Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's Consolidated Balance Sheets include assets and liabilities with fair values that are subject to market risks. The Company's significant market risks are primarily associated with commodity prices, interest rates, equity prices, foreign currency exchange rates and the extension of credit to counterparties with which the Company transacts. The following discussion addresses the significant market risks associated with the Company's business activities. Each of the Company's business platforms has established guidelines for credit risk management.
Commodity Price Risk
The Company is principally exposed to electricity, natural gas, coal and fuel oil commodity price risk primarily through BHE's ownership of 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. The Company does not engage in a material amount of proprietary trading activities. To manage 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 does not hedge all of its commodity price risk, thereby exposing the unhedged portion to changes in market prices. The Company's exposure to commodity price risk is generally limited by its ability to include commodity costs in regulated rates, which is subject to regulatory lag that occurs between the time the costs are incurred and when the costs are included in regulated rates, as well as the impact of any customer sharing resulting from cost adjustment mechanisms.
The table that follows summarizes the Company's price risk on commodity contracts accounted for as derivatives, excluding collateral netting of $(88) million and $26 million, respectively, as of December 31, 2022 and 2021, and shows the effects of a hypothetical 10% increase and 10% decrease in forward market prices with the contracted or expected volumes. The selected hypothetical change does not reflect what could be considered the best or worst case scenarios (dollars in millions).
| | | | | | | | | | | | | | | | | |
| Fair Value - | | Estimated Fair Value after |
| Net Asset | | Hypothetical Change in Price |
| (Liability) | | 10% increase | | 10% decrease |
| As of December 31, 2022: | | | | | |
| Not designated as hedging contracts | $ | 335 | | | $ | 520 | | | $ | 150 | |
| Designated as hedging contracts | 12 | | | 40 | | | (16) | |
| Total commodity derivative contracts | $ | 347 | | | $ | 560 | | | $ | 134 | |
| | | | | |
| As of December 31, 2021: | | | | | |
| Not designated as hedging contracts | $ | 20 | | | $ | 116 | | | $ | (76) | |
| Designated as hedging contracts | (10) | | | (5) | | | (15) | |
| Total commodity derivative contracts | $ | 10 | | | $ | 111 | | | $ | (91) | |
The settled cost of certain of the Company's commodity derivative contracts not designated as hedging contracts is included in regulated rates and, therefore, net unrealized gains and losses associated with interim price movements on commodity derivative contracts do not expose the Company to earnings volatility. Consolidated financial results would be negatively impacted if the costs of wholesale electricity, wholesale natural gas or fuel are higher than what is included in regulated rates, including the impacts of adjustment mechanisms. As of December 31, 2022 and 2021, a net regulatory liability of $231 million and a net regulatory asset of $71 million, respectively, was recorded related to the net derivative asset of $335 million and $20 million, respectively. For the Company's commodity derivative contracts designated as hedging contracts, net unrealized gains and losses associated with interim price movements on commodity derivative contracts, to the extent the hedge is considered effective, generally do not expose the Company to earnings volatility.
Interest Rate Risk
The Company is exposed to interest rate risk on its outstanding variable-rate short- and long-term debt, future debt issuances and mortgage commitments. 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. As a result of the fixed interest rates, the Company's fixed-rate long-term debt does not expose the Company to the risk of loss due to changes in market interest rates. Additionally, because fixed-rate long-term debt is not carried at fair value on the Consolidated Balance Sheets, changes in fair value would impact earnings and cash flows only if the Company were to reacquire all or a portion of these instruments prior to their maturity. The nature and amount of the Company's short- and long-term debt can be expected to vary from period to period as a result of future business requirements, market conditions and other factors. Refer to Notes 9, 10, 11, and 15 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional discussion of the Company's short and long-term debt.
As of December 31, 2022 and 2021, the Company had short- and long-term variable-rate obligations totaling $3.2 billion and $3.7 billion, respectively, that expose the Company to the risk of increased interest expense in the event of increases in short-term interest rates. If variable interest rates were to increase by 10% from December 31 levels, it would not have a material effect on the Company's consolidated annual interest expense. The carrying value of the variable-rate obligations approximates fair value as of December 31, 2022 and 2021.
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. Changes in fair value of agreements designated as cash flow hedges are reported in AOCI to the extent the hedge is effective until the forecasted transaction occurs. Changes in fair value of agreements not designated as hedging contracts are recognized in earnings. As of December 31, 2022 and 2021, the Company had variable-to-fixed interest rate swaps with notional amounts of $481 million and $533 million, respectively, and £272 million and £174 million, respectively, to protect the Company against an increase in interest rates. Additionally, as of December 31, 2022 and 2021, the Company had mortgage commitments, net, with notional amounts of $438 million and $1,512 million, respectively, to protect the Company against an increase in interest rates. The fair value of the Company's interest rate derivative contracts was a net derivative asset of $108 million and $16 million as of December 31, 2022 and 2021, respectively. A hypothetical 10 basis point increase and a 10 basis point decrease in interest rates would not have a material impact on the Company.
The Company holds foreign currency swaps with the purpose of hedging the foreign currency exchange rate associated with Euro denominated debt. As of December 31, 2022, the Company had €250 million in aggregate notional amounts of these foreign currency swaps outstanding. A hypothetical 10% decrease in market interest rates would not have resulted in a material decrease in fair value of the Company's foreign currency swaps as of December 31.
Equity Price Risk
Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions.
As of December 31, 2022 and 2021, the Company's investment in BYD Company Limited common stock represented approximately 86% and 92%, respectively, of the total fair value of the Company's equity securities. The majority of the Company's remaining equity securities are held in a trust related to the decommissioning of nuclear generation assets and the realized and unrealized gains and losses are recorded as a net regulatory liability since the Company expects to recover costs for these activities through regulated rates. The following table summarizes the Company's investment in BYD Company Limited as of December 31, 2022 and 2021 and the effects of a hypothetical 30% increase and a 30% decrease in market price as of those dates. The selected hypothetical change does not reflect what could be considered the best or worst case scenarios (dollars in millions).
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Estimated | | Hypothetical |
| | | Hypothetical | | Fair Value after | | Percentage Increase |
| Fair | | Price | | Hypothetical | | (Decrease) in BHE |
| Value | | Change | | Change in Prices | | Shareholders' Equity |
| | | | | | | |
| As of December 31, 2022 | $ | 3,763 | | | 30% increase | | $ | 4,892 | | | 1 | % |
| | | 30% decrease | | 2,634 | | | (1) | |
| | | | | | | |
| As of December 31, 2021 | $ | 7,693 | | | 30% increase | | $ | 10,001 | | | 3 | % |
| | | 30% decrease | | 5,385 | | | (3) | |
Foreign Currency Exchange Rate Risk
BHE's business operations and investments outside of the U.S. increase its risk related to fluctuations in foreign currency exchange rates primarily in relation to the British pound and the Canadian dollar. BHE's reporting currency is the U.S. dollar, and the value of the assets and liabilities, earnings, cash flows and potential distributions from BHE's foreign operations changes with the fluctuations of the currency in which they transact.
Northern Powergrid's functional currency is the British pound. As of December 31, 2022, a 10% devaluation in the British pound to the U.S. dollar would result in the Company's Consolidated Balance Sheet being negatively impacted by a $491 million cumulative translation adjustment in AOCI. A 10% devaluation in the average currency exchange rate would have resulted in lower reported earnings for Northern Powergrid of $39 million in 2022.
BHE Canada's functional currency is the Canadian dollar. As of December 31, 2022, a 10% devaluation in the Canadian dollar to the U.S. dollar would result in the Company's Consolidated Balance Sheet being negatively impacted by a $387 million cumulative translation adjustment in AOCI. A 10% devaluation in the average currency exchange rate would have resulted in lower reported earnings for BHE Canada of $18 million in 2022.
Credit Risk
Domestic Regulated Operations
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.
As of December 31, 2022, PacifiCorp's aggregate credit exposure with wholesale energy supply and marketing counterparties included counterparties having non-investment grade, internally rated credit ratings. Substantially all of these non-investment grade, internally rated counterparties are associated with long-duration solar and wind power purchase agreements, some of which are from facilities that have not yet achieved commercial operation and for which PacifiCorp has no obligation should the facilities not achieve commercial operation.
Substantially all of MidAmerican Energy's electric wholesale sales revenue results from participation in RTOs, including the MISO and the PJM. MidAmerican Energy's share of historical losses from defaults by other RTO market participants has not been material. Additionally, as of December 31, 2022, MidAmerican Energy's aggregate direct credit exposure from electric wholesale marketing counterparties was not material.
As of December 31, 2022, NV Energy's aggregate credit exposure from energy related transactions, based on settlement and mark-to-market exposures, net of collateral, was not material.
BHE GT&S primary customers include electric and natural gas distribution utilities and LNG export, import and storage customers. Northern Natural Gas' primary customers include utilities in the upper Midwest. Kern River's primary customers are electric and natural gas distribution utilities, major oil and natural gas companies or affiliates of such companies, electric generating companies, energy marketing and trading companies and financial institutions. As a general policy, collateral is not required for receivables from creditworthy customers. Customers' financial condition and creditworthiness, as defined by the tariff, are regularly evaluated and historical losses have been minimal. In order to provide protection against credit risk, and as permitted by the separate terms of each of BHE GT&S, Northern Natural Gas' and Kern River's tariffs, the companies have required customers that lack creditworthiness to provide cash deposits, letters of credit or other security until they meet the creditworthiness requirements of the respective tariff.
Northern Powergrid
The Northern Powergrid Distribution Companies charge fees for the use of their distribution systems to supply companies. The supply companies purchase electricity from generators and traders, sell the electricity to end-use customers and use the Northern Powergrid Distribution Companies' distribution networks pursuant to the multilateral "Distribution Connection and Use of System Agreement." The Northern Powergrid Distribution Companies' customers are concentrated in a small number of electricity supply businesses. During 2022, E.ON and certain of its affiliates and British Gas Trading Limited represented approximately 22% and 14%, respectively, of the total combined distribution revenue of the Northern Powergrid Distribution Companies. The industry operates in accordance with a framework which sets credit limits for each supply business based on its credit rating or payment history and requires them to provide credit cover if their value at risk (measured as being equivalent to 45 days usage) exceeds the credit limit. Acceptable credit typically is provided in the form of a parent company guarantee, letter of credit or an escrow account. Ofgem has indicated that, provided the Northern Powergrid Distribution Companies have implemented credit control, billing and collection in line with best practice guidelines and can demonstrate compliance with the guidelines or are able to satisfactorily explain departure from the guidelines, any bad debt losses arising from supplier default will be recovered through an increase in future allowed income. Losses incurred to date have not been material.
BHE Canada
AltaLink's primary source of operating revenue is the AESO, an entity rated AA- by Standard and Poor's. Because of the dependence on a single customer, any material failure of the customer to fulfill its obligations would significantly impair AltaLink's ability to meet its existing and future obligations. Total operating revenue for AltaLink was $681 million for the year ended December 31, 2022.
BHE Renewables
BHE Renewables owns independent power projects that generally have separate project financing agreements. These projects source of operating revenue is derived primarily from long-term power purchase agreements with single customers, primarily utilities, which expire between 2023 and 2043. Because of the dependence generally from a single customer at each project, any material failure of the customer to fulfill its obligations would significantly impair that project's ability to meet its existing and future obligations. Total operating revenue for BHE Renewables was $994 million for the year ended December 31, 2022.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders of
Berkshire Hathaway Energy Company
Des Moines, Iowa
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Energy Company and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2022, the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 7 to the financial statements
Critical Audit Matter Description
The Company is subject to rate regulation by the Federal Energy Regulatory Commission as well as certain other regulatory commissions (collectively, the "Commissions"), which have jurisdiction with respect to the electric and natural gas rates of the Company's regulated businesses in the respective service territories where the Company operates. Management has determined its regulated operations meet the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economic effects of rate regulation has a pervasive effect on the financial statements.
Regulated rates are subject to regulatory rate-setting processes. Rates are determined, approved, and established based on a cost-of-service basis, which is designed to allow the Company an opportunity to recover its prudently incurred costs of providing services and to earn a reasonable return on its invested capital. Regulatory decisions can have an effect on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. While the Company has indicated it expects to recover costs from customers through regulated rates, there is a risk that changes to the Commissions' approach to setting rates or other regulatory actions could limit the Company's ability to recover their costs.
We identified the effects of rate regulation on the financial statements as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and (3) refunds to customers. Given that management's accounting judgments are based on assumptions about the future outcome of decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of decisions by the Commissions included the following, among others:
•We evaluated the Company's disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the Commissions, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected the Company's filings with the Commissions and the filings with the Commissions by intervenors to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances.
•We inquired of management about property, plant, and equipment that may be abandoned. We inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management's assertion regarding probability of an abandonment.
Wildfires — Contingencies — See Note 16 to the financial statements
Critical Audit Matter Description
As a result of several wildfires that have occurred in the Company's service territory and surrounding areas in Oregon and California, the Company is required to evaluate its exposure to potential loss contingencies arising from claims associated with the 2020 Wildfires and the 2022 McKinney Fire (the "Wildfires"). In determining this exposure, the Company is required to determine whether the likelihood of loss for each of the Wildfires is remote, reasonably possible or probable, which involves complex judgments based on several variables including available information regarding the cause and origin of the Wildfires, investigations, discovery associated with lawsuits and negotiations with claimants.
A provision for a loss contingency is recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If deemed reasonably possible, the Company is required to estimate the potential loss or range of potential loss and disclose any material amounts.
Management has recorded estimated liabilities of $424 million and receivables of $246 million, which represent its best estimate of probable losses and expected insurance recoveries associated with the 2020 Wildfires. During the years ended December 31, 2022, 2021 and 2020, the Company recognized probable losses, net of expected insurance recoveries associated with the 2020 Wildfires of $64 million, $— million and $136 million, respectively. Management has disclosed reasonably possible estimated losses of $31 million, net of potential insurance recoveries of $103 million, associated with the 2022 McKinney Fire.
We identified wildfire-related contingencies and the related disclosures as a critical audit matter because of the significant judgments made by management to determine the probability of loss and estimate the probable or reasonably possible losses and insurance recoveries. This required the application of a high degree of judgment and extensive effort when performing audit procedures to evaluate the reasonableness of management's judgments, estimates and disclosures related to wildfire-related loss contingencies.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management's judgments regarding the probability of loss, estimated losses and insurance recoveries, and related disclosures for wildfire-related contingencies included the following, among others:
•We evaluated management's judgments related to whether a loss was probable or reasonably possible for the Wildfires by inquiring of management and the Company's external and internal legal counsel regarding the likelihood and amounts of probable and reasonably possible losses, including the potential impact of information gained through investigations into the cause of the fires, information from claimants, the advice of legal counsel, and reading external information for any evidence that might contradict management's assertions.
•We evaluated the estimation methodology for determining the amount of probable and reasonably possible losses through inquiries with management and external and internal legal counsel and we tested the significant assumptions used in the estimates of probable and reasonably possible losses.
•We read legal letters from the Company's external and internal legal counsel regarding known information and evaluated whether the information therein was consistent with the information obtained in our procedures.
•We evaluated management's judgments related to whether related insurance recoveries were probable of collection by inquiring of management and the Company's external and internal legal counsel regarding the amounts of insurance recoveries recorded or disclosed. With the assistance of our insurance specialists, we tested the significant assumptions used in the determination of collectability, including obtaining and reading related policies to determine whether the types of insurance claims are included or excluded from coverage.
•We evaluated whether the Company's disclosures were appropriate and consistent with the information obtained in our procedures.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
February 24, 2023
We have served as the Company's auditor since 1991.
BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,591 | | | $ | 1,096 | |
| Investments and restricted cash and cash equivalents | 2,141 | | | 172 | |
| Trade receivables, net | 2,876 | | | 2,468 | |
| | | |
| Inventories | 1,256 | | | 1,122 | |
| Mortgage loans held for sale | 474 | | | 1,263 | |
| Regulatory assets | 1,319 | | | 544 | |
| | | |
| Other current assets | 1,345 | | | 1,583 | |
| Total current assets | 11,002 | | | 8,248 | |
| | | |
| Property, plant and equipment, net | 93,043 | | | 89,816 | |
| Goodwill | 11,489 | | | 11,650 | |
| Regulatory assets | 3,743 | | | 3,419 | |
| Investments and restricted cash and cash equivalents and investments | 11,273 | | | 15,788 | |
| Other assets | 3,290 | | | 3,144 | |
| | | |
| Total assets | $ | 133,840 | | | $ | 132,065 | |
The accompanying notes are an integral part of these consolidated financial statements.
BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| LIABILITIES AND EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 2,679 | | | $ | 2,136 | |
| Accrued interest | 558 | | | 537 | |
| Accrued property, income and other taxes | 746 | | | 606 | |
| Accrued employee expenses | 333 | | | 372 | |
| | | |
| Short-term debt | 1,119 | | | 2,009 | |
| Current portion of long-term debt | 3,201 | | | 1,265 | |
| Other current liabilities | 1,677 | | | 1,837 | |
| Total current liabilities | 10,313 | | | 8,762 | |
| | | |
| BHE senior debt | 13,096 | | | 13,003 | |
| BHE junior subordinated debentures | 100 | | | 100 | |
| Subsidiary debt | 35,238 | | | 35,394 | |
| Regulatory liabilities | 7,070 | | | 6,960 | |
| Deferred income taxes | 12,678 | | | 12,938 | |
| Other long-term liabilities | 4,706 | | | 4,319 | |
| Total liabilities | 83,201 | | | 81,476 | |
| | | |
| Commitments and contingencies (Note 16) | | | |
| | | |
| Equity: | | | |
| BHE shareholders' equity: | | | |
Preferred stock - 100 shares authorized, $0.01 par value, 1 and 2 shares issued and outstanding | 850 | | | 1,650 | |
Common stock - 115 shares authorized, no par value, 76 shares issued and outstanding | — | | | — | |
| Additional paid-in capital | 6,298 | | | 6,374 | |
| Long-term income tax receivable | — | | | (744) | |
| Retained earnings | 41,833 | | | 40,754 | |
| Accumulated other comprehensive loss, net | (2,149) | | | (1,340) | |
| Total BHE shareholders' equity | 46,832 | | | 46,694 | |
| Noncontrolling interests | 3,807 | | | 3,895 | |
| Total equity | 50,639 | | | 50,589 | |
| | | |
| Total liabilities and equity | $ | 133,840 | | | $ | 132,065 | |
The accompanying notes are an integral part of these consolidated financial statements.
BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating revenue: | | | | | |
| Energy | $ | 21,069 | | | $ | 18,935 | | | $ | 15,556 | |
| Real estate | 5,268 | | | 6,215 | | | 5,396 | |
| Total operating revenue | 26,337 | | | 25,150 | | | 20,952 | |
| | | | | |
| Operating expenses: | | | | | |
| Energy: | | | | | |
| Cost of sales | 6,757 | | | 5,504 | | | 4,187 | |
| Operations and maintenance | 4,217 | | | 3,991 | | | 3,545 | |
| Depreciation and amortization | 4,230 | | | 3,829 | | | 3,410 | |
| Property and other taxes | 775 | | | 789 | | | 634 | |
| Real estate | 5,117 | | | 5,710 | | | 4,885 | |
| Total operating expenses | 21,096 | | | 19,823 | | | 16,661 | |
| | | | | |
| Operating income | 5,241 | | | 5,327 | | | 4,291 | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense | (2,216) | | | (2,118) | | | (2,021) | |
| Capitalized interest | 76 | | | 64 | | | 80 | |
| Allowance for equity funds | 167 | | | 126 | | | 165 | |
| Interest and dividend income | 154 | | | 89 | | | 71 | |
| (Losses) gains on marketable securities, net | (2,002) | | | 1,823 | | | 4,797 | |
| Other, net | (7) | | | (17) | | | 88 | |
| Total other income (expense) | (3,828) | | | (33) | | | 3,180 | |
| | | | | |
| Income before income tax (benefit) expense and equity loss | 1,413 | | | 5,294 | | | 7,471 | |
| Income tax (benefit) expense | (1,916) | | | (1,132) | | | 308 | |
| Equity loss | (185) | | | (237) | | | (149) | |
| Net income | 3,144 | | | 6,189 | | | 7,014 | |
| Net income attributable to noncontrolling interests | 423 | | | 399 | | | 71 | |
| Net income attributable to BHE shareholders | 2,721 | | | 5,790 | | | 6,943 | |
| Preferred dividends | 46 | | | 121 | | | 26 | |
| Earnings on common shares | $ | 2,675 | | | $ | 5,669 | | | $ | 6,917 | |
The accompanying notes are an integral part of these consolidated financial statements.
BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Net income | $ | 3,144 | | | $ | 6,189 | | | $ | 7,014 | |
| | | | | | |
| Other comprehensive (loss) income, net of tax: | | | | | |
Unrecognized amounts on retirement benefits, net of tax of $(23), $55 and $(19) | (72) | | | 174 | | | (65) | |
| Foreign currency translation adjustment | (810) | | | (24) | | | 234 | |
| | | | | |
Unrealized gains (losses) on cash flow hedges, net of tax of $20, $10 and $(3) | 76 | | | 67 | | | (15) | |
| Total other comprehensive (loss) income, net of tax | (806) | | | 217 | | | 154 | |
| | | | | | |
| Comprehensive income | 2,338 | | | 6,406 | | | 7,168 | |
| Comprehensive income attributable to noncontrolling interests | 426 | | | 404 | | | 71 | |
| Comprehensive income attributable to BHE shareholders | $ | 1,912 | | | $ | 6,002 | | | $ | 7,097 | |
The accompanying notes are an integral part of these consolidated financial statements.
BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BHE Shareholders' Equity | | | | |
| | | | | | | Long-term | | | | Accumulated | | | | |
| | | | | Additional | | Income | | | | Other | | | | |
| Preferred | | Common | | Paid-in | | Tax | | Retained | | Comprehensive | | Noncontrolling | | Total |
| Stock | | Stock | | Capital | | Receivable | | Earnings | | Loss, Net | | Interests | | Equity |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2019 | $ | — | | | $ | — | | | $ | 6,389 | | | $ | (530) | | | $ | 28,296 | | | $ | (1,706) | | | $ | 129 | | | $ | 32,578 | |
| Net income | — | | | — | | | — | | | — | | | 6,943 | | | — | | | 70 | | | 7,013 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 154 | | | — | | | 154 | |
| Long-term income tax receivable adjustments | — | | | — | | | — | | | (128) | | | — | | | — | | | — | | | (128) | |
| Issuance of preferred stock | 3,750 | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,750 | |
| Preferred stock dividend | — | | | — | | | — | | | — | | | (26) | | | — | | | — | | | (26) | |
| Common stock purchases | | | — | | | (6) | | | — | | | (120) | | | — | | | — | | | (126) | |
| Distributions | — | | | — | | | — | | | — | | | — | | | — | | | (121) | | | (121) | |
Purchase of noncontrolling
interest | — | | | — | | | (5) | | | — | | | — | | | — | | | (28) | | | (33) | |
BHE GT&S acquisition -
noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | 3,916 | | | 3,916 | |
| Other equity transactions | — | | | — | | | (1) | | | — | | | — | | | — | | | 1 | | | — | |
| Balance, December 31, 2020 | 3,750 | | | — | | | 6,377 | | | (658) | | | 35,093 | | | (1,552) | | | 3,967 | | | 46,977 | |
| Net income | — | | | — | | | — | | | — | | | 5,790 | | | — | | | 397 | | | 6,187 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 212 | | | 5 | | | 217 | |
Long-term income tax
receivable adjustments | — | | | — | | | — | | | (86) | | | (8) | | | — | | | — | | | (94) | |
| | | | | | | | | | | | | | | |
| Preferred stock redemptions | (2,100) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,100) | |
| Preferred stock dividend | — | | | — | | | — | | | — | | | (121) | | | — | | | — | | | (121) | |
| | | | | | | | | | | | | | | |
| Distributions | | | — | | | — | | | — | | | — | | | — | | | (478) | | | (478) | |
| Contributions | — | | | — | | | — | | | — | | | — | | | — | | | 9 | | | 9 | |
Purchase of noncontrolling
interest | — | | | — | | | (3) | | | — | | | — | | | — | | | (4) | | | (7) | |
| Other equity transactions | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Balance, December 31, 2021 | 1,650 | | | — | | | 6,374 | | | (744) | | | 40,754 | | | (1,340) | | | 3,895 | | | 50,589 | |
| Net income | — | | | — | | | — | | | — | | | 2,721 | | | — | | | 421 | | | 3,142 | |
| Other comprehensive (loss) income | — | | | — | | | — | | | — | | | — | | | (809) | | | 3 | | | (806) | |
Long-term income tax
receivable adjustments | — | | | — | | | — | | | 744 | | | (791) | | | — | | | — | | | (47) | |
| Preferred stock redemptions | (800) | | | — | | | — | | | — | | | — | | | — | | | — | | | (800) | |
| Preferred stock dividend | — | | | — | | | — | | | — | | | (46) | | | — | | | — | | | (46) | |
| Common stock purchases | — | | | — | | | (77) | | | — | | | (793) | | | — | | | — | | | (870) | |
| Distributions | | | — | | | — | | | — | | | — | | | — | | | (522) | | | (522) | |
| Contributions | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
| Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 6 | |
| Other equity transactions | — | | | — | | | 1 | | | — | | | (12) | | | — | | | (1) | | | (12) | |
| Balance, December 31, 2022 | $ | 850 | | | $ | — | | | $ | 6,298 | | | $ | — | | | $ | 41,833 | | | $ | (2,149) | | | $ | 3,807 | | | $ | 50,639 | |
The accompanying notes are an integral part of these consolidated financial statements.
BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions) | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 3,144 | | | $ | 6,189 | | | $ | 7,014 | |
| Adjustments to reconcile net income to net cash flows from operating activities: | | | | | |
| Losses (gains) on marketable securities, net | 2,002 | | | (1,823) | | | (4,797) | |
| | | | | |
| Depreciation and amortization | 4,286 | | | 3,881 | | | 3,455 | |
| Allowance for equity funds | (167) | | | (126) | | | (165) | |
| Equity loss, net of distributions | 319 | | | 380 | | | 248 | |
| Net power cost deferrals | (1,290) | | | (520) | | | (62) | |
| Amortization of net power cost deferrals | 357 | | | 107 | | | (5) | |
| Other changes in regulatory assets and liabilities | (146) | | | (255) | | | (348) | |
| Deferred income taxes and investment tax credits, net | (467) | | | 646 | | | 1,880 | |
| Other, net | 59 | | | (57) | | | (23) | |
| Changes in other operating assets and liabilities, net of effects from acquisitions: | | | | | |
| Trade receivables and other assets | 20 | | | 553 | | | (1,318) | |
| Derivative collateral, net | 121 | | | 82 | | | 43 | |
| Pension and other postretirement benefit plans | (27) | | | (39) | | | (65) | |
| Accrued property, income and other taxes, net | 397 | | | (489) | | | (134) | |
| Accounts payable and other liabilities | 751 | | | 163 | | | 501 | |
| Net cash flows from operating activities | 9,359 | | | 8,692 | | | 6,224 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (7,505) | | | (6,611) | | | (6,765) | |
| Acquisitions, net of cash acquired | (314) | | | (122) | | | (2,397) | |
| Purchases of marketable securities | (574) | | | (297) | | | (370) | |
| Proceeds from sales of marketable securities | 2,464 | | | 273 | | | 325 | |
| Purchases of other investments | (1,958) | | | (20) | | | (1,323) | |
| Proceeds from other investments | 6 | | | 1,300 | | | 13 | |
| Equity method investments | 119 | | | (212) | | | (2,724) | |
| Other, net | 12 | | | (74) | | | 76 | |
| Net cash flows from investing activities | (7,750) | | | (5,763) | | | (13,165) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of preferred stock | — | | | — | | | 3,750 | |
| Preferred stock redemptions | (800) | | | (2,100) | | | — | |
| Preferred dividends | (50) | | | (132) | | | (7) | |
| Common stock purchases | (870) | | | — | | | (126) | |
| Proceeds from BHE senior debt | 986 | | | — | | | 5,212 | |
| Repayments of BHE senior debt | — | | | (450) | | | (350) | |
| Proceeds from subsidiary debt | 2,887 | | | 2,409 | | | 2,688 | |
| Repayments of subsidiary debt | (1,494) | | | (2,024) | | | (2,841) | |
| Net repayments of short-term debt | (867) | | | (276) | | | (939) | |
| | | | | |
| Distributions to noncontrolling interests | (524) | | | (488) | | | (122) | |
| | | | | |
| Other, net | (274) | | | (70) | | | (162) | |
| Net cash flows from financing activities | (1,006) | | | (3,131) | | | 7,103 | |
| | | | | |
| Effect of exchange rate changes | (30) | | | 1 | | | 15 | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 573 | | | (201) | | | 177 | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | 1,244 | | | 1,445 | | | 1,268 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 1,817 | | | $ | 1,244 | | | $ | 1,445 | |
The accompanying notes are an integral part of these consolidated financial statements.
BERKSHIRE HATHAWAY ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
Berkshire Hathaway Energy Company ("BHE") is a holding company that owns a highly diversified portfolio of locally managed and operated businesses principally engaged in the energy industry (collectively with its subsidiaries, the "Company") and is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway").
The Company's operations are organized as eight business segments: PacifiCorp and its subsidiaries ("PacifiCorp"), MidAmerican Funding, LLC and its subsidiaries ("MidAmerican Funding") (which primarily consists of MidAmerican Energy Company ("MidAmerican Energy")), NV Energy, Inc. and its subsidiaries ("NV Energy") (which primarily consists of Nevada Power Company and its subsidiaries ("Nevada Power") and Sierra Pacific Power Company and its subsidiaries ("Sierra Pacific")), Northern Powergrid Holdings Company and its subsidiaries ("Northern Powergrid") (which primarily consists of Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc), BHE Pipeline Group, LLC and its subsidiaries (which primarily consists of BHE GT&S, LLC and its subsidiaries ("BHE GT&S"), Northern Natural Gas Company ("Northern Natural Gas") and Kern River Gas Transmission Company ("Kern River")), BHE Transmission (which consists of BHE Canada Holdings Corporation and its subsidiaries ("BHE Canada") (which primarily consists of AltaLink, L.P. ("AltaLink")) and BHE U.S. Transmission, LLC and its subsidiaries), BHE Renewables, LLC and its subsidiaries ("BHE Renewables") and HomeServices of America, Inc. and its subsidiaries ("HomeServices"). The Company, through these locally managed and operated businesses, owns four utility companies in the U.S. serving customers in 11 states, two electricity distribution companies in Great Britain, five interstate natural gas pipeline companies and interests in a liquefied natural gas ("LNG") export, import and storage facility in the U.S., an electric transmission business in Canada, interests in electric transmission businesses in the U.S., a renewable energy business primarily investing in wind, solar, geothermal and hydroelectric projects, the largest residential real estate brokerage firm in the U.S. and one of the largest residential real estate brokerage franchise networks in the U.S.
(2) Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The Consolidated Financial Statements include the accounts of BHE and its subsidiaries in which it holds a controlling financial interest as of the financial statement date. The Consolidated Statements of Operations include the revenue and expenses of any acquired entities from the date of acquisition. The Company consolidates variable interest entities ("VIE") in which it possesses both (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE. Intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates include, but are not limited to, the effects of regulation; impairment of goodwill; recovery of long-lived assets; certain assumptions made in accounting for pension and other postretirement benefits; asset retirement obligations ("AROs"); income taxes; unbilled revenue; fair value of assets acquired and liabilities assumed in business combinations; valuation of certain financial assets and liabilities, including derivative contracts; and accounting for contingencies. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Accounting for the Effects of Certain Types of Regulation
PacifiCorp, MidAmerican Energy, Nevada Power, Sierra Pacific, BHE GT&S, Northern Natural Gas, Kern River and AltaLink (the "Regulated Businesses") prepare their financial statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, the Regulated Businesses defer the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as accumulated other comprehensive income (loss) ("AOCI").
Fair Value Measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist substantially of funds restricted for debt service obligations for certain of the Company's nonregulated renewable energy projects. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and 2021, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 1,591 | | | $ | 1,096 | |
| Investments and restricted cash and cash equivalents | 173 | | | 127 | |
| Investments and restricted cash and cash equivalents and investments | 53 | | | 21 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 1,817 | | | $ | 1,244 | |
Investments
Fixed Maturity Securities
The Company's management determines the appropriate classification of investments in fixed maturity securities at the acquisition date and reevaluates the classification at each balance sheet date. Investments and restricted cash and cash equivalents and investments that management does not intend to use or is restricted from using in current operations are presented as noncurrent on the Consolidated Balance Sheets.
Available-for-sale investments are carried at fair value with realized gains and losses, as determined on a specific identification basis, recognized in earnings and unrealized gains and losses recognized in AOCI, net of tax. Realized and unrealized gains and losses on fixed maturity securities in a trust related to the decommissioning of nuclear generation assets are recorded as a net regulatory liability since the Company expects to recover costs for these activities through regulated rates. Trading investments are carried at fair value with changes in fair value recognized in earnings. Held-to-maturity investments are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. The difference between the original cost and maturity value of a fixed maturity security is amortized to earnings using the interest method.
Investment gains and losses arise when investments are sold (as determined on a specific identification basis) or are other-than-temporarily impaired with respect to securities classified as available-for-sale. If the value of a fixed maturity investment declines to below amortized cost and the decline is deemed other than temporary, the amortized cost of the investment is reduced to fair value, with a corresponding charge to earnings. Any resulting impairment loss is recognized in earnings if the Company intends to sell, or expects to be required to sell, the debt security before its amortized cost is recovered. If the Company does not expect to ultimately recover the amortized cost basis even if it does not intend to sell the security, the credit loss component is recognized in earnings and any difference between fair value and the amortized cost basis, net of the credit loss, is reflected in other comprehensive income (loss) ("OCI"). For regulated fixed maturity investments, any impairment charge is offset by the establishment of a regulatory asset to the extent recovery in regulated rates is probable.
Equity Securities
Investments in equity securities are carried at fair value with changes in fair value recognized in earnings as a component of gains (losses) on marketable securities, net. All changes in fair value of equity securities in a trust related to the decommissioning of nuclear generation assets are recorded as a net regulatory liability since the Company expects to recover costs for these activities through regulated rates.
Equity Method Investments
The Company utilizes the equity method of accounting with respect to investments when it possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying value of the investment by the Company's share of the net earnings or losses and OCI of the investee. The Company records dividends or other equity distributions as reductions in the carrying value of the investment. Certain equity investments are presented on the Consolidated Balance Sheets net of related investment tax credits.
Allowance for Credit Losses
Trade receivables are primarily short-term in nature with stated collection terms of less than one year from the date of origination and are stated at the outstanding principal amount, net of an estimated allowance for credit losses. The allowance for credit losses is based on the Company's assessment of the collectability of amounts owed to the Company by its customers. This assessment requires judgment regarding the ability of customers to pay or the outcome of any pending disputes. In measuring the allowance for credit losses for trade receivables, the Company primarily utilizes credit loss history. However, the Company may adjust the allowance for credit losses to reflect current conditions and reasonable and supportable forecasts that deviate from historical experience. The change in the balance of the allowance for credit losses, which is included in trade receivables, net on the Consolidated Balance Sheets, is summarized as follows for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 108 | | | $ | 77 | | | $ | 44 | |
| Charged to operating costs and expenses, net | 43 | | | 81 | | | 56 | |
| Acquisitions | — | | | — | | | 5 | |
| Write-offs, net | (45) | | | (50) | | | (28) | |
| Ending balance | $ | 106 | | | $ | 108 | | | $ | 77 | |
Derivatives
The Company employs a number of different derivative contracts, which may include forwards, futures, options, swaps and other agreements, to manage its commodity price, interest rate, and foreign currency exchange rate risk. 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. Derivative balances reflect offsetting permitted under master netting agreements with counterparties and cash collateral paid or received under such agreements. Cash collateral received from or paid to counterparties to secure derivative contract assets or liabilities in excess of amounts offset is included in other current assets on the Consolidated Balance Sheets.
Commodity derivatives used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases or normal sales. Normal purchases or normal sales contracts are not marked-to-market and settled amounts are recognized as operating revenue or cost of sales on the Consolidated Statements of Operations.
For the Company's derivatives not designated as hedging contracts, the settled amount is generally included in regulated rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of inclusion in regulated rates are recorded as regulatory assets and liabilities. For the Company's derivatives not designated as hedging contracts and for which changes in fair value are not recorded as regulatory assets and liabilities, unrealized gains and losses are recognized on the Consolidated Statements of Operations as operating revenue for sales contracts; cost of sales and operating expense for purchase contracts and electricity, natural gas and fuel swap contracts; and other, net for interest rate swap derivatives.
For the Company's derivatives designated as hedging contracts, the Company formally assesses, at inception and thereafter, whether the hedging contract is highly effective in offsetting changes in the hedged item. The Company formally documents hedging activity by transaction type and risk management strategy.
Changes in the estimated fair value of a derivative contract designated and qualified as a cash flow hedge, to the extent effective, are included on the Consolidated Statements of Changes in Equity as AOCI, net of tax, until the contract settles and the hedged item is recognized in earnings. The Company discontinues hedge accounting prospectively when it has determined that a derivative contract no longer qualifies as an effective hedge, or when it is no longer probable that the hedged forecasted transaction will occur. When hedge accounting is discontinued because the derivative contract no longer qualifies as an effective hedge, future changes in the estimated fair value of the derivative contract are charged to earnings. Gains and losses related to discontinued hedges that were previously recorded in AOCI will remain in AOCI until the contract settles and the hedged item is recognized in earnings, unless it becomes probable that the hedged forecasted transaction will not occur at which time associated deferred amounts in AOCI are immediately recognized in earnings.
Inventories
Inventories consist mainly of fuel, which includes coal stocks, stored gas and fuel oil, totaling $248 million and $296 million as of December 31, 2022 and 2021, respectively, and materials and supplies totaling $1,008 million and $826 million as of December 31, 2022 and 2021, respectively. The cost of materials and supplies, coal stocks and fuel oil is determined primarily using the average cost method. The cost of stored gas is determined using either the last-in-first-out ("LIFO") method or the lower of average cost or market. With respect to inventories carried at LIFO cost, the replacement cost would be $22 million and $27 million higher as of December 31, 2022 and 2021, respectively.
Property, Plant and Equipment, Net
General
Additions to property, plant and equipment are recorded at cost. The Company capitalizes all construction-related materials, direct labor and contract services, as well as indirect construction costs. Indirect construction costs include capitalized interest, including debt allowance for funds used during construction ("AFUDC"), and equity AFUDC, as applicable to the Regulated Businesses. The cost of additions and betterments are capitalized, while costs incurred that do not improve or extend the useful lives of the related assets are generally expensed. Additionally, MidAmerican Energy has regulatory arrangements in Iowa in which the carrying cost of certain utility plant has been reduced for amounts associated with electric returns on equity exceeding specified thresholds.
Depreciation and amortization are generally computed by applying the composite or straight-line method based on either estimated useful lives or mandated recovery periods as prescribed by the Company's various regulatory authorities. Depreciation studies are completed by the Regulated Businesses to determine the appropriate group lives, net salvage and group depreciation rates. These studies are reviewed and rates are ultimately approved by the applicable regulatory commission. Net salvage includes the estimated future residual values of the assets and any estimated removal costs recovered through approved depreciation rates. Estimated removal costs are recorded as either a cost of removal regulatory liability or an ARO liability on the Consolidated Balance Sheets, depending on whether the obligation meets the requirements of an ARO. As actual removal costs are incurred, the associated liability is reduced.
Generally when the Company retires or sells a component of regulated property, plant and equipment, it charges the original cost, net of any proceeds from the disposition, to accumulated depreciation. Any gain or loss on disposals of all other assets is recorded through earnings.
Debt and equity AFUDC, which represent the estimated costs of debt and equity funds necessary to finance the construction of regulated facilities, is capitalized by the Regulated Businesses as a component of property, plant and equipment, with offsetting credits to the Consolidated Statements of Operations. AFUDC is computed based on guidelines set forth by the Federal Energy Regulatory Commission ("FERC") and the Alberta Utilities Commission ("AUC"). After construction is completed, the Company is permitted to earn a return on these costs as a component of the related assets, as well as recover these costs through depreciation expense over the useful lives of the related assets.
Asset Retirement Obligations
The Company recognizes AROs when it has a legal obligation to perform decommissioning, reclamation or removal activities upon retirement of an asset. The Company's AROs are primarily related to the decommissioning of nuclear generating facilities and obligations associated with its other generating facilities and offshore natural gas pipelines. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the ARO liability is adjusted for any revisions to the original estimate of undiscounted cash flows (with corresponding adjustments to property, plant and equipment, net) and for accretion of the ARO liability due to the passage of time. For the Regulated Businesses, the difference between the ARO liability, the corresponding ARO asset included in property, plant and equipment, net and amounts recovered in rates to satisfy such liabilities is recorded as a regulatory asset or liability.
Impairment
The Company evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. As a majority of all property, plant and equipment is used in regulated businesses, the impacts of regulation are considered when evaluating the carrying value of regulated assets.
Leases
The Company has non-cancelable operating leases primarily for office space, office equipment, generating facilities, land and rail cars and finance leases consisting primarily of transmission assets, generating facilities and vehicles. These leases generally require the Company to pay for insurance, taxes and maintenance applicable to the leased property. Given the capital intensive nature of the utility industry, it is common for a portion of lease costs to be capitalized when used during construction or maintenance of assets, in which the associated costs will be capitalized with the corresponding asset and depreciated over the remaining life of that asset. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. The Company does not include options in its lease calculations unless there is a triggering event indicating the Company is reasonably certain to exercise the option. The Company's accounting policy is to not recognize right-of-use assets and lease obligations for leases with contract terms of one year or less and not separate lease components from non-lease components and instead account for each separate lease component and the non-lease components associated with a lease as a single lease component. Leases will be evaluated for impairment in line with Accounting Standards Codification ("ASC") 360, "Property, Plant and Equipment" when a triggering event has occurred that might affect the value and use of the assets being leased.
The Company's leases of generating facilities generally are for the long-term purchase of electric energy, also known as power purchase agreements ("PPA"). PPAs are generally signed before or during the early stages of project construction and can yield a lease that has not yet commenced. These agreements are primarily for renewable energy and the payments are considered variable lease payments as they are based on the amount of output.
The Company's operating and finance right-of-use assets are recorded in other assets and the operating and finance lease liabilities are recorded in current and long-term other liabilities accordingly.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. The Company evaluates goodwill for impairment at least annually and completed its annual review as of October 31, 2022. When evaluating goodwill for impairment, the Company estimates the fair value of its reporting units. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to earnings as an impairment loss. Significant judgment is required in estimating the fair value of the reporting unit and performing goodwill impairment tests. The determination of fair value incorporates significant unobservable inputs. During 2022, 2021 and 2020, the Company did not record any material goodwill impairments.
The Company records goodwill adjustments for changes to the purchase price allocation prior to the end of the measurement period, which is not to exceed one year from the acquisition date.
Revenue Recognition
Customer Revenue
The Company uses a single five-step model to identify and recognize revenue from contracts with customers ("Customer Revenue") upon transfer of control of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company records sales, franchise and excise taxes collected directly from customers and remitted directly to the taxing authorities on a net basis on the Consolidated Statements of Operations. In the event one of the parties to a contract has performed before the other, the Company would recognize a contract asset or contract liability depending on the relationship between the Company's performance and the customer's payment.
Energy Products and Services
A majority of the Company's energy revenue is derived from tariff-based sales arrangements approved by various regulatory commissions. These tariff-based revenues are mainly comprised of energy, transmission, distribution and natural gas and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. The Company's energy revenue that is nonregulated primarily relates to the Company's renewable energy business.
Revenue recognized is equal to what the Company has the right to invoice as it corresponds directly with the value to the customer of the Company's performance to date and includes billed and unbilled amounts. As of December 31, 2022 and 2021, trade receivables, net on the Consolidated Balance Sheets relate substantially to Customer Revenue, including unbilled revenue of $828 million and $718 million, respectively. Payments for amounts billed are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued.
Real Estate Services
The Company's HomeServices reportable segment consists of separate brokerage, mortgage and franchise businesses. Rates charged for brokerage, mortgage and franchise real estate services are established through contractual arrangements that establish the transaction price and the allocation of the price amongst the separate performance obligations.
The full-service residential real estate brokerage business has performance obligations to deliver integrated real estate services including brokerage services, title and closing services, property and casualty insurance, home warranties, relocation services, and other home-related services to customers. All performance obligations related to the full-service residential real estate brokerage business are satisfied in less than one year at the point in time when a real estate transaction is closed or when services are provided. Commission revenue from real estate brokerage transactions and related amounts due to agents are recognized when a real estate transaction is closed. Title and escrow closing fee revenue from real estate transactions and related amounts due to the title insurer are recognized at closing. Payments for amounts billed are generally due from the customer at closing.
The franchise business operates a network that has performance obligations to provide the right to use certain brand names and other related service marks as well as to provide orientation programs, training and consultation services, advertising programs and other services to its franchisees. The performance obligations related to the franchise business are satisfied over time or when the services are provided. Franchise royalty fees are sales-based variable consideration and are based on a percentage of commissions earned by franchisees on real estate sales, which are recognized when the sale closes. Meetings and training revenue, referral fees, late fees, service fees and franchise termination fees are earned when services have been completed. Payments for amounts billed are generally due from the franchisee within 30 days of billing.
Other Revenue
Energy Products and Services
Other revenue consists primarily of revenue related to power purchase agreements not considered Customer Revenue as they are recognized in accordance with ASC 815, "Derivatives and Hedging" and ASC 842, "Leases" and certain non-tariff-based revenue approved by the regulator that is not considered Customer Revenue within ASC 606, "Revenue from Contracts with Customers."
Real Estate Service
Mortgage and other revenue consists primarily of revenue related to the mortgage business. Mortgage fee revenue consists of amounts earned related to application and underwriting fees and fees on canceled loans. Fees associated with the origination of mortgage loans are recognized as earned. These amounts are not considered Customer Revenue as they are recognized in accordance with ASC 815, "Derivatives and Hedging," ASC 825, "Financial Instruments" and ASC 860, "Transfers and Servicing."
Unamortized Debt Premiums, Discounts and Debt Issuance Costs
Premiums, discounts and debt issuance costs incurred for the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Foreign Currency
The accounts of foreign-based subsidiaries are measured in most instances using the local currency of the subsidiary as the functional currency. Revenue and expenses of these businesses are translated into U.S. dollars at the average exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses from translating the financial statements of foreign-based operations are included in equity as a component of AOCI. Gains or losses arising from transactions denominated in a currency other than the functional currency of the entity that is party to the transaction are included in earnings.
Income Taxes
The Company's provision for income taxes has been computed on a stand-alone basis. Berkshire Hathaway includes the Company in its consolidated U.S. federal and Iowa state income tax returns and the majority of the Company's U.S. federal income tax is remitted to or received from Berkshire Hathaway.
Deferred income tax assets and liabilities are based on differences between the financial statement and income tax basis of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities associated with components of OCI are charged or credited directly to OCI. Changes in deferred income tax assets and liabilities associated with income tax benefits and expense for certain property-related basis differences and other various differences that the Company's regulated businesses deems probable to be passed on to their customers are charged or credited directly to a regulatory asset or liability and will be included in regulated rates when the temporary differences reverse. Other changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense or a regulatory asset or liability in the period of enactment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
Investment tax credits are deferred and amortized over the estimated useful lives of the related properties or as prescribed by various regulatory commissions. The Company has not established deferred income taxes on its undistributed foreign earnings that have been determined by management to be reinvested indefinitely.
The Company recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. The Company's unrecognized tax benefits are primarily included in accrued property, income and other taxes and other long-term liabilities on the Consolidated Balance Sheets. Estimated interest and penalties, if any, related to uncertain tax positions are included as a component of income tax expense on the Consolidated Statements of Operations.
(3) Business Acquisitions
BHE GT&S Acquisition
Transaction Description
On November 1, 2020, BHE completed its acquisition of substantially all of the natural gas transmission and storage business of Dominion Energy, Inc. ("DEI") and Dominion Energy Questar Corporation ("Dominion Questar"), exclusive of Dominion Energy Questar Pipeline, LLC and related entities (the "Questar Pipeline Group") (the "GT&S Transaction"). Under the terms of the Purchase and Sale Agreement, dated July 3, 2020 (the "GT&S Purchase Agreement"), BHE paid approximately $2.5 billion in cash, after post-closing adjustments (the "GT&S Cash Consideration") for 100% of the equity interests of Eastern Gas Transmission and Storage, Inc. ("EGTS") and Carolina Gas Transmission, LLC; 50% of the equity interests of Iroquois Gas Transmission System L.P. ("Iroquois"); and a 25% economic interest in Cove Point LNG, LP ("Cove Point"), consisting of 100% of the general partnership interest and 25% of the total limited partnership interests. BHE became the operator of Cove Point after the GT&S Transaction.
On October 5, 2020, DEI and Dominion Questar, as permitted under the terms of the GT&S Purchase Agreement, delivered notice to BHE of their election to terminate the GT&S Transaction with respect to the Questar Pipeline Group and, in connection with the execution of the Q-Pipe Purchase Agreement referenced below, to waive the related termination fee under the GT&S Purchase Agreement. Also on October 5, 2020, BHE entered into a second Purchase and Sale Agreement (the "Q-Pipe Purchase Agreement") with Dominion Questar providing for BHE's purchase of the Questar Pipeline Group from Dominion Questar (the "Q-Pipe Transaction") for a cash purchase price of approximately $1.3 billion (the "Q-Pipe Cash Consideration"), subject to adjustment for cash and indebtedness as of the closing.
Under the Q-Pipe Purchase Agreement, BHE delivered the Q-Pipe Cash Consideration of approximately $1.3 billion to Dominion Questar on November 2, 2020. Pursuant to the Q-Pipe Purchase Agreement, Dominion Questar agreed that, if the Q-Pipe Transaction did not close, it would repay all or (depending upon the repayment date) substantially all of the Q-Pipe Cash Consideration (the "Purchase Price Repayment Amount") to BHE on or prior to December 31, 2021.
On July 9, 2021, Dominion Questar and DEI delivered a written notice to BHE stating that BHE and Dominion Questar have mutually elected to terminate the Q-Pipe Purchase Agreement and on July 14, 2021, BHE received the Purchase Price Repayment Amount of approximately $1.3 billion in cash, which was included in proceeds from other investments on the Consolidated Statements of Cash Flows for the year ended December 31, 2021.
Included in BHE's Consolidated Statement of Operations within the BHE Pipeline Group reportable segment for the years ended December 31, 2022, 2021 and 2020, is operating revenue of $2,402 million, $2,159 million and $331 million, respectively, and net income attributable to BHE shareholders of $549 million, $316 million and $73 million, respectively, as a result of including BHE GT&S from November 1, 2020. Additionally, BHE incurred $9 million of direct transaction costs associated with the GT&S Transaction that are included in operating expense on the Consolidated Statement of Operations for the year ended December 31, 2020.
Pro Forma Financial Information
The following unaudited pro forma financial information reflects the consolidated results of operations of BHE and the amortization of the purchase price adjustments assuming the acquisition had taken place on January 1, 2019, excluding non-recurring transaction costs incurred by BHE during 2020 (in millions):
| | | | | |
| 2020 |
| |
| Operating revenue | $ | 22,581 | |
| |
| Net income attributable to BHE shareholders | $ | 6,800 | |
Other
In 2022, the Company completed various acquisitions totaling $314 million, net of cash acquired. The purchase price for each acquisition was allocated to the assets acquired and liabilities assumed, which related to residential real estate brokerage businesses, 300 MWs of long-term transmission rights and 399 MWs of wind-powered generating facilities. As a result of the various acquisitions, the Company acquired assets of $363 million, assumed liabilities of $65 million and recognized goodwill of $16 million.
In 2021, the Company completed various acquisitions totaling $122 million, net of cash acquired. The purchase price for each acquisition was allocated to the assets acquired and liabilities assumed, which related to residential real estate brokerage businesses. As a result of the various acquisitions, the Company acquired assets of $54 million, assumed liabilities of $61 million and recognized goodwill of $129 million.
(4) Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | 2022 | | 2021 |
| Regulated assets: | | | | | |
| Utility generation, transmission and distribution systems | 5-80 years | | $ | 92,759 | | | $ | 90,223 | |
| Interstate natural gas pipeline assets | 3-80 years | | 18,328 | | | 17,423 | |
| | | 111,087 | | | 107,646 | |
| Accumulated depreciation and amortization | | | (34,599) | | | (32,680) | |
| Regulated assets, net | | | 76,488 | | | 74,966 | |
| | | | | |
| Nonregulated assets: | | | | | |
| Independent power plants | 2-50 years | | 8,545 | | | 7,665 | |
| Cove Point LNG facility | 40 years | | 3,412 | | | 3,364 | |
| Other assets | 2-30 years | | 2,693 | | | 2,666 | |
| | | 14,650 | | | 13,695 | |
| Accumulated depreciation and amortization | | | (3,452) | | | (3,041) | |
| Nonregulated assets, net | | | 11,198 | | | 10,654 | |
| | | | | |
| | | 87,686 | | | 85,620 | |
| Construction work-in-progress | | | 5,357 | | | 4,196 | |
| Property, plant and equipment, net | | | $ | 93,043 | | | $ | 89,816 | |
Construction work-in-progress includes $4.9 billion and $3.8 billion as of December 31, 2022 and 2021, respectively, related to the construction of regulated assets.
(5) Jointly Owned Utility Facilities
Under joint facility ownership agreements, the Domestic Regulated Businesses, as tenants in common, have undivided interests in jointly owned generation, transmission, distribution and pipeline common facilities. The Company accounts for its proportionate share of each facility and each joint owner has provided financing for its share of each facility. Operating costs of each facility are assigned to joint owners based on their percentage of ownership or energy production, depending on the nature of the cost. Operating costs and expenses on the Consolidated Statements of Operations include the Company's share of the expenses of these facilities.
The amounts shown in the table below represent the Company's share in each jointly owned facility included in property, plant and equipment, net as of December 31, 2022 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated | | Construction |
| Company | | Facility In | | Depreciation and | | Work-in- |
| Share | | Service | | Amortization | | Progress |
| PacifiCorp: | | | | | | | |
| Jim Bridger Nos. 1-4 | 67 | % | | $ | 1,529 | | | $ | 914 | | | $ | 39 | |
| Hunter No. 1 | 94 | | | 517 | | | 227 | | | 3 | |
| Hunter No. 2 | 60 | | | 305 | | | 148 | | | 6 | |
| Wyodak | 80 | | | 491 | | | 273 | | | 1 | |
| Colstrip Nos. 3 and 4 | 10 | | | 262 | | | 178 | | | — | |
| Hermiston | 50 | | | 189 | | | 106 | | | — | |
| Craig Nos. 1 and 2 | 19 | | | 372 | | | 331 | | | — | |
| Hayden No. 1 | 25 | | | 77 | | | 52 | | | — | |
| Hayden No. 2 | 13 | | | 44 | | | 31 | | | — | |
| Transmission and distribution facilities | Various | | 916 | | | 274 | | | 129 | |
| Total PacifiCorp | | | 4,702 | | | 2,534 | | | 178 | |
| MidAmerican Energy: | | | | | | | |
| Louisa No. 1 | 88 | % | | 976 | | | 511 | | | 4 | |
Quad Cities Nos. 1 and 2(1) | 25 | | | 730 | | | 482 | | | 11 | |
| Walter Scott, Jr. No. 3 | 79 | | | 964 | | | 624 | | | 13 | |
Walter Scott, Jr. No. 4(2) | 60 | | | 171 | | | 127 | | | 7 | |
| George Neal No. 4 | 41 | | | 321 | | | 184 | | | 6 | |
Ottumwa No. 1(2) | 52 | | | 569 | | | 280 | | | 19 | |
| George Neal No. 3 | 72 | | | 535 | | | 312 | | | 20 | |
| Transmission facilities | Various | | 267 | | | 101 | | | 2 | |
| Total MidAmerican Energy | | | 4,533 | | | 2,621 | | | 82 | |
| NV Energy: | | | | | | | |
| Navajo | 11 | % | | 1 | | | 4 | | | — | |
| Valmy | 50 | | | 399 | | | 327 | | | 2 | |
| On Line Transmission Line | 25 | | | 161 | | | 34 | | | 1 | |
| Transmission facilities | Various | | 60 | | | 29 | | | 1 | |
| Total NV Energy | | | 621 | | | 394 | | | 4 | |
| BHE Pipeline Group: | | | | | | | |
| Ellisburg Pool | 39 | % | | 32 | | | 11 | | | — | |
| Ellisburg Station | 50 | | | 26 | | | 8 | | | 3 | |
| Harrison | 50 | | | 53 | | | 18 | | | — | |
| Leidy | 50 | | | 143 | | | 47 | | | 1 | |
| Oakford | 50 | | | 202 | | | 70 | | | 4 | |
| Common Facilities | Various | | 275 | | | 176 | | | — | |
| Total BHE Pipeline Group | | | 731 | | | 330 | | | 8 | |
| Total | | | $ | 10,587 | | | $ | 5,879 | | | $ | 272 | |
(1)Includes amounts related to nuclear fuel.
(2)Facility in-service and accumulated depreciation and amortization amounts are net of credits applied under Iowa regulatory arrangements totaling $733 million and $150 million, respectively.
(6) Leases
The following table summarizes the Company's leases recorded on the Consolidated Balance Sheet as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Right-of-use assets: | | | |
| Operating leases | $ | 545 | | | $ | 524 | |
| Finance leases | 418 | | | 448 | |
| Total right-of-use assets | $ | 963 | | | $ | 972 | |
| | | |
| Lease liabilities: | | | |
| Operating leases | $ | 605 | | | $ | 577 | |
| Finance leases | 432 | | | 463 | |
| Total lease liabilities | $ | 1,037 | | | $ | 1,040 | |
The following table summarizes the Company's lease costs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Variable | $ | 552 | | | $ | 611 | | $ | 592 |
| Operating | 136 | | | 161 | | 151 |
| Finance: | | | | | |
| Amortization | 20 | | | 23 | | 18 |
| Interest | 36 | | | 38 | | 40 |
| Short-term | 44 | | | 15 | | 20 |
| Total lease costs | $ | 788 | | | $ | 848 | | $ | 821 |
| | | | | |
| Weighted-average remaining lease term (years): | | | | | |
| Operating leases | 7.4 | | 7.6 | | 7.4 |
| Finance leases | 28.1 | | 28.1 | | 27.5 |
| | | | | |
| Weighted-average discount rate: | | | | | |
| Operating leases | 4.1 | % | | 4.3 | % | | 4.5 | % |
| Finance leases | 8.6 | % | | 8.6 | % | | 8.5 | % |
The following table summarizes the Company's supplemental cash flow information relating to leases for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | (141) | | | $ | (163) | | | $ | (152) | |
| Operating cash flows from finance leases | (36) | | | (38) | | | (40) | |
| Financing cash flows from finance leases | (25) | | | (28) | | | (24) | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | | | |
| Operating leases | $ | 131 | | | $ | 119 | | | $ | 83 | |
| Finance leases | 3 | | | 2 | | | 19 | |
The Company has the following remaining lease commitments as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Operating | | Finance | | Total |
| 2023 | $ | 158 | | | $ | 63 | | | $ | 221 | |
| 2024 | 126 | | | 62 | | | 188 | |
| 2025 | 101 | | | 61 | | | 162 | |
| 2026 | 78 | | | 60 | | | 138 | |
| 2027 | 53 | | | 56 | | | 109 | |
| Thereafter | 189 | | | 559 | | | 748 | |
| Total undiscounted lease payments | 705 | | | 861 | | | 1,566 | |
| Less - amounts representing interest | (100) | | | (429) | | | (529) | |
| Lease liabilities | $ | 605 | | | $ | 432 | | | $ | 1,037 | |
(7) Regulatory Matters
Regulatory Assets
Regulatory assets represent costs that are expected to be recovered in future regulated rates. The Company's regulatory assets reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
| Deferred net power costs | 1 year | | $ | 1,478 | | | $ | 531 | |
| Asset retirement obligations | 15 years | | 835 | | | 742 | |
Employee benefit plans(1) | 14 years | | 490 | | | 472 | |
Deferred income taxes(2) | Various | | 373 | | | 342 | |
| Asset disposition costs | Various | | 231 | | | 285 | |
| Demand side management | 10 years | | 224 | | | 211 | |
| Levelized depreciation | 28 years | | 151 | | | 135 | |
| Unrealized losses on regulated derivative contracts | 1 year | | 112 | | | 157 | |
| Environmental costs | 30 years | | 111 | | | 108 | |
| Wildfire mitigation and vegetation management costs | Various | | 111 | | | 21 | |
| Deferred operating costs | 10 years | | 83 | | | 103 | |
| Other | Various | | 863 | | | 856 | |
| Total regulatory assets | | | $ | 5,062 | | | $ | 3,963 | |
| | | | | |
| Reflected as: | | | | | |
| Current assets | | | $ | 1,319 | | | $ | 544 | |
| Noncurrent assets | | | 3,743 | | | 3,419 | |
| Total regulatory assets | | | $ | 5,062 | | | $ | 3,963 | |
(1)Includes amounts not yet recognized as a component of net periodic benefit cost that are expected to be included in regulated rates when recognized.
(2)Amounts primarily represent income tax benefits related to certain property-related basis differences and other various differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
The Company had regulatory assets not earning a return on investment of $2.3 billion and $1.8 billion as of December 31, 2022 and 2021, respectively.
Regulatory Liabilities
Regulatory liabilities represent income to be recognized or amounts to be returned to customers in future periods. The Company's regulatory liabilities reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
Deferred income taxes(1) | Various | | $ | 2,901 | | | $ | 3,185 | |
Cost of removal(2) | 27 years | | 2,578 | | | 2,424 | |
| Revenue sharing mechanisms | 2 years | | 426 | | | 188 | |
| Unrealized gains on regulated derivative contracts | 1 year | | 343 | | | 86 | |
| Asset retirement obligations | 31 years | | 250 | | | 345 | |
| Levelized depreciation | 28 years | | 245 | | | 259 | |
Employee benefit plans(3) | Various | | 180 | | | 243 | |
| Other | Various | | 446 | | | 484 | |
| Total regulatory liabilities | | | $ | 7,369 | | | $ | 7,214 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 299 | | | $ | 254 | |
| Noncurrent liabilities | | | 7,070 | | | 6,960 | |
| Total regulatory liabilities | | | $ | 7,369 | | | $ | 7,214 | |
(1)Amounts primarily represent income tax liabilities related to the federal tax rate change from 35% to 21% that are probable to be passed on to customers, offset by income tax benefits related to certain property-related basis differences and other various differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
(2)Amounts represent estimated costs, as accrued through depreciation rates and exclusive of ARO liabilities, of removing regulated property, plant and equipment in accordance with accepted regulatory practices. Amounts are deducted from rate base or otherwise accrue a carrying cost.
(3)Includes amounts not yet recognized as a component of net periodic benefit cost that are expected to be returned to customers in future periods when recognized.
(8) Investments and Restricted Cash and Cash Equivalents and Investments
Investments and restricted cash and cash equivalents and investments consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Investments: | | | |
| BYD Company Limited common stock | $ | 3,763 | | | $ | 7,693 | |
| U.S. Treasury Bills | 1,931 | | | — | |
| Rabbi trusts | 433 | | | 492 | |
| Other | 335 | | | 305 | |
| Total investments | 6,462 | | | 8,490 | |
| | | |
| Equity method investments: | | | |
| BHE Renewables tax equity investments | 4,535 | | | 4,931 | |
| Electric Transmission Texas, LLC | 623 | | | 595 | |
| Iroquois Gas Transmission System, L.P. | 600 | | | 735 | |
| Other | 304 | | | 293 | |
| Total equity method investments | 6,062 | | | 6,554 | |
| | | |
| Restricted cash and cash equivalents and investments: | | | |
| Quad Cities Station nuclear decommissioning trust funds | 664 | | | 768 | |
| Other restricted cash and cash equivalents | 226 | | | 148 | |
| Total restricted cash and cash equivalents and investments | 890 | | | 916 | |
| | | |
| Total investments and restricted cash and cash equivalents and investments | $ | 13,414 | | | $ | 15,960 | |
| | | |
| Reflected as: | | | |
| Other current assets | $ | 2,141 | | | $ | 172 | |
| Noncurrent assets | 11,273 | | | 15,788 | |
| Total investments and restricted cash and cash equivalents and investments | $ | 13,414 | | | $ | 15,960 | |
Investments
BHE's investment in BYD Company Limited common stock is accounted for as a marketable security with changes in fair value recognized in net income.
Rabbi trusts primarily hold corporate-owned life insurance on certain current and former key executives and directors. The Rabbi trusts were established to hold investments used to fund the obligations of various nonqualified executive and director compensation plans and to pay the costs of the trusts. The amount represents the cash surrender value of all of the policies included in the Rabbi trusts, net of amounts borrowed against the cash surrender value.
(Losses) gains on marketable securities, net recognized during the period consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Unrealized (losses) gains recognized on marketable securities held at the reporting date | $ | (1,487) | | | $ | 1,819 | | | $ | 4,791 | |
| Net (losses) gains recognized on marketable securities sold during the period | (515) | | | 4 | | | 6 | |
| (Losses) gains on marketable securities, net | $ | (2,002) | | | $ | 1,823 | | | $ | 4,797 | |
Equity Method Investments
The Company has invested in wind 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 made no contributions in 2022 and 2021 and $2,736 million in 2020. Once a project achieves commercial operation, the Company enters into a partnership agreement with the project sponsor that directs and allocates the operating profits and tax benefits from the project.
BHE, through separate subsidiaries, owns (i) 50% of Iroquois, which owns and operates an interstate natural gas pipeline located in the states of New York and Connecticut; (ii) 50% of Electric Transmission Texas, LLC, which owns and operates electric transmission assets in the Electric Reliability Council of Texas footprint; (iii) 50% of JAX LNG, LLC, which is an LNG supplier in Florida serving the growing marine and truck LNG markets; and (iv) 66.67% of Bridger Coal Company ("Bridger Coal"), which is a coal mining joint venture that supplies coal to PacifiCorp's Jim Bridger Nos. 1-4 generating facility. Bridger Coal is being accounted for under the equity method of accounting as the power to direct the activities that most significantly impact Bridger Coal's economic performance are shared with the joint venture partner. Coal purchases from Bridger Coal for the years ended December 31, 2022, 2021 and 2020 totaled $100 million, $132 million and $128 million, respectively.
Restricted Investments
MidAmerican Energy has established a trust for the investment of funds for decommissioning the Quad Cities Nuclear Station Units 1 and 2 ("Quad Cities Station"). The debt and equity securities in the trust are reported at fair value. Funds are invested in the trust in accordance with applicable federal and state investment guidelines and are restricted for use as reimbursement for costs of decommissioning the Quad Cities Station, which are currently licensed for operation until December 2032.
(9) Short-term Debt and Credit Facilities
The following table summarizes BHE's and its subsidiaries' availability under their credit facilities as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | MidAmerican | | NV | | Northern | | BHE | | | | |
| BHE | | PacifiCorp | | Funding | | Energy | | Powergrid | | Canada | | HomeServices | | Total(1) |
| 2022: | | | | | | | | | | | | | | | |
Credit facilities(2) | $ | 3,500 | | | $ | 1,200 | | | $ | 1,509 | | | $ | 650 | | | $ | 296 | | | $ | 793 | | | $ | 2,925 | | | $ | 10,873 | |
| Less: | | | | | | | | | | | | | | | |
| Short-term debt | (245) | | | — | | | — | | | — | | | (120) | | | (197) | | | (557) | | | (1,119) | |
Tax-exempt bond support and letters of credit | — | | | (249) | | | (370) | | | — | | | — | | | (1) | | | — | | | (620) | |
| Net credit facilities | $ | 3,255 | | | $ | 951 | | | $ | 1,139 | | | $ | 650 | | | $ | 176 | | | $ | 595 | | | $ | 2,368 | | | $ | 9,134 | |
| | | | | | | | | | | | | | | |
| 2021: | | | | | | | | | | | | | | | |
Credit facilities(2) | $ | 3,500 | | | $ | 1,200 | | | $ | 1,509 | | | $ | 650 | | | $ | 271 | | | $ | 851 | | | $ | 3,300 | | | $ | 11,281 | |
| Less: | | | | | | | | | | | | | | | |
| Short-term debt | — | | | — | | | — | | | (339) | | | (1) | | | (245) | | | (1,424) | | | (2,009) | |
Tax-exempt bond support and letters of credit | — | | | (218) | | | (370) | | | — | | | — | | | (1) | | | — | | | (589) | |
| Net credit facilities | $ | 3,500 | | | $ | 982 | | | $ | 1,139 | | | $ | 311 | | | $ | 270 | | | $ | 605 | | | $ | 1,876 | | | $ | 8,683 | |
(1)The table does not include unused credit facilities and letters of credit for investments that are accounted for under the equity method.
(2)Includes $55 million and $1 million, respectively, drawn on capital expenditure and other uncommitted credit facilities at Northern Powergrid as of December 31, 2022 and 2021.
As of December 31, 2022, the Company was in compliance with the covenants of its credit facilities and letter of credit arrangements.
BHE
BHE has a $3.5 billion unsecured credit facility expiring in June 2025 with an unlimited number of maturity extension options subject to lender consent. This credit facility, which is for general corporate purposes, supports BHE's commercial paper program and provides for the issuance of letters of credit, has a variable interest rate based on the Secured Overnight Financing Rate ("SOFR") or a base rate, at BHE's option, plus a spread that varies based on BHE's credit ratings for its senior unsecured long-term debt securities.
As of December 31, 2022 and 2021, BHE had $245 million and $— million of commercial paper borrowings outstanding at a weighted average interest rate of 4.55% and —%, respectively. 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.
As of December 31, 2022 and 2021, BHE had $101 million of letters of credit outstanding outside of its credit facility. These letters of credit primarily support power purchase agreements and debt service requirements at certain subsidiaries of BHE Renewables, LLC expiring through January 2024 and have provisions that automatically extend the annual expiration dates for an additional year unless the issuing bank elects not to renew a letter of credit prior to the expiration date.
PacifiCorp
PacifiCorp has a $1.2 billion unsecured credit facility expiring in June 2025 with an unlimited number of maturity extension options, subject to lender consent. The credit facility, which supports PacifiCorp's commercial paper program and certain series of its tax-exempt bond obligations and provides for the issuance of letters of credit, has a variable interest rate based on SOFR 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.
In January 2023, PacifiCorp entered into an additional $800 million 364-day unsecured credit facility expiring in January 2024.No amounts are currently outstanding against this new credit facility.
