch is seeking monetary damages and to invalidate the settlement agreement between Switch and Nevada Power relating to Switch utilizing an alternative energy provider. Nevada Power intends to vigorously defend against these claims. Nevada Power cannot assess or predict the outcome of the case at this time.

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

General

Nevada Power's revenues and operating income are subject to fluctuations during the year due to impacts that seasonal weather, rate changes, and customer usage patterns have on demand for electric energy and resources. Nevada Power is a summer peaking utility experiencing its highest retail energy sales in response to the demand for air conditioning. The variations in energy usage due to varying weather, customer growth and other energy usage patterns, including energy efficiency and conservation measures, necessitates a continual balancing of loads and resources and purchases and sales of energy under short- and long-term energy supply contracts. As a result, the prudent management and optimization of available resources has a direct effect on the operating and financial performance of Nevada Power. Additionally, the timely recovery of purchased power, fuel costs and other costs and the ability to earn a fair return on investments through rates are essential to the operating and financial performance of Nevada Power.

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

Results of Operations for the Second Quarter and First Six Months of 2016 and 2015

Net income for the second quarter of 2016 was $66 million , an increase of $6 million , or 10% , compared to 2015 due to higher customer growth and usage primarily due to the impacts of weather and the redemption of $210 million Series M, 5.950% General and Refunding Mortgage Notes in May 2016, offset by higher expenses related to uncollectible accounts, higher planned maintenance and other generating costs, lower margins from changes in usage patterns with commercial and industrial customers, lower transmission demand and increased taxes due to a new state commerce tax and increases in property and franchise taxes.

Net income for the first six months of 2016 was $69 million , a decrease of $15 million , or 18% , compared to 2015 due to benefits from changes in contingent liabilities in 2015, higher planned maintenance and other generating costs, lower margins from changes in usage patterns with commercial and industrial customers and lower transmission demand, expenses related to uncollectible accounts, a gain on the sale of an equity investment in 2015, increased taxes due to a new state commerce tax and increases in property and franchise taxes, higher interest on deferred charges and higher depreciation and amortization primarily due to higher plant placed in-service. The decrease in net income is offset by higher customer growth and usage primarily due to the impacts of weather and the redemption of $210 million Series M, 5.950% General and Refunding Mortgage Notes in May 2016.

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Operating revenue and cost of fuel, energy and capacity are key drivers of Nevada Power's results of operations as they encompass retail and wholesale electricity revenue and the direct costs associated with providing electricity to customers. Nevada Power believes that a discussion of gross margin, representing operating revenue less cost of fuel, energy and capacity, is therefore meaningful. A comparison of Nevada Power's key operating results is as follows:



	Second Quarter										First Six Months
	2016		2015		Change						2016		2015		Change
Gross margin (in millions):
Operating revenue	$	525	$	607	$	(82	)	(14	)	%	$	924	$	1,066	$	(142	)	(13	)	%
Cost of fuel, energy and capacity	199		291		(92		)	(32	)		367		517		(150		)	(29	)
Gross margin	$	326	$	316	$	10		3			$	557	$	549	$	8		1

GWh sold:
Residential	2,415		2,289		126			6		%	3,988		3,814		174			5		%
Commercial	1,176		1,138		38			3			2,160		2,131		29			1
Industrial	1,972		1,919		53			3			3,623		3,637		(14		)	—
Other	47		46		1			2			96		98		(2		)	(2	)
Total retail	5,610		5,392		218			4			9,867		9,680		187			2
Wholesale	46		174		(128		)	(74	)		101		188		(87		)	(46	)
Total GWh sold	5,656		5,566		90			2			9,968		9,868		100			1

Average number of retail customers (in thousands):
Residential	795		781		14			2		%	793		779		14			2		%
Commercial	105		104		1			1			105		105		—			—
Industrial	2		2		—			—			2		1		1			100
Total	902		887		15			2			900		885		15			2

Average retail revenue per MWh	$	91.59	$	109.80	$	(18.21	)	(17	)	%	$	91.52	$	107.38	$	(15.86	)	(15	)	%

Heating degree days	39		38		1			3		%	829		624		205			33		%
Cooling degree days	1,315		1,269		46			4		%	1,379		1,417		(38		)	(3	)	%

Sources of energy (GWh) ⁽¹⁾ :
Coal	356		429		(73		)	(17	)	%	541		710		(169		)	(24	)	%
Natural gas	3,801		4,507		(706		)	(16	)		6,912		8,047		(1,135		)	(14	)
Renewables	13		—		13			*			21		—		21			*
Total energy generated	4,170		4,936		(766		)	(16	)		7,474		8,757		(1,283		)	(15	)
Energy purchased	1,707		1,086		621			57			2,939		1,610		1,329			83
Total	5,877		6,022		(145		)	(2	)		10,413		10,367		46			—

* Not meaningful


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

127

Gross margin increased $10 million , or 3% , for the second quarter of 2016 compared to 2015 due to:


•	$5 million due to higher customer growth,


•	$4 million higher customer usage and


•	$3 million in higher energy efficiency program rate revenue, which is offset in operating and maintenance expense.

The increase in gross margin was offset by:


•	$1 million in usage patterns for commercial and industrial customers and


•	$1 million in lower transmission demand.

Operating and maintenance increased $3 million , or 3% , for the second quarter of 2016 compared to 2015 due to higher energy efficiency program costs, which are fully recovered in operating revenue, expenses related to uncollectible accounts and higher planned maintenance and other generating costs.

Depreciation and amortization increased $2 million , or 3% , for the second quarter of 2016 compared to 2015 primarily due to higher plant placed in-service.

Other income (expense) is favorable $3 million , or 7% , for the second quarter of 2016 compared to 2015 primarily due to redemption of $210 million Series M, 5.950% General and Refunding Mortgage Notes in May 2016.

Income tax expense increased $2 million , or 6% , for the second quarter of 2016 compared to 2015 . The effective tax rate was 35% for 2016 and 36% for 2015 .

Gross margin increased $8 million , or 1% , for the first six months of 2016 compared to 2015 due to:


•	$5 million due to higher customer growth,


•	$4 million higher customer usage and


•	$4 million in higher energy efficiency program rate revenue, which is offset in operating and maintenance expense.

The increase in gross margin was offset by:


•	$3 million in usage patterns for commercial and industrial customers and


•	$2 million in lower transmission demand.

Operating and maintenance increased $24 million , or 14% , for the first six months of 2016 compared to 2015 due to benefits from changes in contingent liabilities in 2015, higher energy efficiency program costs, which are fully recovered in operating revenue, higher planned maintenance and other generating costs and expenses related to uncollectible accounts.

Depreciation and amortization increased $3 million , or 2% , for the first six months of 2016 compared to 2015 primarily due to higher plant placed in-service.

Property and other taxes increased 4 million , or 25% , for the first six months of 2016 compared to 2015 due to a new state commerce tax and increases in property and franchise taxes.

Other income (expense) is unfavorable $1 million , or 1% , for the first six months of 2016 compared to 2015 due to a gain on the sale of an equity investment in 2015 and higher interest on deferred charges, partially offset by the redemption of $210 million Series M, 5.950% General and Refunding Mortgage Notes in May 2016.

Income tax expense decreased $9 million , or 19% , for the first six months of 2016 compared to 2015 . The effective tax rate was 36% for 2016 and 2015 .

Liquidity and Capital Resources

As of June 30, 2016 , Nevada Power's total net liquidity was $512 million consisting of $112 million in cash and cash equivalents and $400 million of revolving credit facility availability.

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Operating Activities

Net cash flows from operating activities for the six-month periods ended June 30, 2016 and 2015 were $244 million and $257 million , respectively. The change was due to decreased collections from customers due to lower retail rates as a result of deferred energy adjustment mechanisms and the timing of compensation payments. The decrease was offset by lower payments for fuel costs, settlement payments of contingent liabilities in 2015, higher collections from customers for renewable energy programs and lower interest payments.

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") was signed into law, extending bonus depreciation for qualifying property acquired and placed in-service before January 1, 2020 (bonus depreciation rates will be 50% for 2015-2017, 40% in 2018, and 30% in 2019), with an additional year for certain longer lived assets. Investment tax credits were extended and phased-down for solar projects that are under construction before the end of 2021 (investment tax credit rates are 30% through 2019, 26% in 2020 and 22% in 2021; they revert to the statutory rate of 10% thereafter). As a result of PATH, Nevada Power's cash flows from operations are expected to benefit in 2016 and beyond due to bonus depreciation on qualifying assets placed in-service and investment tax credits (once the net operating loss is fully utilized) earned on qualifying projects.

Investing Activities

Net cash flows from investing activities for the six-month periods ended June 30, 2016 and 2015 were $(181) million and $(106) million , respectively. The change was due to increased capital maintenance expenditures and cash received for the sale of securities and an equity investment in 2015.

Financing Activities

Net cash flows from financing activities for the six-month periods ended June 30, 2016 and 2015 were $(487) million and $(265) million , respectively. The change was primarily due to higher dividends paid to NV Energy, Inc. in 2016, partially offset by lower repayments of long-term debt.

Ability to Issue Debt

Nevada Power's ability to issue debt is primarily impacted by its financing authority from the PUCN. As of June 30, 2016 , Nevada Power has financing authority from the PUCN consisting of the ability to: (1) issue additional long-term debt securities of up to $725 million ; (2) refinance up to $553 million of long-term debt securities; and (3) maintain a revolving credit facility of up to $1.3 billion . Nevada Power's revolving credit facility contains a financial maintenance covenant which Nevada Power was in compliance with as of June 30, 2016 . In addition, certain financing agreements contain covenants which are currently suspended as Nevada Power's senior secured debt is rated investment grade. However, if Nevada Power's senior secured debt ratings fall below investment grade by either Moody's Investors Service or Standard & Poor's, Nevada Power would be subject to limitations under these covenants.

Future Uses of Cash

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

Capital Expenditures

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

129

Nevada Power's historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items are as follows (in millions):



	Six-Month Periods				Annual
	Ended June 30,				Forecast
	2015		2016		2016

Generation development	$	18	$	1	$	78
Distribution	73		58		87
Transmission system investment	—		16		32
Other	34		106		115
Total	$	125	$	181	$	312

In April 2016, Nevada Power executed an agreement to purchase a 504-MW natural gas facility. The sale is subject to certain conditions including federal and state regulatory approval. The transaction is expected to close no later than the first quarter of 2017.

Contractual Obligations

As of June 30, 2016 , there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of Nevada Power's Annual Report on Form 10-K for the year ended December 31, 2015 .

Regulatory Matters

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

Environmental Laws and Regulations

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

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

New Accounting Pronouncements

For a discussion of new accounting pronouncements affecting Nevada Power, refer to Note 2 of Notes to Consolidated Financial Statements in Nevada Power's Part I, Item 1 of this Form 10-Q.

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Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Consolidated Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of long-lived assets, income taxes and revenue recognition - unbilled revenue. For additional discussion of Nevada Power's critical accounting estimates, see Item 7 of Nevada Power's Annual Report on Form 10‑K for the year ended December 31, 2015 . There have been no significant changes in Nevada Power's assumptions regarding critical accounting estimates since December 31, 2015 .

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Sierra Pacific Power Company and its subsidiaries

Consolidated Financial Section

132

PART I


Item 1.	Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Sierra Pacific Power Company

Las Vegas, Nevada

We have reviewed the accompanying consolidated balance sheet of Sierra Pacific Power Company and subsidiaries ("Sierra Pacific") as of June 30, 2016 , and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2016 and 2015 , and of changes in shareholder's equity and cash flows for the six-month periods ended June 30, 2016 and 2015 . These interim financial statements are the responsibility of Sierra Pacific's management.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Sierra Pacific Power Company and subsidiaries as of December 31, 2015 , and the related consolidated statements of operations, changes in shareholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2016 , 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, 2015 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

Las Vegas, Nevada

August 5, 2016

133

SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in millions, except share data)



	As of
	June 30,			December 31,
	2016			2015
ASSETS

Current assets:
Cash and cash equivalents	$	69		$	106
Accounts receivable, net	95			124
Inventories	42			39
Other current assets	13			13
Total current assets	219			282

Property, plant and equipment, net	2,791			2,766
Regulatory assets	433			432
Other assets	7			7

Total assets	$	3,450		$	3,487

LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	111		$	127
Accrued interest	14			15
Accrued property, income and other taxes	12			13
Regulatory liabilities	98			78
Current portion of long-term debt and financial and capital lease obligations	2			453
Customer deposits	17			17
Other current liabilities	16			11
Total current liabilities	270			714

Long-term debt and financial and capital lease obligations	1,154			749
Regulatory liabilities	229			230
Deferred income taxes	585			570
Other long-term liabilities	149			148
Total liabilities	2,387			2,411

Commitments and contingencies (Note 8)

Shareholder's equity:
Common stock - $3.75 stated value, 20,000,000 shares authorized and 1,000 issued and outstanding	—			—
Other paid-in capital	1,111			1,111
Accumulated deficit	(48		)	(35		)
Total shareholder's equity	1,063			1,076

Total liabilities and shareholder's equity	$	3,450		$	3,487

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

134

SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in millions)



	Three-Month Periods						Six-Month Periods
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015

Operating revenue:
Electric	$	162		$	201		$	332		$	397
Natural Gas	19			26			66			76
Total operating revenue	181			227			398			473

Operating costs and expenses:
Cost of fuel, energy and capacity	65			101			135			198
Natural gas purchased for resale	7			15			37			50
Operating and maintenance	45			40			86			77
Depreciation and amortization	29			28			58			56
Property and other taxes	7			6			13			12
Total operating costs and expenses	153			190			329			393

Operating income	28			37			69			80

Other income (expense):
Interest expense	(14		)	(15		)	(30		)	(30		)
Allowance for borrowed funds	1			1			1			1
Allowance for equity funds	—			—			1			1
Other, net	—			1			1			2
Total other income (expense)	(13		)	(13		)	(27		)	(26		)

Income before income tax expense	15			24			42			54
Income tax expense	5			8			15			19
Net income	$	10		$	16		$	27		$	35

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

135

SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)

(Amounts in millions, except shares)



									Accumulated
				Other					Other			Total
	Common Stock			Paid-in		Accumulated			Comprehensive			Shareholder's
	Shares	Amount		Capital		Deficit			Loss, Net			Equity

Balance, December 31, 2014	1,000	$	—	$	1,111	$	(111	)	$	(2	)	$	998
Net income	—	—		—		35			—			35
Dividends declared	—	—		—		(7		)	—			(7		)
Balance, June 30, 2015	1,000	$	—	$	1,111	$	(83	)	$	(2	)	$	1,026

Balance, December 31, 2015	1,000	$	—	$	1,111	$	(35	)	$	—		$	1,076
Net income	—	—		—		27			—			27
Dividends declared	—	—		—		(40		)	—			(40		)
Balance, June 30, 2016	1,000	$	—	$	1,111	$	(48	)	$	—		$	1,063

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

136

SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in millions)



	Six-Month Periods
	Ended June 30,
	2016			2015

Cash flows from operating activities:
Net income	$	27		$	35
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	58			56
Allowance for equity funds	(1		)	(1		)
Deferred income taxes and amortization of investment tax credits	15			19
Changes in regulatory assets and liabilities	(9		)	(9		)
Deferred energy	44			47
Amortization of deferred energy	(21		)	19
Other, net	1			1
Changes in other operating assets and liabilities:
Accounts receivable and other assets	29			7
Inventories	(3		)	(2		)
Accounts payable and other liabilities	2			24
Net cash flows from operating activities	142			196

Cash flows from investing activities:
Capital expenditures	(92		)	(98		)
Other, net	—			2
Net cash flows from investing activities	(92		)	(96		)

Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of costs	1,095			—
Repayments of long-term debt and financial and capital lease obligations	(1,137		)	—
Dividends paid	(40		)	(7		)
Other, net	(5		)	—
Net cash flows from financing activities	(87		)	(7		)

Net change in cash and cash equivalents	(37		)	93
Cash and cash equivalents at beginning of period	106			22
Cash and cash equivalents at end of period	$	69		$	115

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

137

SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

( 1 ) Organization and Operations

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

The unaudited 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 June 30, 2016 and for the three- and six-month periods ended June 30, 2016 and 2015 . The Consolidated Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the three- and six-month periods ended June 30, 2016 and 2015 . Certain amounts in the prior period Financial Statements have been reclassified to conform to the current period presentation. Such reclassifications did not impact previously reported operating income, net income or retained earnings. The results of operations for the three- and six-month periods ended June 30, 2016 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 Sierra Pacific's Item 8 Notes to Consolidated Financial Statements included in BHE's Annual Report on Form 10-K for the year ended December 31, 2015 describes the most significant accounting policies used in the preparation of the unaudited Consolidated Financial Statements. There have been no significant changes in Sierra Pacific's assumptions regarding significant accounting estimates and policies during the six-month period ended June 30, 2016 .

( 2 ) New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, which creates FASB Accounting Standards Codification ("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. 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. Sierra Pacific is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

138

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB ASC Topic 606, "Revenue from Contracts with Customers" and supersedes ASC Topic 605, "Revenue Recognition." The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 one year to interim and annual reporting periods beginning after December 15, 2017. During 2016, the FASB issued several ASUs that clarify the implementation guidance for ASU No. 2014-09 but do not change the core principle of the guidance. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. Sierra Pacific is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

( 3 ) Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following (in millions):



		As of
	Depreciable Life	June 30,			December 31,
	Depreciable Life	2016			2015
Utility plant:
Electric generation	40 - 125 years	$	1,137		$	1,134
Electric distribution	20 - 70 years	1,407			1,382
Electric transmission	50 - 70 years	761			739
Electric general and intangible plant	5 - 65 years	166			139
Natural gas distribution	40 - 70 years	376			374
Natural gas general and intangible plant	8 - 10 years	15			13
Common general	5 - 65 years	265			265
Utility plant		4,127			4,046
Accumulated depreciation and amortization		(1,403		)	(1,368		)
Utility plant, net		2,724			2,678
Construction work-in-progress		67			88
Property, plant and equipment, net		$	2,791		$	2,766

( 4 ) Regulatory Matters

Deferred Energy

139


( 5 )	Recent Financing Transactions

In May 2016, Sierra Pacific entered into a Financing Agreement with Washoe County, Nevada (the "Washoe Issuer") whereby the Washoe Issuer loaned to Sierra Pacific the proceeds from the issuance, on behalf of Sierra Pacific, of $30 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016C, due 2036, $25 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016D, due 2036 and $25 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016E, due 2036 (collectively the "Series 2016CDE Bonds").

In May 2016, Sierra Pacific entered into a Financing Agreement with the Washoe Issuer whereby the Washoe Issuer loaned to Sierra Pacific the proceeds from the issuance, on behalf of Sierra Pacific, of $59 million of its 1.50% tax-exempt Gas Facilities Refunding Revenue Bonds, Series 2016A, due 2031, $60 million of its 3.00% tax-exempt Gas and Water Facilities Refunding Revenue Bonds, Series 2016B, due 2036, $75 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016F, due 2036 and $20 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016G, due 2036 (collectively the "Series 2016ABFG Bonds"). The Series 2016A bonds and Series 2016B bonds are subject to mandatory purchase by Sierra Pacific in June 2019 and June 2022, respectively, at which dates the interest rate mode may be adjusted from time to time. Sierra Pacific purchased the Series 2016F bonds and the Series 2016G bonds on their date of issuance to hold for its own account and potential remarketing to the public at a future date.

In May 2016, Sierra Pacific entered into a Financing Agreement with Humboldt County, Nevada (the "Humboldt Issuer") whereby the Humboldt Issuer loaned to Sierra Pacific the proceeds from the issuance, on behalf of Sierra Pacific, of $20 million of its 1.25% tax-exempt Pollution Control Refunding Revenue Bonds, Series A, due 2029 and $30 million of its variable-rate tax-exempt Pollution Control Refunding Revenue Bonds, Series B, due 2029 (collectively the "Series 2016AB Bonds"). The Series A bonds are subject to mandatory purchase by Sierra Pacific in June 2019 at which date the interest rate mode may be adjusted from time to time. Sierra Pacific purchased the Series B bonds on their date of issuance to hold for its own account and potential remarketing to the public at a future date.

To provide collateral security for its obligations, Sierra Pacific issued its General and Refunding Securities, Series V, No. V-1 in the amount of $80 million , No. V-2 in the amount of $214 million , and V-3 in the amount of $50 million (collectively the "Series V Notes"). The obligation of Sierra Pacific to make any payment of the principal and interest on any Series V Notes is discharged to the extent Sierra Pacific has made payment on the Series 2016CDE Bonds, Series 2016ABFG Bonds and Series 2016AB Bonds, respectively.

The collective proceeds from the tax-exempt bond issuances were used in April and May 2016 to refund at par value, plus accrued interest, the Washoe Issuer's $40 million of Water Facilities Refunding Revenue Bonds Series, 2007A, due 2036, $40 million of Water Facilities Refunding Revenue Bonds, Series 2007B, due 2036, $59 million of Gas Facilities Refunding Revenue Bonds, Series 2006A, due 2031, $85 million of Gas and Water Facilities Refunding Revenue Bonds, Series 2006C, due 2036, and $75 million of Water Facilities Refunding Revenue Bonds, Series 2006B, due 2036, and the Humboldt Issuer's $50 million of Pollution Control Refunding Revenue Bonds, Series 2006, due 2029, each previously issued on behalf of Sierra Pacific. The Series 2006C and 2006 were previously held by Sierra Pacific.

( 6 ) Employee Benefit Plans

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

140

Amounts payable to NV Energy are included on the Consolidated Balance Sheets and consist of the following (in millions):



	As of
	June 30,			December 31,
	2016			2015
Qualified Pension Plan -
Other long-term liabilities	$	(30	)	$	(29	)

Non-Qualified Pension Plans:
Other current liabilities	(1		)	(1		)
Other long-term liabilities	(9		)	(9		)

Other Postretirement Plans -
Other long-term liabilities	(32		)	(32		)


( 7 )	Fair Value Measurements

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


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

•


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

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



	As of June 30, 2016				As of December 31, 2015
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Long-term debt	$	1,120	$	1,257	$	1,165	$	1,248

141


( 8 )	Commitments and Contingencies

Environmental Laws and Regulations

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

Legal Matters

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

( 9 ) Segment Information

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

142

Sierra Pacific believes presenting gross margin allows the reader to assess the impact of Sierra Pacific's regulatory treatment and its overall regulatory environment on a consistent basis and is meaningful. Gross margin is calculated as operating revenue less cost of fuel, energy and capacity and natural gas purchased for resale ("cost of sales"). The following tables provide information on a reportable segment basis (in millions):



	Three-Month Periods				Six-Month Periods
	Ended June 30,				Ended June 30,
	2016		2015		2016		2015
Operating revenue:
Regulated electric	$	162	$	201	$	332	$	397
Regulated gas	19		26		66		76
Total operating revenue	$	181	$	227	$	398	$	473

Cost of sales:
Regulated electric	$	65	$	101	$	135	$	198
Regulated gas	7		15		37		50
Total cost of sales	$	72	$	116	$	172	$	248

Gross margin:
Regulated electric	$	97	$	100	$	197	$	199
Regulated gas	12		11		29		26
Total gross margin	$	109	$	111	$	226	$	225

Operating and maintenance:
Regulated electric	$	40	$	36	$	76	$	69
Regulated gas	5		4		10		8
Total operating and maintenance	$	45	$	40	$	86	$	77

Depreciation and amortization:
Regulated electric	$	25	$	24	$	50	$	48
Regulated gas	4		4		8		8
Total depreciation and amortization	$	29	$	28	$	58	$	56

Operating income:
Regulated electric	$	26	$	34	$	59	$	71
Regulated gas	2		3		10		9
Total operating income	$	28	$	37	$	69	$	80

Interest expense:
Regulated electric	$	13	$	14	$	27	$	28
Regulated gas	1		1		3		2
Total interest expense	$	14	$	15	$	30	$	30

143



	As of
	June 30,		December 31,
	2016		2015
Total assets:
Regulated electric	$	3,059	$	3,060
Regulated gas	316		316
Regulated common assets ⁽¹⁾	75		111
Total assets	$	3,450	$	3,487


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

144

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

General

Sierra Pacific's revenues and operating income are subject to fluctuations during the year due to impacts that seasonal weather, rate changes, and customer usage patterns have on demand for electric energy and resources. Sierra Pacific is a summer peaking utility experiencing its highest retail energy sales in response to the demand for air conditioning. The variations in energy usage due to varying weather, customer growth and other energy usage patterns, including energy efficiency and conservation measures, necessitates a continual balancing of loads and resources and purchases and sales of energy under short- and long-term energy supply contracts. As a result, the prudent management and optimization of available resources has a direct effect on the operating and financial performance of Sierra Pacific. Additionally, the timely recovery of purchased power, fuel costs and other costs and the ability to earn a fair return on investments through rates are essential to the operating and financial performance of Sierra Pacific.

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

Results of Operations for the Second Quarter and First Six Months of 2016 and 2015

Overview

Net income for the second quarter of 2016 was $10 million , a decrease of $6 million , or 38% , compared to 2015 due to a settlement payment associated with terminated transmission service in 2015, higher compensation costs, lower margins from changes in usage patterns with commercial and industrial customers and expenses related to uncollectible accounts, partially offset by higher natural gas margins from increased customer usage due to the impacts of weather.

Net income for the first six months of 2016 was $27 million , a decrease of $8 million , or 23% , compared to 2015 due to a settlement payment associated with terminated transmission service in 2015, lower margins from changes in usage patterns with commercial and industrial customers, expenses related to uncollectible accounts, higher compensation costs, and higher planned maintenance and other generating costs, partially offset by higher natural gas margins from increased customer usage due to the impacts of weather.

145

Operating revenue, cost of fuel, energy and capacity and natural gas purchased for resale are key drivers of Sierra Pacific's results of operations as they encompass retail and wholesale electricity and natural gas revenue and the direct costs associated with providing electricity and natural gas to customers. Sierra Pacific believes that a discussion of gross margin, representing operating revenue less cost of fuel, energy and capacity and natural gas purchased for resale, is therefore meaningful. A comparison of Sierra Pacific's key operating results is as follows:

Electric Gross Margin



	Second Quarter										First Six Months
	2016		2015		Change						2016		2015		Change
Gross margin (in millions):
Operating electric revenue	$	162	$	201	$	(39	)	(19	)	%	$	332	$	397	$	(65	)	(16	)	%
Cost of fuel, energy and capacity	65		101		(36		)	(36	)		135		198		(63		)	(32	)
Gross margin	$	97	$	100	$	(3	)	(3	)		$	197	$	199	$	(2	)	(1	)

GWh sold:
Residential	495		489		6			1		%	1,104		1,080		24			2		%
Commercial	738		749		(11		)	(1	)		1,387		1,415		(28		)	(2	)
Industrial	750		774		(24		)	(3	)		1,488		1,491		(3		)	—
Other	4		4		—			—			8		8		—			—
Total retail	1,987		2,016		(29		)	(1	)		3,987		3,994		(7		)	—
Wholesale	146		163		(17		)	(10	)		334		345		(11		)	(3	)
Total GWh sold	2,133		2,179		(46		)	(2	)		4,321		4,339		(18		)	—

Average number of retail customers (in thousands):
Residential	292		288		4			1		%	291		288		3			1		%
Commercial	46		46		—			—			46		46		—			—
Total	338		334		4			1			337		334		3			1

Average retail revenue per MWh	$	75.84	$	90.85	$	(15.01	)	(17	)	%	$	77.09	$	91.35	$	(14.26	)	(16	)	%

Heating degree days	484		566		(82		)	(14	)	%	2,444		2,234		210			9		%
Cooling degree days	292		319		(27		)	(8	)	%	292		319		(27		)	(8	)	%

Sources of energy (GWh) ⁽¹⁾ :
Coal	85		154		(69		)	(45	)	%	299		494		(195		)	(39	)	%
Natural gas	991		1,116		(125		)	(11	)		1,980		2,094		(114		)	(5	)
Total energy generated	1,076		1,270		(194		)	(15	)		2,279		2,588		(309		)	(12	)
Energy purchased	1,089		1,113		(24		)	(2	)		2,233		2,040		193			9
Total	2,165		2,383		(218		)	(9	)		4,512		4,628		(116		)	(3	)

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

146

Natural Gas Gross Margin



	Second Quarter										First Six Months
	2016		2015		Change						2016		2015		Change
Gross margin (in millions):
Operating natural gas revenue	$	19	$	26	$	(7	)	(27	)	%	$	66	$	76	$	(10	)	(13	)	%
Natural gas purchased for resale	7		15		(8		)	(53	)		37		50		(13		)	(26	)
Gross margin	$	12	$	11	$	1		9			$	29	$	26	$	3		12

Dth sold:
Residential	1,368		1,309		59			5		%	5,231		4,524		707			16		%
Commercial	691		650		41			6			2,723		2,265		458			20
Industrial	291		315		(24		)	(8	)		864		840		24			3
Total retail	2,350		2,274		76			3			8,818		7,629		1,189			16

Average number of retail customers (in thousands)	161		158		3			2		%	161		158		3			2		%
Average revenue per retail Dth sold	$	7.92	$	11.16	$	(3.24	)	(29	)	%	$	7.28	$	9.75	$	(2.47	)	(25	)	%
Average cost of natural gas per retail Dth sold	$	3.54	$	6.69	$	(3.15	)	(47	)	%	$	4.24	$	6.54	$	(2.30	)	(35	)	%
Heating degree days	484		566		(82		)	(14	)	%	2,444		2,234		210			9		%

Electric gross margin decreased $3 million , or 3% , for the second quarter of 2016 compared to 2015 due to:


•	$4 million related to a settlement payment associated with terminated transmission service in 2015 and


•	$1 million in usage patterns for commercial and industrial customers.

The decrease in gross margin was offset by:


•	$1 million higher energy efficiency program rate revenue, which is offset in operating and maintenance expense and


•	$1 million in rental revenue.