As of December 31, 2022 and 2021, PacifiCorp did not have any commercial paper borrowings outstanding. 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 December 31, 2022 and 2021, PacifiCorp had $38 million and $19 million, respectively, of fully available letters of credit issued under committed arrangements outside of its credit facility in support of certain transactions required by third parties that generally have provisions that automatically extend the annual expiration dates for an additional year unless the issuing bank elects not to renew a letter of credit prior to the expiration date.
MidAmerican Funding
As of December 31, 2022, MidAmerican Energy has a $1.5 billion unsecured credit facility expiring in June 2025 with an unlimited number of maturity extension options, subject to lender consent. 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 SOFR 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.
As of December 31, 2022 and 2021, MidAmerican Energy had no commercial paper borrowings outstanding. The $1.5 billion credit facility requires that MidAmerican Energy's ratio of consolidated debt, including current maturities, to total capitalization not exceed 0.65 to 1.0 as of the last day of any quarter.
As of December 31, 2022 and 2021, MidAmerican Energy had $34 million and $42 million, respectively, of fully available letters of credit issued under committed arrangements outside of its credit facility in support of certain transactions required by third parties that generally have provisions that automatically extend the annual expiration dates for an additional year unless the issuing bank elects not to renew a letter of credit prior to the expiration date.
NV Energy
Nevada Power has a $400 million secured credit facility expiring in June 2025 and Sierra Pacific has a $250 million secured credit facility expiring in June 2025 each with an unlimited number of maturity extension options, subject to lender consent. These credit facilities, which are for general corporate purposes and provide for the issuance of letters of credit, have a variable interest rate based on SOFR or a base rate, at each of the Nevada Utilities' option, plus a spread that varies based on each of the Nevada Utilities' credit ratings for its senior secured long‑term debt securities. As of December 31, 2022 and 2021, the Nevada Utilities had borrowings of $— million and $339 million outstanding under these credit facilities at a weighted average interest rate of —% and 0.86%, respectively. Amounts due under each credit facility are collateralized by each of the Nevada Utilities' general and refunding mortgage bonds. These credit facilities require that each of the Nevada Utilities' 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.
Northern Powergrid
Northern Powergrid has a £200 million unsecured credit facility expiring in December 2025 with a one-year maturity extension option remaining. The credit facility has a variable interest rate based on Sterling Overnight Index Average plus a spread that varies based on Northern Powergrid's credit ratings and a credit adjustment spread that varies based on the tenor of any borrowings. The credit facility requires that the ratio of consolidated senior total net debt, including current maturities, to regulated asset value not exceed 0.8 to 1.0 at Northern Powergrid and 0.65 to 1.0 at each of Northern Powergrid (Northeast) plc and Northern Powergrid (Yorkshire) plc as of June 30 and December 31. Northern Powergrid's interest coverage ratio shall not be less than 2.5 to 1.0.
As of December 31, 2022 and 2021, Northern Powergrid had $65 million and $— million outstanding under this facility at a weighted average interest rate of 3.56% and —%, respectively.
AltaLink
AltaLink has a C$500 million secured revolving term credit facility expiring in December 2027 with a recurring one-year extension option subject to lender consent. The credit facility, which supports AltaLink's commercial paper program and may also be used for general corporate purposes, has a variable interest rate based on the Canadian bank prime lending rate or a spread above the Bankers' Acceptance rate, at AltaLink's option, based on AltaLink's credit ratings for its senior secured long-term debt securities. In addition, AltaLink has a C$75 million secured revolving term credit facility expiring in December 2027 with a recurring one-year extension option subject to lender consent. The credit facility, which may be used for general corporate purposes and letters of credit, has a variable interest rate based on the Canadian bank prime lending rate, U.S. base rate, or a spread above the Bankers' Acceptance rate, at AltaLink's option, based on AltaLink's credit ratings for its senior secured long-term debt securities.
As of December 31, 2022 and 2021, AltaLink had $89 million and $108 million outstanding under these facilities at a weighted average interest rate of 4.59% and 0.35%, respectively. The credit facilities require the ratio of consolidated indebtedness to total capitalization not exceed 0.75 to 1.0 measured as of the last day of each quarter.
AltaLink Investments, L.P. has a C$300 million unsecured revolving term credit facility expiring in December 2026 with a recurring one-year extension option subject to lender consent. The credit facility, which may be used for general corporate purposes and letters of credit to a maximum of C$10 million, has a variable interest rate based on the Canadian bank prime lending rate, U.S. base rate, or a spread above the Bankers' Acceptance rate, at AltaLink Investments, L.P.'s option, based on AltaLink Investments, L.P.'s credit ratings for its senior unsecured long-term debt securities.
AltaLink Investments, L.P. also has a C$200 million revolving term credit facility expiring in April 2023 with a recurring one-year extension option subject to lender consent. The credit facility, which may be used for general corporate purposes and letters of credit to a maximum of C$10 million, has a variable interest rate based on the Canadian bank prime lending rate, U.S. base rate, or a spread above the Bankers' Acceptance rate, at AltaLink Investments, L.P.'s option, based on AltaLink Investments, L.P.'s credit ratings for its senior unsecured long-term debt securities. On an annual basis, with the consent of the lenders, AltaLink Investments, L.P. can request that the maturity date of the credit facility be extended for a further 365 days.
As of December 31, 2022 and 2021, AltaLink Investments, L.P. had $108 million and $137 million outstanding under this facility at a weighted average interest rate of 5.71% and 1.46%, respectively. The credit facilities require the ratio of consolidated total debt to capitalization not exceed 0.8 to 1.0 and earnings before interest, taxes, depreciation and amortization to interest expense for the four fiscal quarters ended not be less than 2.25 to 1.0 measured as of the last day of each quarter.
HomeServices
HomeServices has an $700 million unsecured credit facility expiring in September 2026. The credit facility, which is for general corporate purposes 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 HomeServices' option, plus a spread that varies based on HomeServices' total net leverage ratio as of the last day of each quarter. As of December 31, 2022 and 2021, HomeServices had $115 million and $250 million, respectively, outstanding under its credit facility with a weighted average interest rate of 5.17% and 0.95%, respectively.
Through its subsidiaries, HomeServices maintains mortgage lines of credit totaling $2.2 billion and $2.6 billion as of December 31, 2022 and 2021, respectively, used for mortgage banking activities that expire beginning in March 2023 through September 2023. The mortgage lines of credit have variable rates based on the Bloomberg Short-term Bank Yield Index or SOFR, plus a spread. Collateral for these credit facilities is comprised of residential property being financed and is equal to the loans funded with the facilities. As of December 31, 2022 and 2021, HomeServices had $442 million and $1.2 billion, respectively, outstanding under these mortgage lines of credit at a weighted average interest rate of 6.09% and 1.91%, respectively.
BHE Renewables Letters of Credit
As of December 31, 2022 and 2021, certain renewable projects collectively have letters of credit outstanding of $309 million and $311 million, respectively, primarily in support of the power purchase agreements and large generator interconnection agreements associated with the projects.
(10) BHE Debt
Senior Debt
BHE senior debt represents unsecured senior obligations of BHE that are redeemable in whole or in part at any time generally with make whole premiums. BHE senior debt consists of the following, including fair value adjustments and unamortized premiums, discounts and debt issuance costs, as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| | | | | |
2.80% Senior Notes, due 2023 | $ | 400 | | | $ | 400 | | | $ | 398 | |
3.75% Senior Notes, due 2023 | 500 | | | 500 | | | 499 | |
3.50% Senior Notes, due 2025 | 400 | | | 398 | | | 398 | |
4.05% Senior Notes, due 2025 | 1,250 | | | 1,245 | | | 1,246 | |
3.25% Senior Notes, due 2028 | 600 | | | 594 | | | 594 | |
8.48% Senior Notes, due 2028 | 256 | | | 266 | | | 260 | |
3.70% Senior Notes, due 2030 | 1,100 | | | 1,095 | | | 1,096 | |
1.65% Senior Notes, due 2031 | 500 | | | 497 | | | 497 | |
6.125% Senior Bonds, due 2036 | 1,670 | | | 1,661 | | | 1,661 | |
5.95% Senior Bonds, due 2037 | 550 | | | 548 | | | 548 | |
6.50% Senior Bonds, due 2037 | 225 | | | 223 | | | 223 | |
5.15% Senior Notes, due 2043 | 750 | | | 740 | | | 740 | |
4.50% Senior Notes, due 2045 | 750 | | | 738 | | | 738 | |
3.80% Senior Notes, due 2048 | 750 | | | 738 | | | 738 | |
4.45% Senior Notes, due 2049 | 1,000 | | | 990 | | | 990 | |
4.25% Senior Notes, due 2050 | 900 | | | 889 | | | 889 | |
2.85% Senior Notes, due 2051 | 1,500 | | | 1,487 | | | 1,488 | |
4.60% Senior Notes, due 2053 | 1,000 | | | 987 | | | — | |
| Total BHE Senior Debt | $ | 14,101 | | | $ | 13,996 | | | $ | 13,003 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 900 | | | $ | — | |
| Noncurrent liabilities | | | 13,096 | | | 13,003 | |
| Total BHE Senior Debt | | | $ | 13,996 | | | $ | 13,003 | |
Junior Subordinated Debentures
BHE junior subordinated debentures consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| | | | | |
5.00% Junior subordinated debentures, due 2057 | 100 | | | 100 | | | 100 | |
Total BHE junior subordinated debentures - noncurrent | $ | 100 | | | $ | 100 | | | $ | 100 | |
The junior subordinated debentures are held by a minority shareholder and are redeemable at BHE's option at any time from and after June 15, 2037, at par plus accrued and unpaid interest. Interest expense to the minority shareholder was $5 million for each of the years ended December 31, 2022, 2021 and 2020.
(11) Subsidiary Debt
BHE's direct and indirect subsidiaries are organized as legal entities separate and apart from BHE and its other subsidiaries. Pursuant to separate financing agreements, substantially all of PacifiCorp's electric utility properties; the equity interest of MidAmerican Funding's subsidiary; MidAmerican Energy's electric utility properties in the state of Iowa; substantially all of Nevada Power's and Sierra Pacific's properties in the state of Nevada; AltaLink's transmission properties; and substantially all of the assets of the subsidiaries of BHE Renewables that are direct or indirect owners of wind and solar generation projects are pledged or encumbered to support or otherwise provide the security for their related subsidiary debt. 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 which 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. The long-term debt of BHE's subsidiaries may include provisions that allow BHE's subsidiaries to redeem such debt in whole or in part at any time. These provisions generally include make-whole premiums.
Distributions at these separate legal entities are limited by various covenants including, among others, leverage ratios, interest coverage ratios and debt service coverage ratios. As of December 31, 2022, all subsidiaries were in compliance with their long-term debt covenants.
Long-term debt of subsidiaries consists of the following, including fair value adjustments and unamortized premiums, discounts and debt issuance costs, as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| | | | | |
| PacifiCorp | $ | 9,742 | | | $ | 9,666 | | | $ | 8,730 | |
| MidAmerican Funding | 8,057 | | | 7,954 | | | 7,946 | |
| NV Energy | 4,386 | | | 4,354 | | | 3,675 | |
| Northern Powergrid | 3,085 | | | 3,054 | | | 3,287 | |
| BHE Pipeline Group | 5,518 | | | 5,849 | | | 5,924 | |
| BHE Transmission | 3,509 | | | 3,495 | | | 3,906 | |
| BHE Renewables | 3,064 | | | 3,027 | | | 3,043 | |
| HomeServices | 140 | | | 140 | | | 148 | |
| Total subsidiary debt | $ | 37,501 | | | $ | 37,539 | | | $ | 36,659 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 2,301 | | | $ | 1,265 | |
| Noncurrent liabilities | | | 35,238 | | | 35,394 | |
| Total subsidiary debt | | | $ | 37,539 | | | $ | 36,659 | |
PacifiCorp
PacifiCorp's long-term debt consists of the following, including unamortized premiums, discounts and debt issuance costs as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| First mortgage bonds: | | | | | |
2.95% to 8.23%, due through 2026 | $ | 1,224 | | | $ | 1,223 | | | $ | 1,377 | |
2.70% to 7.70%, due 2029 to 2031 | 1,100 | | | 1,095 | | | 1,094 | |
5.25% to 6.25%, due 2034 to 2037 | 2,050 | | | 2,042 | | | 2,042 | |
4.10% to 6.35%, due 2038 to 2042 | 1,250 | | | 1,239 | | | 1,238 | |
2.90% to 5.35%, due 2049 to 2053 | 3,900 | | | 3,849 | | | 2,761 | |
Variable-rate series, tax-exempt bond obligations (2022-3.75% to 4.10%; 2021-0.12% to 0.14%): | | | | | |
Due 2025 | 25 | | | 25 | | | 25 | |
Due 2024 to 2025(1) | 193 | | | 193 | | | 193 | |
| Total PacifiCorp | $ | 9,742 | | | $ | 9,666 | | | $ | 8,730 | |
(1)Secured by pledged first mortgage bonds registered to and held by the tax-exempt bond trustee generally with the same interest rates, maturity dates and redemption provisions as the tax-exempt bond obligations.
The issuance of PacifiCorp's first mortgage bonds is limited by available property, earnings tests and other provisions of PacifiCorp's mortgage. Approximately $33 billion of PacifiCorp's eligible property (based on original cost) was subject to the lien of the mortgage as of December 31, 2022.
MidAmerican Funding
MidAmerican Funding's long-term debt consists of the following, including fair value adjustments and unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| MidAmerican Funding: | | | | | |
6.927% Senior Bonds, due 2029 | $ | 239 | | | $ | 240 | | | $ | 240 | |
| Fair value adjustment | — | | | (15) | | | (15) | |
| MidAmerican Funding, net of fair value adjustments | 239 | | | 225 | | | 225 | |
| | | | | |
| MidAmerican Energy: | | | | | |
| First Mortgage Bonds: | | | | | |
3.70%, due 2023 | 250 | | | 250 | | | 250 | |
3.50%, due 2024 | 500 | | | 500 | | | 501 | |
3.10%, due 2027 | 375 | | | 374 | | | 373 | |
3.65%, due 2029 | 850 | | | 859 | | | 860 | |
4.80%, due 2043 | 350 | | | 347 | | | 346 | |
4.40%, due 2044 | 400 | | | 395 | | | 395 | |
4.25%, due 2046 | 450 | | | 446 | | | 446 | |
3.95%, due 2047 | 475 | | | 471 | | | 470 | |
3.65%, due 2048 | 700 | | | 689 | | | 689 | |
4.25%, due 2049 | 900 | | | 875 | | | 874 | |
3.15%, due 2050 | 600 | | | 592 | | | 592 | |
2.70%, due 2052 | 500 | | | 492 | | | 492 | |
| Notes: | | | | | |
6.75% Series, due 2031 | 400 | | | 397 | | | 397 | |
5.75% Series, due 2035 | 300 | | | 298 | | | 298 | |
5.80% Series, due 2036 | 350 | | | 348 | | | 348 | |
Transmission upgrade obligation, 3.20% to 7.81%, due 2036 to 2042 | 48 | | | 27 | | | 22 | |
| Tax-exempt bond obligations - | | | | | |
Variable-rate tax-exempt bond obligation series: (weighted average interest rate - 2022-3.83%, 2021-0.13%), due 2023-2047 | 370 | | | 369 | | | 368 | |
| Total MidAmerican Energy | 7,818 | | | 7,729 | | | 7,721 | |
| Total MidAmerican Funding | $ | 8,057 | | | $ | 7,954 | | | $ | 7,946 | |
Pursuant to MidAmerican Energy's mortgage dated September 9, 2013, MidAmerican Energy's first mortgage bonds, currently and from time to time outstanding, are secured by a first mortgage lien on substantially all of its electric generating, transmission and distribution property within the state of Iowa, subject to certain exceptions and permitted encumbrances. Approximately $24 billion of MidAmerican Energy's eligible property, based on original cost, was subject to the lien of the mortgage as of December 31, 2022. Additionally, MidAmerican Energy's senior notes outstanding are equally and ratably secured with the first mortgage bonds as required by the indentures under which the senior notes were issued.
MidAmerican Energy's variable-rate tax-exempt obligations bear interest at rates that are periodically established through remarketing of the bonds in the short-term tax-exempt market. MidAmerican Energy, at its option, may change the mode of interest calculation for these bonds by selecting from among several floating or fixed rate alternatives. The interest rates shown in the table above are the weighted average interest rates as of December 31, 2022 and 2021. MidAmerican Energy maintains revolving credit facility agreements to provide liquidity for holders of these issues. Additionally, MidAmerican Energy's obligations associated with $180 million of the variable rate, tax-exempt bond obligations are secured by an equal amount of first mortgage bonds pursuant to MidAmerican Energy's mortgage dated September 9, 2013, as supplemented and amended.
NV Energy
NV Energy's long-term debt consists of the following, including fair value adjustments and unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| | | | | |
| | | | | |
| | | | | |
| Nevada Power: | | | | | |
| General and refunding mortgage securities: | | | | | |
| | | | | |
3.700% Series CC, due 2029 | $ | 500 | | | $ | 497 | | | $ | 497 | |
2.400% Series DD, due 2030 | 425 | | | 422 | | | 422 | |
6.650% Series N, due 2036 | 367 | | | 360 | | | 359 | |
6.750% Series R, due 2037 | 349 | | | 346 | | | 346 | |
5.375% Series X, due 2040 | 250 | | | 248 | | | 248 | |
5.450% Series Y, due 2041 | 250 | | | 239 | | | 239 | |
3.125% Series EE, due 2050 | 300 | | | 298 | | | 297 | |
5.900% Series GG, due 2053 | 400 | | | 394 | | | — | |
| Tax-exempt refunding revenue bond obligations: | | | | | |
| Fixed-rate series: | | | | | |
1.875% Pollution Control Bonds Series 2017A, due 2032(1) | 40 | | | 39 | | | 39 | |
1.650% Pollution Control Bonds Series 2017, due 2036(1) | 40 | | | 39 | | | 39 | |
1.650% Pollution Control Bonds Series 2017B, due 2039(1) | 13 | | | 13 | | | 13 | |
Variable-rate 4.821% Term Loan, due 2024(2) | 300 | | | 300 | | | — | |
| Total Nevada Power | 3,234 | | | 3,195 | | | 2,499 | |
| Fair value adjustments | — | | | 10 | | | 11 |
| Total Nevada Power, net of fair value adjustments | 3,234 | | | 3,205 | | | 2,510 | |
| | | | | |
| Sierra Pacific: | | | | | |
| General and refunding mortgage securities: | | | | | |
3.375% Series T, due 2023 | 250 | | | 249 | | | 249 | |
2.600% Series U, due 2026 | 400 | | | 397 | | | 397 | |
6.750% Series P, due 2037 | 252 | | | 254 | | | 253 | |
4.710% Series W, due 2052 | 250 | | | 248 | | | — | |
| Tax-exempt refunding revenue bond obligations: | | | | | |
| Fixed-rate series: | | | | | |
1.850% Pollution Control Series 2016B, due 2029 | — | | | — | | | 30 | |
3.000% Gas and Water Series 2016B, due 2036 | — | | | — | | | 60 | |
0.625% Water Facilities Series 2016C, due 2036 | — | | | — | | | 30 | |
2.050% Water Facilities Series 2016D, due 2036 | — | | | — | | | 25 | |
2.050% Water Facilities Series 2016E, due 2036 | — | | | — | | | 25 | |
2.050% Water Facilities Series 2016F, due 2036 | — | | | — | | | 75 | |
1.850% Water Facilities Series 2016G, due 2036 | — | | | — | | | 20 | |
| Total Sierra Pacific | 1,152 | | | 1,148 | | | 1,164 | |
| Fair value adjustments | — | | | 1 | | | 1 | |
| Total Sierra Pacific, net of fair value adjustment | 1,152 | | | 1,149 | | | 1,165 | |
| Total NV Energy | $ | 4,386 | | | $ | 4,354 | | | $ | 3,675 | |
(1) Subject to mandatory purchase by Nevada Power in March 2023 at which date the interest rate may be adjusted.
(2) Amounts borrowed under the facility bear interest at variable rates based on SOFR or a base rate, at Nevada Power's option, plus a pricing margin.
The issuance of General and Refunding Mortgage Securities by the Nevada Utilities are subject to PUCN approval and are limited by available property and other provisions of the mortgage indentures for each of Nevada Power and Sierra Pacific. As of December 31, 2022, approximately $9.8 billion of Nevada Power's and $4.9 billion of Sierra Pacific's (based on original cost) property was subject to the liens of the mortgages.
Northern Powergrid
Northern Powergrid and its subsidiaries' long-term debt consists of the following, including fair value adjustments and unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value(1) | | 2022 | | 2021 |
| | | | | |
4.133% European Investment Bank loans, due 2022 | $ | — | | | $ | — | | | $ | 204 | |
7.25% Bonds, due 2022 | — | | | — | | | 269 | |
2.50% Bonds, due 2025 | 182 | | | 181 | | | 202 | |
2.073% European Investment Bank loan, due 2025 | 60 | | | 62 | | | 69 | |
2.564% European Investment Bank loans, due 2027 | 302 | | | 301 | | | 337 | |
7.25% Bonds, due 2028 | 224 | | | 227 | | | 254 | |
4.375% Bonds, due 2032 | 182 | | | 179 | | | 200 | |
5.125% Bonds, due 2035 | 242 | | | 240 | | | 268 | |
5.125% Bonds, due 2035 | 182 | | | 180 | | | 201 | |
2.750% Bonds, due 2049 | 182 | | | 178 | | | 200 | |
3.250% Bonds, due 2052 | 423 | | | 419 | | | — | |
2.250% Bonds, due 2059 | 363 | | | 355 | | | 398 | |
1.875% Bonds, due 2062 | 363 | | | 356 | | | 398 | |
Variable-rate loan, due 2025(2) | 163 | | | 164 | | | — | |
Variable-rate loan, due 2026(3) | 217 | | | 212 | | | 287 | |
| Total Northern Powergrid | $ | 3,085 | | | $ | 3,054 | | | $ | 3,287 | |
(1)The par values for these debt instruments are denominated in sterling.
(2)Amortizes quarterly and the loan is 70% floating and 30% fixed. The Company has entered into an interest rate swap that fixes the interest rate on 100% of the floating rate portion. The variable interest rate as of December 31, 2022, was 5.20% (including 2.00% margin) and the average fixed interest rate was 3.09% (including 2.00% margin).
(3)Amortizes semiannually and the Company has entered into an interest rate swap that fixes the interest rate on 80% of the outstanding debt. The variable interest rate as of December 31, 2022 was 4.98% (including 1.55% margin) and the fixed interest rate was 2.45% (including 1.55% margin), resulting in a blended rate of 2.95%.
BHE Pipeline Group
BHE Pipeline Group's long-term debt consists of the following, including fair value adjustments and unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| Eastern Energy Gas: | | | | | |
2.875% Senior Notes, due 2023 | $ | 250 | | | $ | 250 | | | $ | 250 | |
3.55% Senior Notes, due 2023 | 400 | | | 399 | | | 399 | |
2.50% Senior Notes, due 2024 | 600 | | | 598 | | | 597 | |
3.60% Senior Notes, due 2024 | 339 | | | 338 | | | 338 | |
3.32% Senior Notes, due 2026 (€250)(1) | 268 | | | 267 | | | 283 | |
3.00% Senior Notes, due 2029 | 174 | | | 173 | | | 173 | |
3.80% Senior Notes, due 2031 | 150 | | | 150 | | | 150 | |
4.80% Senior Notes, due 2043 | 54 | | | 53 | | | 53 | |
4.60% Senior Notes, due 2044 | 56 | | | 56 | | | 56 | |
3.90% Senior Notes, due 2049 | 27 | | | 26 | | | 26 | |
| | | | | |
| EGTS: | | | | | |
3.60% Senior Notes, due 2024 | 111 | | | 110 | | | 110 | |
3.00% Senior Notes, due 2029 | 426 | | | 422 | | | 422 | |
4.80% Senior Notes, due 2043 | 346 | | | 342 | | | 341 | |
4.60% Senior Notes, due 2044 | 444 | | | 437 | | | 437 | |
3.90% Senior Notes, due 2049 | 273 | | | 271 | | | 271 | |
| Total Eastern Energy Gas | 3,918 | | | 3,892 | | | 3,906 | |
| Fair value adjustments | — | | | 368 | | | 430 | |
| Total Eastern Energy Gas, net of fair value adjustments | 3,918 | | | 4,260 | | | 4,336 | |
| | | | | |
| Northern Natural Gas: | | | | | |
5.80% Senior Bonds, due 2037 | 150 | | | 149 | | | 149 | |
4.10% Senior Bonds, due 2042 | 250 | | | 248 | | | 248 | |
4.30% Senior Bonds, due 2049 | 650 | | | 652 | | | 651 | |
3.40% Senior Bonds, due 2051 | 550 | | | 540 | | | 540 | |
| Total Northern Natural Gas | 1,600 | | | 1,589 | | | 1,588 | |
| Total BHE Pipeline Group | $ | 5,518 | | | $ | 5,849 | | | $ | 5,924 | |
(1) The senior notes are denominated in Euros with an outstanding principal balance of €250 million and a fixed interest rate of 1.45%. Eastern Energy Gas has entered into cross currency swaps that fix USD payments for 100% of the notes. The fixed USD outstanding principal when combined with the swaps is $280 million, with fixed interest rates at both December 31, 2022 and 2021 that averaged 3.32%.
BHE Transmission
BHE Transmission's long-term debt consists of the following, including fair value adjustments and unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value(1) | | 2022 | | 2021 |
| AltaLink Investments, L.P.: | | | | | |
Series 15-1 Senior Bonds, 2.244%, due 2022 | $ | — | | | $ | — | | | $ | 158 | |
| Total AltaLink Investments, L.P. | — | | | — | | | 158 | |
| | | | | |
| AltaLink, L.P.: | | | | | |
Series 2012-2 Notes, 2.978%, due 2022 | — | | | — | | | 218 | |
Series 2013-4 Notes, 3.668%, due 2023 | 369 | | | 369 | | | 395 | |
Series 2014-1 Notes, 3.399%, due 2024 | 258 | | | 258 | | | 277 | |
Series 2016-1 Notes, 2.747%, due 2026 | 258 | | | 258 | | | 276 | |
Series 2020-1 Notes, 1.509%, due 2030 | 166 | | | 165 | | | 177 | |
Series 2022-1 Notes, 4.692%, due 2032 | 203 | | | 202 | | | — | |
Series 2006-1 Notes, 5.249%, due 2036 | 111 | | | 111 | | | 118 | |
Series 2010-1 Notes, 5.381%, due 2040 | 92 | | | 92 | | | 99 | |
Series 2010-2 Notes, 4.872%, due 2040 | 111 | | | 110 | | | 118 | |
Series 2011-1 Notes, 4.462%, due 2041 | 203 | | | 202 | | | 217 | |
Series 2012-1 Notes, 3.990%, due 2042 | 387 | | | 383 | | | 410 | |
Series 2013-3 Notes, 4.922%, due 2043 | 258 | | | 258 | | | 276 | |
Series 2014-3 Notes, 4.054%, due 2044 | 218 | | | 216 | | | 232 | |
Series 2015-1 Notes, 4.090%, due 2045 | 258 | | | 257 | | | 275 | |
Series 2016-2 Notes, 3.717%, due 2046 | 332 | | | 330 | | | 354 | |
Series 2013-1 Notes, 4.446%, due 2053 | 184 | | | 184 | | | 197 | |
Series 2014-2 Notes, 4.274%, due 2064 | 96 | | | 95 | | | 103 | |
| Total AltaLink, L.P. | 3,504 | | | 3,490 | | | 3,742 | |
| | | | | |
| Other: | | | | | |
Construction Loan, 5.620%, due 2024 | 5 | | | 5 | | | 6 | |
| | | | | |
| Total BHE Transmission | $ | 3,509 | | | $ | 3,495 | | | $ | 3,906 | |
(1)The par values for these debt instruments are denominated in Canadian dollars.
BHE Renewables
BHE Renewables' long-term debt consists of the following, including unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
Fixed-rate(1): | | | | | |
Bishop Hill Holdings Senior Notes, 5.125%, due 2032 | $ | 57 | | | $ | 56 | | | $ | 62 | |
Solar Star Funding Senior Notes, 3.950%, due 2035 | 244 | | | 242 | | | 256 | |
Solar Star Funding Senior Notes, 5.375%, due 2035 | 787 | | | 781 | | | 819 | |
Grande Prairie Wind Senior Notes, 3.860%, due 2037 | 269 | | | 267 | | | 297 | |
Topaz Solar Farms Senior Notes, 5.750%, due 2039 | 573 | | | 568 | | | 600 | |
Topaz Solar Farms Senior Notes, 4.875%, due 2039 | 162 | | | 160 | | | 170 | |
Alamo 6 Senior Notes, 4.170%, due 2042 | 190 | | | 188 | | | 197 | |
| Other | — | | | — | | | 5 | |
Variable-rate(1): | | | | | |
TX Jumbo Road Term Loan, due 2025(2) | 97 | | | 96 | | | 117 | |
Marshall Wind Term Loan, due 2026(2) | 57 | | | 56 | | | 63 | |
Flat Top Wind I Term Loan, due 2028(2) | 102 | | | 99 | | | 113 | |
Mariah Del Norte Term Loan, due 2028(2) | 56 | | | 54 | | | — | |
Mariah Del Norte Term Loan, due 2032(2) | 142 | | | 138 | | | — | |
Pinyon Pines I and II Term Loans, due 2034(2) | 328 | | | 322 | | | 344 | |
| Total BHE Renewables | $ | 3,064 | | | $ | 3,027 | | | $ | 3,043 | |
(1)Amortizes quarterly or semiannually.
(2)The term loans have variable interest rates based on LIBOR or SOFR plus a margin that varies during the terms of the agreements. The Company has entered into interest rate swaps that fix the interest rate on 100% of the TX Jumbo Road, Marshall Wind and Pinyon Pines outstanding debt. The fixed interest rates as of December 31, 2022 and 2021 ranged from 3.23% to 3.88%. The variable interest rate on the Flat Top Wind I and Mariah Del Norte outstanding debt was 9.82% as of December 31, 2022.
HomeServices
HomeServices' long-term debt consists of the following, including unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| Variable-rate: | | | | | |
Variable-rate term loan (2022 - 5.242%, 2021 - 0.950%), due 2026(1) | $ | 140 | | | $ | 140 | | | $ | 148 | |
(1)Term loan amortizes quarterly and variable-rate resets monthly.
Annual Repayments of Long-Term Debt
The annual repayments of BHE and subsidiary debt for the years beginning January 1, 2023 and thereafter, excluding fair value adjustments and unamortized premiums, discounts and debt issuance costs, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2028 and | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| | | | | | | | | | | | | |
| BHE senior notes | $ | 900 | | | $ | — | | | $ | 1,650 | | | $ | — | | | $ | — | | | $ | 11,551 | | | $ | 14,101 | |
| BHE junior subordinated debentures | — | | | — | | | — | | | — | | | — | | | 100 | | | 100 | |
| PacifiCorp | 449 | | | 591 | | | 302 | | | 100 | | | — | | | 8,300 | | | 9,742 | |
| MidAmerican Funding | 317 | | | 538 | | | 15 | | | 3 | | | 378 | | | 6,806 | | | 8,057 | |
| NV Energy | 250 | | | 300 | | | — | | | 400 | | | — | | | 3,436 | | | 4,386 | |
| Northern Powergrid | 56 | | | 57 | | | 435 | | | 75 | | | 302 | | | 2,160 | | | 3,085 | |
| BHE Pipeline Group | 650 | | | 1,050 | | | — | | | 268 | | | — | | | 3,550 | | | 5,518 | |
| BHE Transmission | 368 | | | 263 | | | — | | | 258 | | | — | | | 2,620 | | | 3,509 | |
| BHE Renewables | 203 | | | 210 | | | 241 | | | 218 | | | 235 | | | 1,957 | | | 3,064 | |
| HomeServices | 8 | | | 9 | | | 15 | | | 108 | | | — | | | — | | | 140 | |
| Totals | $ | 3,201 | | | $ | 3,018 | | | $ | 2,658 | | | $ | 1,430 | | | $ | 915 | | | $ | 40,480 | | | $ | 51,702 | |
(12) Income Taxes
The Company's provision for income taxes has been computed on a stand-alone basis. Berkshire Hathaway includes the Company in its consolidated U.S. federal and Iowa state income tax returns and the majority of the Company's U.S. federal income tax is remitted to or received from Berkshire Hathaway. As of December 31, 2022, the Company had a current income tax payable to Berkshire Hathaway for federal income tax of $113 million. As of December 31, 2021, the Company had a current income tax receivable from Berkshire Hathaway for federal income tax of $324 million and a long-term income tax receivable from Berkshire Hathaway, reflected as a component of BHE's shareholders' equity, of $744 million for Iowa state income tax. Additionally, for the year ended December 31, 2021 the Company generated $100 million of Iowa state net operating losses which were carried forward and increased the long-term income tax receivable from Berkshire Hathaway. In July 2022, the Company amended its tax allocation agreement with Berkshire Hathaway, which changed how state tax attributes will be settled with respect to state income tax returns that Berkshire Hathaway includes the Company. As a result, the Company no longer expects to receive the cash benefits from the state of Iowa net operating loss carryforward previously recorded as a long-term income tax receivable from Berkshire Hathaway as a component of BHE's shareholders' equity, and recognized a noncash distribution of $744 million to retained earnings.
Income tax (benefit) expense consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | (1,463) | | | $ | (1,701) | | | $ | (1,537) | |
| State | (65) | | | (177) | | | (121) | |
| Foreign | 79 | | | 100 | | | 86 | |
| (1,449) | | | (1,778) | | | (1,572) | |
| Deferred: | | | | | |
| Federal | (408) | | | 1,037 | | | 1,438 | |
| State | (49) | | | (476) | | | 424 | |
| Foreign | (5) | | | 89 | | | 21 | |
| (462) | | | 650 | | | 1,883 | |
| | | | | |
| Investment tax credits | (5) | | | (4) | | | (3) | |
| Total | $ | (1,916) | | | $ | (1,132) | | | $ | 308 | |
A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax (benefit) expense is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| Income tax credits | (124) | | | (27) | | | (16) | |
| Effects of ratemaking | (16) | | | (4) | | | (3) | |
| State income tax, net of federal income tax benefit | (6) | | | (10) | | | 3 | |
| Non-controlling interest | (6) | | | (2) | | | — | |
| Income tax effect of foreign income | (4) | | | 1 | | | — | |
| | | | | |
| Equity loss | (3) | | | (1) | | | — | |
| Other, net | 2 | | | 1 | | | (1) | |
| Effective income tax rate | (136) | % | | (21) | % | | 4 | % |
Income tax credits relate primarily to production tax credits ("PTC") from wind- and solar-powered generating facilities owned by MidAmerican Energy, PacifiCorp and BHE Renewables. Federal renewable electricity PTCs are earned as energy from qualifying wind- and solar-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- and solar-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service. PTCs recognized for the years ended December 31, 2022, 2021 and 2020 totaled $1.7 billion, $1.4 billion, and $1.2 billion, respectively.
Income tax effect on foreign income includes, among other items, a deferred income tax charge of $105 million in 2021, related to the United Kingdom's corporate income tax rate. The United Kingdom's rate is scheduled to increase from 19% to 25%, effective April 1, 2023, through legislation enacted in June 2021. The United Kingdom's rate was scheduled to decrease from 19% to 17% effective April 1, 2020; however, the rate was maintained at 19% through amended legislation enacted in July 2020.
The net deferred income tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Regulatory liabilities | $ | 1,323 | | | $ | 1,349 | |
| Federal, state and foreign carryforwards | 812 | | | 820 | |
| AROs | 283 | | | 304 | |
| | | |
| | | |
| Other | 741 | | | 686 | |
| Total deferred income tax assets | 3,159 | | | 3,159 | |
| Valuation allowances | (187) | | | (164) | |
| Total deferred income tax assets, net | 2,972 | | | 2,995 | |
| | | |
| Deferred income tax liabilities: | | | |
| Property-related items | (12,244) | | | (11,814) | |
| Investments | (1,998) | | | (2,877) | |
| Regulatory assets | (898) | | | (764) | |
| Other | (510) | | | (478) | |
| Total deferred income tax liabilities | (15,650) | | | (15,933) | |
| Net deferred income tax liability | $ | (12,678) | | | $ | (12,938) | |
The following table provides, without regard to valuation allowances, the Company's net operating loss and tax credit carryforwards and expiration dates as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | State | | Foreign | | Total |
Net operating loss carryforwards(1) | $ | 192 | | | $ | 9,653 | | | $ | 725 | | | $ | 10,570 | |
| Deferred income taxes on net operating loss carryforwards | 41 | | | 562 | | | 166 | | | 769 | |
| Expiration dates | 2023 - indefinite | | 2023 - indefinite | | 2028 - 2042 | | |
| | | | | | | |
| Tax credits | $ | 15 | | | $ | 28 | | | $ | — | | | $ | 43 | |
| Expiration dates | 2023 - 2034 | | 2023 - indefinite | | | | |
(1)The federal net operating loss carryforwards relate principally to net operating loss carryforwards of subsidiaries that are tax residents in both the U.S. and the United Kingdom. The federal net operating loss carryforwards were generated prior to Berkshire Hathaway Inc.'s ownership and began to expire in 2022.
The U.S. Internal Revenue Service has closed or effectively settled its examination of the Company's income tax returns through December 31, 2013. The statute of limitations for the Company's income tax returns have expired for certain states through December 31, 2011, and for other states through December 31, 2018, except for the impact of any federal audit adjustments. The closure of examinations, or the expiration of the statute of limitations, for state filings may not preclude the state from adjusting the state net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
A reconciliation of the beginning and ending balances of the Company's net unrecognized tax benefits is as follows for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 97 | | | $ | 153 | |
| Additions based on tax positions related to the current year | 15 | | | 24 | |
| Additions for tax positions of prior years | — | | | 13 | |
| Reductions based on tax positions related to the current year | (12) | | | (19) | |
| Reductions for tax positions of prior years | (23) | | | (83) | |
| | | |
| Settlements | — | | | (1) | |
| Interest and penalties | (9) | | | 10 | |
| Ending balance | $ | 68 | | | $ | 97 | |
As of December 31, 2022 and 2021, the Company had unrecognized tax benefits totaling $79 million and $100 million, respectively, that if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits, other than applicable interest and penalties, would not affect the Company's effective income tax rate.
(13) Employee Benefit Plans
Defined Benefit Plans
Domestic Operations
PacifiCorp, MidAmerican Energy and NV Energy sponsor defined benefit pension plans that cover a majority of all employees of BHE and its domestic energy subsidiaries. These pension plans include noncontributory defined benefit pension plans, supplemental executive retirement plans ("SERP") and restoration plans. PacifiCorp, MidAmerican Energy and NV Energy also provide certain postretirement healthcare and life insurance benefits through various plans to eligible retirees.
Net Periodic Benefit Cost
For purposes of calculating the expected return on plan assets, a market-related value is used. The market-related value of plan assets is generally calculated by spreading the difference between expected and actual investment returns over a five-year period beginning after the first year in which they occur.
Net periodic benefit cost (credit) for the plans included the following components for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| Service cost | $ | 22 | | | $ | 30 | | | $ | 17 | | | $ | 11 | | | $ | 12 | | | $ | 7 | |
| Interest cost | 83 | | | 78 | | | 93 | | | 20 | | | 19 | | | 21 | |
| Expected return on plan assets | (108) | | | (134) | | | (140) | | | (29) | | | (22) | | | (34) | |
| Curtailment | (10) | | | — | | | — | | | — | | | — | | | — | |
| Settlement | 17 | | | 3 | | | — | | | — | | | — | | | — | |
| Net amortization | 19 | | | 25 | | | 32 | | | (1) | | | (3) | | | (4) | |
| Net periodic benefit cost (credit) | $ | 23 | | | $ | 2 | | | $ | 2 | | | $ | 1 | | | $ | 6 | | | $ | (10) | |
Funded Status
The following table is a reconciliation of the fair value of plan assets for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Plan assets at fair value, beginning of year | $ | 2,795 | | | $ | 2,824 | | | $ | 769 | | | $ | 744 | |
| Employer contributions | 14 | | | 13 | | | 8 | | | 14 | |
| Participant contributions | — | | | — | | | 8 | | | 9 | |
| Actual return on plan assets | (491) | | | 234 | | | (122) | | | 53 | |
| Settlement | (164) | | | (134) | | | — | | | — | |
| Benefits paid | (141) | | | (142) | | | (49) | | | (51) | |
| Plan assets at fair value, end of year | $ | 2,013 | | | $ | 2,795 | | | $ | 614 | | | $ | 769 | |
The following table is a reconciliation of the benefit obligations for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Benefit obligation, beginning of year | $ | 2,777 | | | $ | 3,077 | | | $ | 714 | | | $ | 758 | |
| Service cost | 22 | | | 30 | | | 11 | | | 12 | |
| Interest cost | 83 | | | 78 | | | 20 | | | 19 | |
| Participant contributions | — | | | — | | | 8 | | | 9 | |
| Actuarial (gain) loss | (524) | | | (132) | | | (155) | | | (35) | |
| Amendment | (3) | | | — | | | 20 | | | 2 | |
| Curtailment | (10) | | | — | | | — | | | — | |
| Settlement | (164) | | | (134) | | | — | | | — | |
| | | | | | | |
| Benefits paid | (141) | | | (142) | | | (49) | | | (51) | |
| Benefit obligation, end of year | $ | 2,040 | | | $ | 2,777 | | | $ | 569 | | | $ | 714 | |
| Accumulated benefit obligation, end of year | $ | 2,003 | | | $ | 2,713 | | | | | |
The funded status of the plans and the amounts recognized on the Consolidated Balance Sheets as of December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Plan assets at fair value, end of year | $ | 2,013 | | | $ | 2,795 | | | $ | 614 | | | $ | 769 | |
| Benefit obligation, end of year | 2,040 | | | 2,777 | | | 569 | | | 714 | |
| Funded status | $ | (27) | | | $ | 18 | | | $ | 45 | | | $ | 55 | |
| | | | | | | |
| Amounts recognized on the Consolidated Balance Sheets: | | | | | | | |
| Other assets | $ | 125 | | | $ | 204 | | | $ | 52 | | | $ | 60 | |
| Other current liabilities | (13) | | | (13) | | | — | | | — | |
| Other long-term liabilities | (139) | | | (173) | | | (7) | | | (5) | |
| Amounts recognized | $ | (27) | | | $ | 18 | | | $ | 45 | | | $ | 55 | |
The SERPs and restoration plan have no plan assets; however, the Company has Rabbi trusts that hold corporate-owned life insurance and other investments to provide funding for the future cash requirements of the SERPs and restoration plan. The cash surrender value of all of the policies included in the Rabbi trusts, net of amounts borrowed against the cash surrender value, plus the fair market value of other Rabbi trust investments, was $300 million and $343 million as of December 31, 2022 and 2021, respectively. These assets are not included in the plan assets in the above table, but are reflected in noncurrent investments and restricted cash and investments on the Consolidated Balance Sheets.
The fair value of plan assets, projected benefit obligation and accumulated benefit obligation for (1) pension and other postretirement benefit plans with a projected benefit obligation in excess of the fair value of plan assets and (2) pension plans with an accumulated benefit obligation in excess of the fair value of plan assets as of December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Fair value of plan assets | $ | 490 | | | $ | — | | | $ | 240 | | | $ | 137 | |
| | | | | | | |
| Projected benefit obligation | $ | 643 | | | $ | 186 | | | $ | 247 | | | $ | 142 | |
| | | | | | | |
| Fair value of plan assets | $ | — | | | $ | — | | | | | |
| | | | | | | |
| Accumulated benefit obligation | $ | 142 | | | $ | 185 | | | | | |
Unrecognized Amounts
The portion of the funded status of the plans not yet recognized in net periodic benefit cost as of December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Net loss (gain) | $ | 365 | | | $ | 343 | | | $ | (38) | | | $ | (34) | |
| Prior service (credit) cost | (4) | | | (1) | | | 21 | | | (1) | |
| Regulatory deferrals | 29 | | | 11 | | | 1 | | | 2 | |
| Total | $ | 390 | | | $ | 353 | | | $ | (16) | | | $ | (33) | |
A reconciliation of the amounts not yet recognized as components of net periodic benefit cost for the years ended December 31, 2022 and 2021 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated | | |
| | | | | Other | | |
| Regulatory | | Regulatory | | Comprehensive | | |
| Asset | | Liability | | Loss | | Total |
| Pension | | | | | | | |
| Balance, December 31, 2020 | $ | 600 | | | $ | (20) | | | $ | 33 | | | $ | 613 | |
| Net gain arising during the year | (177) | | | (44) | | | (10) | | | (231) | |
| | | | | | | |
| Settlement | (9) | | | 5 | | | — | | | (4) | |
| Net amortization | (24) | | | — | | | (1) | | | (25) | |
| Total | (210) | | | (39) | | | (11) | | | (260) | |
| Balance, December 31, 2021 | 390 | | | (59) | | | 22 | | | 353 | |
| Net loss (gain) arising during the year | 58 | | | 38 | | | (20) | | | 76 | |
| Net prior service credit arising during the year | — | | | (3) | | | — | | | (3) | |
| Settlement | (13) | | | (4) | | | — | | | (17) | |
| Net amortization | (17) | | | — | | | (2) | | | (19) | |
| Total | 28 | | | 31 | | | (22) | | | 37 | |
| Balance, December 31, 2022 | $ | 418 | | | $ | (28) | | | $ | — | | | $ | 390 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated | | |
| | | | | Other | | |
| Regulatory | | Regulatory | | Comprehensive | | |
| Asset | | Liability | | Loss | | Total |
| Other Postretirement | | | | | | | |
| Balance, December 31, 2020 | $ | 47 | | | $ | (23) | | | $ | 4 | | | $ | 28 | |
| Net gain arising during the year | (40) | | | (22) | | | (3) | | | (65) | |
| Net prior service cost arising during the year | 1 | | | — | | | — | | | 1 | |
| Net amortization | 3 | | | — | | | — | | | 3 | |
| Total | (36) | | | (22) | | | (3) | | | (61) | |
| Balance, December 31, 2021 | 11 | | | (45) | | | 1 | | | (33) | |
| Net loss (gain) arising during the year | 20 | | | (20) | | | (4) | | | (4) | |
| Net prior service cost arising during the year | 11 | | | 8 | | | 1 | | | 20 | |
| Net amortization | 3 | | | (2) | | | — | | | 1 | |
| Total | 34 | | | (14) | | | (3) | | | 17 | |
| Balance, December 31, 2022 | $ | 45 | | | $ | (59) | | | $ | (2) | | | $ | (16) | |
Plan Assumptions
Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| Benefit obligations as of December 31: | | | | | | | | | | | |
| Discount rate | 5.65 | % | | 2.98 | % | | 2.60 | % | | 4.54 | % | | 2.95 | % | | 2.59 | % |
| Rate of compensation increase | 3.00 | % | | 2.75 | % | | 2.75 | % | | N/A | | N/A | | N/A |
| Interest crediting rates for cash balance plan | | | | | | | | | | | |
| 2020 | N/A | | N/A | | 2.44 | % | | N/A | | N/A | | N/A |
| 2021 | N/A | | 2.45 | % | | 2.25 | % | | N/A | | N/A | | N/A |
| 2022 | 3.25 | % | | 2.56 | % | | 2.25 | % | | N/A | | N/A | | N/A |
| 2023 | 4.25 | % | | 2.56 | % | | 2.65 | % | | N/A | | N/A | | N/A |
| 2024 | 4.25 | % | | 2.83 | % | | 2.65 | % | | N/A | | N/A | | N/A |
2025 and beyond | 3.65 | % | | 2.83 | % | | 2.65 | % | | N/A | | N/A | | N/A |
| | | | | | | | | | | |
| Net periodic benefit cost for the years ended December 31: | | | | | | | | | | | |
| Discount rate | 2.98 | % | | 2.60 | % | | 3.32 | % | | 2.95 | % | | 2.59 | % | | 3.24 | % |
| Expected return on plan assets | 4.30 | % | | 5.39 | % | | 5.94 | % | | 4.20 | % | | 3.35 | % | | 5.42 | % |
| Rate of compensation increase | 2.75 | % | | 2.75 | % | | 2.75 | % | | N/A | | N/A | | N/A |
| Interest crediting rate for cash balance plan | 3.25 | % | | 2.45 | % | | 2.44 | % | | N/A | | N/A | | N/A |
In establishing its assumption as to the expected return on plan assets, the Company utilizes the asset allocation and return assumptions for each asset class based on historical performance and forward-looking views of the financial markets.
| | | | | | | | | | | |
| 2022 | | 2021 |
| Assumed healthcare cost trend rates as of December 31: | | | |
| Healthcare cost trend rate assumed for next year | 6.50 | % | | 6.00 | % |
| Rate that the cost trend rate gradually declines to | 5.00 | % | | 5.00 | % |
| Year that the rate reaches the rate it is assumed to remain at | 2028 | | 2025 |
Contributions and Benefit Payments
Employer contributions to the pension and other postretirement benefit plans are expected to be $13 million and $7 million, respectively, during 2023. Funding to the established pension trusts is based upon the actuarially determined costs of the plans and the requirements of the IRC, the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006, as amended. The Company considers contributing additional amounts from time to time in order to achieve certain funding levels specified under the Pension Protection Act of 2006, as amended. The Company evaluates a variety of factors, including funded status, income tax laws and regulatory requirements, in determining contributions to its other postretirement benefit plans.
The expected benefit payments to participants in the Company's pension and other postretirement benefit plans for 2023 through 2027 and for the five years thereafter are summarized below (in millions):
| | | | | | | | | | | |
| Projected Benefit |
| Payments |
| | | Other |
| Pension | | Postretirement |
| | | |
| 2023 | $ | 192 | | | $ | 53 | |
| 2024 | 184 | | | 53 | |
| 2025 | 180 | | | 53 | |
| 2026 | 177 | | | 52 | |
| 2027 | 172 | | | 52 | |
| 2028-2032 | 782 | | | 235 | |
Plan Assets
Investment Policy and Asset Allocations
The Company's investment policy for its pension and other postretirement benefit plans is to balance risk and return through a diversified portfolio of debt securities, equity securities and other alternative investments. Maturities for debt securities are managed to targets consistent with prudent risk tolerances. The plans retain outside investment consultants to advise on plan investments within the parameters outlined by the Berkshire Hathaway Energy Company Investment Committee. The investment portfolio is managed in line with the investment policy with sufficient liquidity to meet near-term benefit payments.
The target allocations (percentage of plan assets) for the Company's pension and other postretirement benefit plan assets are as follows as of December 31, 2022:
| | | | | | | | | | | |
| | | Other |
| Pension | | Postretirement |
| % | | % |
| PacifiCorp: | | | |
Debt securities(1) | 73 | | 77 |
Equity securities(1) | 22 | | 23 |
| Limited partnership interests | 5 | | 0 |
| | | |
| | | |
| MidAmerican Energy: | | | |
Debt securities(1) | 40-70 | | 20-40 |
Equity securities(1) | 35-60 | | 60-80 |
| | | |
| Other | 0-15 | | 0-5 |
| | | |
| NV Energy: | | | |
Debt securities(1) | 65-80 | | 68-89 |
Equity securities(1) | 20-35 | | 11-32 |
(1)For purposes of target allocation percentages and consistent with the plans' investment policy, investment funds are allocated based on the underlying investments in debt and equity securities.
Fair Value Measurements
The following table presents the fair value of plan assets, by major category, for the Company's defined benefit pension plans (in millions):
| | | | | | | | | | | | | | | | | | | |
| Input Levels for Fair Value Measurements(1) | | | | |
| Level 1 | | Level 2 | | | | Total |
| As of December 31, 2022: | | | | | | | |
| Cash equivalents | $ | — | | | $ | 51 | | | | | $ | 51 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 109 | | | — | | | | | 109 | |
| | | | | | | |
| Corporate obligations | — | | | 613 | | | | | 613 | |
| Municipal obligations | — | | | 43 | | | | | 43 | |
| Agency, asset and mortgage-backed obligations | — | | | 81 | | | | | 81 | |
| Equity securities: | | | | | | | |
| U.S. companies | 198 | | | — | | | | | 198 | |
| International companies | 1 | | | — | | | | | 1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total assets in the fair value hierarchy | $ | 308 | | | $ | 788 | | | | | 1,096 | |
Investment funds(2) measured at net asset value | | | | | | | 885 | |
Limited partnership interests(3) measured at net asset value | | | | | | | 32 | |
| | | | | | | |
| Total assets measured at fair value | | | | | | | $ | 2,013 | |
| | | | | | | |
| As of December 31, 2021: | | | | | | | |
| Cash equivalents | $ | — | | | $ | 64 | | | | | $ | 64 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 142 | | | — | | | | | 142 | |
| | | | | | | |
| Corporate obligations | — | | | 912 | | | | | 912 | |
| Municipal obligations | — | | | 66 | | | | | 66 | |
| Agency, asset and mortgage-backed obligations | — | | | 93 | | | | | 93 | |
| Equity securities: | | | | | | | |
| U.S. companies | 135 | | | — | | | | | 135 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total assets in the fair value hierarchy | $ | 277 | | | $ | 1,135 | | | | | 1,412 | |
Investment funds(2) measured at net asset value | | | | | | | 1,349 | |
Limited partnership interests(3) measured at net asset value | | | | | | | 34 | |
| | | | | | | |
| Total assets measured at fair value | | | | | | | $ | 2,795 | |
(1)Refer to Note 15 for additional discussion regarding the three levels of the fair value hierarchy.
(2)Investment funds are comprised of mutual funds and collective trust funds. These funds consist of equity and debt securities of approximately 53% and 47%, respectively, for 2022 and 54% and 46%, respectively, for 2021. Additionally, these funds are invested in U.S. and international securities of approximately 95% and 5%, respectively, for 2022 and 89% and 11%, respectively, for 2021.
(3)Limited partnership interests include several funds that invest primarily in real estate, buyout, growth equity and venture capital.
The following table presents the fair value of plan assets, by major category, for the Company's defined benefit other postretirement plans (in millions):
| | | | | | | | | | | | | | | | | | | |
| Input Levels for Fair Value Measurements(1) | | | | |
| Level 1 | | Level 2 | | | | Total |
| As of December 31, 2022: | | | | | | | |
| Cash equivalents | $ | 15 | | | $ | 9 | | | | | $ | 24 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 8 | | | — | | | | | 8 | |
| | | | | | | |
| Corporate obligations | — | | | 52 | | | | | 52 | |
| Municipal obligations | — | | | 35 | | | | | 35 | |
| Agency, asset and mortgage-backed obligations | — | | | 49 | | | | | 49 | |
| Equity securities: | | | | | | | |
| U.S. companies | 7 | | | — | | | | | 7 | |
| | | | | | | |
Investment funds(2) | 307 | | | — | | | | | 307 | |
| | | | | | | |
| | | | | | | |
| Total assets in the fair value hierarchy | $ | 337 | | | $ | 145 | | | | | 482 | |
Investment funds(2) measured at net asset value | | | | | | | 132 | |
Limited partnership interests(3) measured at net asset value | | | | | | | — | |
| | | | | | | |
| Total assets measured at fair value | | | | | | | $ | 614 | |
| | | | | | | |
| As of December 31, 2021: | | | | | | | |
| Cash equivalents | $ | 12 | | | $ | 4 | | | | | $ | 16 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 27 | | | — | | | | | 27 | |
| | | | | | | |
| Corporate obligations | — | | | 85 | | | | | 85 | |
| Municipal obligations | — | | | 43 | | | | | 43 | |
| Agency, asset and mortgage-backed obligations | — | | | 38 | | | | | 38 | |
| Equity securities: | | | | | | | |
| U.S. companies | 4 | | | — | | | | | 4 | |
| | | | | | | |
Investment funds(2) | 394 | | | — | | | | | 394 | |
| | | | | | | |
| Total assets in the fair value hierarchy | $ | 437 | | | $ | 170 | | | | | 607 | |
Investment funds(2) measured at net asset value | | | | | | | 161 | |
Limited partnership interests(3) measured at net asset value | | | | | | | 1 | |
| | | | | | | |
| Total assets measured at fair value | | | | | | | $ | 769 | |
(1)Refer to Note 15 for additional discussion regarding the three levels of the fair value hierarchy.
(2)Investment funds are comprised of mutual funds and collective trust funds. These funds consist of equity and debt securities of approximately 55% and 45%, respectively, for 2022 and 55% and 45%, respectively, for 2021. Additionally, these funds are invested in U.S. and international securities of approximately 88% and 12%, respectively, for 2022 and 88% and 12%, respectively, for 2021.
(3)Limited partnership interests include several funds that invest primarily in real estate, buyout, growth equity and venture capital.
For level 1 investments, 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. For level 2 investments, the fair value is determined using pricing models based on observable market inputs. Shares of mutual funds not registered under the Securities Act of 1933, private equity limited partnership interests, common and commingled trust funds and investment entities are reported at fair value based on the net asset value per unit, which is used for expedience purposes. A fund's net asset value is based on the fair value of the underlying assets held by the fund less its liabilities.
Foreign Operations
Certain wholly-owned subsidiaries of Northern Powergrid participate in the Northern Powergrid group of the United Kingdom industry-wide Electricity Supply Pension Scheme (the "UK Plan"), which provides pension and other related defined benefits, based on final pensionable pay, to the employees of Northern Powergrid. The UK Plan is closed to employees hired after July 23, 1997. Employees hired after that date are covered by a defined contribution plan sponsored by a wholly-owned subsidiary of Northern Powergrid.
Net Periodic Benefit Cost
For purposes of calculating the expected return on pension plan assets, a market-related value is used. The market-related value of plan assets is calculated by including the difference between expected and actual investment returns after the first year in which they occur.
Net periodic benefit (credit) cost for the UK Plan included the following components for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Service cost | $ | 14 | | | $ | 16 | | | $ | 16 | |
| Interest cost | 35 | | | 31 | | | 40 | |
| Expected return on plan assets | (92) | | | (111) | | | (101) | |
| Settlement | — | | | 10 | | | 17 | |
| Net amortization | 24 | | | 55 | | | 43 | |
| Net periodic benefit (credit) cost | $ | (19) | | | $ | 1 | | | $ | 15 | |
Funded Status
The following table is a reconciliation of the fair value of plan assets for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Plan assets at fair value, beginning of year | $ | 2,363 | | | $ | 2,334 | |
| Employer contributions | 15 | | | 28 | |
| Participant contributions | 1 | | | 1 | |
| Actual return on plan assets | (671) | | | 148 | |
| Settlement | — | | | (51) | |
| Benefits paid | (109) | | | (72) | |
| Foreign currency exchange rate changes | (236) | | | (25) | |
| Plan assets at fair value, end of year | $ | 1,363 | | | $ | 2,363 | |
The following table is a reconciliation of the benefit obligation for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Benefit obligation, beginning of year | $ | 2,003 | | | $ | 2,205 | |
| Service cost | 14 | | | 16 | |
| Interest cost | 35 | | | 31 | |
| Participant contributions | 1 | | | 1 | |
| Actuarial gain | (596) | | | (105) | |
| Settlement | — | | | (51) | |
| Amendment | 27 | | | — | |
| Benefits paid | (109) | | | (72) | |
| Foreign currency exchange rate changes | (200) | | | (22) | |
| Benefit obligation, end of year | $ | 1,175 | | | $ | 2,003 | |
| Accumulated benefit obligation, end of year | $ | 1,060 | | | $ | 1,778 | |
The funded status of the UK Plan and the amounts recognized on the Consolidated Balance Sheets as of December 31 are as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Plan assets at fair value, end of year | $ | 1,363 | | | $ | 2,363 | |
| Benefit obligation, end of year | 1,175 | | | 2,003 | |
| Funded status | $ | 188 | | | $ | 360 | |
| | | |
| Amounts recognized on the Consolidated Balance Sheets: | | | |
| Other assets | $ | 188 | | | $ | 360 | |
Unrecognized Amounts
The portion of the funded status of the UK Plan not yet recognized in net periodic benefit cost as of December 31 is as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Net loss | $ | 499 | | | $ | 400 | |
| Prior service cost | 30 | | | 5 | |
| Total | $ | 529 | | | $ | 405 | |
A reconciliation of the amounts not yet recognized as components of net periodic benefit cost, which are included in accumulated other comprehensive loss on the Consolidated Balance Sheets, for the years ended December 31 is as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Balance, beginning of year | $ | 405 | | | $ | 618 | |
| Net loss (gain) arising during the year | 167 | | | (143) | |
| Net prior service cost arising during the year | 27 | | | — | |
| Settlement | — | | | (10) | |
| Net amortization | (24) | | | (55) | |
| Foreign currency exchange rate changes | (46) | | | (5) | |
| Total | 124 | | | (213) | |
| Balance, end of year | $ | 529 | | | $ | 405 | |
Plan Assumptions
Assumptions used to determine benefit obligations and net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Benefit obligations as of December 31: | | | | | |
| Discount rate | 4.80 | % | | 1.95 | % | | 1.40 | % |
| Rate of compensation increase | 3.20 | % | | 3.45 | % | | 3.05 | % |
| Rate of future price inflation | 2.95 | % | | 2.95 | % | | 2.55 | % |
| | | | | |
| Net periodic benefit cost for the years ended December 31: | | | | | |
| Discount rate | 1.95 | % | | 1.40 | % | | 2.10 | % |
| Expected return on plan assets | 4.40 | % | | 4.85 | % | | 5.00 | % |
| Rate of compensation increase | 3.45 | % | | 3.05 | % | | 3.30 | % |
| Rate of future price inflation | 2.95 | % | | 2.55 | % | | 2.80 | % |
Contributions and Benefit Payments
Employer contributions to the UK Plan are expected to be £11 million during 2023. The expected benefit payments to participants in the UK Plan for 2023 through 2027 and for the five years thereafter, excluding lump sum settlement elections and using the foreign currency exchange rate as of December 31, 2022, are summarized below (in millions):
| | | | | |
| 2023 | $ | 67 | |
| 2024 | 69 | |
| 2025 | 70 | |
| 2026 | 72 | |
| 2027 | 74 | |
| 2028-2032 | 398 | |
Plan Assets
Investment Policy and Asset Allocations
The investment policy for the UK Plan is to balance risk and return through a diversified portfolio of debt securities, equity securities, real estate and other asset classes. Maturities for debt securities are managed to targets consistent with prudent risk tolerances. The UK Plan retains outside investment advisors to manage plan investments within the parameters set by the trustees of the UK Plan in consultation with Northern Powergrid. The investment portfolio is managed in line with the investment policy with sufficient liquidity to meet near-term benefit payments. The return on assets assumption is based on a weighted-average of the expected historical performance for the types of assets in which the UK Plan invests.
The target allocations (percentage of plan assets) for the UK Plan assets are as follows as of December 31, 2022:
| | | | | |
| % |
Debt securities(1) | 60-70 |
Equity securities(1) | 10-20 |
| Real estate funds and other | 15-25 |
(1)For purposes of target allocation percentages and consistent with the plans' investment policy, investment funds have been allocated based on the underlying investments in debt and equity securities.
Fair Value Measurements
The following table presents the fair value of the UK Plan assets, by major category (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Input Levels for Fair Value Measurements(1) | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| As of December 31, 2022: | | | | | | | |
| Cash equivalents | $ | 1 | | | $ | 29 | | | $ | — | | | $ | 30 | |
| Debt securities: | | | | | | | |
| United Kingdom government obligations | 711 | | | — | | | — | | | 711 | |
| | | | | | | |
| | | | | | | |
| Equity securities: | | | | | | | |
Investment funds(2) | — | | | 312 | | | — | | | 312 | |
| Real estate funds | — | | | — | | | 214 | | | 214 | |
| Total | $ | 712 | | | $ | 341 | | | $ | 214 | | | 1,267 | |
Investment funds(2) measured at net asset value | | | | | | | 96 | |
| Total assets measured at fair value | | | | | | | $ | 1,363 | |
| | | | | | | |
| As of December 31, 2021: | | | | | | | |
| Cash equivalents | $ | 5 | | | $ | 27 | | | $ | — | | | $ | 32 | |
| Debt securities: | | | | | | | |
| | | | | | | |
| United Kingdom government obligations | 1,308 | | | — | | | — | | | 1,308 | |
| | | | | | | |
| | | | | | | |
| Equity securities: | | | | | | | |
Investment funds(2) | — | | | 646 | | | — | | | 646 | |
| Real estate funds | — | | | — | | | 269 | | | 269 | |
| Total | $ | 1,313 | | | $ | 673 | | | $ | 269 | | | 2,255 | |
Investment funds(2) measured at net asset value | | | | | | | 108 | |
| Total assets measured at fair value | | | | | | | $ | 2,363 | |
(1)Refer to Note 15 for additional discussion regarding the three levels of the fair value hierarchy.
(2)Investment funds are comprised of mutual funds and collective trust funds. These funds consist of equity and debt securities of approximately 25% and 75%, respectively, for 2022 and 23% and 77%, respectively, for 2021.
The fair value of the UK Plan's assets are determined similar to the plan assets of the domestic plans as previously discussed.
The following table reconciles the beginning and ending balances of the UK Plan assets measured at fair value using significant Level 3 inputs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Real Estate Funds |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Beginning balance | $ | 269 | | | $ | 237 | | | $ | 243 | |
| Actual return on plan assets still held at period end | (27) | | | 35 | | | (13) | |
| | | | | |
| Foreign currency exchange rate changes | (28) | | | (3) | | | 7 | |
| Ending balance | $ | 214 | | | $ | 269 | | | $ | 237 | |
Defined Contribution Plans
The Company sponsors various defined contribution plans covering substantially all employees. The Company's contributions vary depending on the plan, but matching contributions are based on each participant's level of contribution, and certain participants receive contributions based on eligible pre-tax annual compensation. Contributions cannot exceed the maximum allowable for tax purposes. The Company's contributions to these plans were $159 million, $137 million and $127 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(14) Asset Retirement Obligations
The Company estimates its 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.
The Company does not recognize liabilities for AROs for which the fair value cannot be reasonably estimated. Due to the indeterminate removal date, the fair value of the associated liabilities on certain generation, transmission, distribution and other assets cannot currently be estimated, and no amounts are recognized on the Consolidated Financial Statements other than those included in the cost of removal regulatory liability established via approved depreciation rates in accordance with accepted regulatory practices. These accruals totaled $2.6 billion and $2.4 billion as of December 31, 2022 and 2021, respectively.
The following table presents the Company's ARO liabilities by asset type as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Quad Cities Station | $ | 417 | | | $ | 427 | |
| Fossil-fueled generating facilities | 396 | | | 466 | |
| Wind-powered generating facilities | 353 | | | 299 | |
| Solar-powered generating facilities | 30 | | | 25 | |
| Offshore pipeline facilities | 14 | | | 14 | |
| Other | 118 | | | 109 | |
| Total asset retirement obligations | $ | 1,328 | | | $ | 1,340 | |
| | | |
| Quad Cities Station nuclear decommissioning trust funds | $ | 664 | | | $ | 768 | |
The following table reconciles the beginning and ending balances of the Company's ARO liabilities for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 1,340 | | | $ | 1,341 | |
| Change in estimated costs | 2 | | | 81 | |
| Acquisitions | 29 | | | — | |
| Additions | 32 | | | 15 | |
| Retirements | (122) | | | (144) | |
| Accretion | 47 | | | 47 | |
| Ending balance | $ | 1,328 | | | $ | 1,340 | |
| | | |
| Reflected as: | | | |
| Other current liabilities | $ | 76 | | | $ | 130 | |
| Other long-term liabilities | 1,252 | | | 1,210 | |
| Total ARO liability | $ | 1,328 | | | $ | 1,340 | |
The Nuclear Regulatory Commission regulates the decommissioning of nuclear generating facilities, which includes the planning and funding for the decommissioning. In accordance with these regulations, MidAmerican Energy submits a biennial report to the Nuclear Regulatory Commission providing reasonable assurance that funds will be available to pay for its share of the Quad Cities Station decommissioning.
Certain of the Company's decommissioning and reclamation obligations relate to jointly owned facilities and mine sites, and as such, each subsidiary is committed to pay a proportionate share of the decommissioning or reclamation costs. In the event of a default by any of the other joint participants, the respective subsidiary may be obligated to absorb, directly or by paying additional sums to the entity, a proportionate share of the defaulting party's liability. The Company's estimated share of the decommissioning and reclamation obligations are primarily recorded as ARO liabilities.
(15) Fair Value Measurements
The carrying value of the Company's cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. The Company has various financial assets and liabilities that are measured at fair value on the Consolidated Financial Statements using inputs from the three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:
•Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•Level 3 - Unobservable inputs reflect the Company's judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. The Company develops these inputs based on the best information available, including its own data.