Natural gas gross margin increased $1 million , or 9% , for the second quarter of 2016 compared to 2015 primarily due to higher customer usage, primarily from the impacts of weather.

Operating and maintenance increased $5 million , or 13% , for the second quarter of 2016 compared to 2015 due to higher energy efficiency program costs, which are fully recovered in operating revenue, higher compensation costs and expenses related to uncollectible accounts.

Depreciation and amortization increased $1 million , or 4% , for the second quarter of 2016 compared to 2015 primarily due to higher plant placed in-service.

Income tax expense decreased $3 million , or 38% , for the second quarter of 2016 compared to 2015 . The effective tax rate was 33% for 2016 and 2015 .

Electric gross margin decreased $2 million , or 1% , for the first six months of 2016 compared to 2015 due to:


•	$4 million related to a settlement payment associated with terminated transmission service in 2015 and


•	$1 million in usage patterns for commercial and industrial customers.

The decrease in gross margin was offset by:


•	$2 million higher energy efficiency program rate revenue, which is offset in operating and maintenance expense and


•	$1 million in rental revenue.

147

Natural gas gross margin increased $3 million , or 12% , for the first six months of 2016 compared to 2015 primarily due to higher customer usage, primarily from the impacts of weather.

Operating and maintenance increased $9 million , or 12% , for the first six months of 2016 compared to 2015 due to planned maintenance and other generating costs, higher energy efficiency program costs, which are fully recovered in operating revenue, expenses related to uncollectible accounts, and higher compensation costs.

Depreciation and amortization increased $2 million , or 4% , for the first six months of 2016 compared to 2015 primarily due to higher plant placed in-service.

Income tax expense decreased $4 million , or 21% , for the first six months of 2016 compared to 2015 . The effective tax rate was 36% for 2016 and 35% for 2015 .

Liquidity and Capital Resources

As of June 30, 2016 , Sierra Pacific's total net liquidity was $319 million consisting of $69 million in cash and cash equivalents and $250 million of revolving credit facility availability.

Operating Activities

Net cash flows from operating activities for the six-month periods ended June 30, 2016 and 2015 were $142 million and $196 million , respectively. The change was due to decreased collections from customers due to lower retail rates as a result of deferred energy adjustment mechanisms, increased customer deposits and the timing of compensation payments, partially offset by lower payments for fuel costs.

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") was signed into law, extending bonus depreciation for qualifying property acquired and placed in-service before January 1, 2020 (bonus depreciation rates will be 50% for 2015-2017, 40% in 2018, and 30% in 2019), with an additional year for certain longer lived assets. Investment tax credits were extended and phased-down for solar projects that are under construction before the end of 2021 (investment tax credit rates are 30% through 2019, 26% in 2020 and 22% in 2021; they revert to the statutory rate of 10% thereafter). As a result of PATH, Sierra Pacific's cash flows from operations are expected to benefit in 2016 and beyond due to bonus depreciation on qualifying assets placed in-service and investment tax credits (once the net operating loss is fully utilized) earned on qualifying projects.

Investing Activities

Net cash flows from investing activities for the six-month periods ended June 30, 2016 and 2015 were $(92) million and $(96) million , respectively. The change was primarily due to decreased capital expenditures, partially offset by cash received from the sale of securities in 2015.

Financing Activities

Net cash flows from financing activities for the six-month periods ended June 30, 2016 and 2015 were $(87) million and $(7) million , respectively. The change was due to refinancing long-term debt and higher dividends paid to NV Energy, Inc. in 2016.

For a discussion of recent financing transactions, refer to Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Ability to Issue Debt

Sierra Pacific's ability to issue debt is primarily impacted by its financing authority from the PUCN. As of June 30, 2016 , Sierra Pacific has financing authority from the PUCN consisting of the ability to: (1) issue additional long-term debt securities of up to $350 million ; (2) refinance up to $55 million of long-term debt securities; and (3) maintain a revolving credit facility of up to $600 million . Sierra Pacific's revolving credit facility contains a financial maintenance covenant which Sierra Pacific was in compliance with as of June 30, 2016 . In addition, certain financing agreements contain covenants which are currently suspended as Sierra Pacific's senior secured debt is rated investment grade. However, if Sierra Pacific's senior secured debt ratings fall below investment grade by either Moody's Investors Service or Standard & Poor's, Sierra Pacific would be subject to limitations under these covenants.

148

Future Uses of Cash

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

Capital Expenditures

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

Sierra Pacific's historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items are as follows (in millions):



	Six-Month Periods				Annual
	Ended June 30,				Forecast
	2015		2016		2016

Distribution	$	56	$	40	$	104
Transmission system investment	1		10		36
Other	41		42		65
Total	$	98	$	92	$	205

Contractual Obligations

As of June 30, 2016 , there have been no material changes outside the normal course of business in contractual obligations from the information provided in Item 7 of Sierra Pacific's Annual Report on Form 10-K for the year ended December 31, 2015 .

Regulatory Matters

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

Environmental Laws and Regulations

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

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

149

New Accounting Pronouncements

For a discussion of new accounting pronouncements affecting Sierra Pacific, refer to Note 2 of Notes to Consolidated Financial Statements in Sierra Pacific's Part I, Item 1 of this Form 10-Q.

Critical Accounting Estimates

Certain accounting measurements require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized on the Consolidated Financial Statements based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty and will likely change in the future as additional information becomes available. Estimates are used for, but not limited to, the accounting for the effects of certain types of regulation, derivatives, impairment of long-lived assets, income taxes and revenue recognition - unbilled revenue. For additional discussion of Sierra Pacific's critical accounting estimates, see Item 7 of Sierra Pacific's Annual Report on Form 10‑K for the year ended December 31, 2015 . There have been no significant changes in Sierra Pacific's assumptions regarding critical accounting estimates since December 31, 2015 .

150


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting the Registrants, see Item 7A of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2015 . Each Registrant's exposure to market risk and its management of such risk has not changed materially since December 31, 2015 . Refer to Note 10 of the Notes to Consolidated Financial Statements of Berkshire Hathaway Energy in Part I, Item 1 of this Form 10-Q, Note 6 of the Notes to Consolidated Financial Statements of PacifiCorp in Part I, Item 1 of this Form 10-Q, Note 8 of the Notes to Financial Statements of MidAmerican Energy in Part I, Item 1 of this Form 10-Q and Note 6 of the Notes to Consolidated Financial Statements of Nevada Power in Part I, Item 1 of this Form 10-Q for disclosure of the respective Registrant's derivative positions as of June 30, 2016 .


Item 4.	Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, each of Berkshire Hathaway Energy Company, PacifiCorp, MidAmerican Funding, LLC, MidAmerican Energy Company, Nevada Power Company and Sierra Pacific Power Company carried out separate evaluations, under the supervision and with the participation of each such entity's management, including its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial officer), or persons performing similar functions, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based upon these evaluations, management of each such entity, including its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial officer), or persons performing similar functions, in each case, concluded that the disclosure controls and procedures for such entity were effective to ensure that information required to be disclosed by such entity in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission's rules and forms, and is accumulated and communicated to its management, including its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial officer), or persons performing similar functions, in each case, as appropriate to allow timely decisions regarding required disclosure by it. Each such entity hereby states that there has been no change in its internal control over financial reporting during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

151

PART II


Item 1.	Legal Proceedings

For a description of certain legal proceedings affecting PacifiCorp, refer to Note 8 of the Notes to Consolidated Financial Statements of PacifiCorp in Part I, Item 1 of this Form 10-Q.


Item 1A.	Risk Factors

There has been no material change to each Registrant's risk factors from those disclosed in Item 1A of each Registrant's Annual Report on Form 10-K for the year ended December 31, 2015 .


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.


Item 3.	Defaults Upon Senior Securities

Not applicable.


Item 4.	Mine Safety Disclosures

Information regarding Berkshire Hathaway Energy's and PacifiCorp's mine safety violations and other legal matters disclosed in accordance with Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is included in Exhibit 95 to this Form 10-Q.


Item 5.	Other Information

Not applicable.


Item 6.	Exhibits

The exhibits listed on the accompanying Exhibit Index are filed as part of this Quarterly Report.

152

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	BERKSHIRE HATHAWAY ENERGY COMPANY

Date: August 5, 2016	/s/ Patrick J. Goodman
	Patrick J. Goodman
	Executive Vice President and Chief Financial Officer
	(principal financial and accounting officer)

	PACIFICORP

Date: August 5, 2016	/s/ Nikki L. Kobliha
	Nikki L. Kobliha
	Vice President and Chief Financial Officer
	(principal financial and accounting officer)

	MIDAMERICAN FUNDING, LLC
	MIDAMERICAN ENERGY COMPANY

Date: August 5, 2016	/s/ Thomas B. Specketer
	Thomas B. Specketer
	Vice President and Controller
	of MidAmerican Funding, LLC
	and Vice President, Chief Financial Officer and Director
	of MidAmerican Energy Company
	(principal financial and accounting officer)

	NEVADA POWER COMPANY

Date: August 5, 2016	/s/ E. Kevin Bethel
	E. Kevin Bethel
	Senior Vice President, Chief Financial Officer and Director
	(principal financial and accounting officer)

	SIERRA PACIFIC POWER COMPANY

Date: August 5, 2016	/s/ E. Kevin Bethel
	E. Kevin Bethel
	Senior Vice President, Chief Financial Officer and Director
	(principal financial and accounting officer)

153

EXHIBIT INDEX


Exhibit No.	Description

BERKSHIRE HATHAWAY ENERGY


4.1	£120,000,000 Finance Contract, dated December 2, 2015, by and between Northern Powergrid (Northeast) Ltd and the European Investment Bank.


4.2	Guarantee and Indemnity Agreement, dated December 8, 2015, by and between Northern Powergrid Holdings Company and the European Investment Bank.


4.3	£130,000,000 Finance Contract, dated December 2, 2015, by and between Northern Powergrid (Yorkshire) plc and the European Investment Bank.


4.4	Guarantee and Indemnity Agreement, dated December 8, 2015, by and between Northern Powergrid Holdings Company and the European Investment Bank.


4.5	Deed of Amendment and Consent, dated March 1, 2016, by and between Northern Powergrid Holdings Company, Northern Powergrid (Yorkshire) plc and the European Investment Bank.


10.1	$2,000,000,000 Credit Agreement, dated as of June 30, 2016, among Berkshire Hathaway Energy Company, as Borrower, the Banks, Financial Institutions and Other Institutional Lenders, as Initial Lenders, MUFG Union Bank, N.A., as Administrative Agent, and the LC Issuing Banks.


10.2	Amended and Restated £150,000,000 Facility Agreement, dated April 30, 2015, among Northern Powergrid Holdings Company, as Borrower, and Abbey National Treasury Services plc, Lloyds Bank plc and The Royal Bank of Scotland plc, as Original Lenders.


10.3	Amended and Restated Credit Agreement, dated as of July 30, 2015, among AltaLink Investments, L.P., as borrower, AltaLink Investment Management Ltd., as general partner, The Royal Bank of Canada, as administrative agent, and Lenders.


10.4	First Amending Agreement to Amended and Restated Credit Agreement, dated as of November 20, 2015, among AltaLink Investments, L.P., as borrower, AltaLink Investment Management Ltd., as general partner, The Royal Bank of Canada, as administrative agent, and Lenders.


10.5	Second Amending Agreement to Amended and Restated Credit Agreement, dated as of December 14, 2015, among AltaLink Investments, L.P., as borrower, AltaLink Investment Management Ltd., as general partner, The Royal Bank of Canada, as administrative agent, and Lenders.


10.6	Third Amending Agreement to Amended and Restated Credit Agreement, dated as of July 8, 2016, among AltaLink Investments, L.P., as borrower, AltaLink Investment Management Ltd., as general partner, The Royal Bank of Canada, as administrative agent, and Lenders.


10.7	Third Amended and Restated Credit Agreement, dated as of December 17, 2015, among AltaLink, L.P., as borrower, AltaLink Management Ltd., as general partner, The Bank of Nova Scotia, as administrative agent, and Lenders.


10.8	Fourth Amended and Restated Credit Agreement, dated as of December 17, 2015, among AltaLink, L.P., as borrower, AltaLink Management Ltd., as general partner, The Bank of Nova Scotia, as administrative agent, and Lenders.


15.1	Awareness Letter of Independent Registered Public Accounting Firm.


31.1	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1	Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.2	Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

154

Exhibit No. Description

PACIFICORP


15.2	Awareness Letter of Independent Registered Public Accounting Firm.


31.3	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.4	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.3	Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.4	Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

BERKSHIRE HATHAWAY ENERGY AND PACIFICORP


10.9	$400,000,000 Credit Agreement, dated as of June 30, 2016, among PacifiCorp, as Borrower, the Banks, Financial Institutions and Other Institutional Lenders, as Initial Lenders, JPMorgan Chase Bank, N.A., as Administrative Agent, and the LC Issuing Banks.


95	Mine Safety Disclosures Required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

MIDAMERICAN ENERGY


15.3	Awareness Letter of Independent Registered Public Accounting Firm.


31.5	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.6	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.5	Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.6	Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

MIDAMERICAN FUNDING


31.7	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.8	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.7	Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.8	Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

NEVADA POWER


15.4	Awareness Letter of Independent Registered Public Accounting Firm.


31.9	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.10	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.9	Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.10	Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIERRA PACIFIC


15.5	Awareness Letter of Independent Registered Public Accounting Firm.


31.11	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.12	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.11	Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.12	Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

155

Exhibit No. Description

BERKSHIRE HATHAWAY ENERGY AND SIERRA PACIFIC


4.6	Officer's Certificate establishing the terms of Sierra Pacific Power Company's 2.60% General and Refunding Mortgage Notes, Series U, due 2026 (incorporated by reference to Exhibit 4.1 to the Sierra Pacific Power Company Current Report on Form 8-K dated April 15, 2016).


4.7	Financing Agreement dated May 1, 2016 between Washoe County, Nevada and Sierra Pacific Power Company (relating to Washoe County, Nevada's $80,000,000 Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company Project) Series 2016C, 2016D and 2016E (incorporated by reference to Exhibit 4.1 to the Sierra Pacific Power Company Current Report on Form 8-K dated May 24, 2016).

4.8

Financing Agreement dated May 1, 2016 between Washoe County, Nevada and Sierra Pacific Power Company (relating to Washoe County, Nevada's $213,930,000 Gas Facilities Refunding Revenue Bonds, Gas and Water Facilities Refunding Revenue Bonds and Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company Projects) Series 2016A, 2016B, 2016F and 2016G (incorporated by reference to Exhibit 4.2 to the Sierra Pacific Power Company Current Report on Form 8-K dated May 24, 2016).


4.9	Financing Agreement dated May 1, 2016 between Humboldt County, Nevada and Sierra Pacific Power Company (relating to Humboldt County, Nevada's $49,750,000 Pollution Control Refunding Revenue Bonds (Sierra Pacific Power Company Project) Series 2016A and 2016B (incorporated by reference to Exhibit 4.3 to the Sierra Pacific Power Company Current Report on Form 8-K dated May 24, 2016).


4.10	Officer’s Certificate establishing the terms of Sierra Pacific Power Company’s General and Refunding Mortgage Notes, Series V (Nos. V-1, V-2 and V-3) (incorporated by reference to Exhibit 4.4 to the Sierra Pacific Power Company Current Report on Form 8-K dated May 24, 2016).

ALL REGISTRANTS

101

The following financial information from each respective Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 , is formatted in XBRL (eXtensible Business Reporting Language) and included herein: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements, tagged in summary and detail.

156

EXHIBIT 4.1

FI N° 85.424
Serapis N° 2015-0155

Northern Powergrid Network Investment - A

Finance Contract

between the

European Investment Bank

and

Northern Powergrid (Northeast) Ltd

Newcastle upon Tyne, 1 December 2015

Luxembourg, 2 December 2015



CONTENTS

ARTICLE 1 CREDIT AND DISBURSEMENT		15
1.01	AMOUNT OF CREDIT	15
1.02	DISBURSEMENT PROCEDURE	15
1.03	CURRENCY OF DISBURSEMENT	16
1.04	CONDITIONS OF DISBURSEMENT	16
1.05	DEFERMENT OF DISBURSEMENT	17
1.06	CANCELLATION AND SUSPENSION	18
1.07	CANCELLATION AFTER EXPIRY OF THE CREDIT	18
1.08	APPRAISAL FEE	19
1.09	SUMS DUE UNDER ARTICLE 1	19
ARTICLE 2 THE LOAN		19
2.01	AMOUNT OF LOAN	19
2.02	CURRENCY OF REPAYMENT, INTEREST AND OTHER CHARGES	19
2.03	CONFIRMATION BY THE BANK	19
ARTICLE 3 INTEREST		19
3.01	RATE OF INTEREST	19
3.02	INTEREST ON OVERDUE SUMS	20
3.03	MARKET DISRUPTION EVENT	20
ARTICLE 4 REPAYMENT		21
4.01	NORMAL REPAYMENT	21
4.02	VOLUNTARY PREPAYMENT	21
4.03	COMPULSORY PREPAYMENT	22
4.04	GENERAL	24
ARTICLE 5 PAYMENTS		24
5.01	DAY COUNT CONVENTION	24
5.02	TIME AND PLACE OF PAYMENT	24
5.03	SET-OFF	25
5.04	DISRUPTION TO PAYMENT SYSTEMS	25
5.05	APPLICATION OF SUMS RECEIVED	25
ARTICLE 6 BORROWER UNDERTAKINGS AND REPRESENTATIONS		26
6.01	USE OF LOAN AND AVAILABILITY OF OTHER FUNDS	26
6.02	COMPLETION OF PROJECT	26
6.03	INCREASED COST OF PROJECT	26
6.04	PROCUREMENT PROCEDURE	26
6.05	CONTINUING PROJECT UNDERTAKINGS	26
6.06	ENVIRONMENTAL IMPACT ASSESSMENTS, EU HABITATS AND BIRDS DIRECTIVES	28
6.07	DISPOSAL OF ASSETS	28
6.08	COMPLIANCE WITH LAWS	28
6.09	CHANGE IN BUSINESS	29
6.10	MERGER	29
6.11	ARMS’ LENGTH DEALINGS	29
6.12	CROSS DEFAULT	29
6.13	RESTRICTIONS ON INCURRING FINANCIAL INDEBTEDNESS	29
6.14	FINANCIAL COVENANTS	29
6.15	GENERAL REPRESENTATIONS AND WARRANTIES	31
ARTICLE 7 SECURITY		33



7.01	SECURITY	33
7.02	NEGATIVE PLEDGE	34
7.03	PARI PASSU RANKING	34
7.04	MOST FAVOURED LENDER	34
ARTICLE 8 INFORMATION AND VISITS		35
8.01	INFORMATION CONCERNING THE PROJECT	35
8.02	INFORMATION CONCERNING THE BORROWER	36
8.03	VISITS BY THE BANK	37
ARTICLE 9 CHARGES AND EXPENSES		38
9.01	TAXES, DUTIES AND FEES	38
9.02	OTHER CHARGES	38
9.03	CURRENCY INDEMNITY	38
9.04	INCREASED COSTS AND INDEMNITY	38
ARTICLE 10 EVENTS OF DEFAULT		39
10.01	RIGHT TO DEMAND REPAYMENT	39
10.02	OTHER RIGHTS AT LAW	41
10.03	INDEMNITY	41
10.04	NON-WAIVER	42
ARTICLE 11 LAW AND JURISDICTION		42
11.01	GOVERNING LAW	42
11.02	JURISDICTION	42
11.03	EVIDENCE OF SUMS DUE	42
ARTICLE 12 FINAL CLAUSES		42
12.01	NOTICES TO EITHER PARTY	42
12.02	FORM OF NOTICE	43
12.03	CHANGES TO PARTIES	43
12.04	CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999	43
12.05	EUROPEAN MONETARY UNION, GBP OBLIGATIONS AND IFRS	43
12.06	ENTIRE AGREEMENT	43
12.07	INVALIDITY	43
12.08	AMENDMENTS	44
12.09	RECITALS, SCHEDULES AND ANNEXES	44
12.10	COUNTERPARTS	44
SCHEDULE A		46
SCHEDULE B		53
SCHEDULE C		54
SCHEDULE D		57

THIS CONTRACT IS MADE BETWEEN:



The European Investment Bank having its seat at 100 blvd Konrad Adenauer, Luxembourg, L-2950 Luxembourg, represented by Anita Furstenberg, Director and Joanna Kalisz, Legal Counsel	(the " Bank ")

of the first part, and



Northern Powergrid (Northeast) Ltd (company number 02906593), a limited company incorporated in England and having its registered office at Lloyds Court, 78 Grey Street, Newcastle upon Tyne, NE1 6AF, represented by John France, Regulation Director	(the " Borrower ")

of the second part.

WHEREAS:

(1)

The Borrower has stated that it is undertaking a project during the period from January 2015 to December 2016 consisting of certain schemes aimed at refurbishing, upgrading and reinforcing the distribution electricity network of the Borrower in North England, as more particularly described in the technical description (the " Technical Description ") set out in Schedule A (collectively, the " Project ").


(2)	The total cost of the Project is estimated by the Bank to be GBP 320,743,000 (three hundred and twenty million seven hundred and forty three thousand pounds sterling) and the Borrower has stated that it intends to finance the Project as follows:



Source	Amount (M GBP)
Own funds	200.743
Credit from the Bank	120
TOTAL	320.743


(3)	In order to fulfil the financing plan set out in Recital (2), the Borrower has requested from the Bank a credit of GBP 120,000,000 (one hundred and twenty million pounds sterling).

(4)

The Bank, considering that the financing of the Project falls within the scope of its functions, and having regard to the statements and facts cited in these Recitals, has decided to give effect to the Borrower's request by providing to it a credit in an amount of GBP 120,000,000 (one hundred and twenty million pounds sterling) under this Finance Contract (the " Contract "); provided that the amount of the Bank loan shall not, in any case, exceed 50% (fifty per cent) of the total cost of the Project set out in Recital (2).

(5)

The Board of Directors of the Borrower has authorised the borrowing of the sum of GBP 120,000,000 (one hundred and twenty million pounds sterling) represented by this credit on the terms and conditions set out in this Contract by a resolution in the terms set out in Annex I and it has been duly certified in the form set out in Annex II that such borrowing is within the corporate powers of the Borrower and does not exceed any borrowing or similar limit binding upon the Borrower.

(6)

The financial obligations of the Borrower under this Contract are from the date of this Contract to be guaranteed by Northern Powergrid Holdings Company (the " Guarantor ") under a guarantee and indemnity (the " Guarantee ") by execution of a guarantee and indemnity agreement dated on or about the date hereof in form and substance satisfactory to the Bank (the " Guarantee Agreement "). The Guarantee Agreement may be replaced by alternative security from time to time in accordance with the terms of this Contract.


(7)	The Statute of the Bank provides that the Bank shall ensure that its funds are used as rationally as possible in the interests of the European Union; and, accordingly, the terms and conditions of the Bank's loan operations must be consistent with relevant EU policies.


(8)	The Bank considers that access to information plays an essential role in the reduction of environmental and social risks, including human rights violations, linked to the projects it finances and has therefore established its transparency policy, the purpose of which is to enhance the accountability of the EIB Group towards its stakeholders and the citizens of the European Union in general.


(9)	The processing of personal data shall be carried out by the Bank in accordance with applicable European Union legislation on the protection of individuals with regard to the processing of personal data by the EC institutions and bodies and on the free movement of such data.


(10)	The Bank has entered on or about the date of this Contract into a finance contract with Northern Powergrid (Yorkshire) plc, a Subsidiary of the Guarantor to finance refurbishing, upgrading and reinforcing the distribution electricity network of Northern Powergrid (Yorkshire) plc in Yorkshire (the " Yorkshire Finance Contract ").


(11)	In this Contract:

" Acceptable Security " means security for the Loan in the form of:


(a)	the Guarantee from the Guarantor;


(b)	a guarantee on terms and from a bank acceptable to the Bank;


(c)	cash collateral; or


(d)	other security acceptable to the Bank.

" Acceptable Security Event " means any of the following events, circumstances or occurrences:


(a)	an Acceptable Security Provider fails to pay any amount payable under the relevant Acceptable Security Document on or before its due date unless the non-payment is due to a technical or administrative error or disruption to a payment system and is cured within 3 (three) Business Days;


(b)	any representation or statement made or deemed to be made by an Acceptable Security Provider in an Acceptable Security Document is or proves to have been incorrect or misleading in any respect;


(c)	any representation or statement made or deemed to be made by an Acceptable Security Provider in connection with the negotiation of an Acceptable Security Document or any other information or document given to the Bank by or on behalf of an Acceptable Security Provider is or proves to have been incorrect or misleading in any material respect;

(d)

following any default in relation thereto, an Acceptable Security Provider is required or is capable of being required or will, following expiry of any applicable contractual grace period, be required or be capable of being required to prepay, discharge, close out or terminate ahead of maturity any other Financial Indebtedness or any commitment for any other Financial Indebtedness is cancelled or suspended, provided that no Acceptable Security Event shall occur under this paragraph (d) if the aggregate amount of such Financial Indebtedness or commitment for Financial Indebtedness is less than GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies;

(e)

an Acceptable Security Provider is unable to pay its debts as they fall due or is deemed unable to pay its debts within the meaning of Section 123(1) or 123(2) of the Insolvency Act 1986 or any statutory modification or re-enactment thereof (whether or not a court of justice has so determined), or admits its inability to pay its debts as they fall due, or suspends its debts, or makes or, without the prior written agreement of the Bank, seeks to make a composition with its creditors or by reason of actual or anticipated financial difficulties commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness or a moratorium is declared in respect of any indebtedness of an Acceptable Security Provider;


(f)	any corporate action, legal proceedings or other procedure or step is taken in relation to or an order is made or an effective resolution is passed for:


(i)	the winding up of an Acceptable Security Provider;


(ii)	the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise) of an Acceptable Security Provider;


(iii)	a composition, compromise, assignment or arrangement with any creditor of an Acceptable Security Provider;


(iv)	the appointment of a liquidator, receiver, administrative receiver, administrator, compulsory manager or other similar officer in respect of an Acceptable Security Provider or of any of its assets; or

(v)

the enforcement of any Security over assets of an Acceptable Security Provider, or any analogous procedure or step is taken in any jurisdiction, provided that no Acceptable Security Event shall occur under this paragraph (f) in respect of any frivolous or vexatious winding-up petition brought by a third party (other than the Guarantor or any of its Subsidiaries) which is discharged within 14 (fourteen) days of commencement or, if earlier, the date on which it is advertised;


(g)	an Acceptable Security Provider takes steps towards a substantial reduction in its capital, is declared insolvent or ceases or resolves to cease to carry on (or threatens to suspend or cease to carry on) the whole or any substantial part of its business or activities;

(h)

an encumbrancer takes possession of, or a receiver, liquidator, administrator, compulsory manager, administrative receiver or similar officer is appointed, whether by a court of competent jurisdiction or by any competent administrative authority or by any person, of or over, any part of the business or assets of an Acceptable Security Provider having an aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent

in any other currency or currencies and, in the case of any of the foregoing, the same is not discharged within 14 (fourteen) days or if the Acceptable Security Provider petitions for the appointment of such an officer;

(i)

any step is taken by any person with a view to the seizure, attachment, sequestration, distress, compulsory acquisition, expropriation, execution or nationalisation of all or any of the shares, or all or any material part of the assets of an Acceptable Security Provider having an aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies;


(j)	by or under the authority of any Governmental Authority, the management of an Acceptable Security Provider is wholly or substantially displaced or the authority of an Acceptable Security Provider in the conduct of its business is wholly or substantially curtailed;


(k)	an Acceptable Security Provider defaults in the performance of any obligation in respect of any other loan or financial instrument granted by the Bank or to the Bank;


(l)	any distress, attachment, execution, sequestration or other process is levied or enforced upon the property of an Acceptable Security Provider having an aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies and is not discharged within 14 (fourteen) days;


(m)	any material Authorisation issued to an Acceptable Security Provider is subject to notice of revocation by the competent Governmental Authority or an Acceptable Security Provider agrees to any revocation or surrender of such material Authorisation;

(n)

it is or becomes unlawful for an Acceptable Security Provider to perform any of its obligations under an Acceptable Security Document or an Acceptable Security Document is not effective in accordance with its terms or is alleged by an Acceptable Security Provider to be ineffective in accordance with its terms or an Acceptable Security Provider evidences an intention to repudiate an Acceptable Security Document;

(o)

an Acceptable Security Provider fails to comply with any obligation under an Acceptable Security Document (not being an obligation otherwise referred to in any other paragraph of this definition of Acceptable Security Event) unless the non-compliance or circumstance giving rise to the non-compliance is capable of remedy and is remedied within 15 (fifteen) days of the earlier of (i) the Bank giving notice to the Acceptable Security Provider or (ii) the Acceptable Security Provider or the Borrower becoming aware of the non-compliance.

" Acceptable Security Document " means the Guarantee Agreement or any other document evidencing Acceptable Security.

" Acceptable Security Provider " means the Guarantor or any other provider of Acceptable Security.

" Acceptance Deadline " for a notice means:

(a) 16h00 Luxembourg time on the day of delivery, if the notice is delivered by 14h00 Luxembourg time on a Business Day; or

(b) 11h00 Luxembourg time on the next following day which is a Business Day, if the notice is delivered after 14h00 Luxembourg time on any such day or is delivered on a day which is not a Business Day.

" Authorisation " means any authorisation, consent, registration, filing, agreement, notarisation, certificate, licence, approval, permit, resolution, authority or exemption and any corporate, creditors' and shareholders' approval or consent.

" Authority " means the Gas and Electricity Markets Authority, operating through OFGEM, and any successors thereto.

" Bonds " means the GBP 150,000,000 5.125% per cent. Guaranteed Bonds due 2035 issued by Northern Electric Finance plc.