The following table presents the Company's financial assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Input Levels for Fair Value Measurements | | | | |
| Level 1 | | Level 2 | | Level 3 | | Other(1) | | Total |
| As of December 31, 2022: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Commodity derivatives | $ | 6 | | | $ | 614 | | | $ | 51 | | | $ | (194) | | | $ | 477 | |
| | | | | | | | | |
| Interest rate derivatives | 50 | | | 54 | | | 8 | | | — | | | 112 | |
| Mortgage loans held for sale | — | | | 474 | | | — | | | — | | | 474 | |
| Money market mutual funds | 1,178 | | | — | | | — | | | — | | | 1,178 | |
Debt securities: | | | | | | | | | |
| U.S. government obligations | 2,146 | | | — | | | — | | | — | | | 2,146 | |
International government obligations | — | | | 1 | | | — | | | — | | | 1 | |
Corporate obligations | — | | | 70 | | | — | | | — | | | 70 | |
Municipal obligations | — | | | 3 | | | — | | | — | | | 3 | |
Agency, asset and mortgage-backed obligations | — | | | 1 | | | — | | | — | | | 1 | |
| | | | | | | | | |
Equity securities: | | | | | | | | | |
| U.S. companies | 360 | | | — | | | — | | | — | | | 360 | |
International companies | 3,771 | | | — | | | — | | | — | | | 3,771 | |
Investment funds | 231 | | | — | | | — | | | — | | | 231 | |
| $ | 7,742 | | | $ | 1,217 | | | $ | 59 | | | $ | (194) | | | $ | 8,824 | |
| Liabilities: | | | | | | | | | |
| Commodity derivatives | $ | (8) | | | $ | (206) | | | $ | (110) | | | $ | 106 | | | $ | (218) | |
| Foreign currency exchange rate derivatives | — | | | (21) | | | — | | | — | | | (21) | |
| Interest rate derivatives | — | | | (2) | | | (2) | | | 1 | | | (3) | |
| $ | (8) | | | $ | (229) | | | $ | (112) | | | $ | 107 | | | $ | (242) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Input Levels for Fair Value Measurements | | | | |
| Level 1 | | Level 2 | | Level 3 | | Other(1) | | Total |
| As of December 31, 2021: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Commodity derivatives | $ | 5 | | | $ | 271 | | | $ | 73 | | | $ | (47) | | | $ | 302 | |
| Foreign currency exchange rate derivatives | — | | | 3 | | | — | | | — | | | 3 | |
| Interest rate derivatives | 1 | | | 3 | | | 20 | | | — | | | 24 | |
| Mortgage loans held for sale | — | | | 1,263 | | | — | | | — | | | 1,263 | |
| Money market mutual funds | 554 | | | — | | | — | | | — | | | 554 | |
| Debt securities: | | | | | | | | | |
| U.S. government obligations | 232 | | | — | | | — | | | — | | | 232 | |
| International government obligations | — | | | 2 | | | — | | | — | | | 2 | |
| Corporate obligations | — | | | 90 | | | — | | | — | | | 90 | |
| Municipal obligations | — | | | 3 | | | — | | | — | | | 3 | |
| Agency, asset and mortgage-backed obligations | — | | | 2 | | | — | | | — | | | 2 | |
| | | | | | | | | |
| Equity securities: | | | | | | | | | |
| U.S. companies | 428 | | | — | | | — | | | — | | | 428 | |
| International companies | 7,703 | | | — | | | — | | | — | | | 7,703 | |
Investment funds | 237 | | | — | | | — | | | — | | | 237 | |
| $ | 9,160 | | | $ | 1,637 | | | $ | 93 | | | $ | (47) | | | $ | 10,843 | |
| Liabilities: | | | | | | | | | |
| Commodity derivatives | $ | (2) | | | $ | (113) | | | $ | (224) | | | $ | 73 | | | $ | (266) | |
| Foreign currency exchange rate derivatives | — | | | (3) | | | — | | | — | | | (3) | |
| Interest rate derivatives | — | | | (7) | | | (1) | | | — | | | (8) | |
| $ | (2) | | | $ | (123) | | | $ | (225) | | | $ | 73 | | | $ | (277) | |
(1)Represents netting under master netting arrangements and a net cash collateral payable of $87 million and receivable of $26 million as of December 31, 2022 and 2021, respectively.
Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at estimated fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which the Company transacts. When quoted prices for identical contracts are not available, the Company uses forward price curves. Forward price curves represent the Company's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. The Company bases its forward price curves upon market price quotations, when available, or internally developed and commercial models, with internal and external fundamental data inputs. Market price quotations are obtained from independent brokers, exchanges, direct communication with market participants and actual transactions executed by the Company. Market price quotations are generally readily obtainable for the applicable term of the Company's outstanding derivative contracts; therefore, the Company's forward price curves reflect observable market quotes. Market price quotations for certain electricity and natural gas trading hubs are not as readily obtainable due to the length of the contract. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, the Company uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The estimated fair value of these derivative contracts is a function of underlying forward commodity prices, interest rates, currency rates, related volatility, counterparty creditworthiness and duration of contracts.
The Company's mortgage loans held for sale are valued based on independent quoted market prices, where available, or the prices of other mortgage whole loans with similar characteristics. As necessary, these prices are adjusted for typical securitization activities, including servicing value, portfolio composition, market conditions and liquidity.
The Company's investments in money market mutual funds and debt and equity securities are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value. In the absence of a quoted market price or net asset value of an identical security, the fair value is determined using pricing models or net asset values based on observable market inputs and quoted market prices of securities with similar characteristics.
The following table reconciles the beginning and ending balances of the Company's financial assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs for the years ended December 31 (in millions). Transfers out of Level 3 occur primarily due to increased price observability.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commodity Derivatives | | Interest Rate Derivatives | | |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | | | | | |
| | | | | | | | | | | | | | | | | |
| Beginning balance | $ | (151) | | | $ | 116 | | | $ | 97 | | | $ | 19 | | | $ | 62 | | | $ | 14 | | | | | | | |
Changes included in earnings(1) | (85) | | | (43) | | | (10) | | | (13) | | | (43) | | | 48 | | | | | | | |
Changes in fair value recognized in OCI | 9 | | | (13) | | | — | | | — | | | — | | | — | | | | | | | |
Changes in fair value recognized in net regulatory assets | (52) | | | (118) | | | (17) | | | — | | | — | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Purchases | 3 | | | (76) | | | 5 | | | — | | | — | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Settlements | 171 | | | (34) | | | 41 | | | — | | | — | | | — | | | | | | | |
| Transfers out of Level 3 into Level 2 | 46 | | | 17 | | | — | | | — | | | — | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Ending balance | $ | (59) | | | $ | (151) | | | $ | 116 | | | $ | 6 | | | $ | 19 | | | $ | 62 | | | | | | | |
(1)Changes included in earnings for interest rate derivatives are reported net of amounts related to the satisfaction of the associated loan commitment.
The Company's long-term debt is carried at cost, including fair value adjustments and unamortized premiums, discounts and debt issuance costs as applicable, on the Consolidated Financial Statements. 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 as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying | | Fair | | Carrying | | Fair |
| Value | | Value | | Value | | Value |
| | | | | | | |
| Long-term debt | $ | 51,635 | | | $ | 46,906 | | | $ | 49,762 | | | $ | 57,189 | |
(16) Commitments and Contingencies
Commitments
The Company has the following firm commitments that are not reflected on the Consolidated Balance Sheet. Minimum payments as of December 31, 2022 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2028 and | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Contract type: | | | | | | | | | | | | | | |
Fuel, capacity and transmission contract commitments | | $ | 3,431 | | | $ | 1,879 | | | $ | 1,381 | | | $ | 1,286 | | | $ | 1,234 | | | $ | 11,862 | | | $ | 21,073 | |
| Construction commitments | | 2,434 | | | 1,088 | | | 144 | | | 294 | | | 10 | | | — | | | 3,970 | |
| Easements | | 88 | | | 86 | | | 85 | | | 86 | | | 87 | | | 3,049 | | | 3,481 | |
Maintenance, service and other contracts | | 461 | | | 350 | | | 297 | | | 283 | | | 256 | | | 1,472 | | | 3,119 | |
| | $ | 6,414 | | | $ | 3,403 | | | $ | 1,907 | | | $ | 1,949 | | | $ | 1,587 | | | $ | 16,383 | | | $ | 31,643 | |
Fuel, Capacity and Transmission Contract Commitments
The Utilities have fuel supply and related transportation and lime contracts for their coal- and natural gas-fueled generating facilities. The Utilities expect to supplement these contracts with additional contracts and spot market purchases to fulfill their future fossil fuel needs. The Utilities acquire a portion of their electricity through long-term purchases and exchange agreements. The Utilities have several power purchase agreements with renewable generating facilities that are not included in the table above as the payments are based on the amount of energy generated and there are no minimum payments. The Utilities also have contracts for the right to transmit electricity over other entities' transmission lines to facilitate delivery to their customers.
MidAmerican Energy has long-term rail transportation contracts with BNSF Railway Company ("BNSF"), an affiliate company, and Union Pacific Railroad Company for the transportation of coal to all of the MidAmerican Energy-operated coal-fueled generating facilities. For the years ended December 31, 2022, 2021 and 2020, $100 million, $76 million and $90 million, respectively, were incurred for coal transportation services, the majority of which was related to the BNSF agreement.
Construction Commitments
The Company's firm construction commitments reflected in the table above include the following major construction projects:
•PacifiCorp's costs associated with certain generating plant, transmission, and distribution projects.
•MidAmerican Energy's firm construction commitments primarily consisting of contracts for the repowering and construction of wind- and solar-powered generating facilities and the settlement of AROs.
•Nevada Utilities' firm construction commitments consisting of costs associated with a planned 150-MW solar photovoltaic facility with an additional 100 MWs of co-located battery storage that will be developed in Clark County, Nevada, a planned 220-MW grid-tied battery energy storage system that will be developed on the site of the retired Reid Gardner generating station in Clark County, Nevada and certain other generating plant projects and costs associated with two additional solar photovoltaic facility projects. The first project is a 250-MW solar photovoltaic facility with an additional 200 MWs of co-located battery storage that will be developed in Humboldt County, Nevada. The second project is a 350-MW solar photovoltaic facility with an additional 280 MWs of co-located battery storage that will be developed in Humboldt County, Nevada. Commercial operation has been delayed for both projects to an undetermined date. Both facilities will be jointly owned and operated by Nevada Power and Sierra Pacific.
•AltaLink's investments in directly assigned transmission projects from the AESO.
Easements
The Company has non-cancelable easements for land on which certain of its assets, primarily wind- and solar-powered generating facilities, are located.
Maintenance, Service and Other Contracts
The Company has entered into service agreements related to its nonregulated wind-powered and solar-powered projects with third parties to operate and maintain the projects under fixed-fee operating and maintenance agreements. Additionally, the Company has various non-cancelable maintenance, service and other contracts primarily related to turbine and equipment maintenance and various other service agreements.
Environmental Laws and Regulations
The Company is subject to federal, state, local and foreign laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal and other environmental matters that have the potential to impact the its current and future operations. The Company believes it is in material compliance with all applicable laws and regulations.
Hydroelectric Relicensing
PacifiCorp is a party to the 2016 amended Klamath Hydroelectric Settlement Agreement ("KHSA"), which is intended to resolve disputes surrounding PacifiCorp's efforts to relicense the Klamath Hydroelectric Project. The KHSA establishes a process for PacifiCorp, the states of Oregon and California ("States") and other stakeholders to assess whether dam removal can occur consistent with the settlement's terms. For PacifiCorp, the key elements of the settlement include: (1) a contribution from PacifiCorp's Oregon and California customers capped at $200 million plus $250 million in California bond funds; (2) complete indemnification from harms associated with dam removal; (3) transfer of the Federal Energy Regulatory Commission ("FERC") license to a third-party dam removal entity, the Klamath River Renewal Corporation ("KRRC"), who would conduct dam removal; and (4) ability for PacifiCorp to operate the facilities for the benefit of customers until dam removal commences.
In September 2016, the KRRC and PacifiCorp filed a joint application with the FERC to transfer the license for the four mainstem Klamath hydroelectric dams comprising the Lower Klamath Project (FERC Project No. 14803) from PacifiCorp to the KRRC. The FERC approved the partial transfer of the Klamath license in a July 2020 order, subject to the condition that PacifiCorp remains co-licensee. Under the amended KHSA, PacifiCorp did not agree to remain co-licensee during the surrender and removal process given concerns about liability protections for PacifiCorp and its customers. In November 2020, PacifiCorp entered a memorandum of agreement (the "MOA") with the KRRC, the Karuk Tribe, the Yurok Tribe and the States to continue implementation of the KHSA. The agreement required the States, PacifiCorp and KRRC to file a new license transfer application to remove PacifiCorp from the license for the Lower Klamath Project and add the States and KRRC as co-licensees for the purposes of surrender. In addition, the MOA provides for additional contingency funding of $45 million, equally split between PacifiCorp and the States, and for PacifiCorp and the States to equally share in any additional cost overruns in the unlikely event that dam removal costs exceed the $450 million in funding to ensure dam removal is complete. The MOA also requires PacifiCorp to cover the costs associated with certain pre-existing environmental conditions. In June 2021, the FERC approved the transfer of the Lower Klamath Project dams from PacifiCorp to the KRRC and the States as co-licensees. In July 2021, the Oregon, Wyoming, Idaho and California state public utility commissions conditionally approved the required property transfer applications. In August 2021, PacifiCorp notified the Public Service Commission of Utah of the property transfer, however no formal approval is required in Utah. In August 2022, the FERC staff issued a final environmental impact statement for the project, concluding that dam removal is the preferred action. In November 2022, the FERC issued a license surrender order for the project, which was accepted by the KRRC and the States in December 2022, along with the transfer of the Lower Klamath Project dams. Although PacifiCorp no longer owns the Lower Klamath Project, PacifiCorp will continue to operate the facilities under an operation and maintenance agreement with the KRRC until each facility is ready for removal. Removal of the Copco No. 2 facility is anticipated to begin in 2023, and removal of the remaining three dams (J.C. Boyle, Copco No. 1, and Iron Gate) is anticipated to begin in 2024.
Hydroelectric Commitments
Certain of PacifiCorp's hydroelectric licenses and settlement agreements contain requirements for PacifiCorp to make certain capital and operating expenditures related to its hydroelectric facilities, which are estimated to be approximately $282 million over the next 10 years.
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.
Wildfires Overview - PacifiCorp
A provision for a loss contingency is recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. PacifiCorp evaluates the related range of reasonably estimated losses and records a loss based on its best estimate within that range or the lower end of the range if there is no better estimate.
In California, under inverse condemnation, courts have held that investor-owned utilities can be liable for real and personal property damages from wildfires without the utility being found negligent and regardless of fault. California law also permits inverse condemnation plaintiffs to recover reasonable attorney fees and costs. In both Oregon and California, PacifiCorp has equipment in areas accessed through special use permits, easements or similar agreements that may contain provisions requiring it to pay for damages caused by its equipment regardless of fault. Even if inverse condemnation or other provisions do not apply, PacifiCorp could be found liable for all damages proximately caused by negligence, including real and personal property and natural resource damages; fire suppression costs; personal injury and loss of life damages; and interest.
2020 Wildfires
In September 2020, a severe weather event resulting in high winds, low humidity and warm temperatures contributed to several major wildfires, which resulted in real and personal property and natural resource damage, personal injuries and loss of life and widespread power outages in Oregon and Northern California (the "2020 Wildfires"). The wildfires spread across certain parts of PacifiCorp's service territory and surrounding areas across multiple counties in Oregon and California, including Siskiyou County, California; Jackson County, Oregon; Douglas County, Oregon; Marion County, Oregon; Lincoln County, Oregon; and Klamath County, Oregon burning over 500,000 acres in aggregate. Third party reports for these wildfires indicate over 2,000 structures destroyed, including residences; several structures damaged; multiple individuals injured; and several fatalities. Fire suppression costs estimated by various agencies total approximately $150 million.
Investigations into the cause and origin of each wildfire are complex and ongoing and being conducted by various entities, including the U.S. Forest Service, the California Public Utilities Commission, the Oregon Department of Forestry, the Oregon Department of Justice, PacifiCorp and various experts engaged by PacifiCorp.
As of the date of this filing, numerous lawsuits have been filed in Oregon and California, including a class action complaint in Oregon, on behalf of plaintiffs related to the 2020 Wildfires. The plaintiffs seek damages that include property damages, economic losses, punitive damages, exemplary damages, attorneys' fees and other damages. Additionally, several insurance carriers have filed subrogation complaints in Oregon and California with allegations similar to those made in the aforementioned lawsuits. The final determinations of liability, however, will only be made following the completion of comprehensive investigations and litigation processes.
PacifiCorp has accrued cumulative estimated probable losses associated with the 2020 Wildfires of $477 million through December 31, 2022. The accrual includes PacifiCorp's estimate of losses for fire suppression costs, real and personal property damages, natural resource damages for certain areas and noneconomic damages such as personal injury damages and loss of life damages that are considered probable of being incurred and that it is reasonably able to estimate at this time. For certain aspects of the 2020 Wildfires for which loss is considered probable, information necessary to reasonably estimate the potential losses, such as those related to certain areas of natural resource damages, is not currently available.
It is reasonably possible PacifiCorp will incur additional losses beyond the amounts accrued; however, PacifiCorp is currently unable to estimate the range of possible additional losses that could be incurred due to the number of properties and parties involved and the variation in those types of properties and lack of available details. To the extent losses beyond the amounts accrued are incurred, additional insurance coverage is expected to be available to cover a portion of the losses.
The following table presents changes in PacifiCorp's liability for estimated losses associated with the 2020 Wildfires for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Beginning balance | $ | 252 | | | $ | 252 | | | $ | — | |
| Accrued losses | 225 | | | — | | | 252 | |
| Payments | (53) | | | — | | | — | |
| Ending balance | $ | 424 | | | $ | 252 | | | $ | 252 | |
PacifiCorp's receivable for expected insurance recoveries associated with the probable losses was $246 million and $116 million, respectively, as of December 31, 2022 and 2021. During the years ended December 31, 2022, 2021, and 2020, PacifiCorp recognized probable losses net of expected insurance recoveries associated with the 2020 Wildfires of $64 million, $— million and $136 million, respectively.
2022 McKinney Fire
According to California Department of Forestry and Fire Protection, on July 29, 2022, at approximately 2:16 p.m. Pacific Time, a wildfire began in the Oak Knoll Ranger District of the Klamath National Forest in Siskiyou County, California (the "2022 McKinney Fire") located in PacifiCorp's service territory. Third party reports indicate that the 2022 McKinney Fire resulted in 11 structures damaged, 185 structures destroyed, 12 injuries and four fatalities and consumed 60,000 acres. The cause of the 2022 McKinney Fire is undetermined and remains under investigation by the U.S. Forest Service.
Due to the preliminary nature of the investigation PacifiCorp does not believe a loss is probable and therefore has not accrued any loss as of the date of this filing. While the loss is not probable, PacifiCorp estimates the potential loss, excluding losses for natural resource damages, to be $31 million, net of expected insurance recoveries. The loss estimate includes PacifiCorp's estimate of losses for fire suppression costs; real and personal property damages; and noneconomic damages such as personal injury damages and loss of life damages. PacifiCorp is unable to estimate the total potential loss, including losses for natural resource damages, because there are a number of unknown facts and legal considerations that may impact the amount of any potential liability, including the total scope and nature of claims that may be asserted against PacifiCorp. PacifiCorp has insurance available and estimates the potential insurance recoveries to be $103 million, to cover potential losses.
As of the date of this filing, multiple lawsuits have been filed in California on behalf of plaintiffs related to the 2022 McKinney Fire. The plaintiffs seek damages that include property damages, economic losses, punitive damages, exemplary damages, attorneys' fees and other damages but the amount of damages sought are not specified. The final determinations of liability, however, will only be made following the completion of comprehensive investigations and litigation processes.
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.
(17) Revenue from Contracts with Customers
Energy Products and Services
The following table summarizes the Company's energy products and services Customer Revenue by regulated energy and nonregulated energy, with further disaggregation of regulated energy by line of business, including a reconciliation to the Company's reportable segment information included in Note 22, for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | PacifiCorp | | MidAmerican Funding | | NV Energy | | Northern Powergrid | | BHE Pipeline Group | | BHE Transmission | | BHE Renewables | | BHE and Other(1) | | Total |
| Customer Revenue: | | | | | | | | | | | | | | | | | | |
| Regulated: | | | | | | | | | | | | | | | | | | |
| Retail Electric | | $ | 5,099 | | | $ | 2,320 | | | $ | 3,465 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 10,884 | |
| Retail Gas | | — | | | 855 | | | 167 | | | — | | | — | | | — | | | — | | | — | | | 1,022 | |
| Wholesale | | 260 | | | 668 | | | 92 | | | — | | | 8 | | | — | | | — | | | (4) | | | 1,024 | |
Transmission and
distribution | | 166 | | | 61 | | | 76 | | | 1,081 | | | — | | | 683 | | | — | | | — | | | 2,067 | |
| Interstate pipeline | | — | | | — | | | — | | | — | | | 2,603 | | | — | | | — | | | (127) | | | 2,476 | |
| Other | | 102 | | | — | | | 2 | | | — | | | 3 | | | — | | | — | | | (2) | | | 105 | |
| Total Regulated | | 5,627 | | | 3,904 | | | 3,802 | | | 1,081 | | | 2,614 | | | 683 | | | — | | | (133) | | | 17,578 | |
| Nonregulated | | — | | | 7 | | | — | | | 169 | | | 1,076 | | | 70 | | | 866 | | | 597 | | | 2,785 | |
| Total Customer Revenue | | 5,627 | | | 3,911 | | | 3,802 | | | 1,250 | | | 3,690 | | | 753 | | | 866 | | | 464 | | | 20,363 | |
| Other revenue | | 52 | | | 114 | | | 22 | | | 115 | | | 154 | | | (21) | | | 128 | | | 142 | | | 706 | |
| Total | | $ | 5,679 | | | $ | 4,025 | | | $ | 3,824 | | | $ | 1,365 | | | $ | 3,844 | | | $ | 732 | | | $ | 994 | | | $ | 606 | | | $ | 21,069 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | PacifiCorp | | MidAmerican Funding | | NV Energy | | Northern Powergrid | | BHE Pipeline Group | | BHE Transmission | | BHE Renewables | | BHE and Other(1) | | Total |
| Customer Revenue: | | | | | | | | | | | | | | | | | | |
| Regulated: | | | | | | | | | | | | | | | | | | |
| Retail Electric | | $ | 4,847 | | | $ | 2,128 | | | $ | 2,828 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (2) | | | $ | 9,801 | |
| Retail Gas | | — | | | 859 | | | 115 | | | — | | | — | | | — | | | — | | | — | | | 974 | |
| Wholesale | | 157 | | | 454 | | | 62 | | | — | | | 57 | | | — | | | — | | | (3) | | | 727 | |
Transmission and
distribution | | 143 | | | 58 | | | 74 | | | 1,023 | | | — | | | 702 | | | — | | | — | | | 2,000 | |
| Interstate pipeline | | — | | | — | | | — | | | — | | | 2,404 | | | — | | | — | | | (131) | | | 2,273 | |
| Other | | 108 | | | — | | | 1 | | | — | | | (1) | | | — | | | — | | | 1 | | | 109 | |
| Total Regulated | | 5,255 | | | 3,499 | | | 3,080 | | | 1,023 | | | 2,460 | | | 702 | | | — | | | (135) | | | 15,884 | |
| Nonregulated | | — | | | 15 | | | 3 | | | 43 | | | 956 | | | 35 | | | 796 | | | 576 | | | 2,424 | |
| Total Customer Revenue | | 5,255 | | | 3,514 | | | 3,083 | | | 1,066 | | | 3,416 | | | 737 | | | 796 | | | 441 | | | 18,308 | |
| Other revenue | | 41 | | | 33 | | | 24 | | | 122 | | | 128 | | | (6) | | | 185 | | | 100 | | | 627 | |
| Total | | $ | 5,296 | | | $ | 3,547 | | | $ | 3,107 | | | $ | 1,188 | | | $ | 3,544 | | | $ | 731 | | | $ | 981 | | | $ | 541 | | | $ | 18,935 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | PacifiCorp | | MidAmerican Funding | | NV Energy | | Northern Powergrid | | BHE Pipeline Group | | BHE Transmission | | BHE Renewables | | BHE and Other(1) | | Total |
| Customer Revenue: | | | | | | | | | | | | | | | | | | |
| Regulated: | | | | | | | | | | | | | | | | | | |
| Retail Electric | | $ | 4,932 | | | $ | 1,924 | | | $ | 2,566 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (1) | | | $ | 9,421 | |
| Retail Gas | | — | | | 505 | | | 114 | | | — | | | — | | | — | | | — | | | — | | | 619 | |
| Wholesale | | 107 | | | 199 | | | 45 | | | — | | | 17 | | | — | | | — | | | (2) | | | 366 | |
Transmission and
distribution | | 96 | | | 60 | | | 95 | | | 887 | | | — | | | 641 | | | — | | | — | | | 1,779 | |
| Interstate pipeline | | — | | | — | | | — | | | — | | | 1,397 | | | — | | | — | | | (139) | | | 1,258 | |
| Other | | 108 | | | — | | | 2 | | | — | | | — | | | — | | | — | | | — | | | 110 | |
| Total Regulated | | 5,243 | | | 2,688 | | | 2,822 | | | 887 | | | 1,414 | | | 641 | | | — | | | (142) | | | 13,553 | |
| Nonregulated | | — | | | 16 | | | 2 | | | 26 | | | 134 | | | 18 | | | 817 | | | 515 | | | 1,528 | |
| Total Customer Revenue | | 5,243 | | | 2,704 | | | 2,824 | | | 913 | | | 1,548 | | | 659 | | | 817 | | | 373 | | | 15,081 | |
| Other revenue | | 98 | | | 24 | | | 30 | | | 109 | | | 30 | | | — | | | 119 | | | 65 | | | 475 | |
| Total | | $ | 5,341 | | | $ | 2,728 | | | $ | 2,854 | | | $ | 1,022 | | | $ | 1,578 | | | $ | 659 | | | $ | 936 | | | $ | 438 | | | $ | 15,556 | |
(1)The BHE and Other reportable segment represents amounts related principally to other entities, including MidAmerican Energy Services, LLC, corporate functions and intersegment eliminations.
Real Estate Services
The following table summarizes the Company's real estate services Customer Revenue by line of business for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| HomeServices |
| 2022 | | 2021 | | 2020 |
| Customer Revenue: | | | | | |
| Brokerage | $ | 4,867 | | | $ | 5,498 | | | $ | 4,520 | |
| Franchise | 66 | | | 85 | | | 76 | |
| Total Customer Revenue | 4,933 | | | 5,583 | | | 4,596 | |
| Mortgage and other revenue | 335 | | | 632 | | | 800 | |
| Total | $ | 5,268 | | | $ | 6,215 | | | $ | 5,396 | |
Remaining Performance Obligations
The following table summarizes the Company's revenue it expects to recognize in future periods related to significant unsatisfied remaining performance obligations for fixed contracts with expected durations in excess of one year as of December 31, 2022, by reportable segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance obligations expected to be satisfied | | | | | |
| Less than 12 months | | More than 12 months | | Total | | | |
| BHE Pipeline Group | $ | 2,835 | | | $ | 20,619 | | | $ | 23,454 | | | | |
| BHE Transmission | 679 | | | — | | | 679 | | | | |
| Total | $ | 3,514 | | | $ | 20,619 | | | $ | 24,133 | | | | |
| | | | | | | | |
| | | | | | | | |
(18) BHE Shareholders' Equity
Preferred Stock
As of December 31, 2022 and 2021, BHE had 849,982 and 1,649,988 shares outstanding of its Perpetual Preferred Stock (the "4% Perpetual Preferred Stock") issued to certain subsidiaries of Berkshire Hathaway Inc. The 4% Perpetual Preferred Stock has a liquidation preference of $1,000 per share and currently pays a 4.00% dividend per share on the liquidation preference. Dividends shall accrue and accumulate daily, be cumulative, compound semi-annually and, if declared, be payable in cash semi-annually in arrears on May 15 and November 15 of each year. If dividends are not declared and paid, any accumulating dividends shall continue to accumulate and compound. BHE may not make any dividends on shares of any other class or series of its capital stock (other than for dividends on shares of common stock payable in shares of common stock, unless the holders of the then outstanding 4% Perpetual Preferred Stock shall first receive, or simultaneously receive, a dividend in an amount at least equivalent to the amount accumulated and not previously paid. BHE may not declare or pay any dividends on shares of the 4% Perpetual Preferred Stock if such declaration or payment would constitute an event of default on BHE's senior indebtedness (as defined). BHE may, at its option, redeem the 4% Perpetual Preferred Stock in whole or in part at any time at a price per share equal to the liquidation preference.
Common Stock
On March 14, 2000, and as amended on December 7, 2005, BHE's shareholders entered into a Shareholder Agreement that provides specific rights to certain shareholders. One of these rights allows certain shareholders the ability to put their common shares to BHE at the then-current fair value dependent on certain circumstances controlled by BHE.
In June 2022, BHE purchased 740,961 shares of its common stock held by Mr. Gregory E. Abel, BHE's Chair, for $870 million. The purchase was pursuant to the terms of BHE's Shareholders Agreement.
Restricted Net Assets
BHE has maximum debt-to-total capitalization percentage restrictions imposed by its senior unsecured credit facilities expiring in June 2025 which, in certain circumstances, limit BHE's ability to make cash dividends or distributions. As a result of this restriction, BHE has restricted net assets of $18.8 billion as of December 31, 2022.
Certain of BHE's subsidiaries have restrictions on their ability to dividend, loan or advance funds to BHE due to specific legal or regulatory restrictions, including, but not limited to, maximum debt-to-total capitalization percentages and commitments made to state commissions. As a result of these restrictions, BHE's subsidiaries had restricted net assets of $20.4 billion as of December 31, 2022.
(19) Components of Accumulated Other Comprehensive Loss, Net
The following table shows the change in accumulated other comprehensive loss attributable to BHE shareholders by each component of other comprehensive income (loss), net of applicable income taxes, for the year ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Unrecognized | | Foreign | | | | Unrealized | | | | AOCI |
| | Amounts on | | Currency | | | | Gains (Losses) | | | | Attributable |
| | Retirement | | Translation | | | | on Cash Flow | | Noncontrolling | | To BHE |
| | Benefits | | Adjustment | | | | Hedges | | Interests | | Shareholders, Net |
| | | | | | | | | | | | |
| Balance, December 31, 2019 | | $ | (417) | | | $ | (1,296) | | | | | $ | 7 | | | $ | — | | | $ | (1,706) | |
| Other comprehensive (loss) income | | (65) | | | 234 | | | | | (15) | | | — | | | 154 | |
| BHE GT&S acquisition | | (10) | | | — | | | | | — | | | 10 | | | — | |
| Balance, December 31, 2020 | | (492) | | | (1,062) | | | | | (8) | | | 10 | | | (1,552) | |
| Other comprehensive income (loss) | | 174 | | | (24) | | | | | 67 | | | (5) | | | 212 | |
| Balance, December 31, 2021 | | (318) | | | (1,086) | | | | | 59 | | | 5 | | | (1,340) | |
| Other comprehensive (loss) income | | (72) | | | (810) | | | | | 76 | | | (3) | | | (809) | |
| Balance, December 31, 2022 | | $ | (390) | | | $ | (1,896) | | | | | $ | 135 | | | $ | 2 | | | $ | (2,149) | |
Reclassifications from AOCI to net income for the years ended December 31, 2022, 2021 and 2020 were insignificant. Additionally, refer to the "Foreign Operations" discussion in Note 13 for information about unrecognized amounts on retirement benefits reclassifications from AOCI that do not impact net income in their entirety.
(20) Variable Interest Entities and Noncontrolling Interests
The primary beneficiary of a VIE is required to consolidate the VIE and to disclose certain information about its significant variable interests in the VIE. The primary beneficiary of a VIE is the entity that has both (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE.
As part of the GT&S Transaction, BHE acquired an indirect 25% economic interest in Cove Point, consisting of 100% of the general partnership interest and 25% of the total limited partnership interests. BHE concluded that Cove Point is a VIE due to the limited partners lacking the characteristics of a controlling financial interest. BHE is the primary beneficiary of Cove Point as it has the power to direct the activities that most significantly impact its economic performance as well as the obligation to absorb losses and benefits which could be significant to it.
Included in noncontrolling interests on the Consolidated Balance Sheets are (i) Dominion Energy's 50% interest in Cove Point and Brookfield Super-Core Infrastructure Partner's 25% interest in Cove Point and (ii) preferred securities of subsidiaries of $58 million as of December 31, 2022 and 2021, consisting of $56 million of 8.061% cumulative preferred securities of Northern Electric plc, a subsidiary of Northern Powergrid, which are redeemable in the event of the revocation of Northern Electric plc's electricity distribution license by the Secretary of State, and $2 million of nonredeemable preferred stock of PacifiCorp.
(21) Supplemental Cash Flow Disclosures
The summary of supplemental cash flow disclosures as of and for the years ended December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 2,071 | | | $ | 2,041 | | | $ | 1,855 | |
Income taxes received, net(1) | $ | 1,863 | | | $ | 1,309 | | | $ | 1,361 | |
| | | | | |
| Supplemental disclosure of non-cash investing and financing transactions: | | | | | |
| Accruals related to property, plant and equipment additions | $ | 1,049 | | | $ | 834 | | | $ | 801 | |
| | | | | |
(1)Includes $1,961 million, $1,441 million and $1,504 million of income taxes received from Berkshire Hathaway in 2022, 2021 and 2020, respectively.
(22) Segment Information
The Company's reportable segments with foreign operations include Northern Powergrid, whose business is principally in the United Kingdom, and BHE Transmission, whose business includes operations in Canada. Intersegment eliminations and adjustments, including the allocation of goodwill, have been made. Information related to the Company's reportable segments is shown below (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating revenue: | | | | | |
| PacifiCorp | $ | 5,679 | | | $ | 5,296 | | | $ | 5,341 | |
| MidAmerican Funding | 4,025 | | | 3,547 | | | 2,728 | |
| NV Energy | 3,824 | | | 3,107 | | | 2,854 | |
| Northern Powergrid | 1,365 | | | 1,188 | | | 1,022 | |
| BHE Pipeline Group | 3,844 | | | 3,544 | | | 1,578 | |
| BHE Transmission | 732 | | | 731 | | | 659 | |
| BHE Renewables | 994 | | | 981 | | | 936 | |
| HomeServices | 5,268 | | | 6,215 | | | 5,396 | |
BHE and Other(1) | 606 | | | 541 | | | 438 | |
| Total operating revenue | $ | 26,337 | | | $ | 25,150 | | | $ | 20,952 | |
| | | | | |
| Depreciation and amortization: | | | | | |
| PacifiCorp | $ | 1,120 | | | $ | 1,088 | | | $ | 1,209 | |
| MidAmerican Funding | 1,168 | | | 914 | | | 716 | |
| NV Energy | 566 | | | 549 | | | 502 | |
| Northern Powergrid | 361 | | | 305 | | | 266 | |
| BHE Pipeline Group | 508 | | | 492 | | | 231 | |
| BHE Transmission | 239 | | | 238 | | | 201 | |
| BHE Renewables | 264 | | | 241 | | | 284 | |
| HomeServices | 56 | | | 52 | | | 45 | |
BHE and Other(1) | 4 | | | 2 | | | 1 | |
| Total depreciation and amortization | $ | 4,286 | | | $ | 3,881 | | | $ | 3,455 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating income: | | | | | |
| PacifiCorp | $ | 1,158 | | | $ | 1,133 | | | $ | 924 | |
| MidAmerican Funding | 438 | | | 416 | | | 454 | |
| NV Energy | 606 | | | 621 | | | 649 | |
| Northern Powergrid | 551 | | | 543 | | | 421 | |
| BHE Pipeline Group | 1,720 | | | 1,516 | | | 779 | |
| BHE Transmission | 333 | | | 339 | | | 316 | |
| BHE Renewables | 300 | | | 329 | | | 291 | |
| HomeServices | 151 | | | 505 | | | 511 | |
BHE and Other(1) | (16) | | | (75) | | | (54) | |
| Total operating income | 5,241 | | | 5,327 | | | 4,291 | |
| Interest expense | (2,216) | | | (2,118) | | | (2,021) | |
| Capitalized interest | 76 | | | 64 | | | 80 | |
| Allowance for equity funds | 167 | | | 126 | | | 165 | |
| Interest and dividend income | 154 | | | 89 | | | 71 | |
| (Losses) gains on marketable securities, net | (2,002) | | | 1,823 | | | 4,797 | |
| Other, net | (7) | | | (17) | | | 88 | |
| Total income before income tax (benefit) expense and equity loss | $ | 1,413 | | | $ | 5,294 | | | $ | 7,471 | |
| | | | | |
| Interest expense: | | | | | |
| PacifiCorp | $ | 431 | | | $ | 430 | | | $ | 426 | |
| MidAmerican Funding | 333 | | | 319 | | | 322 | |
| NV Energy | 221 | | | 206 | | | 227 | |
| Northern Powergrid | 133 | | | 130 | | | 130 | |
| BHE Pipeline Group | 148 | | | 143 | | | 74 | |
| BHE Transmission | 153 | | | 155 | | | 148 | |
| BHE Renewables | 175 | | | 158 | | | 166 | |
| HomeServices | 7 | | | 4 | | | 11 | |
BHE and Other(1) | 615 | | | 573 | | | 517 | |
| Total interest expense | $ | 2,216 | | | $ | 2,118 | | | $ | 2,021 | |
| | | | | |
| Income tax (benefit) expense: | | | | | |
| PacifiCorp | $ | (61) | | | $ | (78) | | | $ | (75) | |
| MidAmerican Funding | (776) | | | (680) | | | (574) | |
| NV Energy | 56 | | | 56 | | | 61 | |
| Northern Powergrid | 75 | | | 192 | | | 96 | |
| BHE Pipeline Group | 276 | | | 269 | | | 162 | |
| BHE Transmission | 14 | | | 10 | | | 13 | |
BHE Renewables(2) | (887) | | | (753) | | | (602) | |
| HomeServices | 47 | | | 138 | | | 138 | |
BHE and Other(1) | (660) | | | (286) | | | 1,089 | |
| Total income tax (benefit) expense | $ | (1,916) | | | $ | (1,132) | | | $ | 308 | |
| | | | | |
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| | | | | |
| | | | | |
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| | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Earnings on common shares: | | | | | |
| PacifiCorp | $ | 921 | | | $ | 889 | | | $ | 741 | |
| MidAmerican Funding | 947 | | | 883 | | | 818 | |
| NV Energy | 427 | | | 439 | | | 410 | |
| Northern Powergrid | 385 | | | 247 | | | 201 | |
| BHE Pipeline Group | 1,040 | | | 807 | | | 528 | |
| BHE Transmission | 247 | | | 247 | | | 231 | |
BHE Renewables(2) | 625 | | | 451 | | | 521 | |
| HomeServices | 100 | | | 387 | | | 375 | |
BHE and Other(1) | (2,017) | | | 1,319 | | | 3,092 | |
| Total earnings on common shares | $ | 2,675 | | | $ | 5,669 | | | $ | 6,917 | |
| | | | | |
| Capital expenditures: | | | | | |
| PacifiCorp | $ | 2,166 | | | $ | 1,513 | | | $ | 2,540 | |
| MidAmerican Funding | 1,869 | | | 1,912 | | | 1,836 | |
| NV Energy | 1,113 | | | 749 | | | 675 | |
| Northern Powergrid | 768 | | | 742 | | | 682 | |
| BHE Pipeline Group | 1,157 | | | 1,128 | | | 659 | |
| BHE Transmission | 200 | | | 279 | | | 372 | |
| BHE Renewables | 138 | | | 225 | | | 95 | |
| HomeServices | 48 | | | 42 | | | 36 | |
| BHE and Other | 46 | | | 21 | | | (130) | |
| Total capital expenditures | $ | 7,505 | | | $ | 6,611 | | | $ | 6,765 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 | | 2020 |
| Property, plant and equipment, net: | | | | | |
| PacifiCorp | $ | 24,430 | | | $ | 22,914 | | | $ | 22,430 | |
| MidAmerican Funding | 21,092 | | | 20,302 | | | 19,279 | |
| NV Energy | 10,993 | | | 10,231 | | | 9,865 | |
| Northern Powergrid | 7,445 | | | 7,572 | | | 7,230 | |
| BHE Pipeline Group | 16,216 | | | 15,692 | | | 15,097 | |
| BHE Transmission | 6,209 | | | 6,590 | | | 6,445 | |
| BHE Renewables | 6,231 | | | 6,103 | | | 5,645 | |
| HomeServices | 188 | | | 169 | | | 159 | |
| BHE and Other | 239 | | | 243 | | | (22) | |
| Total property, plant and equipment, net | $ | 93,043 | | | $ | 89,816 | | | $ | 86,128 | |
| | | | | |
| | | | | |
| | | | | |
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| | | | | |
| | | | | |
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| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 | | 2020 |
| Total assets: | | | | | |
| PacifiCorp | $ | 30,559 | | | $ | 27,615 | | | $ | 26,862 | |
| MidAmerican Funding | 26,077 | | | 25,352 | | | 23,530 | |
| NV Energy | 16,676 | | | 15,239 | | | 14,501 | |
| Northern Powergrid | 9,005 | | | 9,326 | | | 8,782 | |
| BHE Pipeline Group | 21,005 | | | 20,434 | | | 19,541 | |
| BHE Transmission | 9,334 | | | 9,476 | | | 9,208 | |
| BHE Renewables | 11,458 | | | 11,829 | | | 12,004 | |
| HomeServices | 3,436 | | | 4,574 | | | 4,955 | |
| BHE and Other | 6,290 | | | 8,220 | | | 7,933 | |
| Total assets | $ | 133,840 | | | $ | 132,065 | | | $ | 127,316 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating revenue by country: | | | | | |
| U.S. | $ | 24,263 | | | $ | 23,215 | | | $ | 19,254 | |
| United Kingdom | 1,345 | | | 1,188 | | | 1,022 | |
| Canada | 709 | | | 719 | | | 653 | |
| Australia | 20 | | | — | | | — | |
| Other | — | | | 28 | | | 23 | |
| Total operating revenue by country | $ | 26,337 | | | $ | 25,150 | | | $ | 20,952 | |
| | | | | |
| Income before income tax (benefit) expense and equity loss by country: | | | | |
| U.S. | $ | 771 | | | $ | 4,650 | | | $ | 6,954 | |
| United Kingdom | 447 | | | 454 | | | 338 | |
| Canada | 181 | | | 181 | | | 173 | |
| Australia | 15 | | | (8) | | | — | |
| Other | (1) | | | 17 | | | 6 | |
| Total income before income tax (benefit) expense and equity loss by country | $ | 1,413 | | | $ | 5,294 | | | $ | 7,471 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 | | 2020 |
| Property, plant and equipment, net by country: | | | | | |
| U.S. | $ | 79,578 | | | $ | 75,774 | | | $ | 72,583 | |
| United Kingdom | 6,959 | | | 7,487 | | | 7,134 | |
| Canada | 6,091 | | | 6,547 | | | 6,401 | |
| Australia | 415 | | | 8 | | | 10 | |
| Total property, plant and equipment, net by country | $ | 93,043 | | | $ | 89,816 | | | $ | 86,128 | |
(1)The differences between the reportable segment amounts and the consolidated amounts, described as BHE and Other, relate to other corporate entities, including MidAmerican Energy Services, LLC, corporate functions and intersegment eliminations.
(2)Income tax (benefit) expense includes the tax attributes of disregarded entities that are not required to pay income taxes and the earnings of which are taxable directly to BHE.
The following table shows the change in the carrying amount of goodwill by reportable segment for the years ended December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | BHE | | | | | | | | | | |
| | | MidAmerican | | NV | | Northern | | Pipeline | | BHE | | BHE | | | | | | |
| PacifiCorp | | Funding | | Energy | | Powergrid | | Group | | Transmission | | Renewables | | HomeServices | | | | Total |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | $ | 1,129 | | | $ | 2,102 | | | $ | 2,369 | | | $ | 1,000 | | | $ | 1,803 | | | $ | 1,551 | | | $ | 95 | | | $ | 1,457 | | | | | $ | 11,506 | |
| Acquisitions | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | 129 | | | | | 140 | |
Foreign currency translation | — | | | — | | | — | | | (8) | | | — | | | 12 | | | — | | | — | | | | | 4 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | 1,129 | | | 2,102 | | | 2,369 | | | 992 | | | 1,814 | | | 1,563 | | | 95 | | | 1,586 | | | | | 11,650 | |
| Acquisitions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 16 | | | | | 16 | |
Foreign currency translation | — | | | — | | | — | | | (75) | | | — | | | (102) | | | — | | | — | | | | | (177) | |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | $ | 1,129 | | | $ | 2,102 | | | $ | 2,369 | | | $ | 917 | | | $ | 1,814 | | | $ | 1,461 | | | $ | 95 | | | $ | 1,602 | | | | | $ | 11,489 | |
PacifiCorp and its subsidiaries
Consolidated Financial Section
Item 7. 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, usage trends and other factors. This discussion should be read in conjunction with PacifiCorp's historical Consolidated Financial Statements and Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. PacifiCorp's actual results in the future could differ significantly from the historical results.
Results of Operations
Overview
Net income for the year ended December 31, 2022, was $920 million, an increase of $32 million, or 4%, compared to 2021, primarily due to higher utility margin, lower other expense, including higher allowance for equity and borrowed funds used during construction and lower property and other taxes, partially offset by higher operations and maintenance expense, largely due to higher general and plant maintenance costs and an increase to the wildfire damage provision, higher depreciation and amortization expense, and lower income tax benefit. Utility margin increased primarily due to higher net power cost deferrals, higher retail prices and volumes, higher average wholesale market prices, lower coal-fueled generation volumes and higher net wheeling revenues, partially offset by higher natural gas-fueled generation prices and volumes, higher purchased electricity costs from higher volumes and prices, higher coal-fueled generation prices, lower wind-based ancillary revenues, and lower wholesale volumes. Retail customer volumes increased 1.6% primarily due to an increase in the average number of customers, favorable impacts of weather and an increase in commercial customer usage, partially offset by a decrease in residential and industrial customer usage. Energy generated decreased 4% for 2022 compared to 2021 primarily due lower coal-fueled generation, partially offset by higher wind-powered, natural gas-fueled and hydroelectric-powered generation. Wholesale electricity sales volumes decreased 5% and purchased electricity volumes increased 20%.
Net income for the year ended December 31, 2021, was $888 million, an increase of $149 million, or 20%, compared to 2020, primarily due to higher utility gross margin (excluding $231 million of decreases fully offset in depreciation, operating, other income/expense and income tax expense due to prior year regulatory adjustments); lower operations and maintenance expense primarily due to prior year costs associated with the 2020 Wildfires and changes in how obligations associated with the implementation of the Klamath Hydroelectric Settlement Agreement will be met; and favorable income tax expense from higher PTCs recognized due to new wind-powered generating facilities placed in-service and the impacts of ratemaking; partially offset by higher depreciation and amortization expense (excluding $376 million of decreases offset in operating revenue and income tax expense due to prior year regulatory adjustments) from the impacts of the depreciation study for which rates became effective January 2021 and higher plant in-service; and lower allowances for equity and borrowed funds used during construction. Utility margin increased $145 million (excluding the $231 million of fully offsetting decreases) primarily due to the higher retail, wheeling and wholesale revenue; higher deferred net power costs; and lower purchased electricity volumes; partially offset by higher purchased electricity prices; and higher natural gas- and coal-fueled generation costs. Retail customer volumes increased 3.1% due to increase in customer usage, increase in the average number of customers and favorable impacts of weather. Energy generated increased 10% for 2021 compared to 2020 primarily due higher wind-powered, natural gas-fueled and coal-fueled generation, partially offset by lower hydroelectric-powered generation. Wholesale electricity sales volumes decreased 3% and purchased electricity volumes decreased 17%.
Non-GAAP Financial Measure
Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as, utility margin, to help evaluate results of operations. Utility margin is calculated as operating revenue less cost of fuel and energy, which are captions presented on the Consolidated Statements of Operations.
PacifiCorp's cost of fuel and energy is generally recovered from its retail customers through regulatory recovery mechanisms and, as a result, changes in PacifiCorp's expenses included in regulatory recovery mechanisms result in comparable changes to revenue. As such, management believes utility margin more appropriately and concisely explains profitability rather than a discussion of revenue and cost of fuel and energy separately. Management believes the presentation of utility margin provides meaningful and valuable insight into the information management considers important to running the business and a measure of comparability to others in the industry.
Utility margin is not a measure calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, operating income, which is the most directly comparable financial measure prepared in accordance with GAAP. The following table provides a reconciliation of utility margin to operating income for the years ended December 31 (in millions):
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| 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Utility margin: | | | | | | | | | | | | | |
| Operating revenue | $ | 5,679 | | | $ | 5,296 | | | $ | 383 | | 7 | % | | $ | 5,296 | | | $ | 5,341 | | | $ | (45) | | (1) | % |
| Cost of fuel and energy | 1,979 | | | 1,831 | | | 148 | | 8 | | | 1,831 | | | 1,790 | | | 41 | | 2 | |
| Utility margin | 3,700 | | | 3,465 | | | 235 | | 7 | | | 3,465 | | | 3,551 | | | (86) | | (2) | |
| Operations and maintenance | 1,227 | | | 1,031 | | | 196 | | 19 | | | 1,031 | | | 1,209 | | | (178) | | (15) | |
| Depreciation and amortization | 1,120 | | | 1,088 | | | 32 | | 3 | | | 1,088 | | | 1,209 | | | (121) | | (10) | |
| Property and other taxes | 195 | | | 213 | | | (18) | | (8) | | | 213 | | | 209 | | | 4 | | 2 | |
| Operating income | $ | 1,158 | | | $ | 1,133 | | | $ | 25 | | 2 | % | | $ | 1,133 | | | $ | 924 | | | $ | 209 | | 23 | % |
Utility Margin
A comparison of key operating results related to utility margin is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| | | | | | | | | | | | | | | | |
| Utility margin (in millions): | | | | | | | | | | | | | | | | |
| Operating revenue | | $ | 5,679 | | | $ | 5,296 | | | $ | 383 | | | 7 | % | | $ | 5,296 | | | $ | 5,341 | | | $ | (45) | | | (1) | % |
| Cost of fuel and energy | | 1,979 | | | 1,831 | | | 148 | | | 8 | | | 1,831 | | | 1,790 | | | 41 | | | 2 | |
| Utility margin | | $ | 3,700 | | | $ | 3,465 | | | $ | 235 | | | 7 | % | | $ | 3,465 | | | $ | 3,551 | | | $ | (86) | | | (2) | % |
| | | | | | | | | | | | | | | | |
Sales (GWhs): | | | | | | | | | | | | | | | | |
| Residential | | 18,425 | | | 17,905 | | | 520 | | | 3 | % | | 17,905 | | | 17,150 | | | 755 | | | 4 | % |
Commercial(1) | | 19,570 | | | 18,839 | | | 731 | | | 4 | | | 18,839 | | | 17,727 | | | 1,112 | | | 6 | |
Industrial(1) | | 17,622 | | | 17,909 | | | (287) | | | (2) | | | 17,909 | | | 18,039 | | | (130) | | | (1) | |
Other(1) | | 1,547 | | | 1,621 | | | (74) | | | (5) | | | 1,621 | | | 1,644 | | | (23) | | | (1) | |
| Total retail | | 57,164 | | | 56,274 | | | 890 | | | 2 | | | 56,274 | | | 54,560 | | | 1,714 | | | 3 | |
| Wholesale | | 4,836 | | | 5,113 | | | (277) | | | (5) | | | 5,113 | | | 5,249 | | | (136) | | | (3) | |
| Total sales | | 62,000 | | | 61,387 | | | 613 | | | 1 | % | | 61,387 | | | 59,809 | | | 1,578 | | | 3 | % |
| | | | | | | | | | | | | | | | |
| Average number of retail customers | | | | | | | | | | | | | | | | |
| (in thousands) | | 2,037 | | | 2,003 | | | 34 | | | 2 | % | | 2,003 | | | 1,967 | | | 36 | | | 2 | % |
| | | | | | | | | | | | | | | | |
| Average revenue per MWh: | | | | | | | | | | | | | | | | |
| Retail | | $ | 89.33 | | | $ | 86.08 | | | $ | 3.25 | | | 4 | % | | $ | 86.08 | | | $ | 90.59 | | | $ | (4.51) | | | (5) | % |
| Wholesale | | $ | 61.39 | | | $ | 37.90 | | | $ | 23.49 | | | 62 | % | | $ | 37.90 | | | $ | 35.56 | | | $ | 2.34 | | | 7 | % |
| | | | | | | | | | | | | | | | |
| Heating degree days | | 10,767 | | | 9,914 | | | 853 | | | 9 | % | | 9,914 | | | 10,155 | | | (241) | | | (2) | % |
| Cooling degree days | | 2,451 | | | 2,431 | | | 20 | | | 1 | % | | 2,431 | | | 2,111 | | | 320 | | | 15 | % |
| | | | | | | | | | | | | | | | |
Sources of energy (GWhs)(1): | | | | | | | | | | | | | | | | |
| Coal | | 28,390 | | | 31,566 | | | (3,176) | | | (10) | % | | 31,566 | | | 30,636 | | | 930 | | | 3 | % |
| Natural gas | | 13,686 | | | 13,323 | | | 363 | | | 3 | | | 13,323 | | | 12,045 | | | 1,278 | | | 11 | |
Wind(2) | | 7,238 | | | 6,686 | | | 552 | | | 8 | | | 6,686 | | | 3,769 | | | 2,917 | | | 77 | |
Hydroelectric and other(2) | | 3,206 | | | 3,010 | | | 196 | | | 7 | | | 3,010 | | | 3,223 | | | (213) | | | (7) | |
| Total energy generated | | 52,520 | | | 54,585 | | | (2,065) | | | (4) | | | 54,585 | | | 49,673 | | | 4,912 | | | 10 | |
| Energy purchased | | 13,968 | | | 11,601 | | | 2,367 | | | 20 | | | 11,601 | | | 14,054 | | | (2,453) | | | (17) | |
| Total | | 66,488 | | | 66,186 | | | 302 | | | — | % | | 66,186 | | | 63,727 | | | 2,459 | | | 4 | % |
| | | | | | | | | | | | | | | | |
| Average cost of energy per MWh: | | | | | | | | | | | | | | | | |
Energy generated(3) | | $ | 22.86 | | | $ | 18.05 | | | $ | 4.81 | | | 27 | % | | $ | 18.05 | | | $ | 18.74 | | | $ | (0.69) | | | (4) | % |
| Energy purchased | | $ | 71.15 | | | $ | 66.93 | | | $ | 4.22 | | | 6 | % | | $ | 66.93 | | | $ | 47.60 | | | $ | 19.33 | | | 41 | % |
(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 sources 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.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Utility margin increased $235 million, or 7% for 2022 compared to 2021 primarily due to:
•$290 million from higher deferred net power costs in accordance with established adjustment mechanisms;
•$263 million of higher retail revenue primarily due to higher average prices and higher volumes. Retail customer volumes increased 1.6% primarily due to an increase in the average number of customers, favorable impacts of weather and an increase in commercial customer usage, partially offset by a decrease in residential and industrial customer usage;
•$103 million of higher wholesale revenue primarily due to higher average market prices, partially offset by lower volumes;
•$44 million of lower coal-fueled generation costs due to lower volumes, partially offset by higher average prices; and
•$19 million of favorable wheeling activities.
The increases above were partially offset by:
•$259 million of higher natural gas-fueled generation costs primarily due to higher average market prices and higher volumes;
•$217 million of higher purchased electricity costs from higher volumes and higher average market prices; and
•$10 million of lower wind-based ancillary revenue.
Operations and maintenance increased $196 million, or 19%, for 2022 compared to 2021 primarily due to a $64 million increase in the loss accruals associated with the September 2020 wildfires net of estimated insurance recoveries, $38 million of higher plant maintenance costs, $27 million of higher DSM amortization expense (offset in retail revenue), $25 million of changes in the prior year in how obligations associated with the implementation of the Klamath Hydroelectric Settlement Agreement will be met, $17 million of higher insurance premiums due to cost increases related to wildfire coverage, $37 million of higher consumption of materials, chemical and start-up fuel costs, partially offset by $22 million of deferrals of vegetation management costs in Oregon and Utah, net of higher vegetation management costs.
Depreciation and amortization increased $32 million, or 3%, for 2022 compared to 2021 primarily due to higher plant-in-service balances in the current year and prior year deferral of the 2018 depreciation study in Idaho compared to current year amortization, partially offset by current year allocation adjustment for Oregon incremental depreciation of certain coal units and Oregon deferral associated with the depreciation of certain wind-powered generating facilities.
Property and other taxes decreased $18 million, or 8%, for 2022 compared to 2021 primarily due to lower property tax rates in Utah.
Allowance for borrowed and equity funds increased $28 million, or 38%, for 2022 compared to 2021 primarily due to higher qualified construction work-in-progress balances and higher rates.
Interest and dividend income increased $20 million, or 83%, for 2022 compared to 2021 primarily due to the recording of interest on the 2021 Oregon PCAM deferral and higher investment income due to higher average interest rates.
Other, net decreased $23 million for 2022 compared to 2021 primarily due to lower cash surrender value of corporate-owned life insurance policies driven by market declines, unfavorable change in deferred compensation and long-term incentive plan primarily due to market movements (offset in operations and maintenance expense) and higher pension costs primarily due to lower expected return on net assets.
Income tax benefit decreased $17 million, or 22%, for 2022 compared to 2021. The effective tax rate was (7)% and (10)% for 2022 and 2021, respectively. The effective tax rate increased primarily as a result of lower effects of ratemaking associated with excess deferred income tax amortization and an increase to the valuation allowance for state net operating losses, partially offset by increased PTCs from PacifiCorp's wind-powered generating facilities in the current year.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Utility margin decreased $86 million (including the $231 million of fully offsetting decreases) for 2021 compared to 2020 primarily due to:
•$111 million of higher purchased electricity costs due to higher average prices, partially offset by lower volumes;
•$99 million of lower retail revenue primarily due to $234 million fully offset in depreciation expense, income tax expense, fuel expense, and other income (expense) due to accelerated depreciation of certain coal-fueled units in Utah and Oregon and recognition of certain Utah regulatory balances in the prior year, and lower average retail prices, partially offset by higher retail customer volumes. Retail customer volumes increased 3.1% due to an increase in residential and commercial customer usage, increase in the average number of customers and favorable impacts of weather, primarily in Oregon, Washington and Idaho;
•$88 million of higher natural gas-fueled generation costs primarily due to higher average prices and higher volumes; and
•$34 million of lower other revenue due to prior year recognition of previously deferred other revenue in Oregon that was used to accelerate the depreciation of certain retired wind equipment as a result of the 2020 Oregon RAC settlement (offset in depreciation expense).
The decreases above were partially offset by:
•$141 million primarily from higher deferred net power costs in accordance with established adjustment mechanisms;
•$43 million of favorable wheeling activities;
•$33 million of lower coal-fueled generation costs primarily due to $37 million of accelerated recognition of certain Utah regulatory balances associated with the 2015 Utah mine disposition and certain Cholla Unit 4 related closure costs in Oregon and Idaho (offset in income tax expense) in the prior year and lower prices, partially offset by higher volumes;
•$19 million of higher other revenue primarily due to higher REC, fly ash and by-product revenues; and
•$7 million of higher wholesale revenue due to higher average wholesale market prices, partially offset by lower wholesale volumes.
Operations and maintenance decreased $178 million, or 15%, for 2021 compared to 2020 primarily due to prior year estimated losses associated with the 2020 Wildfires of $136 million, net of expected insurance recoveries, changes in how obligations associated with the implementation of the Klamath Hydroelectric Settlement Agreement will be met, lower thermal plant maintenance expense and lower labor expenses, partially offset by higher wind plant and distribution maintenance and higher legal and insurance expenses associated with the 2020 Wildfires.
Depreciation and amortization decreased $121 million, or 10%, for 2021 compared to 2020 primarily due to prior year accelerated depreciation of $376 million as a result of regulatory adjustments ordered by the UPSC, the OPUC and the IPUC (fully offset in retail revenue, other revenue, and income tax expense), including accelerated depreciation of certain coal-fueled units and Oregon's share of certain retired wind equipment as a result the 2020 Oregon RAC settlement, partially offset by the impacts of the depreciation study for which rates became effective January 1, 2021 of approximately $158 million and higher plant in-service balances.
Property and other taxes increased $4 million, or 2%, for 2021 compared to 2020 primarily due to higher property taxes in Oregon and Wyoming, partially offset by lower property taxes in Utah and Washington.
Interest expense increased $4 million, or 1%, for 2021 compared to 2020 primarily due to higher average long-term debt balances, partially offset by a lower weighted average long-term debt interest rate.
Allowance for borrowed and equity funds decreased $72 million, or 49%, for 2021 compared to 2020 primarily due to lower qualified construction work-in-progress balances.
Interest and dividend income increased $14 million, or 140%, for 2021 compared to 2020 primarily due to higher carrying charges on DSM regulatory assets in the current year.
Income tax benefit increased $4 million, or 5% for 2021 compared to 2020. The effective tax rate was (10)% and (11)% for 2021 and 2020, respectively. The effective tax rate increased primarily as a result of lower effects of ratemaking associated with excess deferred income tax amortization, offset by increased PTCs from PacifiCorp's new wind-powered generating facilities in the current year. In 2020, $118 million of excess deferred income taxes was amortized pursuant to regulatory orders from Utah, Oregon and Idaho, whereby portions of excess deferred income taxes were used to accelerate depreciation of certain coal-fueled units and Oregon's share of certain retired wind equipment or offset other regulatory balances for these jurisdictions.
Liquidity and Capital Resources
As of December 31, 2022, PacifiCorp's total net liquidity was as follows (in millions):
| | | | | | | | |
| Cash and cash equivalents | | $ | 641 | |
| | |
Credit facility(1) | | 1,200 | |
| Less: | | |
| | |
| Tax-exempt bond support and letters of credit | | (249) | |
| Net credit facility | | 951 | |
| | |
| Total net liquidity | | $ | 1,592 | |
| | |
| Credit facility: | | |
| Maturity date | | 2025 |
(1)Refer to Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K and "Credit Facilities" below for further discussion regarding PacifiCorp's credit facilities.
Operating Activities
Net cash flows from operating activities for the years ended December 31, 2022 and 2021 were $1.82 billion and $1.80 billion, respectively. The increase is primarily due to higher collections from retail customers, collateral received from counterparties, transmission deposits and cash received for income taxes, partially offset by higher fuel, wholesale and material and supplies purchases.
Net cash flows from operating activities for the years ended December 31, 2021 and 2020 were $1.8 billion and $1.6 billion, respectively. The increase is primarily due to higher cash received for income taxes and higher collections from retail customers, partially offset by higher wholesale purchases and timing of operating payables.
The timing of PacifiCorp's income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods selected and assumptions made for each payment date.
Investing Activities
Net cash flows from investing activities for the years ended December 31, 2022 and 2021 were $(2.2) billion and $(1.5) billion, respectively. The increase in net cash outflows from investing activities is mainly due to an increase in capital expenditures of $653 million.
Net cash flows from investing activities for the years ended December 31, 2021 and 2020 were $(1.5) billion and $(2.5) billion, respectively. The decrease in net cash outflows from investing activities is mainly due to a decrease in capital expenditures of $1.0 billion.
Financing Activities
Short-term Debt
As of December 31, 2022, regulatory authorities limited PacifiCorp to $1.5 billion of short-term debt. In January 2023, updated regulatory authorization provided PacifiCorp with an increased limit to $2.0 billion of short-term debt. As of December 31, 2022 and 2021, PacifiCorp had no short-term debt outstanding. For further discussion, refer to Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Long-term Debt
In December 2022, PacifiCorp issued $1.1 billion of its 5.350% First Mortgage Bonds due December 2053. PacifiCorp intends within 24 months of the issuance date to allocate an amount equal to the net proceeds to finance or refinance, in whole or in part, new or existing investments or expenditures made in one or more eligible projects in alignment with BHE's Green Financing Framework. Proceeds will not knowingly be allocated to the same portion of a project that received allocation of proceeds under any other Green Financing Instrument; activities related to the exploration, production, transportation, or consumption of fossil fuels; or activities related to nuclear energy.
PacifiCorp made repayments on long-term debt totaling $155 million and $870 million during the years ended December 31, 2022 and 2021, respectively.
PacifiCorp's Mortgage and Deed of Trust creates a lien on most of PacifiCorp's electric utility property, allowing the issuance of bonds based on a percentage of utility property additions, bond credits arising from retirement of previously outstanding bonds or deposits of cash. The amount of bonds that PacifiCorp may issue generally is also subject to a net earnings test. As of December 31, 2022, PacifiCorp estimated it would be able to issue up to $8.5 billion of new first mortgage bonds under the most restrictive issuance test in the mortgage. Any issuances are subject to market conditions and amounts are further limited by regulatory authorizations or commitments or by covenants and tests contained in other financing agreements. PacifiCorp also has the ability to release property from the lien of the mortgage on the basis of property additions, bond credits or deposits of cash.
Credit Facilities
In June 2022, PacifiCorp amended and restated its existing $1.2 billion unsecured credit facility expiring in June 2024. The amendment extended the expiration date to June 2025 and amended pricing from the London Interbank Offered Rate to the Secured Overnight Financing Rate.
In January 2023, PacifiCorp entered into an additional $800 million 364-day unsecured credit facility expiring in January 2024.
Debt Authorizations
PacifiCorp currently has regulatory authority from the OPUC and the IPUC to issue an additional $900 million of long-term debt. PacifiCorp must make a notice filing with the WUTC prior to any future issuance. PacifiCorp currently has an effective shelf registration statement with the SEC to issue an indeterminate amount of first mortgage bonds through September 2023.
Preferred Stock
As of December 31, 2022 and 2021, PacifiCorp had non-redeemable preferred stock outstanding with an aggregate stated value of $2 million.
Common Shareholder's Equity
In 2022 and 2021, PacifiCorp declared and paid dividends of $100 million and $150 million, respectively, to PPW Holdings LLC.
In January 2023, PacifiCorp declared dividends of $300 million payable to PPW Holdings LLC in February 2023.
Capitalization
PacifiCorp manages its capitalization and liquidity position to maintain a prudent capital structure with the objective of retaining strong investment grade credit ratings, which is expected to facilitate continuing access to flexible borrowing arrangements at favorable costs and rates. This objective, subject to periodic review and revision, attempts to balance the interests of all shareholders, customers and creditors and provide a competitive cost of capital and predictable capital market access.
Under existing or prospective authoritative accounting guidance, such as guidance pertaining to consolidations and leases, it is possible that new purchase power and gas agreements, transmission arrangements or amendments to existing arrangements may be accounted for as lease obligations on PacifiCorp's financial statements. While PacifiCorp has successfully amended covenants in financing arrangements that may be impacted, it may be more difficult for PacifiCorp to comply with its capitalization targets or regulatory commitments concerning minimum levels of common equity as a percentage of capitalization. This may lead PacifiCorp to seek amendments or waivers under financing agreements and from regulators, delay or reduce dividends or spending programs, seek additional new equity contributions from its indirect parent company, BHE, or take other actions.
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 associated with PacifiCorp 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, impacts to customer rates; changes in environmental and other rules and regulations; outcomes of regulatory proceedings, including regulatory filings for Certificates of Public Convenience and Necessity; changes in income tax laws; general business conditions; new customer requests; 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, for the years ended December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Historical | | Forecast |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| | | | | | | | | | | |
| Wind generation | $ | 1,278 | | | $ | 131 | | | $ | 37 | | | $ | 797 | | | $ | 422 | | | $ | 302 | |
| Electric distribution | 603 | | | 608 | | | 678 | | | 658 | | | 536 | | | 894 | |
| Electric transmission | 415 | | | 325 | | | 1,208 | | | 1,431 | | | 1,120 | | | 1,586 | |
| Solar generation | — | | | — | | | — | | | 24 | | | 93 | | | 286 | |
| Electric battery and pumped hydro storage | — | | | 5 | | | 8 | | | 32 | | | 105 | | | 361 | |
| Other | 244 | | | 444 | | | 235 | | | 637 | | | 793 | | | 557 | |
| Total | $ | 2,540 | | | $ | 1,513 | | | $ | 2,166 | | | $ | 3,579 | | | $ | 3,069 | | | $ | 3,986 | |
PacifiCorp's 2021 IRP identified a roadmap for a significant increase in renewable and carbon free generation resources, coal-to-natural gas conversion of certain coal-fueled units, energy storage and associated transmission. PacifiCorp's 2021 IRP identified over 1,800 MWs of new wind-powered generation, over 2,100 MWs of new solar-powered generation and nearly 700 MWs of new battery storage capacity that are expected to be online by 2025. PacifiCorp anticipates that the additional new wind-powered generation will be a mixture of owned and contracted resources. PacifiCorp has included an estimate for these new generation resources and associated transmission in its forecast capital expenditures for 2023 through 2025. These estimates are likely to change as a result of the RFP process. PacifiCorp's historical and forecast capital expenditures include the following:
•Wind generation includes both growth projects and operating expenditures. Growth projects include construction of new wind-powered generating facilities and construction at existing wind-powered generating facility sites acquired from third parties totaling $23 million for 2022, $118 million for 2021 and $1,148 million for 2020. PacifiCorp placed in-service 516 MWs of new wind-powered generating facilities in 2021 and 674 MWs in 2020. Planned spending for the construction of additional new wind-powered generating facilities and those at acquired sites totals $771 million in 2023, $385 million in 2024 and $251 million in 2025 and is primarily for projects totaling approximately 683 MWs that are expected to be placed in-service in 2023 through 2025.
•Electric distribution includes both growth projects and operating expenditures. Operating expenditures includes spend on wildfire mitigation. Expenditures for these items totaled $135 million in 2022, $54 million in 2021 and $28 million in 2020, and planned spending totals $90 million in 2023, $124 million in 2024 and $127 million in 2025. The remaining investments primarily relate to expenditures for new connections and distribution operations.
•Electric transmission includes both growth projects and operating expenditures. Transmission growth investments primarily reflects costs associated with Energy Gateway Transmission projects. Expenditures for these projects totaled $944 million for 2022, $94 million for 2021 and $56 million for 2020. Forecast expenditures for Energy Gateway projects include planned costs for the following Energy Gateway Transmission segments:
•416-mile, 500-kV high-voltage transmission line between the Aeolus substation near Medicine Bow, Wyoming and the Clover substation near Mona, Utah;
•59-mile, 230-kV high-voltage transmission line between the Windstar substation near Glenrock, Wyoming and the Aeolus substation;
•290-mile, 500-kV high-voltage transmission line from the Longhorn substation near Boardman, Oregon to the Hemingway substation near Boise, Idaho;
•14-mile, 345-kV high-voltage transmission line between the Oquirrh substation in the Salt Lake Valley and the Terminal substation near the Salt Lake City Airport;
•40-mile, 500-kV high-voltage transmission line between the Limber substation in central Utah and the Terminal substation; and
•195-mile, 500-kV high-voltage transmission line between the Anticline substation near Point of Rocks, Wyoming and the Populus substation in Downey, Idaho.
Planned spending for these Energy Gateway Transmission segments that are expected to be placed in-service in 2024 through 2028 totals $1,005 million in 2023, $661 million in 2024 and $763 million in 2025. The remaining investments primarily relate to expenditures for transmission operations, including wildfire mitigation, generation interconnection requests and other Energy Gateway Transmission segments.
•Solar generation includes growth projects. Planned spending for the construction of new solar projects will add approximately 377 MWs of new generation and are expected to be placed in-service in 2026.
•Electric battery and pumped hydro storage includes growth projects. Planned spending for the construction of storage projects from 2023 through 2025 includes $319 million for battery storage projects providing approximately 419 MWs of storage that are expected to be placed in-service in 2026 and $79 million for the construction of 38 MWs of new pumped hydro storage on the North Umpqua River system expected to be placed in-service in 2024 and 2026. The remaining investments relate to planned spending on projects that are expected to be placed in-service beyond 2026.
•Other includes both growth projects and operating expenditures. Expenditures for information technology totaled $155 million in 2022, $108 million in 2021 and $75 million for 2020. Planned information technology spending totals $224 million in 2023, $181 million in 2024 and $232 million in 2025. The remaining investments relate to operating projects that consist of routine expenditures for generation and other infrastructure needed to serve existing and expected demand.