" Borrower Material Adverse Change " means, in relation to the Borrower or any other member of the Group, any event or change of condition, as compared with the condition as at the date of this Contract, affecting the Borrower or its Group as a whole, which: (1) materially impairs the ability of the Borrower to perform its financial obligations under this Contract or to comply with any of the financial ratios set out in Article 6.13 or 6.14 of this Contract; or (2) materially impairs the business or financial condition of the Borrower or its Group as a whole.

" Business Day " means a day (other than a Saturday or Sunday) on which the Bank and commercial banks are open for general business in Luxembourg.

" Calculation Date " has the meaning given to it in Article 6.14C.

" Cash Equivalents " has the meaning given to it in Article 6.14C.

" Change-of-Control Event " has the meaning given to it in Article 4.03A(3).

" Change-of-Law Event " has the meaning given to it in Article 4.03A(4).

“ Code ” means the U.S. Internal Revenue Code of 1986, as amended.

" Competition Act " means the Competition Act 1998.

" Compliance Certificate " means a certificate substantially in the form set out in Schedule C.3.

" Compulsory Prepayment Event " means any circumstance, event or occurrence which constitutes or which, with the giving of notice, the passage of time or the making of any determination, or any combination thereof, would constitute a prepayment event under Article 4.03A.

" Consent Letter " means the letter dated 6 August 2004 from the Gas and Electricity Markets Authority to the Borrower.

" Consolidated EBIT " has the meaning given to it in Article 6.14C.

" Consolidated Net Finance Charges " has the meaning given to it in Article 6.14C.

" Consolidated Senior Total Net Debt " has the meaning given to it in Article 6.14C.

" Contract " has the meaning given to it in Recital (4).

" Credit " has the meaning given to it in Article 1.01.

" Credit Facility " has the meaning given to it in Article 7.04(a).

“Criminal Offence” means any of the following criminal offences as applicable: fraud, corruption, coercion, collusion, obstruction, money laundering, financing of terrorism (each as defined in the Bank’s Anti-Fraud Policy dated 17 September 2013).

" Cross Default Obligation " means a term of any agreement or arrangement under which the Borrower’s liability to pay or repay any debt or other sum arises or is increased or accelerated or is capable of arising or of increasing or of being accelerated, because of a default (however it may be described or defined) by any person other than the Borrower, unless:

(a) that liability can arise only as the result of a default by a Subsidiary of the Borrower;

(b) the Borrower holds a majority of the voting shares in that Subsidiary and has the right to appoint or remove a majority of its board of directors; and

(c) that Subsidiary carries on business only for a purpose within sub-paragraph (a) or (b) of the definition of "Permitted Purpose" set out in Standard Condition 1 of the Licence.

" Default " means any Event of Default or any event, circumstance or occurrence which, with the giving of notice, the passage of time or the making of any determination, or any combination thereof, would become an Event of Default.

“ Deferment Indemnity ” means an indemnity calculated on the amount of disbursement deferred or suspended at the percentage rate (if higher than zero) by which:


-	the interest rate excluding the Margin that would have been applicable to such amount had it been disbursed to the Borrower on the Scheduled Disbursement Date

exceeds

- LIBOR (one month rate) less 0.125% (12.5 basis points), unless this value is less than zero, in which case it will be set at zero.

Such indemnity shall accrue on a daily basis from the Scheduled Disbursement Date to the Disbursement Date or, as the case may be, until the date of cancellation of the Notified Tranche in accordance with this Contract.

“ Disbursement Date ” means the date on which actual disbursement of a Tranche is made by the Bank.

" Disbursement Notice " means a notice from the Bank to the Borrower pursuant to and in accordance with Article 1.02C.

" Disbursement Request " means a notice substantially in the form set out in Schedule C.1.

“ Disruption Event ” means either or both of:


(a)	a material disruption to those payment or communications systems or to those financial markets which are, in each case, required to operate in order for payments to be made in connection with this Contract; or


(b)	the occurrence of any other event which results in a disruption (of a technical or systems-related nature) to the treasury or payments operations of either the Bank or the Borrower, preventing that party:

(i) from performing its payment obligations under this Contract; or

(ii) from communicating with other parties,

and which disruption (in either such case as per (a) or (b) above) is not caused by, and is beyond the control of, the party whose operations are disrupted.

“ EIB Group ” means Bank and the European Investment Fund.

" Electricity Act " means the Electricity Act 1989, as amended by the Utilities Act 2000, the Enterprise Act 2002 and the Energy Act 2004, the Energy Act 2008, the Energy Act 2010, the Energy Act 2011,the Enterprise and Regulatory Reform Act 2013 and the Infrastructure Act 2015 or as otherwise amended from time to time.

" Energy Act " means the Energy Act 2004, as amended by the Energy Act 2008, the Energy Act 2011 and the Enterprise and Regulatory Reform Act 2013, or as otherwise amended from time to time

" Energy Administration Order " means an order made pursuant to Chapter 3 of Part 3 of the Energy Act, as amended by the Energy Act 2011 and the Enterprise and Regulatory Reform Act 2013.

" Enforcement Order " means a Final Order or a Provisional Order.

" Enterprise Act " means the United Kingdom Enterprise Act 2002.

" Environment " means the following, in so far as they affect human health and social well-being:

(a) fauna and flora;

(b) soil, water, air, climate and the landscape; and

and includes, without limitation, occupational and community health and safety

“ Environmental Approval ” means any Authorisation required by Environmental Law.

" Environmental Claim " means any claim, proceeding or formal notice by any person in respect of any Environmental Law.

" Environmental Impact Assessment " or “ EIA ” has the meaning given to it in the relevant Environmental Law.

" Environmental Law " means EU law and national laws and regulations applicable in the United Kingdom, as well as applicable international treaties, of which a principal objective is the preservation, protection or improvement of the Environment.

" EUR " or " euro " means the lawful currency for the time being of the Participating Member States.

" Event of Default " means any one of the circumstances, events or occurrences specified in Article 10.01.

” Existing Bond Documentation ” means the terms and conditions of the following bonds:

(a) the Bonds;

(b) the GBP 200,000,000 5.125% Guaranteed Bonds due 2035 issued by Northern Powergrid (Yorkshire) plc on 5 May 2005; and

“ FATCA ” means:


(a)	Sections 1471 to 1474 of the Code or any associated regulations or other official guidance;


(b)	any treaty, law, regulation or other official guidance enacted in any other jurisdiction, or relating to an intergovernmental agreement between the United States and any other jurisdiction, which (in either case) facilitates the implementation of paragraph (a) above; or


(c)	any agreement pursuant to the implementation of paragraphs (a) or (b) above with the U.S. Internal Revenue Service, the U.S. government or any governmental or taxation authority in any other jurisdiction.

" Final Availability Date " means the date which is 12 (twelve) months after the date of this Contract.

" Final Order " means a final order, as defined in section 25 of the Electricity Act.

" Final Determination " has the meaning given to it in Article 6.14C.

" Financial Indebtedness " means, at any time, any obligation of such person, whether incurred as principal or surety and whether present, future, actual or contingent, for the payment or repayment of money in respect of:

(a) moneys borrowed;

(b) any amount raised by acceptance under any acceptance credit facility or dematerialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which would, in accordance with IFRS, be treated as a finance or capital lease;

(e) receivables sold or discounted (other than any receivables to the extent they are sold on a non-recourse basis) and any bill discounting or factoring facilities;

(f) the acquisition cost of any asset to the extent payable before or after the time of acquisition or possession by the party liable where the advance or deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset;

(g) leases (whether in respect of land, machinery, equipment or otherwise) entered into primarily as a method of raising finance or financing the acquisition of that asset;

(h) any amount raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of a borrowing or raising money;

(i) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price (and, when calculating the value of any derivative transaction, only the marked to market value shall be taken into account);

(j) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution;

(k) any amount raised by the issue of redeemable shares which are by their terms capable of redemption before the 31 December 2036 in the case of a Tranche being repaid in instalments or 31 December 2028 in the case of a Tranche being repaid by a single instalment; and (without double counting) the amount of any liability in respect of any guarantee or indemnity in respect of any of the items referred to in paragraphs (a) to (k) above.

" First Currency " has the meaning given to it in Article 9.03(a).

" Fixed Rate " means an annual interest rate determined by the Bank in accordance with the applicable principles from time to time laid down by the governing bodies of the Bank for loans made at a fixed rate of interest, denominated in the currency of the Tranche and bearing equivalent terms for the repayment of capital and the payment of interest. Fixed Rate shall include the Margin.

" Fixed Rate Notified Tranche " means a Notified Tranche which is a Fixed Rate Tranche.

" Fixed Rate Tranche " means a Tranche on which Fixed Rate is applied.

" Floating Rate " means a fixed-spread floating interest rate, that is to say an annual interest rate equal to LIBOR plus the Spread, determined by the Bank for each successive Floating Rate Reference Period.

" Floating Rate Notified Tranche " means a Notified Tranche which is a Floating Rate Tranche.

" Floating Rate Reference Period " means each period from one Payment Date to the next relevant Payment Date and the first Floating Rate Reference Period shall commence on the date of disbursement of the Tranche.

" Floating Rate Tranche " means a Tranche on which Floating Rate is applied.

" GBP " means pounds sterling, the lawful currency for the time being of the United Kingdom.

" GIC " has the meaning given to it in Article 6.14C.

" Governmental Authority " means the government of any country, or of any political subdivision thereof, whether state, regional or local, and any agency, authority, branch, department, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government or any subdivision thereof (including any supra-national bodies and including, for the avoidance of doubt, the Authority), and all officials, agents and representatives of each of the foregoing.

" Group " means the Borrower and the Borrower's Subsidiaries (if any) from time to time.

" Guarantee " has the meaning given to it in Recital (6).

" Guarantee Agreement " has the meaning given to it in Recital (6).

" Guarantor " has the meaning given to it in Recital (6).

" Guarantor Group " means the Guarantor and the Guarantor's Subsidiaries from time to time.

" IFRS " means the international accounting standards within the meaning of IAS Regulation 1606/2002.

" Incorporated Provision " has the meaning given to it in Article 7.04(a).

" Indemnifiable Prepayment Event " means a prepayment event under Article 4.03A other than paragraphs 4.03A(2) and 4.03A(5).

" Interest Cover " has the meaning given to it in Article 6.14C.

" Interest Revision/Conversion " means the determination of new financial conditions relative to the interest rate, specifically the same interest rate basis ("revision") or a different interest rate basis ("conversion") which can be offered for the remaining term of a Tranche or until a next Interest Revision/Conversion Date, if any, for an amount which, at the proposed Interest Revision/Conversion Date, is not less than GBP 10,000,000 (ten million pounds sterling).

" Interest Revision/Conversion Date " means the date, being a Payment Date, specified by the Bank pursuant to Article 1.02C in the Disbursement Notice or pursuant to Article 3 and Schedule D.

" Interest Revision/Conversion Proposal " means a proposal made by the Bank under Schedule D.

" Interest Revision/Conversion Request " means a written notice from the Borrower, delivered at least 75 (seventy-five) days before an Interest Revision/Conversion Date, requesting the Bank to submit to it an Interest Revision/Conversion Proposal. The Interest Revision/Conversion Request shall also specify:

(a) Payment Dates chosen in accordance with the provisions of Article 3.01;

(b) the preferred repayment schedule chosen in accordance with Article 4.01; and

" LIBOR " has the meaning given to it in Schedule B.

" Licence " means the distribution licence granted to the Borrower under Section 6(1)(c) of the Electricity Act with respect to the distribution of electricity in the distribution service area as such area is defined in such licence, as such licence may be amended or replaced from time to time.

" Loan " means the aggregate amount of Tranches disbursed from time to time by the Bank under this Contract.

" Margin " means the component of the rate of interest quantified in Article 3.01.

“ Market Disruption Event ” means any of the following circumstances:


(a)	there are, in the reasonable opinion of the Bank, events or circumstances adversely affecting the Bank’s access to its sources of funding;


(b)	in the opinion of the Bank, funds are not available from its ordinary sources of funding in order to adequately fund a Tranche in the relevant currency and/or for the relevant maturity and/or in relation to the reimbursement profile of such Tranche;


(c)	in relation to a Tranche in respect of which interest is or would be payable at Floating Rate:

(A) the cost to the Bank of obtaining funds from its sources of funding, as determined by the Bank, for a period equal to the Floating Rate Reference Period of such Tranche (i.e. in the money market) would be in excess of the applicable Relevant Interbank Rate;

(B) the Bank determines that adequate and fair means do not exist for ascertaining the applicable Relevant Interbank Rate for the relevant currency of such Tranche or it is not possible to determine the Relevant Interbank Rate in accordance with the definition contained in Schedule B.

" Material Adverse Change " means (a) in relation to the Borrower, a Borrower Material Adverse Change; and (b) in relation to the Guarantor or any other member of the Guarantor Group, any event or change of condition, as compared with the condition as at the date of this Contract, affecting the Guarantor or the Guarantor Group, which: (1) materially impairs the ability of the Guarantor to perform its financial obligations under the Guarantee Agreement or to comply with any of the financial ratios set out in Article 6.01, 6.02 or 6.03 of the Guarantee Agreement; or (2) materially impairs the business or financial condition of the Guarantor or of the Guarantor Group as a whole.

" Maturity Date " means the last or sole repayment date of a Tranche specified pursuant to Article 4.01A(b)(iv) or Article 4.01B.

" Moody's " means Moody's Investors Service, Inc. or its successor.

" More Favourable Provision " has the meaning given to it in Article 7.04(a).

“Non-Technical Summary” has the meaning given to it in the relevant Environmental Law.

" Notified Tranche " means a Tranche in respect of which the Bank has issued a Disbursement Notice.

" OFGEM " means the Office of Gas and Electricity Markets.

" Original Financial Statements " means the audited financial statements of the Borrower for the financial year ended 31 December 2014.

“ Overdraft Agreement ” means the overdraft letter between the Borrower and Lloyds TSB Bank plc dated 23 July 2013 as amended from time to time.

" Participating Member States " means any member state of the European Union that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Union relating to Economic and Monetary Union.

" Payment Date " means the annual, semi-annual or quarterly dates specified in the Disbursement Notice until the Interest Revision/Conversion Date, if any, or the Maturity Date, save that, in case any such date is not a Relevant Business Day, it means:

(a)

for a Fixed Rate Tranche, the following Relevant Business Day, without adjustment to the interest due under Article 3.01 except for those cases where repayment is made in a single instalment according to Article 4.01B, when the preceding Relevant Business Day shall apply instead to the single instalment and last interest payment and only in this case with adjustment to the interest due under Article 3.01; and


(b)	for a Floating Rate Tranche, the next day, if any, of that calendar month that is a Relevant Business Day or, failing that, the nearest preceding day that is a Relevant Business Day, in all cases with corresponding adjustment to the interest due under Article 3.01.

" Permitted Financial Indebtedness " means:


(a)	Financial Indebtedness of Northern Electric Finance plc under the Bonds in an amount of GBP 150,000,000 (one hundred and fifty million pounds sterling) and of the Borrower pursuant to a guarantee in an amount of GBP 150,000,000 (one hundred and fifty million pounds sterling) dated 5 May 2005 between, among others, the Borrower and Northern Electric Finance plc;


(b)	Financial Indebtedness of Northern Electric Finance plc and the Borrower outstanding on 30 June 2015 and not otherwise referred to in the definition of "Permitted Financial Indebtedness";


(c)	Financial Indebtedness of the Borrower pursuant to the Revolving Facility Agreement;


(d)	Financial Indebtedness of the Borrower pursuant to the Overdraft Agreement;


(e)	Financial Indebtedness owed by one member of the Group to another member of the Group;


(f)	Financial Indebtedness owed to the Bank;


(g)	Financial Indebtedness which is subordinated to the Loan on terms satisfactory in form and substance to the Bank; and


(h)	Financial Indebtedness of the Borrower from time to time which does not exceed an aggregate amount of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies.

" Prepayment Amount " means the amount of a Tranche to be prepaid by the Borrower in accordance with Article 4.02A.

" Prepayment Date " means the date, which shall be a Payment Date, on which the Borrower proposes to effect prepayment of a Prepayment Amount.

“ Prepayment Indemnity ” means in respect of any principal amount to be prepaid or cancelled, the amount communicated by the Bank to the Borrower as the present value (as of the Prepayment Date) of the excess, if any, of:


(a)	the interest excluding the Margin that would accrue thereafter on the Prepayment Amount over the period from the Prepayment Date to the Interest Revision/Conversion Date, if any, or the Maturity Date, if it were not prepaid; over


(b)	the interest that would so accrue over that period, if it were calculated at the Redeployment Rate, less 0.15% (fifteen basis points).

The said present value shall be calculated at a discount rate equal to the Redeployment Rate, applied as of each relevant Payment Date.

" Prepayment Notice " means a written notice from the Bank to the Borrower in accordance with Article 4.02C.

“ Prepayment Request ” means a written request from the Borrower to the Bank to prepay all or part of the Loan, in accordance with Article 4.02A.

" Project " has the meaning given to it in Recital (1).

"Project Completion Report" means the information that the Borrower is obliged to deliver to the Bank in accordance with paragraph 4 of Schedule A.2.

“Promoter” means the Guarantor.

" Provisional Order " means a provisional order, as defined in section 25 of the Electricity Act.

" Quasi-Security " has the meaning given to it in Article 7.02(c).

" Rating Agency " has the meaning given to it in Article 6.14C.

" RAV " has the meaning given to it in Article 6.14C.

" Redeployment Rate " means the Fixed Rate excluding the Margin in effect on the day of the indemnity calculation for fixed-rate loans denominated in the same currency and which shall have the same terms for the payment of interest and the same repayment profile to the Interest Revision/Conversion Date, if any, or the Maturity Date as the Tranche in respect of which a prepayment is proposed or requested to be made.. For those cases where the period is shorter than 48 months (or 36 months in the absence of a repayment of principal during that period) the most closely corresponding money market rate equivalent will be used, that is LIBOR minus 0.125% (12.5 basis points) for periods of up to 12 (twelve) months. For periods falling between 12 and 36/48 months respectively, the bid point on the swap rates as published by Reuters for the related currency and observed by the Bank at the time of calculation will apply.

" Regulated Asset Value " has the meaning given to it in Article 6.14C.

" Relevant Business Day " means a day on which banks are open for general business in London.

" Relevant Interbank Rate " means LIBOR for an amount denominated in GBP.

" Relevant Period " has the meaning given to it in Article 6.14C.

" Revolving Facility Agreement " means the GBP 150,000,000 Multicurrency Revolving Facility Agreement dated 20 August 2012 as amended and restated on 30 April 2015 entered into between the Guarantor, the Borrower, Northern Powergrid (Yorkshire) plc, Abbey National Treasury Services plc, Lloyds Bank plc and The Royal Bank of Scotland plc.

" Scheduled Disbursement Date " means the date on which a Tranche is scheduled to be disbursed in accordance with Article 1.02C.

" Second Currency " has the meaning given to it in Article 9.03(a).

" Security " and " Security Interest " means any mortgage, pledge, lien, charge, assignment, hypothecation or security interest or any other agreement or arrangement having the effect of conferring security.

" Spread " means the fixed spread to LIBOR (being either plus or minus) determined by the Bank including the Margin and notified to the Borrower in the relevant Disbursement Notice or Interest Revision/Conversion Proposal.

" S&P " means Standard and Poor’s Ratings Group or its successor.

" Subsidiary ":


(a)	for the purposes of the definition of Cross Default Obligation, has the meaning given to such term in the Licence of the Borrower; and


(b)	for all other purposes, means a subsidiary undertaking within the meaning of section 1162 of the Companies Act 2006 and in interpreting that provision for the purposes of this Contract, an undertaking is to be treated as a subsidiary undertaking even if its shares are registered in the name of (i) a nominee, or (ii) any party holding Security over those shares, or that secured party’s nominee.

" Sum " has the meaning given to it in Article 9.03(a).

" Tax " means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same).

" Technical Description " has the meaning given to it in Recital (1).

" Term Loan " has the meaning given to it in Article 4.03A(2).

" Tranche " means each disbursement made or to be made under this Contract. In case no Disbursement Notice has been delivered, Tranche shall mean a Tranche as requested under Article 1.02B.

" USD " means the lawful currency for the time being of the United States of America.

" Yorkshire Finance Contract " has the meaning given to it in Recital (10).

In this Contract:

(a) references to Articles, Recitals, Schedules and Annexes are, save if explicitly stipulated otherwise, references respectively to articles of, and recitals, schedules and annexes to, this Contract;

(b) unless the context otherwise requires, words denoting the singular include the plural and vice versa;

(c) a reference (i) to an amendment or to an agreement being amended includes a supplement, variation, assignment, novation, restatement or re-enactment, and (ii) to an agreement shall be construed as a reference to such agreement as it may be amended, supplemented or restated from time to time;

(d) the headings and the Table of Contents are inserted for convenience of reference only and shall not affect the interpretation of this Contract;

(e) any reference to "law" means any law (including, any common or customary law) and any treaty, constitution, statute, legislation, decree, normative act, rule, regulation, judgement, order, writ, injunction, determination, award or other legislative or administrative measure or judicial or arbitral decision in any jurisdiction which has the force of law;

(f) any reference to a provision of law, is a reference to that provision as from time to time amended or re-enacted;

(g) a reference to a "person" includes any person, natural or juridical entity, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having separate legal personality) or two or more of the foregoing and references to a "person" include its successors in title, permitted transferees and permitted assigns;

(h) "including" and "include" shall be deemed to be followed by "without limitation" where not so followed;

(i) a Default is "continuing" if it has not been remedied or waived in writing by the Bank; and

(j) a reference to "indebtedness" includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or future, actual or contingent.

NOW THEREFORE it is hereby agreed as follows:

ARTICLE 1
Credit and disbursement

1.01 Amount of Credit

By this Contract the Bank establishes in favour of the Borrower, and the Borrower accepts, the credit in an amount of GBP 120,000,000 (one hundred and twenty million pounds sterling) for the financing of the Project (the " Credit ").

1.02 Disbursement procedure

1.02A Tranches

The Bank shall disburse the Credit in up to 5 (five) Tranches. The amount of each Tranche, if not being the undrawn balance of the Credit, shall be in a minimum amount of GBP 10,000,000 (ten million pounds sterling).

1.02B Disbursement Request


(a)	From time to time up to 15 (fifteen) days before the Final Availability Date, the Borrower may present to the Bank a Disbursement Request for the disbursement of a Tranche. The Disbursement Request shall specify:

(i) the amount and currency (being GBP) of the Tranche;

(ii) the preferred disbursement date for the Tranche, which shall be a Relevant Business Day falling at least 15 (fifteen) days after the date of the Disbursement Request and, in any event, on or before the Final Availability Date, it being understood that notwithstanding the Final Availability Date the Bank may disburse the Tranche up to 4 (four) calendar months from the date of the Disbursement Request;

(iii) whether the Tranche is a Fixed Rate Tranche or a Floating Rate Tranche, each pursuant to the relevant provisions of Article 3.01;

(iv) the preferred interest payment periodicity for the Tranche, chosen in accordance with Article 3.01;

(v) the preferred terms for repayment of principal for the Tranche, chosen in accordance with Article 4.01;

(vi) the preferred first and last dates for repayment of principal for the Tranche;

(vii) the Borrower’s choice of Interest Revision/Conversion Date, if any, for the Tranche; and

(viii) the IBAN code (or appropriate format in line with local banking practice) and SWIFT BIC of the bank account to which disbursement of the Tranche should be made in accordance with Article 1.02D.


(b)	The Borrower may also at its discretion specify in the Disbursement Request the following respective elements, if any, as provided by the Bank on an indicative basis and without commitment, to be applicable to the Tranche, that is to say:

(i) in the case of a Fixed Rate Tranche, the fixed interest rate previously quoted by the Bank; and

(ii) in the case of a Floating Rate Tranche, the aforementioned spread previously quoted by the Bank,

applicable until the Maturity Date or until the Interest Revision/Conversion Date, if any.


(c)	Each Disbursement Request shall be accompanied by evidence of the authority of the person or persons authorised to sign it and the specimen signature of such person or persons.


(d)	Subject to Article 1.02C(b), each Disbursement Request is irrevocable.

1.02C Disbursement Notice


(a)	Not less than 10 (ten) days before the proposed Scheduled Disbursement Date of a Tranche the Bank shall, if the Disbursement Request conforms to this Article 1.02, deliver to the Borrower a Disbursement Notice which shall specify:


(i)	the currency and amount of the Tranche;


(ii)	the Scheduled Disbursement Date;


(iii)	the interest rate basis for the Tranche, being: (i) a Fixed Rate Tranche; or (ii) a Floating Rate Tranche all pursuant to the relevant provisions of Article 3.01;


(iv)	the first interest Payment Date and the periodicity for the payment of interest for the Tranche;


(v)	the terms for repayment of principal for the Tranche;


(vi)	the first and last dates for repayment of principal for the Tranche;

(vii) the applicable Payment Dates for the Tranche;

(viii) the Interest Revision/Conversion Date, if requested by the Borrower, for the Tranche; and


(ix)	for a Fixed Rate Tranche the fixed interest rate and for a Floating Rate Tranche the Spread applicable to the Tranche until the Interest Revision/Conversion Date, if any or until the Maturity Date.

(b)

If one or more of the elements specified in the Disbursement Notice does not reflect the corresponding element, if any, in the Disbursement Request, the Borrower may following receipt of the Disbursement Notice revoke the Disbursement Request by written notice to the Bank to be received no later than 12h00 Luxembourg time on the next Business Day and thereupon the Disbursement Request and the Disbursement Notice shall be of no effect. If the Borrower has not revoked in writing the Disbursement Request within such period, the Borrower will be deemed to have accepted all elements specified in the Disbursement Notice.


(c)	If the Borrower has presented to the Bank a Disbursement Request in which the Borrower has not specified the elements referred to in Article 1.02B(b), the Borrower will be deemed to have agreed in advance to the corresponding element as subsequently specified in the Disbursement Notice.

1.02D Disbursement Account

Disbursement shall be made to the account of the Borrower as the Borrower shall notify in writing to the Bank not later than 15 (fifteen) days before the Scheduled Disbursement Date (with IBAN code or with the appropriate format in line with local banking practice).

Only one account may be specified for each Tranche.

1.03 Currency of disbursement

The Bank shall disburse each Tranche in GBP.

1.04 Conditions of disbursement

1.04A First Tranche

The disbursement of the first Tranche under Article 1.02 is conditional upon receipt by the Bank in form and substance satisfactory to it, on or before the date falling 5 (five) Business Days before the Scheduled Disbursement Date, of the following documents or evidence:


(a)	a certified copy of the Borrower’s constitutional documents and of the Licence;


(b)	evidence satisfactory to the Bank that the execution of this Contract by the Borrower has been duly authorised and that the person or persons signing the Contract on behalf of the Borrower is/are duly authorised to do so together with the specimen signature of each such person or persons;


(c)	evidence that the Borrower has obtained all necessary Authorisations required in connection with entering into and delivering this Contract;


(d)	if required by the Bank, evidence that the Borrower has obtained all necessary Authorisations required in connection with the Project;


(e)	the duly executed Guarantee Agreement, in form and substance satisfactory to the Bank;


(f)	evidence satisfactory to the Bank that the execution of the Guarantee Agreement by the Guarantor has been duly authorised and that the person or persons signing the Guarantee Agreement on behalf of the Guarantor is/are duly authorised to do so together with the specimen signature of each such person or persons;


(g)	evidence that the Guarantor has obtained all necessary Authorisations required in connection with entering into and delivering the Guarantee Agreement;


(h)	evidence that the fees, costs and expenses then due from the Borrower have been paid, including those payable pursuant to Article 9 of this Contract, if applicable;


(i)	an external legal opinion issued by Slaughter and May English law legal counsel to the Borrower, confirming the due capacity and authority of, and due execution of this Contract and the Guarantee Agreement by, the relevant obligor, as well as non-violation of the License in relation to this Contract and the Guarantee Agreement;


(j)	a certified copy of the Revolving Facility Agreement; and


(k)	a certified copy of the Consent Letter.

1.04B All Tranches

The disbursement of each Tranche under Article 1.02, including the first, is conditional upon:


(a)	receipt by the Bank in form and substance satisfactory to it, on or before the date falling 5 (five) Business Days before the Scheduled Disbursement Date for the proposed Tranche, of the following documents or evidence:

(i)

a certificate from the Borrower in the form of Schedule C.2, such certificate to be signed by two directors of the Borrower (or, failing that, by one director of the Borrower and the finance director or the treasurer or the investor reporting manager or the financial controller or the company secretary of the Borrower) and to be dated no earlier than the date falling 15 (fifteen) days before the Scheduled Disbursement Date;

(ii) a copy of any other Authorisation or other document, opinion or assurance which the Bank has notified the Borrower is necessary or desirable in connection with (1) the entry into and performance of, and the transactions contemplated by, this Contract or the Guarantee or the validity and enforceability of the same or (2) the Project; and


(b)	that on the Scheduled Disbursement Date for the proposed Tranche:


(i)	the representations and warranties which are repeated pursuant to Article 6.15 are correct in all respects;


(ii)	no Default or Compulsory Prepayment Event has occurred and is continuing unremedied or unwaived or would result from the proposed Tranche; and


(iii)	no event referred to in Article 1.06B(a)(iv) has occurred and is continuing unremedied or unwaived.

1.05 Deferment of disbursement

1.05A Grounds for deferment

Upon the written request of the Borrower, the Bank shall defer the disbursement of any Notified Tranche in whole or in part to a date specified by the Borrower being a date falling not later than 6 (six) months from its Scheduled Disbursement Date and not later than 60 days prior to the first repayment date of the Tranche indicated in the Disbursement Notice. In such case, the Borrower shall pay the Deferment Indemnity calculated on the amount of disbursement deferred.

Any request for deferment shall have effect in respect of a Tranche only if it is made at least 5 (five) Business Days before its Scheduled Disbursement Date.

agreed between the Bank and the Borrower falling not earlier than 5 (five) Business Days following the fulfilment of all conditions of disbursement (without prejudice to the right of the Bank to suspend and/or cancel the undisbursed portion of the Credit in whole or in part pursuant to Article 1.06B). In such case, the Borrower shall pay the Deferment Indemnity calculated on the amount of disbursement deferred.

1.05B Cancellation of disbursement deferred by 6 (six) months

The Bank may, by notice in writing to the Borrower, cancel a disbursement which has been deferred under Article 1.05A by more than 6 (six) months in aggregate. The cancelled amount shall remain available for disbursement under Article 1.02.

1.06 Cancellation and suspension

1.06A Borrower’s right to cancel

The Borrower may at any time by notice in writing to the Bank cancel, in whole or in part and with immediate effect, the undisbursed portion of the Credit. However, the notice shall have no effect in respect of (i) a Notified Tranche which has a Scheduled Disbursement Date falling within 5 (five) Business Days of the date of the notice or (ii) a Tranche in respect of which a Disbursement Request has been submitted but no Disbursement Notice has been issued..

1.06B Bank’s right to suspend and cancel


(a)	The Bank may, by notice in writing to the Borrower, suspend and/or cancel the undisbursed portion of the Credit in whole or in part at any time and with immediate effect:


(i)	if a Default or a Compulsory Prepayment Event has occurred and is continuing;


(ii)	if, in the opinion of the Bank, a Material Adverse Change has occurred and is continuing;

(iii) if a Market Disruption Event has occurred and is continuing; or

(iv) if the Credit (as such term is defined in the Yorkshire Finance Contract) or any part thereof is suspended and/or cancelled or if a Default or a Compulsory Prepayment Event (as such terms are defined in the Yorkshire Finance Contract) occurs under the Yorkshire Finance Contract.


(b)	Any suspension shall continue until the Bank ends the suspension or cancels the suspended amount.

1.06C Indemnity for suspension and cancellation of a Tranche

1.06C(1) SUSPENSION

If the Bank suspends a Notified Tranche, whether upon an Indemnifiable Prepayment Event or an Event of Default, the Borrower shall pay to the Bank the Deferment Indemnity calculated on the amount of disbursement suspended.

1.06C(2) CANCELLATION

If, pursuant to Article 1.06A, the Borrower cancels:


(a)	a Fixed Rate Notified Tranche, it shall indemnify the Bank under Article 4.02B;


(b)	a Floating Rate Notified Tranche or any part of the Credit other than a Notified Tranche, no indemnity is payable.

If the Bank cancels


(i)	a Fixed Rate Notified Tranche upon an Indemnifiable Prepayment Event or pursuant to Article 1.05B or pursuant to Article 1.06B(a) (ii) and (iv), the Borrower shall pay to the Bank the Prepayment Indemnity; or


(ii)	a Notified Tranche upon a Default, the Borrower shall indemnify the Bank under Article 10.03.

Save in these cases, no indemnity is payable upon cancellation of a Tranche by the Bank.

The indemnity shall be calculated as if the cancelled amount had been disbursed and repaid on the Scheduled Disbursement Date or, to the extent that the disbursement of the Tranche is currently deferred or suspended, on the date of the cancellation notice.

1.07 Cancellation after expiry of the Credit

On the day following the Final Availability Date, and unless otherwise specifically agreed to in writing by the Bank, the part of the Credit in respect of which no Disbursement Request has been made in accordance with Article 1.02B shall be automatically cancelled, without any notice being served by the Bank to the Borrower and without liability arising on the part of either party.

1.08 Appraisal fee

The Borrower shall pay to the Bank an appraisal fee in an amount of GBP 120,000 (one hundred and twenty thousand pounds sterling) for the establishment of the Credit under this Contract. Such appraisal fee shall be payable as follows:


(a)	upon separate request of the Borrower to be made together with the Disbursement Request, it shall be deducted by the Bank from the amount to be disbursed under the first Tranche;


(b)	by the Borrower to the Bank on the Scheduled Disbursement Date of the first Tranche;


(c)	if the Borrower communicates to the Bank that it wishes to cancel the Credit without a Disbursement Request having been submitted by the Borrower, within 30 (thirty) days of such notice of cancellation; or


(d)	if the Borrower fails to make a valid Disbursement Request before or by the Final Availability Date, within 30 (thirty) days of the Final Availability Date.

The amount due to the Bank under paragraphs (b) to (d) above shall be payable in GBP and shall be paid to the account indicated by the Bank to the Borrower.

The amount due to the Bank and deducted from the first Tranche upon the request of the Borrower under paragraph (a) above shall be considered as having been duly paid by the Borrower to the Bank on the Scheduled Disbursement Date of the first Tranche. For the purposes of Article 2.01, such amount shall also be considered as having been disbursed by the Bank.

1.09 Sums due under Article 1

Sums due under Articles 1.05 and 1.06 shall be payable in GBP. They shall be payable within 7 (seven) days of the Borrower’s receipt of the Bank’s demand or within any longer period specified in the Bank's demand.

ARTICLE 2
The Loan

2.01 Amount of Loan

The Loan shall comprise the aggregate amount of Tranches disbursed by the Bank under the Credit, as confirmed by the Bank pursuant to Article 2.03.

2.02 Currency of repayment, interest and other charges

Interest, repayments and other charges payable in respect of each Tranche shall be made by the Borrower in the currency in which the Tranche is disbursed.

Any other payment shall be made in the currency specified by the Bank having regard to the currency of the expenditure to be reimbursed by means of that payment.

2.03 Confirmation by the Bank

Within 10 (ten) days after disbursement of each Tranche, the Bank shall deliver to the Borrower the amortisation table referred to in Article 4.01, if appropriate, showing the Disbursement Date, currency, the amount disbursed, the repayment terms and the interest rate of and for that Tranche.

ARTICLE 3
Interest

3.01 Rate of interest

For the purposes of this Contract " Margin " means twenty six basis points (0.26%) per annum.

Fixed Rates and Spreads are available for periods of not less than 4 (four) years or, in the absence of a repayment of principal during this period, not less than 3 (three) years.

3.01A Fixed Rate Tranches

The Borrower shall pay interest on the outstanding balance of each Fixed Rate Tranche at the Fixed Rate quarterly, semi-annually or annually in arrears on the relevant Payment Dates, as specified in the Disbursement Notice, commencing on the first such Payment Date following the Disbursement Date of the Tranche. If the period from the Disbursement Date to the first Payment Date is 15 days or less then the payment of interest accrued during such period shall be postponed to the following Payment Date.

Interest shall be calculated on the basis of Article 5.01(a).

3.01B Floating Rate Tranches

The Borrower shall pay interest on the outstanding balance of each Floating Rate Tranche at the Floating Rate quarterly, semi-annually or annually in arrear on the relevant Payment Dates, as specified in the Disbursement Notice commencing on the first such Payment Date following the Disbursement Date of the Tranche. If the period from the Disbursement Date to the first Payment Date is 15 days or less then the payment of interest accrued during such period shall be postponed to the following Payment Date.

The Bank shall notify the Floating Rate to the Borrower within 10 (ten) days following the commencement of each Floating Rate Reference Period.

If pursuant to Articles 1.05 and 1.06 disbursement of any Floating Rate Tranche takes place after the Scheduled Disbursement Date the Relevant Interbank Rate applicable to the first Floating Rate Reference Period shall apply as though the disbursement had taken place on the Scheduled Disbursement Date but interest shall only accrue from the Disbursement Date.

Interest shall be calculated in respect of each Floating Rate Reference Period on the basis of Article 5.01(b). If the Floating Rate for any Floating Rate Reference Period is below zero it will be set at zero.

3.01C Revision or Conversion of Tranches

Where the Borrower exercises an option to revise or convert the interest rate basis of a Tranche, it shall, from the effective Interest Revision/Conversion Date (in accordance with the procedure set out in Schedule D) pay interest at a rate determined in accordance with the provisions of Schedule D.

3.02 Interest on overdue sums

Without prejudice to Article 10 and by way of exception to Article 3.01, if the Borrower fails to pay any amount payable by it under the Contract on its due date, interest shall accrue on any overdue sum payable under the terms of this Contract from the due date to the date of actual payment at an annual rate equal to:

(i) for overdue sums related to Floating Rate Tranches, the applicable Floating Rate plus 2% (200 basis points);

(ii) for overdue sums related to Fixed Rate Tranches, the higher of (a) the applicable Fixed Rate plus 2% (200 basis points) or (b) the Relevant Interbank Rate plus 2% (200 basis points);

(iii) for overdue sums other than under (i) or (ii) above, the Relevant Interbank Rate plus 2% (200 basis points)

and shall be payable in accordance with the demand of the Bank. For the purpose of determining the Relevant Interbank Rate in relation to this Article 3.02, the relevant periods within the meaning of Schedule B shall be successive periods of one month commencing on the due date.

If the overdue sum is in a currency other than the currency of the Loan, the following rate per annum shall apply, namely the relevant interbank rate that is generally retained by the Bank for transactions in that currency plus 2% (200 basis points), calculated in accordance with the market practice for such rate.

3.03 Market Disruption Event

If at any time (i) from the issuance by the Bank of the Disbursement Notice in respect of a Tranche, and (ii) until the date falling thirty (30) calendar days prior to the Scheduled Disbursement Date, a Market Disruption Event occurs, the Bank may notify to the Borrower that this clause has come into effect. In such case, the rate of interest applicable to such Notified Tranche until the Maturity Date or the Interest Revision/Conversion Date if any, shall be the percentage rate per annum which is the sum of:

- the Margin and

- the rate (expressed as a percentage rate per annum) which is determined by the Bank to be the all-inclusive cost to the Bank for the funding of the relevant Tranche based upon the then applicable internally generated Bank reference rate or an alternative rate determination method reasonably determined by the Bank. The Borrower shall have the right to refuse in writing such disbursement within the deadline specified in the notification (any such deadline to be reasonable in the circumstances) and shall bear charges incurred as a result, if any, in which case the Bank shall not effect the disbursement and the corresponding Credit shall remain available for disbursement under Article 1.02B. If the Borrower does not refuse the disbursement in time, the parties agree that the disbursement and the conditions thereof shall be fully binding for both parties .

In each case the Spread or Fixed Rate previously notified by the Bank in the Disbursement Notice shall no longer be applicable.

ARTICLE 4
Repayment

4.01 Normal repayment

4.01A Repayment by instalments


(a)	The Borrower shall repay each Tranche by instalments on the Payment Dates specified in the relevant Disbursement Notice in accordance with the terms of the amortisation table delivered pursuant to Article 2.03.


(b)	Each amortisation table shall be drawn up on the basis that:


(i)	in the case of a Fixed Rate Tranche without an Interest Revision/Conversion Date, repayment shall be made annually, semi-annually or quarterly by equal instalments of principal or constant instalments of principal and interest;


(ii)	in the case of a Fixed Rate Tranche with an Interest Revision/Conversion Date or a Floating Rate Tranche, repayment shall be made by equal annual, semi-annual or quarterly instalments of principal; and


(iii)	the first repayment date of each Tranche shall be a Payment Date falling not earlier than 60 days from the Scheduled Disbursement Date and not later than the first Payment Date immediately following the 4th (fourth) anniversary of the Scheduled Disbursement Date of the Tranche; and


(iv)	the last repayment date of each Tranche shall be a Payment Date falling not earlier than 4 (four) years and not later than 20 (twenty) years from the Scheduled Disbursement Date.

4.01B Single instalment

Alternatively, the Borrower may repay the Tranche in a single instalment on a Payment Date specified in the Disbursement Notice, being a date falling not less than 3 (three) years or more than 12 (twelve) years from the Scheduled Disbursement Date.

4.02 Voluntary prepayment

4.02A Prepayment option

Subject to Articles 4.02B, 4.02C and 4.04, the Borrower may prepay all or part of any Tranche, together with accrued interest and indemnities if any, upon giving a Prepayment Request with at least 1 (one) month's prior notice specifying (i) the Prepayment Amount,(ii) the Prepayment Date, (iii) if applicable, the choice of application method of the Prepayment Amount in line with Article 5.05(c)(i) and (iv) the contract number (“FI nr”) mentioned on the cover page of this Contract.

Subject to Article 4.02C the Prepayment Request shall be binding and irrevocable.

4.02B Prepayment indemnity

4.02B(1) FIXED RATE TRANCHE


(a)	Subject to paragraph (b) below, if the Borrower prepays a Fixed Rate Tranche, the Borrower shall pay to the Bank on the Prepayment Date the Prepayment Indemnity in respect of the Fixed Tranche which is being prepaid.


(b)	Unless the Borrower has accepted in writing a Fixed Rate in respect of an Interest Revision/Conversion Proposal pursuant to Schedule D, the Borrower may prepay a Fixed Rate Tranche without indemnity on the Interest Revision/Conversion Date in the event of the non-fulfilment of an Interest Revision/Conversion pursuant to Schedule D.

4.02B(2) FLOATING RATE TRANCHE

The Borrower may prepay a Floating Rate Tranche without indemnity on any relevant Payment Date. If the Borrower has accepted an Interest Revision/Conversion Proposal to convert a Floating Rate Tranche to a Fixed Rate Tranche pursuant to Schedule D, then Article 4.02B(1) applies.

4.02C Prepayment mechanics

Upon presentation by the Borrower to the Bank of a Prepayment Request, the Bank shall issue a Prepayment Notice to the Borrower, not later than 15 (fifteen) days prior to the Prepayment Date. The Prepayment Notice shall specify the Prepayment Amount, the accrued interest due thereon, the Prepayment Indemnity payable under Article 4.02B or, as the case may be, that no indemnity is due, the method of application of the Prepayment Amount and the Acceptance Deadline,.

If the Borrower accepts the Prepayment Notice by the Acceptance Deadline, it shall effect the prepayment. In any other case, the Borrower may not effect the prepayment.

The Borrower shall accompany the prepayment by the payment of accrued interest and indemnity, if any, due on the Prepayment Amount, as specified in the Prepayment Notice

4.03 Compulsory prepayment

4.03A Grounds for prepayment

4.03A(1) PROJECT COST REDUCTION

If the total cost of the Project should be reduced from the figure stated in Recital (2) to a level at which the aggregate of (i) the amount of the Credit remaining available for disbursement and (ii) the Loan exceeds 50% (fifty per cent) of such cost, the Bank may, by notice to the Borrower, cancel the Credit and/or demand prepayment of the Loan in an amount not exceeding the amount required to ensure that the aggregate of (i) the Credit remaining available for disbursement and (ii) the Loan does not exceed 50% (fifty per cent) of the total cost of the Project as so reduced.

4.03A(2) PARI PASSU TO ANOTHER TERM LOAN

If the Borrower (or any other member of the Group) voluntarily prepays a part or the whole of any other loan originally granted to it for a term of more than 3 (three) years (a " Term Loan ") otherwise than out of the proceeds of a loan having a term at least equal to the unexpired term of the Term Loan prepaid, the Bank may, by notice to the Borrower, cancel the Credit and demand prepayment of the Loan, in such proportion as the prepaid amount of the Term Loan bears to the aggregate outstanding amount of all Term Loans.

The Bank shall address its notice to the Borrower within 30 (thirty) days of receipt of the relevant notice under Article 8.02(c)(iii).

For the purposes of this Article:


(a)	" loan " includes any loan, bond or other form of financial indebtedness or any obligation for the payment or repayment of money; and


(b)	" Term Loan " excludes a loan from the Guarantor or any member of the Guarantor Group to the Borrower or to any member of the Group.

4.03A(3) CHANGE OF CONTROL

The Borrower shall promptly inform the Bank if a Change-of-Control Event has occurred or is reasonably likely to occur. In such case, or if the Bank has reasonable cause to believe that a Change-of-Control Event has occurred or is about to occur, the Bank may request that the Borrower consult with it. Such consultation shall take place within 30 (thirty) days from the date of the Bank’s request. After the earlier of (a) the expiry of 30 (thirty) days from the date of such request for consultation; or (b) the occurrence of the anticipated Change-of-Control Event, the Bank may, by notice to the Borrower, cancel the Credit and demand prepayment of the Loan, together with accrued interest and all other amounts accrued and outstanding under this Contract. The Borrower shall effect payment of the amount demanded on the date specified by the Bank, such date being a date falling not less than 30 (thirty) days from the date of the demand.

For the purposes of this Article, a " Change-of-Control Event " occurs if:


(a)	any of the Guarantor or Berkshire Hathaway Energy Company ceases to be the beneficial owner directly or indirectly through wholly owned subsidiaries of the entire issued share capital of the Borrower; or


(b)	Berkshire Hathaway Energy Company ceases to be the beneficial owner directly or indirectly through wholly owned subsidiaries of the entire issued share capital of the Guarantor.

4.03A(4) CHANGE OF LAW

The Borrower shall promptly inform the Bank if a Change-of-Law Event has occurred or is reasonably likely to occur in respect to the Borrower. In such case, or if the Bank has reasonable cause to believe that a Change-of-Law Event has occurred or is about to occur, the Bank may request that the Borrower consult with it. Such consultation shall take place within 30 (thirty) days from the date of the Bank’s request. After the earlier of (a) the lapse of 30 (thirty) days from the date of such request for consultation or (b) the occurrence of the anticipated Change-of-Law Event, the Bank may, by notice to the Borrower, cancel the Credit and demand prepayment of the Loan, together with accrued interest and all other amounts accrued and outstanding under this Contract. The Borrower shall effect payment of the amount demanded on the date specified by the Bank, such date being a date falling not less than 30 (thirty) days from the date of the demand.

For the purposes of this Article " Change-of-Law Event " means the enactment, promulgation, execution or ratification of or any change in or amendment to any law, rule or regulation (or in the application or official interpretation of any law, rule or regulation) that occurs after the date of this Contract which results or is reasonably likely to result in a Borrower Material Adverse Change.

4.03A(5) ILLEGALITY

If it becomes unlawful in any applicable jurisdiction for the Bank to perform any of its obligations as contemplated in this Contract or to fund or maintain the Loan, the Bank shall promptly notify the Borrower and may immediately (i) suspend or cancel the undisbursed portion of the Credit and/or (ii) demand prepayment of the Loan, together with accrued interest and all other amounts accrued or outstanding under this Contract on the date indicated by the Bank in its notice to the Borrower.

4.03A(6) ACCEPTABLE SECURITY EVENT

(a) If an Acceptable Security Event occurs, the Borrower shall provide alternative Acceptable Security in replacement of the existing Acceptable Security.


(b)	If within a period of 30 (thirty) days alternative Acceptable Security has not been executed in a manner, form and substance acceptable to the Bank, the Bank may, by notice to the Borrower, forthwith cancel the Credit and demand prepayment of the Loan together with accrued interest and all other amounts accrued and outstanding under this Contract.


(c)	Notwithstanding the aforegoing, the Bank shall not have any right under this Article 4.03A(6) to the extent that such right would constitute a "Cross-Default Obligation" as defined in the Licence.

4.03B Prepayment mechanics

Any sum demanded by the Bank pursuant to Article 4.03A, together with any interest or other amounts accrued and outstanding under this Contract including, without limitation, any indemnity due under Article 4.03C and Article 4.04, shall be paid on the date indicated by the Bank in its notice of demand, which date shall fall not less than 30 (thirty) days from the date of the Bank’s notice of demand.

4.03C Prepayment indemnity

In the case of an Indemnifiable Prepayment Event, the indemnity, if any, shall be determined in accordance with Article 4.02B(1) for a Fixed Rate Tranche.

4.04 General

A repaid or prepaid amount may not be reborrowed. This Article 4 shall not prejudice Article 10.

If, the Borrower prepays a Tranche on a date other than a relevant Payment Date, the Borrower shall indemnify the Bank in such amount as the Bank shall certify is required to compensate it for receipt of funds otherwise than on a relevant Payment Date.

ARTICLE 5
Payments

5.01 Day count convention

Any amount due by way of interest, indemnity or fee from the Borrower under this Contract, and calculated in respect of a fraction of a year, shall be determined on the following respective conventions:


(a)	in respect of interest and indemnities due under a Fixed Rate Tranche, a year of 360 (three hundred and sixty) days and a month of 30 (thirty) days;


(b)	in respect of interest and indemnities due under a Floating Rate Tranche, a year of 365 (three hundred and sixty five) days (invariable) and the number of days elapsed;


(c)	in respect of fees, a year of 365 (three hundred and sixty five) days (invariable) and the number of days elapsed.

5.02 Time and place of payment

Unless otherwise specified, all sums other than sums of interest, indemnity and principal are payable within 7 (seven) days of the Borrower’s receipt of the Bank’s demand.

Each sum payable by the Borrower under this Contract shall be paid to the respective account notified by the Bank to the Borrower. The Bank shall indicate the account not less than 15 (fifteen) days before the due date for the first payment by the Borrower and shall notify any change of account not less than 15 (fifteen) days before the date of the first payment to which the change applies. This period of notice does not apply in the case of payment under Article 10.

The Borrower shall indicate in each payment made hereunder the contract number (“FI nr”) found on the cover page of this Contract.

A sum due from the Borrower shall be deemed paid when the Bank receives it.

Any disbursements by and payments to the Bank under this Contract shall be made using account(s) acceptable to the Bank. For the avoidance of doubt, any account in the name of the Borrower held with a duly authorized financial institution in the jurisdiction where the Borrower is incorporated or where the Project is undertaken is deemed acceptable to the Bank.

5.03 Set-off

(a) The Bank may set off any matured obligation due from the Borrower under this Contract (to the extent beneficially owned by the Bank) against any obligation (whether or not matured) owed by the Bank to the Borrower regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Bank may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off. If either obligation is unliquidated or unascertained, the Bank may set off in an amount estimated by it in good faith to be the amount of that obligation.

(b) All payments to be made by the Borrower under this Contract shall be calculated and be made without (and free and clear of any deduction for) set-off or counterclaim.

5.04 Disruption to Payment Systems

If either the Bank determines (in its discretion) that a Disruption Event has occurred or the Bank is notified by the Borrower that a Disruption Event has occurred:


(a)	the Bank may, and shall if requested to do so by the Borrower, consult with the Borrower with a view to agreeing with the Borrower such changes to the operation or administration of the Contract as the Bank may deem necessary in the circumstances;


(b)	the Bank shall not be obliged to consult with the Borrower in relation to any changes mentioned in paragraph (a) if, in its opinion, it is not practicable to do so in the circumstances and, in any event, shall have no obligation to agree to such changes; and


(c)	the Bank shall not be liable for any damages, costs or losses whatsoever arising as a result of a Disruption Event or for taking or not taking any action pursuant to or in connection with this Article 5.04.

5.05 Application of sums received


(a)	General

Sums received from the Borrower shall only discharge its payment obligations if received in accordance with the terms of this Contract.


(b)	Partial payments

If the Bank receives a payment that is insufficient to discharge all the amounts then due and payable by the Borrower under this Contract, the Bank shall apply that payment:

(i) first, in or towards payment pro rata of any unpaid fees, costs, indemnities and expenses due under this Contract;

(ii) secondly, in or towards payment of any accrued interest due but unpaid under this Contract;

(iii) thirdly, in or towards payment of any principal due but unpaid under this Contract; and

(iv) fourthly, in or towards payment of any other sum due but unpaid under this Contract.


(c)	Allocation of sums related to Tranches

(i) In case of:


-	a partial voluntary prepayment of a Tranche that is subject to a repayment in several instalments, the Prepayment Amount shall be applied pro rata to each outstanding instalment, or, at the request of the Borrower, in inverse order of maturity,


-	a partial compulsory prepayment of a Tranche that is subject to a repayment in several instalments, the Prepayment Amount shall be applied in reduction

of the outstanding instalments in inverse order of maturity or, at the request of the Borrower, pro rata to each outstanding instalment

(ii) Sums received by the Bank following a demand under Article 10.01 and applied to a Tranche, shall reduce the outstanding instalments in inverse order of maturity. The Bank may apply sums received between Tranches at its discretion.

(iii) In case of receipt of sums which cannot be identified as applicable to a specific Tranche, and on which there is no agreement between the Bank and the Borrower on their application, the Bank may apply these between Tranches at its discretion.

ARTICLE 6
Borrower undertakings and representations

The undertakings in this Article 6 remain in force from the date of this Contract for so long as any amount is outstanding under this Contract or the Credit is in force.

A. Project undertakings

6.01 Use of Loan and availability of other funds

The Borrower shall use the proceeds of the Loan exclusively for the execution of the Project.

The Borrower shall ensure that it has available to it the other funds listed in Recital (2) and that such funds are expended, to the extent required, on the financing of the Project.

6.02 Completion of Project

The Borrower shall carry out the Project in accordance with the Technical Description as may be modified from time to time with the approval of the Bank, and complete it by the final date specified therein.

6.03 Increased cost of Project

If the total cost of the Project exceeds the estimated figure set out in Recital (2), the Borrower shall obtain the finance to fund the excess cost without recourse to the Bank, so as to enable the Project to be completed in accordance with the Technical Description. The plans for funding the excess cost shall be communicated to the Bank without delay.

6.04 Procurement procedure

The Borrower shall purchase equipment, secure services and order works for the Project (a) in so far as they apply to it or to the Project, in accordance with EU law in general and in particular with the relevant EU Directives and (b) in so far as EU Directives do not apply, by procurement procedures which, to the satisfaction of the Bank, respect the criteria of economy and efficiency.

6.05 Continuing Project undertakings

The Borrower shall:


(a)	Maintenance : maintain, repair, overhaul and renew all property forming part of the Project as required to keep it in good working order;

(b)

Project assets : unless the Bank shall have given its prior consent in writing, retain title to and possession of all or substantially all the assets comprising the Project or, as appropriate, replace and renew such assets and maintain the Project in substantially continuous operation in accordance with its original purpose; provided that the Bank may withhold its consent only where the proposed action would prejudice the Bank's interests as lender to the Borrower or would render the Project ineligible for financing by the Bank under its Statute or under Article 309 of the Treaty on the Functioning of the European Union;


(c)	Insurance : insure all works and property (including all works and property forming part of the Project) with reputable underwriters or insurance companies against those risks and to the extent as is consistent with sound business practice;


(d)	Rights and Permits : maintain in force all rights of way or use and all permits necessary for the execution and operation of the Project; and


(e)	Environmen t:

(i) implement and operate the Project in conformity with Environmental Law;

(ii) obtain and maintain requisite Environmental Approvals for the Project; and

(iii) comply with any such Environmental Approvals.


(f)	Integrity:

take, within a reasonable timeframe, appropriate measures in respect of any member of its board of directors who has been convicted by a final and irrevocable court ruling of a Criminal Offence perpetrated in the course of the exercise of his/her professional duties, in order to ensure that such member is excluded from any Borrower’s activity in relation to the Loan or the Project

(g) Integrity Audit Rights :

ensure that all contracts under the Project to be procured after the date of signature of this Contract in accordance with EU Directives on procurement provide for:


(i)	the requirement that the relevant contractor promptly informs the Bank of a genuine allegation, complaint or information with regard to Criminal Offences related to the Project (in the case of contractors incorporated in EU/OECD jurisdictions, to the extent such Criminal Offences constitute criminal offences under laws of such jurisdiction);


(ii)	the requirement that the relevant contractor keeps books and records of all financial transactions and expenditures in connection with the Project; and


(iii)	the Bank’s right, in relation to an alleged Criminal Offence, in addition to and without prejudice to the rights of the relevant investigating authority, to review the books and records of the relevant contractor in relation to the Project and to take copies of documents to the extent permitted by law.

6.06 Environmental Impact Assessments, EU Habitats and Birds Directives

The Borrower:

(a) shall not allocate any part of the Loan to any component of the Project that would require an Environmental Impact Assessment according to applicable EU or national law until the Environmental Impact Assessment with the integrated biodiversity assessment has been finalised and approved by the competent authority and found satisfactory by the Bank;

(b) shall send to the Bank an electronic copy of all Non-Technical Summaries and of the corresponding Authorisations as soon as the Environmental Impact Assessment is made available to the public;

(c) shall store and keep updated any documents as may be relevant for the Project supporting the compliance with the provisions of the EU Habitats and Birds Directives (Form A/B or equivalent declaration by the competent authority) and shall promptly upon request deliver such documents to the Bank.

(d) undertakes to take into account and implement conditions imposed on the Borrower in any screening-out decision or EIA consent granted by the competent authority for nature and environment.

B. General undertakings

6.07 Disposal of assets


(a)	The Borrower shall not, and shall procure that no other member of the Group will, without the prior written consent of the Bank, either in a single transaction or in a series of transactions whether related or not and whether voluntarily or involuntarily, dispose of all or any part of its business, undertaking or assets.


(b)	Paragraph (a) above does not apply to the disposal of assets, other than assets forming part of the Project and all shares in Subsidiaries holding assets forming part of the Project:


(i)	for fair market value and at arm's length, provided that, during the life of the Loan, the aggregate book value of the assets disposed of by each and every member of the Group shall not exceed 5% (five per cent) of the Group’s consolidated fixed assets as reflected in the latest consolidated management accounts of the Group prior to the signature of this Contract;


(ii)	of assets in exchange for other assets comparable or superior as to type, value and quality; or


(iii)	made in good faith and in the ordinary course of business by way of dividend out of distributable profits and as permitted by applicable law.

(c)

Paragraph (a) does not apply to the disposal of assets forming part of the Project provided that each of the following conditions is satisfied: (i) such disposal does not exceed 1% (one per cent) of the aggregate of the value of the assets forming part of the Project, (ii) the proposed disposal would not prejudice the Bank's interests as lender to the Borrower nor would such disposal render the Project ineligible for financing by the Bank under its Statute or under Article 309 of the Treaty on the Functioning of the European Union; and (iii) the proposed disposal would not jeopardise the completion of the Project in accordance with the Technical Description. For the avoidance of doubt, there shall be no disposal of any assets forming part of the Project other than as set out in this Article 6.07(c) or with the prior written consent of the Bank provided pursuant to Article 6.07(a) and no disposal of any shares in Subsidiaries holding assets forming part of the Project shall be permitted.

For the purposes of this Article, " dispose " and " disposal " includes any act effecting sale, transfer, lease or other disposal.