Off-Balance Sheet Arrangements
From time to time, PacifiCorp enters into arrangements in the normal course of business to facilitate commercial transactions with third parties that involve guarantees or similar arrangements. PacifiCorp currently has indemnification obligations in connection with the sale or transfer of certain assets. In addition, PacifiCorp evaluates potential obligations that arise out of variable interests in unconsolidated entities, determined in accordance with authoritative accounting guidance. PacifiCorp believes that the likelihood that it would be required to perform or otherwise incur any significant losses associated with any of these obligations is remote. Refer to Notes 11 and 19 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for more information on these obligations and arrangements.
Material Cash Requirements
PacifiCorp has cash requirements that may affect its consolidated financial condition that arise primarily from long-term debt (refer to Note 8), certain commitments and contingencies (refer to Note 14), cost of removal and AROs (refer to Notes 6 and 11). Refer to the respective referenced note in Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
PacifiCorp has cash requirements relating to interest payments of $8.0 billion on long-term debt, including $449 million due in 2023.
Regulatory Matters
PacifiCorp is subject to comprehensive regulation. Refer to the discussion contained in Item 1 of this Form 10-K for further information regarding PacifiCorp's general regulatory framework and current regulatory matters.
Environmental Laws and Regulations
PacifiCorp is subject to federal, state and local laws and regulations regarding air quality, climate change, water quality, emissions performance standards, coal ash disposal, wildfire prevention and mitigation and other environmental matters that have the potential to impact PacifiCorp'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 various federal, state and local agencies. PacifiCorp believes it is in material compliance with all applicable laws and regulations, although many are subject to interpretation that 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 financial results.
Refer to "Environmental Laws and Regulations" in Item 1 of this Form 10-K for further discussion regarding environmental laws and regulations.
Collateral and Contingent Features
Debt and preferred securities of PacifiCorp are rated by credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of PacifiCorp's ability to, in general, meet the obligations of its issued debt or preferred securities. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time. As of December 31, 2022, PacifiCorp's credit ratings for its senior secured debt and its issuer credit ratings for senior unsecured debt from the recognized credit rating agencies were investment grade.
PacifiCorp has no credit rating downgrade triggers that would accelerate the maturity dates of outstanding debt and a change in ratings is not an event of default under the applicable debt instruments. PacifiCorp's unsecured revolving credit facilities do not require the maintenance of a minimum credit rating level to draw upon their availability. However, commitment fees and interest rates under the credit facilities are tied to credit ratings and increase or decrease when the ratings change. A ratings downgrade could also increase the future cost of commercial paper, short- and long-term debt issuances or new credit facilities. Certain authorizations or exemptions by regulatory commissions for the issuance of securities are valid as long as PacifiCorp maintains investment grade ratings on senior secured debt. A downgrade below that level would necessitate new regulatory applications and approvals.
In accordance with industry practice, certain wholesale agreements, including 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 recognized credit rating agencies. These agreements 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" if there is a material adverse change in PacifiCorp's creditworthiness. These rights can vary by contract and by counterparty. If all credit-risk-related contingent features or adequate assurance provisions for these agreements had been triggered as of December 31, 2022, PacifiCorp would have been required to post $433 million of additional collateral. PacifiCorp's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, outstanding accounts payable and receivable or other factors. Refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of PacifiCorp's collateral requirements specific to PacifiCorp's derivative contracts.
Inflation
PacifiCorp operates under a cost-of-service based rate-setting structure administered by various state commissions and the FERC. Under this rate-setting structure, PacifiCorp is allowed to include prudent costs in its rates, including the impact of inflation. PacifiCorp seeks to minimize the potential impact of inflation on its operations through the use of energy and other cost adjustment clauses and tariff riders, by employing prudent risk management and hedging strategies and entering into contracts with fixed pricing where possible by considering, among other areas, its impact on purchases of energy, operating expenses, materials and equipment costs, contract negotiations, future capital spending programs and long-term debt issuances. There can be no assurance that such actions will be successful.
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. The following critical accounting estimates are impacted significantly by PacifiCorp's methods, judgments and assumptions used in the preparation of the Consolidated Financial Statements and should be read in conjunction with PacifiCorp's Summary of Significant Accounting Policies included in Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Accounting for the Effects of Certain Types of Regulation
PacifiCorp prepares its financial statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, PacifiCorp defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in rates occur.
PacifiCorp continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition that could limit PacifiCorp's ability to recover its costs. PacifiCorp believes its application of the guidance for regulated operations is appropriate and its existing regulatory assets and liabilities are probable of inclusion in future rates. The evaluation reflects the current political and regulatory climate at both the federal and state levels. If it becomes no longer probable that the deferred costs or income will be included in future rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as AOCI. Total regulatory assets were $1.9 billion and total regulatory liabilities were $2.9 billion as of December 31, 2022. Refer to Note 6 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding PacifiCorp's regulatory assets and liabilities.
Pension and Other Postretirement Benefits
PacifiCorp sponsors defined benefit pension and other postretirement benefit plans as described in Note 10. PacifiCorp recognizes the funded status of these defined benefit pension and other postretirement benefit plans on the Consolidated Balance Sheets. Funded status is the fair value of plan assets minus the benefit obligation as of the measurement date. As of December 31, 2022, PacifiCorp recognized a net asset totaling $57 million for the funded status of its defined benefit pension and other postretirement benefit plans. As of December 31, 2022, amounts not yet recognized as a component of net periodic benefit cost included in net regulatory assets and accumulated other comprehensive loss totaled $255 million and $12 million, respectively.
The expense and benefit obligations relating to these defined benefit pension and other postretirement benefit plans are based on actuarial valuations. Inherent in these valuations are key assumptions, including, but not limited to, discount rate and expected long-term rate of return on plan assets. These key assumptions are reviewed annually and modified as appropriate. PacifiCorp believes that the key assumptions utilized in recording obligations under the plans are reasonable based on prior plan experience and current market and economic conditions. Refer to Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for disclosures about PacifiCorp's defined benefit pension and other postretirement benefit plans, including the key assumptions used to calculate the funded status and net periodic benefit cost for these plans as of and for the year ended December 31, 2022.
PacifiCorp chooses a discount rate based upon high quality debt security investment yields in effect as of the measurement date with cash flows aligning to the expected timing and amount of plan liabilities.
In establishing its assumption as to the expected long-term rate of return on plan assets, PacifiCorp evaluates the investment allocation between return-seeking investment and fixed income securities based on the funded status of the plan and utilizes the asset allocation and return assumptions for each asset class based on forward-looking views of the financial markets and historical performance. Pension and other postretirement benefits expense increases as the expected long-term rate of return on plan assets decreases. PacifiCorp regularly reviews its actual asset allocations and rebalances its investments to its targeted allocations when considered appropriate.
The key assumptions used may differ materially from period to period due to changing market and economic conditions. These differences may result in a significant impact to pension and other postretirement benefits expense and funded status. If changes were to occur for the following key assumptions, the approximate effect on the Consolidated Financial Statements would be as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Other Postretirement |
| Pension Plans | | Benefit Plan |
| +0.5% | | -0.5% | | +0.5% | | -0.5% |
| | | | | | | |
| Effect on December 31, 2022 Benefit Obligations: | | | | | | | |
| Discount rate | $ | (25) | | | $ | 26 | | | $ | (8) | | | $ | 8 | |
| | | | | | | |
| Effect on 2022 Periodic Cost: | | | | | | | |
| Discount rate | $ | 1 | | | $ | (1) | | | $ | 1 | | | $ | (1) | |
| Expected rate of return on plan assets | (5) | | | 5 | | | (2) | | | 2 | |
A variety of factors affect the funded status of the plans, including asset returns, discount rates, mortality assumptions, plan changes and PacifiCorp's funding policy for each plan.
Income Taxes
In determining PacifiCorp's income taxes, management is required to interpret complex income tax laws and regulations, which includes consideration of regulatory implications imposed by PacifiCorp's various regulatory commissions. PacifiCorp's income tax returns are subject to continuous examinations by federal, state and local income tax authorities that may give rise to different interpretations of these complex laws and regulations. Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved. PacifiCorp recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Although the ultimate resolution of PacifiCorp's federal, state and local income tax examinations is uncertain, PacifiCorp believes it has made adequate provisions for these income tax positions. The aggregate amount of any additional income tax liabilities that may result from these examinations is not expected to have a material impact on PacifiCorp's consolidated financial results. Refer to Note 9 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding PacifiCorp's income taxes.
It is probable that PacifiCorp will pass income tax benefit and expense related to the federal tax rate change from 35% to 21% as a result of 2017 Tax Reform, certain property-related basis differences and other various differences on to customers in certain state jurisdictions. As of December 31, 2022, these amounts were recognized as a net regulatory liability of $1.2 billion and will primarily be included in regulated rates over the estimated useful lives of the related properties.
Revenue Recognition - Unbilled Revenue
Revenue is recognized as electricity is delivered or services are provided. The determination of customer billings is based on a systematic reading of meters. At the end of each month, energy provided to customers since the date of the last meter reading is estimated, and the corresponding unbilled revenue is recorded. Unbilled revenue was $301 million as of December 31, 2022. Factors that can impact the estimate of unbilled energy include, but are not limited to, seasonal weather patterns, total volumes supplied to the system, line losses, economic impacts and composition of sales among customer classes. Estimates are reversed in the following month and actual revenue is recorded based on subsequent meter readings.
Wildfire Loss Contingencies
As a result of several wildfires that have occurred in PacifiCorp's service territory and surrounding areas in Oregon and California, PacifiCorp is required to evaluate its exposure to potential loss contingencies arising from claims associated with the wildfires. In determining this exposure, PacifiCorp is required to assess whether the likelihood of loss for each of the wildfires and lawsuits is remote, reasonably possible or probable, which involves complex judgments based on several variables including available information regarding the cause and origin of the wildfires, investigations, discovery associated with lawsuits and negotiations with various parties. If deemed reasonably possible, PacifiCorp is required to estimate the potential loss or range of potential loss and disclose any material amounts. If deemed probable, PacifiCorp is required to accrue a loss if reasonably estimable based on the bottom end of the range if no amount within the range of estimated loss is any better than another amount. Many assumptions and variables are involved in determining these estimates, including identifying the various categories of potential loss such as fire suppression costs, real and personal property damages, natural resource damages for certain areas and noneconomic damages such as personal injury damages and loss of life damages. Within the categories of potential loss, further assumptions are made regarding items such as the types of structures damaged, estimated replacement values associated with those structures, value of personal property, the types of natural resource damage such as timber, the value of that timber, the nature of noneconomic damages such as those arising from personal injuries, other damages PacifiCorp may be responsible for if found negligent such as punitive damages, and the amount of any penalties or fines that may be imposed by governmental entities. Refer to Note 14 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding PacifiCorp's loss contingencies associated with the 2020 Wildfires and the 2022 McKinney fire.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
PacifiCorp's Consolidated Balance Sheets include assets and liabilities with fair values that are subject to market risks. PacifiCorp's significant market risks are primarily associated with commodity prices, interest rates and the extension of credit to counterparties with which PacifiCorp transacts. The following discussion addresses the significant market risks associated with PacifiCorp's business activities. PacifiCorp has established guidelines for credit risk management. Refer to Notes 2 and 12 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding PacifiCorp's contracts accounted for as derivatives.
PacifiCorp has a risk management committee that is responsible for the oversight of market and credit risk relating to the commodity transactions of PacifiCorp. To limit PacifiCorp's exposure to market and credit risk, the risk management committee recommends, and executive management establishes, policies, limits and approved products, which are reviewed frequently to respond to changing market conditions.
Risk is an inherent part of PacifiCorp's business and activities. PacifiCorp has established a risk management process that is designed to identify, assess, manage and report on each of the various types of risk involved in PacifiCorp's business. The risk management policy governs energy transactions and is designed for hedging PacifiCorp's existing energy and asset exposures, and to a limited extent, the policy permits arbitrage and trading activities to take advantage of market inefficiencies. The policy also governs the types of transactions authorized for use and establishes guidelines for credit risk management and management information systems required to effectively monitor such transactions. PacifiCorp's risk management policy provides for the use of only those contracts that have a similar volume or price relationship to its portfolio of assets, liabilities or anticipated transactions.
Commodity Price Risk
PacifiCorp is principally exposed to electricity, natural gas, coal and fuel oil commodity price risk as PacifiCorp has an obligation to serve retail customer load in its 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. PacifiCorp does not engage in a material amount of proprietary trading activities. To mitigate a portion of its commodity price risk, PacifiCorp 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. PacifiCorp does not hedge all of its commodity price risk, thereby exposing the unhedged portion to changes in market prices. PacifiCorp's exposure to commodity price risk is generally limited by its ability to include commodity costs in rates, which is subject to regulatory lag that occurs between the time the costs are incurred and when the costs are included in rates, as well as the impact of any customer sharing resulting from cost adjustment mechanisms.
PacifiCorp measures, monitors and manages the market risk in its electricity and natural gas portfolio in comparison to established thresholds and measures its open positions subject to price risk in terms of quantity at each delivery location for each forward time period. PacifiCorp has a risk management policy that requires increasing volumes of hedge transactions over a three-year position management and hedging horizon to reduce market risk of its electricity and natural gas portfolio.
PacifiCorp maintained compliance with its risk management policy and limit procedures during the year ended December 31, 2022.
The table that follows summarizes PacifiCorp's price risk on commodity contracts accounted for as derivatives, excluding collateral netting of $(78) million and $5 million as of December 31, 2022 and 2021, respectively, and shows the effects of a hypothetical 10% increase and 10% decrease in forward market prices by the expected volumes for these contracts as of that date. The selected hypothetical change does not reflect what could be considered the best or worst case scenarios (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Fair Value - | | Estimated Fair Value after |
| Net Asset | | Hypothetical Change in Price |
| (Liability) | | 10% increase | | 10% decrease |
| As of December 31, 2022: | | | | | |
| Total commodity derivative contracts | $ | 270 | | | $ | 381 | | | $ | 159 | |
| | | | | |
| As of December 31, 2021: | | | | | |
| Total commodity derivative contracts | $ | 53 | | | $ | 104 | | | $ | 2 | |
PacifiCorp's commodity derivative contracts are generally recoverable from customers in rates; therefore, net unrealized gains and losses associated with interim price movements on commodity derivative contracts do not expose PacifiCorp to earnings volatility. As of December 31, 2022 and 2021, a regulatory liability of $270 million and $53 million, respectively, was recorded related to the net derivative asset of $270 million and $53 million, respectively. Consolidated financial results would be negatively impacted if the costs of wholesale electricity, natural gas or fuel are higher or the level of wholesale electricity sales are lower than what is included in rates, including the impacts of adjustment mechanisms.
Interest Rate Risk
PacifiCorp is exposed to interest rate risk on its outstanding variable-rate short- and long-term debt and future debt issuances. 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. As a result of the fixed interest rates, PacifiCorp's fixed-rate long-term debt does not expose PacifiCorp to the risk of loss due to changes in market interest rates. Additionally, because fixed-rate long-term debt is not carried at fair value on the Consolidated Balance Sheets, changes in fair value would impact earnings and cash flows only if PacifiCorp were to reacquire all or a portion of these instruments prior to their maturity. PacifiCorp has the ability to enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate PacifiCorp's exposure to interest rate risk. The nature and amount of PacifiCorp's short- and long-term debt can be expected to vary from period to period as a result of future business requirements, market conditions and other factors. Refer to Notes 7, 8 and 13 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional discussion of PacifiCorp's short- and long-term debt.
As of December 31, 2022 and 2021, PacifiCorp had long-term variable-rate obligations totaling $218 million that expose PacifiCorp to the risk of increased interest expense in the event of increases in short-term interest rates. The market risk related to PacifiCorp's variable-rate debt as of December 31, 2022 is not hedged. If variable interest rates were to increase by 10% from December 31 levels, it would not have a material effect on PacifiCorp's consolidated annual interest expense. The carrying value of the variable-rate obligations approximates fair value as of December 31, 2022 and 2021.
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.
As of December 31, 2022, PacifiCorp's aggregate credit exposure with wholesale energy supply and marketing counterparties included counterparties having non-investment grade, internally rated credit ratings. Substantially all of these non-investment grade, internally rated counterparties are associated with long-duration solar and wind power purchase agreements, some of which are from facilities that have not yet achieved commercial operation and for which PacifiCorp has no obligation should the facilities not achieve commercial operation.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of PacifiCorp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PacifiCorp and subsidiaries ("PacifiCorp") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of PacifiCorp as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of PacifiCorp's management. Our responsibility is to express an opinion on PacifiCorp's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to PacifiCorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. PacifiCorp is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of PacifiCorp's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 6 to the financial statements
Critical Audit Matter Description
PacifiCorp is subject to rate regulation by state public service commissions as well as the Federal Energy Regulatory Commission (collectively the "Commissions"), which have jurisdiction with respect to the rates of electric and natural gas companies in the respective service territories where PacifiCorp operates. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economic effects of rate regulation has a pervasive effect on the financial statements.
Regulated rates are subject to regulatory rate-setting processes. Rates are determined, approved, and established based on a cost-of-service basis, which is designed to allow PacifiCorp an opportunity to recover its prudently incurred costs of providing services and to earn a reasonable return on its invested capital. Regulatory decisions can have an effect on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. While PacifiCorp has indicated it expects to recover costs from customers through regulated rates, there is a risk that changes to the Commissions' approach to setting rates or other regulatory actions could limit PacifiCorp's ability to recover its costs.
We identified the effects of rate regulation on the financial statements as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and (3) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:
•We evaluated PacifiCorp's disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the Commissions, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected PacifiCorp's filings with the Commissions and the filings with the Commissions by intervenors to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances.
•We inquired of management about property, plant, and equipment that may be abandoned. We inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management's assertion regarding probability of an abandonment.
Wildfires – Contingencies – Refer to Note 14 to the financial statements
Critical Audit Matter Description
As a result of several wildfires that have occurred in PacifiCorp's service territory and surrounding areas in Oregon and California, PacifiCorp is required to evaluate its exposure to potential loss contingencies arising from claims associated with the 2020 Wildfires and the 2022 McKinney Fire (the "Wildfires"). In determining this exposure, PacifiCorp is required to determine whether the likelihood of loss for each of the Wildfires is remote, reasonably possible or probable, which involves complex judgments based on several variables including available information regarding the cause and origin of the Wildfires, investigations, discovery associated with lawsuits and negotiations with claimants.
A provision for a loss contingency is recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If deemed reasonably possible, PacifiCorp is required to estimate the potential loss or range of potential loss and disclose any material amounts.
Management has recorded estimated liabilities of $424 million and receivables of $246 million, which represent its best estimate of probable losses and expected insurance recoveries associated with the 2020 Wildfires. During the years ended December 31, 2022, 2021 and 2020, PacifiCorp recognized probable losses net of expected insurance recoveries associated with the 2020 Wildfires of $64 million, $— million and $136 million, respectively. Management has disclosed reasonably possible estimated losses of $31 million, net of potential insurance recoveries of $103 million, associated with the 2022 McKinney Fire.
We identified wildfire-related contingencies and the related disclosures as a critical audit matter because of the significant judgments made by management to determine the probability of loss and estimate the probable or reasonably possible losses and insurance recoveries. This required the application of a high degree of judgment and extensive effort when performing audit procedures to evaluate the reasonableness of management's judgments, estimates and disclosures related to wildfire-related loss contingencies.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management's judgments regarding the probability of loss, estimated losses and insurance recoveries, and related disclosures for wildfire-related contingencies included the following, among others:
•We evaluated management's judgments related to whether a loss was probable or reasonably possible for the Wildfires by inquiring of management and PacifiCorp's external and internal legal counsel regarding the likelihood and amounts of probable and reasonably possible losses, including the potential impact of information gained through investigations into the cause of the fires, information from claimants, the advice of legal counsel, and reading external information for any evidence that might contradict management's assertions.
•We evaluated the estimation methodology for determining the amount of probable and reasonably possible losses through inquiries with management and external and internal legal counsel, and we tested the significant assumptions used in the estimates of probable and reasonably possible losses.
•We read legal letters from PacifiCorp's external and internal legal counsel regarding known information and evaluated whether the information therein was consistent with the information obtained in our procedures.
•We evaluated management's judgments related to whether related insurance recoveries were probable of collection by inquiring of management and PacifiCorp's external and internal legal counsel regarding the amounts of insurance recoveries recorded or disclosed. With the assistance of our insurance specialists, we tested the significant assumptions used in the determination of collectability, including obtaining and reading related policies to determine whether the types of insurance claims are included or excluded from coverage.
•We evaluated whether PacifiCorp's disclosures were appropriate and consistent with the information obtained in our procedures.
/s/ Deloitte & Touche LLP
Portland, Oregon
February 24, 2023
We have served as PacifiCorp's auditor since 2006.
PACIFICORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ASSETS |
| | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 641 | | | $ | 179 | |
| Trade receivables, net | 825 | | | 725 | |
| Other receivables, net | 72 | | | 52 | |
| Inventories | 474 | | | 474 | |
| Derivative contracts | 184 | | | 76 | |
| Regulatory assets | 275 | | | 65 | |
| | | |
| Other current assets | 213 | | | 150 | |
| Total current assets | 2,684 | | | 1,721 | |
| | | |
| Property, plant and equipment, net | 24,430 | | | 22,914 | |
| Regulatory assets | 1,605 | | | 1,287 | |
| Other assets | 686 | | | 534 | |
| | | |
| Total assets | $ | 29,405 | | | $ | 26,456 | |
The accompanying notes are an integral part of these consolidated financial statements.
PACIFICORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| | | |
| Current liabilities: | | | |
| Accounts payable | $ | 1,049 | | | $ | 680 | |
| Accrued interest | 128 | | | 121 | |
| Accrued property, income and other taxes | 67 | | | 78 | |
| Accrued employee expenses | 86 | | | 89 | |
| | | |
| Current portion of long-term debt | 449 | | | 155 | |
| Regulatory liabilities | 96 | | | 118 | |
| Other current liabilities | 271 | | | 219 | |
| Total current liabilities | 2,146 | | | 1,460 | |
| | | |
| Long-term debt | 9,217 | | | 8,575 | |
| Regulatory liabilities | 2,843 | | | 2,650 | |
| Deferred income taxes | 3,152 | | | 2,847 | |
| Other long-term liabilities | 1,306 | | | 1,011 | |
| Total liabilities | 18,664 | | | 16,543 | |
| | | |
| Commitments and contingencies (Note 14) | | | |
| | | |
| 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 | 6,269 | | | 5,449 | |
| Accumulated other comprehensive loss, net | (9) | | | (17) | |
| Total shareholders' equity | 10,741 | | | 9,913 | |
| | | |
| Total liabilities and shareholders' equity | $ | 29,405 | | | $ | 26,456 | |
The accompanying notes are an integral part of these consolidated financial statements.
PACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Operating revenue | $ | 5,679 | | | $ | 5,296 | | | $ | 5,341 | |
| | | | | |
| Operating expenses: | | | | | |
| Cost of fuel and energy | 1,979 | | | 1,831 | | | 1,790 | |
| Operations and maintenance | 1,227 | | | 1,031 | | | 1,209 | |
| Depreciation and amortization | 1,120 | | | 1,088 | | | 1,209 | |
| Property and other taxes | 195 | | | 213 | | | 209 | |
| Total operating expenses | 4,521 | | | 4,163 | | | 4,417 | |
| | | | | |
| Operating income | 1,158 | | | 1,133 | | | 924 | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense | (431) | | | (430) | | | (426) | |
| Allowance for borrowed funds | 31 | | | 24 | | | 48 | |
| Allowance for equity funds | 71 | | | 50 | | | 98 | |
| Interest and dividend income | 44 | | | 24 | | | 10 | |
| Other, net | (15) | | | 8 | | | 10 | |
| Total other income (expense) | (300) | | | (324) | | | (260) | |
| | | | | |
| Income before income tax benefit | 858 | | | 809 | | | 664 | |
| Income tax benefit | (62) | | | (79) | | | (75) | |
| Net income | $ | 920 | | | $ | 888 | | | $ | 739 | |
The accompanying notes are an integral part of these consolidated financial statements.
PACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Net income | $ | 920 | | | $ | 888 | | | $ | 739 | |
| | | | | |
| Other comprehensive income (loss), net of tax — | | | | | |
Unrecognized amounts on retirement benefits, net of tax of $3, $1 and $(1) | 8 | | | 2 | | | (3) | |
| | | | | |
| Comprehensive income | $ | 928 | | | $ | 890 | | | $ | 736 | |
The accompanying notes are an integral part of these consolidated financial statements.
PACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated | | |
| | | | | Additional | | | | Other | | Total |
| Preferred | | Common | | Paid-in | | Retained | | Comprehensive | | Shareholders' |
| Stock | | Stock | | Capital | | Earnings | | Loss, Net | | Equity |
| Balance, December 31, 2019 | $ | 2 | | | $ | — | | | $ | 4,479 | | | $ | 3,972 | | | $ | (16) | | | $ | 8,437 | |
| Net income | — | | | — | | | — | | | 739 | | | — | | | 739 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| | | | | | | | | | | |
| Balance, December 31, 2020 | 2 | | | — | | | 4,479 | | | 4,711 | | | (19) | | | 9,173 | |
| Net income | — | | | — | | | — | | | 888 | | | — | | | 888 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 2 | | | 2 | |
| Common stock dividends declared | — | | | — | | | — | | | (150) | | | — | | | (150) | |
| Balance, December 31, 2021 | 2 | | | — | | | 4,479 | | | 5,449 | | | (17) | | | 9,913 | |
| Net income | — | | | — | | | — | | | 920 | | | — | | | 920 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 8 | | | 8 | |
| Common stock dividends declared | — | | | — | | | — | | | (100) | | | — | | | (100) | |
| Balance, December 31, 2022 | $ | 2 | | | $ | — | | | $ | 4,479 | | | $ | 6,269 | | | $ | (9) | | | $ | 10,741 | |
The accompanying notes are an integral part of these consolidated financial statements.
PACIFICORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 920 | | | $ | 888 | | | $ | 739 | |
| Adjustments to reconcile net income to net cash flows from operating | | | | | |
| activities: | | | | | |
| Depreciation and amortization | 1,120 | | | 1,088 | | | 1,209 | |
| Allowance for equity funds | (71) | | | (50) | | | (98) | |
| Net power cost deferrals | (482) | | | (159) | | | (1) | |
| Amortization of net power cost deferrals | 100 | | | 67 | | | 50 | |
| Other changes in regulatory assets and liabilities | (162) | | | (97) | | | (278) | |
| Deferred income taxes and amortization of investment tax credits | 157 | | | 64 | | | (124) | |
| Other, net | 13 | | | (5) | | | 1 | |
| Changes in other operating assets and liabilities: | | | | | |
| Trade receivables, other receivables and other assets | (264) | | | 17 | | | (169) | |
| Inventories | — | | | 8 | | | (88) | |
| | | | | |
| Derivative collateral, net | 95 | | | 19 | | | 23 | |
| Accrued property, income and other taxes, net | (46) | | | (37) | | | (53) | |
| Accounts payable and other liabilities | 439 | | | 1 | | | 372 | |
| Net cash flows from operating activities | 1,819 | | | 1,804 | | | 1,583 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (2,166) | | | (1,513) | | | (2,540) | |
| Other, net | 5 | | | 12 | | | 30 | |
| Net cash flows from investing activities | (2,161) | | | (1,501) | | | (2,510) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from long-term debt | 1,087 | | | 984 | | | 987 | |
| Repayments of long-term debt | (155) | | | (870) | | | (38) | |
| (Repayments of) net proceeds from short-term debt | — | | | (93) | | | (37) | |
| | | | | |
| Dividends paid | (100) | | | (150) | | | — | |
| Other, net | (2) | | | (7) | | | (2) | |
| Net cash flows from financing activities | 830 | | | (136) | | | 910 | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 488 | | | 167 | | | (17) | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | 186 | | | 19 | | | 36 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 674 | | | $ | 186 | | | $ | 19 | |
The accompanying notes are an integral part of these consolidated financial statements.
PACIFICORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
PacifiCorp, which includes PacifiCorp and its subsidiaries, is a U.S. regulated electric utility company serving retail customers, including residential, commercial, industrial, irrigation and other customers in portions 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").
(2) Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The Consolidated Financial Statements include the accounts of PacifiCorp and its subsidiaries in which it holds a controlling financial interest as of the financial statement date. Intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates include, but are not limited to, the effects of regulation; certain assumptions made in accounting for pension and other postretirement benefits; asset retirement obligations ("AROs"); income taxes; unbilled revenue; valuation of certain financial assets and liabilities, including derivative contracts; and accounting for loss contingencies and applicable insurance recoveries, including those related to the Oregon and Northern California 2020 wildfires (the "2020 Wildfires") and the 2022 McKinney fire described in Note 14. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Accounting for the Effects of Certain Types of Regulation
PacifiCorp prepares its financial statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, PacifiCorp defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in rates occur.
If it becomes no longer probable that the deferred costs or income will be included in future rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as accumulated other comprehensive income (loss) ("AOCI").
Fair Value Measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Different valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist substantially of funds representing vendor retention, custodial and nuclear decommissioning funds. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and 2021 as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| Cash and cash equivalents | $ | 641 | | | $ | 179 | |
| Restricted cash included in other current assets | 7 | | | 4 | |
| Restricted cash included in other assets | 26 | | | 3 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 674 | | | $ | 186 | |
Investments
Available-for-sale securities are carried at fair value with realized gains and losses, as determined on a specific identification basis, recognized in earnings and unrealized gains and losses recognized in AOCI, net of tax. As of December 31, 2022 and 2021, PacifiCorp had no unrealized gains and losses on available-for-sale securities. Trading securities are carried at fair value with realized and unrealized gains and losses recognized in earnings.
Equity Method Investments
PacifiCorp utilizes the equity method of accounting with respect to investments when it possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, PacifiCorp records the investment at cost and subsequently increases or decreases the carrying value of the investment by PacifiCorp's proportionate share of the net earnings or losses and other comprehensive income (loss) ("OCI") of the investee. PacifiCorp records dividends or other equity distributions as reductions in the carrying value of the investment.
Allowance for Credit Losses
Trade receivables are primarily short-term in nature with stated collection terms of less than one year from the date of origination, and are stated at the outstanding principal amount, net of an estimated allowance for credit losses. The allowance for credit losses is based on PacifiCorp's assessment of the collectability of amounts owed to PacifiCorp by its customers. This assessment requires judgment regarding the ability of customers to pay or the outcome of any pending disputes. In measuring the allowance for credit losses for trade receivables, PacifiCorp primarily utilizes credit loss history. However, PacifiCorp may adjust the allowance for credit losses to reflect current conditions and reasonable and supportable forecasts that deviate from historical experience. The change in the balance of the allowance for credit losses, which is included in trade receivables, net on the Consolidated Balance Sheets, is summarized as follows for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Beginning balance | $ | 18 | | | $ | 17 | | | $ | 8 | |
| Charged to operating costs and expenses, net | 18 | | | 13 | | | 18 | |
| Write-offs, net | (17) | | | (12) | | | (9) | |
| Ending balance | $ | 19 | | | $ | 18 | | | $ | 17 | |
Derivatives
PacifiCorp employs a number of different derivative contracts, which may include forwards, options, swaps and other agreements, to manage price risk for electricity, natural gas and other commodities and interest rate risk. 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. Derivative balances reflect offsetting permitted under master netting agreements with counterparties and cash collateral paid or received under such agreements.
Commodity derivatives used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases or normal sales. Normal purchases or normal sales contracts are not marked-to-market and settled amounts are recognized as operating revenue or cost of fuel and energy on the Consolidated Statements of Operations.
For PacifiCorp's derivative contracts, the settled amount is generally included in rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of inclusion in rates are recorded as regulatory liabilities or assets. For a derivative contract not probable of inclusion in rates, changes in the fair value are recognized in earnings.
Inventories
Inventories consist mainly of materials, supplies and fuel stocks and are stated at the lower of average cost or net realizable value.
Property, Plant and Equipment, Net
General
Additions to property, plant and equipment are recorded at cost. PacifiCorp capitalizes all construction-related material, direct labor and contract services, as well as indirect construction costs, which include debt and equity allowance for funds used during construction ("AFUDC"). The cost of additions and betterments are capitalized, while costs incurred that do not improve or extend the useful lives of the related assets are generally expensed.
Depreciation and amortization are generally computed on the straight-line method based on composite asset class lives prescribed by PacifiCorp's various regulatory authorities or over the assets' estimated useful lives. Depreciation studies are completed periodically to determine the appropriate composite asset class lives, net salvage and depreciation rates. These studies are reviewed and rates are ultimately approved by the various regulatory authorities. Net salvage includes the estimated future residual values of the assets and any estimated removal costs recovered through approved depreciation rates. Estimated removal costs are recorded as either a cost of removal regulatory liability or an ARO liability on the Consolidated Balance Sheets, depending on whether the obligation meets the requirements of an ARO. As actual removal costs are incurred, the associated liability is reduced.
Generally when PacifiCorp retires or sells a component of regulated property, plant and equipment, it charges the original cost, net of any proceeds from the disposition, to accumulated depreciation. Any gain or loss on disposals of all other assets is recorded through earnings.
Debt and equity AFUDC, which represents the estimated costs of debt and equity funds necessary to finance the construction of property, plant and equipment, is capitalized as a component of property, plant and equipment, with offsetting credits to the Consolidated Statements of Operations. AFUDC is computed based on guidelines set forth by the Federal Energy Regulatory Commission ("FERC"). After construction is completed, PacifiCorp is permitted to earn a return on these costs as a component of the related assets, as well as recover these costs through depreciation expense over the useful lives of the related assets.
Asset Retirement Obligations
PacifiCorp recognizes AROs when it has a legal obligation to perform decommissioning, reclamation or removal activities upon retirement of an asset. PacifiCorp's AROs are primarily associated with its generating facilities. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the ARO liability is adjusted for any revisions to the original estimate of undiscounted cash flows (with corresponding adjustments to property, plant and equipment, net) and for accretion of the ARO liability due to the passage of time. The difference between the ARO liability, the corresponding ARO asset included in property, plant and equipment, net and amounts recovered in rates to satisfy such liabilities is recorded as a regulatory asset or liability.
Impairment
PacifiCorp evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. Substantially all property, plant and equipment supports PacifiCorp's regulated operations, the impacts of regulation are considered when evaluating the carrying value of regulated assets.
Leases
PacifiCorp has non-cancelable operating leases primarily for land, office space, office equipment, and generating facilities and finance leases consisting primarily of office buildings, natural gas pipeline facilities, and generating facilities. These leases generally require PacifiCorp to pay for insurance, taxes and maintenance applicable to the leased property. Given the capital intensive nature of the utility industry, it is common for a portion of lease costs to be capitalized when used during construction or maintenance of assets, in which the associated costs will be capitalized with the corresponding asset and depreciated over the remaining life of that asset. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. PacifiCorp does not include options in its lease calculations unless there is a triggering event indicating PacifiCorp is reasonably certain to exercise the option. PacifiCorp's accounting policy is to not recognize right-of-use assets and lease obligations for leases with contract terms of one year or less and not separate lease components from non-lease components and instead account for each separate lease component and the non-lease components associated with a lease as a single lease component. Right-of-use assets will be evaluated for impairment in line with Accounting Standards Codification ("ASC") 360, "Property, Plant and Equipment" when a triggering event has occurred that might affect the value and use of the assets being leased.
PacifiCorp's leases of generating facilities generally are in the form of long-term purchases of electricity, also known as power purchase agreements ("PPA"). PPAs are generally signed before or during the early stages of project construction and can yield a lease that has not yet commenced. These agreements are primarily for renewable energy and the payments are considered variable lease payments as they are based on the amount of output.
PacifiCorp's operating and finance right-of-use assets are recorded in other assets and the operating and finance lease liabilities are recorded in current and long-term other liabilities accordingly.
Revenue Recognition
PacifiCorp uses a single five-step model to identify and recognize revenue from contracts with customers ("Customer Revenue") upon transfer of control of promised goods or services in an amount that reflects the consideration to which PacifiCorp expects to be entitled in exchange for those goods or services. PacifiCorp records sales, franchise and excise taxes collected directly from customers and remitted directly to the taxing authorities on a net basis on the Consolidated Statements of Operations.
Substantially all of PacifiCorp's Customer Revenue is derived from tariff-based sales arrangements approved by various regulatory commissions. These tariff-based revenues are mainly comprised of energy, transmission and distribution and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. Other revenue consists primarily of revenue recognized in accordance with ASC 815, "Derivatives and Hedging."
Revenue recognized is equal to what PacifiCorp has the right to invoice as it corresponds directly with the value to the customer of PacifiCorp's performance to date and includes billed and unbilled amounts. As of December 31, 2022 and 2021, trade receivables, net on the Consolidated Balance Sheets relate substantially to Customer Revenue, including unbilled revenue of $301 million and $264 million, respectively. Payments for amounts billed are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued.
Unamortized Debt Premiums, Discounts and Debt Issuance Costs
Premiums, discounts and debt issuance costs incurred for the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Income Taxes
Berkshire Hathaway includes PacifiCorp in its consolidated U.S. federal income tax return. Consistent with established regulatory practice, PacifiCorp's provision for income taxes has been computed on a stand-alone basis.
Deferred income tax assets and liabilities are based on differences between the financial statement and income tax basis of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities associated with components of OCI are charged or credited directly to OCI. Changes in deferred income tax assets and liabilities associated with certain property-related basis differences and other various differences that PacifiCorp deems probable to be passed on to its customers in most state jurisdictions are charged or credited directly to a regulatory asset or liability and will be included in regulated rates when the temporary differences reverse or as otherwise approved by PacifiCorp's various regulatory commissions. Other changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense or a regulatory asset or liability in the period of enactment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
Investment tax credits are deferred and amortized over the estimated useful lives of the related properties or as prescribed by various regulatory commissions.
PacifiCorp recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. PacifiCorp's unrecognized tax benefits are primarily included in other long-term liabilities on the Consolidated Balance Sheets. Estimated interest and penalties, if any, related to uncertain tax positions are included as a component of income tax expense on the Consolidated Statements of Operations.
Segment Information
PacifiCorp currently has one segment, which includes its regulated electric utility operations.
(3) Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | 2022 | | 2021 |
| Utility Plant: | | | | | |
| Generation | 15 - 59 years | | $ | 13,726 | | | $ | 13,679 | |
| Transmission | 60 - 90 years | | 8,051 | | | 7,894 | |
| Distribution | 20 - 75 years | | 8,477 | | | 8,044 | |
Intangible plant(1) and other | 5 - 75 years | | 2,755 | | | 2,645 | |
| | | | | |
| Utility plant in-service | | | 33,009 | | | 32,262 | |
| Accumulated depreciation and amortization | | | (11,093) | | | (10,507) | |
| Utility plant in-service, net | | | 21,916 | | | 21,755 | |
| Nonregulated, net of accumulated depreciation and amortization | 14 - 95 years | | 18 | | | 18 | |
| | | 21,934 | | | 21,773 | |
| Construction work-in-progress | | | 2,496 | | | 1,141 | |
| Property, plant and equipment, net | | | $ | 24,430 | | | $ | 22,914 | |
(1)Computer software costs included in intangible plant are initially assigned a depreciable life of 5 to 10 years.
The average depreciation and amortization rate applied to depreciable property, plant and equipment was 3.5%, 3.5% and 4.1% for the years ended December 31, 2022, 2021 and 2020, respectively.
Unallocated Acquisition Adjustments
PacifiCorp has unallocated acquisition adjustments that represent the excess of costs of the acquired interests in property, plant and equipment purchased from the entity that first dedicated the assets to utility service over their net book value in those assets. These unallocated acquisition adjustments included in other property, plant and equipment had an original cost of $156 million as of December 31, 2022 and 2021, and accumulated depreciation of $144 million and $143 million as of December 31, 2022 and 2021, respectively.
(4) Jointly Owned Utility Facilities
Under joint facility ownership agreements with other utilities, PacifiCorp, as a tenant in common, has undivided interests in jointly owned generation, transmission and distribution facilities. PacifiCorp accounts for its proportionate share of each facility, and each joint owner has provided financing for its share of each facility. Operating costs of each facility are assigned to joint owners based on their percentage of ownership or energy production, depending on the nature of the cost. Operating costs and expenses on the Consolidated Statements of Operations include PacifiCorp's share of the expenses of these facilities.
The amounts shown in the table below represent PacifiCorp's share in each jointly owned facility included in property, plant and equipment, net as of December 31, 2022 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Facility | | Accumulated | | Construction |
| PacifiCorp | | in | | Depreciation and | | Work-in- |
| Share | | Service | | Amortization | | Progress |
| | | | | | | |
Jim Bridger Nos. 1 - 4 | 67 | % | | $ | 1,529 | | | $ | 914 | | | $ | 39 | |
| Hunter No. 1 | 94 | | | 517 | | | 227 | | | 3 | |
Hunter No. 2 | 60 | | | 305 | | | 148 | | | 6 | |
Wyodak | 80 | | | 491 | | | 273 | | | 1 | |
Colstrip Nos. 3 and 4 | 10 | | | 262 | | | 178 | | | — | |
Hermiston | 50 | | | 189 | | | 106 | | | — | |
| Craig Nos. 1 and 2 | 19 | | | 372 | | | 331 | | | — | |
| Hayden No. 1 | 25 | | | 77 | | | 52 | | | — | |
| Hayden No. 2 | 13 | | | 44 | | | 31 | | | — | |
| | | | | | | |
| Transmission and distribution facilities | Various | | 916 | | | 274 | | | 129 | |
| Total | | | $ | 4,702 | | | $ | 2,534 | | | $ | 178 | |
(5) Leases
The following table summarizes PacifiCorp's leases recorded on the Consolidated Balance Sheets as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Right-of-use assets: | | | |
| Operating leases | $ | 11 | | | $ | 11 | |
| Finance leases | 9 | | | 11 | |
| Total right-of-use assets | $ | 20 | | | $ | 22 | |
| | | |
| Lease liabilities: | | | |
| Operating leases | $ | 11 | | | $ | 11 | |
| Finance leases | 11 | | | 12 | |
| Total lease liabilities | $ | 22 | | | $ | 23 | |
The following table summarizes PacifiCorp's lease costs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Variable | $ | 61 | | | $ | 56 | | | $ | 60 | |
| Operating | 3 | | | 3 | | | 3 | |
| Finance: | | | | | |
| Amortization | 1 | | | 5 | | | 2 | |
| Interest | 1 | | | 2 | | | 2 | |
| Short-term | 5 | | | 3 | | | 1 | |
| Total lease costs | $ | 71 | | | $ | 69 | | | $ | 68 | |
| | | | | |
| Weighted-average remaining lease term (years): | | | | | |
| Operating leases | 11.4 | | 12.7 | | 13.9 |
| Finance leases | 9.7 | | 10.1 | | 8.4 |
| | | | | |
| Weighted-average discount rate: | | | | | |
| Operating leases | 3.9 | % | | 3.7 | % | | 3.8 | % |
| Finance leases | 11.4 | % | | 11.1 | % | | 10.5 | % |
Cash payments associated with operating and finance lease liabilities approximated lease cost for the years ended December 31, 2022, 2021 and 2020.
PacifiCorp has the following remaining lease commitments as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Operating | | Finance | | Total |
| | | | | |
| 2023 | $ | 3 | | | $ | 2 | | | $ | 5 | |
| 2024 | 2 | | | 2 | | | 4 | |
| 2025 | 2 | | | 2 | | | 4 | |
| 2026 | 1 | | | 2 | | | 3 | |
| 2027 | 1 | | | 2 | | | 3 | |
| Thereafter | 5 | | | 8 | | | 13 | |
| Total undiscounted lease payments | 14 | | | 18 | | | 32 | |
| Less - amounts representing interest | (3) | | | (7) | | | (10) | |
| Lease liabilities | $ | 11 | | | $ | 11 | | | $ | 22 | |
(6) Regulatory Matters
Regulatory Assets
Regulatory assets represent costs that are expected to be recovered in future rates. PacifiCorp's regulatory assets reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining | | | | |
| Life | | 2022 | | 2021 |
| | | | | |
| | | | | |
Employee benefit plans(1) | 16 years | | $ | 290 | | | $ | 286 | |
Utah mine disposition(2) | Various | | 115 | | | 116 | |
| Unamortized contract values | 1 year | | 18 | | | 36 | |
| Deferred net power costs | 2 years | | 546 | | | 151 | |
| | | | | |
| Environmental costs | 30 years | | 111 | | | 108 | |
| Asset retirement obligation | 29 years | | 275 | | | 241 | |
| Demand side management (DSM) | 10 years | | 224 | | | 211 | |
| Wildfire mitigation and vegetation management costs | Various | | 111 | | | 21 | |
| Other | Various | | 190 | | | 182 | |
| Total regulatory assets | | | $ | 1,880 | | | $ | 1,352 | |
| | | | | |
| Reflected as: | | | | | |
| Current assets | | | $ | 275 | | | $ | 65 | |
| Noncurrent assets | | | 1,605 | | | 1,287 | |
| Total regulatory assets | | | $ | 1,880 | | | $ | 1,352 | |
(1)Represents amounts not yet recognized as a component of net periodic benefit cost that are expected to be included in rates when recognized.
(2)Amounts represent regulatory assets established as a result of the Utah mine disposition in 2015 for the United Mine Workers of America ("UMWA") 1974 Pension Plan withdrawal and closure costs incurred to date considered probable of recovery.
PacifiCorp had regulatory assets not earning a return on investment of $1,200 million and $723 million as of December 31, 2022 and 2021, respectively.
Regulatory Liabilities
Regulatory liabilities represent income to be recognized or amounts to be returned to customers in future periods. PacifiCorp's regulatory liabilities reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining | | | | |
| Life | | 2022 | | 2021 |
| | | | | |
Cost of removal(1) | 26 years | | $ | 1,332 | | | $ | 1,187 | |
Deferred income taxes(2) | Various | | 1,164 | | | 1,307 | |
| | | | | |
| Unrealized gain on regulated derivatives | 1 year | | 270 | | | 53 | |
| Other | Various | | 173 | | | 221 | |
| Total regulatory liabilities | | | $ | 2,939 | | | $ | 2,768 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 96 | | | $ | 118 | |
| Noncurrent liabilities | | | 2,843 | | | 2,650 | |
| Total regulatory liabilities | | | $ | 2,939 | | | $ | 2,768 | |
(1)Amounts represent estimated costs, as generally accrued through depreciation rates, of removing property, plant and equipment in accordance with accepted regulatory practices. Amounts are deducted from rate base or otherwise accrue a carrying cost.
(2)Amounts primarily represent income tax liabilities related to the federal tax rate change from 35% to 21% that are probable of being passed on to customers, partially offset by income tax benefits related to certain property-related basis differences and other various differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
(7) Short-term Debt and Credit Facilities
The following table summarizes PacifiCorp's availability under its unsecured credit facility as of December 31 (in millions):
| | | | | | | | |
| 2022: | | |
| Credit facility | | $ | 1,200 | |
| Less: | | |
| | |
| Tax-exempt bond support and letters of credit | | (249) | |
| Net credit facility | | $ | 951 | |
| | |
| 2021: | | |
| Credit facility | | $ | 1,200 | |
| Less: | | |
| | |
| Tax-exempt bond support | | (218) | |
| Net credit facility | | $ | 982 | |
As of December 31, 2022, PacifiCorp was in compliance with the covenants of its credit facility and letter of credit arrangements.
PacifiCorp has a $1.2 billion unsecured credit facility expiring in June 2025 with an unlimited number of maturity extension options, subject to lender consent. The credit facility, which supports PacifiCorp's commercial paper program and 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 Secured Overnight Financing Rate 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. As of December 31, 2022 and 2021, PacifiCorp did not have any commercial paper borrowings outstanding.
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.
In January 2023, PacifiCorp entered into an additional $800 million 364-day unsecured credit facility expiring in January 2024. No amounts are currently outstanding against this new credit facility.
As of December 31, 2022 and 2021, PacifiCorp had $38 million and $19 million, respectively, of fully available letters of credit issued under committed arrangements outside of its credit facility in support of certain transactions required by third parties that generally have provisions that automatically extend the annual expiration dates for an additional year unless the issuing bank elects not to renew a letter of credit prior to the expiration date.
(8) Long-term Debt
PacifiCorp's long-term debt was as follows as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| | | | | Average | | | | Average |
| Principal | | Carrying | | Interest | | Carrying | | Interest |
| Amount | | Value | | Rate | | Value | | Rate |
| | | | | | | | | |
| First mortgage bonds: | | | | | | | | | |
2.95% to 8.23%, due through 2026 | $ | 1,224 | | | $ | 1,223 | | | 4.07 | % | | $ | 1,377 | | | 4.41 | % |
2.70% to 7.70%, due 2029 to 2031 | 1,100 | | | 1,095 | | | 4.35 | | | 1,094 | | | 4.35 | |
5.25% to 6.25%, due 2034 to 2037 | 2,050 | | | 2,042 | | | 5.90 | | | 2,042 | | | 5.90 | |
4.10% to 6.35%, due 2038 to 2042 | 1,250 | | | 1,239 | | | 5.63 | | | 1,238 | | | 5.63 | |
| | | | | | | | | |
2.90% to 5.35%, due 2049 to 2053 | 3,900 | | | 3,849 | | | 4.03 | | | 2,761 | | | 3.52 | |
Variable-rate series, tax-exempt bond obligations (2022-3.75% to 4.10%; 2021-0.12% to 0.14%): | | | | | | | | | |
| Due 2025 | 25 | | | 25 | | | 4.10 | | | 25 | | | 0.12 | |
Due 2024 to 2025(1) | 193 | | | 193 | | | 3.81 | | | 193 | | | 0.13 | |
| Total long-term debt | $ | 9,742 | | | $ | 9,666 | | | | | $ | 8,730 | | | |
| | | | | | | | | | | |
| Reflected as: | | | |
| 2022 | | 2021 |
| Current portion of long-term debt | $ | 449 | | | $ | 155 | |
| Long-term debt | 9,217 | | | 8,575 | |
| Total long-term debt | $ | 9,666 | | | $ | 8,730 | |
(1)Secured by pledged first mortgage bonds registered to and held by the tax-exempt bond trustee generally with the same interest rates, maturity dates and redemption provisions as the tax-exempt bond obligations.
In December 2022, PacifiCorp issued $1.1 billion of its 5.35% First Mortgage Bonds due December 2053. PacifiCorp intends within 24 months of the issuance date to allocate an amount equal to the net proceeds to finance or refinance, in whole or in part, new or existing investments or expenditures made in one or more eligible projects in alignment with BHE's Green Financing Framework. Proceeds will not knowingly be allocated to the same portion of a project that received allocation of proceeds under any other Green Financing Instrument; activities related to the exploration, production, transportation, or consumption of fossil fuels; or activities related to nuclear energy.
PacifiCorp's long-term debt generally includes provisions that allow PacifiCorp to redeem the first mortgage bonds in whole or in part at any time through the payment of a make-whole premium. Variable-rate tax-exempt bond obligations are generally redeemable at par value.
PacifiCorp currently has regulatory authority from the Oregon Public Utility Commission and the Idaho Public Utilities Commission to issue an additional $900 million of long-term debt. PacifiCorp must make a notice filing with the Washington Utilities and Transportation Commission prior to any future issuance. PacifiCorp currently has an effective shelf registration statement filed with the U.S. Securities and Exchange Commission to issue an indeterminate amount of first mortgage bonds through September 2023.
The issuance of PacifiCorp's first mortgage bonds is limited by available property, earnings tests and other provisions of PacifiCorp's mortgage. Approximately $33 billion of PacifiCorp's eligible property (based on original cost) was subject to the lien of the mortgage as of December 31, 2022.
As of December 31, 2022, the annual principal maturities of long-term debt for 2023 and thereafter are as follows (in millions):
| | | | | |
| Long-term |
| Debt |
| |
| 2023 | $ | 449 | |
| 2024 | 591 | |
| 2025 | 302 | |
| 2026 | 100 | |
| 2027 | — | |
| Thereafter | 8,300 | |
| Total | 9,742 | |
| Unamortized discount and debt issuance costs | (76) | |
| |
| Total | $ | 9,666 | |
(9) Income Taxes
Income tax (benefit) expense consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | (216) | | | $ | (150) | | | $ | 19 | |
| State | (3) | | | 7 | | | 30 | |
| Total | (219) | | | (143) | | | 49 | |
| | | | | |
| Deferred: | | | | | |
| Federal | 90 | | | 26 | | | (124) | |
| State | 71 | | | 40 | | | 1 | |
| Total | 161 | | | 66 | | | (123) | |
| | | | | |
| Investment tax credits | (4) | | | (2) | | | (1) | |
| Total income tax (benefit) expense | $ | (62) | | | $ | (79) | | | $ | (75) | |
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 for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| State income taxes, net of federal income tax benefit | 3 | | | 3 | | | 3 | |
Effects of ratemaking | (12) | | | (14) | | | (22) | |
Federal income tax credits | (22) | | | (20) | | | (13) | |
| Valuation allowance | 2 | | | — | | | — | |
| Other | 1 | | | — | | | — | |
| Effective income tax rate | (7) | % | | (10) | % | | (11) | % |
Income tax credits relate primarily to production tax credits ("PTC") earned by PacifiCorp's wind-powered generating facilities. Federal renewable electricity PTCs 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. PTCs for the years ended December 31, 2022, 2021 and 2020 totaled $185 million, $164 million and $89 million, respectively.
Effects of ratemaking is primarily attributable to activity associated with excess deferred income taxes. Excess deferred income tax amortization, net of deferrals, was $102 million for 2022. Excess deferred income tax amortization, net of deferrals, was $112 million for 2021, including the use of $4 million to amortize certain regulatory balances in Wyoming and Idaho. Excess deferred income tax amortization, net of deferrals, was $132 million for 2020, including the use of $118 million to accelerate depreciation of certain retired equipment and to amortize certain regulatory balances in Idaho, Oregon and Utah.
The net deferred income tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Regulatory liabilities | $ | 724 | | | $ | 682 | |
| Employee benefits | 59 | | | 68 | |
| | | |
| State carryforwards | 73 | | | 73 | |
| Loss contingencies | 107 | | | 63 | |
| Asset retirement obligations | 79 | | | 73 | |
| Other | 80 | | | 88 | |
| Total deferred income tax assets | 1,122 | | | 1,047 | |
| Valuation allowances | (35) | | | (15) | |
| Total deferred income tax assets, net | 1,087 | | | 1,032 | |
| | | |
| Deferred income tax liabilities: | | | |
| Property, plant and equipment | (3,612) | | | (3,468) | |
| Regulatory assets | (462) | | | (332) | |
| Other | (165) | | | (79) | |
| Total deferred income tax liabilities | (4,239) | | | (3,879) | |
| Net deferred income tax liability | $ | (3,152) | | | $ | (2,847) | |
The following table provides, without regard to valuation allowances, PacifiCorp's net operating loss and tax credit carryforwards and expiration dates as of December 31, 2022 (in millions):
| | | | | | | | |
| | State |
| | |
| Net operating loss carryforwards | | $ | 1,159 | |
| Deferred income taxes on net operating loss carryforwards | | $ | 53 | |
| Expiration dates | | 2023 - indefinite |
| | |
| Tax credit carryforwards | | $ | 20 | |
| Expiration dates | | 2023 - indefinite |
The U.S. Internal Revenue Service has closed or effectively settled its examination of PacifiCorp's income tax returns through December 31, 2013. The statute of limitations for PacifiCorp's income tax returns have expired for certain states through December 31, 2011, and for Idaho through December 31, 2018, except for the impact of any federal audit adjustments. The closure of examinations, or the expiration of the statute of limitations, for state filings may not preclude the state from adjusting the state net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
(10) Employee Benefit Plans
PacifiCorp sponsors defined benefit pension and other postretirement benefit plans that cover certain of its employees, as well as a defined contribution 401(k) employee savings plan ("401(k) Plan"). In addition, PacifiCorp contributes to a joint trustee pension plan and a subsidiary previously contributed to a multiemployer pension plan for benefits offered to certain bargaining units.
Defined Benefit Plans
PacifiCorp's pension plans include non-contributory defined benefit pension plans, collectively the PacifiCorp Retirement Plan ("Retirement Plan"), and the Supplemental Executive Retirement Plan ("SERP"). The Retirement Plan is closed to all non-union employees hired after January 1, 2008. All non-union Retirement Plan participants hired prior to January 1, 2008 that did not elect to receive equivalent fixed contributions to the 401(k) Plan effective January 1, 2009 earned benefits based on a cash balance formula through December 31, 2016. Effective January 1, 2017, non-union employee participants with a cash balance benefit in the Retirement Plan are no longer eligible to receive pay credits in their cash balance formula. In general for union employees, benefits under the Retirement Plan were frozen at various dates from December 31, 2007 through December 31, 2011 as they are now being provided with enhanced 401(k) Plan benefits. However, certain limited union Retirement Plan participants continue to earn benefits under the Retirement Plan based on the employee's years of service and a final average pay formula. The SERP was closed to new participants as of March 21, 2006 and froze future accruals for active participants as of December 31, 2014.
PacifiCorp's other postretirement benefit plan provides healthcare and life insurance benefits to eligible retirees.
Pension Settlement
Pension settlement accounting was triggered in 2022 and 2021 as a result of the amount of lump sum distributions in the Retirement Plan exceeding the service and interest cost threshold. The 2021 pension settlement accounting included an interim July 31, 2021 remeasurement of the pension plan assets and projected benefit obligation. As a result of the settlement accounting, PacifiCorp recognized settlement losses of $6 million, net of regulatory deferrals during each of the years ended December 31, 2022 and 2021.
Net Periodic Benefit Cost
For purposes of calculating the expected return on plan assets, a market-related value is used. The market-related value of plan assets is calculated by spreading the difference between expected and actual investment returns over a five-year period beginning after the first year in which they occur.
Net periodic benefit cost (credit) for the plans included the following components for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| Service cost | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
| Interest cost | 29 | | | 29 | | | 36 | | | 8 | | | 7 | | | 9 | |
| Expected return on plan assets | (42) | | | (51) | | | (56) | | | (11) | | | (9) | | | (14) | |
Settlement(1) | 6 | | | 6 | | | — | | | — | | | — | | | — | |
| Net amortization | 16 | | | 21 | | | 18 | | | 1 | | | 1 | | | 3 | |
| Net periodic benefit cost (credit) | $ | 9 | | | $ | 5 | | | $ | (2) | | | $ | — | | | $ | 1 | | | $ | — | |
(1)Pension amounts represent settlement losses of $24 million and $15 million net of deferrals of $18 million and $9 million during the years ended December 31, 2022 and 2021.
Funded Status
The following table is a reconciliation of the fair value of plan assets for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Plan assets at fair value, beginning of year | $ | 1,058 | | | $ | 1,064 | | | $ | 324 | | | $ | 327 | |
Employer contributions(1) | 4 | | | 5 | | | — | | | 1 | |
| Participant contributions | — | | | — | | | 5 | | | 6 | |
| Actual (loss) return on plan assets | (172) | | | 109 | | | (42) | | | 14 | |
Settlement(2) | (67) | | | (52) | | | — | | | — | |
| Benefits paid | (65) | | | (68) | | | (23) | | | (24) | |
| Plan assets at fair value, end of year | $ | 758 | | | $ | 1,058 | | | $ | 264 | | | $ | 324 | |
(1)Pension amounts represent employer contributions to the SERP.
(2)Benefits paid in the form of lump sum distributions that gave rise to the settlement accounting described above.
The following table is a reconciliation of the benefit obligations for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Benefit obligation, beginning of year | $ | 1,048 | | | $ | 1,202 | | | $ | 288 | | | $ | 307 | |
Service cost | — | | | — | | | 2 | | | 2 | |
Interest cost | 29 | | | 29 | | | 8 | | | 7 | |
| Participant contributions | — | | | — | | | 5 | | | 6 | |
| Actuarial gain | (199) | | | (63) | | | (61) | | | (10) | |
| | | | | | | |
Settlement(1) | (67) | | | (52) | | | — | | | — | |
| | | | | | | |
| Benefits paid | (65) | | | (68) | | | (23) | | | (24) | |
| Benefit obligation, end of year | $ | 746 | | | $ | 1,048 | | | $ | 219 | | | $ | 288 | |
| Accumulated benefit obligation, end of year | $ | 746 | | | $ | 1,048 | | | | | |
(1)Benefits paid in the form of lump sum distributions that gave rise to the settlement accounting described above.
The funded status of the plans and the amounts recognized on the Consolidated Balance Sheets as of December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Plan assets at fair value, end of year | $ | 758 | | | $ | 1,058 | | | $ | 264 | | | $ | 324 | |
Less - Benefit obligation, end of year | 746 | | | 1,048 | | | 219 | | | 288 | |
| Funded status | $ | 12 | | | $ | 10 | | | $ | 45 | | | $ | 36 | |
| | | | | | | |
| Amounts recognized on the Consolidated Balance Sheets: | | | | | | | |
| Other assets | $ | 53 | | | $ | 63 | | | $ | 45 | | | $ | 36 | |
| Accrued employee expenses | (4) | | | (4) | | | — | | | — | |
| Other long-term liabilities | (37) | | | (49) | | | — | | | — | |
| Amounts recognized | $ | 12 | | | $ | 10 | | | $ | 45 | | | $ | 36 | |
The SERP has no plan assets; however, PacifiCorp has a Rabbi trust that holds corporate-owned life insurance and other investments to provide funding for the future cash requirements of the SERP. The cash surrender value of all of the policies included in the Rabbi trust, net of amounts borrowed against the cash surrender value, plus the fair market value of other Rabbi trust investments, was $61 million and $69 million as of December 31, 2022 and 2021, respectively. These assets are not included in the plan assets in the above table, but are reflected in noncurrent other assets as of December 31, 2022 and 2021, respectively, on the Consolidated Balance Sheets. The projected and accumulated benefit obligations for the SERP were $42 million and $54 million at December 31, 2022 and 2021, respectively.
As of December 31, 2022, the fair value of the plan assets for the Retirement Plan was in excess of both the projected benefit obligation and the accumulated benefit obligation.
Unrecognized Amounts
The portion of the funded status of the plans not yet recognized in net periodic benefit cost as of December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Net loss (gain) | $ | 273 | | | $ | 298 | | | $ | (36) | | | $ | (28) | |
| | | | | | | |
Regulatory deferrals(1) | 29 | | | 11 | | | 1 | | | 2 | |
| Total | $ | 302 | | | $ | 309 | | | $ | (35) | | | $ | (26) | |
(1)Pension amounts represent the unamortized portion of deferred settlement losses.
A reconciliation of the amounts not yet recognized as components of net periodic benefit cost for the years ended December 31, 2022 and 2021 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated | | |
| | | | | Other | | |
| Regulatory | | | | Comprehensive | | |
| Asset | | | | Loss | | Total |
| Pension | | | | | | | |
| Balance, December 31, 2020 | $ | 432 | | | | | $ | 25 | | | $ | 457 | |
| Net gain arising during the year | (120) | | | | | (1) | | | (121) | |
| | | | | | | |
| Net amortization | (20) | | | | | (1) | | | (21) | |
| Settlement | (6) | | | | | — | | | (6) | |
| Total | (146) | | | | | (2) | | | (148) | |
| Balance, December 31, 2021 | 286 | | | | | 23 | | | 309 | |
| Net loss (gain) arising during the year | 24 | | | | | (9) | | | 15 | |
| | | | | | | |
| Net amortization | (14) | | | | | (2) | | | (16) | |
| Settlement | (6) | | | | | — | | | (6) | |
| Total | 4 | | | | | (11) | | | (7) | |
| Balance, December 31, 2022 | $ | 290 | | | | | $ | 12 | | | $ | 302 | |
| | | | | |
| Regulatory |
| Liability |
| Other Postretirement | |
| Balance, December 31, 2020 | $ | (10) | |
| Net gain arising during the year | (15) | |
| |
| Net amortization | (1) | |
| Total | (16) | |
| Balance, December 31, 2021 | (26) | |
| Net gain arising during the year | (8) | |
| |
| Net amortization | (1) | |
| Total | (9) | |
| Balance, December 31, 2022 | $ | (35) | |
Plan Assumptions
Assumptions used to determine benefit obligations and net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Benefit obligations as of December 31: | | | | | | | | | | | |
| Discount rate | 5.55 | % | | 2.90 | % | | 2.50 | % | | 5.50 | % | | 2.90 | % | | 2.50 | % |
| Rate of compensation increase | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
| Interest crediting rates for cash balance plan - non-union | | | | | | | | | | | |
| 2020 | N/A | | N/A | | 2.27 | % | | N/A | | N/A | | N/A |
| 2021 | N/A | | 0.82 | % | | 0.82 | % | | N/A | | N/A | | N/A |
| 2022 | 0.88 | % | | 0.88 | % | | 0.82 | % | | N/A | | N/A | | N/A |
| 2023 | 4.73 | % | | 0.88 | % | | 2.00 | % | | N/A | | N/A | | N/A |
| 2024 | 4.73 | % | | 1.90 | % | | 2.00 | % | | N/A | | N/A | | N/A |
| 2025 and beyond | 2.60 | % | | 1.90 | % | | 2.00 | % | | N/A | | N/A | | N/A |
| | | | | | | | | | | |
| Interest crediting rates for cash balance plan - union | | | | | | | | | | | |
| 2020 | N/A | | N/A | | 2.16 | % | | N/A | | N/A | | N/A |
| 2021 | N/A | | 1.42 | % | | 1.42 | % | | N/A | | N/A | | N/A |
| 2022 | 1.94 | % | | 1.94 | % | | 1.42 | % | | N/A | | N/A | | N/A |
| 2023 | 3.55 | % | | 1.94 | % | | 2.40 | % | | N/A | | N/A | | N/A |
| 2024 | 3.55 | % | | 2.30 | % | | 2.40 | % | | N/A | | N/A | | N/A |
| 2025 and beyond | 2.40 | % | | 2.30 | % | | 2.40 | % | | N/A | | N/A | | N/A |
| | | | | | | | | | | |
| Net periodic benefit cost for the years ended December 31: | | | | | | | | | | |
| Discount rate | 2.90 | % | | 2.50 | % | | 3.25 | % | | 2.90 | % | | 2.50 | % | | 3.20 | % |
| Expected return on plan assets | 4.70 | | | 6.00 | | | 6.50 | | | 3.44 | | | 2.90 | | | 4.92 | |
| | | | | | | | | | | |
In establishing its assumption as to the expected return on plan assets, PacifiCorp utilizes the asset allocation and return assumptions for each asset class based on historical performance and forward-looking views of the financial markets.
As a result of a plan amendment effective on January 1, 2017, the benefit obligation for the Retirement Plan is no longer affected by future increases in compensation. As a result of a labor settlement reached with UMWA in December 2014, the benefit obligation for the other postretirement plan is no longer affected by healthcare cost trends.
Contributions and Benefit Payments
Employer contributions to the pension and other postretirement benefit plans are expected to be $4 million and $— million, respectively, during 2023. Funding to PacifiCorp's Retirement Plan trust is based upon the actuarially determined costs of the plan and the requirements of the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 ("ERISA") and the Pension Protection Act of 2006, as amended ("PPA of 2006"). PacifiCorp considers contributing additional amounts from time to time in order to achieve certain funding levels specified under the PPA of 2006. PacifiCorp evaluates a variety of factors, including funded status, income tax laws and regulatory requirements, in determining contributions to its other postretirement benefit plan.
The expected benefit payments to participants in PacifiCorp's pension and other postretirement benefit plans for 2023 through 2027 and for the five years thereafter are summarized below (in millions):
| | | | | | | | | | | |
| Projected Benefit Payments |
| Pension | | Other Postretirement |
| | | |
| 2023 | $ | 76 | | | $ | 23 | |
| 2024 | 73 | | | 22 | |
| 2025 | 70 | | | 21 | |
| 2026 | 67 | | | 20 | |
| 2027 | 64 | | | 20 | |
| 2028-2032 | 277 | | | 87 | |
Plan Assets
Investment Policy and Asset Allocations
PacifiCorp's investment policy for its pension and other postretirement benefit plans is to balance risk and return through a diversified portfolio of debt securities, equity securities and other alternative investments. Maturities for debt securities are managed to targets consistent with prudent risk tolerances. The plans retain outside investment consultants to advise on plan investments within the parameters outlined by the Berkshire Hathaway Energy Company Investment Committee. The investment portfolio is managed in line with the investment policy with sufficient liquidity to meet near-term benefit payments.
In 2020, the assets of the PacifiCorp Master Retirement Trust were transferred into the BHE Master Retirement Trust.
The target allocations (percentage of plan assets) for PacifiCorp's pension and other postretirement benefit plan assets are as follows as of December 31, 2022:
| | | | | | | | | | | |
| Pension(1) | | Other Postretirement(1) |
| % | | % |
Debt securities(2) | 73 | | 77 |
Equity securities(2) | 22 | | 23 |
| Other | 5 | | 0 |
(1)The trust in which the PacifiCorp Retirement Plan is invested includes a separate account that is used to fund benefits for the other postretirement benefit plan. In addition to this separate account, the assets for the other postretirement benefit plan are held in Voluntary Employees' Beneficiary Association ("VEBA") trusts, each of which has its own investment allocation strategies. Target allocations for the other postretirement benefit plan include the separate account of the Retirement Plan trust and the VEBA trusts.
(2)For purposes of target allocation percentages and consistent with the plans' investment policy, investment funds are allocated based on the underlying investments in debt and equity securities.
Fair Value Measurements
The following table presents the fair value of plan assets, by major category, for PacifiCorp's defined benefit pension plan (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Input Levels for Fair Value Measurements | | |
| | Level 1(1) | | Level 2(1) | | Level 3(1) | | Total |
| As of December 31, 2022: | | | | | | | | |
| Cash equivalents | | $ | — | | | $ | 10 | | | $ | — | | | $ | 10 | |
| Debt securities: | | | | | | | | |
| U.S. government obligations | | 41 | | | — | | | — | | | 41 | |
| | | | | | | | |
| Corporate obligations | | — | | | 211 | | | — | | | 211 | |
| Municipal obligations | | — | | | 15 | | | — | | | 15 | |
| Agency, asset and mortgage-backed obligations | | — | | | 34 | | | — | | | 34 | |
| Equity securities: | | | | | | | | |
| U.S. companies | | 69 | | | — | | | — | | | 69 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total assets in the fair value hierarchy | | $ | 110 | | | $ | 270 | | | $ | — | | | $ | 380 | |
Investment funds(2) measured at net asset value | | | | | | | | 346 | |
Limited partnership interests(3) measured at net asset value | | | | | | | | 32 | |
| | | | | | | | |
| Investments at fair value | | | | | | | | $ | 758 | |
| | | | | | | | |
| As of December 31, 2021: | | | | | | | | |
| Cash equivalents | | $ | — | | | $ | 15 | | | $ | — | | | $ | 15 | |
| Debt securities: | | | | | | | | |
| U.S. government obligations | | 51 | | | — | | | — | | | 51 | |
| | | | | | | | |
| Corporate obligations | | — | | | 299 | | | — | | | 299 | |
| Municipal obligations | | — | | | 22 | | | — | | | 22 | |
| Agency, asset and mortgage-backed obligations | | — | | | 38 | | | — | | | 38 | |
| Equity securities: | | | | | | | | |
| U.S. companies | | 61 | | | — | | | — | | | 61 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total assets in the fair value hierarchy | | $ | 112 | | | $ | 374 | | | $ | — | | | $ | 486 | |
Investment funds(2) measured at net asset value | | | | | | | | 538 | |
Limited partnership interests(3) measured at net asset value | | | | | | | | 34 | |
| | | | | | | | |
| Investments at fair value | | | | | | | | $ | 1,058 | |
(1)Refer to Note 13 for additional discussion regarding the three levels of the fair value hierarchy.
(2)Investment funds are substantially comprised of mutual funds and collective trust funds. These funds consist of equity and debt securities of approximately 50% and 50%, respectively, for 2022 and 59% and 41%, respectively, for 2021, and are invested in U.S. and international securities of approximately 90% and 10%, respectively, for 2022 and 84% and 16%, respectively, for 2021.
(3)Limited partnership interests include several funds that invest primarily in real estate.
The following table presents the fair value of plan assets, by major category, for PacifiCorp's defined benefit other postretirement plan (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Input Levels for Fair Value Measurements | | |
| | Level 1(1) | | Level 2(1) | | Level 3(1) | | Total |
| As of December 31, 2022: | | | | | | | | |
| Cash and cash equivalents | | $ | 5 | | | $ | 5 | | | $ | — | | | $ | 10 | |
| Debt securities: | | | | | | | | |
| U.S. government obligations | | 6 | | | — | | | — | | | 6 | |
| | | | | | | | |
| Corporate obligations | | — | | | 49 | | | — | | | 49 | |
| Municipal obligations | | — | | | 13 | | | — | | | 13 | |
| Agency, asset and mortgage-backed obligations | | — | | | 47 | | | — | | | 47 | |
| Equity securities: | | | | | | | | |
| U.S. companies | | 7 | | | — | | | — | | | 7 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total assets in the fair value hierarchy | | $ | 18 | | | $ | 114 | | | $ | — | | | 132 | |
Investment funds(2) measured at net asset value | | | | | | | | 132 | |
Limited partnership interests(3) measured at net asset value | | | | | | | | — | |
| | | | | | | | |
| Investments at fair value | | | | | | | | $ | 264 | |
| | | | | | | | |
| As of December 31, 2021: | | | | | | | | |
| Cash and cash equivalents | | $ | 4 | | | $ | 1 | | | $ | — | | | $ | 5 | |
| Debt securities: | | | | | | | | |
| U.S. government obligations | | 24 | | | — | | | — | | | 24 | |
| | | | | | | | |
| Corporate obligations | | — | | | 79 | | | — | | | 79 | |
| Municipal obligations | | — | | | 15 | | | — | | | 15 | |
| Agency, asset and mortgage-backed obligations | | — | | | 35 | | | — | | | 35 | |
| Equity securities: | | | | | | | | |
| U.S. companies | | 4 | | | — | | | — | | | 4 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total assets in the fair value hierarchy | | $ | 32 | | | $ | 130 | | | $ | — | | | 162 | |
Investment funds(2) measured at net asset value | | | | | | | | 161 | |
Limited partnership interests(3) measured at net asset value | | | | | | | | 1 | |
| | | | | | | | |
| Investments at fair value | | | | | | | | $ | 324 | |
(1)Refer to Note 13 for additional discussion regarding the three levels of the fair value hierarchy.
(2)Investment funds are substantially comprised of mutual funds and collective trust funds. These funds consist of equity and debt securities of approximately 41% and 59%, respectively, for 2022 and 39% and 61%, respectively, for 2021, and are invested in U.S. and international securities of approximately 91% and 9%, respectively, for 2022 and 90% and 10%, respectively, for 2021.
(3)Limited partnership interests include several funds that invest primarily in real estate, buyout, growth equity and venture capital.
For level 1 investments, 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. For level 2 investments, the fair value is determined using pricing models based on observable market inputs. Shares of mutual funds not registered under the Securities Act of 1933, private equity limited partnership interests, common and commingled trust funds and investment entities are reported at fair value based on the net asset value per unit, which is used for expedience purposes. A fund's net asset value is based on the fair value of the underlying assets held by the fund less its liabilities.
Multiemployer and Joint Trustee Pension Plans
PacifiCorp contributes to the PacifiCorp/IBEW Local 57 Retirement Trust Fund ("Local 57 Trust Fund") (plan number 001) and its subsidiary, Energy West Mining Company, previously contributed to the UMWA 1974 Pension Plan (plan number 002). Contributions to these pension plans are based on the terms of collective bargaining agreements.
As a result of the Utah Mine Disposition and UMWA labor settlement, PacifiCorp's subsidiary, Energy West Mining Company, triggered involuntary withdrawal from the UMWA 1974 Pension Plan in June 2015 when the UMWA employees ceased performing work for the subsidiary. PacifiCorp recorded its estimate of the withdrawal obligation in December 2014 when withdrawal was considered probable and deferred the portion of the obligation considered probable of recovery to a regulatory asset. PacifiCorp has subsequently revised its estimate due to changes in facts and circumstances for a withdrawal occurring by July 2015. As communicated in a letter received in August 2016, the plan trustees determined a withdrawal liability of $115 million. Energy West Mining Company began making installment payments in November 2016 and has the option to elect a lump sum payment to settle the withdrawal obligation. The ultimate amount paid by Energy West Mining Company to settle the obligation is dependent on a variety of factors, including the results of ongoing negotiations with the plan trustees.
The Local 57 Trust Fund is a joint trustee plan such that the board of trustees is represented by an equal number of trustees from PacifiCorp and the union. The Local 57 Trust Fund was established pursuant to the provisions of the Taft-Hartley Act and although formed with the ability for other employers to participate in the plan, there are no other employers that participate in this plan.
The risk of participating in multiemployer pension plans generally differs from single-employer plans in that assets are pooled such that contributions by one employer may be used to provide benefits to employees of other participating employers and plan assets cannot revert to employers. If an employer ceases participation in the plan, the employer may be obligated to pay a withdrawal liability based on the participants' unfunded, vested benefits in the plan. This occurred as a result of Energy West Mining Company's withdrawal from the UMWA 1974 Pension Plan. If participating employers withdraw from a multiemployer plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
The following table presents PacifiCorp's participation in individually significant joint trustee and multiemployer pension plans for the years ended December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | PPA of 2006 zone status or
plan funded status percentage for
plan years beginning July 1, | | | | | | Contributions | | |
| Plan name | | Employer Identification Number | | 2022 | | 2021 | | 2020 | | Funding improvement plan | | Surcharge imposed under PPA of 2006 | | 2022 | | 2021 | | 2020 | | Year contributions to plan exceeded more than 5% of total contributions |
| Local 57 Trust Fund | | 87-0640888 | | At least 80% | | At least 80% | | At least 80% | | None | | None | | $ | 6 | | | $ | 6 | | | $ | 6 | | | 2022, 2021, 2020 |
PacifiCorp's minimum contributions to the Local 57 Trust Fund are based on the amount of wages paid to employees covered by the Local 57 Trust Fund collective bargaining agreements, subject to ERISA minimum funding requirements. The collective bargaining agreements governing the Local 57 Trust Fund that were due to expire in 2023 were extended to 2028 in December 2022.
Defined Contribution Plan
PacifiCorp's 401(k) Plan covers substantially all employees. PacifiCorp's matching contributions are based on each participant's level of contribution and, as of January 1, 2022, all participants receive contributions based on eligible pre-tax annual compensation. Contributions cannot exceed the maximum allowable for tax purposes. PacifiCorp's contributions to the 401(k) Plan were $44 million, $40 million and $41 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(11) Asset Retirement Obligations
PacifiCorp estimates its 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.
PacifiCorp does not recognize liabilities for AROs for which the fair value cannot be reasonably estimated. Due to the indeterminate removal date, the fair value of the associated liabilities on certain transmission, distribution and other assets cannot currently be estimated, and no amounts are recognized on the Consolidated Financial Statements other than those included in the cost of removal regulatory liability established via approved depreciation rates in accordance with accepted regulatory practices. Cost of removal regulatory liabilities totaled $1,332 million and $1,187 million as of December 31, 2022 and 2021, respectively.
The following table reconciles the beginning and ending balances of PacifiCorp's ARO liabilities for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 304 | | | $ | 270 | |
| Change in estimated costs | 20 | | | 40 | |
| Additions | 3 | | | — | |
| Retirements | (6) | | | (15) | |
| Accretion | 10 | | | 9 | |
| Ending balance | $ | 331 | | | $ | 304 | |
| | | |
| Reflected as: | | | |
| Other current liabilities | $ | 11 | | | $ | 5 | |
| Other long-term liabilities | 320 | | | 299 | |
| $ | 331 | | | $ | 304 | |
Certain of PacifiCorp's decommissioning and reclamation obligations relate to jointly owned facilities and mine sites. PacifiCorp is committed to pay a proportionate share of the decommissioning or reclamation costs. In the event of a default by any of the other joint participants, PacifiCorp may be obligated to absorb, directly or by paying additional sums to the entity, a proportionate share of the defaulting party's liability. PacifiCorp's estimated share of the decommissioning and reclamation obligations are primarily recorded as ARO liabilities.
(12) 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 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 and report on 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, futures, 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 Notes 2 and 13 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 December 31, 2022: | | | | | | | | | |
Not designated as hedging contracts(1): | | | | | | | | | |
| Commodity assets | $ | 279 | | | $ | 27 | | | $ | 9 | | | $ | 3 | | | $ | 318 | |
| Commodity liabilities | (22) | | | (7) | | | (14) | | | (5) | | | (48) | |
| Total | 257 | | | 20 | | | (5) | | | (2) | | | 270 | |
| | | | | | | | | |
| Total derivatives | 257 | | | 20 | | | (5) | | | (2) | | | 270 | |
Cash collateral payable (2) | (73) | | | (5) | | | — | | | — | | | (78) | |
| Total derivatives - net basis | $ | 184 | | | $ | 15 | | | $ | (5) | | | $ | (2) | | | $ | 192 | |
| | | | | | | | | |
| As of December 31, 2021: | | | | | | | | | |
Not designated as hedging contracts(1): | | | | | | | | | |
| Commodity assets | $ | 81 | | | $ | 21 | | | $ | 2 | | | $ | — | | | $ | 104 | |
| Commodity liabilities | (5) | | | (1) | | | (38) | | | (7) | | | (51) | |
| Total | 76 | | | 20 | | | (36) | | | (7) | | | 53 | |
| | | | | | | | | |
| Total derivatives | 76 | | | 20 | | | (36) | | | (7) | | | 53 | |
| Cash collateral receivable | — | | | — | | | 5 | | | — | | | 5 | |
| Total derivatives - net basis | $ | 76 | | | $ | 20 | | | $ | (31) | | | $ | (7) | | | $ | 58 | |
(1)PacifiCorp's commodity derivatives are generally included in rates. As of December 31, 2022 a regulatory liability of $270 million was recorded related to the net derivative asset of $270 million. As of December 31, 2021 regulatory liability of $53 million was recorded related to the net derivative asset of $53 million.
(2)As December 31, 2022, PacifiCorp had an additional $12 million cash collateral payable that was not required to be netted against total derivatives.
The following table reconciles the beginning and ending balances of PacifiCorp's net regulatory (liabilities) assets and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory (liabilities) assets, as well as amounts reclassified to earnings for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Beginning balance | $ | (53) | | | $ | 17 | | | $ | 62 | |
| Changes in fair value recognized in regulatory (liabilities) assets | (513) | | | (171) | | | (11) | |
| Net (losses) gains reclassified to operating revenue | (13) | | | (23) | | | 3 | |
| Net gains (losses) reclassified to cost of fuel and energy | 309 | | | 124 | | | (37) | |
| Ending balance | $ | (270) | | | $ | (53) | | | $ | 17 | |
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 December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Unit of | | | | |
| Measure | | 2022 | | 2021 |
| | | | | |
| Electricity purchases, net | Megawatt hours | | 2 | | | 2 | |
| Natural gas purchases | Decatherms | | 127 | | | 106 | |
| | | | | |
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 agreements, including 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 recognized credit rating agencies. These agreements 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" if there is a material adverse change in PacifiCorp's creditworthiness. These rights can vary by contract and by counterparty. As of December 31, 2022, PacifiCorp's credit ratings for its senior secured debt and its issuer credit ratings for senior unsecured debt from the 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 $48 million and $37 million as of December 31, 2022 and 2021, respectively, for which PacifiCorp had posted collateral of $— million and $5 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 December 31, 2022 and 2021, PacifiCorp would have been required to post $3 million and $23 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.
(13) 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 financial 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 December 31, 2022: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Commodity derivatives | $ | — | | | $ | 318 | | | $ | — | | | $ | (119) | | | $ | 199 | |
| Money market mutual funds | 649 | | | — | | | — | | | — | | | 649 | |
| Investment funds | 23 | | | — | | | — | | | — | | | 23 | |
| $ | 672 | | | $ | 318 | | | $ | — | | | $ | (119) | | | $ | 871 | |
| | | | | | | | | |
| Liabilities - Commodity derivatives | $ | — | | | $ | (48) | | | $ | — | | | $ | 41 | | | $ | (7) | |
| | | | | | | | | |
| As of December 31, 2021: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Commodity derivatives | $ | — | | | $ | 104 | | | $ | — | | | $ | (8) | | | $ | 96 | |
| Money market mutual funds | 181 | | | — | | | — | | | — | | | 181 | |
| Investment funds | 27 | | | — | | | — | | | — | | | 27 | |
| $ | 208 | | | $ | 104 | | | $ | — | | | $ | (8) | | | $ | 304 | |
| | | | | | | | | |
| Liabilities - Commodity derivatives | $ | — | | | $ | (51) | | | $ | — | | | $ | 13 | | | $ | (38) | |
(1)Represents netting under master netting arrangements and a net cash collateral payable of $78 million and a net cash collateral receivable of $5 million as of December 31, 2022 and 2021, respectively. As December 31, 2022, PacifiCorp had an additional $12 million cash collateral payable that was not required to be netted against total derivatives.
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. A discounted cash flow valuation method was used to estimate fair value. 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 three 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 three 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 12 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. When available, PacifiCorp uses a readily observable quoted market price or net asset value of an identical security in an active market 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 as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying | | Fair | | Carrying | | Fair |
| Value | | Value | | Value | | Value |
| | | | | | | |
| Long-term debt | $ | 9,666 | | | $ | 9,045 | | | $ | 8,730 | | | $ | 10,374 | |
(14) Commitments and Contingencies
Commitments
PacifiCorp has the following firm commitments that are not reflected on the Consolidated Balance Sheet. Certain commitments are with related parties. Refer to Note 21 for transactions associated with these related party contracts. Minimum payments as of December 31, 2022 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and Thereafter | | Total |
| Contract type: | | | | | | | | | | | | | |
| Purchased electricity contracts - | | | | | | | | | | | | | |
| commercially operable | $ | 547 | | | $ | 241 | | | $ | 199 | | | $ | 197 | | | $ | 197 | | | $ | 2,162 | | | $ | 3,543 | |
| Purchased electricity contracts - | | | | | | | | | | | | | |
| non-commercially operable | — | | | — | | | 6 | | | 12 | | | 12 | | | 208 | | | 238 | |
| Fuel contracts | 784 | | | 398 | | | 148 | | | 146 | | | 153 | | | 401 | | | 2,030 | |
| Construction commitments | 535 | | | 210 | | | 14 | | | 1 | | | — | | | — | | | 760 | |
| Transmission | 108 | | | 100 | | | 74 | | | 65 | | | 55 | | | 418 | | | 820 | |
| Easements | 21 | | | 20 | | | 20 | | | 21 | | | 21 | | | 720 | | | 823 | |
| Maintenance, service and | | | | | | | | | | | | | |
| other contracts | 101 | | | 54 | | | 55 | | | 53 | | | 53 | | | 197 | | | 513 | |
| Total commitments | $ | 2,096 | | | $ | 1,023 | | | $ | 516 | | | $ | 495 | | | $ | 491 | | | $ | 4,106 | | | $ | 8,727 | |
Purchased Electricity Contracts - Commercially Operable
As part of its energy resource portfolio, PacifiCorp acquires a portion of its electricity through long-term purchases and exchange agreements. PacifiCorp has many long-term PPAs primarily with solar-powered or wind-powered generating facilities that are not included in the table above due to there being no minimum payments generally due to being dependent on wind and solar conditions. The PPAs generally range from 7 to 30 years in duration, with certain of the PPAs extending through 2054. Future payments associated with these PPAs are expected to be material. Certain of these PPAs qualify as leases as described in Note 2. Refer to Note 5 for variable lease costs associated with these lease commitments.
Included in the minimum fixed annual payments for purchased electricity above are commitments to purchase electricity from several hydroelectric systems under long-term arrangements with public utility districts. These purchases are made on a "cost-of-service" basis for a stated percentage of system output and for a like percentage of system operating expenses and debt service. These costs are included in energy costs on the Consolidated Statements of Operations. PacifiCorp is required to pay its portion of operating costs and its portion of the debt service, whether or not any electricity is produced. These arrangements accounted for less than 5% of PacifiCorp's 2022, 2021 and 2020 energy sources.
Purchased Electricity Contracts - Non-Commercially Operable
PacifiCorp has many long-term PPAs with facilities that have not yet achieved commercial operation, primarily related to wind-powered and solar-powered generated facilities and including with facilities that are not included in the table above due to there being no minimum payments generally due to being dependent on wind and solar conditions. The PPAs generally range from 7 to 30 years in duration with certain of the PPAs extending through 2054.
In September 2022, PacifiCorp entered into a purchased electricity contract for a 400 MW solar generating facility including a 200 MW battery storage unit. Minimum obligations associated with the battery storage unit are included in the table above. In January 2023, PacifiCorp entered into a PPA for a 525 MW solar generating facility with a corresponding agreement for a 150 MW battery storage unit for which the minimum obligations are being evaluated.
Future payments associated with these arrangements are expected to be material. However, to the extent these facilities do not achieve commercial obligation, PacifiCorp has no obligation to the counterparties.
Fuel Contracts
PacifiCorp has "take or pay" coal and natural gas contracts that require minimum payments.
Construction Commitments
PacifiCorp's construction commitments included in the table above relate to firm commitments and include costs associated with certain generating plant, transmission, and distribution projects.
Transmission
PacifiCorp has contracts for the right to transmit electricity over other entities' transmission lines to facilitate delivery to PacifiCorp's customers.
Easements
PacifiCorp has non-cancelable easements for land on which certain of its assets, primarily wind-powered generating facilities, are located.
Environmental Laws and Regulations
PacifiCorp is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal, wildfire prevention and mitigation and other environmental matters that have the potential to impact its current and future operations. PacifiCorp believes it is in material compliance with all applicable laws and regulations.
Lower Klamath Hydroelectric Project
PacifiCorp is a party to the 2016 amended Klamath Hydroelectric Settlement Agreement ("KHSA"), which is intended to resolve disputes surrounding PacifiCorp's efforts to relicense the Klamath Hydroelectric Project. The KHSA establishes a process for PacifiCorp, the states of Oregon and California ("States") and other stakeholders to assess whether dam removal can occur consistent with the settlement's terms. For PacifiCorp, the key elements of the settlement include: (1) a contribution from PacifiCorp's Oregon and California customers capped at $200 million plus $250 million in California bond funds; (2) complete indemnification from harms associated with dam removal; (3) transfer of the Federal Energy Regulatory Commission ("FERC") license to a third-party dam removal entity, the Klamath River Renewal Corporation ("KRRC"), who would conduct dam removal; and (4) ability for PacifiCorp to operate the facilities for the benefit of customers until dam removal commences.
In September 2016, the KRRC and PacifiCorp filed a joint application with the FERC to transfer the license for the four mainstem Klamath hydroelectric dams comprising the Lower Klamath Project (FERC Project No. 14803) from PacifiCorp to the KRRC. The FERC approved the partial transfer of the Klamath license in a July 2020 order, subject to the condition that PacifiCorp remains co-licensee. Under the amended KHSA, PacifiCorp did not agree to remain co-licensee during the surrender and removal process given concerns about liability protections for PacifiCorp and its customers. In November 2020, PacifiCorp entered a memorandum of agreement (the "MOA") with the KRRC, the Karuk Tribe, the Yurok Tribe and the States to continue implementation of the KHSA. The agreement required the States, PacifiCorp and KRRC to file a new license transfer application to remove PacifiCorp from the license for the Lower Klamath Project and add the States and KRRC as co-licensees for the purposes of surrender. In addition, the MOA provides for additional contingency funding of $45 million, equally split between PacifiCorp and the States, and for PacifiCorp and the States to equally share in any additional cost overruns in the unlikely event that dam removal costs exceed the $450 million in funding to ensure dam removal is complete. The MOA also requires PacifiCorp to cover the costs associated with certain pre-existing environmental conditions. In June 2021, the FERC approved the transfer of the Lower Klamath Project dams from PacifiCorp to the KRRC and the States as co-licensees. In July 2021, the Oregon, Wyoming, Idaho and California state public utility commissions conditionally approved the required property transfer applications. In August 2021, PacifiCorp notified the Public Service Commission of Utah of the property transfer, however no formal approval is required in Utah. In August 2022, the FERC staff issued a final environmental impact statement for the project, concluding that dam removal is the preferred action. In November 2022, the FERC issued a license surrender order for the project, which was accepted by the KRRC and the States in December 2022, along with the transfer of the Lower Klamath Project dams. Although PacifiCorp no longer owns the Lower Klamath Project, PacifiCorp will continue to operate the facilities under an operation and maintenance agreement with the KRRC until each facility is ready for removal. Removal of the Copco No. 2 facility is anticipated to begin in 2023, and removal of the remaining three dams (J.C. Boyle, Copco No. 1, and Iron Gate) is anticipated to begin in 2024.
Hydroelectric Commitments
Certain of PacifiCorp's hydroelectric licenses and settlement agreements contain requirements for PacifiCorp to make certain capital and operating expenditures related to its hydroelectric facilities, which are estimated to be approximately $282 million over the next 10 years.
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.
Wildfires Overview
A provision for a loss contingency is recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. PacifiCorp evaluates the related range of reasonably estimated losses and records a loss based on its best estimate within that range or the lower end of the range if there is no better estimate.
In California, under inverse condemnation, courts have held that investor-owned utilities can be liable for real and personal property damages from wildfires without the utility being found negligent and regardless of fault. California law also permits inverse condemnation plaintiffs to recover reasonable attorney fees and costs. In both Oregon and California, PacifiCorp has equipment in areas accessed through special use permits, easements or similar agreements that may contain provisions requiring it to pay for damages caused by its equipment regardless of fault. Even if inverse condemnation or other provisions do not apply, PacifiCorp could be found liable for all damages proximately caused by negligence, including real and personal property and natural resource damages; fire suppression costs; personal injury and loss of life damages; and interest.
2020 Wildfires
In September 2020, a severe weather event resulting in high winds, low humidity and warm temperatures contributed to several major wildfires, which resulted in real and personal property and natural resource damage, personal injuries and loss of life and widespread power outages in Oregon and Northern California. The wildfires spread across certain parts of PacifiCorp's service territory and surrounding areas across multiple counties in Oregon and California, including Siskiyou County, California; Jackson County, Oregon; Douglas County, Oregon; Marion County, Oregon; Lincoln County, Oregon; and Klamath County, Oregon burning over 500,000 acres in aggregate. Third party reports for these wildfires indicate over 2,000 structures destroyed, including residences; several structures damaged; multiple individuals injured; and several fatalities. Fire suppression costs estimated by various agencies total approximately $150 million.
Investigations into the cause and origin of each wildfire are complex and ongoing and being conducted by various entities, including the U.S. Forest Service, the California Public Utilities Commission, the Oregon Department of Forestry, the Oregon Department of Justice, PacifiCorp and various experts engaged by PacifiCorp.
As of the date of this filing, numerous lawsuits have been filed in Oregon and California, including a class action complaint in Oregon, on behalf of plaintiffs related to the 2020 Wildfires. The plaintiffs seek damages that include property damages, economic losses, punitive damages, exemplary damages, attorneys' fees and other damages. Additionally, several insurance carriers have filed subrogation complaints in Oregon and California with allegations similar to those made in the aforementioned lawsuits. The final determinations of liability, however, will only be made following the completion of comprehensive investigations and litigation processes.
PacifiCorp has accrued cumulative estimated probable losses associated with the 2020 Wildfires of $477 million, through December 31, 2022. The accrual includes PacifiCorp's estimate of losses for fire suppression costs, real and personal property damages, natural resource damages for certain areas and noneconomic damages such as personal injury damages and loss of life damages that are considered probable of being incurred and that it is reasonably able to estimate at this time. For certain aspects of the 2020 Wildfires for which loss is considered probable, information necessary to reasonably estimate the potential losses, such as those related to certain areas of natural resource damages, is not currently available.
It is reasonably possible PacifiCorp will incur additional losses beyond the amounts accrued; however, PacifiCorp is currently unable to estimate the range of possible additional losses that could be incurred due to the number of properties and parties involved and the variation in those types of properties and lack of available details. To the extent losses beyond the amounts accrued are incurred, additional insurance coverage is expected to be available to cover a portion of the losses.
The following table presents changes in PacifiCorp's liability for estimated losses associated with the 2020 Wildfires for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Beginning balance | $ | 252 | | | $ | 252 | | | $ | — | |
| Accrued losses | 225 | | | — | | | 252 | |
| Payments | (53) | | | — | | | — | |
| Ending balance | $ | 424 | | | $ | 252 | | | $ | 252 | |
PacifiCorp's receivable for expected insurance recoveries associated with the probable losses was $246 million and $116 million, respectively, as of December 31, 2022 and 2021. During the years ended December 31, 2022, 2021, and 2020, PacifiCorp recognized probable losses net of expected insurance recoveries associated with the 2020 Wildfires of $64 million, $— million and $136 million, respectively.
2022 McKinney Fire
According to California Department of Forestry and Fire Protection, on July 29, 2022, at approximately 2:16 p.m. Pacific Time, a wildfire began in the Oak Knoll Ranger District of the Klamath National Forest in Siskiyou County, California (the "2022 McKinney Fire") located in PacifiCorp's service territory. Third party reports indicate that the 2022 McKinney Fire resulted in 11 structures damaged, 185 structures destroyed, 12 injuries and four fatalities and consumed 60,000 acres. The cause of the 2022 McKinney Fire is undetermined and remains under investigation by the U.S. Forest Service.
Due to the preliminary nature of the investigation PacifiCorp does not believe a loss is probable and therefore has not accrued any loss as of the date of this filing. While the loss is not probable, PacifiCorp estimates the potential loss, excluding losses for natural resource damages, to be $31 million, net of expected insurance recoveries. The loss estimate includes PacifiCorp's estimate of losses for fire suppression costs; real and personal property damages; and noneconomic damages such as personal injury damages and loss of life damages. PacifiCorp is unable to estimate the total potential loss, including losses for natural resource damages, because there are a number of unknown facts and legal considerations that may impact the amount of any potential liability, including the total scope and nature of claims that may be asserted against PacifiCorp. PacifiCorp has insurance available and estimates the potential insurance recoveries to be $103 million, to cover potential losses.
As of the date of this filing, multiple lawsuits have been filed in California on behalf of plaintiffs related to the 2022 McKinney Fire. The plaintiffs seek damages that include property damages, economic losses, punitive damages, exemplary damages, attorneys' fees and other damages but the amount of damages sought are not specified. The final determinations of liability, however, will only be made following the completion of comprehensive investigations and litigation processes.
Guarantees
PacifiCorp has entered into guarantees as part of the normal course of business and the sale or transfer of certain assets. These guarantees are not expected to have a material impact on PacifiCorp's consolidated financial results.
(15) Revenue from Contracts with Customers
The following table summarizes PacifiCorp's Customer Revenue by line of business, with further disaggregation of retail by customer class, for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| 2022 | | 2021 | | 2020 |
| Customer Revenue: | | | | | |
| Retail: | | | | | |
| Residential | $ | 2,013 | | | $ | 1,914 | | | $ | 1,910 | |
| Commercial | 1,645 | | | 1,559 | | | 1,578 | |
| Industrial | 1,163 | | | 1,125 | | | 1,185 | |
| Other retail | 278 | | | 249 | | | 259 | |
| Total retail | 5,099 | | | 4,847 | | | 4,932 | |
| Wholesale | 260 | | | 157 | | | 107 | |
| Transmission | 166 | | | 143 | | | 96 | |
| Other Customer Revenue | 102 | | | 108 | | | 108 | |
| Total Customer Revenue | 5,627 | | | 5,255 | | | 5,243 | |
| Other revenue | 52 | | | 41 | | | 98 | |
| Total operating revenue | $ | 5,679 | | | $ | 5,296 | | | $ | 5,341 | |
(16) Preferred Stock
PacifiCorp has 3,500 thousand shares of Serial Preferred Stock authorized at the stated value of $100 per share. PacifiCorp had 24 thousand shares of Serial Preferred Stock issued and outstanding as of December 31, 2022 and 2021. The outstanding preferred stock series are non-redeemable and have annual dividend rates of 6.00% and 7.00%.
In the event of voluntary liquidation, all preferred stock is entitled to stated value or a specified preference amount per share plus accrued dividends. Upon involuntary liquidation, all preferred stock is entitled to stated value plus accrued dividends. Dividends on all preferred stock are cumulative. Holders also have the right to elect members to the PacifiCorp Board of Directors in the event dividends payable are in default in an amount equal to four full quarterly payments.
PacifiCorp also has 16 million shares of No Par Serial Preferred Stock and 127 thousand shares of 5% Preferred Stock authorized, but no shares were issued or outstanding as of December 31, 2022 and 2021.
(17) Common Shareholder's Equity
Through PPW Holdings, BHE is the sole shareholder of PacifiCorp's common stock. The state regulatory orders that authorized BHE's acquisition of PacifiCorp contain restrictions on PacifiCorp's ability to pay dividends to the extent that they would reduce PacifiCorp's common equity below specified percentages of defined capitalization. As of December 31, 2022, the most restrictive of these commitments prohibits PacifiCorp from making any distribution to PPW Holdings or BHE without prior state regulatory approval to the extent that it would reduce PacifiCorp's common equity below 44% of its total capitalization, excluding short-term debt and current maturities of long-term debt. As of December 31, 2022, PacifiCorp's actual common equity percentage, as calculated under this measure, was 54%, and PacifiCorp would have been permitted to dividend $3.5 billion under this commitment.
These commitments also restrict PacifiCorp from making any distributions to either PPW Holdings or BHE if PacifiCorp's senior unsecured debt rating is BBB- or lower by Standard & Poor's Rating Services or Fitch Ratings, or Baa3 or lower by Moody's Investor Service, as indicated by two of the three rating services. As of December 31, 2022, PacifiCorp met the minimum required senior unsecured debt ratings for making distributions.
PacifiCorp is also subject to a maximum debt-to-total capitalization percentage under various financing agreements as further discussed in Note 7.
In January 2023, PacifiCorp declared dividends of $300 million payable to PPW Holdings LLC in February 2023.
(18) Components of Accumulated Other Comprehensive Loss, Net
Accumulated other comprehensive loss, net consists of unrecognized amounts on retirement benefits, net of tax, of $9 million and $17 million as of December 31, 2022 and 2021, respectively.
(19) Variable Interest Entities
PacifiCorp holds a 66.67% interest in Bridger Coal Company ("Bridger Coal"), which supplies coal to the Jim Bridger generating facility that is owned 66.67% by PacifiCorp and 33.33% by PacifiCorp's joint venture partner in Bridger Coal. PacifiCorp purchases 66.67% of the coal produced by Bridger Coal, while the joint venture partner purchases the remaining 33.33% of the coal produced. The power to direct the activities that most significantly impact Bridger Coal's economic performance are shared with the joint venture partner. Each joint venture partner is jointly and severally liable for the obligations of Bridger Coal. Bridger Coal's necessary working capital to carry out its mining operations is financed by contributions from PacifiCorp and its joint venture partner. PacifiCorp's equity investment in Bridger Coal was $28 million and $45 million as of December 31, 2022 and 2021, respectively. Refer to Note 21 for information regarding related party transactions with Bridger Coal.
(20) Supplemental Cash Flow Disclosures
The summary of supplemental cash flow disclosures as of and for the years ended December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Supplemental disclosure of cash flow information: | | | | | | |
| Interest paid, net of amounts capitalized | | $ | 380 | | | $ | 395 | | | $ | 348 | |
| Income taxes (received) paid, net | | $ | (185) | | | $ | (120) | | | $ | 107 | |
| | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: |
Accruals related to property, plant and equipment additions | | $ | 558 | | | $ | 254 | | | $ | 344 | |
(21) Related Party Transactions
PacifiCorp has an intercompany administrative services agreement and a mutual assistance agreement with BHE and its subsidiaries. Amounts charged to PacifiCorp by BHE and its subsidiaries under these agreements totaled $123 million, $70 million and $14 million during the years ended December 31, 2022, 2021 and 2020, respectively. Amounts charged to PacifiCorp in 2022 and 2021 were primarily reflected in construction work in progress on the Consolidated Balance Sheets as of December 31, 2022 and 2021. Payables associated with the charges were $16 million and $9 million as of December 31, 2022 and 2021, respectively. Amounts charged by PacifiCorp to BHE and its subsidiaries under these agreements totaled $23 million, $8 million and $5 million during the years ended December 31, 2022, 2021 and 2020, respectively. Such amounts primarily relate to information technology projects and other costs managed at a consolidated level and allocated or passed through to affiliates.
PacifiCorp also engages in various transactions with several subsidiaries of BHE in the ordinary course of business. Services provided by these subsidiaries in the ordinary course of business and charged to PacifiCorp primarily relate to wholesale electricity purchases and transmission of electricity, transportation of natural gas and employee relocation services. These expenses totaled $8 million, $6 million and $6 million during the years ended December 31, 2022, 2021 and 2020, respectively.
PacifiCorp has long-term transportation contracts with BNSF Railway Company, an indirect wholly owned subsidiary of Berkshire Hathaway, PacifiCorp's ultimate parent company. Transportation costs under these contracts were $21 million, $19 million and $29 million during the years ended December 31, 2022, 2021 and 2020, respectively.
PacifiCorp has a long-term master materials supply contract with Marmon Utility, LLC, an indirect wholly owned subsidiary of a holding company in which Berkshire Hathaway holds a majority interest. Materials and supplies purchased under this contract were $8 million, $2 million and $3 million during the years ended December 31, 2022, 2021 and 2020, respectively.
PacifiCorp is party to a tax-sharing agreement and is part of the Berkshire Hathaway consolidated U.S. federal income tax return. Federal and state income taxes receivable from BHE were $84 million and $48 million as of December 31, 2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, cash refunded from BHE for federal and state income taxes totaled $185 million and $120 million, respectively. For the year ended December 31, 2020, cash paid to BHE for federal and state income taxes totaled $107 million.
PacifiCorp transacts with its equity investees, Bridger Coal and Trapper Mining Inc. Services provided by equity investees to PacifiCorp primarily relate to coal purchases. During the years ended December 31, 2022, 2021 and 2020, coal purchases from PacifiCorp's equity investees totaled $119 million, $148 million and $145 million, respectively. Payables to PacifiCorp's equity investees were $10 million and $7 million as of December 31, 2022 and 2021, respectively.
MidAmerican Funding, LLC and its subsidiaries and MidAmerican Energy Company
Consolidated Financial Section
Item 7. 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 MidAmerican Funding and its subsidiaries and MidAmerican Energy during the periods included herein. 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, usage trends and other factors. This discussion should be read in conjunction with MidAmerican Funding's historical Consolidated Financial Statements and Notes to Consolidated Financial Statements and MidAmerican Energy's historical Financial Statements and Notes to Financial Statements each in Item 8 of this Form 10-K. MidAmerican Funding's and MidAmerican Energy's actual results in the future could differ significantly from the historical results.
Results of Operations
Overview
MidAmerican Energy -
MidAmerican Energy's net income for 2022 was $961 million, an increase of $67 million, or 7%, compared to 2021 primarily due to higher electric utility margin, a favorable income tax benefit, higher natural gas utility margin and higher AFUDC, partially offset by higher depreciation and amortization expense, higher operations and maintenance expense, unfavorable changes in the cash surrender value of corporate-owned life insurance policies, higher non-service benefit plan costs, higher interest expense and lower nonregulated utility margin. Electric utility margin increased due to higher wholesale utility margin from higher margins per unit and higher wholesale customer volumes of 12.2% and higher retail utility margin, largely from higher retail customer volumes. Retail customer volumes increased 4.3% due to higher customer usage, reflecting the favorable impact of weather and an increase in certain industrial customer usage. Energy generated increased 6% primarily due to higher wind-powered generation, partially offset by lower coal-fueled generation, and energy purchased increased 19%. The favorable income tax benefit was mainly due to higher PTCs recognized from higher wind- and solar-powered generation, partially offset by the timing of state income tax benefits. Depreciation and amortization expense increased primarily from the impacts of certain regulatory mechanisms and additional assets placed in-service.
MidAmerican Energy's net income for 2021 was $894 million, an increase of $68 million, or 8%, compared to 2020 primarily due to higher electric utility margin and a favorable income tax benefit, partially offset by higher depreciation and amortization expense, higher operations and maintenance expense and lower allowances for equity and borrowed funds. Electric utility margin increased primarily due to a higher retail utility margin, largely from higher customer volumes and price impacts from changes in sales mix, and higher wholesale utility margin from higher margins per unit and higher wholesale customer volumes of 42.7%. Electric retail customer volumes increased 5.8% primarily due to higher customer usage for certain industrial customers. Energy generated increased 26% primarily due to higher coal-fueled generation and higher wind-powered generation, and energy purchased decreased 35%. Operations and maintenance expense increased primarily due to higher costs associated with additional wind-powered generating facilities placed in-service as well as higher natural gas distribution costs, partially offset by 2020 costs associated with storm restoration activities. The increase in depreciation and amortization expense was primarily due to higher regulatory mechanisms and additional assets placed in-service. The favorable income tax benefit was from higher PTCs recognized due to new wind-powered generating facilities placed in-service in late 2020 and 2021, state income tax impacts and lower pretax income.
MidAmerican Funding -
MidAmerican Funding's net income for 2022 was $947 million, an increase of $64 million, or 7%, compared to 2021. MidAmerican Funding's net income for 2021 was $883 million, an increase of $65 million, or 8%, compared to 2020. The increases were primarily due to the changes in MidAmerican Energy's earnings discussed above.
Non-GAAP Financial Measure
Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as, electric utility margin and natural gas utility margin, to help evaluate results of operations. Electric utility margin is calculated as regulated electric operating revenue less cost of fuel and energy, which are captions presented on the Statements of Operations. Natural gas utility margin is calculated as regulated natural gas operating revenue less cost of natural gas purchased for resale, which are included in regulated natural gas and other and cost of natural gas purchased for resale and other, respectively, on the Statements of Operations.
MidAmerican Energy's cost of fuel and energy and cost of natural gas purchased for resale are generally recovered from its retail customers through regulatory recovery mechanisms and, as a result, changes in MidAmerican Energy's expenses included in regulatory recovery mechanisms result in comparable changes to revenue. As such, management believes electric utility margin and natural gas utility margin more appropriately and concisely explain profitability rather than a discussion of revenue and cost of sales separately. Management believes the presentation of electric utility margin and natural gas utility margin provides meaningful and valuable insight into the information management considers important to managing the business and a measure of comparability to others in the industry.
Electric utility margin and natural gas utility margin are not measures calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, operating income, which is the most directly comparable financial measure prepared in accordance with GAAP. The following table provides a reconciliation of utility margin to operating income for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| | | | | | | | | | | | | | |
| Electric utility margin: | | | | | | | | | | | | | | |
| Operating revenue | | $ | 2,988 | | | $ | 2,529 | | | $ | 459 | | 18 | % | | $ | 2,529 | | | $ | 2,139 | | | $ | 390 | | 18 | % |
| Cost of fuel and energy | | 679 | | | 539 | | | 140 | | 26 | | | 539 | | | 339 | | | 200 | | 59 | |
| Electric utility margin | | 2,309 | | | 1,990 | | | 319 | | 16 | % | | 1,990 | | | 1,800 | | | 190 | | 11 | % |
| | | | | | | | | | | | | | |
| Natural gas utility margin: | | | | | | | | | | | | | | |
| Operating revenue | | 1,030 | | | 1,003 | | | 27 | | 3 | % | | 1,003 | | | 573 | | | 430 | | 75 | % |
| Natural gas purchased for resale | | 762 | | | 760 | | | 2 | | — | | | 760 | | | 327 | | | 433 | | * |
| Natural gas utility margin | | 268 | | | 243 | | | 25 | | 10 | % | | 243 | | | 246 | | | (3) | | (1) | % |
| | | | | | | | | | | | | | |
| Utility margin | | $ | 2,577 | | | $ | 2,233 | | | $ | 344 | | 15 | % | | $ | 2,233 | | | $ | 2,046 | | | $ | 187 | | 9 | % |
| | | | | | | | | | | | | | |
| Other operating revenue | | 7 | | | 15 | | | (8) | | (53) | % | | 15 | | | 8 | | | 7 | | 88 | % |
| Other cost of sales | | 1 | | | 1 | | | — | | — | | | 1 | | | 1 | | | — | | — | |
| Operations and maintenance | | 828 | | | 775 | | | 53 | | 7 | | | 775 | | | 754 | | | 21 | | 3 | |
| Depreciation and amortization | | 1,168 | | | 914 | | | 254 | | 28 | | | 914 | | | 716 | | | 198 | | 28 | |
| Property and other taxes | | 149 | | | 142 | | | 7 | | 5 | | | 142 | | | 135 | | | 7 | | 5 | |
| | | | | | | | | | | | | | |
| Operating income | | $ | 438 | | | $ | 416 | | | $ | 22 | | 5 | % | | $ | 416 | | | $ | 448 | | | $ | (32) | | (7) | % |
* Not meaningful.
Electric Utility Margin
A comparison of key operating results related to electric utility margin is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Utility margin (in millions): | | | | | | | | | | | | | | | |
| Operating revenue | $ | 2,988 | | | $ | 2,529 | | | $ | 459 | | | 18 | % | | $ | 2,529 | | | $ | 2,139 | | | $ | 390 | | | 18 | % |
| Cost of fuel and energy | 679 | | | 539 | | | 140 | | | 26 | | | 539 | | | 339 | | | 200 | | | 59 | |
| Utility margin | $ | 2,309 | | | $ | 1,990 | | | $ | 319 | | | 16 | % | | $ | 1,990 | | | $ | 1,800 | | | $ | 190 | | | 11 | % |
| | | | | | | | | | | | | | | |
| Sales (GWhs): | | | | | | | | | | | | | | | |
| Residential | 7,006 | | | 6,718 | | | 288 | | | 4 | % | | 6,718 | | | 6,687 | | | 31 | | | — | % |
| Commercial | 4,017 | | | 3,841 | | | 176 | | | 5 | | | 3,841 | | | 3,707 | | | 134 | | | 4 | |
| Industrial | 16,646 | | | 15,944 | | | 702 | | | 4 | | | 15,944 | | | 14,645 | | | 1,299 | | | 9 | |
| Other | 1,621 | | | 1,571 | | | 50 | | | 3 | | | 1,571 | | | 1,484 | | | 87 | | | 6 | |
| Total retail | 29,290 | | | 28,074 | | | 1,216 | | | 4 | | | 28,074 | | | 26,523 | | | 1,551 | | | 6 | |
| Wholesale | 17,964 | | | 16,011 | | | 1,953 | | | 12 | | | 16,011 | | | 11,219 | | | 4,792 | | | 43 | |
| Total sales | 47,254 | | | 44,085 | | | 3,169 | | | 7 | % | | 44,085 | | | 37,742 | | | 6,343 | | | 17 | % |
| | | | | | | | | | | | | | | |
Average number of retail customers (in thousands) | 813 | | 804 | | 9 | | 1 | % | | 804 | | 795 | | 9 | | 1 | % |
| | | | | | | | | | | | | | | |
| Average revenue per MWh: | | | | | | | | | | | | | | | |
| Retail | $ | 79.23 | | | $ | 75.84 | | | $ | 3.39 | | | 4 | % | | $ | 75.84 | | | $ | 72.57 | | | $ | 3.27 | | | 5 | % |
| Wholesale | $ | 31.07 | | | $ | 18.92 | | | $ | 12.15 | | | 64 | % | | $ | 18.92 | | | $ | 11.08 | | | $ | 7.84 | | | 71 | % |
| | | | | | | | | | | | | | | |
| Heating degree days | 6,449 | | | 5,704 | | | 745 | | | 13 | % | | 5,704 | | | 5,932 | | | (228) | | | (4) | % |
| Cooling degree days | 1,274 | | | 1,331 | | | (57) | | | (4) | % | | 1,331 | | | 1,172 | | | 159 | | | 14 | % |
| | | | | | | | | | | | | | | |
Sources of energy (GWhs)(1): | | | | | | | | | | | | | | | |
Wind and other(2) | 28,129 | | | 23,374 | | | 4,755 | | | 20 | % | | 23,374 | | | 20,668 | | | 2,706 | | | 13 | % |
| Coal | 10,078 | | | 12,313 | | | (2,235) | | | (18) | | | 12,313 | | | 7,217 | | | 5,096 | | | 71 | |
| Nuclear | 3,782 | | | 3,934 | | | (152) | | | (4) | | | 3,934 | | | 3,927 | | | 7 | | | — | |
| Natural gas | 1,504 | | | 1,398 | | | 106 | | | 8 | | | 1,398 | | | 675 | | | 723 | | | * |
| Total energy generated | 43,493 | | | 41,019 | | | 2,474 | | | 6 | | | 41,019 | | | 32,487 | | | 8,532 | | | 26 | |
| Energy purchased | 4,594 | | | 3,865 | | | 729 | | | 19 | | | 3,865 | | | 5,979 | | | (2,114) | | | (35) | |
| Total | 48,087 | | | 44,884 | | | 3,203 | | | 7 | % | | 44,884 | | | 38,466 | | | 6,418 | | | 17 | % |
| | | | | | | | | | | | | | | |
| Average cost of energy per MWh: | | | | | | | | | | | | | | | |
Energy generated(3) | $ | 7.42 | | | $ | 7.12 | | | $ | 0.30 | | | 4 | % | | $ | 7.12 | | | $ | 4.74 | | | $ | 2.38 | | | 50 | % |
| Energy purchased | $ | 77.59 | | | $ | 64.04 | | | $ | 13.55 | | | 21 | % | | $ | 64.04 | | | $ | 30.94 | | | $ | 33.10 | | | * |
* 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 sources 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.
Natural Gas Utility Margin
A comparison of key operating results related to natural gas utility margin is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Utility margin (in millions): | | | | | | | | | | | | | | | |
| Operating revenue | $ | 1,030 | | | $ | 1,003 | | | $ | 27 | | | 3 | % | | $ | 1,003 | | | $ | 573 | | | $ | 430 | | | 75 | % |
| Natural gas purchased for resale | 762 | | | 760 | | | 2 | | | — | | | 760 | | | 327 | | | 433 | | | * |
| Utility margin | $ | 268 | | | $ | 243 | | | $ | 25 | | | 10 | % | | $ | 243 | | | $ | 246 | | | $ | (3) | | | (1) | % |
| | | | | | | | | | | | | | | |
| Throughput (000's Dths): | | | | | | | | | | | | | | | |
| Residential | 56,100 | | | 48,984 | | | 7,116 | | | 15 | % | | 48,984 | | | 51,023 | | | (2,039) | | | (4) | % |
| Commercial | 26,298 | | | 23,240 | | | 3,058 | | | 13 | | | 23,240 | | | 23,336 | | | (96) | | | — | |
| Industrial | 6,039 | | | 5,287 | | | 752 | | | 14 | | | 5,287 | | | 5,275 | | | 12 | | | — | |
| Other | 75 | | | 68 | | | 7 | | | 10 | | | 68 | | | 74 | | | (6) | | | (8) | |
| Total retail sales | 88,512 | | | 77,579 | | | 10,933 | | | 14 | | | 77,579 | | | 79,708 | | | (2,129) | | | (3) | |
| Wholesale sales | 30,996 | | | 34,337 | | | (3,341) | | | (10) | | | 34,337 | | | 34,691 | | | (354) | | | (1) | |
| Total sales | 119,508 | | | 111,916 | | | 7,592 | | | 7 | | | 111,916 | | | 114,399 | | | (2,483) | | | (2) | |
| Natural gas transportation service | 102,827 | | | 112,631 | | | (9,804) | | | (9) | | | 112,631 | | | 110,263 | | | 2,368 | | | 2 | |
| Total throughput | 222,335 | | | 224,547 | | | (2,212) | | | (1) | % | | 224,547 | | | 224,662 | | | (115) | | | — | % |
| | | | | | | | | | | | | | | |
Average number of retail customers (in thousands) | 789 | | | 781 | | | 8 | | | 1 | % | | 781 | | | 774 | | | 7 | | | 1 | % |
| Average revenue per retail Dth sold | $ | 9.19 | | | $ | 10.59 | | | $ | (1.40) | | | (13) | % | | $ | 10.59 | | | $ | 5.91 | | | $ | 4.68 | | | 79 | % |
| | | | | | | | | | | | | | | |
| Heating degree days | 6,810 | | | 6,000 | | | 810 | | | 14 | % | | 6,000 | | | 6,253 | | | (253) | | | (4) | % |
| | | | | | | | | | | | | | | |
Average cost of natural gas per retail Dth sold | $ | 6.66 | | | $ | 7.95 | | | $ | (1.29) | | | (16) | % | | $ | 7.95 | | | $ | 3.29 | | | $ | 4.66 | | | * |
| | | | | | | | | | | | | | | |
Combined retail and wholesale average cost of natural gas per Dth sold | $ | 6.38 | | | $ | 6.79 | | | $ | (0.41) | | | (6) | % | | $ | 6.79 | | | $ | 2.86 | | | $ | 3.93 | | | * |
* Not meaningful.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
MidAmerican Energy -
Electric utility margin increased $319 million, or 16%, for 2022 compared to 2021 primarily due to:
•a $250 million increase in wholesale utility margin due to higher margins per unit of $237 million, reflecting higher market prices and lower energy costs, and higher volumes of 12.2%;
•a $66 million increase in retail utility margin primarily due to $62 million from higher customer usage, including $7 million from the favorable impact of weather; and $9 million, net of energy costs, from higher recoveries through bill riders (offset in operations and maintenance expense and income tax benefit); partially offset by $6 million in 2021 from liquidated damages related to a wind-powered generation project. Retail customer volumes increased 4.3%; and
•a $3 million increase in Multi-Value Projects ("MVP") transmission revenue.
Natural gas utility margin increased $25 million, or 10%, for 2022 compared to 2021 primarily due to:
•an $18 million increase in customer usage, including $9 million from the favorable impact of weather;
•a $5 million increase from higher refunds related to amortization of excess accumulated deferred income taxes arising from in 2017 Tax Reform (offset in income tax benefit); and
•a $3 million increase in natural gas transportation margin, reflecting higher prices.
Operations and maintenance increased $53 million, or 7%, for 2022 compared to 2021 primarily due to higher other power generation costs of $21 million from additional wind turbines and easements, higher electric distribution costs of $17 million reflecting greater tree-trimming efforts, higher steam generation costs of $13 million and higher transmission costs from MISO of $6 million, partially offset by lower gas distribution costs of $6 million.
Depreciation and amortization increased $254 million, or 28%, for 2022 compared to 2021 primarily due to $181 million from higher Iowa revenue sharing accruals, $40 million related to new and repowered wind-powered generating facilities and other plant placed in-service and $31 million from a regulatory mechanism that provides customers the retail energy benefits of certain wind-powered generation projects.
Property and other taxes increased $7 million, or 5%, for 2022 compared to 2021 primarily due to higher wind turbine property taxes.
Interest expense increased $11 million, or 4%, for 2022 compared to 2021 primarily due to a higher average long-term debt balance and higher variable interest rates.
Allowance for borrowed and equity funds increased $14 million, or 27%, for 2022 compared to 2021 primarily due to higher construction work-in-progress balances related to wind- and solar-powered generation projects.
Other, net decreased $53 million, or 100%, for 2022 compared to 2021 primarily due to lower cash surrender values of corporate-owned life insurance policies of $37 million, higher non-service costs of postretirement employee benefit plans of $17 million and lower other investment values, partially offset by higher interest income.
Income tax benefit increased $95 million, or 14%, for 2022 compared to 2021, and the effective tax rate was (403)% for 2022 and (308)% for 2021. The change in the effective tax rate was substantially due to an increase of $136 million in PTCs, partially offset by state income tax impacts.
Federal renewable electricity PTCs are earned as energy from qualifying wind- and solar-powered generating facilities is produced and sold and are based on a prescribed per-kilowatt rate pursuant to the applicable federal income tax law. Qualifying generating facilities are eligible for the credits for 10 years from the date the facilities are placed in-service. Beginning in late 2014, some of MidAmerican Energy's wind-powered generating facilities surpassed the 10-year eligibility period for earning the credits. Most of those facilities have since been repowered, and under IRS rules, qualifying repowered facilities are eligible for the available credits, for 10 years from the date they are returned to service. Refer to "Capital Expenditures" in Liquidity and Capital Resources for additional information about repowering and new wind- and solar-powered generation placed in-service. PTC's totaled $710 million, $574 million and $510 million in 2022, 2021 and 2020, respectively.
MidAmerican Funding -
Income tax benefit for MidAmerican Funding increased $96 million, or 14%, for 2022 compared to 2021, and the effective tax rate was (454)% for 2022 and (335)% for 2021. The change in effective tax rates was due principally to the factors discussed for MidAmerican Energy.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
MidAmerican Energy -
Electric utility margin decreased $190 million, or 11%, for 2021 compared to 2020 primarily due to:
•a $99 million increase in retail utility margin primarily due to $50 million from higher usage for certain industrial customers; $13 million from the favorable impact of weather; $19 million due to price impacts from changes in sales mix; $10 million, net of energy costs, from higher recoveries through bill riders (offset in operations and maintenance expense and income tax benefit) and $6 million from liquidated damages related to a wind-powered generation project. Retail customer volumes increased 5.8%; and
•a $93 million increase in wholesale utility margin due to higher margins per unit of $52 million, reflecting higher market prices, net of higher energy costs, and higher volumes of 42.7%; partially offset by
•a $2 million decrease in Multi-Value Projects ("MVP") transmission revenue.
Natural gas utility margin decreased $3 million, or 1%, for 2021 compared to 2020 primarily due to:
•a $6 million decrease from higher refunds related to amortization of excess accumulated deferred income taxes arising from 2017 Tax Reform (offset in income tax benefit);
•a $3 million decrease due to the unfavorable impact of weather, partially offset by price impacts from changes in sales mix; partially offset by
•a $4 million increase in natural gas energy efficiency program revenue (offset in operations and maintenance expense); and
•a $2 million increase in natural gas transportation margin, reflecting higher volumes.
Operations and maintenance increased $21 million, or 3%, for 2021 compared to 2020 primarily due higher other generation operations and maintenance expenses of $7 million due to additional wind turbines and easements, higher energy efficiency program expense of $7 million (offset in operating revenue), higher natural gas distribution costs of $6 million and higher transmission operations costs from MISO of $3 million, partially offset by lower electric distribution costs of $11 million due to storm restoration costs in 2020.
Depreciation and amortization increased $198 million, or 28%, for 2021 compared to 2020 primarily due to $114 million from higher Iowa revenue sharing accruals, $25 million from a regulatory mechanism that provides customers the retail energy benefits of certain wind-powered generation projects and $59 million related to new and repowered wind-powered generating facilities and other plant placed in-service.
Property and other taxes increased $7 million, or 5%, for 2021 compared to 2020 primarily due to higher wind turbine property taxes.
Interest expense decreased $2 million, or 1%, for 2021 compared to 2020 primarily due to a decrease in a regulatory carrying charge and lower variable interest rates, partially offset by a higher average long-term debt balance.
Allowance for borrowed and equity funds decreased $8 million, or 13%, for 2021 compared to 2020 primarily due to lower construction work-in-progress balances related to wind-powered generation projects.
Other, net increased $1 million, or 2%, for 2021 compared to 2020 primarily due to higher cash surrender values of corporate-owned life insurance policies and lower non-service costs of postretirement employee benefit plans, partially offset by a gain from the contribution of land to a joint venture in 2020.
Income tax benefit increased $105 million, or 18%, for 2021 compared to 2020, and the effective tax rate was (308)% for 2021 and (223)% for 2020. The change in the effective tax rate was substantially due to an increase of $64 million in PTCs, state income tax impacts and lower pretax income in 2021.
MidAmerican Funding -
Income tax benefit for MidAmerican Funding increased $106 million, or 18%, for 2021 compared to 2020, and the effective tax rate was (335)% for 2021 and (235)% for 2020. The change in effective tax rates was due principally to the factors discussed for MidAmerican Energy.
Liquidity and Capital Resources
As of December 31, 2022, MidAmerican Energy's and MidAmerican Funding's total net liquidity were as follows (in millions):
| | | | | | | | |
| MidAmerican Energy: | | |
| Cash and cash equivalents | | $ | 258 | |
| | | |
| Credit facilities, maturing 2023 and 2025 | | 1,505 | |
| Less: | | |
| | |
| Tax-exempt bond support | | (370) | |
| Net credit facilities | | 1,135 | |
| MidAmerican Energy total net liquidity | | $ | 1,393 | |
| | | |
| MidAmerican Funding: | | |
| MidAmerican Energy total net liquidity | | $ | 1,393 | |
| Cash and cash equivalents | | 3 | |
| MHC, Inc. credit facility, maturing 2023 | | 4 | |
| MidAmerican Funding total net liquidity | | $ | 1,400 | |
Operating Activities
MidAmerican Energy's net cash flows from operating activities were $2,174 million, $1,617 million and $1,543 million for 2022, 2021 and 2020, respectively. MidAmerican Funding's net cash flows from operating activities were $2,161 million, $1,605 million and $1,536 million for 2022, 2021 and 2020, respectively. Cash flows from operating activities increased for 2022 compared to 2021 primarily due to higher utility margins for MidAmerican Energy's regulated electric and natural gas businesses, higher income tax receipts and lower payments to vendors. Higher utility margins are partially attributable to timing of the recovery of higher natural gas costs caused by the February 2021 polar vortex weather event. Cash flows from operating activities increased for 2021 compared to 2020 primarily due to higher income tax receipts, lower payments for the settlement of AROs and lower interest payments.
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 selected and assumptions made for each payment date.
Investing Activities
MidAmerican Energy's net cash flows from investing activities were $(1,867) million, $(1,911) million and $(1,826) million for 2022, 2021 and 2020, respectively. MidAmerican Funding's net cash flows from investing activities were $(1,868) million, $(1,912) million and $(1,825) million for 2022, 2021 and 2020, respectively. Net cash flows from investing activities consist almost entirely of capital expenditures. Refer to "Future Uses of Cash" for further discussion of capital expenditures. Purchases and proceeds related to marketable securities primarily consist of activity within the Quad Cities Generating Station nuclear decommissioning trust, and other investment proceeds relates primarily to company-owned life insurance policies.
Financing Activities
MidAmerican Energy's net cash flows from financing activities were $(278) million, $488 million and $(2) million for 2022, 2021 and 2020, respectively. MidAmerican Funding's net cash flows from financing activities were $(262) million, $501 million and $4 million for 2022, 2021 and 2020, respectively. In 2022 MidAmerican Energy paid $275 million in dividends to its parent company, MHC, Inc. In July 2021, MidAmerican Energy issued $500 million of its 2.70% First Mortgage Bonds due August 2052. In 2022, MidAmerican Funding made a $69 million distribution to its sole member, BHE. MidAmerican Funding paid $189 million in 2022 and received $12 million and $5 million in 2021 and 2020, respectively, through its note payable with BHE.
Debt Authorizations and Related Matters
Short-term Debt
MidAmerican Energy has authority from the FERC to issue, through April 2, 2024, commercial paper and bank notes aggregating $1.5 billion. MidAmerican Energy has a $1.5 billion unsecured credit facility expiring in June 2025. 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 the Secured Overnight Financing Rate, 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.
Long-term Debt and Preferred Stock
MidAmerican Energy currently has an effective shelf registration statement with the SEC to issue up to $3.25 billion of long-term debt securities and preferred stock through June 13, 2024. MidAmerican Energy has authorization from the FERC to issue, through June 30, 2023, long-term debt securities up to an aggregate of $2.0 billion and preferred stock up to an aggregate of $500 million. MidAmerican Energy has authorization from the ICC through May 25, 2025, to issue long-term debt securities up to an aggregate of $2.2 billion and preferred stock up to an aggregate of $500 million; through October 15, 2024, to issue $750 million of long-term debt securities for the purpose of refinancing $250 million of its 3.70% Senior notes due September 2023 and $500 million of its 2.40% Senior notes due October 2024; and through January 1, 2025, to issue $105 million of long-term debt securities for the purpose of refinancing three of its variable-rate tax-exempt bond series, including $57 million due in May 2023, $35 million due in October 2024 and $13 million due in January 2025.
MidAmerican Energy's mortgage dated September 9, 2013, creates a lien on most of MidAmerican Energy's electric utility property within the state of Iowa, allowing the issuance of bonds based on a percentage of eligible utility property additions, bond credits arising from retirement of previously outstanding bonds or deposits of cash. As of December 31, 2022, MidAmerican Energy estimated it would be able to issue up to $9.3 billion of new first mortgage bonds under the mortgage. Any issuances are subject to market conditions, and amounts are further limited by regulatory authorizations and commitments, as well as any more restrictive requirements of covenants and tests contained in other financing agreements. MidAmerican Energy also has the ability to release property from the lien of the mortgage on the basis of property additions, bond credits or deposits of cash.
MidAmerican Funding or one of its subsidiaries, including MidAmerican Energy, may from time to time seek to acquire its outstanding debt securities through cash purchases in the open market, privately negotiated transactions or otherwise. Any debt securities repurchased by MidAmerican Funding or one of its subsidiaries may be reissued or resold by MidAmerican Funding or one of its subsidiaries from time to time and will depend on prevailing market conditions, the issuing company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
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.
Capital Expenditures
MidAmerican Energy 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, impacts to customers' rates; changes in environmental and other rules and regulations; 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.
MidAmerican Energy's historical and forecast capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, for the years ended December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Historical | | Forecast |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| | | | | | | | | | | |
| Wind generation | $ | 911 | | | $ | 964 | | | $ | 685 | | | $ | 1,353 | | | $ | 1,288 | | | $ | 895 | |
| Electric distribution | 273 | | | 257 | | | 311 | | | 296 | | | 250 | | | 259 | |
| Electric transmission | 160 | | | 199 | | | 145 | | | 186 | | | 159 | | | 211 | |
| Solar generation | 16 | | | 132 | | | 119 | | | 10 | | | 48 | | | 74 | |
| Other | 476 | | | 360 | | | 609 | | | 606 | | | 404 | | | 352 | |
| Total | $ | 1,836 | | | $ | 1,912 | | | $ | 1,869 | | | $ | 2,451 | | | $ | 2,149 | | | $ | 1,791 | |
MidAmerican Energy's capital expenditures provided above consist of the following:
•Wind generation includes the construction, acquisition, repowering and operation of wind-powered generating facilities in Iowa.
◦Construction and acquisition of wind-powered generating facilities totaled $72 million for 2022, $540 million for 2021 and $848 million for 2020. The timing and amount of forecast wind generation capital expenditures may be impacted by the outcome of MidAmerican Energy's Wind PRIME filing currently before the IUB. MidAmerican Energy placed in-service 294 MWs during 2021 and 729 MWs during 2020. All of these wind-powered generating facilities placed in-service in 2021 and 2020 qualify for 100% of PTCs available. PTCs from these projects are excluded from MidAmerican Energy's Iowa EAC until these generation assets are reflected in base rates.
◦Repowering of wind-powered generating facilities totaled $500 million for 2022, $354 million for 2021 and $37 million for 2020. Planned spending for repowering totals $20 million in 2023. MidAmerican Energy expects its repowered facilities to meet IRS guidelines for the re-establishment of PTCs for 10 years from the date the facilities are placed in-service.
•Electric distribution includes expenditures for new facilities to meet retail demand growth and for replacement of existing facilities to maintain system reliability.
•Electric transmission includes expenditures to meet retail demand growth, upgrades to accommodate third-party generator requirements and replacement of existing facilities to maintain system reliability.
•Solar generation includes the construction of solar-powered generating facilities totaling 141 MWs of small- and utility-scale solar generation, all of which were placed in-service in 2022, with total spend of $119 million in 2022 and $132 million in 2021. MidAmerican Energy is pursuing additional opportunities for solar generation, including those in MidAmerican Energy's Wind PRIME filing currently before the IUB.
•Remaining expenditures primarily relate to routine projects for other generation, natural gas distribution, technology, facilities and other operational needs to serve existing and expected demand.
Material Cash Requirements
MidAmerican Energy and MidAmerican Funding have cash requirements that may affect their financial condition that arise primarily from long- and short-term debt (refer to Notes 7 and 8), firm commitments (refer to Note 13) and construction and other development costs (refer to Liquidity and Capital Resources included within this Item 7) and AROs (refer to Note 11). Refer, where applicable, to the respective referenced note in Notes to Financial Statements in Item 8 of this Form 10-K for additional information.
MidAmerican Energy has cash requirements relating to interest payments of $5.6 billion on long-term debt, including $316 million due in 2023. Additionally, MidAmerican Funding has cash requirements relating to interest payments on its long-term debt of $109 million, including $17 million due in 2023.
Regulatory Matters
MidAmerican Energy is subject to comprehensive regulation. Refer to the discussion contained in Item 1 of this Form 10-K for further information regarding MidAmerican Energy's general regulatory framework and current regulatory matters.
Quad Cities Generating Station Operating Status
Constellation Energy Generation, LLC ("Constellation Energy"), the operator of Quad Cities Generating Station Units 1 and 2 ("Quad Cities Station") of which MidAmerican Energy has a 25% ownership interest, receives financial support for continued operation of Quad Cities Station from the zero emission standard enacted by the Illinois legislature in December 2016. The zero emission standard requires the Illinois Power Agency to purchase ZECs and recover the costs from certain ratepayers in Illinois, subject to certain limitations. The proceeds from the ZECs provide Constellation Energy additional revenue through 2027 as an incentive for continued operation of Quad Cities Station. MidAmerican Energy does not receive additional revenue from the subsidy.
The PJM Interconnection, L.L.C. ("PJM") capacity market includes a Minimum Offer Price Rule ("MOPR"). If a generation resource is subjected to a MOPR, its offer price in the market is adjusted to effectively remove the revenues it receives through a state government-provided financial support program like the Illinois zero emission standard, resulting in a higher offer that may not clear the capacity market. Prior to December 19, 2019, the PJM MOPR applied only to certain new gas-fueled resources.
On December 19, 2019, the FERC issued an order requiring the PJM to broadly apply the MOPR to all new and existing resources, including nuclear. This greatly expanded the breadth and scope of the PJM's MOPR, which became effective as of the PJM's capacity auction for the 2022-2023 planning year. While the FERC included some limited exemptions, no exemptions were available to state-supported nuclear resources, such as Quad Cities Station. The FERC denied rehearing of that order on April 16, 2020. A number of parties, including Constellation Energy, have filed petitions for review of the FERC's orders in this proceeding, which remain pending before the Court of Appeals for the Seventh Circuit. MidAmerican Energy cannot predict the outcome of this proceeding.
While this litigation is pending, the MOPR applied to Quad Cities Station in the capacity auction for the 2022-2023 planning year in May 2021, which prevented Quad Cities Station from clearing in that capacity auction.
At the direction of the PJM Board of Managers, the PJM and its stakeholders developed further MOPR reforms to ensure that the capacity market rules respect and accommodate state resource preferences such as the ZEC programs. The PJM filed related tariff revisions with the FERC on July 30, 2021, and, on September 29, 2021, the PJM's proposed MOPR reforms became effective by operation of law. Under the new tariff provisions, the MOPR applied in the capacity auction for the 2023-2024 delivery year but did not restrict the offers of Quad Cities Station, which cleared in the capacity auction. Requests for rehearing of the FERC's notice establishing the effective date for the PJM's proposed market reforms were filed in October 2021 and denied by operation of law on November 4, 2021. Several parties have filed petitions for review of the FERC's orders in this proceeding, which remain pending before the Court of Appeals for the Third Circuit.
Assuming the continued effectiveness of the Illinois zero emission standard, Constellation Energy no longer considers Quad Cities Station to be at heightened risk for early retirement. However, to the extent the Illinois zero emission standard does not operate as expected over its full term, Quad Cities Station would be at heightened risk for early retirement. The FERC provided no new mechanism for accommodating state-supported resources like Quad Cities Station other than the existing Fixed Resource Requirement ("FRR") mechanism under which an entire utility zone would be removed from PJM's capacity auction along with sufficient resources to support the load in such zone. Depending on the outcome of the proceedings related to the PJM MOPR, the continued effectiveness of the Illinois zero emission standard may be undermined unless the PJM adopts further changes to the MOPR or Illinois implements an FRR mechanism, under which Quad Cities Station would be removed from the PJM's capacity auction.
Environmental Laws and Regulations
MidAmerican Energy is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal and other environmental matters that have the potential to impact MidAmerican Energy'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 various federal, state and local agencies. MidAmerican Energy believes it is in material compliance with all applicable laws and regulations, although many are subject to interpretation that 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 financial results.
Refer to "Environmental Laws and Regulations" in Item 1 of this Form 10-K for further discussion regarding environmental laws and regulations.
Collateral and Contingent Features
Debt securities of MidAmerican Energy are rated by credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of MidAmerican Energy's ability to, in general, meet the obligations of its issued debt securities. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time. As of December 31, 2022, MidAmerican Energy's credit ratings for its senior secured debt and its issuer credit ratings for senior unsecured debt from the recognized credit rating agencies were investment grade. As a result of the issuance of first mortgage bonds by MidAmerican Energy in September 2013, its then outstanding senior unsecured debt was equally and ratably secured with such first mortgage bonds. Refer to Note 8 of MidAmerican Energy's Notes to Financial Statements in Item 8 of this Form 10-K for a discussion of MidAmerican Energy's first mortgage bonds.