6.08 Compliance with laws

(a)

The Borrower shall, and shall procure that each other member of the Group will, observe, perform and comply in all material respects with all laws to which it or the Project is subject (including with the Electricity Act, the Competition Act and/or the Enterprise Act) and with all rules, regulations, orders and other requirements of the competent Secretary of State and of the Authority applicable to the Borrower.


(b)	The Borrower shall, and shall procure that each other member of the Group will, comply in all material respects with the conditions and restrictions (if any) imposed on it in, or in connection with, every material Authorisation of any Governmental Authority, including,

in the case of the Borrower, the Licence and will do nothing (and procure that no member of the Group does anything) which could reasonably be expected to lead to the termination, suspension or revocation of any such Authorisation or the License.

(c)

The Borrower shall do, or cause to be done, all other acts and things which may from time to time be necessary to be done by it under any applicable law, the Balancing and Settlement Code, the Connection and Use of System Code, the Grid Code and the Distribution Code (each as defined in the Borrower’s Licence) for the continued due compliance in all material respects by the Borrower with such Licence.


(d)	The Borrower shall not agree to any material amendments to (including any amended or additional standard or special conditions) the Licence without the prior written consent of the Bank, save where such amendments are required by law.


(e)	The Borrower shall not transfer the Licence to any person, whether or not it is a member of the Group.


(f)	The Borrower shall promptly:

(i) obtain, comply with and do all that is necessary to maintain in full force and effect; and

(ii) supply certified copies to the Bank of,

any Authorisation required under any law or regulation of its jurisdiction of incorporation to enable it to enter into this Contract and to ensure the legality, validity, enforceability or admissibility in evidence in its jurisdiction of incorporation of this Contract.

6.09 Change in business

The Borrower shall procure that no substantial change is made to the general nature of the business of the Borrower or of the Group as a whole from that carried on at the date of this Contract.

6.10 Merger

The Borrower shall not, and shall ensure that no other member of the Group will, enter into any amalgamation, demerger, merger or corporate reconstruction provided that nothing in this Article 6.10 shall prohibit any Subsidiary of the Borrower from entering into any intra-Group amalgamation, de-merger, merger or corporate reconstruction on a solvent basis and which does not involve (a) an amalgamation, de-merger or corporate reconstruction of the Borrower; or (b) any transfer of assets, rights or obligations to or from the Borrower.

6.11 Arms’ length dealings

The Borrower shall ensure that all relationships between it and any other company shall be undertaken and conducted on an arms’ length basis save for any dealings that are not at arms' length but which are expressly permitted pursuant to the Consent Letter.

6.12 Cross Default

The Borrower shall not, after the date of this Contract, enter into any arrangement containing a Cross Default Obligation.

6.13 Restrictions on incurring Financial Indebtedness

The Borrower shall not, and shall ensure that no member of the Group will, incur any Financial Indebtedness, except for Permitted Financial Indebtedness, unless the following conditions are satisfied:


(a)	all payments then due under this Contract have been made;


(b)	no Default or Compulsory Prepayment Event has occurred and is continuing unremedied or unwaived;


(c)	the Borrower’s ratio of Consolidated Senior Total Net Debt to RAV does not exceed 0.70:1; and


(d)	the Borrower’s Interest Cover is 2.6:1 or more.

6.14 Financial covenants

6.14A The covenants

The Borrower shall ensure that, at all times:


(a)	its Interest Cover for each Relevant Period shall not be less than 2.5:1; and


(b)	its ratio of Consolidated Senior Total Net Debt to RAV for each Relevant Period shall not exceed 0.725:1.

6.14B Calculation

The value of the terms referred to in Article 6.14A shall be calculated and interpreted in accordance with IFRS (consistently applied) and, in each case, shall be expressed in GBP and:

(a) in respect of each Relevant Period ending on 30 June in any year, shall be calculated on a consolidated basis using the consolidated management accounts of the Group most recently delivered to the Bank; and

(b) in respect of each Relevant Period ending on 31 December in any year, shall be calculated (i) once on a consolidated basis using the consolidated management accounts of the Group most recently delivered to the Bank and (ii) once using the audited annual financial statements of the Borrower most recently delivered to the Bank (on an unconsolidated basis for so long as such audited annual financial statements are prepared on an unconsolidated basis and on a consolidated basis should such audited annual financial statements be prepared on a consolidated basis).

6.14C Relevant definitions

For the purposes of this Contract:

" Calculation Date " means each of 30 June and 31 December in any year save that the first Calculation Date shall be 31 December 2015.

" Cash Equivalents " means investments in GBP, EUR or USD demand or time deposits, certificates of deposit and short term debt obligations (including commercial paper), synthetic GBP, EUR or USD deposits, shares in money market liquidity funds or a guaranteed investment contract, provided that in all cases such investments have a maturity of not longer than 9 (nine) months from the date of their acquisition and meet the following credit criteria: (i) they are money market funds with a minimum credit rating of AAA or equivalent from any of the two Rating Agencies (or, in the case of shares in money market liquidity funds, from any single Rating Agency) and (ii) in the case of all other counterparties and other specific instruments, they have a minimum short term credit rating of A-1 from S&P or of P-1 from Moody's.

" Consolidated EBIT " means, for each Relevant Period, the profit shown in the relevant accounts or statements for the relevant period on the line entitled "operating profit":

(i) before taking into account any items treated as exceptional items;


(ii)	after deducting the amount of any profit of any member of the Group which is attributable to minority interests;


(iii)	after adding dividends received from associates and joint ventures to the extent not included in operating profit;


(iv)	before taking into account any realised or unrealised exchange gains and losses including those arising on translation of currency debt;


(v)	before taking into account any gain or loss arising from an upward or downward revaluation of any asset;

in each case, to the extent added, deducted or taken into account, as the case may be, for the purposes of determining the profit before tax of the Group (or, as the case may be, of the Borrower) and without double counting.

" Consolidated Net Finance Charges " means, for any Relevant Period, the aggregate amount of interest paid on Consolidated Senior Total Net Debt (net of interest received and after taking account of payments made and amounts received under any derivatives related to such Consolidated Senior Total Net Debt) included in the relevant cash flow statement of the Borrower or the Group, as applicable, in respect of that Relevant Period.

" Consolidated Senior Total Net Debt " means, at any time, the aggregate amount (without double counting) of all obligations of the Group (or, as the case may be, of the Borrower) for or in respect of Financial Indebtedness (other than between members of the Group) which rank at least pari passu with the Loan but:


(i)	deducting the aggregate amount of all obligations of any member of the Group (or, as the case may be, of the Borrower) in respect of Financial Indebtedness to the extent that the

repayment or redemption of such Financial Indebtedness is provided for by the purchase by a member of the Group (or, as the case may be, by the Borrower) of a GIC;


(ii)	deducting the aggregate amount of freely available cash and Cash Equivalents held by any member of the Group (or, as the case may be, by the Borrower) at such time; and

( iii) deducting the interest component of Financial Indebtedness in existence at the date of this Contract which interest has accrued but not as at the time when the Consolidated Senior Total Net Debt is being calculated fallen due for payment or been paid, provided that no material change is made to the basis upon which such interest accrues after the date of this Contract and that such interest component shall not exceed on an aggregate basis GBP 20,000,000 (twenty million pounds sterling) or its equivalent in any other currency or currencies,

and so that no amount shall be excluded more than once.

Final Determination " means the final determination document published by Ofgem for each electricity distribution price control review, as the same may be modified by the decisions of the Competition and Markets Authority.

" GIC " means each of (i) the investment agreement dated on or about 26 April 2005 between Ambac Capital Funding, Inc., Ambac Assurance UK Limited and the Borrower and (ii) any other guaranteed investment contract or similar investment agreement with a maturity of 60 months or less from the date of purchase and which is provided by a counterparty which has, or whose obligations under such guaranteed investment contract or other agreement are guaranteed by an entity that has, a credit rating of at least A+ from S&P and A1 from Moody's.

" Interest Cover " means, in respect of any Relevant Period, the ratio of Consolidated EBIT for that Relevant Period to Consolidated Net Finance Charges for that Relevant Period.

" Rating Agency " means each of S&P and Moody's.

" Regulated Asset Value " or " RAV " means the regulatory asset value of the Borrower, as set out in the most recent Final Determination, or, if any electricity distribution price control financial model has been published on Ofgem's website since the most recent Final Determination, the regulatory asset value of the Borrower as set out in such financial model, in each case adjusted for inflation, as of the 31 March nearest to (i) the relevant Calculation Date, in the case of a calculation of the ratios set out under Article 6.14A or, as the case may be, (ii) the date on which the relevant member of the Group proposes to incur any further Financial Indebtedness other than Permitted Financial Indebtedness (in the case of the covenant under Article 6.13), provided that there shall be included in any determination of RAV the value of any assets which were included in RAV as at 31 March 2015 but which (i) subsequently are excluded from RAV by OFGEM, (ii) have become subject to a separate price control arrangement, and (iii) are still owned by the Borrower as of the date of determination of RAV, and provided further that if at any time OFGEM alters its methodology of determining RAV in a manner which results in a change in RAV, the Bank may require the Borrower to enter into negotiations with a view to agreeing appropriate adjustments to this definition (and to other terms defined or described herein solely for the purposes of this definition), whereupon the Borrower and the Bank shall promptly in good faith negotiate such appropriate adjustments so that the original intent of the undertakings set forth in Articles 6.13 and 6.14 hereof is preserved and in the absence of agreement between the Bank and the Borrower within 60 (sixty) days from the date when the Bank has requested the entering into of such negotiations, such adjustments shall be determined by an independent accountant experienced in the regulated electricity distribution market selected by the Bank.

" Relevant Period " means each period of 12 (twelve) months ending on such Calculation Date.

6.15 General Representations and Warranties

The Borrower represents and warrants to the Bank that:


(a)	it and each of its Subsidiaries is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and it has power to carry on its business as it is now being conducted and to own its property and other assets;


(b)	it is not a U.S Person and none of the payments made by the Borrower under this Contract could be deemed to constitute U.S. Source Withholdable Payments, as such terms are defined under FATCA;


(c)	it has the power to execute, deliver and perform its obligations under this Contract and all necessary corporate, shareholder and other action has been taken to authorise the execution, delivery and performance of the same by it;

(d)

no Authorisations are required for the due execution, delivery or performance by the Borrower of this Contract, or the validity, enforceability or admissibility in evidence thereof, except for such Authorisations as have been duly obtained and are in full force and effect and admissible in evidence (including no objection having been raised by OFGEM in relation to this Contract), and there has been no default in the observance of the conditions or restrictions (if any) imposed in, or in connection with, any such Authorisations (it being understood that the representations and warranties in this Article 6.15(d) do not refer to Authorisations required for the carrying out of the Project, in respect of which the representations and warranties in Article 6.15(e) shall apply);

(e)

no material Authorisations are required for the carrying on of the business of the Borrower or of any other member of the Group as it is carried on or is contemplated to be carried on, or for the carrying out of the Project, except for such Authorisations that are not required at the time this representation is made or repeated or as have been duly obtained and are in full force and effect and admissible in evidence, and there has been no default in the observance of the conditions or restrictions (if any) imposed in, or in connection with, any such Authorisations;


(f)	this Contract constitutes its legally valid, binding and enforceable obligations;


(g)	the execution and delivery of, the performance of its obligations under and compliance with the provisions of this Contract and the transactions contemplated in this Contract do not and will not:


(i)	contravene or conflict with any applicable law, statute, rule or regulation, or any judgement, decree or permit to which it is subject or the Licence;


(ii)	contravene or conflict with any material agreement or other instrument binding upon it or any of its Subsidiaries;


(iii)	contravene or conflict with any provision of its or of its Subsidiaries' constitutional documents; or


(iv)	result in the imposition of increased financial charges or requirements as to security under any other contract or instrument to which the Borrower or any of its Subsidiaries is a party;


(h)	it is not necessary to ensure the legality, validity, enforceability or admissibility in evidence of this Contract, that it or any other instrument be notarised, filed, recorded, registered or enrolled in any court, public office or elsewhere;


(i)	under the laws of its jurisdiction of incorporation it is not necessary that any stamp, registration or similar tax be paid on or in relation to this Contract or the transactions contemplated in this Contract;


(j)	the choice of English law as the governing law of this Contract will be recognised and enforced in its jurisdiction of incorporation and any judgement obtained in England in relation to this Contract will be recognised and enforced in its jurisdiction of incorporation;


(k)	it is not required to make any deduction for or on account of Tax from any payment it may make under this Contract to the Bank;

(l)

the most recent consolidated management accounts of the Group and audited accounts of the Borrower have been prepared on a basis consistent with previous years in accordance with IFRS (consistently applied) and, in the case of its audited accounts, have been approved by the Borrower’s auditors as representing a true and fair view of the results of its operations for that year, they accurately disclose or reserve against all the liabilities (actual or contingent) of the Borrower at the time when such financial statements were produced and no material adverse change in the Borrower’s business or the financial conditon of the Group has occurred since the date of such accounts;


(m)	there has been no Borrower Material Adverse Change since the date of this Contract;


(n)	no Event of Default has occurred and is continuing unremedied or unwaived or might reasonably be expected to result from the disbursement of the Loan;


(o)	no other event or circumstance is outstanding which constitutes a default under any other agreement or instrument which is binding on it or any of its Subsidiaries or to which its (or any of its Subsidiaries') assets are subject which might reasonably be expected to result in a Borrower Material Adverse Change;


(p)	no litigation, arbitration, administrative proceedings or investigation is current or to its knowledge is threatened or pending before any court, arbitral body or agency which has resulted or if adversely determined is reasonably likely to result in a Borrower Material

Adverse Change, nor is there subsisting against it or any of its subsidiaries any unsatisfied judgement or award with a value in aggregate in excess of GBP 2,000,000 (two million pounds sterling) or its equivalent in any other currency or currencies;


(q)	at the date of this Contract, no Security Interest exists over its assets or over those of the Group except for the Security Interests referred to in Article 7.02(c)(i) to (iv);


(r)	it is in compliance with Article 6.05(e) and no Environmental Claim in respect of the Project has been commenced or (to the best of its knowledge and belief) is threatened against any member of the Group;


(s)	the Borrower is not party to any arrangement containing a Cross Default Obligation;


(t)	there has been no application made by the Authority or the applicable Secretary of State for an Energy Administration Order under the Energy Act or any Enforcement Order under the Electricity Act in respect of the Borrower and no Energy Administration Order under the Energy Act or Enforcement Order under the Electricity Act has been made in respect of the Borrower;


(u)	any written factual information provided by any member of the Group to the Bank was true and accurate in all material respects as at the date it was provided or as at the date (if any) at which it is stated;


(v)	its payment obligations under this Contract rank not less than pari passu in right of payment with all other present and future unsecured and unsubordinated obligations under any of its debt instruments except for obligations mandatorily preferred by law applying to companies generally;


(w)	except as specified in Article 7.04(b), the Borrower is not party to any Credit Facility that includes a More Favourable Provision; and


(x)	to the best of its knowledge, no funds invested in the Project by the Borrower or by another member of the Group are unlawful in nature, insofar as they are neither the product of money laundering nor are linked to the financing of terrorism. The Borrower shall promptly inform the Bank if at any time it becomes aware of any such funds.

The representations and warranties set out above shall survive the execution of this Contract and are, except for the representation and warranty in paragraph (q) above, deemed repeated on each Scheduled Disbursement Date, on the date on which any Disbursement Request is submitted and on each Payment Date, by reference to the facts and circumstances then prevailing.

The Borrower acknowledges that it has made the representations and warranties contained in this Article 6.15 with the intention of inducing the Bank to enter into this Contract and that the Bank has entered into this Contract on the basis of, and in full reliance on, each of such representations and warranties.

ARTICLE 7
Security

The undertakings in this Article 7 remain in force from the date of this Contract for so long as any amount is outstanding under this Contract or the Credit is in force.

7.01 Security

(a)

The obligations of the Bank under this Contract are conditional upon the prior execution and delivery to the Bank of Acceptable Security in form and substance satisfactory to it. As at the date of execution of this Contract, the Acceptable Security provided is the Guarantee, whereby the Guarantor unconditionally guarantees the due performance of the Borrower's financial obligations under this Contract in accordance with the terms of the Guarantee Agreement. The Borrower hereby acknowledges and consents to the terms of the Guarantee Agreement.


(b)	The Borrower may at any time with the prior written consent of the Bank replace the Acceptable Security in place at such time with alternative Acceptable Security acceptable to the Bank.


(c)	The Borrower shall replace the Acceptable Security at any time it is required to do so in accordance with Article 4.03A(6).

7.02 Negative pledge


(a)	Subject to paragraph (c) below, the Borrower shall not and shall ensure that no other member of the Group will, without the prior written consent of the Bank, create or permit to subsist any Security Interest or Quasi-Security on, or with respect to, any of its present or future business, undertaking, assets or revenues (including any uncalled capital).


(b)	Subject to paragraph (c) below, the Borrower shall not, and shall procure that no other member of the Group shall:

(i) sell, transfer or otherwise dispose of any of its assets on terms whereby they are or may be leased to or re-acquired by a member of the Group;

(ii) sell, transfer or otherwise dispose of any of its receivables on recourse terms;

(iii) enter into any arrangement under which money or the benefit of a bank or other account may be applied, set-off or made subject to a combination of accounts; or

(iv) enter into any other preferential arrangement having a similar effect,

in circumstances where the arrangement or transaction is entered into primarily as a method of raising Financial Indebtedness or of financing the acquisition of an asset.


(c)	Paragraphs (a) and (b) above do not apply to:

(i) any netting or set-off arrangement entered into by the Borrower or any member of the Group in the ordinary course of its banking arrangements for the purpose of netting debit and credit balances;

(ii) any lien arising by operation of law and in the ordinary course of trading;

(iii) any Security over or affecting (or transaction (" Quasi-Security ") described in paragraph (b) above affecting) any asset acquired by the Borrower or any member of the Group after the date of this Contract if:


a.	the Security or Quasi-Security was not created in contemplation of the acquisition of that asset by the Borrower or any member of the Group;


b.	the principal amount secured has not been increased in contemplation of, or since the acquisition of that asset by the Borrower or any member of the Group; and


c.	the Security or Quasi-Security is removed or discharged within 3 (three) months of the date of acquisition of such asset;

(iv) any Security entered into pursuant to this Contract; or

(v) any Security or Quasi-Security securing indebtedness the principal amount of which (when aggregated with the principal amount of any other indebtedness which has the benefit of Security or Quasi-Security given by any member of the Group other than any permitted under paragraphs (i) to (iv) above) does not exceed GBP 10,000,000 (ten million pounds sterling) or its equivalent in another currency or currencies,

provided in each case that no such Security or Quasi-Security is created or permitted to subsist over any assets forming part of the Project or over any shares in Subsidiaries holding assets forming part of the Project.

7.03 Pari passu ranking

The Borrower shall ensure that its payment obligations under this Contract rank, and will rank, not less than pari passu in right of payment with all other present and future unsecured and unsubordinated obligations under any of its debt instruments except for obligations mandatorily preferred by law applying to companies generally.

7.04 Most favoured lender

(a)

Subject to Article 7.04(b), if at any time while any part of the Credit or the Loan is outstanding, the Borrower or any other member of the Group has concluded or shall conclude with any other creditor a " Credit Facility " (meaning a loan, credit agreement, facility or private placement purchase or any other financing agreement) that includes any (i) affirmative or negative covenant, including but not limited to a loss-of-rating clause or any financial covenant regarding the Borrower or any other member of the Group, (ii)

defaults or events of defaults or (iii) mandatory prepayment or "put" provision or provisions for collateral security (each such provision or clause hereinafter referred to as a " More Favourable Provision ") that either:


(i)	is not otherwise included in this Contract,


(ii)	is more restrictive upon the relevant member of the Group than those contained in this Contract, or


(iii)	is more beneficial to the financial creditors than relevant similar provisions contained in this Contract,

the Borrower shall immediately and in any event within 10 (ten) Business Days of entering into or permitting the amendment of the Credit Facility inform the Bank in writing of the More Favourable Provision and provide the Bank with its wording including, if relevant, an English translation thereof. Thereupon such More Favourable Provision shall be deemed incorporated by reference in this Contract as if set forth fully herein, mutatis mutandis, effective as of the date when such More Favourable Provision became effective under such other Credit Facility (each such More Favourable Provision as incorporated herein being referred to as an " Incorporated Provision ") and, subject to Article 7.04(c), no Incorporated Provision may thereafter be waived, amended or modified under this Contract without the prior written consent of the Bank. Thereafter, upon the request of the Bank, the Borrower shall execute an agreement to amend this Contract, evidencing the incorporation of such Incorporated Provision.

(b) Nothing in Article 7.04(a) shall apply to More Favourable Provisions included in the Existing Bond Documentation or as set out in clause 21.2(c) of the Revolving Facility Agreement (and in the case of the Revolving Facility Agreement only, as such facility may be renewed or extended, provided that following such renewal or extension, the total amount of financial indebtedness made available under such facility does not exceed GBP 250,000.000).


(i)	the corresponding provision in the relevant Credit Facility in respect of an Incorporated Provision has been amended or is no longer in effect and no Default, Compulsory Prepayment Event or Material Adverse Change has occurred; and


(ii)	the Borrower provides evidence satisfactory in form and substance to the Bank that the conditions set out in Article 7.04(c)(i) have been satisfied,

the Borrower may request that the relevant Incorporated Provision be amended, mutatis mutandis, as set out in the relevant Credit Facility or, as the case may be, that the Incorporated Provision no longer apply, and the Bank shall consent to such request provided however, for the avoidance of doubt, that nothing in this Article 7.04 shall in any way affect any of the provisions of this Contract as of the date hereof, which shall continue in full force and effect and shall not be affected by any amendment to any Incorporated Provision or any Incorporated Provision no longer applying pursuant to this Article 7.04(c).

ARTICLE 8
Information and visits

8.01 Information concerning the Project

The Borrower shall:


(a)	deliver to the Bank:


(i)	the information in content and in form, and at the times, specified in Schedule A.2 or otherwise as agreed from time to time by the parties to this Contract; and


(ii)	any such information or further document concerning the financing, procurement, implementation, operation and environmental impact of or for the Project as the Bank may reasonably require within a reasonable time;

provided always that if such information or document is not delivered to the Bank on time, and the Borrower does not rectify the omission within a reasonable time set by the Bank in writing, the Bank may remedy the deficiency, to the extent feasible, by employing its own staff or a consultant or any other third party, at the Borrower’s expense and the Borrower shall provide such persons with all assistance necessary for the purpose;


(b)	submit for the approval of the Bank without delay any material change to the Project, including, inter alia, in respect of the price, design, plans, timetable or to the expenditure programme or financing plan for the Project, in relation to the disclosures made to the Bank prior to the signing of this Contract;


(i)	any material action or protest initiated or any material objection raised by any third party or any genuine material complaint received by the Borrower or any material litigation that is commenced or threatened against it with regard to environmental or other matters affecting the Project;


(ii)	any fact or event known to the Borrower, which may substantially prejudice or affect the conditions of execution or operation of the Project;


(iii)	a genuine allegation, complaint or information with regard to Criminal Offences related to the Project of which the Borrower becomes aware;


(iv)	any non-compliance by it with any applicable Environmental Law;


(v)	any suspension, revocation or modification of any Environmental Approval,

and set out the action to be taken with respect to such matters; and

(d) promptly provide to the Bank, if so requested:


(i)	a certificate of its insurers showing fulfilment of the requirements of Article 6.05(c); and


(ii)	annually, a list of policies in force covering the insured property forming part of the Project, together with confirmation of payment of the current premiums.

8.02 Information concerning the Borrower

The Borrower shall:

(a) deliver to the Bank:


(i)	as soon as they become available but in any event within 150 days after the end of each of its and the Guarantor’s financial years, its and the Guarantor’s audited financial statements for that financial year (consolidated in the case of the Guarantor and, in the case of the Borrower, consolidated or unconsolidated);


(ii)	as soon as they become available but in any event within 90 days after each Calculation Date, its and the Guarantor's consolidated management accounts showing their respective financial performance for the financial year-to-date on such Calculation Date;

(iii)

together with each set of financial statements and management accounts delivered pursuant to Article 8.02(a)(i) or 8.02(a)(ii), a Compliance Certificate setting out (in reasonable detail) computations as to compliance with Article 6.14 as at the date when those financial statements were drawn up, such Compliance Certificate to be signed by two directors of the Borrower (or, failing that, by one director of the Borrower and the finance director or the treasurer or the investor reporting manager or the financial controller or the company secretary of the Borrower);


(iv)	promptly upon request by the Bank, a certificate signed by two of its directors certifying that no Default is continuing (or, if a Default is continuing, specifying the Default and the steps, if any, being taken to remedy it); and


(v)	from time to time, such further information on the general financial condition, business and operations of the Borrower, of any member of the Group and of the Guarantor as the Bank may reasonably require;

(b) ensure that its accounting records fully reflect the operations relating to the financing, execution and operation of the Project; and


(c)	inform the Bank promptly of:


(i)	any material alteration to its constitutional documents or shareholding structure after the date of this Contract;


(ii)	any fact which obliges it to prepay any Financial Indebtedness or any EU funding;


(iii)	any event or decision that constitutes or may result in any Compulsory Prepayment Event or of its belief or, as the case may be, reasonable grounds for belief that such an event has occurred or is likely to occur;


(iv)	any intention on its part to grant any Security over any of its assets in favour of a third party;


(v)	any intention on its part to relinquish ownership of any material component of the Project;

(vi) any fact or event that is reasonably likely to prevent the substantial fulfilment of any obligation of the Borrower under this Contract;

(vii) any Default or Material Adverse Change having occurred or being threatened or anticipated and the steps, if any, being taken to remedy it;

(viii) any proposed material changes to the Licence and, as soon as reasonably available, provide to the Bank a certified copy of any amendments or modifications to the Licence or replacement thereof;


(ix)	any material dispute with the Authority and any allegation of the Authority of material non-compliance with applicable law, regulation and the terms of the License;


(x)	the commencement of any proceedings and the giving of any notice regarding the termination or revocation of the Licence;


(xi)	any Energy Administration Order, any Enforcement Order and any other material regulatory notices or orders.

(xii) any litigation, arbitration or administrative proceedings or investigation which is current, threatened or pending which might if adversely determined result in a Material Adverse Change;

(xiii) any investigations concerning the integrity of the members of the Borrower’s board of directors;

(xiv) to the extent permitted by law, any material litigation, arbitration, administrative proceedings or investigation carried out by a court, administration or similar public authority, which, to the best of its knowledge and belief, is current, imminent or pending against the Borrower or its controlling entities or members of the Borrower’s board of directors in connection with Criminal Offences related to the Loan or the Project;

(xv) any measure taken by the Borrower pursuant to Article 6.05(f) of this Contract.

8.03 Visits by the Bank

The Borrower shall allow persons designated by the Bank, as well as persons designated by other institutions or bodies of the European Union when so required by the relevant mandatory provisions of European Union law, at reasonable times:

(a) to visit the sites, installations and works comprising the Project and to conduct such checks as they may wish,

(b) to interview representatives of the Borrower and not obstruct contacts with any other person involved in or affected by the Project; and

(c) to review the Borrower’s books and records in relation to the execution of the Project and to be able to take copies of related documents to the extent permitted by the law.

The Borrower shall provide the Bank, or ensure that the Bank is provided, with all necessary assistance for the purposes described in this Article. Other than after the occurrence of a Default or Compulsory Prepayment Event which is continuing, the Bank shall provide reasonable notice of any such visits and any such persons shall comply with the Borrower’s or its contractor’s safety and security requirements.

The Borrower acknowledges that the Bank may be obliged to communicate information relating to the Borrower and the Project to any competent institution or body of the European Union in accordance with the relevant mandatory provisions of European Union law.

ARTICLE 9
Charges and expenses

9.01 Taxes, duties and fees

The Borrower shall pay all Taxes, duties, fees and other impositions of whatsoever nature, including stamp duty and registration fees, arising out of the execution or implementation of this Contract or any related document and in the creation, perfection, registration or enforcement of any security for the Loan to the extent applicable.

The Borrower shall pay all principal, interest, indemnity and other amounts due under this Contract gross without any withholding or deduction of any national or local impositions whatsoever required by law or an agreement with a Governmental Authority or otherwise; provided that, if the Borrower is obliged to make any such withholding or deduction, it will gross up the payment to the Bank so that after withholding or deduction, the net amount received by the Bank is equivalent to the sum due.

If the Borrower is obliged to deduct any amount under this Article and the Bank subsequently recovers any sum or obtains any credit against any tax payable by it in respect of any such payment, the Bank shall promptly upon receiving such sum or obtaining such credit pay a corresponding amount to the Borrower; provided that the Bank is not obliged to seek any such recovery or credit.

9.02 Other charges

The Borrower shall bear all charges and expenses, including professional, banking or exchange charges incurred in connection with the preparation, execution, implementation, enforcement, administration, monitoring and termination of this Contract or any related document (including the Guarantee Agreement), any amendment, supplement or waiver in respect of this Contract or any related document (including the Guarantee Agreement), and in the amendment, creation, management and realisation of any security for the Loan.

9.03 Currency indemnity


(a)	If any sum due from the Borrower under this Contract (a " Sum "), or any order, judgment or award given or made in relation to a Sum, has to be converted from the currency (the " First Currency ") in which that Sum is payable into another currency (the " Second Currency ") for the purpose of:

(i) making or filing a claim or proof against the Borrower; or

(ii) obtaining or enforcing an order, judgment or award in relation to any litigation or arbitration proceedings,

the Borrower shall as an independent obligation, within 3 (three) Business Days of demand, indemnify the Bank against any cost, loss or liability arising out of or as a result of the conversion including any discrepancy between (A) the rate of exchange used to convert that Sum from the First Currency into the Second Currency and (B) the rate or rates of exchange available to the Bank at the time of its receipt of that Sum.


(b)	The Borrower waives any right it may have in any jurisdiction to pay any amount under this Contract in a currency or currency unit other than that in which it is expressed to be payable.

9.04 Increased costs and indemnity

(a)

The Borrower shall pay to the Bank any sums or expenses incurred or suffered by the Bank (for the avoidance of doubt, other than any taxes, duties, fees or other impositions of whatsoever nature referred to in Article 9.01 to the extent they have been fully paid) as a consequence of the introduction of or any change in (or in the interpretation, administration or application of) any law or regulation or compliance with any law or regulation made after the date of signature of this Contract, in accordance with or as a result of which (i) the Bank is obliged to incur additional costs in order to fund or perform its obligations under this Contract, or (ii) any amount owed to the Bank under this Contract or the financial income resulting from the granting of the Credit or the Loan by the Bank to the Borrower is reduced or eliminated.


(b)	Without prejudice to any other rights of the Bank under this Contract or under any applicable law, the Borrower shall indemnify and hold the Bank harmless from and against any loss incurred as a result of any payment or partial discharge that takes place in a manner other than as expressly set out in this Contract.

ARTICLE 10
Events of default

10.01 Right to demand repayment

The Borrower shall repay all or part of the Loan forthwith, together with accrued interest and other outstanding amounts, upon written demand being made by the Bank in accordance with the following provisions.

10.01A Immediate demand

The Bank may make such demand immediately:


(a)	if the Borrower fails on the due date to repay any part of the Loan, to pay interest thereon or to make any other payment to the Bank as provided in this Contract unless the non-payment is due to a technical or administrative error or disruption to a payment system and is cured within 3 (three) Business Days;


(b)	if the Borrower is in breach of any of the covenants set out in Article 6.14A;


(c)	if any representation or statement made or deemed to be made by the Borrower in this Contract is or proves to have been incorrect or misleading in any respect;


(d)	if any representation or statement made or deemed to be made by the Borrower in connection with the negotiation of this Contract or any other information or document given to the Bank by or on behalf of the Borrower is or proves to have been incorrect or misleading in any material respect;

(e)

if, following any default in relation thereto, the Borrower or any other member of the Group is required or is capable of being required or will, following expiry of any applicable contractual grace period, be required or be capable of being required to prepay, discharge, close out or terminate ahead of maturity any other Financial Indebtedness or any commitment for any other Financial Indebtedness is cancelled or suspended, provided that no Event of Default shall occur under this paragraph (e) if the aggregate amount of such Financial Indebtedness or commitment for Financial Indebtedness is less than GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies;

(f)

if the Borrower or any other member of the Group is unable to pay its debts as they fall due or is deemed unable to pay its debts within the meaning of Section 123(1) or 123(2) of the Insolvency Act 1986 or any statutory modification or re-enactment thereof (whether or not a court of justice has so determined), or admits its inability to pay its debts as they fall due, or suspends its debts, or makes or, without the prior written agreement of the Bank, seeks to make a composition with its creditors or by reason of actual or anticipated financial difficulties commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness or a moratorium is declared in respect of any indebtendess of the Borrower or of any other member of the Group;


(g)	if any corporate action, legal proceedings or other procedure or step is taken in relation to or an order is made or an effective resolution is passed for:


(i)	the winding up of the Borrower or of any other member of the Group;


(ii)	the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise) of the Borrower or of any other member of the Group;


(iii)	a composition, compromise, assignment or arrangement with any creditor of the Borrower or of any other member of the Group;


(iv)	the appointment of a liquidator, receiver, administrative receiver, administrator, compulsory manager or other similar officer in respect of the Borrower or of any other member of the Group or of any of the assets of any such company; or


(v)	the enforcement of any Security over assets of the Borrower or of any other member of the Group,

or any analogous procedure or step is taken in any jurisdiction, provided that no Event of Default shall occur under this paragraph (g) in respect of any frivolous or vexatious winding-up petition brought by a third party (other than the Guarantor or any of its Subsidiaries) which is discharged within 14 (fourteen) days of commencement or, if earlier, the date on which it is advertised;


(h)	if the Borrower or any other member of the Group takes steps towards a substantial reduction in its capital, is declared insolvent or ceases or resolves to cease to carry on (or threatens to suspend or cease to carry on) the whole or any substantial part of its business or activities;

(i)

if an encumbrancer takes possession of, or a receiver, liquidator, administrator, compulsory manager, administrative receiver or similar officer is appointed, whether by a court of competent jurisdiction or by any competent administrative authority or by any person, of or over, any part of the business or assets of the Borrower or of any other member of the Group (other than any property forming part of the Project) having an aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies and, in the case of any of the foregoing, the same is not discharged within 14 (fourteen) days or if the Borrower or any other member of the Group petitions for the appointment of such an officer;


(j)	if an encumbrancer takes possession of any property forming part of the Project and such proceeding is not discharged within 14 (fourteen) days or if the Borrower or any other member of the Group petitions for the appointment of such an officer;

(k)

if any step is taken by any person with a view to the seizure, attachment, sequestration, distress, compulsory acquisition, expropriation, execution or nationalisation of all or any of the shares, or all or any material part of the assets of the Borrower or of any other member of the Group having an aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies;


(l)	if, by or under the authority of any Governmental Authority, the management of the Borrower or of any other member of the Group is wholly or substantially displaced or the authority of the Borrower or of any other member of the Group in the conduct of its business is wholly or substantially curtailed;


(m)	if a Final Order is made under section 25 of the Electricity Act or a Provisional Order is made and confirmed under that section against the Borrower or the Borrower is issued with an order by the Authority as a result of the Authority's belief that the Borrower is in breach (or is likely to be in breach) of a condition in its Licence or its obligations under the Electricity Act;


(n)	if an application is made by OFGEM or the applicable Secretary of State for an Energy Administration Order to be made in respect of the Borrower; or if an Energy Administration Order is made in respect of the Borrower;


(o)	if the Borrower or any other member of the Group defaults in the performance of any obligation in respect of any other loan or financial instrument granted by the Bank or to the Bank;


(p)	if any distress, attachment, execution, sequestration or other process is levied or enforced upon any property of the Borrower or of any other member of the Group not forming part of the Project having an aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies and is not discharged within 14 (fourteen) days;


(q)	if any distress, attachment, execution, sequestration or other process is levied or enforced upon any property forming part of the Project and is not discharged within 14 (fourteen) days;


(r)	if a Borrower Material Adverse Change occurs;


(s)	if the Licence or any other material Authorisation issued to the Borrower or to any other member of the Group is revoked or subject to notice of revocation by the competent Governmental Authority or the Borrower agrees to any revocation or surrender of the Licence or of such other material Authorisation; or


(t)	if it is or becomes unlawful for the Borrower to perform any of its obligations under this Contract or this Contract is not effective in accordance with its terms or is alleged by the

Borrower to be ineffective in accordance with its terms or the Borrower evidences an intention to repudiate this Contract.

10.01B Demand after notice to remedy

The Bank may also make such demand:


(a)	if the Borrower fails to comply with any obligation under this Contract not being an obligation mentioned in Article 10.01A;


(b)	if any fact stated in the Recitals materially alters and is not materially restored and if the alteration either prejudices the interests of the Bank as lender to the Borrower or adversely affects the implementation or operation of the Project;


(c)	if the terms of the Licence or any other material Authorisation issued to the Borrower are amended in such a way as to have a material adverse effect on the Borrower’s ability to operate the Project or any significant element of its core businesses of distributing electricity or to perform its obligations under this Contract, save in either case with the prior written consent of the Bank;

(d)

if the Borrower is declared by the competent Governmental Authority to have failed to comply in any material respect with: (i) the terms and conditions of the Licence; (ii) the rules, regulations, orders and other requirements for the time being of the Secretary of State and the Authority or any other competent Governmental Authority applicable to the relevant company with which it is obliged to comply; (iii) the duties and functions of a public electricity distributor in accordance with the provisions of the Electricity Act; (iv) any agreement with the Authority under s. 25(5)(b) of the Electricity Act or (v) any final or Provisional Order confirmed by the Authority so as to secure or facilitate compliance with the duties and requirements imposed on the relevant company under s. 9 or ss. 16 to 22 of the Electricity Act;


(e)	if the Balancing and Settlement Code made by the Borrower with The National Grid Company plc and others or the Borrower’s membership of such arrangement shall be terminated or cease for any reason to be in full force and effect and if, in either case, no substitute arrangement on terms reasonably acceptable to the Bank has come into force upon its termination or cessation;

(f)

if any rights, benefits or obligations of the Borrower as a public electricity distributor arising under the Electricity Act or under any similar law or regulation (including the Licence) are modified or lost (whether or not with the consent of the Borrower and whether pursuant to the Electricity Act or otherwise) and such modification or loss would reasonably be expected to result in a Borrower Material Adverse Change or to have a material adverse effect of the Borrower's ability to perform its obligations under this Contract or to operate the Project or any significant element of its business of distributing electricity; or

(g)

if any legislation (whether primary or subordinate) is enacted removing, reducing or qualifying in any material way the duties and powers of the Secretary of State (or any successor) and/or the Authority (or any successor) (including, without limitation, any such legislation removing, reducing or qualifying such duties under or pursuant to Section 15 of the Electricity Act), unless such removal, reduction or qualification of any such duties or powers would not result in a Borrower Material Adverse Change,

unless the non-compliance or circumstance giving rise to the non-compliance is capable of remedy and is remedied within 15 (fifteen) days of the earlier of (i) the Bank giving notice to the Borrower or (ii) the Borrower becoming aware of the non-compliance or circumstance.

10.02 Other rights at law

Article 10.01 shall not restrict any other right of the Bank at law to require prepayment of the Loan.

10.03 Indemnity

10.03A Fixed Rate Tranches

In case of demand under Article 10.01 in respect of any Fixed Rate Tranche, the Borrower shall pay to the Bank the amount demanded together with the Prepayment Indemnity on any amount of principal due to be prepaid. Such Prepayment Indemnity shall accrue from the due date for payment specified in the Bank’s notice of demand and be calculated on the basis that prepayment is effected on the date so specified.

10.03B Floating Rate Tranches

In case of demand under Article 10.01 in respect of a Floating Rate Tranche, the Borrower shall pay to the Bank the sum demanded together with a sum equal to the present value of 0.15% (fifteen basis points) per annum calculated and accruing on the amount of principal due to be prepaid in the same manner as interest would have been calculated and would have accrued, if that amount had remained outstanding according to the original amortisation schedule of the Tranche, until the Interest Revision/Conversion Date, if any, or the Maturity Date.

The value shall be calculated at a discount rate equal to the Redeployment Rate applied as of each relevant Payment Date.

10.03C General

Amounts due by the Borrower pursuant to this Article 10.03 shall be payable on the date of prepayment specified in the Bank’s demand.

10.04 Non-Waiver

No failure or delay or single or partial exercise by the Bank in exercising any of its rights or remedies under this Contract shall be construed as a waiver of such right or remedy. The rights and remedies provided in this Contract are cumulative and not exclusive of any rights or remedies provided by law.

ARTICLE 11
Law and jurisdiction

11.01 Governing Law

This Contract and any non-contractual obligations arising out of or in connection with it shall be governed by English law.

11.02 Jurisdiction

The parties hereby submit to the jurisdiction of the courts of England. The Bank appoints The Securities Management Trust Limited whose present address is 8 Lothbury, London EC2R 7HH to be its agent for the purpose of accepting service of legal process.

11.03 Evidence of sums due

In any legal action arising out of this Contract the certificate of the Bank as to any amount or rate due to the Bank under this Contract shall in the absence of manifest error be prima facie evidence of such amount or rate.

ARTICLE 12
Final clauses

12.01 Notices to either party

Notices and other communications given under this Contract addressed to either party to this Contract shall be made to the address or facsimile number as set out below, or to such other address or facsimile number as a party previously notifies to the other in writing:



For the Bank	Attention: Ops EU 100 boulevard Konrad Adenauer L-2950 Luxembourg Facsimile no.: +352 4379 66488
For the Borrower	Attention: Treasury (Finance Director) Northern Powergrid (Northeast) Limited Lloyds Court, 78 Grey Street Newcastle upon Tyne Tyne and Wear NE1 6AF Facsimile no.: + 44 0191 223 5165

12.02 Form of notice

Any notice or other communication given under this Contract must be in writing.

Notices and other communications for which fixed periods are laid down in this Contract or which themselves fix periods binding on the addressee may be made by hand delivery, registered letter or facsimile. The date of delivery, registration or, as the case may be, the stated date of receipt of transmission shall be conclusive for the determination of a period.

Other notices and communications may be made by hand delivery, registered letter or facsimile.

Without affecting the validity of any notice delivered by facsimile according to the paragraphs above, a copy of each notice delivered by facsimile shall also be sent by letter to the relevant party on the next following Business Day at the latest.

Notices issued by the Borrower pursuant to any provision of this Contract shall, where required by the Bank, be delivered to the Bank together with satisfactory evidence of the authority of the person or persons authorised to sign such notice on behalf of the Borrower and the authenticated specimen signature of such person or persons.

12.03 Changes to parties

The Borrower may not assign or transfer any of its rights or obligations under this Contract without the prior written consent of the Bank.

The Bank may, with the prior consent of the Borrower (such consent not to be unreasonably withheld or delayed) assign all or part of its rights and benefits or transfer all or part of its rights, benefits and obligations under this Contract.

12.04 Contracts (Rights of Third Parties) Act 1999

A person who is not a party to this Contract has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or to enjoy the benefit of any term of this Contract. Notwithstanding any term of this Contract, the consent of any person who is not a party to this Contract is not required to rescind or vary this Contract at any time.

12.05 European Monetary Union, GBP obligations and IFRS

12.05A Recognition of Currency Unit

If more than one currency or currency unit is at the same time recognised by the Bank of England as a denomination of the lawful currency of the United Kingdom, then:


(a)	any reference in this Contract to, and any obligations arising under this Contract in, the currency of the United Kingdom shall be translated into, or paid in, the currency or currency unit of the United Kingdom designated by the Bank; and


(b)	any translation from one currency or currency unit to another shall be at the official rate of exchange or conversion rate recognised by the Bank of England for the conversion of that currency or currency unit into the other.

12.05B Change in Currency Unit

If a change in any currency of the United Kingdom occurs, this Contract will be amended to the extent determined by the Bank (acting reasonably and in consultation with the Borrower) to be appropriate to reflect the change in currency and to put the Bank and the Borrower in the same position, so far as possible, that they would have been in had no change in that currency occurred. Without prejudice to the foregoing, the Bank reserves the right to require the Borrower to agree such amendments to this Contract as may be necessary to reflect changes occurring in the Bank's funding arrangements in respect of the Loan as a result of such change of currency.

12.05C Change in IFRS

If a material change in IFRS occurs which is detrimental to either party, the parties shall consult and will discuss in good faith any change that may be required to this Contract.

12.06 Entire Agreement

This Contract constitutes the entire agreement between the Bank and the Borrower in relation to the provision of the Credit hereunder, and supersedes any previous agreement, whether express or implied, on the same matter.

12.07 Invalidity

If at any time any term of this Contract is or becomes illegal, invalid or unenforceable in any respect, or this Contract is or becomes ineffective in any respect, under the laws of any jurisdiction, such illegality, invalidity, unenforceability or ineffectiveness shall not affect:


(a)	the legality, validity or enforceability in that jurisdiction of any other term of this Contract or the effectiveness in any other respect of this Contract in that jurisdiction; or


(b)	the legality, validity or enforceability in other jurisdictions of that or any other term of this Contract or the effectiveness of this Contract under the laws of such other jurisdictions.

12.08 Amendments

Any amendment to this Contract shall be made in writing and shall be signed by the parties hereto.

12.09 Recitals, Schedules and Annexes

The Recitals and following Schedules form part of this Contract:



Schedule A	Technical Description and Reporting
Schedule B	Definition of LIBOR
Schedule C	Forms for the Borrower
Schedule D	Interest Rate Revision and Conversion

The following Annexes are attached hereto:



Annex I	Resolution of the Board of Directors of the Borrower and authorisation of signatory
Annex II Annex III	Certificate of Borrowing Powers Side Letter

12.10 Counterparts

This Contract may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of the Contract.

IN WITNESS WHEREOF the parties hereto have caused this Contract to be executed in 4 (four) originals in the English language



Signed for and on behalf of EUROPEAN INVESTMENT BANK /s/ A. Furstenberg A. Furstenburg /s/ J. Kalisz J. Kalisz	Signed for and on behalf of NORTHERN POWERGRID (NORTHEAST) LIMITED /s/ J. France J. FRANCE
At Luxembourg, this 2nd day of December 2015	At Newcastle upon Tyne, this 1st day of December 2015

Schedule A

Technical Description and Reporting

A.1 Technical Description (Article 6.02)

Purpose, Location

The operation is a 2-year investment programme over the period 2015 to 2016, aimed at refurbishing, upgrading and reinforcing the electricity distribution network of the Borrower, located in the North East of England. The implementation of the programme will primarily involve the refurbishment and replacement of overhead lines, cables, transformers and substations as well as the connection of around 18,000 new customers. The overall objective of the programme is to extend the network and maintain a high standard of safety and reliability.

Description

The programme comprises a large number of independent and geographically dispersed schemes for refurbishing, upgrading and reinforcing the electricity distribution infrastructure of the Borrower, from 132 kV down to low voltage.

The programme schemes to be implemented and associated cost estimates are presented in Table A1 and A2 of Appendix A.1.

Calendar

The time scale for the programme is January 2015-December 2016.

A.2. PROJECT INFORMATION TO BE SENT TO THE BANK AND METHOD OF TRANSMISSION

1. Dispatch of information: designation of the person responsible

The information below has to be sent to the Bank under the responsibility of:



	Financial Contact	Technical Contact
Company	Northern Powergrid	Northern Powergrid
Contact person	Tom Fielden	Owen Sutherland
Title	Finance Director	Investor Reporting Manager
Address	Lloyds Court, 78 Grey Street Newcastle upon Tyne, Tyne and Wear NE1 6AF	Lloyds Court, 78 Grey Street Newcastle upon Tyne, Tyne and Wear NE1 6AF
Phone	+44 0191 2235121	+44 0191 2235160
Fax	+44 0191 2235165	+44 0191 2235165
Email	tom.fielden@northernpowergrid.com	owen.sutherland@northernpowergrid.com

The above-mentioned contact person(s) is (are) the responsible contact(s) for the time being.

The Borrower shall inform the Bank immediately in case of any change.

2. Information on specific subjects

The Borrower shall deliver to the Bank the following information at the latest by the deadline indicated below.



Document / information	Deadline
Not Applicable

3. Information on the project’s implementation

The Borrower shall deliver to the Bank the following information on project progress during implementation at the latest by the deadline indicated below.



Document / information	Deadline	Frequency of reporting
Project Progress Report Reference Data Name of the project: Promoter: Contract number: Period of operation covered in this report: mm/yyyy – mm/yyyy Author/contact: Project implementation 1. An update of the Technical Description including updating Table A1.1 and A.1.2 with realised amounts, explaining the reasons for significant changes vs. initial scope, including the progress (percentage implemented) of individual items. 2 An update of date of start and completion of works for each of the main project’s components, explaining reasons for any possible delay in comparison to original time schedule given in Annex A1; 3. An update of cost of the project components, explaining reasons for any possible cost increases vs. initial budgeted cost given in Table A1.1 and A.1.2; 4. Update of the status of the EIA processes for all project schemes requiring an EIA under the programme; 5. Any significant public acceptance issue related to the project components or programme as a whole; 6. A description of any major issue with impact on the environment, in particular issues related to programme schemes located within environmentally sensitive area; 7. Any legal action concerning the programme that has or may be on-going or expected; 8. A description of any major social issues during the implementation of the components;	28.02.2017	Only one report required if implementation programme is respected.

4. Information on the end of works and first year of operation

The Borrower shall deliver to the Bank the following information on project completion and initial operation at the latest by the deadline indicated below.



Document / information	Date of delivery to the Bank
Project Completion Report, including: Reference Data Name of the project: Promoter: Contract number: Commercial Operation Date: dd/mm/yyyy Period of operation covered in this report: mm/yyyy – mm/yyyy Author/contact: 1. Project implementation a. The date of start and completion of works for each of the project’s main components, explaining reasons for any possible delay in comparison to original time schedule given in Annex A1 to the Finance Contract; b. The final cost of the project components, explaining reasons for any possible cost increases vs. initial budgeted cost given in Table A.1.1 and A.1.2 in Annex A1; c. The number of new jobs created by the project: both jobs during implementation (in person-year) and permanent new jobs created (full time equivalent); d. Any legal action concerning the project that has or may be on-going or expected; e. Confirmation that all insurance cover is in place; f. Description of compliance with specific project conditions and undertakings as given in section 2 of Annex A2 in the Finance Contract if applicable; 2. Technical scope and characteristics a. A description of the technical characteristics of the project as completed; b. An update of the Technical Description including updating Table A.1.1 and A.1.2 with realised amounts, explaining the reasons for significant changes vs. initial scope; c. Amount of RES generation connected by the project 3. Operational a. Project’s first year operational data explaining reasons for any deviation from original forecast for the first year of operation as well as future outlook for operations; b. Reliability indicators of the distribution network (outage time and frequency, planned and unplanned) and network losses (technical and non-technical) over the investment period; c. Describe any differences between the planned operation expenditures and the actual incurred as well as future outlook for operations; d. Any significant issue that has occurred or any significant risk that may affect the project’s operation; e. Statistics on the project’s health and safety performance during implementation and first year of operation (in total days of absence from work for each case); 4. Market and regulatory environment a. Any relevant change of the regulatory framework and tariff setting that has occurred; b. Update on the market situation in the country, supply/demand balance, demand developments during implementation; c. Energy distributed and network peak demand over the investment period; incremental energy supplied as a result of the project;.	30.06.2018



5. Environmental and social aspects a. Final update of the status of the EIA processes for all project schemes requiring an EIA; b. Describe the main environmental and social impacts during implementation and residual impacts; c. An update on the status of environmental mitigation and compensation measures that were foreseen as part of the project; d. Any significant public acceptance issue related to programme schemes; e. Confirmation that the project has been implemented and operated in compliance with requirements under respective permits (operating licenses in place, reliability and performance tests successfully completed);



Language of reports	English

Schedule B

Definition of LIBOR

A. LIBOR

" LIBOR ’’ means, in respect of GBP :


(a)	in respect of a relevant period of less than one month, the Screen Rate for a term of one month;


(b)	in respect of a relevant period of one or more months for which a Screen rate is available, the applicable Screen Rate for a term for the corresponding number of months; and


(c)	in respect of a relevant period of more than one month for which a Screen rate is not available, the rate resulting from a linear interpolation by reference to two Screen rates, one of which is applicable for a period next shorter and the other for a period next longer than the length of the relevant period,

(the period for which the Screen Rate is taken or from which the Screen Rates are interpolated being the " Representative Period "),

For the purposes of paragraphs (b) and (c) above, “available” means “calculated and published” under the aegis of the ICE Benchmark Administration Limited (or any successor to that function of the ICE Benchmark Administration Limited as determined by the Bank) for given maturities.

“ Screen Rate ” means the rate of interest for deposits in GBP for the relevant period as set by the ICE Benchmark Administration Limited (or any successor to that function of the ICE Benchmark Administration Limited as determined by the Bank) and released by financial news providers at 11h00, London time, or at a later time acceptable to the Bank on the day (the “ Reset Date ”) on which the relevant period starts or, if that day is not a Business Day in London, on the next following day which is such a Business Day.

If such Screen Rate is not so released by any financial news provider acceptable to the Bank, the Bank shall request the principal London offices of 4 (four) major banks in the London interbank market, selected by the Bank, to quote the rate at which GBP deposits in a comparable amount are offered by each of them at approximately 11h00 London time on the Reset Date, to prime banks in the London interbank market for a period equal to the Representative Period. If at least 2 (two) such quotations are provided, the rate will be the arithmetic mean of the quotations provided.

If fewer than 2 (two) quotations are provided as requested, the rate will be the arithmetic mean of the rates quoted at approximately 11h00 London time on the Reset Date by major banks in London (selected by the Bank) for loans in GBP in a comparable amount to leading European banks for a period equal to the Representative Period.

If the rate resulting from the above is below zero, LIBOR will be deemed to be zero.

If no rate is available as provided above, LIBOR shall be the rate (expressed as a percentage rate per annum) which is determined by the Bank to be the all-inclusive cost to the Bank for the funding of the relevant Tranche based upon the then applicable internally generated Bank reference rate or an alternative rate determination method reasonably determined by the Bank.

B. General

For the purposes of the foregoing definitions:


(a)	" London Business Day " means a day on which banks are open for normal business in London.


(b)	All percentages resulting from any calculations referred to in this Schedule will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with halves being rounded up.


(d)	If any of the foregoing provisions becomes inconsistent with provisions adopted under the aegis of the ICE Benchmark Administration Limited (or any successor to that function of the ICE Benchmark Administration Limited as determined by the Bank), the Bank may by notice to the Borrower amend the provision to bring it into line with such other provisions.

Schedule C ¹

Forms for the Borrower

C.1 Form of Disbursement Request (Article 1.02B)

Disbursement Request

United Kingdom – Northern Powergrid Network Investment - A



	Date:

Please proceed with the following disbursement:

Loan Name (*):

Northern Powergrid Network Investment - A

Signature Date (*):

Contract FI number:

85.424

Currency & amount requested

Proposed disbursement date:

Currency

Amount

I NTEREST

Int. rate basis (Art. 3.01)

Reserved for the EIB

GBP

Rate (% or Spread) ²

Total Credit Amount:

Frequency (Art. 3.01)

Annual o

Semi-annual o

Quarterly o

Disbursed to date:

Payment Dates (Art. 5)

Balance for disbursement:

Interest Revision/Conversion date (if any)

Current disbursement:

CAPITAL

Repayment frequency

Annual o

Semi-annual o

Quarterly o

Balance after disbursement:

Repayment methodology
(Art. 4.01)

Equal instalments o

Constant annuities o

Single instalment o

Disbursement deadline:

First repayment date

Max. number of disbursements:

Maturity Date:

Minimum Tranche size:

Total allocations to date:

Conditions precedent:

Yes / No

¹ To be provided on paper bearing the Borrower's letterhead

² NOTE: If the Borrower does not specify an interest rate or Spread here, the Borrower will be deemed to have agreed to the interest rate or Spread subsequently provided by the Bank in the Disbursement Notice, in accordance with Article 1.02C(c).

Borrower's account to be credited:

Acc. N ° : …………………………………………………………………………………………….

(please provide the appropriate format for the relevant currency)

Bank name, address: …………………………………………………………………………

Please transmit information relevant to:

Borrower's authorised name(s) and signature(s):

C.2 Form of Certificate from Borrower (Article 1.04B)

To: European Investment Bank

From: Northern Powergrid (Northeast) Ltd

Date:


Subject:	Finance Contract between European Investment Bank and Northern Powergrid (Northeast) Limited dated [ ] 2015 (the " Finance Contract ")

FI number 85.424 Serapis number 2015-0155

______________________________________________________________________

Dear Sirs,

Terms defined in the Finance Contract have the same meaning when used in this letter.

For the purposes of Article 1.04 of the Finance Contract we hereby certify to you as follows:


(a)	we are in compliance with the financial covenants pursuant to Article 6.14 of the Finance Contract and attached is evidence of such compliance;


(b)	no security of the type prohibited under Article 7.02 (a) or (b) of the Finance Contract has been created or is in existence;


(c)	there has been no material change to any aspect of the Project or in respect of which we are obliged to report under Article 8.01 of the Finance Contract, save as previously communicated by us;


(d)	no Default or Compulsory Prepayment Event has occurred and is continuing unremedied or unwaived;

(e)

no litigation, arbitration administrative proceedings or investigation is current or to our knowledge is threatened or pending before any court, arbitral body or agency which has resulted or if adversely determined is reasonably likely to result in a Material Adverse Change, nor is there subsisting against us or any of our subsidiaries any unsatisfied judgement or award with a value in aggregate in excess of GBP 2,000,000 (two million pounds sterling) or its equivalent in any other currency or currencies;


(f)	the representations and warranties to be made in the Contract or repeated by us under Article 6.15 of the Finance Contract are true in all respects; and


(g)	no Material Adverse Change has occurred, as compared with the condition at the date of the Finance Contract.

Yours faithfully,

For and on behalf of Northern Powergrid (Northeast) Limited

Date:

C.3 Form of Compliance Certificate

To: European Investment Bank

From: Northern Powergrid (Northeast) Limited

Date:


Subject:	Finance Contract between European Investment Bank and Northern Powergrid (Northeast) Limited dated [ ] 2015 (the " Finance Contract ")

FI number 85.424 Serapis number 2015-0155

______________________________________________________________________

Dear Sirs,

We refer to the Finance Contract. This is a Compliance Certificate. Terms defined in the Finance Contract have the same meaning when used in this Compliance Certificate unless given a different meaning in this Compliance Certificate.

We confirm that:


(a)	the provisions of Article 6.14 [have/have not] been complied with for the Relevant Period ending on [ insert most recent Calculation Date ];


(b)	the computations necessary to demonstrate the [compliance/non compliance] referred to in paragraph (a) above are as follows: ¹

Interest Cover

(i) Consolidated EBIT

[ ]

(ii) Consolidated Net Finance Charges

[ ]

Consolidated Senior Total Net Debt to RAV

(i) Consolidated Senior Total Net Debt

[ ]

(ii) RAV

[ ]

[We confirm that no Default is continuing.] ²



…............	…....................................
Director	[Director/ Finance Director/ Treasurer/ Investor Reporting Manager/ Financial Controller/ Company Secretary]
of	of
Northern Powergrid (Northeast) Limited	Northern Powergrid (Northeast) Limited


¹	In the case of a Compliance Certificate to be delivered together with any financial statements under Article 8.02(a)(i), both the consolidated and the unconsolidated calculations shall be included.


²	If this statement cannot be made, the certificate should identify any Default that is continuing and the steps, if any, being taken to remedy it.