MidAmerican Funding and MidAmerican Energy have no credit rating downgrade triggers that would accelerate the maturity dates of its outstanding debt, and a change in ratings is not an event of default under the applicable debt instruments. MidAmerican Energy's unsecured revolving credit facilities do not require the maintenance of a minimum credit rating level in order to draw upon their availability. However, commitment fees and interest rates under the credit facilities are tied to credit ratings and increase or decrease when the ratings change. A ratings downgrade could also increase the future cost of commercial paper, short- and long-term debt issuances or new credit facilities.
In accordance with industry practice, certain wholesale agreements, including 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 recognized credit rating agencies. These agreements 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. If all credit-risk-related contingent features or adequate assurance provisions for these agreements had been triggered as of December 31, 2022, MidAmerican Energy would have been required to post $128 million 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.
Inflation
Historically, overall inflation and changing prices in the economies where MidAmerican Energy operates have not had a significant impact on its financial results. MidAmerican Energy operates under cost-of-service based rate-setting structures administered by various state commissions and the FERC. Under these rate-setting structures, MidAmerican Energy is allowed to include prudent costs in its rates, including the impact of inflation. MidAmerican Energy attempts to minimize the potential impact of inflation on its operations through the use of fuel, energy and other cost adjustment clauses and bill riders, by employing prudent risk management and hedging strategies and by considering, among other areas, inflation's impact on purchases of energy, operating expenses, materials and equipment costs, contract negotiations, future capital spending programs, and long-term debt issuances. There can be no assurance that such actions will be successful.
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. The following critical accounting estimates are impacted significantly by MidAmerican Energy's methods, judgments and assumptions used in the preparation of the Financial Statements and should be read in conjunction with MidAmerican Energy's Summary of Significant Accounting Policies included in Note 2 of Notes to Financial Statements in Item 8 of this Form 10-K.
Accounting for the Effects of Certain Types of Regulation
MidAmerican Energy prepares its financial statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, MidAmerican Energy defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur.
MidAmerican Energy continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future regulated rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition, that could limit MidAmerican Energy's ability to recover its costs. MidAmerican Energy believes its application of the guidance for regulated operations is appropriate, and its existing regulatory assets and liabilities are probable of inclusion in future regulated rates. The evaluation reflects the current political and regulatory climate at both the federal and state levels. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be written off to net income, returned to customers or re-established as AOCI. Total regulatory assets were $550 million and total regulatory liabilities were $1,119 million as of December 31, 2022. Refer to Note 5 of Notes to Financial Statements in Item 8 of this Form 10-K for additional information regarding regulatory assets and liabilities.
Impairment of Goodwill
MidAmerican Funding's Consolidated Balance Sheet as of December 31, 2022, includes goodwill from the acquisition of MHC totaling $1.3 billion. Goodwill is allocated to each reporting unit. MidAmerican Funding evaluates goodwill for impairment at least annually and completed its annual review as of October 31, 2022. Additionally, no indicators of impairment were identified as of December 31, 2022. Significant judgment is required in estimating the fair value of the reporting unit and performing goodwill impairment tests. MidAmerican Funding uses a variety of methods to estimate a reporting unit's fair value, principally discounted projected future net cash flows. Key assumptions used include, but are not limited to, the use of estimated future cash flows; multiples of earnings; and an appropriate discount rate. Estimated future cash flows are impacted by, among other factors, growth rates, changes in regulations and rates, ability to renew contracts and estimates of future commodity prices. In estimating future cash flows, MidAmerican Funding incorporates current market information, as well as historical factors.
Pension and Other Postretirement Benefits
MidAmerican Energy sponsors defined benefit pension and other postretirement benefit plans that cover the majority of the employees of BHE and its domestic energy subsidiaries other than PacifiCorp and NV Energy Inc. MidAmerican Energy recognizes the funded status of its defined benefit pension and other postretirement benefit plans on the Balance Sheets. Funded status is the fair value of plan assets minus the benefit obligation as of the measurement date. As of December 31, 2022, MidAmerican Energy recognized a net liability totaling $99 million for the funded status of its defined benefit pension and other postretirement benefit plans. As of December 31, 2022, amounts not yet recognized as a component of net periodic benefit cost that were included in regulatory assets totaled $47 million.
The expense and benefit obligations relating to these defined benefit pension and other postretirement benefit plans are based on actuarial valuations. Inherent in these valuations are key assumptions, including, but not limited to, discount rates, expected long-term rate of return on plan assets and healthcare cost trend rates. These key assumptions are reviewed annually and modified as appropriate. MidAmerican Energy believes that the key assumptions utilized in recording obligations under the plans are reasonable based on prior plan experience and current market and economic conditions. Refer to Note 10 of Notes to Financial Statements in Item 8 of this Form 10-K for disclosures about MidAmerican Energy's defined benefit pension and other postretirement benefit plans, including the key assumptions used to calculate the funded status and net periodic benefit cost for these plans as of and for the year ended December 31, 2022.
MidAmerican Energy chooses a discount rate based upon high quality debt security investment yields in effect as of the measurement date that corresponds to cash flows over the expected benefit period. The pension and other postretirement benefit liabilities increase as the discount rate is reduced.
In establishing its assumption as to the expected long-term rate of return on plan assets, MidAmerican Energy utilizes the expected asset allocation and return assumptions for each asset class based on historical performance and forward-looking views of the financial markets. Pension and other postretirement benefits expense increases as the expected long-term rate of return on plan assets decreases. MidAmerican Energy regularly reviews its actual asset allocations and rebalances its investments to its targeted allocations when considered appropriate.
MidAmerican Energy chooses a healthcare cost trend rate that reflects the near and long-term expectations of increases in medical costs and corresponds to the expected benefit payment periods. The healthcare cost trend rate is assumed to gradually decline to 5.00% by 2028 at which point the rate of increase is assumed to remain constant.
The key assumptions used may differ materially from period to period due to changing market and economic conditions. These differences may result in a significant impact to pension and other postretirement benefits expense and funded status. If changes were to occur for the following key assumptions, the approximate effect on the Financial Statements of the total plan before allocations to affiliates would be as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Other Postretirement |
| Pension Plans | | Benefit Plans |
| +0.5% | | -0.5% | | +0.5% | | -0.5% |
| Effect on December 31, 2022 Benefit Obligations: | | | | | | | |
| Discount rate | $ | (22) | | | $ | 24 | | | $ | (9) | | | $ | 10 | |
| | | | | | | |
| Effect on 2022 Periodic Cost: | | | | | | | |
| Discount rate | 1 | | | (1) | | | — | | | — | |
| Expected rate of return on plan assets | (3) | | | 3 | | | (1) | | | 1 | |
A variety of factors affect the funded status of the plans, including asset returns, discount rates, plan changes and MidAmerican Energy's funding policy for each plan.
Income Taxes
In determining MidAmerican Funding's and MidAmerican Energy's income taxes, management is required to interpret complex income tax laws and regulations, which includes consideration of regulatory implications imposed by MidAmerican Energy's various regulatory commissions. MidAmerican Funding's and MidAmerican Energy's income tax returns are subject to continuous examinations by federal, state and local tax authorities that may give rise to different interpretations of these complex laws and regulations. Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved. MidAmerican Funding and MidAmerican Energy recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Although the ultimate resolution of their federal, state and local tax examinations is uncertain, each company believes it has made adequate provisions for its income tax positions. The aggregate amount of any additional income tax liabilities that may result from these examinations is not expected to have a material impact on its consolidated financial results. Refer to Note 9 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding income taxes.
It is probable that MidAmerican Energy will either refund to, or recover from its customers in certain state jurisdiction income tax benefits and expense related to the federal tax rate change from 35% to 21% as a result of 2017 Tax Reform, certain property-related basis differences, and other various differences. As of December 31, 2022, these amounts were recognized as a net regulatory liability of $72 million and will be included in regulated rates when the temporary differences reverse.
Revenue Recognition - Unbilled Revenue
Revenue from electric and natural gas customers is recognized as electricity or natural gas is delivered or services are provided. The determination of customer billings is based on a systematic reading of customer meters and applicable rates. At the end of each month, energy provided to customers since the date of the last meter reading is estimated, and the corresponding unbilled revenue is recorded. Unbilled revenue was $102 million as of December 31, 2022. Factors that can impact the estimate of unbilled revenue include, but are not limited to, seasonal weather patterns, total volumes supplied to the system, line losses and composition of sales among customer classes. Unbilled revenue is reversed in the following month, and billed revenue is recorded based on the subsequent meter readings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MidAmerican Energy's Balance Sheets include assets and liabilities with fair values that are subject to market risks. MidAmerican Energy's significant market risks are primarily associated with commodity prices, interest rates and the extension of credit to counterparties with which it transacts. The following discussion addresses the significant market risks associated with MidAmerican Energy's business activities. MidAmerican Energy has established guidelines for credit risk management. Refer to Note 2 of Notes to Financial Statements in Item 8 of this Form 10-K for additional information regarding MidAmerican Energy's contracts accounted for as derivatives.
Commodity Price Risk
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. 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. Commodity price risk for MidAmerican Energy's regulated retail electricity and natural gas operations is significantly mitigated by the inclusion of energy costs in energy cost rider mechanisms, which permit the current recovery of such costs from its retail customers. MidAmerican Energy uses commodity derivative contracts, which may include forwards, futures, options, swaps and other agreements to mitigate price volatility on behalf of its customers. MidAmerican Energy does not engage in a material amount of proprietary trading activities.
Interest Rate Risk
MidAmerican Energy and MidAmerican Funding are exposed to interest rate risk on their outstanding variable-rate short- and long-term debt and future debt issuances. MidAmerican Energy and MidAmerican Funding manage interest rate risk by limiting their exposure to variable interest rates primarily through the issuance of fixed-rate long-term debt and by monitoring market changes in interest rates. As a result of the fixed interest rates, the fixed-rate long-term debt does not expose MidAmerican Energy or MidAmerican Funding to the risk of loss due to changes in market interest rates. Additionally, because fixed-rate long-term debt is not carried at fair value on the Consolidated Balance Sheets, changes in fair value would impact earnings and cash flows only if MidAmerican Energy or MidAmerican Funding were to reacquire all or a portion of these instruments prior to their maturity. MidAmerican Energy or MidAmerican Funding may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate their exposure to interest rate risk. The nature and amount of their short- and long-term debt can be expected to vary from period to period as a result of future business requirements, market conditions and other factors. Refer to Notes 7, 8 and 12 of Notes to Consolidated Financial Statements in Item 1 of this Form 10-K for additional discussion of MidAmerican Energy's and MidAmerican Funding's short- and long-term debt.
As of December 31, 2022 and 2021, MidAmerican Energy had short- and long-term variable-rate obligations totaling $370 million that expose MidAmerican Energy to the risk of increased interest expense in the event of increases in short-term interest rates. The market risk related to MidAmerican Energy's variable-rate debt as of December 31, 2022, is not hedged. If variable interest rates were to increase by 10% from December 31 levels, it would not have a material effect on MidAmerican Energy's annual interest expense. The carrying value of the variable-rate obligations approximates fair value as of December 31, 2022 and 2021.
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. Additionally, MidAmerican Energy participates in the RTO markets and has indirect credit exposure related to other participants, although RTO credit policies are designed to limit exposure to credit losses from individual 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.
Substantially all of MidAmerican Energy's electric wholesale sales revenue results from participation in RTOs, including the MISO and the PJM. MidAmerican Energy's share of historical losses from defaults by other RTO market participants has not been material. Additionally, as of December 31, 2022, MidAmerican Energy's aggregate direct credit exposure from electric wholesale marketing counterparties was not material.
Item 8. Financial Statements and Supplementary Data
MidAmerican Energy Company
MidAmerican Funding, LLC and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
MidAmerican Energy Company
Des Moines, Iowa
Opinion on the Financial Statements
We have audited the accompanying balance sheets of MidAmerican Energy Company ("MidAmerican Energy") as of December 31, 2022 and 2021, the related statements of operations, changes in shareholder's equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of MidAmerican Energy as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of MidAmerican Energy's management. Our responsibility is to express an opinion on MidAmerican Energy's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to MidAmerican Energy in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. MidAmerican Energy is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of MidAmerican Energy's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 5 to the financial statements
Critical Audit Matter Description
MidAmerican Energy is subject to rate regulation by state public service commissions as well as the Federal Energy Regulatory Commission (collectively, the "Commissions"), which have jurisdiction with respect to the rates of electric and natural gas companies in the respective service territories where MidAmerican Energy operates. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economic effects of rate regulation has a pervasive effect on the financial statements.
Regulated rates are subject to regulatory rate-setting processes. Rates are determined, approved, and established based on a cost-of-service basis, which is designed to allow MidAmerican Energy an opportunity to recover its prudently incurred costs of providing services and to earn a reasonable return on its invested capital. Regulatory decisions can have an effect on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. While MidAmerican Energy has indicated it expects to recover costs from customers through regulated rates, there is a risk that changes to the Commissions' approach to setting rates or other regulatory actions could limit MidAmerican Energy's ability to recover their costs.
We identified the effects of rate regulation on the financial statements as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and (3) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:
•We evaluated MidAmerican Energy's disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the Commissions, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected MidAmerican Energy's filings with the Commissions and the filings with the Commissions by intervenors to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances.
•We inquired of management about property, plant, and equipment that may be abandoned. We inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management's assertion regarding probability of an abandonment.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
February 24, 2023
We have served as MidAmerican Energy's auditor since 1999.
MIDAMERICAN ENERGY COMPANY
BALANCE SHEETS
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 258 | | | $ | 232 | |
| Trade receivables, net | 536 | | | 526 | |
| Income tax receivable | 42 | | | 79 | |
| Inventories | 277 | | | 234 | |
| Prepayments | 91 | | | 71 | |
| Other current assets | 66 | | | 52 | |
| Total current assets | 1,270 | | | 1,194 | |
| | | |
| Property, plant and equipment, net | 21,091 | | | 20,301 | |
| Regulatory assets | 550 | | | 473 | |
| Investments and restricted investments | 902 | | | 1,026 | |
| Other assets | 165 | | | 263 | |
| | | |
| Total assets | $ | 23,978 | | | $ | 23,257 | |
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY COMPANY
BALANCE SHEETS (continued)
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| LIABILITIES AND SHAREHOLDER'S EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 536 | | | $ | 531 | |
| Accrued interest | 85 | | | 84 | |
| Accrued property, income and other taxes | 170 | | | 158 | |
| | | |
| Current portion of long-term debt | 317 | | | — | |
| Other current liabilities | 93 | | | 145 | |
| Total current liabilities | 1,201 | | | 918 | |
| | | |
| Long-term debt | 7,412 | | | 7,721 | |
| Regulatory liabilities | 1,119 | | | 1,080 | |
| Deferred income taxes | 3,433 | | | 3,389 | |
| Asset retirement obligations | 683 | | | 714 | |
| Other long-term liabilities | 485 | | | 475 | |
| Total liabilities | 14,333 | | | 14,297 | |
| | | |
| Commitments and contingencies (Note 13) | | | |
| | | |
| Shareholder's equity: | | | |
Common stock - 350 shares authorized, no par value, 71 shares issued and outstanding | — | | | — | |
| Additional paid-in capital | 561 | | | 561 | |
| Retained earnings | 9,084 | | | 8,399 | |
| | | |
| Total shareholder's equity | 9,645 | | | 8,960 | |
| | | |
| Total liabilities and shareholder's equity | $ | 23,978 | | | $ | 23,257 | |
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY COMPANY
STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating revenue: | | | | | |
| Regulated electric | $ | 2,988 | | | $ | 2,529 | | | $ | 2,139 | |
| Regulated natural gas and other | 1,037 | | | 1,018 | | | 581 | |
| Total operating revenue | 4,025 | | | 3,547 | | | 2,720 | |
| | | | | |
| Operating expenses: | | | | | |
| Cost of fuel and energy | 679 | | | 539 | | | 339 | |
| Cost of natural gas purchased for resale and other | 763 | | | 761 | | | 328 | |
| Operations and maintenance | 828 | | | 775 | | | 754 | |
| Depreciation and amortization | 1,168 | | | 914 | | | 716 | |
| Property and other taxes | 149 | | | 142 | | | 135 | |
| Total operating expenses | 3,587 | | | 3,131 | | | 2,272 | |
| | | | | |
| Operating income | 438 | | | 416 | | | 448 | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense | (313) | | | (302) | | | (304) | |
| Allowance for borrowed funds | 15 | | | 13 | | | 15 | |
| Allowance for equity funds | 51 | | | 39 | | | 45 | |
| Other, net | — | | | 53 | | | 52 | |
| Total other income (expense) | (247) | | | (197) | | | (192) | |
| | | | | |
| Income before income tax benefit | 191 | | | 219 | | | 256 | |
| Income tax benefit | (770) | | | (675) | | | (570) | |
| | | | | |
| Net income | $ | 961 | | | $ | 894 | | | $ | 826 | |
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Additional | | | | Total |
| Common | | Paid-in | | Retained | | Shareholder's |
| Stock | | Capital | | Earnings | | Equity |
| | | | | | | |
| Balance, December 31, 2019 | $ | — | | | $ | 561 | | | $ | 6,679 | | | $ | 7,240 | |
| Net income | — | | | — | | | 826 | | | 826 | |
| Other equity transactions | — | | | — | | | (1) | | | (1) | |
| Balance, December 31, 2020 | — | | | 561 | | | 7,504 | | | 8,065 | |
| Net income | — | | | — | | | 894 | | | 894 | |
| Other equity transactions | — | | | — | | | 1 | | | 1 | |
| | | | | | | |
| Balance, December 31, 2021 | — | | | 561 | | | 8,399 | | | 8,960 | |
| Net income | — | | | — | | | 961 | | | 961 | |
| Common stock dividends | — | | | — | | | (275) | | | (275) | |
| Other equity transactions | — | | | — | | | (1) | | | (1) | |
| Balance, December 31, 2022 | $ | — | | | $ | 561 | | | $ | 9,084 | | | $ | 9,645 | |
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY COMPANY
STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 961 | | | $ | 894 | | | $ | 826 | |
Adjustments to reconcile net income to net cash flows from operating activities: | | | | | |
| Depreciation and amortization | 1,168 | | | 914 | | | 716 | |
| Amortization of utility plant to other operating expenses | 35 | | | 34 | | | 34 | |
| Allowance for equity funds | (51) | | | (39) | | | (45) | |
| Deferred income taxes and amortization of investment tax credits | 33 | | | 153 | | | 208 | |
| | | | | |
| Settlements of asset retirement obligations | (85) | | | (103) | | | (124) | |
| Other, net | 51 | | | 21 | | | (18) | |
| Changes in other operating assets and liabilities: | | | | | |
| Trade receivables and other assets | (11) | | | (293) | | | 48 | |
| Inventories | (43) | | | 44 | | | (52) | |
| | | | | |
| Pension and other postretirement benefit plans, net | 8 | | | (4) | | | (19) | |
| Accrued property, income and other taxes, net | 40 | | | (71) | | | (64) | |
| Accounts payable and other liabilities | 68 | | | 67 | | | 33 | |
| Net cash flows from operating activities | 2,174 | | | 1,617 | | | 1,543 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (1,869) | | | (1,912) | | | (1,836) | |
| Purchases of marketable securities | (499) | | | (213) | | | (281) | |
| Proceeds from sales of marketable securities | 492 | | | 207 | | | 269 | |
| Proceeds from sales of other investments | — | | | — | | | 2 | |
| Other investment proceeds | 2 | | | 1 | | | 9 | |
| Other, net | 7 | | | 6 | | | 11 | |
| Net cash flows from investing activities | (1,867) | | | (1,911) | | | (1,826) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Common stock dividends | (275) | | | — | | | — | |
| Proceeds from long-term debt | — | | | 492 | | | — | |
| Repayments of long-term debt | (2) | | | (1) | | | — | |
| | | | | |
| Other, net | (1) | | | (3) | | | (2) | |
| Net cash flows from financing activities | (278) | | | 488 | | | (2) | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 29 | | | 194 | | | (285) | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of year | 239 | | | 45 | | | 330 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of year | $ | 268 | | | $ | 239 | | | $ | 45 | |
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Operations
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. MHC's nonregulated subsidiary is Midwest Capital Group, Inc. 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 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").
(2) Summary of Significant Accounting Policies
Basis of Presentation
The Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the years ended December 31, 2022, 2021 and 2020.
Use of Estimates in Preparation of Financial Statements
The preparation of the Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates include, but are not limited to, the effects of regulation; certain assumptions made in accounting for pension and other postretirement benefits; asset retirement obligations ("AROs"); income taxes; unbilled revenue; valuation of certain financial assets and liabilities, including derivative contracts; and accounting for contingencies. Actual results may differ from the estimates used in preparing the Financial Statements.
Accounting for the Effects of Certain Types of Regulation
MidAmerican Energy's utility operations are subject to the regulation of the Iowa Utilities Board ("IUB"), the Illinois Commerce Commission ("ICC"), the South Dakota Public Utilities Commission, and the Federal Energy Regulatory Commission ("FERC"). MidAmerican Energy's accounting policies and the accompanying Financial Statements conform to GAAP applicable to rate-regulated enterprises and reflect the effects of the ratemaking process.
MidAmerican Energy prepares its financial statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, MidAmerican Energy defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be written off to net income, returned to customers or re-established as accumulated other comprehensive income (loss) ("AOCI").
Fair Value Measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Different valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist substantially of funds restricted for wildlife preservation. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and 2021 as presented in the Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| Cash and cash equivalents | $ | 258 | | | $ | 232 | |
| Restricted cash and cash equivalents in other current assets | 10 | | | 7 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 268 | | | $ | 239 | |
Investments
Fixed Maturity Securities
MidAmerican Energy's management determines the appropriate classification of investments in fixed maturity securities at the acquisition date and reevaluates the classification at each balance sheet date. Investments that management does not intend to use or is restricted from using in current operations are presented as noncurrent on the Balance Sheets.
Available-for-sale investments are carried at fair value with realized gains and losses, as determined on a specific identification basis, recognized in earnings and unrealized gains and losses recognized in AOCI, net of tax. Realized and unrealized gains and losses on fixed maturity securities in a trust related to the decommissioning of the Quad Cities Generating Station Units 1 and 2 ("Quad Cities Station") are recorded as a net regulatory liability because MidAmerican Energy expects to refund to customers any decommissioning funds in excess of costs for these activities through regulated rates. Trading investments are carried at fair value with changes in fair value recognized in earnings. Held-to-maturity securities are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. The difference between the original cost and maturity value of a fixed maturity security is amortized to earnings using the interest method.
Investments gains and losses arise when investments are sold (as determined on a specific identification basis) or are other-than-temporarily impaired with respect to securities classified as available-for-sale. If the value of a fixed maturity investment declines to below amortized cost and the decline is deemed other than temporary, the amortized cost of the investment is reduced to fair value, with a corresponding charge to earnings. Any resulting impairment loss is recognized in earnings if MidAmerican Energy intends to sell, or expects to be required to sell, the debt security before its amortized cost is recovered. If MidAmerican Energy does not expect to ultimately recover the amortized cost basis even if it does not intend to sell the security, the credit loss component is recognized in earnings and any difference between fair value and the amortized cost basis, net of the credit loss, is reflected in other comprehensive income (loss) ("OCI"). For regulated investments, any impairment charge is offset by the establishment of a regulatory asset to the extent recovery in regulated rates is probable.
Equity Securities
All changes in fair value of equity securities in a trust related to the decommissioning of nuclear generation assets are recorded as a net regulatory liability since MidAmerican Energy expects to refund to customers any decommissioning funds in excess of costs for these activities through regulated rates.
Allowance for Credit Losses
Trade receivables are primarily short-term in nature with stated collection terms of less than one year from the date of origination and are stated at the outstanding principal amount, net of an estimated allowance for credit losses. The allowance for credit losses is based on MidAmerican Energy's assessment of the collectability of amounts owed to it by its customers. This assessment requires judgment regarding the ability of customers to pay or the outcome of any pending disputes. In measuring the allowance for credit losses for trade receivables, MidAmerican Energy primarily utilizes credit loss history. However, it may adjust the allowance for credit losses to reflect current conditions and reasonable and supportable forecasts that deviate from historical experience. The change in the balance of the allowance for credit losses, which is included in trade receivables, net on the Balance Sheets, is summarized as follows for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 12 | | | $ | 12 | | | $ | 5 | |
| Charged to operating costs and expenses, net | 11 | | | 10 | | | 12 | |
| Write-offs, net | (9) | | | (10) | | | (5) | |
| Ending balance | $ | 14 | | | $ | 12 | | | $ | 12 | |
Derivatives
MidAmerican Energy employs a number of different derivative contracts, including forwards, futures, options, swaps and other agreements, to manage price risk for electricity, natural gas and other commodities, and interest rate risk. 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. Derivative balances reflect offsetting permitted under master netting agreements with counterparties and cash collateral paid or received under such agreements. Cash collateral received from or paid to counterparties to secure derivative contract assets or liabilities in excess of amounts offset is included in other current assets on the Balance Sheets.
Commodity derivatives used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases or normal sales. Normal purchases or normal sales contracts are not marked to market, and settled amounts are recognized as operating revenue or cost of sales on the Statements of Operations.
For MidAmerican Energy's derivatives not designated as hedging contracts, the settled amount is generally included in regulated rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of inclusion in regulated rates are recorded as regulatory assets and liabilities.
Inventories
Inventories consist mainly of materials and supplies, totaling $175 million and $135 million as of December 31, 2022 and 2021, respectively, coal stocks, totaling $68 million and $63 million as of December 31, 2022 and 2021, respectively, and natural gas in storage, totaling $27 million and $30 million as of December 31, 2022 and 2021, respectively. The cost of materials and supplies, coal stocks and fuel oil is determined using the average cost method. The cost of stored natural gas is determined using the last-in-first-out method. With respect to stored natural gas, the replacement cost would be $22 million and $27 million higher as of December 31, 2022 and 2021, respectively.
Property, Plant and Equipment, Net
General
Additions to utility plant are recorded at cost. MidAmerican Energy capitalizes all construction-related material, direct labor and contract services, as well as indirect construction costs. Indirect construction costs include debt allowance for funds used during construction ("AFUDC") and equity AFUDC. The cost of additions and betterments are capitalized, while costs incurred that do not improve or extend the useful lives of the related assets are generally expensed. Additionally, MidAmerican Energy has regulatory arrangements in Iowa in which the carrying cost of certain utility plant has been reduced for amounts associated with electric returns on equity exceeding specified thresholds and retail energy benefits associated with certain wind-powered generation. Amounts expensed under these arrangements are included as a component of depreciation and amortization.
Depreciation and amortization for MidAmerican Energy's utility operations are computed by applying the composite or straight-line method based on either estimated useful lives or mandated recovery periods as prescribed by its various regulatory authorities. Depreciation studies are completed by MidAmerican Energy to determine the appropriate group lives, net salvage and group depreciation rates. These studies are reviewed and rates are ultimately approved by the applicable regulatory commission. Net salvage includes the estimated future residual values of the assets and any estimated removal costs recovered through approved depreciation rates. Estimated removal costs are recorded as either a cost of removal regulatory liability or an ARO liability on the Balance Sheets, depending on whether the obligation meets the requirements of an ARO. As actual removal costs are incurred, the associated liability is reduced.
Generally, when MidAmerican Energy retires or sells a component of utility plant, it charges the original cost, net of any proceeds from the disposition to accumulated depreciation. Any gain or loss on disposals of nonregulated assets is recorded through earnings.
Debt and equity AFUDC, which represent the estimated costs of debt and equity funds necessary to finance the construction of its regulated facilities, is capitalized by MidAmerican Energy as a component of utility plant, with offsetting credits to the Statements of Operations. AFUDC is computed based on guidelines set forth by the FERC. After construction is completed, MidAmerican Energy is permitted to earn a return on these costs as a component of the related assets, as well as recover these costs through depreciation expense over the useful lives of the related assets.
Asset Retirement Obligations
MidAmerican Energy recognizes AROs when it has a legal obligation to perform decommissioning or removal activities upon retirement of an asset. MidAmerican Energy's AROs are primarily related to decommissioning of the Quad Cities Station and obligations associated with its other generating facilities. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the ARO liability is adjusted for any revisions to the original estimate of undiscounted cash flows (with corresponding adjustments to utility plant) and for accretion of the ARO liability due to the passage of time. The difference between the ARO liability, the corresponding ARO asset included in utility plant, net and amounts recovered in rates to satisfy such liabilities is recorded as a regulatory asset or liability.
Impairment
MidAmerican Energy evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. Additionally, when evaluating the carrying value of regulated assets, MidAmerican Energy considers the impact of regulation on recoverability. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Statements of Operations.
Revenue Recognition
MidAmerican Energy uses a single five-step model to identify and recognize revenue from contracts with customers ("Customer Revenue") upon transfer of control of promised goods or services in an amount that reflects the consideration to which MidAmerican Energy expects to be entitled in exchange for those goods and services. MidAmerican Energy records sales, franchise and excise taxes collected directly from customers and remitted directly to the taxing authorities on a net basis on the Statements of Operations.
A majority of MidAmerican Energy's energy revenue is derived from tariff-based sales arrangements approved by various regulatory commissions. These tariff-based revenues are mainly comprised of energy, transmission, distribution and natural gas and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided.
Revenue from electric and natural gas customers is recognized as electricity or natural gas is delivered or services are provided. Revenue recognized includes billed and unbilled amounts. As of December 31, 2022 and 2021, unbilled revenue was $102 million and $85 million, respectively, and is included in trade receivables, net on the Balance Sheets.
The determination of customer billings is based on a systematic reading of customer meters and applicable rates. At the end of each month, amounts of energy provided to customers since the date of the last meter reading are estimated, and the corresponding unbilled revenue is recorded. Factors that can impact the estimate of unbilled revenue include, but are not limited to, seasonal weather patterns, total volumes supplied to the system, line losses and composition of customer classes. Unbilled revenue is reversed in the following month and billed revenue is recorded based on the subsequent meter readings.
All of MidAmerican Energy's regulated retail electric and natural gas sales are subject to energy adjustment clauses. MidAmerican Energy also has costs that are recovered, at least in part, through bill riders, including demand-side management and certain transmission costs. The clauses and riders allow MidAmerican Energy to adjust the amounts charged for electric and natural gas service as the related costs change. The costs recovered in revenue through use of the adjustment clauses and bill riders are charged to expense in the same year the related revenue is recognized. At any given time, these costs may be over or under collected from customers. The total under collection included in trade receivables, net at December 31, 2022 and 2021, was $156 million and $230 million, respectively.
Unamortized Debt Premiums, Discounts and Issuance Costs
Premiums, discounts and issuance costs incurred for the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Income Taxes
Berkshire Hathaway includes MidAmerican Funding and MidAmerican Energy in its consolidated U.S. federal and Iowa state income tax returns. MidAmerican Funding's and MidAmerican Energy's provisions for income taxes have been computed on a stand-alone basis.
Deferred income tax assets and liabilities are based on differences between the financial statement and income tax basis of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities associated with certain property-related basis differences and other various differences that MidAmerican Energy deems probable to be passed on to its customers in most state jurisdictions are charged or credited directly to a regulatory asset or liability and will be included in regulated rates when the temporary differences reverse. Other changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense or a regulatory asset or liability in the period of enactment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
Investment tax credits are deferred and amortized over the estimated useful lives of the related properties or as prescribed by various regulatory commissions.
MidAmerican Funding and MidAmerican Energy recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. MidAmerican Funding's and MidAmerican Energy's unrecognized tax benefits are primarily included in taxes accrued and other long-term liabilities on their respective Consolidated Balance Sheets. Estimated interest and penalties, if any, related to uncertain tax positions are included as a component of income tax expense on the Consolidated Statements of Operations.
(3) Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | 2022 | | 2021 |
| Utility plant: | | | | | |
| Generation | 20-62 years | | $ | 18,582 | | | $ | 17,397 | |
| Transmission | 55-80 years | | 2,662 | | | 2,474 | |
| Electric distribution | 15-80 years | | 4,931 | | | 4,661 | |
| Natural gas distribution | 30-75 years | | 2,144 | | | 2,039 | |
| Utility plant in-service | | | 28,319 | | | 26,571 | |
| Accumulated depreciation and amortization | | | (8,024) | | | (7,376) | |
| Utility plant in-service, net | | | 20,295 | | | 19,195 | |
| | | | | |
| | | | | |
| | | | | |
| Nonregulated property, net of accumulated depreciation and amortization | 20-50 years | | 6 | | | 6 | |
| | | 20,301 | | | 19,201 | |
| Construction work-in-progress | | | 790 | | | 1,100 | |
| Property, plant and equipment, net | | | $ | 21,091 | | | $ | 20,301 | |
Nonregulated property, net consists primarily of land not recoverable for regulated utility purposes.
The average depreciation and amortization rates applied to depreciable utility plant for the years ended December 31 were as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Electric | 3.2 | % | | 3.3 | % | | 3.2 | % |
| Natural gas | 2.9 | % | | 2.8 | % | | 2.8 | % |
Under a revenue sharing arrangement in Iowa, MidAmerican Energy accrues throughout the year a regulatory liability based on the extent to which its anticipated annual equity return exceeds specified thresholds, with an equal amount recorded in depreciation and amortization expense. For the years ended December 31, 2022, 2021 and 2020, $296 million, $115 million, and $— million, respectively, is reflected in depreciation and amortization expense on the Statements of Operations.
(4) Jointly Owned Utility Facilities
Under joint facility ownership agreements with other utilities, MidAmerican Energy, as a tenant in common, has undivided interests in jointly owned generation and transmission facilities. MidAmerican Energy accounts for its proportionate share of each facility, and each joint owner has provided financing for its share of each facility. Operating costs of each facility are assigned to joint owners based on their percentage of ownership or energy production, depending on the nature of the cost. Operating expenses on the Statements of Operations include MidAmerican Energy's share of the expenses of these facilities.
The amounts shown in the table below represent MidAmerican Energy's share in each jointly owned facility included in property, plant and equipment, net as of December 31, 2022 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated | | Construction |
| Company | | Plant in | | Depreciation and | | Work-in- |
| Share | | Service | | Amortization | | Progress |
| | | | | | | |
| Louisa Unit No. 1 | 88 | % | | $ | 976 | | | $ | 511 | | | $ | 4 | |
Quad Cities Unit Nos. 1 & 2(1) | 25 | | | 730 | | | 482 | | | 11 | |
| Walter Scott, Jr. Unit No. 3 | 79 | | | 964 | | | 624 | | | 13 | |
Walter Scott, Jr. Unit No. 4(2) | 60 | | | 171 | | | 127 | | | 7 | |
| George Neal Unit No. 4 | 41 | | | 321 | | | 184 | | | 6 | |
Ottumwa Unit No. 1(2) | 52 | | | 569 | | | 280 | | | 19 | |
| George Neal Unit No. 3 | 72 | | | 535 | | | 312 | | | 20 | |
Transmission facilities | Various | | 267 | | | 101 | | | 2 | |
| Total | | | $ | 4,533 | | | $ | 2,621 | | | $ | 82 | |
(1)Includes amounts related to nuclear fuel.
(2)Plant in-service and accumulated depreciation and amortization amounts are net of credits applied under Iowa regulatory arrangements totaling $733 million and $150 million, respectively.
(5) Regulatory Matters
Regulatory Assets
Regulatory assets represent costs that are expected to be recovered in future regulated rates. MidAmerican Energy's regulatory assets reflected on the Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
| | | | | |
Asset retirement obligations(1) | 9 years | | $ | 469 | | | $ | 393 | |
Employee benefit plans(2) | 15 years | | 47 | | | 42 | |
| | | | | |
| Other | Various | | 34 | | | 38 | |
| Total | | | $ | 550 | | | $ | 473 | |
(1)Amount predominantly relates to AROs for fossil-fueled and wind-powered generating facilities. Refer to Note 11 for a discussion of AROs.
(2)Represents amounts not yet recognized as a component of net periodic benefit cost that are expected to be included in regulated rates when recognized.
MidAmerican Energy had regulatory assets not earning a return on investment of $548 million and $470 million as of December 31, 2022 and 2021, respectively.
Regulatory Liabilities
Regulatory liabilities represent amounts expected to be returned to customers in future periods. MidAmerican Energy's regulatory liabilities reflected on the Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
Cost of removal(1) | 29 years | | $ | 392 | | | $ | 394 | |
Iowa electric revenue sharing(2) | 1 year | | 312 | | | 115 | |
Asset retirement obligations(3) | 31 years | | 247 | | | 341 | |
Deferred income taxes(4) | Various | | 72 | | | 83 | |
Pre-funded AFUDC on transmission MVPs(5) | 57 years | | 34 | | | 34 | |
| Unrealized gain on regulated derivative contracts | 1 year | | 31 | | | 26 | |
Employee benefit plans(6) | N/A | | — | | | 55 | |
| Other | Various | | 31 | | | 32 | |
| Total | | | $ | 1,119 | | | $ | 1,080 | |
(1)Amounts represent estimated costs, as accrued through depreciation rates and exclusive of ARO liabilities, of removing utility plant in accordance with accepted regulatory practices. Amounts are deducted from rate base or otherwise accrue a carrying cost.
(2)Represents current-year accruals under a regulatory arrangement in Iowa in which equity returns exceeding specified thresholds reduce utility plant upon final determination.
(3)Amount represents the excess of nuclear decommission trust assets over the related ARO. Refer to Note 11 for a discussion of AROs.
(4)Amounts primarily represent income tax liabilities primarily related to the federal tax rate change from 35% to 21% that are probable to be passed on to customers, offset by income tax benefits related to state accelerated tax depreciation and certain property-related basis differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
(5)Represents AFUDC accrued on transmission MVPs that is deducted from rate base as a result of the inclusion of related construction work-in-progress in rate base.
(6)Represents amounts not yet recognized as a component of net periodic benefit cost that are to be returned to customers in future periods when recognized.
Natural Gas Purchased for Resale
In February 2021, severe cold weather over the central U.S. caused disruptions in natural gas supply from the southern part of the U.S. These disruptions, combined with increased demand, resulted in historically high prices for natural gas purchased for resale to MidAmerican Energy's retail customers and caused an approximate $245 million increase in natural gas costs above those normally expected. These increased costs are reflected in cost of natural gas purchased for resale and other on the Statement of Operations and their recovery through the Purchased Gas Adjustment Clause is reflected in regulated natural gas and other revenue.
To mitigate the impact to MidAmerican Energy's customers, the IUB ordered the recovery of these higher costs to be applied to customer bills over the period April 2021 through April 2022 based on a customer's monthly natural gas usage. The unbilled portion of these costs as of December 31, 2021, is reflected in trade receivables, net on the Balance Sheet.
(6) Investments and Restricted Investments
Investments and restricted investments consists of the following amounts as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Nuclear decommissioning trust | $ | 664 | | | $ | 768 | |
| Rabbi trusts | 215 | | | 233 | |
| Other | 23 | | | 25 | |
| Total | $ | 902 | | | $ | 1,026 | |
MidAmerican Energy has established a trust for the investment of funds for decommissioning the Quad Cities Station. The debt and equity securities in the trust are reported at fair value. Funds are invested in the trust in accordance with applicable federal and state investment guidelines and are restricted for use as reimbursement for costs of decommissioning the Quad Cities Station, which is currently licensed for operation until December 2032. As of December 31, 2022 and 2021, the fair value of the trust's funds was invested as follows: 54% and 56%, respectively, in domestic common equity securities, 32% and 30%, respectively, in U.S. government securities, 11% and 12%, respectively, in domestic corporate debt securities and 3% and 2%, respectively, in other securities.
Rabbi trusts primarily hold corporate-owned life insurance on certain current and former key executives and directors. The Rabbi trusts were established to hold investments used to fund the obligations of various nonqualified executive and director compensation plans and to pay the costs of the trusts. The amount represents the cash surrender value of all of the policies included in the Rabbi trusts, net of amounts borrowed against the cash surrender value. Changes in the cash surrender value of the policies are reflected in other income (expense) - other, net on the Statements of Operation.
(7) Short-term Debt and Credit Facilities
Interim financing of working capital needs and the construction program is obtained from unaffiliated parties through the sale of commercial paper or short-term borrowing from banks. The following table summarizes MidAmerican Energy's availability under its unsecured revolving credit facilities as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Credit facilities | $ | 1,505 | | | $ | 1,505 | |
| Less: | | | |
| | | |
| Variable-rate tax-exempt bond support | (370) | | | (370) | |
| Net credit facilities | $ | 1,135 | | | $ | 1,135 | |
As of December 31, 2022, MidAmerican Energy has a $1.5 billion unsecured credit facility expiring in June 2025 with an unlimited number of maturity extension options, subject to lender consent. 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 the Secured Overnight Financing Rate ("SOFR") 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, which expires June 2023 and has a variable interest rate based on SOFR, plus a spread.
MidAmerican Energy had no commercial paper borrowings outstanding of as of December 31, 2022 and 2021. The $1.5 billion credit facility requires that MidAmerican Energy's ratio of consolidated debt, including current maturities, to total capitalization not exceed 0.65 to 1.0 as of the last day of any quarter.
As of December 31, 2022, MidAmerican Energy was in compliance with the covenants of its credit facilities. MidAmerican Energy has authority from the FERC to issue commercial paper and bank notes aggregating $1.5 billion through April 2, 2024.
As of December 31, 2022 and 2021, MidAmerican Energy had $34 million and $42 million, respectively, of fully available letters of credit issued under committed arrangements outside of its credit facility in support of certain transactions required by third parties that generally have provisions that automatically extend the annual expiration dates for an additional year unless the issuing bank elects not to renew a letter of credit prior to the expiration date.
(8) Long-term Debt
MidAmerican Energy's long-term debt consists of the following, including amounts maturing within one year and unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| | | | | |
| First mortgage bonds: | | | | | |
3.70%, due 2023 | $ | 250 | | | $ | 250 | | | $ | 250 | |
3.50%, due 2024 | 500 | | | 500 | | | 501 | |
3.10%, due 2027 | 375 | | | 374 | | | 373 | |
3.65%, due 2029 | 850 | | | 859 | | | 860 | |
4.80%, due 2043 | 350 | | | 347 | | | 346 | |
4.40%, due 2044 | 400 | | | 395 | | | 395 | |
4.25%, due 2046 | 450 | | | 446 | | | 446 | |
3.95%, due 2047 | 475 | | | 471 | | | 470 | |
3.65%, due 2048 | 700 | | | 689 | | | 689 | |
4.25%, due 2049 | 900 | | | 875 | | | 874 | |
3.15%, due 2050 | 600 | | | 592 | | | 592 | |
2.70%, due 2052 | 500 | | | 492 | | | 492 | |
| Notes: | | | | | |
6.75% Series, due 2031 | 400 | | | 397 | | | 397 | |
5.75% Series, due 2035 | 300 | | | 298 | | | 298 | |
5.80% Series, due 2036 | 350 | | | 348 | | | 348 | |
Transmission upgrade obligations, 3.20% to 7.81%, due 2036 to 2042 | 48 | | | 27 | | | 22 | |
Variable-rate tax-exempt bond obligation series: (weighted average interest rate- 2022-3.83%, 2021-0.13%): | | | | | |
Due 2023, issued in 1993 | 7 | | | 7 | | | 7 | |
Due 2023, issued in 2008 | 57 | | | 57 | | | 57 | |
| Due 2024 | 35 | | | 35 | | | 35 | |
| Due 2025 | 13 | | | 13 | | | 13 | |
| Due 2036 | 33 | | | 33 | | | 33 | |
| Due 2038 | 45 | | | 45 | | | 45 | |
| Due 2046 | 30 | | | 30 | | | 29 | |
| Due 2047 | 150 | | | 149 | | | 149 | |
| Total long-term debt | $ | 7,818 | | | $ | 7,729 | | | $ | 7,721 | |
| | | | | |
| Reflected as: | | | | | |
| | | 2022 | | 2021 |
| Current portion of long-term debt | | | $ | 317 | | | $ | — | |
| Long-term debt | | | 7,412 | | | 7,721 | |
| Total long-term debt | | | $ | 7,729 | | | $ | 7,721 | |
The annual repayments of MidAmerican Energy's long-term debt for the years beginning January 1, 2023, and thereafter, excluding unamortized premiums, discounts and debt issuance costs, are as follows (in millions):
| | | | | | | | |
| 2023 | | $ | 317 | |
| 2024 | | 538 | |
| 2025 | | 15 | |
| 2026 | | 3 | |
| 2027 | | 378 | |
| 2028 and thereafter | | 6,567 | |
Pursuant to MidAmerican Energy's mortgage dated September 9, 2013, MidAmerican Energy's first mortgage bonds, currently and from time to time outstanding, are secured by a first mortgage lien on substantially all of its electric generating, transmission and distribution property within the state of Iowa, subject to certain exceptions and permitted encumbrances. Approximately $24 billion of MidAmerican Energy's eligible property, based on original cost, was subject to the lien of the mortgage as of December 31, 2022. Additionally, MidAmerican Energy's senior notes outstanding are equally and ratably secured with the first mortgage bonds as required by the indentures under which the senior notes were issued.
MidAmerican Energy's variable-rate tax-exempt bond obligations bear interest at rates that are periodically established through remarketing of the bonds in the short-term tax-exempt market. MidAmerican Energy, at its option, may change the mode of interest calculation for these bonds by selecting from among several floating or fixed rate alternatives. The interest rates shown in the table above are the weighted average interest rates as of December 31, 2022 and 2021. MidAmerican Energy maintains revolving credit facility agreements to provide liquidity for holders of these issues. Additionally, MidAmerican Energy's obligations associated with the $30 million and $150 million variable rate, tax-exempt bond obligations due 2046 and 2047, respectively, are secured by an equal amount of first mortgage bonds pursuant to MidAmerican Energy's mortgage dated September 9, 2013, as supplemented and amended.
As of December 31, 2022, MidAmerican Energy was in compliance with all of its applicable long-term debt covenants.
In March 1999, 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 from 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. As of December 31, 2022, MidAmerican Energy's common equity ratio was 55% computed on a basis consistent with its commitment. As a result of its regulatory commitment to maintain its common equity level above certain thresholds, MidAmerican Energy could dividend $4.2 billion as of December 31, 2022, without falling below 42%.
(9) Income Taxes
MidAmerican Energy's income tax benefit consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | (769) | | | $ | (736) | | | $ | (684) | |
| State | (34) | | | (92) | | | (94) | |
| (803) | | | (828) | | | (778) | |
| Deferred: | | | | | |
| Federal | 77 | | | 189 | | | 201 | |
| State | (43) | | | (35) | | | 8 | |
| 34 | | | 154 | | | 209 | |
| | | | | |
| Investment tax credits | (1) | | | (1) | | | (1) | |
| Total | $ | (770) | | | $ | (675) | | | $ | (570) | |
A reconciliation of the federal statutory income tax rate to MidAmerican Energy's effective income tax rate applicable to income before income tax benefit is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| Income tax credits | (372) | | | (262) | | | (199) | |
| State income tax, net of federal income tax benefit | (32) | | | (46) | | | (27) | |
| Effects of ratemaking | (23) | | | (20) | | | (17) | |
| Other, net | 3 | | | (1) | | | (1) | |
| Effective income tax rate | (403) | % | | (308) | % | | (223) | % |
Income tax credits relate primarily to production tax credits ("PTC") earned by MidAmerican Energy's wind- and solar-powered generating facilities. Federal renewable electricity PTCs are earned as energy from qualifying wind- and solar-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- and solar-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service. PTCs recognized for the years ended December 31, 2022, 2021 and 2020 totaled $710 million, $574 million and $510 million, respectively.
MidAmerican Energy's net deferred income tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Regulatory liabilities | $ | 194 | | | $ | 240 | |
| | | |
| Asset retirement obligations | 191 | | | 220 | |
| Revenue sharing | 87 | | | 33 | |
| State carryforwards | 61 | | | 55 | |
| Employee benefits | 37 | | | 26 | |
| Other | 24 | | | (3) | |
| Total deferred income tax assets | 594 | | | 571 | |
| Valuation allowances | (2) | | | (1) | |
| Total deferred income tax assets, net | 592 | | | 570 | |
| | | |
| Deferred income tax liabilities: | | | |
| Depreciable property | (3,895) | | | (3,843) | |
| Regulatory assets | (128) | | | (112) | |
| Other | (2) | | | (4) | |
| Total deferred income tax liabilities | (4,025) | | | (3,959) | |
| | | |
| Net deferred income tax liability | $ | (3,433) | | | $ | (3,389) | |
As of December 31, 2022, MidAmerican Energy's state tax carryforwards, principally related to $921 million of net operating losses, expire at various intervals between 2023 and 2041.
The U.S. Internal Revenue Service has closed or effectively settled its examination of MidAmerican Energy's income tax returns through December 31, 2013. The statute of limitations for MidAmerican Energy's income tax returns have expired for certain states through December 31, 2011, and for other states through December 31, 2018, except for the impact of any federal audit adjustments. The closure of examinations, or the expiration of the statute of limitations, for state filings may not preclude the state from adjusting the state net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
A reconciliation of the beginning and ending balances of MidAmerican Energy's net unrecognized tax benefits is as follows for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 13 | | | $ | 8 | |
| Additions based on tax positions related to the current year | 15 | | | 16 | |
| | | |
| Reductions based on tax positions related to the current year | (12) | | | (11) | |
| | | |
| | | |
| | | |
| | | |
| Ending balance | $ | 16 | | | $ | 13 | |
As of December 31, 2022, MidAmerican Energy had unrecognized tax benefits totaling $39 million that, if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits, other than applicable interest and penalties, would not affect MidAmerican Energy's effective income tax rate.
(10) Employee Benefit Plans
Defined Benefit Plan
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. Benefit obligations under the plan are based on a cash balance arrangement for salaried employees and most union employees and final average pay formulas for other union employees. MidAmerican Energy also maintains noncontributory, nonqualified defined benefit supplemental executive retirement plans ("SERP") for certain active and retired participants. For the years ended December 31, 2022 and 2021, the defined benefit pension plan recorded a settlement loss of $4 million and a settlement gain of $5 million, respectively, for previously unrecognized losses and gains as a result of excess lump sum distributions over the defined threshold. In 2022, the defined benefit pension plan recorded a curtailment gain of $10 million as a result of certain plan amendments.
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. Under the plans, a majority of all employees of the participating companies may become eligible for these benefits if they reach retirement age. New employees are not eligible for benefits under the plans. MidAmerican Energy has been allowed to recover accrued pension and other postretirement benefit costs in its electric and gas service rates.
Net Periodic Benefit Cost
For purposes of calculating the expected return on pension plan assets, a market-related value is used. The market-related value of plan assets is calculated by spreading the difference between expected and actual investment returns on equity investments over a five-year period beginning after the first year in which they occur.
MidAmerican Energy bills to and is reimbursed currently for affiliates' share of the net periodic benefit costs from all plans in which such affiliates participate. In 2022, 2021 and 2020, MidAmerican Energy's share of the pension net periodic benefit (credit) cost was $(2) million, $(20) million and $(13) million, respectively. MidAmerican Energy's share of the other postretirement net periodic benefit (credit) cost in 2022, 2021 and 2020 totaled $(2) million, $1 million and $(5) million, respectively.
Net periodic benefit cost (credit) for the plans of MidAmerican Energy and the aforementioned affiliates included the following components for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | | |
| Service cost | $ | 15 | | | $ | 20 | | | $ | 8 | | | $ | 8 | | | $ | 9 | | | $ | 4 | |
| Interest cost | 23 | | | 22 | | | 25 | | | 8 | | | 8 | | | 7 | |
| Expected return on plan assets | (27) | | | (37) | | | (40) | | | (14) | | | (10) | | | (14) | |
| Curtailment | (10) | | | — | | | — | | | — | | | — | | | — | |
| Settlement | 4 | | | (5) | | | — | | | — | | | — | | | — | |
| Net amortization | 1 | | | 1 | | | 1 | | | (2) | | | (4) | | | (5) | |
| Net periodic benefit cost (credit) | $ | 6 | | | $ | 1 | | | $ | (6) | | | $ | — | | | $ | 3 | | | $ | (8) | |
Funded Status
The following table is a reconciliation of the fair value of plan assets for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Plan assets at fair value, beginning of year | $ | 704 | | | $ | 718 | | | $ | 308 | | | $ | 278 | |
| Employer contributions | 7 | | | 8 | | | 3 | | | 10 | |
| Participant contributions | — | | | — | | | 1 | | | 1 | |
| Actual return on plan assets | (130) | | | 58 | | | (58) | | | 34 | |
| Settlement | (57) | | | (46) | | | — | | | — | |
| Benefits paid | (34) | | | (34) | | | (14) | | | (15) | |
| Plan assets at fair value, end of year | $ | 490 | | | $ | 704 | | | $ | 240 | | | $ | 308 | |
The following table is a reconciliation of the benefit obligations for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Benefit obligation, beginning of year | $ | 781 | | | $ | 845 | | | $ | 285 | | | $ | 304 | |
| Service cost | 15 | | | 20 | | | 8 | | | 9 | |
| Interest cost | 23 | | | 22 | | | 8 | | | 8 | |
| Participant contributions | — | | | — | | | 1 | | | 1 | |
| Actuarial (gain) loss | (129) | | | (25) | | | (64) | | | (18) | |
| Amendment | (3) | | | — | | | 19 | | | 1 | |
| Curtailment | (10) | | | — | | | — | | | — | |
| Settlement | (57) | | | (46) | | | — | | | — | |
| Acquisition | — | | | (1) | | | — | | | (5) | |
| Benefits paid | (34) | | | (34) | | | (14) | | | (15) | |
| Benefit obligation, end of year | $ | 586 | | | $ | 781 | | | $ | 243 | | | $ | 285 | |
| Accumulated benefit obligation, end of year | $ | 551 | | | $ | 721 | | | | | |
The funded status of the plans and the amounts recognized on the Balance Sheets as of December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Plan assets at fair value, end of year | $ | 490 | | | $ | 704 | | | $ | 240 | | | $ | 308 | |
| Less - Benefit obligation, end of year | 586 | | | 781 | | | 243 | | | 285 | |
| Funded status | $ | (96) | | | $ | (77) | | | $ | (3) | | | $ | 23 | |
| | | | | | | |
| Amounts recognized on the Balance Sheets: | | | | | | | |
| Other assets | $ | — | | | $ | 34 | | | $ | — | | | $ | 23 | |
| Other current liabilities | (8) | | | (7) | | | — | | | — | |
| Other long-term liabilities | (88) | | | (104) | | | (3) | | | — | |
| Amounts recognized | $ | (96) | | | $ | (77) | | | $ | (3) | | | $ | 23 | |
The SERP has no plan assets; however, MidAmerican Energy and BHE have Rabbi trusts that hold corporate-owned life insurance and other investments to provide funding for the future cash requirements of the SERP. The cash surrender value of all of the policies included in MidAmerican Energy's Rabbi trusts, net of amounts borrowed against the cash surrender value, plus the fair market value of other Rabbi trust investments, was $134 million and $143 million as of December 31, 2022 and 2021, respectively. These assets are not included in the plan assets in the above table, but are reflected in investments and restricted investments on the Balance Sheets. The accumulated benefit obligation and projected benefit obligation for the SERP was $85 million and $85 million for 2022 and $111 million and $111 million for 2021, respectively.
Unrecognized Amounts
The portion of the funded status of the plans not yet recognized in net periodic benefit cost as of December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| Net loss (gain) | $ | (4) | | | $ | (25) | | | $ | 11 | | | $ | 2 | |
| Prior service cost (credit) | (3) | | | — | | | 19 | | | (3) | |
| | | | | | | |
| Total | $ | (7) | | | $ | (25) | | | $ | 30 | | | $ | (1) | |
MidAmerican Energy sponsors pension and other postretirement benefit plans on behalf of certain of its affiliates in addition to itself, and therefore, the portion of the funded status of the respective plans that has not yet been recognized in net periodic benefit cost is attributable to multiple entities. Additionally, substantially all of MidAmerican Energy's portion of such amounts is either refundable to or recoverable from its customers and is reflected as regulatory liabilities and regulatory assets.
A reconciliation of the amounts not yet recognized as components of net periodic benefit cost for the years ended December 31, 2022 and 2021 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Regulatory Asset | | Regulatory Liability | | Receivables (Payables) with Affiliates | | Total |
| Pension | | | | | | | |
| Balance, December 31, 2020 | $ | 21 | | | $ | (20) | | | $ | 17 | | | $ | 18 | |
| Net loss (gain) arising during the year | 2 | | | (40) | | | (9) | | | (47) | |
| | | | | | | |
| Settlement | — | | | 5 | | | — | | | 5 | |
| Net amortization | (1) | | | — | | | — | | | (1) | |
| Total | 1 | | | (35) | | | (9) | | | (43) | |
| Balance, December 31, 2021 | 22 | | | (55) | | | 8 | | | (25) | |
| Net loss (gain) arising during the year | (7) | | | 58 | | | (25) | | | 26 | |
| Net prior service cost (credit) arising during the year | — | | | — | | | (3) | | | (3) | |
| Settlement | — | | | (4) | | | — | | | (4) | |
| Net amortization | (1) | | | — | | | — | | | (1) | |
| Total | (8) | | | 54 | | | (28) | | | 18 | |
| Balance, December 31, 2022 | $ | 14 | | | $ | (1) | | | $ | (20) | | | $ | (7) | |
| | | | | | | | | | | | | | | | | | | |
| Regulatory
Asset | | | | Receivables (Payables) with Affiliates | | Total |
| Other Postretirement | | | | | | | |
| Balance, December 31, 2020 | $ | 45 | | | | | $ | (9) | | | $ | 36 | |
| Net loss (gain) arising during the year | (29) | | | | | (13) | | | (42) | |
| Net prior service cost (credit) arising during the year | 1 | | | | | — | | | 1 | |
| Net amortization | 3 | | | | | 1 | | | 4 | |
| Total | (25) | | | | | (12) | | | (37) | |
| Balance, December 31, 2021 | 20 | | | | | (21) | | | (1) | |
| Net loss (gain) arising during the year | 10 | | | | | (1) | | | 9 | |
| Net prior service cost (credit) arising during the year | — | | | | | 19 | | | 19 | |
| Net amortization | 3 | | | | | — | | | 3 | |
| Total | 13 | | | | | 18 | | | 31 | |
| Balance, December 31, 2022 | $ | 33 | | | | | $ | (3) | | | $ | 30 | |
Plan Assumptions
Assumptions used to determine benefit obligations and net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Postretirement |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Benefit obligations as of December 31: | | | | | | | | | | | |
| Discount rate | 5.70 | % | | 3.05 | % | | 2.75 | % | | 5.60 | % | | 2.95 | % | | 2.65 | % |
| Rate of compensation increase | 3.00 | % | | 2.75 | % | | 2.75 | % | | N/A | | N/A | | N/A |
| Interest crediting rates for cash balance plan | | | | | | | | | | | |
| 2020 | N/A | | N/A | | 2.27 | % | | N/A | | N/A | | N/A |
| 2021 | N/A | | 1.19 | % | | 0.99 | % | | N/A | | N/A | | N/A |
| 2022 | 3.74 | % | | 1.19 | % | | 0.99 | % | | N/A | | N/A | | N/A |
| 2023 | 3.74 | % | | 1.19 | % | | 0.99 | % | | N/A | | N/A | | N/A |
| 2024 | 3.74 | % | | 1.19 | % | | 0.99 | % | | N/A | | N/A | | N/A |
| 2025 and beyond | 3.74 | % | | 1.19 | % | | 0.99 | % | | N/A | | N/A | | N/A |
| | | | | | | | | | | |
| Net periodic benefit cost for the years ended December 31: | | | | | | | | | | | |
| Discount rate | 3.05 | % | | 2.75 | % | | 3.40 | % | | 2.95 | % | | 2.65 | % | | 3.20 | % |
Expected return on plan assets(1) | 4.30 | % | | 5.60 | % | | 6.25 | % | | 5.30 | % | | 4.00 | % | | 6.00 | % |
| Rate of compensation increase | 2.75 | % | | 2.75 | % | | 2.75 | % | | N/A | | N/A | | N/A |
| Interest crediting rates for cash balance plan | 3.74 | % | | 1.19 | % | | 2.27 | % | | N/A | | N/A | | N/A |
(1)Amounts reflected are pretax values. Assumed after-tax returns for a taxable, non-union other postretirement plan were 4.21% for 2022, 2.39% for 2021 and 4.62% for 2020.
In establishing its assumption as to the expected return on plan assets, MidAmerican Energy utilizes the asset allocation and return assumptions for each asset class based on historical performance and forward-looking views of the financial markets.
| | | | | | | | | | | |
| 2022 | | 2021 |
| Assumed healthcare cost trend rates as of December 31: | | | |
| Healthcare cost trend rate assumed for next year | 6.50 | % | | 5.90 | % |
| Rate that the cost trend rate gradually declines to | 5.00 | % | | 5.00 | % |
| Year that the rate reaches the rate it is assumed to remain at | 2028 | | 2025 |
Contributions and Benefit Payments
Employer contributions to the pension and other postretirement benefit plans are expected to be $7 million and $2 million, respectively, during 2022. Funding to MidAmerican Energy's qualified pension benefit plan trust is based upon the actuarially determined costs of the plan and the requirements of the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006, as amended. MidAmerican Energy considers contributing additional amounts from time to time in order to achieve certain funding levels specified under the Pension Protection Act of 2006, as amended. MidAmerican Energy evaluates a variety of factors, including funded status, income tax laws and regulatory requirements, in determining contributions to its other postretirement benefit plans.
Net periodic benefit costs assigned to MidAmerican Energy affiliates are reimbursed currently in accordance with its intercompany administrative services agreement. The expected benefit payments to participants in MidAmerican Energy's pension and other postretirement benefit plans for 2023 through 2027 and for the five years thereafter are summarized below (in millions):
| | | | | | | | | | | |
| Projected Benefit Payments |
| Pension | | Other Postretirement |
| 2023 | $ | 59 | | | $ | 21 | |
| 2024 | 54 | | | 22 | |
| 2025 | 53 | | | 23 | |
| 2026 | 53 | | | 23 | |
| 2027 | 51 | | | 23 | |
| 2028-2032 | 231 | | | 105 | |
Plan Assets
Investment Policy and Asset Allocations
MidAmerican Energy's investment policy for its pension and other postretirement benefit plans is to balance risk and return through a diversified portfolio of debt securities, equity securities and other alternative investments. Maturities for debt securities are managed to targets consistent with prudent risk tolerances. The plans retain outside investment consultants to advise on plan investments within the parameters outlined by the Berkshire Hathaway Energy Company Investment Committee. The investment portfolio is managed in line with the investment policy with sufficient liquidity to meet near-term benefit payments.
The target allocations (percentage of plan assets) for MidAmerican Energy's pension and other postretirement benefit plan assets are as follows as of December 31, 2022:
| | | | | | | | | | | |
| Pension | | Other Postretirement |
| % | | % |
Debt securities(1) | 40-70 | | 20-40 |
Equity securities(1) | 35-60 | | 60-80 |
| | | |
| Other | 0-15 | | 0-5 |
(1)For purposes of target allocation percentages and consistent with the plans' investment policy, investment funds are allocated based on the underlying investments in debt and equity securities.
Fair Value Measurements
The following table presents the fair value of plan assets, by major category, for MidAmerican Energy's defined benefit pension plan (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Input Levels for Fair Value Measurements(1) | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| As of December 31, 2022: | | | | | | | |
| Cash equivalents | $ | — | | | $ | 15 | | | $ | — | | | $ | 15 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 22 | | | — | | | — | | | 22 | |
| | | | | | | |
| Corporate obligations | — | | | 135 | | | — | | | 135 | |
| Municipal obligations | — | | | 10 | | | — | | | 10 | |
| Agency, asset and mortgage-backed obligations | — | | | 13 | | | — | | | 13 | |
| Equity securities: | | | | | | | |
| U.S. companies | 71 | | | — | | | — | | | 71 | |
| International companies | 1 | | | — | | | — | | | 1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total assets in the fair value hierarchy | $ | 94 | | | $ | 173 | | | $ | — | | | 267 | |
Investment funds(2) measured at net asset value | | | | | | | 223 | |
| | | | | | | |
| | | | | | | |
| Total assets measured at fair value | | | | | | | $ | 490 | |
| | | | | | | |
| As of December 31, 2021: | | | | | | | |
| Cash equivalents | $ | — | | | $ | 27 | | | $ | — | | | $ | 27 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 33 | | | — | | | — | | | 33 | |
| | | | | | | |
| Corporate obligations | — | | | 242 | | | — | | | 242 | |
| Municipal obligations | — | | | 18 | | | — | | | 18 | |
| Agency, asset and mortgage-backed obligations | — | | | 17 | | | — | | | 17 | |
| Equity securities: | | | | | | | |
| U.S. companies | 35 | | | — | | | — | | | 35 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total assets in the fair value hierarchy | $ | 68 | | | $ | 304 | | | $ | — | | | 372 | |
Investment funds(2) measured at net asset value | | | | | | | 332 | |
| | | | | | | |
| | | | | | | |
| Total assets measured at fair value | | | | | | | $ | 704 | |
(1)Refer to Note 12 for additional discussion regarding the three levels of the fair value hierarchy.
(2)Investment funds are comprised of mutual funds and collective trust funds. These funds consist of equity and debt securities of approximately 55% and 45%, respectively, for 2022 and 56% and 44%, respectively, for 2021. Additionally, these funds are invested in U.S. and international securities of approximately 97% and 3%, respectively, for 2022 and 90% and 10%, respectively, for 2021.
The following table presents the fair value of plan assets, by major category, for MidAmerican Energy's defined benefit other postretirement plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Input Levels for Fair Value Measurements(1) | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| As of December 31, 2022: | | | | | | | |
| Cash equivalents | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
| Corporate obligations | — | | | 3 | | | — | | | 3 | |
| Municipal obligations | — | | | 22 | | | — | | | 22 | |
| Agency, asset and mortgage-backed obligations | — | | | 2 | | | — | | | 2 | |
| Equity securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Investment funds(2) | 201 | | | — | | | — | | | 201 | |
| | | | | | | |
| | | | | | | |
| Total assets measured at fair value | $ | 213 | | | $ | 27 | | | $ | — | | | $ | 240 | |
| | | | | | | |
| As of December 31, 2021: | | | | | | | |
| Cash equivalents | $ | 8 | | | $ | — | | | $ | — | | | $ | 8 | |
| Debt securities: | | | | | | | |
| U.S. government obligations | 3 | | | — | | | — | | | 3 | |
| | | | | | | |
| Corporate obligations | — | | | 6 | | | — | | | 6 | |
| Municipal obligations | — | | | 28 | | | — | | | 28 | |
| Agency, asset and mortgage-backed obligations | — | | | 3 | | | — | | | 3 | |
| Equity securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Investment funds(2) | 260 | | | — | | | — | | | 260 | |
| | | | | | | |
| | | | | | | |
| Total assets measured at fair value | $ | 271 | | | $ | 37 | | | $ | — | | | $ | 308 | |
(1)Refer to Note 12 for additional discussion regarding the three levels of the fair value hierarchy.
(2)Investment funds are comprised of mutual funds and collective trust funds. These funds consist of equity and debt securities of approximately 82% and 18%, respectively, for 2022 and 2021. Additionally, these funds are invested in U.S. and international securities of approximately 82% and 18%, respectively, for 2022 and for 2021.
For level 1 investments, 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. For level 2 investments, the fair value is determined using pricing models based on observable market inputs. Shares of mutual funds not registered under the Securities Act of 1933, private equity limited partnership interests, common and commingled trust funds and investment entities are reported at fair value based on the net asset value per unit, which is used for expedience purposes. A fund's net asset value is based on the fair value of the underlying assets held by the fund less its liabilities.
Defined Contribution Plan
MidAmerican Energy sponsors a defined contribution plan ("401(k) plan") covering substantially all employees. MidAmerican Energy's matching contributions are based on each participant's level of contribution, and certain participants receive contributions based on eligible pretax annual compensation. Contributions cannot exceed the maximum allowable for tax purposes. Certain participants now receive enhanced benefits in the 401(k) plan and no longer accrue benefits in the noncontributory defined benefit pension plans. MidAmerican Energy's contributions to the plan were $33 million, $27 million, and $26 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(11) Asset Retirement Obligations
MidAmerican Energy estimates its 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.
MidAmerican Energy does not recognize liabilities for AROs for which the fair value cannot be reasonably estimated. Due to the indeterminate removal date, the fair value of the associated liabilities on certain generation, transmission, distribution and other assets cannot currently be estimated, and no amounts are recognized on the Financial Statements other than those included in the cost of removal regulatory liability established via approved depreciation rates in accordance with accepted regulatory practices. These accruals totaled $392 million and $394 million as of December 31, 2022 and 2021, respectively.
The following table presents MidAmerican Energy's ARO liabilities by asset type as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Quad Cities Station | $ | 417 | | | $ | 427 | |
| Fossil-fueled generating facilities | 76 | | | 161 | |
| Wind-powered generating facilities | 210 | | | 197 | |
| Solar-powered generating facilities and other | 4 | | | 2 | |
| Total asset retirement obligations | $ | 707 | | | $ | 787 | |
| | | |
Quad Cities Station nuclear decommissioning trust funds(1) | $ | 664 | | | $ | 768 | |
(1)Refer to Note 6 for a discussion of the Quad Cities Station nuclear decommissioning trust funds.
The following table reconciles the beginning and ending balances of MidAmerican Energy's ARO liabilities for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 787 | | | $ | 818 | |
| Change in estimated costs | (27) | | | 35 | |
| Additions | 2 | | | 6 | |
| Retirements | (85) | | | (103) | |
| Accretion | 30 | | | 31 | |
| Ending balance | $ | 707 | | | $ | 787 | |
| | | |
| Reflected as: | | | |
| Other current liabilities | $ | 24 | | | $ | 73 | |
| Asset retirement obligations | 683 | | | 714 | |
| $ | 707 | | | $ | 787 | |
Retirements in 2022 and 2021 relate to settlements of MidAmerican Energy's coal combustion residuals ARO liabilities.