Schedule D

Interest Rate Revision and Conversion

If an Interest Revision/Conversion Date has been included in the Disbursement Notice for a Tranche, the following provisions shall apply.

A. Mechanics of Interest Revision/Conversion

Upon receiving an Interest Revision/Conversion Request the Bank shall, during the period commencing 60 (sixty) days and ending 30 (thirty) days before the Interest Revision/Conversion Date, deliver to the Borrower an Interest Revision/Conversion Proposal stating:


(a)	the Fixed Rate and/or Spread that would apply to the Tranche, or the part thereof indicated in the Interest Revision/Conversion Request pursuant to Article 3.01; and


(b)	that such rate shall apply until the Maturity Date or until a new Interest Revision/Conversion Date, if any, and that interest is payable quarterly, semi-annually or annually in arrears on designated Payment Dates.

The Borrower may accept in writing an Interest Revision/Conversion Proposal by the deadline specified therein.

Any amendment to the Contract requested by the Bank in this connection shall be effected by an agreement to be concluded not later than 15 (fifteen) days prior to the relevant Interest Revision/Conversion Date.

B. Effects of Interest Revision/Conversion

If the Borrower duly accepts in writing a Fixed Rate or a Spread in respect of an Interest Revision/Conversion Proposal, the Borrower shall pay accrued interest on the Interest Revision/Conversion Date and thereafter on the designated Payment Dates.

Prior to the Interest Revision/Conversion Date, the relevant provisions of the Contract and Disbursement Notice shall apply to the entire Tranche. From and including the Interest Revision/Conversion Date onwards, the provisions contained in the Interest Revision/Conversion Proposal relating to the new interest rate or Spread shall apply to the Tranche (or part thereof) until the new Interest Revision/Conversion Date, if any, or until the Maturity Date.

C. Non-fulfillment of Interest Revision/Conversion

If the Borrower does not submit an Interest Revision/Conversion Request or does not accept in writing the Interest Revision/Conversion Proposal for the Tranche or if the parties fail to effect an amendment requested by the Bank pursuant to Paragraph A above, the Borrower shall repay the Tranche (or part thereof) on the Interest Revision/Conversion Date, without indemnity. The Borrower will repay on the Interest Revision/Conversion Date any part of a Tranche which is unaffected by the Interest Revision/Conversion.

EXHIBIT 4.2

Serapis N° 2015-0155

FI N° 85.424

Northern Powergrid Network Investment - A

Guarantee and Indemnity Agreement

between

European Investment Bank

and

Northern Powergrid Holdings Company

This Guarantee and Indemnity Agreement (this " Guarantee ") is made as a deed on

by: Anita Furstenberg, Director and Joanna Kalisz, Legal Counsel

European Investment Bank having its Head Office at 100, boulevard Konrad Adenauer, Luxembourg‑Kirchberg, Grand Duchy of Luxembourg, represented by

hereinafter called: "the Bank"

of the first part, and

Northern Powergrid Holdings Company (Co. No. 03476201), a private unlimited company incorporated in England and having its registered office at Lloyds Court, 78 Grey Street, Newcastle upon Tyne, NE1 6AF, represented by John France, Regulation Director

hereinafter called: "the Guarantor"

of the second part.

WHEREAS:


(A)	By an agreement (hereinafter called the " Finance Contract ") dated on or about the date hereof and made between the Bank and Northern Powergrid (Northeast) Limited (the " Borrower "), the Bank has agreed to establish in favour of the Borrower a credit in an amount of GBP 120,000,000 (one hundred and twenty million pounds sterling);


(B)	The obligations of the Bank under the Finance Contract are conditional upon the prior execution and delivery of security for the performance by the Borrower of its obligations under the Finance Contract. The execution and delivery by the Guarantor of this Guarantee is being made in satisfaction of such condition;


(C)	Execution of this Guarantee by the Guarantor has been duly authorised by a resolution of its Board of Directors (Annex I) and it has been duly certified in the form set out in Annex II that the issue of this Guarantee is within the corporate powers of the Guarantor and will materially benefit the Guarantor; and


(D)	In this Guarantee:


(a)	references to Articles, Recitals, Schedules and Annexes are, save if explicitly stipulated otherwise, references respectively to articles of, and recitals, schedules and annexes to, this Guarantee;


(b)	unless the context otherwise requires, words denoting the singular include the plural and vice versa;


(c)	a reference (i) to an amendment or to an agreement being amended includes a supplement, variation, assignment, novation, restatement or re-enactment, and (ii) to an agreement shall be construed as a reference to such agreement as it may be amended, supplemented or restated from time to time;


(d)	the headings are inserted for convenience of reference only and shall not affect the interpretation of this Guarantee;


(e)	any reference to "law" means any law (including, any common or customary law) and any treaty, constitution, statute, legislation, decree, normative act, rule, regulation, judgement, order, writ, injunction, determination, award or other legislative or administrative measure or judicial or arbitral decision in any jurisdiction which has the force of law;


(f)	any reference to a provision of law, is a reference to that provision as from time to time amended or re-enacted;


(g)	a reference to a "person" includes any person, natural or juridical entity, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having separate legal personality) or two or more of the foregoing and references to a "person" include its successors in title, permitted transferees and permitted assigns;


(h)	a Default is "continuing" if it has not been remedied or waived in writing by the Bank; and


(i)	"including" and "include" shall be deemed to be followed by "without limitation" where not so followed.

NOW THEREFORE it is hereby agreed as follows:

ARTICLE 1

Finance Contract


1.01	The Guarantor acknowledges notice of the provisions of the Finance Contract, an original of which has been delivered to it, and confirms its acceptance of the provisions thereof. Unless otherwise defined herein, capitalised terms used herein and defined in the Finance Contract shall have the same meaning where used herein and in addition:

" Excluded Subsidiary " means any Subsidiary of the Guarantor (other than (a) the Borrower; (b) Northern Powergrid (Yorkshire) plc; or (c) any Subsidiary of the Borrower or Northern Powergrid (Yorkshire) plc) which satisfies each of the following conditions:


(a)	it is either a single purpose company whose principal assets and business are constituted by the ownership, acquisition, development, design, engineering, procurement, construction, servicing, management and/or operation of an asset or it is a member of the Gas Sub-Group;


(b)	none of its indebtedness is subject to any recourse whatsoever to any member of the Guarantor Group (other than (i) such Subsidiary or another Excluded Subsidiary; or (ii) in respect of the shares (including any ancillary rights, such as dividends) held by any member of the Guarantor Group in such Excluded Subsidiary); and

(c)

until otherwise notified by the Guarantor to the Bank in writing, it has been designated as such by the Guarantor by written notice delivered to the Bank with a copy of (i) the then current corporate structure chart of the Gas Sub-Group in which the relevant Subsidiary is identified (if applicable) and (ii) the most recently available audited financial statements of the relevant Subsidiary (which shall include details of net debt of such Subsidiary) and a confirmation from the Guarantor that there has been no material adverse change since the date of such financial statements.

" Gas Sub-Group " means Northern Powergrid Gas Limited and any of its Subsidiaries.

" Gas Sub-Group Equity Subscription " means, in relation to each member of the Gas Sub-Group, the aggregate amount paid up after the date of this Guarantee by all Non-Gas Entities by way of subscription for share capital in such member of the Gas Sub-Group.

" Guaranteed Sum " has the meaning given to it in Article 2.01.

" Liabilities " and " Liability " have the meaning given to them in Article 2.01.

" Non-Gas Entity " means any member of the Guarantor Group that is not a member of the Gas Sub-Group.

" Project Finance Borrowings " means any future indebtedness incurred to finance or refinance the ownership, acquisition, development, design, engineering, procurement, construction, servicing, management and/or operation of an asset or assets by a member of the Guarantor Group which is an Excluded Subsidiary.

ARTICLE 2

Guarantee

2.01

In consideration of the credit established by the Bank under the Finance Contract, the Guarantor hereby irrevocably and unconditionally guarantees to the Bank the due and punctual payment and performance of all present and future obligations and liabilities of the Borrower (whether solely or jointly with one or more persons and whether as principal or as surety or in some other capacity) to the Bank under the Finance Contract (collectively, the " Liabilities ", and each, a " Liability ") and the payment of all Guaranteed Sums in accordance with the Finance Contract. The Guarantor undertakes that, if the Borrower should fail to pay any Guaranteed Sum to the Bank in accordance with the Finance Contract, whether upon the normal due date, upon acceleration or otherwise, the Guarantor shall unconditionally pay the sum in question to the Bank on demand as if the Guarantor were the principal obligor, in the currency specified in the Finance Contract and to the account specified in the demand.

For the purposes of this Guarantee, a " Guaranteed Sum " means any and all principal, interest, commission, liquidated damages, charge, indemnity, expense or other sum which may from time to time become due by the Borrower to the Bank under or pursuant to the Finance Contract and any other sum due from time to time by the Borrower in connection with any advance or credit extended or to be extended pursuant to the Finance Contract (in each case, whether actual or contingent, whether owed jointly or severally and whether owed as principal or surety or in any other capacity and references to the Guaranteed Sum includes references to any part of it).

The Guarantor further agrees and undertakes to pay interest to the Bank at the rate and on the terms specified in Article 3.02 ( Interest on overdue sums ) of the Finance Contract for payment of overdue sums on all sums demanded under this Guarantee (before and after any judgement) from the date of the Bank's demand until the date of receipt of such sum by the Bank, provided that there shall be no double counting with the Finance Contract.


2.02	The obligations of the Guarantor hereunder are those of a primary obligor and not merely those of a surety. Neither the obligations of the Guarantor under this Guarantee nor the rights, powers or remedies conferred upon the Bank in this Guarantee or by law shall be impaired, discharged or otherwise affected by reason of:


(a)	any illegality, invalidity, ineffectiveness or unenforceability in or of the terms of the Finance Contract or of any other security for the Liabilities;


(b)	any disability, incapacity or lack of power, authority or legal personality or change in status or constitution of the Borrower, the Bank or any other person;

(c)

any winding-up, dissolution, administration, re-organisation, liquidation, insolvency or other similar procedure in respect of the Borrower or any other person or any change in the status, function, control or ownership of the Borrower or of any other person or the claiming, proving for, accepting or transferring any payment in respect of the Guaranteed Sum in any winding-up, dissolution, administration, re-organisation, liquidation, insolvency or composition of the Borrower or any other person or abstaining from so claiming, proving for, accepting or transferring;


(d)	any time or other indulgence agreed or granted by the Bank or any arrangement entered into or composition accepted by the Bank, varying the rights of the Bank under the Finance Contract or any security arrangement;


(e)	any release of the Borrower or any other person under the terms of any composition or arrangement with any creditor of any member of the Group;


(f)	any forbearance or delay on the part of the Bank in asserting any of its rights against the Borrower under the Finance Contract;


(g)	any other guarantee or Security Interest which the Bank now has or may hereafter acquire with respect to the Borrower's or any other person’s obligations under the Finance Contract or any related agreement;

(h)

any amendment to, or any variation, waiver, assignment, novation, supplement, extension, restatement, replacement or release of (in each case, however fundamental and whether or not more onerous), the Finance Contract or any other document or security (including, without limitation, any change in the purpose, time, manner or place of payment, any extension of or any increase in any facility or the addition of any new facility under the Finance Contract or other document or security), the Guaranteed Sums or the Liabilities or any of them or any Security Interest (or of any person thereunder) held by the Bank in respect thereof;

(i)

the taking, acceptance, variation, compromise, exchange or renewal of any Security Interest or any total or partial failure to take or perfect any security proposed to be taken in respect of any Guaranteed Sums or Liabilities or any total or partial failure to realise the value of, or any surrender, release, discharge, exchange or substitution of, any Security Interest held by the Bank in respect of any Guaranteed Sum or Liabilities or any non-presentation or non-observance of any formality or other requirement in respect of any instrument; or


(j)	any other act, event, omission or circumstance, which, but for this Article 2.02, might otherwise discharge, impair or otherwise affect any of the obligations of the Guarantor contained in this Guarantee or any of the rights, powers or remedies conferred upon the Bank by this Guarantee or by law,

it being the intent of the Guarantor that its liability to the Bank under this Guarantee shall be absolute and unconditional under any and all circumstances and shall not be discharged except by payment in full of the Guaranteed Sums and the satisfaction of the Liabilities.

The payment or performance of any of the Liabilities or Guaranteed Sums shall continue to be effective or be reinstated, as the case may be, if at any time any payment or performance of the Liabilities or the Guaranteed Sums is rescinded or must otherwise be returned by the Bank upon the insolvency, bankruptcy or reorganization of the Borrower or of the Guarantor or otherwise, all as though such payment or performance had not been made.

2.03

It is the intent of this Guarantee that the Bank be fully indemnified for the complete payment and performance of the Liabilities and the Guaranteed Sums. As an independent, continuing and primary obligation additional to and separate from those set out in Articles 2.01 and 2.02, and without prejudice to the validity or enforceability of those obligations, the Guarantor unconditionally and irrevocably undertakes (as a primary obligor and not merely as surety) that, if any Guaranteed Sum should not be recoverable from the Guarantor under Article 2.01 for whatsoever reason (including as a result of the Finance Contract or any of the Guaranteed Sums being or becoming void, voidable, unenforceable or ineffective as against the Borrower for any reason whatsoever), and whether or not the reason may have been known to the Bank or any other person at any material time, the Guarantor shall, upon first written demand by the Bank, and as if the Guarantor were a sole and independent obligor, fully indemnify, compensate and hold harmless the Bank by way of a full indemnity for all costs, losses,

damages, expenses, claims or liabilities resulting from: (a) the failure of the Borrower to duly and punctually make payment of any Guaranteed Sum in the amount and currency provided for by or pursuant to the Finance Contract, whether upon the normal due date, upon acceleration or otherwise; (b) any Liability being or becoming void, voidable, unenforceable or ineffective as against the Borrower for any reason whatsoever, whether or not known to the Bank, the amount of such loss being the amount which the Bank would have been entitled to recover from the Borrower but for such Liability being or becoming void, voidable, unenforceable or ineffective as against the Borrower; or (c) any act or omission of the Bank in connection with the enforcement of its rights or remedies against the Borrower or the Guarantor.

2.04

This Guarantee is a continuing security and the obligations of the Guarantor under this Guarantee shall constitute and be continuing obligations notwithstanding any settlement of account or other matter or thing whatsoever, and shall endure until all Guaranteed Sums have been fully paid or discharged and shall not be released or discharged by any intermediate payment or settlement of the Guaranteed Sums or of any of them or by any intermediate satisfaction of all or any of the obligations of the Borrower in relation to any of the Liabilities. This Guarantee shall continue in full force and effect until final payment in full of all amounts owing by the Borrower in respect of the Liabilities and total satisfaction of all the Borrower's actual and contingent obligations in relation to the Liabilities. No payment or discharge which may be avoided under any enactment relating to insolvency, bankruptcy, voluntary or involuntary dissolution, winding up, merger or amalgamation of the Borrower, the Guarantor or any other person, no payment or discharge made or given which is subsequently avoided and no release, return, cancellation or discharge of this Guarantee given or made or any other agreement reached between the Bank and the Guarantor on the faith of any payment or discharge aforesaid shall constitute discharge of the Guarantor under this Guarantee or prejudice or affect the Bank's right to recover from the Guarantor to the full extent of this Guarantee, and any such discharge, release, return, cancellation or agreement shall be deemed always to have been void. This is a guarantee of payment not a deficiency guarantee. The originals of this Guarantee which are in the possession of the Bank shall remain the property of the Bank after any release, cancellation or discharge of this Guarantee.

2.05

Any money received, recovered or realised in connection with this Guarantee (including the proceeds of any conversion of currency) may be placed by the Bank in its discretion to the credit of a suspense account, with a view to preserving the right of the Bank to prove for the whole of the claims against the Borrower or may be applied by the Bank in or towards satisfaction of such of the Guaranteed Sums as the Bank in its absolute discretion may from time to time determine; provided, however, that if any such money, being freely disposable by the Bank, is not applied towards satisfaction of the Guaranteed Sums for which payment of the money was made hereunder, the Guarantor's responsibility in respect of the Guaranteed Sums shall be discharged to the extent of such payment.


2.06	The Guarantor agrees that until all the Guaranteed Sums have been irrevocably fully paid or discharged and so long as the Borrower is under any actual or contingent obligations in respect of the Liabilities, the Guarantor shall:


(a)	not exercise any rights which it may at any time have by reason of performance by it of its obligations under this Guarantee or by reason of any amount being payable, or liability arising, under this Guarantee to:


(i)	be indemnified by the Borrower or to receive any collateral from the Borrower; and/or


(ii)	claim any contribution from any other guarantor of any of the Liabilities or Guaranteed Sums; and/or


(iii)	take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Bank in respect of any of the Liabilities or Guaranteed Sums or of any other security taken by the Bank pursuant to, or in connection with, any of the Liabilities or Guaranteed Sums; and/or


(iv)	bring any legal or other proceedings for an order requiring the Borrower to make any payment, or perform any obligation, in respect of which the Guarantor has given a guarantee, undertaking or indemnity pursuant to this Guarantee; and/or


(v)	exercise any right of set-off against the Borrower; and/or


(vi)	claim or prove as a creditor of the Borrower in competition with the Bank;


(b)	not seek to enforce any obligation owed to it by the Borrower which arises by virtue of the discharge by the Guarantor of its obligations hereunder;


(c)	pay to the Bank all dividends or distributions, in bankruptcy, insolvency, receivership, liquidation, winding up or otherwise received by it from or for the account of the Borrower in respect of any obligation referred to in paragraph (b) above; the Bank shall apply such sums to reduce the outstanding Guaranteed Sums in such sequence as it may decide;


(d)	have no right of subrogation to the rights of the Bank under the Finance Contract or any related security arrangement;

(e)

comply with the terms of and do all that is necessary to maintain in full force and effect all authorisations, approvals, licences and consents required in or by the laws and regulations of England and Wales to enable the Guarantor lawfully to enter into and perform its obligations under this Guarantee and to ensure the legality, validity, enforceability and admissibility in evidence in England of this Guarantee;


(f)	not take any action which would cause any of the representations made in Article 7 below to be untrue at any time during the continuation of this Guarantee; and


(g)	notify the Bank of the occurrence of any event which results in or may reasonably be expected to result in any of the representations made in Article 7 below being untrue when made or when deemed to be repeated.

2.07

If the Guarantor receives any benefit, payment or distribution in relation to any of the rights set out in Article 2.06(a)(i) to (vi), the Guarantor shall hold on trust for the Bank that benefit, payment or distribution to the extent necessary to enable all amounts which may be or become payable to the Bank by the Borrower and/or the Guarantor under or in connection with the Finance Contract and/or this Guarantee to be repaid in full and shall promptly pay or transfer the same to the Bank as the Bank may direct.

2.08

The Guarantor acknowledges: (i) that it has entered into this Guarantee on the basis of its own assessment of the Borrower and any security provided, and (ii) that it has not been induced to enter into this Guarantee by any representation made by the Bank. The Bank is not obliged to report to the Guarantor on the financial position of the Borrower or of any other guarantor or on any security provided. The Bank shall have no liability for granting or disbursing the Loan, for cancelling or suspending, or not cancelling or suspending the Credit or for demanding or not demanding prepayment under the Finance Contract.


2.09	The obligations of the Guarantor contained in this Guarantee shall be in addition to, independent of and in no way prejudiced by any other security or any other guarantee

that the Bank holds or may at any time hold in relation to any of the Liabilities or the Guaranteed Sums.

2.10

The Bank may set off any matured obligation due from the Guarantor under this Guarantee against any obligation (whether or not matured) owed by the Bank to the Guarantor regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Bank may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off. If either obligation is unliquidated or unascertained, the Bank may set off in an amount estimated by it in good faith to be the amount of that obligation.

ARTICLE 3

Enforcement of Guarantee


3.01	A certificate of the Bank as to any default by the Borrower in the payment of any Guaranteed Sum shall be conclusive against the Guarantor save in the event of a proven error.


3.02	The Guarantor undertakes to pay all sums due hereunder in full, free of set‑off or counterclaim. This Guarantee may be enforced by the Bank upon provision of a statement of the reason for the demand.


3.03	The Bank shall not be obliged before exercising any of the rights, powers or remedies conferred upon it in respect of the Guarantor by this Guarantee or by law to:


(a)	take any action or obtain judgement in any court against the Borrower;


(b)	make demand of the Borrower;


(c)	make or file any claim or proof in a winding-up or dissolution of the Borrower;


(d)	enforce or seek to enforce any security taken in respect of any of the obligations of the Borrower in respect of the Guaranteed Sums or Liabilities; or


(e)	have recourse to any other guarantee,

and the Guarantor waives any right it may have of first requiring the Bank (or any trustee or agent on its behalf) to proceed against or enforce or exhaust any other rights or security or claim payment from any person before claiming from the Guarantor under this Guarantee. This waiver applies irrespective of any law or any provision of the Finance Contract to the contrary.

3.04

Where the Bank makes any demand hereunder, the Guarantor may pay to the Bank all outstanding Guaranteed Sums, including sums arising under Article 3.02 ( Interest on overdue sums ) of the Finance Contract, in settlement of its obligations hereunder. If the Guarantor makes such payment, the Bank shall, upon the request and at the expense of the Guarantor, assign to the Guarantor the Bank's rights under the Finance Contract and under any security therefor.

ARTICLE 4

Information


4.01	The Guarantor shall deliver to the Bank:


(a)	as soon as they become available but in any event within 150 days after the end of each of its financial years, its audited consolidated financial statements for that financial year;


(b)	as soon as they become available but in any event within 90 days after each Calculation Date, its consolidated management accounts showing its financial performance for the financial year-to-date on such Calculation Date; and


(c)	from time to time such further information as the Bank may reasonably require as to such Guarantor's financial situation.

The Guarantor shall inform the Bank without delay of any material change in its constitutional documents.

ARTICLE 5

Amendment to the Finance Contract


5.01	Subject to Article 5.02, the Bank may agree to any amendment to the Finance Contract which does not increase the amounts payable by the Borrower thereunder. The Bank shall notify the Guarantor of each such amendment.


5.02	The Bank may grant the Borrower, in respect of the due date of payment of any Guaranteed Sum, an extension of time of up to three months. Any such extension of time shall be notified to the Guarantor.


5.03	The Bank may not amend or vary the terms of the Finance Contract save as provided in Articles 5.01 or 5.02 or with the prior written consent of the Guarantor, which consent shall not be unreasonably withheld or delayed.

ARTICLE 6

Guarantor undertakings


6.01	The Guarantor:

shall not, without the Bank’s prior written consent, (i) declare, make or pay, or pay interest on any unpaid amount of, any dividend, charge, fee or other distribution (whether in cash or kind) on or in respect of its shares or share capital (or any class of its share capital) or (ii) repay or distribute any share premium account or redeem, repurchase, retire or repay any of its share capital; in each case, unless each of the following conditions is met:


(i)	all payments then due under the Finance Contract have been made;


(ii)	no Default or Compulsory Prepayment Event has occurred and is continuing unremedied or unwaived; and


(iii)	the Guarantor’s ratio of Guarantor Consolidated Senior Total Net Debt to Aggregate RAV does not exceed 0.75:1.


6.02	The Guarantor shall not, and shall ensure that no Subsidiary of the Guarantor will, incur any Financial Indebtedness, except for Guarantor Permitted Financial Indebtedness, unless the following conditions are satisfied:


(a)	all payments then due under the Finance Contract and this Guarantee have been made;


(b)	no Default or Compulsory Prepayment Event has occurred and is continuing unremedied or unwaived;


(c)	the Guarantor’s ratio of Guarantor Consolidated Senior Total Net Debt to Aggregate RAV does not exceed 0.75:1; and


(d)	the Guarantor Interest Cover is 2.1:1 or more.


6.03	The Guarantor shall ensure that, at all times:


(a)	the Guarantor Interest Cover for each Relevant Period shall not be less than 2.0:1; and


(b)	the Guarantor’s ratio of Guarantor Consolidated Senior Total Net Debt to Aggregate RAV for each Relevant Period shall not exceed 0.80:1.


6.04	The value of the terms referred to in Article 6 shall be calculated and interpreted in accordance with IFRS (consistently applied) and, in each case, shall be expressed in GBP and shall be calculated using the financial statements of the Guarantor most recently delivered to the Bank.

6.05

The Guarantor shall procure that neither the Borrower and its Subsidiaries, nor Northern Powergrid (Yorkshire) plc and its Subsidiaries shall provide or permit to subsist any form of financial support (other than subscribing to new share capital) to a member of the Gas Sub-Group which is or becomes an Excluded Subsidiary, whether by way of guarantee, letter of credit, “keep well” agreement, shareholder loan, inter-company loan or otherwise


6.06	For the purposes of this Article 6:

" Aggregate RAV " means, at any time, the aggregate of the Northeast RAV and of Yorkshire RAV at such time.

" Consolidated EBIT " means, for each Relevant Period, the profit shown in the consolidated financial statements of the Guarantor Group for the relevant period on the line entitled "operating profit":


(i)	before taking into account any items treated as exceptional items;


(ii)	after deducting the amount of any profit of any member of the Guarantor Group which is attributable to minority interests;


(iii)	after adding dividends received from associates and joint ventures to the extent not included in operating profit;


(iv)	before taking into account any realised or unrealised exchange gains and losses including those arising on translation of currency debt;


(v)	before taking into account any gain or loss arising from an upward or downward revaluation of any asset;

in each case, to the extent added, deducted or taken into account, as the case may be, for the purposes of determining Guarantor Group profit before tax (and without double counting).

" Guarantor Consolidated Net Finance Charges " means, for any Relevant Period, the aggregate amount of interest paid on Guarantor Consolidated Senior Total Net Debt (net of interest received and after taking account of payments made and amounts received under any derivatives related to such Guarantor Consolidated Senior Total Net Debt) included in the consolidated cash flow statement for the Guarantor Group in respect of that Relevant Period.

" Guarantor Consolidated Senior Total Net Debt " means, at any time, the aggregate amount (without double counting) of all obligations of the Guarantor Group for or in

respect of Financial Indebtedness (other than between members of the Guarantor Group) which rank at least pari passu with the Loan and with the Guarantor’s obligations hereunder but:


(i)	deducting an amount equal to A minus B, where:

A means the aggregate amount of all obligations of any Excluded Subsidiary in respect of Project Finance Borrowings; and

B means, in the case of Project Finance Borrowings of each member of the Gas Sub-Group, the Gas Sub Group Equity Subscription made in relation to such member of the Gas Sub-Group (or zero if, in relation to such member, the resulting figure would be negative),

provided that the maximum amount deducted pursuant to this paragraph (i) shall not exceed an amount equal to C plus D, where:

C means the greater of: (a) GBP 100,000,000 (one hundred million pounds sterling) or its equivalent in any other currency or currencies; and (b) the amount equal to 5% of Aggregate RAV; and

D means any Project Finance Borrowings incurred in excess of the amount determined as “C” which have been approved by the Bank in writing (such approval not to be unreasonably withheld);


(ii)	deducting the aggregate amount of all obligations of any member of the Guarantor Group in respect of Financial Indebtedness to the extent that the repayment or redemption of such Financial Indebtedness is provided for by the purchase by a member of the Guarantor Group of a GIC;


(iii)	deducting the aggregate amount of freely available cash and Cash Equivalents held by any member of the Guarantor Group at such time;

(iv)

deducting the interest component of Financial Indebtedness in existence on the date of this Guarantee which interest has accrued but not as at the time when the Guarantor Consolidated Senior Total Net Debt is being calculated fallen due for payment or been paid, provided that no material change is made to the basis upon which such interest accrues after the date of this Guarantee and to the extent that such interest component does not exceed on an aggregate basis GBP 55,000,000 (fifty-five million pounds sterling) or its equivalent in any other currency or currencies; and

(v)

deducting any residual non-cash fair value purchase accounting adjustments made on the acquisition of the Yorkshire Power Group Limited in 2001, to the extent that any such residual non-cash fair value purchase accounting adjustments does not exceed the amount of GBP 44,500,000 (forty-four million five hundred thousand pounds sterling), calculated on an aggregate basis, or its equivalent in any other currency or currencies,

and so that no amount shall be excluded more than once.

" Guarantor Interest Cover " means, in respect of any Relevant Period, the ratio of Guarantor Consolidated EBIT for that Relevant Period to Guarantor Consolidated Net Finance Charges for that Relevant Period.

" Guarantor Original Financial Statements " means the audited consolidated financial statements of the Guarantor Group for the financial year ended 31 December 2014.

" Guarantor Permitted Financial Indebtedness " means:


(a)	Financial Indebtedness owed by the Guarantor to the Bank;


(b)	Financial Indebtedness of any member of the Guarantor Group outstanding on 30 June 2015 and not otherwise referred to in this definition of "Guarantor Permitted Financial Indebtedness";


(c)	Financial Indebtedness of the Borrower pursuant to the Revolving Facility Agreement (as defined in the Finance Contract);


(d)	Financial Indebtedness of the Borrower pursuant to the Overdraft Agreement (as defined in the Finance Contract);


(e)	Financial Indebtedness which is subordinated to the Loan and to the Guarantor’s obligations hereunder on terms satisfactory in form and substance to the Bank;


(f)	Financial Indebtedness owed by one member of the Guarantor Group to another member of the Guarantor Group;


(g)	Financial Indebtedness of the Borrower from time to time which does not exceed an aggregate amount of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies;


(h)	Financial Indebtedness of Yorkshire from time to time which does not exceed an aggregate amount of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies;


(i)	Financial Indebtedness owed by the Borrower to the Bank; and


(j)	Financial Indebtedness owed by Yorkshire to the Bank.

" Northeast RAV " means the Borrower’s RAV, as defined in the Finance Contract.

" Yorkshire " means Northern Powergrid (Yorkshire) plc.

“ Yorkshire Finance Contract” means the agreement dated on or about the date hereof and made between the Bank and Yorkshire pursuant to which the Bank agreed to establish in favour of Yorkshire a credit in an amount of GBP 130,000,000 (one hundred and thirty million pounds sterling).