(12) 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 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 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 financial 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 December 31, 2022: | | | | | | | | | | |
| Assets: | | | | | | | | | | |
| Commodity derivatives | | $ | 1 | | | $ | 37 | | | $ | 6 | | | $ | (10) | | | $ | 34 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Money market mutual funds | | 225 | | | — | | | — | | | — | | | 225 | |
| Debt securities: | | | | | | | | | | |
| U.S. government obligations | | 215 | | | — | | | — | | | — | | | 215 | |
| International government obligations | | — | | | 1 | | | — | | | — | | | 1 | |
| Corporate obligations | | — | | | 70 | | | — | | | — | | | 70 | |
| Municipal obligations | | — | | | 3 | | | — | | | — | | | 3 | |
| Agency, asset and mortgage-backed obligations | | — | | | 1 | | | — | | | — | | | 1 | |
| | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. companies | | 360 | | | — | | | — | | | — | | | 360 | |
| International companies | | 8 | | | — | | | — | | | — | | | 8 | |
| Investment funds | | 16 | | | — | | | — | | | — | | | 16 | |
| | $ | 825 | | | $ | 112 | | | $ | 6 | | | $ | (10) | | | $ | 933 | |
| | | | | | | | | | |
| Liabilities - commodity derivatives | | $ | — | | | $ | (12) | | | $ | (1) | | | $ | 10 | | | $ | (3) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| As of December 31, 2021: | | | | | | | | | | |
Assets: | | | | | | | | | | |
| Commodity derivatives | | $ | — | | | $ | 32 | | | $ | 3 | | | $ | (7) | | | $ | 28 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Money market mutual funds | | 228 | | | — | | | — | | | — | | | 228 | |
| Debt securities: | | | | | | | | | | |
| U.S. government obligations | | 232 | | | — | | | — | | | — | | | 232 | |
| International government obligations | | — | | | 2 | | | — | | | — | | | 2 | |
| Corporate obligations | | — | | | 90 | | | — | | | — | | | 90 | |
| Municipal obligations | | — | | | 3 | | | — | | | — | | | 3 | |
| Agency, asset and mortgage-backed obligations | | — | | | 2 | | | — | | | — | | | 2 | |
| | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. companies | | 428 | | | — | | | — | | | — | | | 428 | |
| International companies | | 10 | | | — | | | — | | | — | | | 10 | |
| Investment funds | | 18 | | | — | | | — | | | — | | | 18 | |
| | $ | 916 | | | $ | 129 | | | $ | 3 | | | $ | (7) | | | $ | 1,041 | |
| | | | | | | | | | |
| Liabilities - commodity derivatives | | $ | — | | | $ | (6) | | | $ | (8) | | | $ | 12 | | | $ | (2) | |
| | | | | | | | | | |
| | | | | | | | | | |
(1)Represents netting under master netting arrangements and a net cash collateral receivable of $— million and $5 million as of December 31, 2022 and 2021, respectively.
MidAmerican Energy's investments in money market mutual funds and debt and equity securities are stated at fair value, with debt securities 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 following table reconciles the beginning and ending balances of MidAmerican Energy's commodity derivative assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | (5) | | | $ | 2 | | | $ | 1 | |
| Changes in fair value recognized in net regulatory assets | 37 | | | (2) | | | 2 | |
| Settlements | (27) | | | (5) | | | (1) | |
| Ending balance | $ | 5 | | | $ | (5) | | | $ | 2 | |
MidAmerican Energy's long-term debt is carried at cost on the Financial Statements. 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 as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | |
| Long-term debt | $ | 7,729 | | | $ | 6,964 | | | $ | 7,721 | | | $ | 9,037 | |
(13) Commitments and Contingencies
Commitments
MidAmerican Energy had the following firm commitments that are not reflected on the Balance Sheet. Minimum payments as of December 31, 2022, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2028 and | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Contract type: | | | | | | | | | | | | | | |
| Coal and natural gas for generation | | $ | 139 | | | $ | 81 | | | $ | 60 | | | $ | 29 | | | $ | 30 | | | $ | — | | | $ | 339 | |
| Electric capacity and transmission | | 33 | | | 32 | | | 33 | | | 33 | | | 17 | | | 7 | | | 155 | |
| Natural gas contracts for gas operations | | 172 | | | 78 | | | 70 | | | 60 | | | 47 | | | 33 | | | 460 | |
| Construction commitments | | 699 | | | 60 | | | 24 | | | 4 | | | — | | | — | | | 787 | |
| Easements | | 42 | | | 43 | | | 44 | | | 44 | | | 45 | | | 1,536 | | | 1,754 | |
| Maintenance, services and other | | 165 | | | 129 | | | 98 | | | 102 | | | 99 | | | 163 | | | 756 | |
| | $ | 1,250 | | | $ | 423 | | | $ | 329 | | | $ | 272 | | | $ | 238 | | | $ | 1,739 | | | $ | 4,251 | |
Coal, Natural Gas, Electric Capacity and Transmission Commitments
MidAmerican Energy has coal supply and related transportation and lime contracts for its coal-fueled generating facilities. MidAmerican Energy expects to supplement the coal contracts with additional contracts and spot market purchases to fulfill its future coal supply needs. Additionally, MidAmerican Energy has a natural gas transportation contract for a natural gas-fueled generating facility. The contracts have minimum payment commitments ranging through 2027.
MidAmerican Energy has various natural gas supply and transportation contracts for its regulated natural gas operations that have minimum payment commitments ranging through 2037.
MidAmerican Energy has contracts to purchase electric capacity that have minimum payment commitments ranging through 2028. MidAmerican Energy also has contracts for the right to transmit electricity over other entities' transmission lines with minimum payment commitments ranging through 2027.
Construction Commitments
MidAmerican Energy's firm construction commitments reflected in the table above consist primarily of contracts for the repowering and construction of wind- and solar-powered generating facilities and the settlement of AROs.
Easements
MidAmerican Energy has non-cancelable easements with minimum payment commitments ranging through 2061 for land in Iowa on which certain of its assets, primarily wind- and solar-powered generating facilities, are located.
Maintenance, Services and Other Contracts
MidAmerican Energy has other non-cancelable contracts primarily related to maintenance and services for various generating facilities with minimum payment commitments ranging through 2030.
Environmental Laws and Regulations
MidAmerican Energy is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal and other environmental matters that have the potential to impact its current and future operations. MidAmerican Energy believes it is in material compliance with all applicable laws and regulations.
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.
Transmission Rates
MidAmerican Energy's wholesale transmission rates are set annually using FERC-approved formula rates subject to true-up for actual cost of service. In November 2013 and February 2015, a coalition of intervenors filed successive complaints with the FERC requesting that the base return on equity ("ROE") used to determine rates in effect prior to September 2016 no longer be found just and reasonable and sought to reduce the base ROE. In August 2022, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion vacating all orders related to the complaints and remanding them back to the FERC. MidAmerican Energy cannot predict the ultimate outcome of these matters or the amount of refunds, if any, and accordingly, has reversed its previously accrued liability for potential refunds of amounts collected under the higher ROE during the periods covered by the complaints.
(14) Revenue from Contracts with Customers
MidAmerican Energy uses a single five-step model to identify and recognize Customer Revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The following table summarizes MidAmerican Energy's revenue by line of business and customer class, including a reconciliation to MidAmerican Energy's reportable segment information included in Note 19, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2022 |
| Electric | | Natural Gas | | Other | | Total |
| Customer Revenue: | | | | | | | |
| Retail: | | | | | | | |
| Residential | $ | 765 | | | $ | 555 | | | $ | — | | | $ | 1,320 | |
| Commercial | 354 | | | 216 | | | — | | | 570 | |
| Industrial | 1,047 | | | 38 | | | — | | | 1,085 | |
| Natural gas transportation services | — | | | 44 | | | — | | | 44 | |
| Other retail | 154 | | | 2 | | | — | | | 156 | |
| Total retail | 2,320 | | | 855 | | | — | | | 3,175 | |
| Wholesale | 495 | | | 173 | | | — | | | 668 | |
| Multi-value transmission projects | 61 | | | — | | | — | | | 61 | |
| Other Customer Revenue | — | | | — | | | 7 | | | 7 | |
| Total Customer Revenue | 2,876 | | | 1,028 | | | 7 | | | 3,911 | |
| Other revenue | 112 | | | 2 | | | — | | | 114 | |
| Total operating revenue | $ | 2,988 | | | $ | 1,030 | | | $ | 7 | | | $ | 4,025 | |
| | | | | | | |
| For the Year Ended December 31, 2021 |
| Electric | | Natural Gas | | Other | | Total |
| Customer Revenue: | | | | | | | |
| Retail: | | | | | | | |
| Residential | $ | 718 | | | $ | 564 | | | $ | — | | | $ | 1,282 | |
| Commercial | 327 | | | 223 | | | — | | | 550 | |
| Industrial | 934 | | | 30 | | | — | | | 964 | |
| Natural gas transportation services | — | | | 39 | | | — | | | 39 | |
| Other retail | 149 | | | 3 | | | — | | | 152 | |
| Total retail | 2,128 | | | 859 | | | — | | | 2,987 | |
| Wholesale | 312 | | | 142 | | | — | | | 454 | |
| Multi-value transmission projects | 58 | | | — | | | — | | | 58 | |
| Other Customer Revenue | — | | | — | | | 15 | | | 15 | |
| Total Customer Revenue | 2,498 | | | 1,001 | | | 15 | | | 3,514 | |
| Other revenue | 31 | | | 2 | | | — | | | 33 | |
| Total operating revenue | $ | 2,529 | | | $ | 1,003 | | | $ | 15 | | | $ | 3,547 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2020 |
| Electric | | Natural Gas | | Other | | Total |
| Customer Revenue: | | | | | | | |
| Retail: | | | | | | | |
| Residential | $ | 685 | | | $ | 342 | | | $ | — | | | $ | 1,027 | |
| Commercial | 304 | | | 111 | | | — | | | 415 | |
| Industrial | 804 | | | 14 | | | — | | | 818 | |
| Natural gas transportation services | — | | | 36 | | | — | | | 36 | |
| Other retail | 131 | | | 2 | | | — | | | 133 | |
| Total retail | 1,924 | | | 505 | | | — | | | 2,429 | |
| Wholesale | 133 | | | 66 | | | — | | | 199 | |
| Multi-value transmission projects | 60 | | | — | | | — | | | 60 | |
| Other Customer Revenue | — | | | — | | | 8 | | | 8 | |
| Total Customer Revenue | 2,117 | | | 571 | | | 8 | | | 2,696 | |
| Other revenue | 22 | | | 2 | | | — | | | 24 | |
| Total operating revenue | $ | 2,139 | | | $ | 573 | | | $ | 8 | | | $ | 2,720 | |
(15) Shareholder's Equity
In 2022, MidAmerican Energy paid $275 million in cash dividends to its parent company, MHC. In January 2023, MidAmerican Energy paid $100 million in cash dividends to its parent company, MHC.
(16) Other Income (Expense)
Other, net, as shown on the Statements of Operations, includes the following other income (expense) items for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Non-service cost components of postretirement employee benefit plans | $ | 9 | | | $ | 26 | | | $ | 24 | |
| Corporate-owned life insurance (loss) income | (16) | | | 21 | | | 16 | |
| Gains on disposition of assets | — | | | — | | | 6 | |
| | | | | |
| | | | | |
| Interest income and other, net | 7 | | | 6 | | | 6 | |
| Total | $ | — | | | $ | 53 | | | $ | 52 | |
(17) Supplemental Cash Flow Disclosures
The summary of supplemental cash flow disclosures as of and for the years ending December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 292 | | | $ | 279 | | | $ | 286 | |
Income taxes received, net | $ | 840 | | | $ | 746 | | | $ | 709 | |
| | | | | |
| Supplemental disclosure of non-cash investing transactions: | | | | | |
Accruals related to property, plant and equipment additions | $ | 168 | | | $ | 257 | | | $ | 227 | |
(18) Related Party Transactions
The companies identified as affiliates of MidAmerican Energy are Berkshire Hathaway and its subsidiaries, including BHE and its subsidiaries. The basis for the following transactions is provided for in service agreements between MidAmerican Energy and the affiliates.
MidAmerican Energy is reimbursed for charges incurred on behalf of its affiliates. The majority of these reimbursed expenses are for general costs, such as insurance and building rent, and for employee wages, benefits and costs related to corporate functions such as information technology, human resources, treasury, legal and accounting. The amount of such reimbursements was $78 million, $66 million and $47 million for 2022, 2021 and 2020, respectively.
MidAmerican Energy reimbursed BHE in the amount of $79 million, $72 million and $15 million in 2022, 2021 and 2020, respectively, for its share of corporate expenses and other costs. Amounts charged to MidAmerican Energy in 2022 and 2021 were primarily reflected in construction work-in-progress on the Balance Sheets as of December 31, 2022 and 2021.
MidAmerican Energy purchases, in the normal course of business at either tariffed or market prices, natural gas transportation and storage capacity services from Northern Natural Gas Company, a wholly owned subsidiary of BHE, and coal transportation services from BNSF Railway Company, an indirect wholly owned subsidiary of Berkshire Hathaway. These purchases totaled $141 million, $132 million and $129 million in 2022, 2021 and 2020, respectively. Additionally, in 2020, MidAmerican Energy paid $7 million to BHE Renewables, LLC, a wholly owned subsidiary of BHE, for the purchase of wind turbine components.
MidAmerican Energy had accounts receivable from affiliates of $9 million and $10 million as of December 31, 2022 and 2021, respectively, that are included in other current assets on the Balance Sheets. MidAmerican Energy also had accounts payable to affiliates of $22 million and $17 million as of December 31, 2022 and 2021, respectively, that are included in accounts payable on the Balance Sheets.
MidAmerican Energy is party to a tax-sharing agreement and is part of the Berkshire Hathaway consolidated U.S. federal income tax return. For current federal and state income taxes, MidAmerican Energy had a receivable from BHE of $42 million and $79 million as of December 31, 2022 and 2021, respectively. MidAmerican Energy received net cash payments for federal and state income taxes from BHE totaling $840 million, $746 million and $709 million for the years ended December 31, 2022, 2021 and 2020, respectively.
MidAmerican Energy recognizes the full amount of the funded status for its pension and postretirement plans, and amounts attributable to MidAmerican Energy's affiliates that have not previously been recognized through income are recognized as an intercompany balance with such affiliates. MidAmerican Energy adjusts these balances when changes to the funded status of the respective plans are recognized and does not intend to settle the balances currently. Amounts receivable from affiliates attributable to the funded status of employee benefit plans totaled $79 million and $124 million as of December 31, 2022 and 2021, respectively, and are included in other assets on the Balance Sheets. Similar amounts payable to affiliates totaled $40 million and $63 million as of December 31, 2022 and 2021, respectively, and are included in other long-term liabilities on the Balance Sheets. See Note 10 for further information pertaining to pension and postretirement accounting.
(19) Segment Information
MidAmerican Energy 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 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. Refer to Note 9 for a discussion of items affecting income tax (benefit) expense for the regulated electric and natural gas operating segments.
The following tables provide information on a reportable segment basis (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating revenue: | | | | | |
| Regulated electric | $ | 2,988 | | | $ | 2,529 | | | $ | 2,139 | |
| Regulated natural gas | 1,030 | | | 1,003 | | | 573 | |
| Other | 7 | | | 15 | | | 8 | |
| Total operating revenue | $ | 4,025 | | | $ | 3,547 | | | $ | 2,720 | |
| | | | | |
| Depreciation and amortization: | | | | | |
| Regulated electric | $ | 1,112 | | | $ | 861 | | | $ | 667 | |
| Regulated natural gas | 56 | | | 53 | | | 49 | |
| Total depreciation and amortization | $ | 1,168 | | | $ | 914 | | | $ | 716 | |
| | | | | |
| Operating income: | | | | | |
| Regulated electric | $ | 372 | | | $ | 358 | | | $ | 384 | |
| Regulated natural gas | 66 | | | 58 | | | 64 | |
| | | | | |
| Total operating income | $ | 438 | | | $ | 416 | | | $ | 448 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Interest expense: | | | | | |
| Regulated electric | $ | 290 | | | $ | 279 | | | $ | 281 | |
| Regulated natural gas | 23 | | | 23 | | | 23 | |
| Total interest expense | $ | 313 | | | $ | 302 | | | $ | 304 | |
| | | | | |
| | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Income tax (benefit) expense: | | | | | |
| Regulated electric | $ | (779) | | | $ | (677) | | | $ | (584) | |
| Regulated natural gas | 9 | | | 3 | | | 14 | |
| Other | — | | | (1) | | | — | |
| Total income tax (benefit) expense | $ | (770) | | | $ | (675) | | | $ | (570) | |
| | | | | |
| Net income: | | | | | |
| Regulated electric | $ | 931 | | | $ | 844 | | | $ | 780 | |
| Regulated natural gas | 30 | | | 50 | | | 45 | |
| Other | — | | | — | | | 1 | |
| Net income | $ | 961 | | | $ | 894 | | | $ | 826 | |
| | | | | |
| Capital expenditures: | | | | | |
| Regulated electric | $ | 1,742 | | | $ | 1,806 | | | $ | 1,704 | |
| Regulated natural gas | 127 | | | 106 | | | 132 | |
| Total capital expenditures | $ | 1,869 | | | $ | 1,912 | | | $ | 1,836 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 | | 2020 |
| Total assets: | | | | | |
| Regulated electric | $ | 22,092 | | | $ | 21,385 | | | $ | 19,892 | |
| Regulated natural gas | 1,885 | | | 1,871 | | | 1,544 | |
| Other | 1 | | | 1 | | | 1 | |
| Total assets | $ | 23,978 | | | $ | 23,257 | | | $ | 21,437 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Managers and Member of
MidAmerican Funding, LLC
Des Moines, Iowa
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MidAmerican Funding, LLC and subsidiaries ("MidAmerican Funding") as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in member's equity, and cash flows for each of the three years in the period ended December 31, 2022, the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of MidAmerican Funding as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of MidAmerican Funding's management. Our responsibility is to express an opinion on MidAmerican Funding's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to MidAmerican Funding in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. MidAmerican Funding is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of MidAmerican Funding's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 5 to the financial statements
Critical Audit Matter Description
MidAmerican Funding is subject to rate regulation by state public service commissions as well as the Federal Energy Regulatory Commission (collectively, the "Commissions"), which have jurisdiction with respect to the rates of electric and natural gas companies in the respective service territories where MidAmerican Funding operates. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economic effects of rate regulation has a pervasive effect on the financial statements.
Regulated rates are subject to regulatory rate-setting processes. Rates are determined, approved, and established based on a cost-of-service basis, which is designed to allow MidAmerican Funding an opportunity to recover its prudently incurred costs of providing services and to earn a reasonable return on its invested capital. Regulatory decisions can have an effect on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. While MidAmerican Funding has indicated it expects to recover costs from customers through regulated rates, there is a risk that changes to the Commissions' approach to setting rates or other regulatory actions could limit MidAmerican Funding's ability to recover their costs.
We identified the effects of rate regulation on the financial statements as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and (3) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:
•We evaluated MidAmerican Funding's disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the Commissions, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected MidAmerican Funding's filings with the Commissions and the filings with the Commissions by intervenors to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances.
•We inquired of management about property, plant, and equipment that may be abandoned. We inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management's assertion regarding probability of an abandonment.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
February 24, 2023
We have served as MidAmerican Funding's auditor since 1999.
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 261 | | | $ | 233 | |
| Trade receivables, net | 536 | | | 526 | |
| Income tax receivable | 43 | | | 80 | |
| Inventories | 277 | | | 234 | |
| Prepayments | 91 | | | 71 | |
| Other current assets | 66 | | | 52 | |
| Total current assets | 1,274 | | | 1,196 | |
| | | |
| Property, plant and equipment, net | 21,092 | | | 20,302 | |
| Goodwill | 1,270 | | | 1,270 | |
| Regulatory assets | 550 | | | 473 | |
| Investments and restricted investments | 904 | | | 1,028 | |
| Other assets | 164 | | | 262 | |
| | | |
| Total assets | $ | 25,254 | | | $ | 24,531 | |
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 December 31, |
| 2022 | | 2021 |
| | | |
| LIABILITIES AND MEMBER'S EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 536 | | | $ | 531 | |
| Accrued interest | 90 | | | 89 | |
| Accrued property, income and other taxes | 170 | | | 158 | |
| Note payable to affiliate | — | | | 189 | |
| | | |
| Current portion of long-term debt | 317 | | | — | |
| Other current liabilities | 93 | | | 146 | |
| Total current liabilities | 1,206 | | | 1,113 | |
| | | |
| Long-term debt | 7,652 | | | 7,961 | |
| Regulatory liabilities | 1,119 | | | 1,080 | |
| Deferred income taxes | 3,431 | | | 3,387 | |
| Asset retirement obligations | 683 | | | 714 | |
| Other long-term liabilities | 484 | | | 475 | |
| Total liabilities | 14,575 | | | 14,730 | |
| | | |
| Commitments and contingencies (Note 13) | | | |
| | | |
| Member's equity: | | | |
| Paid-in capital | 1,679 | | | 1,679 | |
| Retained earnings | 9,000 | | | 8,122 | |
| | | |
| Total member's equity | 10,679 | | | 9,801 | |
| | | |
| Total liabilities and member's equity | $ | 25,254 | | | $ | 24,531 | |
The accompanying notes are an integral part of these consolidated financial statements.
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating revenue: | | | | | |
| Regulated electric | $ | 2,988 | | | $ | 2,529 | | | $ | 2,139 | |
| Regulated natural gas and other | 1,037 | | | 1,018 | | | 589 | |
| Total operating revenue | 4,025 | | | 3,547 | | | 2,728 | |
| | | | | |
| Operating expenses: | | | | | |
| Cost of fuel and energy | 679 | | | 539 | | | 339 | |
| Cost of natural gas purchased for resale and other | 763 | | | 761 | | | 329 | |
| Operations and maintenance | 828 | | | 775 | | | 755 | |
| Depreciation and amortization | 1,168 | | | 914 | | | 716 | |
| Property and other taxes | 149 | | | 142 | | | 135 | |
| Total operating expenses | 3,587 | | | 3,131 | | | 2,274 | |
| | | | | |
| Operating income | 438 | | | 416 | | | 454 | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense | (333) | | | (319) | | | (322) | |
| Allowance for borrowed funds | 15 | | | 13 | | | 15 | |
| Allowance for equity funds | 51 | | | 39 | | | 45 | |
| Other, net | — | | | 54 | | | 52 | |
| Total other income (expense) | (267) | | | (213) | | | (210) | |
| | | | | |
| Income before income tax benefit | 171 | | | 203 | | | 244 | |
| Income tax benefit | (776) | | | (680) | | | (574) | |
| | | | | |
| Net income | $ | 947 | | | $ | 883 | | | $ | 818 | |
The accompanying notes are an integral part of these consolidated financial statements.
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Paid-in Capital | | Retained Earnings | | Total Member's Equity |
| | | | | |
| Balance, December 31, 2019 | $ | 1,679 | | | $ | 6,422 | | | $ | 8,101 | |
| Net income | — | | | 818 | | | 818 | |
| | | | | |
| | | | | |
| Balance, December 31, 2020 | 1,679 | | | 7,240 | | | 8,919 | |
| Net income | — | | | 883 | | | 883 | |
| | | | | |
| Other equity transactions | — | | | (1) | | | (1) | |
| Balance, December 31, 2021 | 1,679 | | | 8,122 | | | 9,801 | |
| Net income | — | | | 947 | | | 947 | |
| Distribution to member | — | | | (69) | | | (69) | |
| | | | | |
| Balance, December 31, 2022 | $ | 1,679 | | | $ | 9,000 | | | $ | 10,679 | |
The accompanying notes are an integral part of these consolidated financial statements.
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 947 | | | $ | 883 | | | $ | 818 | |
Adjustments to reconcile net income to net cash flows from operating activities: | | | | | |
| | | | | |
| Depreciation and amortization | 1,168 | | | 914 | | | 716 | |
| Amortization of utility plant to other operating expenses | 35 | | | 34 | | | 34 | |
| Allowance for equity funds | (51) | | | (39) | | | (45) | |
| Deferred income taxes and amortization of investment tax credits | 33 | | | 153 | | | 211 | |
| | | | | |
| Settlements of asset retirement obligations | (85) | | | (103) | | | (124) | |
| Other, net | 52 | | | 21 | | | (17) | |
| Changes in other operating assets and liabilities: | | | | | |
| Trade receivables and other assets | (11) | | | (293) | | | 48 | |
| Inventories | (43) | | | 44 | | | (52) | |
| | | | | |
| Pension and other postretirement benefit plans, net | 8 | | | (4) | | | (19) | |
| Accrued property, income and other taxes, net | 40 | | | (71) | | | (66) | |
| Accounts payable and other liabilities | 68 | | | 66 | | | 32 | |
| Net cash flows from operating activities | 2,161 | | | 1,605 | | | 1,536 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (1,869) | | | (1,912) | | | (1,836) | |
| Purchases of marketable securities | (499) | | | (213) | | | (281) | |
| Proceeds from sales of marketable securities | 492 | | | 207 | | | 269 | |
| Proceeds from sales of other investments | — | | | — | | | 3 | |
| Other investment proceeds | 2 | | | 1 | | | 9 | |
| Other, net | 6 | | | 5 | | | 11 | |
| Net cash flows from investing activities | (1,868) | | | (1,912) | | | (1,825) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Distribution to member | (69) | | | — | | | — | |
| Proceeds from long-term debt | — | | | 492 | | | — | |
| Repayments of long-term debt | (2) | | | (1) | | | — | |
| Net change in note payable to affiliate | (189) | | | 12 | | | 5 | |
| | | | | |
| Other, net | (2) | | | (2) | | | (1) | |
| Net cash flows from financing activities | (262) | | | 501 | | | 4 | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 31 | | | 194 | | | (285) | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of year | 240 | | | 46 | | | 331 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of year | $ | 271 | | | $ | 240 | | | $ | 46 | |
The accompanying notes are an integral part of these consolidated financial statements.
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
MidAmerican Funding, LLC ("MidAmerican Funding") is an Iowa limited liability company with Berkshire Hathaway Energy Company ("BHE") as its sole member. 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"). 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. MHC's principal subsidiary is MidAmerican Energy Company ("MidAmerican Energy"), a public utility with electric and natural gas operations, and its direct, wholly owned nonregulated subsidiary is Midwest Capital Group, Inc. ("Midwest Capital Group").
(2) Summary of Significant Accounting Policies
In addition to the following significant accounting policies, refer to Note 2 of MidAmerican Energy's Notes to Financial Statements for significant accounting policies of MidAmerican Funding.
Basis of Consolidation and Presentation
The Consolidated Financial Statements include the accounts of MidAmerican Funding and its subsidiaries in which it held a controlling financial interest as of the financial statement date. Intercompany accounts and transactions have been eliminated, other than those between rate-regulated operations. The Consolidated Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the years ended December 31, 2022, 2021 and 2020.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist substantially of funds restricted for wildlife preservation. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and 2021 as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| Cash and cash equivalents | $ | 261 | | | $ | 233 | |
| Restricted cash and cash equivalents in other current assets | 10 | | | 7 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 271 | | | $ | 240 | |
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired when MidAmerican Funding purchased MHC. MidAmerican Funding evaluates goodwill for impairment at least annually and completed its annual review as of October 31, 2022. When evaluating goodwill for impairment, MidAmerican Funding estimates the fair value of its reporting units. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the identifiable assets, including identifiable intangible assets, and liabilities of the reporting unit are estimated at fair value as of the current testing date. The excess of the estimated fair value of the reporting unit over the current estimated fair value of net assets establishes the implied value of goodwill. The excess of the recorded goodwill over the implied goodwill value is charged to earnings as an impairment loss. Significant judgment is required in estimating the fair value of the reporting unit and performing goodwill impairment tests. The determination of fair value incorporates significant unobservable inputs. During 2022, 2021 and 2020, MidAmerican Funding did not record any goodwill impairments.
(3) Property, Plant and Equipment, Net
Refer to Note 3 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 $1 million and $1 million as of December 31, 2022 and 2021, respectively.
(4) Jointly Owned Utility Facilities
Refer to Note 4 of MidAmerican Energy's Notes to Financial Statements.
(5) Regulatory Matters
Refer to Note 5 of MidAmerican Energy's Notes to Financial Statements.
(6) Investments and Restricted Investments
Refer to Note 6 of MidAmerican Energy's Notes to Financial Statements. In addition to MidAmerican Energy's investments and restricted investments, MHC had corporate-owned life insurance policies in a Rabbi trust owned by MHC with a total cash surrender value of $2 million as of December 31, 2022 and 2021.
(7) Short-term Debt and Credit Facilities
Refer to Note 7 of MidAmerican Energy's Notes to Financial Statements. In addition to MidAmerican Energy's credit facilities, MHC has a $4 million unsecured credit facility, which expires in June 2023 and has a variable interest rate based on the Secured Overnight Financing Rate, plus a spread. As of December 31, 2022 and 2021, there were no borrowings outstanding under this credit facility. As of December 31, 2022, MHC was in compliance with the covenants of its credit facility.
(8) Long-term Debt
Refer to Note 8 of MidAmerican Energy's Notes to Financial Statements for detail and a discussion of its long-term debt. In addition to MidAmerican Energy's annual repayments of long-term debt, MidAmerican Funding parent company has $239 million of 6.927% Senior Bonds due in 2029, with a carrying value of $240 million as of December 31, 2022 and 2021.
The MidAmerican Funding parent company bonds are the direct senior secured obligations of MidAmerican Funding and effectively rank junior to all indebtedness and other liabilities of the direct and indirect subsidiaries of MidAmerican Funding, to the extent of the assets of these subsidiaries. MidAmerican Funding may redeem the bonds in whole or in part at any time at a redemption price equal to the sum of any accrued and unpaid interest to the date of redemption and the greater of (1) 100% of the principal amount of the bonds or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the bonds, discounted to the date of redemption on a semiannual basis at the treasury yield plus 25 basis points.
MidAmerican Funding parent company long-term debt is secured by a pledge of the common stock of MHC, which is not publicly traded. In the event of any triggering event under the related debt indenture, the common stock of MHC would be available to satisfy the applicable debt obligations. Triggering events include, among other specified circumstances, (1) default on the payment of interest for 30 days or principal for three days; (2) a material default in the performance of any material covenants or obligations in the indenture continuing for a period of 90 days after written notice in accordance with the indenture; or (3) the failure generally of MidAmerican Funding or any significant subsidiary to pay its debts when due.
Subsidiaries of MidAmerican Funding must make payments on their own indebtedness before making distributions to MidAmerican Funding. Refer to Note 8 of MidAmerican Energy's Notes to Financial Statements for a discussion of utility regulatory restrictions affecting distributions from MidAmerican Energy. As a result of the utility regulatory restrictions agreed to by MidAmerican Energy in March 1999, MidAmerican Funding had restricted net assets of $5.4 billion as of December 31, 2022.
As of December 31, 2022, MidAmerican Funding was in compliance with all of its applicable long-term debt covenants.
Each of MidAmerican Funding's direct or indirect subsidiaries is organized as a legal entity separate and apart from MidAmerican Funding and its other subsidiaries. It should not be assumed that any asset of any subsidiary of MidAmerican Funding will be available to satisfy the obligations of MidAmerican Funding or any of its other subsidiaries; provided, however, that unrestricted cash or other assets which are available for distribution may, subject to applicable law and the terms of financing arrangements of such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to MidAmerican Funding, one of its subsidiaries or affiliates thereof.
(9) Income Taxes
MidAmerican Funding's income tax benefit consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | (773) | | | $ | (739) | | | $ | (689) | |
| State | (36) | | | (94) | | | (96) | |
| (809) | | | (833) | | | (785) | |
| Deferred: | | | | | |
| Federal | 77 | | | 189 | | | 204 | |
| State | (43) | | | (35) | | | 8 | |
| 34 | | | 154 | | | 212 | |
| | | | | |
| Investment tax credits | (1) | | | (1) | | | (1) | |
| Total | $ | (776) | | | $ | (680) | | | $ | (574) | |
A reconciliation of the federal statutory income tax rate to MidAmerican Funding's effective income tax rate applicable to income before income tax benefit is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| Income tax credits | (416) | | | (283) | | | (209) | |
| State income tax, net of federal income tax benefit | (36) | | | (50) | | | (29) | |
| Effects of ratemaking | (26) | | | (21) | | | (17) | |
| Other, net | 3 | | | (2) | | | (1) | |
| Effective income tax rate | (454) | % | | (335) | % | | (235) | % |
Income tax credits relate primarily to production tax credits ("PTC") earned by MidAmerican Energy's wind- and solar-powered generating facilities. Federal renewable electricity PTCs are earned as energy from qualifying wind- and solar-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- and solar-powered generating facilities are eligible for the credits for 10 years from the date the qualifying generating facilities are placed in-service. PTCs recognized for the years ended December 31, 2022, 2021 and 2020 totaled $710 million, $574 million and $510 million, respectively.
MidAmerican Funding's net deferred income tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Regulatory liabilities | $ | 194 | | | $ | 240 | |
| Asset retirement obligations | 192 | | | 220 | |
| Revenue sharing | 87 | | | 33 | |
| State carryforwards | 61 | | | 55 | |
| Employee benefits | 37 | | | 26 | |
| | | |
| Other | 24 | | | (3) | |
| Total deferred income tax assets | 595 | | | 571 | |
| Valuation allowances | (2) | | | (1) | |
| Total deferred income tax assets, net | 593 | | | 570 | |
| | | |
| Deferred income tax liabilities: | | | |
| Depreciable property | (3,895) | | | (3,843) | |
| Regulatory assets | (128) | | | (112) | |
| Other | (1) | | | (2) | |
| Total deferred income tax liabilities | (4,024) | | | (3,957) | |
| | | |
| Net deferred income tax liability | $ | (3,431) | | | $ | (3,387) | |
As of December 31, 2022, MidAmerican Funding's state tax carryforwards, principally related to $921 million of net operating losses, expire at various intervals between 2023 and 2041.
The U.S. Internal Revenue Service has closed or effectively settled its examination MidAmerican Funding's income tax returns through December 31, 2013. The statute of limitations for MidAmerican Funding's income tax returns have expired for certain states through December 31, 2011, and for other states through December 31, 2018, except for the impact of any federal audit adjustments. The closure of examinations, or the expiration of the statute of limitations, for state filings may not preclude the state from adjusting the state net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
A reconciliation of the beginning and ending balances of MidAmerican Funding's net unrecognized tax benefits is as follows for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 13 | | | $ | 8 | |
| Additions based on tax positions related to the current year | 15 | | | 16 | |
| | | |
| Reductions based on tax positions related to the current year | (12) | | | (11) | |
| | | |
| | | |
| | | |
| | | |
| Ending balance | $ | 16 | | | $ | 13 | |
As of December 31, 2022, MidAmerican Funding had unrecognized tax benefits totaling $39 million that, if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits, other than applicable interest and penalties, would not affect MidAmerican Funding's effective income tax rate.
(10) Employee Benefit Plans
Refer to Note 10 of MidAmerican Energy's Notes to Financial Statements for additional information regarding MidAmerican Funding's pension, supplemental retirement and postretirement benefit plans.
Pension and postretirement costs allocated by MidAmerican Funding to its parent and other affiliates in each of the years ended December 31, were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Pension costs | $ | 8 | | | $ | 21 | | | $ | 7 | |
| Other postretirement costs | 1 | | | 2 | | | (3) | |
(11) Asset Retirement Obligations
Refer to Note 11 of MidAmerican Energy's Notes to Financial Statements.
(12) Fair Value Measurements
Refer to Note 12 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 as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | |
| Long-term debt | $ | 7,969 | | | $ | 7,219 | | | $ | 7,961 | | | $ | 9,350 | |
(13) Commitments and Contingencies
Refer to Note 13 of MidAmerican Energy's Notes to Financial Statements.
Legal Matters
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.
(14) Revenue from Contracts with Customers
Refer to Note 14 of MidAmerican Energy's Notes to Financial Statements. Additionally, MidAmerican Funding had $— million, $— million and $8 million of other revenue from contracts with customers for the year ended December 31, 2022, 2021 and 2020, respectively.
(15) Member's Equity
In 2022, MidAmerican Funding paid a $69 million cash distribution to its parent company, BHE. In January 2023, MidAmerican Funding paid a $100 million cash distribution to its parent company, BHE.
(16) Other Income (Expense)
Other, net, as shown on the Consolidated Statements of Operations, includes the following other income (expense) items for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Non-service cost components of postretirement employee benefit plans | $ | 9 | | | $ | 26 | | | $ | 24 | |
| Corporate-owned life insurance (loss) income | (16) | | | 21 | | | 16 | |
| Gains on disposition of assets | — | | | — | | | 6 | |
| | | | | |
| | | | | |
| Interest income and other, net | 7 | | | 7 | | | 6 | |
| Total | $ | — | | | $ | 54 | | | $ | 52 | |
(17) Supplemental Cash Flow Information
The summary of supplemental cash flow information as of and for the years ending December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 309 | | | $ | 296 | | | $ | 302 | |
Income taxes received, net | $ | 845 | | | $ | 751 | | | $ | 715 | |
| | | | | |
| Supplemental disclosure of non-cash investing and financing transactions: | | | | | |
Accruals related to property, plant and equipment additions | $ | 168 | | | $ | 257 | | | $ | 227 | |
| | | | | |
(18) Related Party Transactions
The companies identified as affiliates of MidAmerican Funding are Berkshire Hathaway and its subsidiaries, including BHE and its subsidiaries. The basis for the following transactions is provided for in-service agreements between MidAmerican Funding and the affiliates.
MidAmerican Funding is reimbursed for charges incurred on behalf of its affiliates. The majority of these reimbursed expenses are for allocated general costs, such as insurance and building rent, and for employee wages, benefits and costs for corporate functions, such as information technology, human resources, treasury, legal and accounting. The amount of such reimbursements was $77 million, $65 million and $46 million for 2022, 2021 and 2020, respectively.
MidAmerican Funding reimbursed BHE in the amount of $79 million, $72 million and $15 million in 2022, 2021 and 2020, respectively, for its share of corporate expenses and other costs. Amounts charged to MidAmerican Funding in 2022 and 2021 were primarily reflected in construction work-in-progress on the Consolidated Balance Sheets as of December 31, 2022 and 2021.
MidAmerican Energy purchases, in the normal course of business at either tariffed or market prices. natural gas transportation and storage capacity services from Northern Natural Gas Company, a wholly owned subsidiary of BHE and coal transportation services from BNSF Railway Company, a wholly-owned subsidiary of Berkshire Hathaway. These purchases totaled $141 million, $132 million and $129 million in 2022, 2021 and 2020, respectively. Additionally, in 2020, MidAmerican Energy paid $7 million to BHE Renewables, LLC, a wholly owned subsidiary of BHE, for the purchase of wind turbine components.
MHC has a $300 million revolving credit arrangement carrying interest at SOFR, plus a spread to borrow from BHE. Outstanding balances are unsecured and due on demand. The outstanding balance was $— million as of December 31, 2022, and $189 million at an interest rate of 0.353% as of December 31, 2021, and is reflected as note payable to affiliate on the Consolidated Balance Sheet. During 2022, MHC received $275 million in the form of a dividend from MidAmerican Energy that was used to pay off the note payable to BHE.
BHE has a $100 million revolving credit arrangement, carrying interest at SOFR, plus a spread to borrow from MHC. Outstanding balances are unsecured and due on demand. There were no borrowings outstanding throughout 2022 and 2021.
MidAmerican Funding had accounts receivable from affiliates of $10 million and $11 million as of December 31, 2022 and 2021, respectively, that are included in other current assets on the Consolidated Balance Sheets. MidAmerican Funding also had accounts payable to affiliates of $22 million and $17 million as of December 31, 2022 and 2021, respectively, that are included in accounts payable on the Consolidated Balance Sheets.
MidAmerican Funding is party to a tax-sharing agreement and is part of the Berkshire Hathaway consolidated U.S. federal income tax return. For current federal and state income taxes, MidAmerican Funding had a receivable from BHE of $43 million and $80 million as of December 31, 2022 and 2021, respectively. MidAmerican Funding received net cash payments for federal and state income taxes from BHE totaling $845 million, $751 million and $715 million for the years ended December 31, 2022, 2021 and 2020, respectively.
MidAmerican Funding recognizes the full amount of the funded status for its pension and postretirement plans, and amounts attributable to MidAmerican Funding's affiliates that have not previously been recognized through income are recognized as an intercompany balance with such affiliates. MidAmerican Funding adjusts these balances when changes to the funded status of the respective plans are recognized and does not intend to settle the balances currently. Amounts receivable from affiliates attributable to the funded status of employee benefit plans totaled $79 million and $124 million as of December 31, 2022 and 2021, respectively, and are included in other assets on the Consolidated Balance Sheets. Similar amounts payable to affiliates totaled $40 million and $63 million as of December 31, 2022 and 2021, respectively, and are included in other long-term liabilities on the Consolidated Balance Sheets. See Note 10 for further information pertaining to pension and postretirement accounting.
The indenture pertaining to MidAmerican Funding's long-term debt restricts MidAmerican Funding from paying a distribution on its equity securities, unless after making such distribution either its debt to total capital ratio does not exceed 0.67:1.0 and its interest coverage ratio is not less than 2.2:1.0 or its senior secured long-term debt rating is at least BBB or its equivalent. MidAmerican Funding may seek a release from this restriction upon delivery to the indenture trustee of written confirmation from the ratings agencies that without this restriction MidAmerican Funding's senior secured long-term debt would be rated at least BBB+.
(19) Segment Information
MidAmerican Funding 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 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 nonregulated subsidiaries of MidAmerican Funding not engaged in the energy business and parent company interest expense. Refer to Note 9 for a discussion of items affecting income tax (benefit) expense for the regulated electric and natural gas operating segments.
The following tables provide information on a reportable segment basis (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating revenue: | | | | | |
| Regulated electric | $ | 2,988 | | | $ | 2,529 | | | $ | 2,139 | |
| Regulated natural gas | 1,030 | | | 1,003 | | | 573 | |
| Other | 7 | | | 15 | | | 16 | |
| Total operating revenue | $ | 4,025 | | | $ | 3,547 | | | $ | 2,728 | |
| | | | | |
| Depreciation and amortization: | | | | | |
| Regulated electric | $ | 1,112 | | | $ | 861 | | | $ | 667 | |
| Regulated natural gas | 56 | | | 53 | | | 49 | |
| Total depreciation and amortization | $ | 1,168 | | | $ | 914 | | | $ | 716 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating income: | | | | | |
| Regulated electric | $ | 372 | | | $ | 358 | | | $ | 384 | |
| Regulated natural gas | 66 | | | 58 | | | 64 | |
| Other | — | | | — | | | 6 | |
| Total operating income | $ | 438 | | | $ | 416 | | | $ | 454 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Interest expense: | | | | | |
| Regulated electric | $ | 290 | | | $ | 279 | | | $ | 281 | |
| Regulated natural gas | 23 | | | 23 | | | 23 | |
| Other | 20 | | | 17 | | | 18 | |
| Total interest expense | $ | 333 | | | $ | 319 | | | $ | 322 | |
| | | | | |
| Income tax (benefit) expense: | | | | | |
| Regulated electric | $ | (779) | | | $ | (677) | | | $ | (584) | |
| Regulated natural gas | 9 | | | 3 | | | 14 | |
| Other | (6) | | | (6) | | | (4) | |
| Total income tax (benefit) expense | $ | (776) | | | $ | (680) | | | $ | (574) | |
| | | | | |
| Net income: | | | | | |
| Regulated electric | $ | 931 | | | $ | 844 | | | $ | 780 | |
| Regulated natural gas | 30 | | | 50 | | | 45 | |
| Other | (14) | | | (11) | | | (7) | |
| Net income | $ | 947 | | | $ | 883 | | | $ | 818 | |
| | | | | |
| | | | | |
| | | | | |
| |
| | | | | |
| Capital expenditures: | | | | | |
| Regulated electric | $ | 1,742 | | | $ | 1,806 | | | $ | 1,704 | |
| Regulated natural gas | 127 | | | 106 | | | 132 | |
| Total capital expenditures | $ | 1,869 | | | $ | 1,912 | | | $ | 1,836 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 | | 2020 |
| Total assets: | | | | | |
| Regulated electric | $ | 23,283 | | | $ | 22,576 | | | $ | 21,083 | |
| Regulated natural gas | 1,963 | | | 1,950 | | | 1,623 | |
| Other | 8 | | | 5 | | | 5 | |
| Total assets | $ | 25,254 | | | $ | 24,531 | | | $ | 22,711 | |
Goodwill by reportable segment as of December 31, 2022 and 2021, was as follows (in millions):
| | | | | |
| Regulated electric | $ | 1,191 | |
| Regulated natural gas | 79 | |
| Total | $ | 1,270 | |
Nevada Power Company and its subsidiaries
Consolidated Financial Section
Item 7. 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 Nevada Power during the periods included herein. Explanations include management's best estimate of the impact of weather, customer growth, usage trends and other factors. This discussion should be read in conjunction with Nevada Power's historical Consolidated Financial Statements and Notes to Consolidated Financial Statements in Item 8 of this Form 10‑K. Nevada Power's actual results in the future could differ significantly from the historical results.
Results of Operations
Overview
Net income for the year ended December 31, 2022 was $298 million, a decrease of $5 million, or 2%, compared to 2021, primarily due to lower cash surrender value of corporate-owned life insurance policies and higher pension expense, higher interest expense, primarily due to higher long-term debt, higher depreciation and amortization, mainly due to higher plant placed in-service, higher property and other taxes, mainly due to a decrease in the amount of abatements available, higher operations and maintenance expenses, mainly due to higher earnings sharing and higher plant operations and maintenance expenses, partially offset by higher interest and dividend income, primarily from carrying charges on regulatory balances, higher capitalized interest and allowance for funds used during construction from higher construction work-in-progress and higher utility margin. Utility margin increased primarily due to higher regulatory-related revenue deferrals and higher retail customer volumes, partially offset by unfavorable price impacts from changes in sales mix, lower transmission and wholesale revenue and lower other retail revenue. Retail customer volumes, including distribution only service customers, increased 1.9% primarily due to an increase in the average number of customers and favorable changes in customer usage, offset by the unfavorable impact of weather. Energy generated decreased 4% for 2022 compared to 2021 primarily due to lower natural gas-fueled generation. Wholesale electricity sales volumes increased 65% and purchased electricity volumes increased 14%.
Net income for the year ended December 31, 2021 was $303 million, an increase of $8 million, or 3%, compared to 2020, primarily due to lower operations and maintenance expenses, primarily due to lower net regulatory instructed deferrals and amortizations, lower earnings sharing and lower plant operations and maintenance expenses, lower income tax expense primarily due to the recognition of amortization of excess deferred income taxes following regulatory approval effective January 2021, $10 million of higher interest and dividend income, mainly from carrying charges on regulatory balances, lower interest expense and higher other, net. These increases are offset by lower utility margin, primarily due to lower retail rates from the 2020 regulatory rate review with new rates effective January 2021, lower revenue recognized due to a favorable regulatory decision in 2020 and an adjustment to regulatory-related revenue deferrals, partially offset by an increase in the average number of customers and higher transmission revenue, and higher depreciation and amortization, mainly due to regulatory amortizations approved in the 2020 regulatory rate review effective January 2021 and higher plant placed in-service. Retail customer volumes, including distribution only service customers, increased 3.5% primarily due to an increase in the average number of customers and favorable changes in customer usage patterns, offset by the unfavorable impact of weather. Energy generated increased 1% for 2021 compared to 2020 primarily due to higher natural gas-fueled generation. Wholesale electricity sales volumes decreased 5% and purchased electricity volumes increased 10%.
Non-GAAP Financial Measure
Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as, utility margin, to help evaluate results of operations. Utility margin is calculated as operating revenue less cost of fuel and energy, which are captions presented on the Consolidated Statements of Operations.
Nevada Power's cost of fuel and energy is generally recovered from its retail customers through regulatory recovery mechanisms and, as a result, changes in Nevada Power's expenses included in regulatory recovery mechanisms result in comparable changes to revenue. As such, management believes utility margin more appropriately and concisely explains profitability rather than a discussion of revenue and cost of fuel and energy separately. Management believes the presentation of utility margin provides meaningful and valuable insight into the information management considers important to running the business and a measure of comparability to others in the industry.
Utility margin is not a measure calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, operating income, which is the most directly comparable financial measure prepared in accordance with GAAP.
The following table provides a reconciliation of utility margin to operating income for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Utility margin: | | | | | | | | | | | | | | |
| Operating revenue | | $ | 2,630 | | | $ | 2,139 | | | $ | 491 | | 23 | % | | $ | 2,139 | | | $ | 1,998 | | | $ | 141 | | 7 | % |
| Cost of fuel and energy | | 1,427 | | | 939 | | | 488 | | 52 | | | 939 | | | 816 | | | 123 | | 15 | |
| Utility margin | | 1,203 | | | 1,200 | | | 3 | | — | | | 1,200 | | | 1,182 | | | 18 | | 2 | |
| Operations and maintenance | | 303 | | | 301 | | | 2 | | 1 | | | 301 | | | 299 | | | 2 | | 1 | |
| Depreciation and amortization | | 417 | | | 406 | | | 11 | | 3 | | | 406 | | | 361 | | | 45 | | 12 | |
| Property and other taxes | | 53 | | | 48 | | | 5 | | 10 | | | 48 | | | 47 | | | 1 | | 2 | |
| Operating income | | $ | 430 | | | $ | 445 | | | $ | (15) | | (3) | % | | $ | 445 | | | $ | 475 | | | $ | (30) | | (6) | % |
Utility Margin
A comparison of key operating results related to utility margin is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Utility margin (in millions): | | | | | | | | | | | | | | |
| Operating revenue | | $ | 2,630 | | | $ | 2,139 | | | $ | 491 | | 23 | % | | $ | 2,139 | | | $ | 1,998 | | | $ | 141 | | 7 | % |
| Cost of fuel and energy | | 1,427 | | | 939 | | | 488 | | 52 | | | 939 | | | 816 | | | 123 | | 15 | |
| Utility margin | | $ | 1,203 | | | $ | 1,200 | | | $ | 3 | | — | % | | $ | 1,200 | | | $ | 1,182 | | | $ | 18 | | 2 | % |
| | | | | | | | | | | | | | |
| Sales (GWhs): | | | | | | | | | | | | | | |
| Residential | | 10,299 | | | 10,415 | | | (116) | | (1) | % | | 10,415 | | | 10,477 | | | (62) | | (1) | % |
| Commercial | | 4,904 | | | 4,838 | | | 66 | | 1 | | | 4,838 | | | 4,591 | | | 247 | | 5 | |
| Industrial | | 5,630 | | | 5,270 | | | 360 | | 7 | | | 5,270 | | | 4,881 | | | 389 | | 8 | |
| Other | | 191 | | | 198 | | | (7) | | (4) | | | 198 | | | 195 | | | 3 | | 2 | |
Total fully bundled(1) | | 21,024 | | | 20,721 | | | 303 | | 1 | | | 20,721 | | | 20,144 | | | 577 | | 3 | |
| Distribution only service | | 2,786 | | | 2,646 | | | 140 | | 5 | | | 2,646 | | | 2,425 | | | 221 | | 9 | |
| Total retail | | 23,810 | | | 23,367 | | | 443 | | 2 | | | 23,367 | | | 22,569 | | | 798 | | 4 | |
| Wholesale | | 586 | | | 356 | | | 230 | | 65 | | | 356 | | | 374 | | | (18) | | (5) | |
| Total GWhs sold | | 24,396 | | | 23,723 | | | 673 | | 3 | % | | 23,723 | | | 22,943 | | | 780 | | 3 | % |
| | | | | | | | | | | | | | |
| Average number of retail customers (in thousands) | | 1,001 | | | 985 | | | 16 | | 2 | % | | 985 | | | 968 | | | 17 | | 2 | % |
| | | | | | | | | | | | | | |
| Average revenue per MWh: | | | | | | | | | | | | | | |
Retail - fully bundled(1) | | $ | 120.21 | | | $ | 98.62 | | | $ | 21.59 | | 22 | % | | $ | 98.62 | | | $ | 94.83 | | | $ | 3.79 | | 4 | % |
| Wholesale | | $ | 61.83 | | | $ | 60.69 | | | $ | 1.14 | | 2 | % | | $ | 60.69 | | | $ | 42.83 | | | $ | 17.86 | | 42 | % |
| | | | | | | | | | | | | | |
Heating degree days | | 1,904 | | | 1,613 | | | 291 | | 18 | % | | 1,613 | | | 1,753 | | | (140) | | (8) | % |
Cooling degree days | | 4,016 | | | 4,109 | | | (93) | | (2) | % | | 4,109 | | | 4,236 | | | (127) | | (3) | % |
| | | | | | | | | | | | | | |
Sources of energy (GWhs)(2)(3): | | | | | | | | | | | | | | |
| Natural gas | | 13,068 | | | 13,655 | | | (587) | | (4) | % | | 13,655 | | | 13,545 | | | 110 | | 1 | % |
| | | | | | | | | | | | | | |
| Renewables | | 69 | | | 65 | | | 4 | | 6 | | | 65 | | | 66 | | | (1) | | (2) | |
| Total energy generated | | 13,137 | | | 13,720 | | | (583) | | (4) | | | 13,720 | | | 13,611 | | | 109 | | 1 | |
| Energy purchased | | 8,830 | | | 7,778 | | | 1,052 | | 14 | | | 7,778 | | | 7,044 | | | 734 | | 10 | |
| Total | | 21,967 | | | 21,498 | | | 469 | | 2 | % | | 21,498 | | | 20,655 | | | 843 | | 4 | % |
| | | | | | | | | | | | | | |
Average cost of energy per MWh(4): | | | | | | | | | | | | | | |
| Energy generated | | $ | 49.82 | | | $ | 24.41 | | | $ | 25.42 | | 104 | % | | $ | 24.41 | | | $ | 16.58 | | | $ | 7.83 | | 47 | % |
| Energy purchased | | $ | 87.49 | | | $ | 77.64 | | | $ | 9.85 | | 13 | % | | $ | 77.64 | | | $ | 83.74 | | | $ | (6.10) | | (7) | % |
(1) Fully bundled includes sales to customers for combined energy, transmission and distribution services.
(2) The average cost of energy per MWh and sources of energy excludes 1,113, 1,389 and 1,614 GWhs of natural gas generated energy that is purchased at cost by related parties for the years ended December 31, 2022, 2021 and 2020, respectively.
(3) GWh amounts are net of energy used by the related generating facilities.
(4) The average cost of energy per MWh includes only the cost of fuel associated with the generating facilities, purchased power and deferrals.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Utility margin increased $3 million for 2022 compared to 2021 primarily due to:
•$11 million of higher regulatory-related revenue deferrals and
•$4 million of higher electric retail utility margin due to higher retail customer volumes, offset by unfavorable price impacts from changes in sales mix. Retail customer volumes, including distribution only service customers, increased 1.9% primarily due to an increase in the average number of customers and favorable changes in customer usage, offset by the unfavorable impact of weather.
The increase in utility margin was partially offset by:
•$6 million of lower energy efficiency program rates (offset in operations and maintenance expense);
•$3 million of lower transmission and wholesale revenue; and
•$3 million due to lower other retail revenue.
Operations and maintenance increased $2 million, or 1%, for 2022 compared to 2021 primarily due to higher earnings sharing and higher plant operations and maintenance expenses, partially offset by lower energy efficiency program costs (offset in operating revenue).
Depreciation and amortization increased $11 million, or 3%, for 2022 compared to 2021 primarily due to higher plant placed in-service.
Property and other taxes increased $5 million, or 10%, for 2022 compared to 2021 primarily due to a decrease in the amount of abatements available.
Interest expense increased $12 million, or 8%, for 2022 compared to 2021 primarily due to higher long-term debt.
Capitalized interest increased $5 million for 2022 compared to 2021 primarily due to higher construction work-in-progress.
Allowance for equity funds increased $4 million, or 57%, for 2022 compared to 2021 primarily due to higher construction work-in-progress.
Interest and dividend income increased $27 million for 2022 compared to 2021 primarily due to higher interest income, mainly from carrying charges on regulatory balances.
Other, net decreased $15 million, or 83%, for 2022 compared to 2021 primarily due to lower cash surrender value of corporate-owned life insurance policies and higher pension expense.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Utility margin increased $18 million for 2021 compared to 2020 due to:
•the $120 million one-time bill credit returned to customers in 2020 as a result of the Nevada Power regulatory rate review stipulation ("$120 million bill credit") (offset in operations and maintenance expense and income tax expense) and
•$5 million of higher transmission revenue.
The increase in utility margin was partially offset by:
•$66 million of lower retail electric utility margin primarily due to lower retail rates due to the 2020 regulatory rate review with new rates effective January 2021, offset by higher retail customer volumes. Retail customer volumes, including distribution only service customers, increased 3.5% primarily due to an increase in the average number of customers and favorable changes in customer usage patterns, offset by the unfavorable impact of weather;
•$21 million of lower revenue recognized due to a favorable regulatory decision in 2020;
•$10 million due to lower energy efficiency program rates (offset in operations and maintenance expense);
•$6 million due to an adjustment to regulatory-related revenue deferrals; and
•$4 million due to a regulatory amortization of an impact fee that ended December 2020.
Operations and maintenance increased $2 million, or 1%, for 2021 compared to 2020 primarily due to regulatory liability amortization in 2020 to satisfy a portion of the $120 million bill credit of $94 million (offset in operating revenue), partially offset by lower net regulatory instructed deferrals and amortizations of $46 million, mainly relating to deferrals in 2020 of the non-labor cost savings from the Navajo generating station retirement which was approved for amortization in the 2020 regulatory rate review with new rates effective January 2021, and timing of the regulatory impacts for the ON Line lease cost reallocation, lower earnings sharing, lower energy efficiency program costs (offset in operating revenue) and lower plant operations and maintenance expenses.
Depreciation and amortization increased $45 million, or 12%, for 2021 compared to 2020 primarily due to regulatory amortizations approved in the 2020 regulatory rate review effective January 2021 and higher plant placed in-service.
Interest expense decreased $9 million, or 6% for 2021 compared to 2020 primarily due to lower carrying charges on regulatory balances of $6 million and lower interest expense on long-term debt.
Interest and dividend income increased $10 million for 2021 compared to 2020 primarily due to higher interest income, mainly
from carrying charges on regulatory balances.
Other, net increased $9 million for 2021 compared to 2020 primarily due to lower pension expense of $6 million and higher cash surrender value of corporate-owned life insurance policies.
Income tax expense decreased $10 million, or 21%, for 2021 compared to 2020. The effective tax rate was 11% in 2021 and 14% in 2020 and decreased primarily due to the recognition of amortization of excess deferred income taxes following regulatory approval effective January 2021, partially offset by the one-time recognition in 2020 of amortization of excess deferred income taxes to satisfy a portion of the $120 million bill credit (offset in operating revenue).
Liquidity and Capital Resources
As of December 31, 2022, Nevada Power's total net liquidity was $443 million as follows (in millions):
| | | | | | | | |
| Cash and cash equivalents | | $ | 43 | |
| | |
Credit facilities(1) | | 400 | |
| | |
| | |
| | |
| | |
| | |
| Total net liquidity | | $ | 443 | |
| Credit facilities: | | |
| Maturity dates | | 2025 |
(1)Refer to Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion regarding Nevada Power's credit facility.
Operating Activities
Net cash flows from operating activities for the years ended December 31, 2022 and 2021 were $355 million and $505 million, respectively. The change was primarily due to higher payments related to fuel and energy costs and the timing of payments for operating costs, partially offset by higher collections from customers and lower payments for income taxes.
Net cash flows from operating activities for the years ended December 31, 2021 and 2020 were $505 million and $467 million, respectively. The change was primarily due to higher collections from customers, timing of payments for operating costs, increased collections of customer advances and lower inventory purchases, partially offset by the timing of payments for fuel and energy costs and higher payments for income taxes.
The timing of Nevada Power's income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods selected and assumptions made for each payment date.
Investing Activities
Net cash flows from investing activities for the years ended December 31, 2022 and 2021 were $(862) million and $(447) million, respectively. The change was primarily due to increased capital expenditures and the issuance of an affiliate note receivable. Refer to "Future Uses of Cash" for further discussion of capital expenditures.
Net cash flows from investing activities for the years ended December 31, 2021 and 2020 were $(447) million and $(429) million, respectively. The change was primarily due to increased capital expenditures. Refer to "Future Uses of Cash" for further discussion of capital expenditures.
Financing Activities
Net cash flows from financing activities for the years ended December 31, 2022 and 2021 were $522 million and $(49) million, respectively. The change was primarily due to higher proceeds from the issuance of long-term debt, lower dividends paid to NV Energy, Inc. and higher contributions from NV Energy, Inc., partially offset by higher repayments of short-term debt.
Net cash flows from financing activities for the years ended December 31, 2021 and 2020 were $(49) million and $(27) million, respectively. The change was primarily due to lower proceeds from the issuance of long-term debt and higher dividends paid to NV Energy, Inc., partially offset by lower repayments of long-term debt and higher net proceeds from short-term debt.
Ability to Issue Debt
Nevada Power currently has an effective shelf registration statement with the SEC to issue up to $2.6 billion of general and refunding mortgage securities through November 1, 2025. Additionally, Nevada Power's ability to issue debt is primarily impacted by its financing authority from the PUCN. As of December 31, 2022, Nevada Power has financing authority from the PUCN consisting of the ability to issue long-term and short-term debt securities so long as the total amount of debt outstanding (excluding borrowings under Nevada Power's $400 million secured credit facility) does not exceed $3.8 billion and to issue common and preferred stock so long as the total amounts outstanding do not exceed $4.1 billion and $800 million, respectively, as measured at the end of each calendar quarter. Nevada Power's revolving credit facility contains a financial maintenance covenant which Nevada Power was in compliance with as of December 31, 2022. 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 Investor Service or Standard & Poor's, Nevada Power would be subject to limitations under these covenants.
Ability to Issue General and Refunding Mortgage Securities
To the extent Nevada Power has the ability to issue debt under the most restrictive covenants in its financing agreements and has financing authority to do so from the PUCN, Nevada Power's ability to issue secured debt is limited by the amount of bondable property or retired bonds that can be used to issue debt under Nevada Power's indenture.
Nevada Power's indenture creates a lien on substantially all of Nevada Power's properties in Nevada. As of December 31, 2022, $9.8 billion of Nevada Power's assets were pledged. Nevada Power had the capacity to issue $3.3 billion of additional general and refunding mortgage securities as of December 31, 2022, determined on the basis of 70% of net utility property additions. Property additions include plant-in-service and specific assets in construction work-in-progress. The amount of bond capacity listed above does not include eligible property in construction work-in-progress. Nevada Power also has the ability to release property from the lien of Nevada Power's indenture on the basis of net property additions, cash or retired bonds. To the extent Nevada Power releases property from the lien of Nevada Power's indenture, it will reduce the amount of securities issuable under the indenture.
Long-Term Debt
In October 2022, Nevada Power issued $400 million of 5.90% General and Refunding Mortgage bonds, Series GG, due 2053. The net proceeds were used to repay amounts outstanding under its existing revolving credit facility, to fund capital expenditures and for general corporate purposes.
In January 2022, Nevada Power entered into a $300 million secured delayed draw term loan facility maturing in January 2024. Amounts borrowed under the facility bear interest at variable rates based on the Secured Overnight Financing Rate or a base rate, at Nevada Power's option, plus a pricing margin. In January 2022, Nevada Power borrowed $200 million under the facility at an initial interest rate of 0.55%. In May 2022, Nevada Power drew the remaining $100 million available under the facility at an initial interest rate of 1.24%. Nevada Power used the proceeds to repay amounts outstanding under its existing secured credit facility and for general corporate purposes.
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 secured 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 Nevada Power has access to external financing depends on a variety of factors, including Nevada Power's credit ratings, investors' judgment of risk associated with Nevada Power and conditions in the overall capital markets, including the condition of the utility industry.
Capital 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. Prudently incurred expenditures for compliance-related items such as pollution control technologies, replacement generation and associated operating costs are generally incorporated into Nevada Power's regulated retail rates. Expenditures for certain assets may ultimately include acquisition of existing assets.
Historical and forecasted capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, for the years ending December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Historical | | Forecast |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| | | | | | | | | | | |
| Electric distribution | $ | 232 | | | $ | 184 | | | $ | 236 | | | $ | 276 | | | $ | 276 | | | $ | 275 | |
| Electric transmission | 35 | | | 57 | | | 110 | | | 100 | | | 333 | | | 427 | |
| Solar generation | — | | | 8 | | | 85 | | | 144 | | | 2 | | | 1 | |
| Electric battery storage | — | | | — | | | 8 | | | 271 | | | — | | | — | |
| Other | 188 | | | 200 | | | 323 | | | 512 | | | 342 | | | 150 | |
| Total | $ | 455 | | | $ | 449 | | | $ | 762 | | | $ | 1,303 | | | $ | 953 | | | $ | 853 | |
Nevada Power received PUCN approval through its recent IRP filings for an increase in solar generation and electric transmission and has included estimates from its IRP filings in its forecast capital expenditures for 2023 through 2025. These estimates are likely to change as a result of the RFP process. Nevada Power's historical and forecast capital expenditures include the following:
•Electric distribution includes both growth projects and operating expenditures consisting of routine expenditures for distribution needed to serve existing and expected demand.
•Electric transmission includes both growth projects and operating expenditures. Growth projects primarily relate to the Nevada Utilities' Greenlink Nevada transmission expansion program. In this project, the company has received approval from the PUCN to build a 350-mile, 525-kV transmission line, known as Greenlink West, connecting the Ft. Churchill substation to the Northwest substation to the Harry Allen substation; a 235-mile, 525-kV transmission line, known as Greenlink North, connecting the new Ft. Churchill substation to the Robinson Summit substation; a 46-mile, 345-kV transmission line from the new Ft. Churchill substation to the Mira Loma substations; and a 38-mile, 345-kV transmission line from the new Ft. Churchill substation to the Robinson Summit substations. Operating expenditures consist of routine expenditures for transmission and other infrastructure needed to serve existing and expected demand.
•Solar generation includes a growth project consisting of a 150-MW solar photovoltaic facility with an additional 100 MWs of co-located battery storage that will be developed in Clark County, Nevada. Commercial operation is expected by the end of 2023.
•Electric battery storage includes two growth projects consisting of a 100-MW battery energy storage system co-located with a 150-MW solar photovoltaic facility that will be developed in Clark County, Nevada. Commercial operation is expected by the end of 2023. The second project is a 220-MW grid-tied battery energy storage system that will be developed on the site of the retired Reid Gardner generating station in Clark County, Nevada. Commercial operation is expected by the end of 2023.
•Other includes both growth projects and operating expenditures consisting of turbine upgrades at several generating facilities, routine expenditures for generation, other operating projects and other infrastructure needed to serve existing and expected demand.
Material Cash Requirements
Nevada Power has cash requirements that may affect its consolidated financial condition that arise primarily from long- and short-term debt (refer to Notes 7 and 8), operating and financing leases (refer to Note 5), purchased electricity contracts (refer to Note 14), fuel contracts (refer to Note 14), construction and other development costs (refer to Liquidity and Capital Resources included within this Item 7 and Note 14) and AROs (refer to Note 11). Refer to the respective referenced note in Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
Nevada Power has cash requirements relating to interest payments of $2.4 billion on long-term debt, including $152 million due in 2023.
Regulatory Matters
Nevada Power is subject to comprehensive regulation. Refer to the discussion contained in Item 1 of this Form 10-K for further information regarding Nevada Power's general regulatory framework and current regulatory matters.
Environmental Laws and Regulations
Nevada Power is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal and other environmental matters that have the potential to impact Nevada Power'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 various federal, state and local agencies. Nevada Power believes it is in material compliance with all applicable laws and regulations, although many are subject to interpretation that 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 financial results.
Refer to "Environmental Laws and Regulations" in Item 1 of this Form 10-K for further discussion regarding environmental laws and regulations.
Collateral and Contingent Features
Debt of Nevada Power is rated by credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of Nevada Power's ability to, in general, meet the obligations of its issued debt. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time.
Nevada Power has no credit rating downgrade triggers that would accelerate the maturity dates of outstanding debt, and a change in ratings is not an event of default under the applicable debt instruments. Nevada Power's secured revolving credit facility does not require the maintenance of a minimum credit rating level in order to draw upon its availability. However, commitment fees and interest rates under the credit facility are tied to credit ratings and increase or decrease when the ratings change. A ratings downgrade could also increase the future cost of commercial paper, short- and long-term debt issuances or new credit facilities.
In accordance with industry practice, certain wholesale agreements, including 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 recognized credit rating agencies. These agreements 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 December 31, 2022, the applicable credit ratings obtained from recognized credit rating agencies were investment grade. If all credit-risk-related contingent features or adequate assurance provisions for these agreements had been triggered as of December 31, 2022, Nevada Power would have been required to post $51 million of additional collateral. 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.
Inflation
Historically, overall inflation and changing prices in the economies where Nevada Power operates has not had a significant impact on Nevada Power's consolidated financial results. Nevada Power operates under a cost-of-service based rate-setting structure administered by the PUCN and the FERC. Under this rate-setting structure, Nevada Power is allowed to include prudent costs in its rates, including the impact of inflation after Nevada Power experiences cost increases. Fuel and purchase power costs are recovered through a balancing account, minimizing the impact of inflation related to these costs. Nevada Power attempts to minimize the potential impact of inflation on its operations through the use of periodic rate adjustments for fuel and energy costs, by employing prudent risk management and hedging strategies and by considering, among other areas, its impact on purchases of energy, operating expenses, materials and equipment costs, contract negotiations, future capital spending programs and long-term debt issuances. There can be no assurance that such actions will be successful.
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. The following critical accounting estimates are impacted significantly by Nevada Power's methods, judgments and assumptions used in the preparation of the Consolidated Financial Statements and should be read in conjunction with Nevada Power's Summary of Significant Accounting Policies included in Nevada Power's Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Accounting for the Effects of Certain Types of Regulation
Nevada Power prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, Nevada Power defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur.
Nevada Power continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future regulated rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition that could limit Nevada Power's ability to recover its costs. Nevada Power believes its application of the guidance for regulated operations is appropriate and its existing regulatory assets and liabilities are probable of inclusion in future regulated rates. The evaluation reflects the current political and regulatory climate at both the federal and state levels. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be written off to net income, returned to customers or re-established as AOCI. Total regulatory assets were $1.3 billion and total regulatory liabilities were $1.1 billion as of December 31, 2022. Refer to Nevada Power's Note 6 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Nevada Power's regulatory assets and liabilities.
Impairment of Long-Lived Assets
Nevada Power evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. As substantially all property, plant and equipment was used in regulated businesses, the impacts of regulation are considered when evaluating the carrying value of regulated assets.
The estimate of cash flows arising from the future use of an asset, for the purposes of impairment analysis, requires the exercise of judgment. Circumstances that could significantly alter the calculation of fair value or the recoverable amount of an asset may include significant changes in the regulatory environment, the business climate, management's plans, legal factors, market price of the asset, the use of the asset, the physical condition of the asset, future market prices, load growth, competition and many other factors over the life of the asset. Any resulting impairment loss is highly dependent on the underlying assumptions and could significantly affect Nevada Power's results of operations.