" Yorkshire RAV " means Yorkshire’s RAV, as defined in the Yorkshire Finance Contract.

ARTICLE 7

Representations and Warranties


7.01	The Guarantor represents and warrants to the Bank that:


(a)	it is duly incorporated and validly existing under the laws of England and it has the power to carry on its business as it is now being conducted and to own its property and other assets;


(b)	each of its Subsidiaries is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and it has the power to carry on its business as it is now being conducted and to own its property and other assets;


(c)	it has the power to execute, deliver and perform its obligations under this Guarantee and all necessary corporate, shareholder and other action has been taken to authorise the execution, delivery and performance of the same by it;


(d)	the entering into of this Guarantee is materially beneficial to it;


(e)	this Guarantee constitutes its legally valid, binding and enforceable obligations;


(f)	the execution and delivery of, the performance of its obligations under and compliance with the provisions of this Guarantee do not and will not:


(i)	contravene or conflict with any applicable law, statute, rule or regulation, or any judgement, decree or permit to which it is subject;


(ii)	contravene or conflict with any material agreement or other instrument binding upon it or its Subsidiaries;


(iii)	contravene or conflict with any provision of its constitutional documents; or


(iv)	result in the imposition of increased financial charges or requirements as to security under any other contract or instrument to which it is a party;


(g)	the choice of English law as the governing law of this Guarantee will be recognised and enforced in its jurisdiction of incorporation and any judgement obtained in England in relation to this Guarantee will be recognised and enforced in its jurisdiction of incorporation;

(h)

under the laws of its jurisdiction of incorporation it is not necessary that any stamp, registration or similar tax be paid on or in relation to this Guarantee or the transactions contemplated in this Guarantee and it is not necessary to ensure the legality, validity, enforceability or admissibility in evidence of this Guarantee that this Guarantee or any other instrument be notarised, filed, recorded, registered or enrolled with any court or other authority in that jurisdiction;


(i)	it will not be required to make any deduction or withholding from any payment it may make under this Guarantee;


(j)	it is not unable to pay its debts as they fall due, including within the meaning of the Insolvency Act 1986, and the entering into of this Guarantee and the performance of its obligations hereunder do not and will not cause it to be or to be deemed to be unable to pay its debts as they fall due;

(k)

as of the date of this Guarantee, it has not taken any corporate action nor have any other steps been taken or legal proceedings been started or threatened against it for its winding-up, dissolution, administration or reorganisation or any analogous procedure or step or for the appointment of a liquidator, receiver, administrator, administrative receiver, trustee, compulsory manager or similar officer of it or of any or all of its assets or revenues;

(l)

its most recent consolidated audited accounts have been prepared on a basis consistent with previous years and in accordance with IFRS (consistently applied) and have been approved by its auditors as representing a true and fair view of the consolidated financial position and results of its operations and those of its Subsidiaries for that financial year and accurately disclose or reserve against all its and its Subsidiaries’ liabilities (actual or contingent) at the time when such financial statements were produced and no material adverse change in the business or the consolidated financial condition of the Guarantor and its Subsidiaries has occurred since the date of such accounts;


(m)	there has been no Material Adverse Change since the date of this Guarantee;


(n)	no event or circumstance which constitutes an event of default under Article 10.01 of the Finance Contract or an Acceptable Security Event has occurred and is continuing unremedied or unwaived;


(o)	no event or circumstance (other than those referred to in Article 7.01(n) above) is outstanding which constitutes a default under any agreement or instrument which is binding on it or any of its Subsidiaries or to which its (or any of its Subsidiaries') assets are subject which might reasonably be expected to result in a Material Adverse Change;

(p)

no litigation, arbitration, administrative proceedings or investigation is current or pending or to the best of its knowledge is threatened before any court, arbitral body or agency which has resulted or if adversely determined is reasonably likely to result in a Material Adverse Change, nor is there subsisting against it or any of its Subsidiaries any unsatisfied judgement or award with a value in aggregate in excess of GBP 2,000,000 (two million pounds sterling) or its equivalent in any other currency or currencies;


(q)	it has obtained all necessary Authorisations in connection with this Guarantee, all such Authorisations are in full force and effect and admissible in evidence and there has been no default in the observance of the conditions or restrictions (if any) imposed in, or in connection with, any such Authorisations;

(r)

as at the date on which this representation is made or repeated, it has obtained all material Authorisations in connection with the conduct of its business, trade and ordinary activities, all such Authorisations are in full force and effect and admissible in evidence and there has been no default in the observance of the conditions or restrictions (if any) imposed in, or in connection with, any such Authorisations;


(s)	it has complied:

(i) with all Environmental Laws; and

(ii) in all material respects with all laws (other than Environmental Laws),

to which it is subject;


(t)	it is the sole legal and beneficial owner and has good title to the assets the ownership of which is reflected in its financial statements referred to under Article 7.01(l) and no Security Interest exists over its assets or over those of its Subsidiaries save as follows:


(i)	any netting or set-off arrangement entered into by the Guarantor or any member of the Guarantor Group in the ordinary course of its banking arrangements for the purpose of netting debit and credit balances;


(ii)	any lien arising by operation of law and in the ordinary course of trading;


(iii)	any Security over or affecting (or any Quasi-Security affecting) any asset acquired by the Guarantor or any member of the Guarantor Group after the date of this Guarantee if:


a.	the Security or Quasi-Security was not created in contemplation of the acquisition of that asset by the Guarantor or any member of the Guarantor Group;


b.	the principal amount secured has not been increased in contemplation of, or since the acquisition of that asset by the Guarantor or any member of the Guarantor Group; and


c.	the Security or Quasi-Security is removed or discharged within 3 (three) months of the date of acquisition of such asset; and


(iv)	any Security securing Project Finance Borrowings;


(u)	as of the date of this Guarantee, for the purposes of the Council of the European Union Regulation No. 1346/2000 on Insolvency Proceedings, its centre of main interest is situated in England and Wales;


(v)	its payment obligations under this Guarantee rank not less than pari passu in right of payment with all other present and future unsecured and unsubordinated obligations under any of its debt instruments except for obligations mandatorily preferred by law applying to companies generally;


(w)	any written factual information provided to the Bank by it or on its behalf was, as at the date it was provided or as at the date (if any) at which it is stated, true and accurate in all material respects;


(x)	it has not taken or accepted any Security Interest from the Borrower or, in relation to the Guaranteed Sums, from any third parties; and


(y)	it is not a “US. Person” and none of the payments made under this Guarantee could be deemed to constitute “US Source Withholdable Payments” as such terms are defined under FATCA.


7.02	The representations and warranties set out in Article 7.01 above shall survive the execution of this Guarantee and (with the exception of the representations in Articles 7.01(k) and (u)) are deemed repeated on each Scheduled Disbursement Date, on the date on which any Disbursement Request is submitted and each Payment Date, by reference to the facts and circumstances then prevailing.

7.03

The Guarantor acknowledges that it has made the representations and warranties contained in this Article 7 with the intention of inducing the Bank to enter into the Finance Contract and accepting this Guarantee as security for the Finance Contract and that the Bank has entered into the Finance Contract and has accepted this Guarantee as security for the Finance Contract on the basis of, and in full reliance on, each of such representations and warranties.

ARTICLE 8

Taxes, Charges and Expenses


8.01	The Guarantor shall bear its own costs of execution and implementation of this Guarantee and, without prejudice to the terms of Article 2, the Guarantor shall hold harmless and indemnify the Bank against all:


(a)	taxes and fiscal charges, legal costs and other expenses incurred by the Bank in the negotiation, execution, amendment, implementation or enforcement of this Guarantee; and


(b)	losses, charges and expenses to which the Bank may be subject or which it may properly incur under or in connection with the recovery from any person of sums expressed to be due under or pursuant to the Finance Contract,

in each case together with interest from the date such losses, charges, costs and/or expenses were incurred to the date of payment at such rates as the Bank may reasonably determine.

Furthermore the Guarantor shall make payments hereunder without withholding or deduction on account of tax or fiscal charges, provided that, if the Guarantor is obliged by law to make any such withholding or deduction, the Guarantor shall gross up the payment to the Bank so that the net sum received by the Bank is equal to the sum demanded.

ARTICLE 9

Law and Jurisdiction


9.01	Law

This Guarantee, its formation and its validity and any non-contractual obligations arising out of or in connection with this Guarantee shall be governed by and construed in all respects in accordance with English law.


9.02	Jurisdiction

The parties hereto submit to the exclusive jurisdiction of the courts of England and all disputes concerning this Guarantee (including a dispute relating to the existence, validity or termination of this Guarantee or the consequences of its nullity or any non-contractual obligation arising out of or in connection with this Guarantee) shall be submitted to such courts.

9.03 Service of Process

The Bank appoints The Securities Management Trust Limited of 8 Lothbury, London EC2 7HH to be its agent for service of process on its behalf of any writ, notice, order, judgement or other legal process in connection with this Guarantee.

ARTICLE 10

Final Clauses


10.01	Currency Conversion

The Bank may convert any money received or realised by it under or pursuant to this Guarantee which is not in the currency in which such sums are due and payable from that currency into the currency in which such sum is due at the rate published by the European Central Bank in Frankfurt, Germany for the relevant conversion, available on or shortly before conversion at any time and from time to time as the Bank shall decide, or, if such rate is not available, at the then prevailing commercial rate of exchange, as determined by the Bank.


10.02	Invalidity

If at any time any term of this Guarantee is or becomes illegal, invalid or unenforceable in any respect, or this Guarantee is or becomes ineffective in any respect, under the laws of any jurisdiction, such illegality, invalidity, unenforceability or ineffectiveness shall not affect:


(a)	the legality, validity or enforceability in that jurisdiction of any other term of this Guarantee or the effectiveness in any other respect of this Guarantee in that jurisdiction; or


(b)	the legality, validity or enforceability in other jurisdictions of that or any other term of this Guarantee or the effectiveness of this Guarantee under the laws of such other jurisdictions.


10.03	Remedies and Waivers

No failure by the Bank to exercise, or any delay by the Bank in exercising, any right or remedy under this Guarantee shall operate as a waiver thereof nor shall any single or partial exercise of any such right or remedy prevent any further or other exercise thereof or the exercise of any other such right or remedy.


10.04	Rights Cumulative

The rights and remedies provided by this Guarantee in favour of the Bank are cumulative and not exclusive of any rights or remedies provided by law.


10.05	Notices

Notices and other communications given hereunder to the Guarantor or to the Bank shall be sent by fax (which shall be deemed to have been received when transmission has been completed), registered letter or letter with recorded delivery (which, in the case of each letter, shall be deemed to have been received on the fifth business day following the date of posting), in each case addressed to the relevant party at its address set out below or at such other address as the relevant party shall have previously notified to the other parties in writing as its new address for such purpose, provided that any notice to be served on the Bank shall be effective only when actually received by the Bank, marked for the attention of the department or officer specified by the Bank for such purpose:


FOR the Bank:	100, boulevard Konrad Adenauer

L‑2950 Luxembourg

Attn: Ops EU

Fax: + 352 4379 66488


FOR the Guarantor:	Attention: Treasury (Finance Director)

Northern Powergrid Holdings Company

Lloyds Court, 78 Grey Street,

Newcastle-upon-Tyne,

Tyne and Wear, NE1 6AF

Facsimile no.: +44 0191 223 5132

10.06 Assignments and Successors

The Bank may at any time assign all or any of its rights and benefits under this Guarantee (i) in connection with any assignment or transfer of the Bank’s rights, benefits of obligations under the Finance Contract, without the consent of the Guarantor and (ii) in all other cases, with the prior written consent of the Guarantor, such consent not to be unreasonably withheld or delayed. This Guarantee shall remain in effect despite any amalgamation or merger (however effected) relating to the Bank. References to the Bank shall be deemed to include any assignee or successor in title of the Bank and any person who, under the laws of its jurisdiction of incorporation or domicile, has assumed the rights and obligations of the Bank under this Guarantee or to which under such laws the same have been transferred.

10.07 Third Party Rights

A person who is not a party to this Guarantee has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Guarantee.

10.08 Counterparts

This Guarantee may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. Each counterpart is an original, but all counterparts shall together constitute one and the same instrument. Delivery of a counterpart of this Guarantee by e-mail attachment or telecopy shall be an effective mode of delivery.


10.9	Changes in IFRS

If a material change in IFRS occurs which is detrimental to either party, the parties shall consult and will discuss in good faith any change that may be required to this Guarantee.


10.10	Recitals and Annexes

The Recitals form part of this Guarantee.

The following Annexes are attached hereto:


Annex I	Resolution of the Board of Directors of the Guarantor and authority of Signatory of the Guarantor


Annex II	Certificate of guarantee powers of the Guarantor

IN WITNESS WHEREOF this Guarantee has been signed on behalf of the Bank and executed as a deed by the Guarantor and is intended to be and is hereby delivered as a deed on the date first specified above. The parties hereto have caused this Guarantee to be executed in 3 (three) originals in the English language.



SIGNED by

EUROPEAN INVESTMENT BANK

By:	/s/ Anita Furstenberg
	Name: Anita Furstenberg

	Title: Director

By:	/s/ Joanna Kalisz
	Name: Joanna Kalisz

	Title: Legal Counsel



EXECUTED as a DEED by

NORTHERN POWERGRID HOLDINGS COMPANY


By:	/s/ John France
	Name: John France

	Title: Regulation Director



In the presence of:

By:	/s/ John Elliott
	Name: John Elliott
	Company Secretary
	Address: Lloyds Court
	78 Grey Street
	Newcastle Upon Tyne
	NEI 6AF

EXHIBIT 4.3

FI N° 84.599
Serapis N° 2015-0155

Northern Powergrid Network Investment - B

Finance Contract

between the

European Investment Bank

and

Northern Powergrid (Yorkshire) plc

Newcastle upon Tyne, 1 December 2015

Luxembourg, 2 December 2015



		Contents
ARTICLE 1 CREDIT AND DISBURSEMENT			17
	1.01	AMOUNT OF CREDIT	17
	1.02	DISBURSEMENT PROCEDURE	17
	1.03	CURRENCY OF DISBURSEMENT	19
	1.04	CONDITIONS OF DISBURSEMENT	19
	1.05	DEFERMENT OF DISBURSEMENT	20
	1.06	CANCELLATION AND SUSPENSION	20
	1.07	CANCELLATION AFTER EXPIRY OF THE CREDIT	22
	1.08	APPRAISAL FEE	22
	1.09	SUMS DUE UNDER ARTICLE 1	22
ARTICLE 2 THE LOAN			22
	2.01	AMOUNT OF LOAN	22
	2.02	CURRENCY OF REPAYMENT, INTEREST AND OTHER CHARGES	22
	2.03	CONFIRMATION BY THE BANK	22
ARTICLE 3 INTEREST			22
	3.01	RATE OF INTEREST	22
	3.02	INTEREST ON OVERDUE SUMS	23
	3.03	MARKET DISRUPTION EVENT	23
ARTICLE 4 REPAYMENT			24
	4.01	NORMAL REPAYMENT	24
	4.02	VOLUNTARY PREPAYMENT	24
	4.03	COMPULSORY PREPAYMENT	25
	4.04	GENERAL	27
ARTICLE 5 PAYMENTS			27
	5.01	DAY COUNT CONVENTION	27
	5.02	TIME AND PLACE OF PAYMENT	27
	5.03	SET-OFF	28
	5.04	DISRUPTION TO PAYMENT SYSTEMS	28
	5.05	APPLICATION OF SUMS RECEIVED	28
ARTICLE 6 BORROWER UNDERTAKINGS AND REPRESENTATIONS			30
	6.01	USE OF LOAN AND AVAILABILITY OF OTHER FUNDS	30
	6.02	COMPLETION OF PROJECT	30
	6.03	INCREASED COST OF PROJECT	30
	6.04	PROCUREMENT PROCEDURE	30
	6.05	CONTINUING PROJECT UNDERTAKINGS	30
	6.06	ENVIRONMENTAL IMPACT ASSESSMENTS, EU HABITATS AND BIRDS DIRECTIVES	32
	6.07	DISPOSAL OF ASSETS	32
	6.08	COMPLIANCE WITH LAWS	32
	6.09	CHANGE IN BUSINESS	34
	6.10	MERGER	34
	6.11	ARMS’ LENGTH DEALINGS	34
	6.12	CROSS DEFAULT	34
	6.13	RESTRICTIONS ON INCURRING FINANCIAL INDEBTEDNESS	34
	6.14	FINANCIAL COVENANTS	34
	6.15	GENERAL REPRESENTATIONS AND WARRANTIES	37
ARTICLE 7 SECURITY			38



	7.01	SECURITY	38
	7.02	NEGATIVE PLEDGE	39
	7.03	PARI PASSU RANKING	39
	7.04	MOST FAVOURED LENDER	40
ARTICLE 8 INFORMATION AND VISITS			40
	8.01	INFORMATION CONCERNING THE PROJECT	40
	8.02	INFORMATION CONCERNING THE BORROWER	41
	8.03	VISITS BY THE BANK	42
ARTICLE 9 CHARGES AND EXPENSES			44
	9.01	TAXES, DUTIES AND FEES	44
	9.02	OTHER CHARGES	44
	9.03	CURRENCY INDEMNITY	44
	9.04	INCREASED COSTS AND INDEMNITY	44
ARTICLE 10 EVENTS OF DEFAULT			46
	10.01	RIGHT TO DEMAND REPAYMENT	46
	10.02	OTHER RIGHTS AT LAW	49
	10.03	INDEMNITY	49
	10.04	NON-WAIVER	49
ARTICLE 11 LAW AND JURISDICTION			49
	11.01	GOVERNING LAW	49
	11.02	JURISDICTION	49
	11.03	EVIDENCE OF SUMS DUE	49
ARTICLE 12 FINAL CLAUSES			50
	12.01	NOTICES TO EITHER PARTY	50
	12.02	FORM OF NOTICE	50
	12.03	CHANGES TO PARTIES	50
	12.04	CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999	50
	12.05	EUROPEAN MONETARY UNION, GBP OBLIGATIONS AND IFRS	50
	12.06	ENTIRE AGREEMENT	51
	12.07	INVALIDITY	52
	12.08	AMENDMENTS	52
	12.09	RECITALS, SCHEDULES AND ANNEXES	52
	12.10	COUNTERPARTS	53
SCHEDULE A			54
SCHEDULE B			60
SCHEDULE C			62
SCHEDULE D			65

THIS CONTRACT IS MADE BETWEEN:



The European Investment Bank having its seat at 100 blvd Konrad Adenauer, Luxembourg, L-2950 Luxembourg, represented by: Anita Furstenberg, Director and Joanna Kalisz, Legal Counsel	(the " Bank ")

of the first part, and



Northern Powergrid (Yorkshire) plc (company number 04112320), a limited company incorporated in England and having its registered office at Lloyds Court, 78 Grey Street, Newcastle upon Tyne, NE1 6AF, represented by John France, Regulation Director	(the " Borrower ")

of the second part.

WHEREAS:

(1)

The Borrower has stated that it is undertaking a project during the period from January 2015 to December 2016 consisting of certain schemes aimed at refurbishing, upgrading and reinforcing the distribution electricity network of the Borrower in Yorkshire, as more particularly described in the technical description (the " Technical Description ") set out in Schedule A (collectively, the " Project ").


(2)	The total cost of the Project is estimated by the Bank to be GBP 445,351,000 (four hundred and forty-five million three hundred and fifty one thousand pounds sterling) and the Borrower has stated that it intends to finance the Project as follows:



Source	Amount (M GBP)
Own funds	315.351
Credit from the Bank	130
TOTAL	445.351


(3)	In order to fulfil the financing plan set out in Recital (2), the Borrower has requested from the Bank a credit of GBP 130,000,000 (one hundred and thirty million pounds sterling).

(4)

The Bank, considering that the financing of the Project falls within the scope of its functions, and having regard to the statements and facts cited in these Recitals, has decided to give effect to the Borrower's request by providing to it a credit in an amount of GBP 130,000,000 (one hundred and thirty million pounds sterling) under this Finance Contract (the " Contract "); provided that the amount of the Bank loan shall not, in any case, exceed 50% (fifty per cent) of the total cost of the Project set out in Recital (2).

(5)

The Board of Directors of the Borrower has authorised the borrowing of the sum of GBP 130,000,000 (one hundred and thirty million pounds sterling) represented by this credit on the terms and conditions set out in this Contract by a resolution in the terms set out in Annex I and it has been duly certified in the form set out in Annex II that such borrowing is within the corporate powers of the Borrower and does not exceed any borrowing or similar limit binding upon the Borrower.

(6)


(7)	The Statute of the Bank provides that the Bank shall ensure that its funds are used as rationally as possible in the interests of the European Union; and, accordingly, the terms and conditions of the Bank's loan operations must be consistent with relevant EU policies.


(8)	The Bank considers that access to information plays an essential role in the reduction of environmental and social risks, including human rights violations, linked to the projects it finances and has therefore established its transparency policy, the purpose of which is to enhance the accountability of the EIB Group towards its stakeholders and the citizens of the European Union in general.


(9)	The processing of personal data shall be carried out by the Bank in accordance with applicable European Union legislation on the protection of individuals with regard to the processing of personal data by the EC institutions and bodies and on the free movement of such data.


(10)	The Bank has entered on or about the date of this Contract into a finance contract with Northern Powergrid (Northeast) Limited, a Subsidiary of the Guarantor to finance refurbishing, upgrading and reinforcing the distribution electricity network of Northern Powergrid (Northeast) Limited in North East (the " Northeast Finance Contract ").


(11)	In this Contract:

" Acceptable Security " means security for the Loan in the form of:


(a)	the Guarantee from the Guarantor;


(b)	a guarantee on terms and from a bank acceptable to the Bank;


(c)	cash collateral; or


(d)	other security acceptable to the Bank.

" Acceptable Security Event " means any of the following events, circumstances or occurrences:


(a)	an Acceptable Security Provider fails to pay any amount payable under the relevant Acceptable Security Document on or before its due date unless the non-payment is due to a technical or administrative error or disruption to a payment system and is cured within 3 (three) Business Days;


(b)	any representation or statement made or deemed to be made by an Acceptable Security Provider in an Acceptable Security Document is or proves to have been incorrect or misleading in any respect;


(c)	any representation or statement made or deemed to be made by an Acceptable Security Provider in connection with the negotiation of an Acceptable Security Document or any other information or document given to the Bank by or on behalf of an Acceptable Security Provider is or proves to have been incorrect or misleading in any material respect;

(d)

(e)


(f)	any corporate action, legal proceedings or other procedure or step is taken in relation to or an order is made or an effective resolution is passed for:

(i) the winding up of an Acceptable Security Provider;


(ii)	the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise) of an Acceptable Security Provider;


(iii)	a composition, compromise, assignment or arrangement with any creditor of an Acceptable Security Provider;


(iv)	the appointment of a liquidator, receiver, administrative receiver, administrator, compulsory manager or other similar officer in respect of an Acceptable Security Provider or of any of its assets; or

(v) the enforcement of any Security over assets of an Acceptable Security Provider,

or any analogous procedure or step is taken in any jurisdiction, provided that no Acceptable Security Event shall occur under this paragraph (f) in respect of any frivolous or vexatious winding-up petition brought by a third party (other than the Guarantor or any of its Subsidiaries) which is discharged within 14 (fourteen) days of commencement or, if earlier, the date on which it is advertised;


(g)	an Acceptable Security Provider takes steps towards a substantial reduction in its capital, is declared insolvent or ceases or resolves to cease to carry on (or threatens to suspend or cease to carry on) the whole or any substantial part of its business or activities;


(h)	an encumbrancer takes possession of, or a receiver, liquidator, administrator, compulsory manager, administrative receiver or similar officer is appointed, whether by a court of competent jurisdiction or by any competent administrative authority or by any person, of or over, any part of the business or assets of an Acceptable Security Provider having an

aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies and, in the case of any of the foregoing, the same is not discharged within 14 (fourteen) days or if the Acceptable Security Provider petitions for the appointment of such an officer;

(i)


(j)	by or under the authority of any Governmental Authority, the management of an Acceptable Security Provider is wholly or substantially displaced or the authority of an Acceptable Security Provider in the conduct of its business is wholly or substantially curtailed;


(k)	an Acceptable Security Provider defaults in the performance of any obligation in respect of any other loan or financial instrument granted by the Bank or to the Bank;


(l)	any distress, attachment, execution, sequestration or other process is levied or enforced upon the property of an Acceptable Security Provider having an aggregate value in excess of GBP 10,000,000 (ten million pounds sterling) or its equivalent in any other currency or currencies and is not discharged within 14 (fourteen) days;


(m)	any material Authorisation issued to an Acceptable Security Provider is subject to notice of revocation by the competent Governmental Authority or an Acceptable Security Provider agrees to any revocation or surrender of such material Authorisation;

(n)

(o)

" Acceptable Security Document " means the Guarantee Agreement or any other document evidencing Acceptable Security.

" Acceptable Security Provider " means the Guarantor or any other provider of Acceptable Security.

" Acceptance Deadline " for a notice means:

(a) 16h00 Luxembourg time on the day of delivery, if the notice is delivered by 14h00 Luxembourg time on a Business Day; or

" Authority " means the Gas and Electricity Markets Authority, operating through OFGEM, and any successors thereto.

" Bonds " means the GBP 200,000,000 5.125% per cent. Guaranteed Bonds due 2035 issued by the Borrower.

" Business Day " means a day (other than a Saturday or Sunday) on which the Bank and commercial banks are open for general business in Luxembourg.

" Calculation Date " has the meaning given to it in Article 6.14C.

" Cash Equivalents " has the meaning given to it in Article 6.14C.

" Change-of-Control Event " has the meaning given to it in Article 4.03A(3).

" Change-of-Law Event " has the meaning given to it in Article 4.03A(4).

“ Code ” means the U.S. Internal Revenue Code of 1986, as amended.

" Competition Act " means the Competition Act 1998.

" Compliance Certificate " means a certificate substantially in the form set out in Schedule C.3.

" Consent Letter " means the letter dated 6 August 2004 from the Gas and Electricity Markets Authority to the Borrower.

" Consolidated EBIT " has the meaning given to it in Article 6.14C.

" Consolidated Net Finance Charges " has the meaning given to it in Article 6.14C.

" Consolidated Senior Total Net Debt " has the meaning given to it in Article 6.14C.

" Contract " has the meaning given to it in Recital (4).

" Credit " has the meaning given to it in Article 1.01.

" Credit Facility " has the meaning given to it in Article 7.04(a).

(a) that liability can arise only as the result of a default by a Subsidiary of the Borrower;

(b) the Borrower holds a majority of the voting shares in that Subsidiary and has the right to appoint or remove a majority of its board of directors; and

(c) that Subsidiary carries on business only for a purpose within sub-paragraph (a) or (b) of the definition of "Permitted Purpose" set out in Standard Condition 1 of the Licence.

“ Deferment Indemnity ” means an indemnity calculated on the amount of disbursement deferred or suspended at the percentage rate (if higher than zero) by which:


-	the interest rate excluding the Margin that would have been applicable to such amount had it been disbursed to the Borrower on the Scheduled Disbursement Date

exceeds

- LIBOR (one month rate) less 0.125% (12.5 basis points), unless this value is less than zero, in which case it will be set at zero.

“ Disbursement Date ” means the date on which actual disbursement of a Tranche is made by the Bank.

" Disbursement Notice " means a notice from the Bank to the Borrower pursuant to and in accordance with Article 1.02C.

" Disbursement Request " means a notice substantially in the form set out in Schedule C.1.

“ Disruption Event ” means either or both of:


(a)	a material disruption to those payment or communications systems or to those financial markets which are, in each case, required to operate in order for payments to be made in connection with this Contract; or


(b)	the occurrence of any other event which results in a disruption (of a technical or systems-related nature) to the treasury or payments operations of either the Bank or the Borrower, preventing that party:


(i)	from performing its payment obligations under this Contract; or


(ii)	from communicating with other parties,

and which disruption (in either such case as per (a) or (b) above) is not caused by, and is beyond the control of, the party whose operations are disrupted.

“ EIB Group ” means Bank and the European Investment Fund.

" Energy Act " means the Energy Act 2004, as amended by the Energy Act 2008, the Energy Act 2011 and the Enterprise and Regulatory Reform Act 2013, or as otherwise amended from time to time

" Energy Administration Order " means an order made pursuant to Chapter 3 of Part 3 of the Energy Act, as amended by the Energy Act 2011 and the Enterprise and Regulatory Reform Act 2013.

" Enforcement Order " means a Final Order or a Provisional Order.

" Enterprise Act " means the United Kingdom Enterprise Act 2002.

" Environment " means the following, in so far as they affect human health and social well-being:

(a) fauna and flora;

(b) soil, water, air, climate and the landscape; and

and includes, without limitation, occupational and community health and safety

“ Environmental Approval ” means any Authorisation required by Environmental Law.

" Environmental Claim " means any claim, proceeding or formal notice by any person in respect of any Environmental Law.

" Environmental Impact Assessment " or “ EIA ” has the meaning given to it in the relevant Environmental Law.

" EUR " or " euro " means the lawful currency for the time being of the Participating Member States.

" Event of Default " means any one of the circumstances, events or occurrences specified in Article 10.01.

” Existing Bond Documentation ” means the terms and conditions of the following bonds:

(a) the Bonds;

(b) the GBP 150,000,000 5.125% Guaranteed Bonds due 2035 issued by Northern Electric Finance plc on 5 May 2005; and

“ FATCA ” means:

(a) Sections 1471 to 1474 of the Code or any associated regulations or other official guidance;

(b) any treaty, law, regulation or other official guidance enacted in any other jurisdiction, or relating to an intergovernmental agreement between the United States and any other jurisdiction, which (in either case) facilitates the implementation of paragraph (a) above; or

(c) any agreement pursuant to the implementation of paragraphs (a) or (b) above with the U.S. Internal Revenue Service, the U.S. government or any governmental or taxation authority in any other jurisdiction.