Income Taxes
In determining Nevada Power's income taxes, management is required to interpret complex income tax laws and regulations, which includes consideration of regulatory implications imposed by Nevada Power's various regulatory commissions. Nevada Power's income tax returns are subject to continuous examinations by federal, state and local income tax authorities that may give rise to different interpretations of these complex laws and regulations. Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved. Nevada Power recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Although the ultimate resolution of Nevada Power's federal, state and local income tax examinations is uncertain, Nevada Power believes it has made adequate provisions for these income tax positions. The aggregate amount of any additional income tax liabilities that may result from these examinations is not expected to have a material impact on Nevada Power's consolidated financial results. Refer to Nevada Power's Note 9 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Nevada Power's income taxes.
It is probable that Nevada Power will pass income tax benefit and expense related to the federal tax rate change from 35% to 21% as a result of 2017 Tax Reform, certain property related basis differences and other various differences on to its customers. As of December 31, 2022, these amounts were recognized as a net regulatory liability of $560 million and will be included in regulated rates when the temporary differences reverse.
Revenue Recognition - Unbilled Revenue
Revenue is recognized as electricity is delivered or services are provided. The determination of customer billings is based on a systematic reading of meters. At the end of each month, energy provided to customers since their last billing is estimated, and the corresponding unbilled revenue is recorded. Unbilled revenue was $143 million as of December 31, 2022. Factors that can impact the estimate of unbilled energy include, but are not limited to, seasonal weather patterns, total volumes supplied to the system, line losses, economic impacts and composition of sales among customer classes. Estimates are reversed in the following month when actual revenue is recorded.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Nevada Power's Consolidated Balance Sheets include assets and liabilities with fair values that are subject to market risks. Nevada Power's significant market risks are primarily associated with commodity prices, interest rates and the extension of credit to counterparties with which Nevada Power transacts. The following discussion addresses the significant market risks associated with Nevada Power's business activities. Nevada Power has established guidelines for credit risk management. Refer to Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Nevada Power's contracts accounted for as derivatives.
Commodity Price Risk
Nevada Power is exposed to the impact of market fluctuations in commodity prices and interest rates. Nevada Power is principally exposed to electricity and natural gas 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. 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 does not hedge all of its commodity price risk, thereby exposing the unhedged portion to changes in market prices. Nevada Power's exposure to commodity price risk is generally limited by its ability to include commodity costs in regulated rates through its deferred energy mechanism, which is subject to disallowance and regulatory lag that occurs between the time the costs are incurred and when the costs are included in regulated rates, as well as the impact of any customer sharing resulting from cost adjustment mechanisms.
The table that follows summarizes Nevada Power's price risk on commodity contracts accounted for as derivatives and shows the effects of a hypothetical 10% increase and 10% decrease in forward market prices by the expected volumes for these contracts as of that date. The selected hypothetical change does not reflect what could be considered the best or worse case scenarios (dollars in millions).
| | | | | | | | | | | | | | | | | |
| Fair Value - | | Estimated Fair Value after |
| Net Asset | | Hypothetical Change in Price |
| (Liability) | | 10% increase | | 10% decrease |
| As of December 31, 2022: | | | | | |
| Total commodity derivative contracts | $ | (52) | | | $ | (23) | | | $ | (81) | |
| | | | | |
| As of December 31, 2021: | | | | | |
| Total commodity derivative contracts | $ | (113) | | | $ | (93) | | | $ | (133) | |
Nevada Power's commodity derivative contracts not designated as hedging contracts are recoverable from customers in regulated rates and therefore, net unrealized gains and losses associated with interim price movements on commodity derivative contracts do not expose Nevada Power to earnings volatility. As of December 31, 2022 and 2021, a net regulatory asset of $52 million and $113 million, respectively, was recorded related to the net derivative liability of $52 million and $113 million, respectively. The settled cost of these commodity derivative contracts is generally included in regulated rates.
Interest Rate Risk
Nevada Power is exposed to interest rate risk on its outstanding variable-rate short- and long-term debt and future debt issuances. 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. As a result of the fixed interest rates, Nevada Power's fixed-rate long-term debt does not expose Nevada Power to the risk of loss due to changes in market interest rates. Additionally, because fixed-rate long-term debt is not carried at fair value on the Consolidated Balance Sheets, changes in fair value would impact earnings and cash flows only if Nevada Power were to reacquire all or a portion of these instruments prior to their maturity. The nature and amount of Nevada Power's short- and long-term debt can be expected to vary from period to period as a result of future business requirements, market conditions and other factors. Refer to Notes 7 and 8 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional discussion of Nevada Power's short- and long-term debt.
As of December 31, 2022 and 2021, Nevada Power had short- and long-term variable-rate obligations totaling $300 million and $180 million, respectively, that expose Nevada Power to the risk of increased interest expense in the event of increases in short-term interest rates. If variable interest rates were to increase by 10% from December 31 levels, it would not have a material effect on Nevada Power's annual interest expense. The carrying value of the variable-rate obligations approximates fair value as of December 31, 2022 and 2021.
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, 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, 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.
As of December 31, 2022, Nevada Power's aggregate credit exposure from energy related transactions were not material, based on settlement and mark-to-market exposures, net of collateral.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Nevada Power Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nevada Power Company and subsidiaries ("Nevada Power") as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in shareholder's equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Nevada Power as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of Nevada Power's management. Our responsibility is to express an opinion on Nevada Power's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Nevada Power in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Nevada Power is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Nevada Power's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 6 to the financial statements
Critical Audit Matter Description
Nevada Power is subject to rate regulation by a state public service commission as well as the Federal Energy Regulatory Commission (collectively, the "Commissions"), which have jurisdiction with respect to the rates of electric and natural gas companies in the respective service territories where Nevada Power operates. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economic effects of rate regulation has a pervasive effect on the financial statements.
Regulated rates are subject to regulatory rate-setting processes. Rates are determined, approved, and established based on a cost-of-service basis, which is designed to allow Nevada Power an opportunity to recover its prudently incurred costs of providing services and to earn a reasonable return on its invested capital. Regulatory decisions can have an effect on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. While Nevada Power Company has indicated it expects to recover costs from customers through regulated rates, there is a risk that changes to the Commissions' approach to setting rates or other regulatory actions could limit Nevada Power's ability to recover its costs.
We identified the effects of rate regulation on the financial statements as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs and (2) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:
•We evaluated Nevada Power's disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the Commissions, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected Nevada Power's filings with the Commissions and the filings with the Commissions by intervenors to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances.
•We inquired of management about property, plant, and equipment that may be abandoned. We inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management's assertion regarding probability of an abandonment.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
February 24, 2023
We have served as Nevada Power's auditor since 1987.
NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ASSETS |
| | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 43 | | | $ | 33 | |
| Trade receivables, net | 388 | | | 227 | |
| Note receivable from affiliate | 100 | | | — | |
| Inventories | 93 | | | 64 | |
| | | |
| Regulatory assets | 666 | | | 291 | |
| | | |
| | | |
| Other current assets | 89 | | | 86 | |
| Total current assets | 1,379 | | | 701 | |
| | | |
| Property, plant and equipment, net | 7,406 | | | 6,891 | |
| | | |
| Regulatory assets | 628 | | | 728 | |
| Other assets | 388 | | | 432 | |
| | | |
| Total assets | $ | 9,801 | | | $ | 8,752 | |
| | | |
| LIABILITIES AND SHAREHOLDER'S EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 422 | | | $ | 242 | |
| Accrued interest | 40 | | | 32 | |
| Accrued property, income and other taxes | 32 | | | 29 | |
| Short-term debt | — | | | 180 | |
| | | |
| | | |
| Regulatory liabilities | 45 | | | 49 | |
| Customer deposits | 51 | | | 44 | |
| | | |
| Derivative contracts | 51 | | | 55 | |
| Other current liabilities | 49 | | | 62 | |
| Total current liabilities | 690 | | | 693 | |
| | | |
| Long-term debt | 3,195 | | | 2,499 | |
| Finance lease obligations | 295 | | | 310 | |
| Regulatory liabilities | 1,093 | | | 1,100 | |
| Deferred income taxes | 875 | | | 782 | |
| Other long-term liabilities | 299 | | | 338 | |
| Total liabilities | 6,447 | | | 5,722 | |
| | | |
| Commitments and contingencies (Note 14) | | | |
| | | |
| Shareholder's equity: | | | |
Common stock - $1.00 stated value, 1,000 shares authorized, issued and outstanding | — | | | — | |
| Additional paid-in capital | 2,333 | | | 2,308 | |
| Retained earnings | 1,022 | | | 724 | |
| Accumulated other comprehensive loss, net | (1) | | | (2) | |
| Total shareholder's equity | 3,354 | | | 3,030 | |
| | | |
| Total liabilities and shareholder's equity | $ | 9,801 | | | $ | 8,752 | |
| | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Operating revenue | $ | 2,630 | | | $ | 2,139 | | | $ | 1,998 | |
| | | | | |
| Operating expenses: | | | | | |
| Cost of fuel and energy | 1,427 | | | 939 | | | 816 | |
| Operations and maintenance | 303 | | | 301 | | | 299 | |
| Depreciation and amortization | 417 | | | 406 | | | 361 | |
| Property and other taxes | 53 | | | 48 | | | 47 | |
| | | | | |
| Total operating expenses | 2,200 | | | 1,694 | | | 1,523 | |
| | | | | |
| Operating income | 430 | | | 445 | | | 475 | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense | (165) | | | (153) | | | (162) | |
| Capitalized interest | 8 | | | 3 | | | 3 | |
| Allowance for equity funds | 11 | | | 7 | | | 7 | |
| Interest and dividend income | 47 | | | 20 | | | 10 | |
| Other, net | 3 | | | 18 | | | 9 | |
| Total other income (expense) | (96) | | | (105) | | | (133) | |
| | | | | |
| Income before income tax expense | 334 | | | 340 | | | 342 | |
| Income tax expense | 36 | | | 37 | | | 47 | |
| Net income | $ | 298 | | | $ | 303 | | | $ | 295 | |
| | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(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, 2019 | | 1,000 | | | $ | — | | | $ | 2,308 | | | $ | 493 | | | $ | (4) | | | $ | 2,797 | |
| Net income | | — | | | — | | | — | | | 295 | | | — | | | 295 | |
| Dividends declared | | — | | | — | | | — | | | (155) | | | — | | | (155) | |
| Other equity transactions | | — | | | — | | | — | | | 1 | | | 1 | | | 2 | |
| Balance, December 31, 2020 | | 1,000 | | | — | | | 2,308 | | | 634 | | | (3) | | | 2,939 | |
| Net income | | — | | | — | | | — | | | 303 | | | — | | | 303 | |
| Dividends declared | | — | | | — | | | — | | | (213) | | | — | | | (213) | |
| Other equity transactions | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Balance, December 31, 2021 | | 1,000 | | | — | | | 2,308 | | | 724 | | | (2) | | | 3,030 | |
| Net income | | — | | | — | | | — | | | 298 | | | — | | | 298 | |
| Contributions | | — | | | — | | | 25 | | | — | | | — | | | 25 | |
| Other equity transactions | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Balance, December 31, 2022 | | 1,000 | | | $ | — | | | $ | 2,333 | | | $ | 1,022 | | | $ | (1) | | | $ | 3,354 | |
| | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
NEVADA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 298 | | | $ | 303 | | | $ | 295 | |
| Adjustments to reconcile net income to net cash flows from operating activities: | | | | | |
| | | | | |
| Depreciation and amortization | 417 | | | 406 | | | 361 | |
| Allowance for equity funds | (11) | | | (7) | | | (7) | |
| Deferred energy | (541) | | | (245) | | | (44) | |
| Amortization of deferred energy | 160 | | | 11 | | | (41) | |
| Other changes in regulatory assets and liabilities | (15) | | | (19) | | | (42) | |
| Deferred income taxes and amortization of investment tax credits | 49 | | | — | | | (10) | |
| Other, net | 8 | | | — | | | 2 | |
| Changes in other operating assets and liabilities: | | | | | |
| Trade receivables and other assets | (178) | | | 6 | | | 45 | |
| Inventories | (29) | | | 5 | | | (7) | |
| Accrued property, income and other taxes | 21 | | | (18) | | | 5 | |
| Accounts payable and other liabilities | 176 | | | 63 | | | (90) | |
| Net cash flows from operating activities | 355 | | | 505 | | | 467 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (762) | | | (449) | | | (455) | |
| Proceeds from sale of assets | — | | | — | | | 26 | |
| Issuance of affiliate note receivable | (100) | | | — | | | — | |
| Other, net | — | | | 2 | | | — | |
| Net cash flows from investing activities | (862) | | | (447) | | | (429) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from long-term debt | 694 | | | — | | | 718 | |
| Repayments of long-term debt | — | | | — | | | (575) | |
| Net (repayments of) proceeds from short-term debt | (180) | | | 180 | | | — | |
| Dividends paid | — | | | (213) | | | (155) | |
| Contributions from parent | 25 | | | — | | | — | |
| Other, net | (17) | | | (16) | | | (15) | |
| Net cash flows from financing activities | 522 | | | (49) | | | (27) | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 15 | | | 9 | | | 11 | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | 45 | | | 36 | | | 25 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 60 | | | $ | 45 | | | $ | 36 | |
| | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
NEVADA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
Nevada Power Company and 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 and its subsidiaries ("Sierra Pacific") and certain other subsidiaries. Nevada Power is a U.S. regulated electric utility company serving retail customers, including residential, commercial and industrial customers primarily in 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").
(2) Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The Consolidated Financial Statements include the accounts of Nevada Power and its subsidiaries in which it holds a controlling financial interest as of the financial statement date. Intercompany accounts and transactions have been eliminated. The Consolidated Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the years ended December 31, 2022, 2021 and 2020.
Use of Estimates in Preparation of Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates include, but are not limited to, the effects of regulation; recovery of long-lived assets; certain assumptions made in accounting for pension and other postretirement benefits; asset retirement obligations ("AROs"); income taxes; unbilled revenue; valuation of certain financial assets and liabilities, including derivative contracts; and accounting for contingencies. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Accounting for the Effects of Certain Types of Regulation
Nevada Power prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, Nevada Power defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be written off to net income, returned to customers or re-established as accumulated other comprehensive income (loss) ("AOCI").
Fair Value Measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Different valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Cash and Cash Equivalents and Restricted Cash
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist of funds restricted by the PUCN for a certain renewable energy contract. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and December 31, 2021, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 43 | | | $ | 33 | |
| Restricted cash and cash equivalents included in other current assets | 17 | | | 12 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 60 | | | $ | 45 | |
Allowance for Credit Losses
Trade receivables are primarily short-term in nature with stated collection terms of less than one year from the date of origination and are stated at the outstanding principal amount, net of an estimated allowance for credit losses. The allowance for credit losses is based on Nevada Power's assessment of the collectability of amounts owed to Nevada Power by its customers. This assessment requires judgment regarding the ability of customers to pay or the outcome of any pending disputes. In measuring the allowance for credit losses for trade receivables, Nevada Power primarily utilizes credit loss history. However, Nevada Power may adjust the allowance for credit losses to reflect current conditions and reasonable and supportable forecasts that deviate from historical experience. Nevada Power also has the ability to assess deposits on customers who have delayed payments or who are deemed to be a credit risk. The changes in the balance of the allowance for credit losses, which is included in trade receivables, net on the Consolidated Balance Sheets, is summarized as follows for the years ended December 31, (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 18 | | | $ | 19 | | | $ | 15 | |
| Charged to operating costs and expenses, net | 14 | | | 13 | | | 13 | |
| Write-offs, net | (12) | | | (14) | | | (9) | |
| Ending balance | $ | 20 | | | $ | 18 | | | $ | 19 | |
Derivatives
Nevada Power employs a number of different derivative contracts, which may include forwards, futures, options, swaps and other agreements, to manage its commodity price and interest rate risk. 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. Derivative balances reflect offsetting permitted under master netting agreements with counterparties and cash collateral paid or received under such agreements.
Commodity derivatives used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases or normal sales. Normal purchases or normal sales contracts are not marked‑to‑market and settled amounts are recognized as cost of fuel, energy and capacity on the Consolidated Statements of Operations.
For Nevada Power's derivative contracts, the settled amount is generally included in regulated rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of inclusion in regulated rates are recorded as regulatory assets and liabilities. For a derivative contract not probable of inclusion in rates, changes in the fair value are recognized in earnings.
Inventories
Inventories consist mainly of materials and supplies totaling $93 million and $64 million as of December 31, 2022 and 2021. The cost is determined using the average cost method. Materials are charged to inventory when purchased and are expensed or capitalized to construction work in process, as appropriate, when used.
Property, Plant and Equipment, Net
General
Additions to property, plant and equipment are recorded at cost. Nevada Power capitalizes all construction-related material, direct labor and contract services, as well as indirect construction costs. Indirect construction costs include debt allowance for funds used during construction ("AFUDC"), and equity AFUDC, as applicable. The cost of additions and betterments are capitalized, while costs incurred that do not improve or extend the useful lives of the related assets are generally expensed. The cost of repairs and minor replacements are charged to expense when incurred with the exception of costs for generation plant maintenance under certain long-term service agreements. Costs under these agreements are expensed straight-line over the term of the agreements as approved by the Public Utilities Commission of Nevada ("PUCN").
Depreciation and amortization are generally computed by applying the composite or straight-line method based on either estimated useful lives or mandated recovery periods as prescribed by Nevada Power's various regulatory authorities. Depreciation studies are completed by Nevada Power to determine the appropriate group lives, net salvage and group depreciation rates. These studies are reviewed and rates are ultimately approved by the applicable regulatory commission. Net salvage includes the estimated future residual values of the assets and any estimated removal costs recovered through approved depreciation rates. Estimated removal costs are recorded as a non-current regulatory liability on the Consolidated Balance Sheets. As actual removal costs are incurred, the associated liability is reduced.
Generally when Nevada Power retires or sells a component of regulated property, plant and equipment depreciated using the composite method, it charges the original cost, net of any proceeds from the disposition, to accumulated depreciation. Any gain or loss on disposals of all other assets is recorded through earnings with the exception of material gains or losses on regulated property, plant and equipment depreciated on a straight-line basis, which is then recorded to a regulatory asset or liability.
Debt and equity AFUDC, which represent the estimated costs of debt and equity funds necessary to finance the construction of regulated facilities, are capitalized as a component of property, plant and equipment, with offsetting credits to the Consolidated Statements of Operations. The rate applied to construction costs is the lower of the PUCN allowed rate of return and rates computed based on guidelines set forth by the Federal Energy Regulatory Commission ("FERC"). After construction is completed, Nevada Power is permitted to earn a return on these costs as a component of the related assets, as well as recover these costs through depreciation expense over the useful lives of the related assets. Nevada Power's AFUDC rate used during 2022 and 2021 was 6.55% and 7.14%, respectively.
Asset Retirement Obligations
Nevada Power recognizes AROs when it has a legal obligation to perform decommissioning, reclamation or removal activities upon retirement of an asset. Nevada Power's AROs are primarily associated with its generating facilities. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the ARO liability is adjusted for any revisions to the original estimate of undiscounted cash flows (with corresponding adjustments to property, plant and equipment, net) and for accretion of the ARO liability due to the passage of time. The difference between the ARO liability, the corresponding ARO asset included in property, plant and equipment, net and amounts recovered in rates to satisfy such liabilities is recorded as a regulatory asset or liability on the Consolidated Balance Sheets. The costs are not recovered in rates until the work has been completed.
Impairment
Nevada Power evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. As substantially all property, plant and equipment was used in regulated businesses, the impacts of regulation are considered when evaluating the carrying value of regulated assets.
Leases
Nevada Power has non-cancelable operating leases primarily for land, generating facilities, vehicles and office equipment and finance leases consisting primarily of transmission assets, generating facilities, office space and vehicles. These leases generally require Nevada Power to pay for insurance, taxes and maintenance applicable to the leased property. Given the capital intensive nature of the utility industry, it is common for a portion of lease costs to be capitalized when used during construction or maintenance of assets, in which the associated costs will be capitalized with the corresponding asset and depreciated over the remaining life of that asset. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. Nevada Power does not include options in its lease calculations unless there is a triggering event indicating Nevada Power is reasonably certain to exercise the option. Nevada Power's accounting policy is to not recognize right-of-use assets and lease obligations for leases with contract terms of one year or less and not separate lease components from non-lease components and instead account for each separate lease component and the non-lease components associated with a lease as a single lease component. Leases will be evaluated for impairment in line with Accounting Standards Codification ("ASC") Topic 360, "Property, Plant and Equipment" when a triggering event has occurred that might affect the value and use of the assets being leased.
Nevada Power's leases of generating facilities generally are for the long-term purchase of electric energy, also known as power purchase agreements ("PPA"). PPAs are generally signed before or during the early stages of project construction and can yield a lease that has not yet commenced. These agreements are primarily for renewable energy and the payments are considered variable lease payments as they are based on the amount of output.
Nevada Power's operating and right-of-use assets are recorded in other assets and the operating lease liabilities are recorded in current and long-term other liabilities accordingly.
Revenue Recognition
Nevada Power uses a single five-step model to identify and recognize revenue from contracts with customers ("Customer Revenue") upon transfer of control of promised goods or services in an amount that reflects the consideration to which Nevada Power expects to be entitled in exchange for those goods or services. Nevada Power records sales, franchise and excise taxes collected directly from customers and remitted directly to the taxing authorities on a net basis on the Consolidated Statements of Operations.
Substantially all of Nevada Power's Customer Revenue is derived from tariff-based sales arrangements approved by various regulatory commissions. These tariff-based revenues are mainly comprised of energy, transmission and distribution and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. Other revenue consists primarily of amounts not considered Customer Revenue within ASC 606, "Revenue from Contracts with Customers" and revenue recognized in accordance with ASC 842, "Leases."
Revenue recognized is equal to what Nevada Power has the right to invoice as it corresponds directly with the value to the customer of Nevada Power's performance to date and includes billed and unbilled amounts. As of December 31, 2022 and 2021, trade receivables, net on the Consolidated Balance Sheets relate substantially to Customer Revenue, including unbilled revenue of $143 million and $107 million, respectively. Payments for amounts billed are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued. In addition, Nevada Power has recognized contract assets of $4 million and $6 million as of December 31, 2022 and 2021, respectively, due to Nevada Power's performance on certain contracts.
Unamortized Debt Premiums, Discounts and Issuance Costs
Premiums, discounts and financing costs incurred for the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Income Taxes
Berkshire Hathaway includes Nevada Power in its consolidated U.S. federal income tax return. Consistent with established regulatory practice, Nevada Power's provision for income taxes has been computed on a separate return basis.
Deferred income tax assets and liabilities are based on differences between the financial statement and income tax basis of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities associated with components of other comprehensive income ("OCI") are charged or credited directly to OCI. Changes in deferred income tax assets and liabilities associated with certain property‑related basis differences and other various differences that Nevada Power deems probable to be passed on to its customers are charged or credited directly to a regulatory asset or liability and will be included in regulated rates when the temporary differences reverse. Other changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense or a regulatory asset or liability in the period of enactment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
Investment tax credits are deferred and amortized over the estimated useful lives of the related properties.
Nevada Power recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Nevada Power's unrecognized tax benefits are primarily included in other long-term liabilities on the Consolidated Balance Sheets. Estimated interest and penalties, if any, related to uncertain tax positions are included as a component of income tax expense on the Consolidated Statements of Operations.
Segment Information
Nevada Power currently has one segment, which includes its regulated electric utility operations.
(3) Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | 2022 | | 2021 |
| Utility plant: | | | | | |
| Generation | 30 - 55 years | | $ | 3,977 | | | $ | 3,793 | |
| Transmission | 45 - 70 years | | 1,562 | | | 1,503 | |
| Distribution | 20 - 65 years | | 4,134 | | | 3,920 | |
| General and intangible plant | 5 - 65 years | | 871 | | | 836 | |
| Utility plant | | | 10,544 | | | 10,052 | |
| Accumulated depreciation and amortization | | | (3,624) | | | (3,406) | |
| Utility plant, net | | | 6,920 | | | 6,646 | |
| Nonregulated, net of accumulated depreciation and amortization | 45 years | | 1 | | | 1 | |
| | | 6,921 | | | 6,647 | |
| Construction work-in-progress | | | 485 | | | 244 | |
| Property, plant and equipment, net | | | $ | 7,406 | | | $ | 6,891 | |
Almost all of Nevada Power's plant is subject to the ratemaking jurisdiction of the PUCN and the FERC. Nevada Power's depreciation and amortization expense, as authorized by the PUCN, stated as a percentage of the depreciable property balances as of December 31, 2022, 2021 and 2020 was 3.1%, 3.2%, and 3.1%, respectively. Nevada Power is required to file a utility plant depreciation study every six years as a companion filing with the triennial general rate review filings. The most recent study was filed in 2017.
Construction work-in-progress is primarily related to the construction of regulated assets.
(4) Jointly Owned Utility Facilities
Under joint facility ownership agreements, Nevada Power, as tenants in common, has undivided interests in jointly owned generation and transmission facilities. Nevada Power accounts for its proportionate share of each facility and each joint owner has provided financing for its share of each facility. Operating costs of each facility are assigned to joint owners based on their percentage of ownership or energy production, depending on the nature of the cost. Operating costs and expenses on the Consolidated Statements of Operations include Nevada Power's share of the expenses of these facilities.
The amounts shown in the table below represent Nevada Power's share in each jointly owned facility included in property, plant and equipment, net as of December 31, 2022 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Nevada | | | | | | Construction |
| Power's | | Utility | | Accumulated | | Work-in- |
| Share | | Plant | | Depreciation | | Progress |
| | | | | | | |
Navajo Generating Station(1) | 11 | % | | $ | 1 | | | $ | 4 | | | $ | — | |
| ON Line Transmission Line | 19 | | | 121 | | | 26 | | | 1 | |
| Other transmission facilities | Various | | 56 | | | 27 | | | — | |
| Total | | | $ | 178 | | | $ | 57 | | | $ | 1 | |
(1)Represents Nevada Power's proportionate share of capitalized asset retirement costs to retire the Navajo Generating Station, which was shut down in November 2019.
(5) Leases
The following table summarizes Nevada Power's leases recorded on the Consolidated Balance Sheet as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Right-of-use assets: | | | |
| Operating leases | $ | 9 | | | $ | 10 | |
| Finance leases | 303 | | | 326 | |
| Total right-of-use assets | $ | 312 | | | $ | 336 | |
| | | |
| Lease liabilities: | | | |
| Operating leases | $ | 11 | | | $ | 13 | |
| Finance leases | 313 | | | 336 | |
| Total lease liabilities | $ | 324 | | | $ | 349 | |
The following table summarizes Nevada Power's lease costs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 | | |
| | | | | | | |
| Variable | $ | 369 | | | $ | 449 | | | $ | 434 | | | |
| Operating | 2 | | | 2 | | | 3 | | | |
| Finance: | | | | | | | |
| Amortization | 14 | | | 13 | | | 12 | | | |
| Interest | 27 | | | 28 | | | 29 | | | |
| | | | | | | |
| Total lease costs | $ | 412 | | | $ | 492 | | | $ | 478 | | | |
| | | | | | | |
| Weighted-average remaining lease term (years): | | | | | | | |
| Operating leases | 4.8 | | 5.7 | | 6.5 | | |
| Finance leases | 29.1 | | 28.7 | | 28.7 | | |
| | | | | | | |
| Weighted-average discount rate: | | | | | | | |
| Operating leases | 4.5 | % | | 4.5 | % | | 4.5 | % | | |
| Finance leases | 8.6 | % | | 8.6 | % | | 8.6 | % | | |
The following table summarizes Nevada Power's supplemental cash flow information relating to leases for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 | | |
| | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from operating leases | $ | (3) | | | $ | (3) | | | $ | (3) | | | |
| Operating cash flows from finance leases | (28) | | | (29) | | | (34) | | | |
| Financing cash flows from finance leases | (17) | | | (16) | | | (15) | | | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | | | | | |
| Operating leases | $ | — | | | $ | — | | | $ | 1 | | | |
| Finance leases | 3 | | | 1 | | | 9 | | | |
Nevada Power has the following remaining lease commitments as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Operating | | Finance | | Total |
| 2023 | $ | 2 | | | $ | 44 | | | $ | 46 | |
| 2024 | 3 | | | 44 | | | 47 | |
| 2025 | 3 | | | 43 | | | 46 | |
| 2026 | 3 | | | 44 | | | 47 | |
| 2027 | 2 | | | 42 | | | 44 | |
| Thereafter | — | | | 414 | | | 414 | |
| Total undiscounted lease payments | 13 | | | 631 | | | 644 | |
| Less - amounts representing interest | (2) | | | (318) | | | (320) | |
| Lease liabilities | $ | 11 | | | $ | 313 | | | $ | 324 | |
Operating and Finance Lease Obligations
Nevada Power's lease obligation primarily consists of a transmission line, One Nevada Transmission Line ("ON Line"), which was placed in-service on December 31, 2013. Nevada Power and Sierra Pacific, collectively the ("Nevada Utilities"), entered into a long-term transmission use agreement, in which the Nevada Utilities have a 25% interest and Great Basin Transmission South, LLC has a 75% interest. The Nevada Utilities' share of the long-term transmission use agreement and ownership interest is split at 75% for Nevada Power and 25% for Sierra Pacific, previously split 95% for Nevada Power and 5% for Sierra Pacific. In December 2019, the PUCN ordered the Nevada Utilities to complete the necessary procedures to change the ownership split to 75% for Nevada Power and 25% for Sierra Pacific, effective January 1, 2020. In August 2020, the FERC approved the amended agreement between the Nevada Utilities and Great Basin Transmission, LLC that reallocated the PUCN-approved ownership percentage change from Nevada Power to Sierra Pacific. The term of the lease is 41 years with the agreement ending December 31, 2054. Total ON Line finance lease obligations of $276 million and $286 million were included on the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively. See Note 2 for further discussion of Nevada Power's other lease obligations.
(6) Regulatory Matters
Regulatory Assets
Regulatory assets represent costs that are expected to be recovered in future rates. Nevada Power's regulatory assets reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
| Deferred energy costs | 1 year | | 654 | | | 273 | |
| Decommissioning costs | 3 years | | 116 | | | 169 | |
| Merger costs from 1999 merger | 22 years | | 105 | | | 110 | |
| Unrealized loss on regulated derivative contracts | 1 year | | 75 | | | 117 | |
| Asset retirement obligations | 5 years | | 69 | | | 73 | |
| Deferred operating costs | 13 years | | 67 | | | 93 | |
| Other | Various | | 208 | | | 184 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total regulatory assets | | | $ | 1,294 | | | $ | 1,019 | |
| | | | | |
| Reflected as: | | | | | |
| Current assets | | | $ | 666 | | | $ | 291 | |
| Noncurrent assets | | | 628 | | | 728 | |
| Total regulatory assets | | | $ | 1,294 | | | $ | 1,019 | |
Nevada Power had regulatory assets not earning a return on investment of $320 million and $371 million as of December 31, 2022 and 2021, respectively. The regulatory assets not earning a return on investment primarily consist of merger costs from the 1999 merger, AROs, deferred operating costs, a portion of the employee benefit plans, losses on reacquired debt and deferred energy costs.
Regulatory Liabilities
Regulatory liabilities represent amounts that are expected to be returned to customers in future periods. Nevada Power's regulatory liabilities reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
Deferred income taxes(1) | Various | | $ | 560 | | | $ | 603 | |
Cost of removal(2) | 31 years | | 358 | | | 348 | |
| | | | | |
| | | | | |
| Earning sharing mechanism | 4 years | | 114 | | | 73 | |
| Other | Various | | 106 | | | 125 | |
| Total regulatory liabilities | | | $ | 1,138 | | | $ | 1,149 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 45 | | | $ | 49 | |
| Noncurrent liabilities | | | 1,093 | | | 1,100 | |
| Total regulatory liabilities | | | $ | 1,138 | | | $ | 1,149 | |
(1)Amounts primarily represent income tax liabilities related to the federal tax rate change from 35% to 21% that are probable to be passed on to customers, offset by income tax benefits related to accelerated tax depreciation and certain property-related basis differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
(2)Amounts represent estimated costs, as accrued through depreciation rates and exclusive of ARO liabilities, of removing regulated property, plant and equipment in accordance with accepted regulatory practices.
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 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 and would be included in the table above as deferred energy costs. 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 and is included in the table above as deferred energy costs. These excess amounts are reflected in quarterly adjustments to rates and recorded as cost of fuel, energy and capacity in future time periods.
(7) Short-term Debt and Credit Facilities
The following table summarizes Nevada Power's availability under its credit facilities as of December 31 (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Credit facilities | | $ | 400 | | | $ | 400 | |
| Short-term debt | | — | | | (180) | |
| | | | |
| Net credit facilities | | $ | 400 | | | $ | 220 | |
Nevada Power has a $400 million secured credit facility expiring in June 2025 with an unlimited number of maturity extension options, subject to lender consent. The credit facility, which is for general corporate purposes and provide for the issuance of letters of credit, has a variable interest rate based on the Secured Overnight Financing Rate ("SOFR") or a base rate, at Nevada Power's option, plus a spread that varies based on Nevada Power's credit ratings for its senior secured long‑term debt securities. As of December 31, 2022 and 2021, Nevada Power had borrowings of $— million and $180 million, respectively, outstanding under the credit facility. As of December 31, 2022 and 2021, the weighted average interest rate on borrowings outstanding was —% and 0.86%, respectively. Amounts due under Nevada Power's credit facility are collateralized by Nevada Power's general and refunding mortgage bonds. The credit facility requires Nevada Power'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 December 31, 2022 and 2021, Nevada Power had $— million and $15 million, respectively, of a fully available letter of credit issued under committed arrangements in support of certain transactions required by a third party and has provisions that automatically extend the annual expiration date for an additional year unless the issuing bank elects not to renew the letter of credit prior to the expiration date.
(8) Long-term Debt
Nevada Power's long-term debt consists of the following, including unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| General and refunding mortgage securities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
3.700% Series CC, due 2029 | $ | 500 | | | $ | 497 | | | $ | 497 | |
2.400% Series DD, due 2030 | 425 | | | 422 | | | 422 | |
6.650% Series N, due 2036 | 367 | | | 360 | | | 359 | |
6.750% Series R, due 2037 | 349 | | | 346 | | | 346 | |
5.375% Series X, due 2040 | 250 | | | 248 | | | 248 | |
5.450% Series Y, due 2041 | 250 | | | 239 | | | 239 | |
3.125% Series EE, due 2050 | 300 | | | 298 | | | 297 | |
5.900% Series GG, due 2053 | 400 | | | 394 | | | — | |
| Tax-exempt refunding revenue bond obligations: | | | | | |
| Fixed-rate series: | | | | | |
1.875% Pollution Control Bonds Series 2017A, due 2032(1) | 40 | | | 39 | | | 39 | |
1.650% Pollution Control Bonds Series 2017, due 2036(1) | 40 | | | 39 | | | 39 | |
1.650% Pollution Control Bonds Series 2017B, due 2039(1) | 13 | | | 13 | | | 13 | |
| | | | | |
| | | | | |
| | | | | |
Variable-rate 4.821% Term Loan, due 2024(2) | 300 | | | 300 | | | — | |
| Total long-term debt | $ | 3,234 | | | $ | 3,195 | | | $ | 2,499 | |
| | | | | |
| Reflected as: | | | | | |
| | | | | |
| | | | | |
| Total long-term debt | | | $ | 3,195 | | | $ | 2,499 | |
(1)Subject to mandatory purchase by Nevada Power in March 2023 at which date the interest rate may be adjusted.
(2)Amounts borrowed under the facility bear interest at variable rates based on SOFR or a base rate, at Nevada Power's option, plus a pricing margin.
Annual Payment on Long-Term Debt
The annual repayments of long-term debt for the years beginning January 1, 2023 and thereafter, are as follows (in millions):
| | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| 2024 | $ | 300 | | | | | |
| | | | | |
| | | | | |
| | | | | |
| 2028 and thereafter | 2,934 | | | | | |
| Total | 3,234 | | | | | |
| Unamortized premium, discount and debt issuance cost | (39) | | | | | |
| | | | | |
| | | | | |
| Total | $ | 3,195 | | | | | |
The issuance of General and Refunding Mortgage Securities by Nevada Power is subject to PUCN approval and is limited by available property and other provisions of the mortgage indentures. As of December 31, 2022, approximately $9.8 billion (based on original cost) of Nevada Power's property was subject to the liens of the mortgages.
(9) Income Taxes
Income tax expense consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Current – Federal | $ | (13) | | | $ | 37 | | | $ | 57 | |
| | | | | |
| Deferred – Federal | 49 | | | — | | | (10) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total income tax expense | $ | 36 | | | $ | 37 | | | $ | 47 | |
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 for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| Effects of ratemaking | (11) | | | (11) | | | (8) | |
| | | | | |
| | | | | |
| Other | 1 | | | 1 | | | 1 | |
| Effective income tax rate | 11 | % | | 11 | % | | 14 | % |
The net deferred income tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| | 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Regulatory liabilities | $ | 186 | | | $ | 195 | |
| Operating and finance leases | 68 | | | 73 | |
| Customer advances | 27 | | | 25 | |
| Unamortized contract value | 20 | | | 25 | |
| Other | 9 | | | 8 | |
| Total deferred income tax assets | 310 | | | 326 | |
| | | |
| | | |
| | | |
| Deferred income tax liabilities: | | | |
| Property related items | (821) | | | (800) | |
| Regulatory assets | (273) | | | (204) | |
| Operating and finance leases | (65) | | | (70) | |
| Other | (26) | | | (34) | |
| Total deferred income tax liabilities | (1,185) | | | (1,108) | |
| Net deferred income tax liability | $ | (875) | | | $ | (782) | |
| | | |
| | | |
| | | |
| | | |
| | | |
The U.S. Internal Revenue Service has closed or effectively settled its examination of Nevada Power's income tax return through the short year ended December 31, 2013. The closure of examinations, or the expiration of the statute of limitations, may not preclude the U.S. Internal Revenue Service from adjusting the federal net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
(10) 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. Nevada Power did not make any contributions to the Qualified Pension Plan for the years ended December 31, 2022, 2021 and 2020. Nevada Power contributed $1 million to the Non-Qualified Pension Plans for the years ended December 31, 2022, 2021 and 2020. Nevada Power did not make any contributions to the Other Postretirement Plans for the years ended December 31, 2022, 2021 and 2020. 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 receivable from (payable to) NV Energy are included on the Consolidated Balance Sheets and consist of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Qualified Pension Plan - | | | |
| Other non-current assets | $ | 27 | | | $ | 42 | |
| | | |
| | | |
| Non-Qualified Pension Plans: | | | |
| Other current liabilities | (1) | | | (1) | |
| Other long-term liabilities | (6) | | | (8) | |
| | | |
| Other Postretirement Plans - | | | |
| Other non-current assets | 7 | | | 8 | |
| | | |
(11) Asset Retirement Obligations
Nevada Power estimates its 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.
Nevada Power does not recognize liabilities for AROs for which the fair value cannot be reasonably estimated. Due to the indeterminate removal date, the fair value of the associated liabilities on certain generation, transmission, distribution and other assets cannot currently be estimated, and no amounts are recognized on the Consolidated Financial Statements other than those included in the cost of removal regulatory liability established via approved depreciation rates in accordance with accepted regulatory practices. These accruals totaled $358 million and $348 million as of December 31, 2022 and 2021, respectively.
The following table presents Nevada Power's ARO liabilities by asset type as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Waste water remediation | $ | 31 | | | $ | 37 | |
| Evaporative ponds and dry ash landfills | 14 | | | 13 | |
| | | |
| Solar-powered generating facilities | 3 | | | 3 | |
| Other | 11 | | | 15 | |
| Total asset retirement obligations | $ | 59 | | | $ | 68 | |
The following table reconciles the beginning and ending balances of Nevada Power's ARO liabilities for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 68 | | | $ | 72 | |
| Change in estimated costs | 5 | | | — | |
| | | |
| Retirements | (16) | | | (6) | |
| Accretion | 2 | | | 2 | |
| Ending balance | $ | 59 | | | $ | 68 | |
| | | |
| Reflected as: | | | |
| Other current liabilities | $ | 16 | | | $ | 19 | |
| Other long-term liabilities | 43 | | | 49 | |
| $ | 59 | | | $ | 68 | |
In 2008, Nevada Power signed an administrative order of consent as owner and operator of Reid Gardner Generating Station Unit Nos. 1, 2 and 3 and as co-owner and operating agent of Unit No. 4. Based on the administrative order of consent, Nevada Power recorded estimated AROs and capital remediation costs. However, actual costs of work under the administrative order of consent may vary significantly once the scope of work is defined and additional site characterization has been completed. In connection with the termination of the co-ownership arrangement, effective October 22, 2013, between Nevada Power and California Department of Water Resources ("CDWR") for the Reid Gardner Generating Station Unit No. 4, Nevada Power and CDWR entered into a cost-sharing agreement that sets forth how the parties will jointly share in costs associated with all investigation, characterization and, if necessary, remedial activities as required under the administrative order of consent.
Certain of Nevada Power's decommissioning and reclamation obligations relate to jointly-owned facilities, and as such, Nevada Power is committed to pay a proportionate share of the decommissioning or reclamation costs. In the event of a default by any of the other joint participants, the respective subsidiary may be obligated to absorb, directly or by paying additional sums to the entity, a proportionate share of the defaulting party's liability. Management has identified legal obligations to retire generation plant assets specified in land leases for Nevada Power's jointly-owned Navajo Generating Station, retired in November 2019, and the Higgins Generating Station. Provisions of the lease require the lessees to remove the facilities upon request of the lessors at the expiration of the leases. Nevada Power's estimated share of the decommissioning and reclamation obligations are primarily recorded as ARO liabilities in other long-term liabilities on the Consolidated Balance Sheets.
(12) 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 and natural gas 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 and report on 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 Notes 2 and 13 for additional information on derivative contracts.
The following table, which excludes contracts that have been designated as normal under the normal purchases and normal sales exception afforded by GAAP, summarizes the fair value of Nevada Power's derivative contracts, on a gross basis, and reconciles those amounts presented on a net basis on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Derivative | | | | |
| Other | | | | Contracts - | | Other | | |
| Current | | | | Current | | Long-term | | |
| Assets | | | | Liabilities | | Liabilities | | Total |
| | | | | | | | | |
| As of December 31, 2022: | | | | | | | | | |
Not designated as hedging contracts (1): | | | | | | | | | |
| Commodity assets | $ | 23 | | | | | $ | — | | | $ | — | | | $ | 23 | |
| Commodity liabilities | — | | | | | (51) | | | (24) | | | (75) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total derivative - net basis | $ | 23 | | | | | $ | (51) | | | $ | (24) | | | $ | (52) | |
| | | | | | | | | |
| As of December 31, 2021: | | | | | | | | | |
Not designated as hedging contracts(1): | | | | | | | | | |
| Commodity assets | $ | 4 | | | | | $ | — | | | $ | — | | | $ | 4 | |
| Commodity liabilities | — | | | | | (55) | | | (62) | | | (117) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total derivative - net basis | $ | 4 | | | | | $ | (55) | | | $ | (62) | | | $ | (113) | |
(1)Nevada Power's commodity derivatives not designated as hedging contracts are included in regulated rates. As of December 31, 2022 and 2021, a regulatory asset of $52 million and $113 million, respectively, was recorded related to the net derivative liability of $52 million and $113 million, respectively.
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 December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Unit of | | | | |
| Measure | | 2022 | | 2021 |
| | | | | |
| Electricity purchases | Megawatt hours | | 2 | | | 1 | |
| Natural gas purchases | Decatherms | | 109 | | | 119 | |
| | | | | |
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, 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, 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 agreements, including 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 recognized credit rating agencies. These agreements 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" if there is a material adverse change in Nevada Power's creditworthiness. These rights can vary by contract and by counterparty. As of December 31, 2022, Nevada Power's credit ratings for its senior secured debt and its issuer credit ratings for senior unsecured debt from the 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 totaled $5 million and $6 million as of December 31, 2022 and 2021, respectively, 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.
(13) 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 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 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 financial 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 December 31, 2022: | | | | | | | |
| Assets: | | | | | | | |
| Commodity derivatives | $ | — | | | $ | — | | | $ | 23 | | | $ | 23 | |
| Money market mutual funds | 34 | | | — | | | — | | | 34 | |
| Investment funds | 3 | | | — | | | — | | | 3 | |
| $ | 37 | | | $ | — | | | $ | 23 | | | $ | 60 | |
| | | | | | | |
| Liabilities - commodity derivatives | $ | — | | | $ | — | | | $ | (75) | | | $ | (75) | |
| | | | | | | |
| As of December 31, 2021: | | | | | | | |
| Assets: | | | | | | | |
| Commodity derivatives | $ | — | | | $ | — | | | $ | 4 | | | $ | 4 | |
| Money market mutual funds | 34 | | | — | | | — | | | 34 | |
| Investment funds | 3 | | | — | | | — | | | 3 | |
| $ | 37 | | | $ | — | | | $ | 4 | | | $ | 41 | |
| | | | | | | |
| Liabilities - commodity derivatives | $ | — | | | $ | — | | | $ | (117) | | | $ | (117) | |
Nevada Power's investments in money market mutual funds and investment funds are accounted for as available-for-sale securities and are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value.
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. 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 December 31, 2022, 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.
Nevada Power's investments in money market mutual funds and equity securities are accounted for as available-for-sale securities and are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value.
The following table reconciles the beginning and ending balances of Nevada Power's net commodity derivative assets or liabilities measured at fair value on a recurring basis using significant Level 3 inputs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Beginning balance | | $ | (113) | | | $ | 15 | | | $ | (8) | |
| Changes in fair value recognized in regulatory assets or liabilities | | (68) | | | (90) | | | (17) | |
| | | | | | |
| Settlements | | 129 | | | (38) | | | 40 | |
| Ending balance | | $ | (52) | | | $ | (113) | | | $ | 15 | |
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 following table presents the carrying value and estimated fair value of Nevada Power's long-term debt as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying | | Fair | | Carrying | | Fair |
| Value | | Value | | Value | | Value |
| | | | | | | |
| Long-term debt | $ | 3,195 | | | $ | 3,114 | | | $ | 2,499 | | | $ | 3,067 | |
(14) Commitments and Contingencies
Commitments
Nevada Power has the following firm commitments that are not reflected on the Consolidated Balance Sheet. Minimum payments as of December 31, 2022 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 and Thereafter | | Total |
| Contract type: | | | | | | | | | | | | | |
Fuel, capacity and transmission contract commitments | $ | 1,149 | | | $ | 485 | | | $ | 357 | | | $ | 360 | | | $ | 349 | | | $ | 2,871 | | | $ | 5,571 | |
Fuel and capacity contract commitments (not commercially operable) | 60 | | | 181 | | | 211 | | | 211 | | | 211 | | | 4,148 | | | 5,022 | |
| Construction commitments | 525 | | | 77 | | | 20 | | | 21 | | | 10 | | | — | | | 653 | |
| Easements | 5 | | | 3 | | | 2 | | | 2 | | | 2 | | | 50 | | | 64 | |
| Maintenance, service and other contracts | 30 | | | 24 | | | 24 | | | 19 | | | 11 | | | 38 | | | 146 | |
| Total commitments | $ | 1,769 | | | $ | 770 | | | $ | 614 | | | $ | 613 | | | $ | 583 | | | $ | 7,107 | | | $ | 11,456 | |
Fuel and Capacity Contract Commitments
Purchased Power
Nevada Power has several contracts for long-term purchase of electric energy which have been approved by the PUCN. The expiration of these contracts range from 2023 to 2067. Purchased power includes estimated payments for contracts which meet the definition of a lease and payments are based on the amount of energy expected to be generated. See Note 5 for further discussion of Nevada Power's lease commitments.
Natural Gas
Nevada Power's gas transportation contracts expire from 2027 to 2039 and the gas supply contracts expires from 2023 to 2024.
Fuel and Capacity Contract Commitments - Not Commercially Operable
Nevada Power has several contracts for long-term purchase of electric energy in which the facility remains under development. Amounts represent the estimated payments under renewable energy power purchase contracts, which have been approved by the PUCN and are contingent upon the developers obtaining commercial operation and their ability to deliver power.
Construction Commitments
Nevada Power's construction commitments included in the table above relate to firm commitments and include costs associated with a planned 150-MW solar photovoltaic facility with an additional 100 MWs of co-located battery storage that will be developed in Clark County, Nevada, a planned 220-MW grid-tied battery energy storage system that will be developed on the site of the retired Reid Gardner generating station in Clark County, Nevada and certain other generating plant projects.
Easements
Nevada Power has non-cancelable easements for land. Operations and maintenance expense on non-cancelable easements totaled $4 million for the years ended December 31, 2022, 2021 and 2020.
Maintenance, Service and Other Contracts
Nevada Power has long-term service agreements for the performance of maintenance on generation units. Obligation amounts are based on estimated usage. The estimated expiration of these service agreements range from 2023 to 2031.
Environmental Laws and Regulations
Nevada Power is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal and other environmental matters that have the potential to impact its 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 123 ("SB 123"), which included the retirement of coal plants and replacing the capacity with renewable facilities and other generating facilities. In May 2014, Nevada Power filed its Emissions Reduction and 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.
In compliance with SB 123, Nevada Power retired 255 MWs of coal-fueled generation in 2019 in addition to the 557 MWs of coal-fueled generation retired in 2017. Consistent with the ERCR Plan, between 2014 and 2016, Nevada Power acquired 536 MWs of natural gas generating resources, executed long-term power purchase agreements for 200 MWs of nameplate renewable energy capacity and constructed a 15-MW solar photovoltaic facility. Nevada Power has the option to acquire 35 MWs of nameplate renewable energy capacity in the future under the ERCR Plan, subject to PUCN approval.
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.
(15) Revenues from Contracts with Customers
The following table summarizes Nevada Power's Customer Revenue by customer class for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| 2022 | | 2021 | | 2020 |
| Customer Revenue: | | | | | |
| Retail: | | | | | |
| Residential | $ | 1,440 | | | $ | 1,207 | | | $ | 1,145 | |
| Commercial | 525 | | | 414 | | | 384 | |
| Industrial | 528 | | | 386 | | | 345 | |
| Other | 14 | | | 14 | | | 12 | |
| Total fully bundled | 2,507 | | | 2,021 | | | 1,886 | |
| Distribution-only service | 20 | | | 22 | | | 24 | |
| Total retail | 2,527 | | | 2,043 | | | 1,910 | |
| Wholesale, transmission and other | 82 | | | 74 | | | 62 | |
| Total Customer Revenue | 2,609 | | | 2,117 | | | 1,972 | |
| Other revenue | 21 | | | 22 | | | 26 | |
| Total operating revenue | $ | 2,630 | | | $ | 2,139 | | | $ | 1,998 | |
(16) Supplemental Cash Flow Disclosures
The summary of supplemental cash flow disclosures as of and for the years ended December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 121 | | | $ | 115 | | | $ | 115 | |
| Income taxes (refunded) paid | $ | (29) | | | $ | 63 | | | $ | 50 | |
| | | | | |
| Supplemental disclosure of non-cash investing and financing transactions: | | | | | |
| Accruals related to property, plant and equipment additions | $ | 98 | | | $ | 53 | | | $ | 32 | |
(17) Related Party Transactions
Nevada Power has an intercompany administrative services agreement with BHE and its subsidiaries. Amounts charged to Nevada Power under this agreement, either directly or through NV Energy, totaled $46 million, $30 million and $6 million for the years ended December 31, 2022, 2021 and 2020, respectively. Amounts charged to Nevada Power in 2022 and 2021 primarily relate to information technology projects billed at a consolidated level and passed through to affiliates.
Kern River Gas Transmission Company, an indirect subsidiary of BHE, provided natural gas transportation and other services to Nevada Power of $49 million, $52 million, $52 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, Nevada Power's Consolidated Balance Sheets included amounts due to Kern River Gas Transmission Company of $3 million and $4 million, respectively.
Nevada Power provided electricity and other services to PacifiCorp, an indirect subsidiary of BHE, of $4 million, $3 million and $3 million for the years ended December 31, 2022, 2021 and 2020, respectively. There were no receivables associated with these services as of December 31, 2022 and 2021. PacifiCorp provided electricity and the sale of renewable energy credits to Nevada Power of $— million, $— million and $1 million for the years ended December 31, 2022, 2021, and 2020, respectively. There were no payables associated with these transactions as of December 31, 2022 and 2021.
Nevada Power provided electricity to Sierra Pacific of $362 million, $179 million and $106 million for the years ended December 31, 2022, 2021 and 2020, respectively. Receivables associated with these transactions were $41 million and $13 million as of December 31, 2022 and 2021, respectively. Nevada Power purchased electricity from Sierra Pacific of $86 million, $43 million and $34 million for the years ended December 31, 2022, 2021 and 2020, respectively. Payables associated with these transactions were $5 million and $— million as of December 31, 2022 and 2021, respectively.
Nevada Power incurs intercompany administrative and shared facility costs with NV Energy and Sierra Pacific. These transactions are governed by an intercompany service agreement and are priced at cost. Nevada Power provided services to NV Energy of $3 million, $1 million and $— million for each of the years ending December 31, 2022, 2021 and 2020, respectively. NV Energy provided services to Nevada Power of $9 million for the years ending December 31, 2022, 2021 and 2020. Nevada Power provided services to Sierra Pacific of $25 million, $25 million and $26 million for the years ended December 31, 2022, 2021 and 2020, respectively. Sierra Pacific provided services to Nevada Power of $16 million, $15 million and $15 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, Nevada Power's Consolidated Balance Sheets included amounts due to NV Energy of $51 million and $33 million, respectively. There were no receivables due from NV Energy as of December 31, 2022 and 2021. In November 2022, Nevada Power entered into a $100 million unsecured note with NV Energy receivable upon demand and $100 million was outstanding as of December 31, 2022. As of December 31, 2022 and 2021, Nevada Power's Consolidated Balance Sheets included receivables due from Sierra Pacific of $33 million and $2 million, respectively. There were no payables due to Sierra Pacific as of December 31, 2022 and 2021.
Nevada Power is party to a tax-sharing agreement with NV Energy and NV Energy is part of the Berkshire Hathaway consolidated U.S. federal income tax return. As of December 31, 2022 and 2021 federal income taxes receivable from NV Energy were $12 million and $27 million, respectively. Nevada Power received cash refunds of $29 million for federal income taxes for the year ended December 31, 2022 and made cash payments of $63 million and $50 million for federal income taxes for the years ended December 31, 2021 and 2020, respectively.
Certain disbursements for accounts payable and payroll are made by NV Energy on behalf of Nevada Power and reimbursed automatically when settled by the bank. These amounts are recorded as accounts payable at the time of disbursement.
Sierra Pacific Power Company and its subsidiaries
Consolidated Financial Section
Item 7. 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 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, usage trends and other factors. This discussion should be read in conjunction with Sierra Pacific's historical Consolidated Financial Statements and Notes to Consolidated Financial Statements in Item 8 of this Form 10‑K. Sierra Pacific's actual results in the future could differ significantly from the historical results.
Results of Operations
Overview
Net income for the year ended December 31, 2022 was $118 million, a decrease of $6 million, or 5%, compared to 2021, primarily due to higher operations and maintenance expenses, mainly due to higher plant operations and maintenance expenses, lower other, net, mainly due to higher pension expense and lower cash surrender value of corporate-owned life insurance policies, higher depreciation and amortization, primarily due to higher plant in-service, higher interest expense mainly due to higher long-term debt, partially offset by higher electric utility margin and higher interest and dividend income, mainly from carrying charges on regulatory balances. Electric utility margin increased primarily due to higher transmission and wholesale revenue, higher customer volumes and higher regulatory-related revenue deferrals, partially offset by unfavorable price impacts from changes in sales mix. Electric retail customer volumes, including distribution only service customers, increased 2.8% primarily due to an increase in the average number of customers, offset by the unfavorable impact of weather and unfavorable changes in customer usage. Energy generated decreased 13% for 2022 compared to 2021 primarily due to lower natural gas- and coal-fueled generation. Wholesale electricity sales volumes increased 13% and purchased electricity volumes decreased 5%.
Net income for the year ended December 31, 2021 was $124 million, an increase of $13 million, or 12%, compared to 2020, primarily due to higher interest and dividend income, mainly from carrying charges on regulatory balances, higher electric utility margin, mainly from price impacts from changes in sales mix and an increase in the average number of customer, primarily from the residential customer class, partially offset by lower revenue recognized due to a favorable regulatory decision and an adjustment to regulatory-related revenue deferrals, higher other, net, mainly due to lower pension expense and higher cash surrender value of corporate-owned life insurance policies, higher allowance for equity funds, mainly due to higher construction work-in-progress, higher natural gas utility margin, mainly due to higher commercial usage, and lower interest expense, mainly due to lower carrying charges on regulatory balances, partially offset by higher income tax expense primarily due to higher pretax income, higher depreciation and amortization, mainly from regulatory amortizations and higher plant in-service, and higher operations and maintenance expenses, mainly due to higher plant operations and maintenance expenses and higher legal expenses, offset by lower earnings sharing. Electric retail customer volumes, including distribution only service customers, increased 2.9% primarily due to an increase in the average number of customers, favorable changes in customer usage patterns and the favorable impact of weather. Energy generated decreased 2% for 2021 compared to 2020 primarily due to lower natural gas-fueled generation, partially offset by higher coal-fueled generation. Wholesale electricity sales volumes increased 20% and purchased electricity volumes increased 4%.
Non-GAAP Financial Measure
Management utilizes various key financial measures that are prepared in accordance with GAAP, as well as non-GAAP financial measures such as, electric utility margin and natural gas utility margin, to help evaluate results of operations. Electric utility margin is calculated as electric operating revenue less cost of fuel and energy while natural gas utility margin is calculated as natural gas operating revenue less cost of natural gas purchased for resale, which are captions presented on the Consolidated Statements of Operations.
Sierra Pacific's cost of fuel and energy and cost of natural gas purchased for resale are generally recovered from its retail customers through regulatory recovery mechanisms and, as a result, changes in Sierra Pacific's expenses included in regulatory recovery mechanisms result in comparable changes to revenue. As such, management believes electric utility margin and natural gas utility margin more appropriately and concisely explains profitability rather than a discussion of revenue and cost of sales separately. Management believes the presentation of electric utility margin and natural gas utility margin provides meaningful and valuable insight into the information management considers important to running the business and a measure of comparability to others in the industry.
Electric utility margin and natural gas utility margin are not measures calculated in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, operating income, which is the most directly comparable financial measure prepared in accordance with GAAP. The following table provides a reconciliation of utility margin to operating income for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Electric utility margin: | | | | | | | | | | | | | | |
| Operating revenue | | $ | 1,025 | | | $ | 848 | | | $ | 177 | | 21 | % | | $ | 848 | | | $ | 738 | | | $ | 110 | | 15 | % |
| Cost of fuel and energy | | 555 | | | 407 | | | 148 | | 36 | | | 407 | | | 301 | | | 106 | | 35 | |
| Electric utility margin | | 470 | | | 441 | | | 29 | | 7 | % | | 441 | | | 437 | | | 4 | | 1 | % |
| | | | | | | | | | | | | | |
| Natural gas utility margin: | | | | | | | | | | | | | | |
| Operating revenue | | 168 | | | 117 | | | 51 | | 44 | % | | 117 | | | 116 | | | 1 | | 1 | % |
| Natural gas purchased for resale | | 111 | | | 61 | | | 50 | | 82 | | | 61 | | | 62 | | | (1) | | (2) | |
| Natural gas utility margin | | 57 | | | 56 | | | 1 | | 2 | % | | 56 | | | 54 | | | 2 | | 4 | % |
| | | | | | | | | | | | | | |
| Utility margin | | 527 | | | 497 | | | 30 | | 6 | % | | 497 | | | 491 | | | 6 | | 1 | % |
| | | | | | | | | | | | | | |
| Operations and maintenance | | 189 | | | 163 | | | 26 | | 16 | % | | 163 | | | 162 | | | 1 | | 1 | % |
| Depreciation and amortization | | 149 | | | 143 | | | 6 | | 4 | | | 143 | | | 141 | | | 2 | | 1 | |
| Property and other taxes | | 24 | | | 24 | | | — | | — | | | 24 | | | 23 | | | 1 | | 4 | |
| Operating income | | $ | 165 | | | $ | 167 | | | $ | (2) | | (1) | % | | $ | 167 | | | $ | 165 | | | $ | 2 | | 1 | % |
Electric Utility Margin
A comparison of key operating results related to electric utility margin is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Utility margin (in millions): | | | | | | | | | | | | | | |
| Operating revenue | | $ | 1,025 | | | $ | 848 | | | $ | 177 | | 21 | % | | $ | 848 | | | $ | 738 | | | $ | 110 | | 15 | % |
| Cost of fuel and energy | | 555 | | | 407 | | | 148 | | 36 | | | 407 | | | 301 | | | 106 | | 35 | |
| Utility margin | | $ | 470 | | | $ | 441 | | | $ | 29 | | 7 | % | | $ | 441 | | | $ | 437 | | | $ | 4 | | 1 | % |
| | | | | | | | | | | | | | |
| Sales (GWhs): | | | | | | | | | | | | | | |
| Residential | | 2,747 | | | 2,769 | | | (22) | | (1) | % | | 2,769 | | | 2,672 | | | 97 | | 4 | % |
| Commercial | | 3,124 | | | 3,056 | | | 68 | | 2 | | | 3,056 | | | 2,977 | | | 79 | | 3 | |
| Industrial | | 2,867 | | | 3,716 | | | (849) | | (23) | | | 3,716 | | | 3,544 | | | 172 | | 5 | |
| Other | | 13 | | | 15 | | | (2) | | (13) | | | 15 | | | 15 | | | — | | — | |
Total fully bundled(1) | | 8,751 | | | 9,556 | | | (805) | | (8) | | | 9,556 | | | 9,208 | | | 348 | | 4 | |
| Distribution only service | | 2,757 | | | 1,639 | | | 1,118 | | 68 | | | 1,639 | | | 1,670 | | | (31) | | (2) | |
| Total retail | | 11,508 | | | 11,195 | | | 313 | | 3 | | | 11,195 | | | 10,878 | | | 317 | | 3 | |
| Wholesale | | 741 | | | 656 | | | 85 | | 13 | | | 656 | | | 548 | | | 108 | | 20 | |
| Total GWhs sold | | 12,249 | | | 11,851 | | | 398 | | 3 | % | | 11,851 | | | 11,426 | | | 425 | | 4 | % |
| | | | | | | | | | | | | | |
| Average number of retail customers (in thousands) | | 371 | | | 365 | | | 6 | | 2 | % | | 365 | | | 359 | | | 6 | | 2 | % |
| | | | | | | | | | | | | | |
| Average revenue per MWh: | | | | | | | | | | | | | | |
Retail - fully bundled(1) | | $ | 106.57 | | | $ | 81.77 | | | $ | 24.80 | | 30 | % | | $ | 81.77 | | | $ | 73.89 | | | $ | 7.88 | | 11 | % |
| Wholesale | | $ | 75.48 | | | $ | 58.14 | | | $ | 17.34 | | 30 | % | | $ | 58.14 | | | $ | 52.52 | | | $ | 5.62 | | 11 | % |
| | | | | | | | | | | | | | |
| Heating degree days | | 4,631 | | | 4,494 | | | 137 | | 3 | % | | 4,494 | | | 4,477 | | | 17 | | — | % |
| Cooling degree days | | 1,353 | | | 1,366 | | | (13) | | (1) | % | | 1,366 | | | 1,176 | | | 190 | | 16 | % |
| | | | | | | | | | | | | | |
Sources of energy (GWhs)(2)(3): | | | | | | | | | | | | | | |
| Natural gas | | 4,075 | | | 4,712 | | | (637) | | (14) | % | | 4,712 | | | 5,219 | | | (507) | | (10) | % |
| Coal | | 1,077 | | | 1,220 | | | (143) | | (12) | | | 1,220 | | | 855 | | | 365 | | 43 | |
Renewables(4) | | 26 | | | 31 | | | (5) | | (16) | | | 31 | | | 37 | | | (6) | | (16) | |
| Total energy generated | | 5,178 | | | 5,963 | | | (785) | | (13) | | | 5,963 | | | 6,111 | | | (148) | | (2) | |
| Energy purchased | | 4,691 | | | 4,960 | | | (269) | | (5) | | | 4,960 | | | 4,753 | | | 207 | | 4 | |
| Total | | 9,869 | | | 10,923 | | | (1,054) | | (10) | % | | 10,923 | | | 10,864 | | | 59 | | 1 | % |
| | | | | | | | | | | | | | |
Average cost of energy per MWh(5): | | | | | | | | | | | | | | |
| Energy generated | | $ | 46.05 | | | $ | 28.84 | | | $ | 17.21 | | 60 | % | | $ | 28.84 | | | $ | 20.12 | | | $ | 8.72 | | 43 | % |
| Energy purchased | | $ | 67.49 | | | $ | 47.39 | | | $ | 20.10 | | 42 | % | | $ | 47.39 | | | $ | 37.46 | | | $ | 9.93 | | 27 | % |
(1) Fully bundled includes sales to customers for combined energy, transmission and distribution services.
(2) The average cost of energy per MWh and sources of energy excludes -, 2 and 10 GWhs of coal and -, 6 and 31 GWhs of natural gas generated energy that is purchased at cost by related parties for the years ended December 31, 2022, 2021 and 2020, respectively.
(3) GWh amounts are net of energy used by the related generating facilities.
(4) Includes the Fort Churchill Solar Array which was under lease by Sierra Pacific until it was acquired in December 2021.
(5) The average cost of energy per MWh includes only the cost of fuel associated with the generating facilities, purchased power and deferrals.
Natural Gas Utility Margin
A comparison of key operating results related to natural gas utility margin is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | Change | | 2021 | | 2020 | | Change |
| Utility margin (in millions): | | | | | | | | | | | | | | |
| Operating revenue | | $ | 168 | | | $ | 117 | | | $ | 51 | | 44 | % | | $ | 117 | | | $ | 116 | | | $ | 1 | | 1 | % |
| Natural gas purchased for resale | | 111 | | | 61 | | | 50 | | 82 | | | 61 | | | 62 | | | (1) | | (2) | |
| Utility margin | | $ | 57 | | | $ | 56 | | | $ | 1 | | 2 | % | | $ | 56 | | | $ | 54 | | | $ | 2 | | 4 | % |
| | | | | | | | | | | | | | |
| Sold (000's Dths): | | | | | | | | | | | | | | |
| Residential | | 11,269 | | | 10,662 | | | 607 | | 6 | % | | 10,662 | | | 10,452 | | | 210 | | 2 | % |
| Commercial | | 5,897 | | | 5,524 | | | 373 | | 7 | | | 5,524 | | | 5,148 | | | 376 | | 7 | |
| Industrial | | 2,211 | | | 1,981 | | | 230 | | 12 | | | 1,981 | | | 1,826 | | | 155 | | 8 | |
| Total retail | | 19,377 | | | 18,167 | | | 1,210 | | 7 | % | | 18,167 | | | 17,426 | | | 741 | | 4 | % |
| | | | | | | | | | | | | | |
Average number of retail customers (in thousands) | | 180 | | | 177 | | | 3 | | 2 | % | | 177 | | | 174 | | | 3 | | 2 | % |
| | | | | | | | | | | | | | |
| Average revenue per retail Dth sold | | $ | 8.67 | | | $ | 6.44 | | | $ | 2.23 | | 35 | % | | $ | 6.44 | | | $ | 6.66 | | | $ | (0.22) | | (3) | % |
| | | | | | | | | | | | | | |
| Heating degree days | | 4,631 | | | 4,494 | | | 137 | | 3 | % | | 4,494 | | | 4,477 | | | 17 | | — | % |
| | | | | | | | | | | | | | |
Average cost of natural gas per retail Dth sold | | $ | 5.73 | | | $ | 3.36 | | | $ | 2.37 | | 71 | % | | $ | 3.36 | | | $ | 3.56 | | | $ | (0.20) | | (6) | % |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Electric utility margin increased $29 million, or 7%, for 2022 compared to 2021 primarily due to:
•$15 million of higher ON Line temporary rider (offset in operations and maintenance expense) for the recovery of deferred costs for ON Line due to the regulatory-directed reallocation of costs between Nevada Power and Sierra Pacific;
•$9 million of higher transmission and wholesale revenue;
•$4 million of higher regulatory-related revenue deferrals; and
•$1 million of higher electric retail utility margin due to higher customer volumes, offset by unfavorable price impacts from changes in sales mix. Retail customer volumes, including distribution only service customers, increased 2.8% primarily due to an increase in the average number of customers, offset by the unfavorable impact of weather and unfavorable changes in customer usage.
The increase in electric utility margin was offset by:
•$2 million in lower energy efficiency program rates (offset in operations and maintenance expense).
Operations and maintenance increased $26 million, or 16%, for 2022 compared to 2021 primarily due to higher regulatory-approved cost recovery for the ON Line reallocation of $15 million (offset in operating revenue) and higher plant operations and maintenance expenses, partially offset by lower energy efficiency program costs (offset in operating revenue).
Depreciation and amortization increased $6 million, or 4%, for 2022 compared to 2021 primarily due to higher plant in-service.
Interest expense increased $4 million, or 7%, for 2022 compared to 2021 primarily due to higher interest rates and debt.
Interest and dividend income increased $9 million for 2022 compared to 2021 primarily due to higher interest income, mainly from carrying charges on regulatory balances.
Other, net decreased $9 million, or 82%, for 2022 compared to 2021 primarily due to higher pension expense and lower cash surrender value of corporate-owned life insurance policies.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Electric utility margin increased $4 million, or 1%, for 2021 compared to 2020 primarily due to:
•$10 million of higher electric retail utility margin primarily due to higher retail customer volumes. Retail customer volumes, including distribution only service customers, increased 2.9% primarily due to an increase in the average number of customers, favorable changes in customer usage patterns and the favorable impact of weather, and
•$3 million of higher transmission and wholesale revenue.
The increase in electric utility margin was offset by:
•$3 million in lower revenue recognized due to a favorable regulatory decision in 2020;
•$3 million due to an adjustment to regulatory-related revenue deferrals; and
•$2 million due to lower energy efficiency program rates (offset in operations and maintenance expense).
Natural gas utility margin increased $2 million, or 4%, for 2021 compared to 2020 primarily due to favorable changes in customer usage patterns.
Operations and maintenance increased $1 million, or 1%, for 2021 compared to 2020 primarily due to higher plant operations and maintenance expenses and higher legal expenses, offset by lower earnings sharing and lower energy efficiency program costs (offset in operating revenue).
Depreciation and amortization increased $2 million, or 1%, for 2021 compared to 2020 primarily due to regulatory amortizations and higher plant in-service.
Interest expense decreased $2 million, or 4%, for 2021 compared to 2020 primarily due to lower carrying charges on regulatory
balances.
Allowance for equity funds increased $3 million, or 75%, for 2021 compared to 2020 primarily due to higher construction work-in-progress.
Interest and dividend income increased $5 million for 2021 compared to 2020 primarily due to higher interest income, mainly from carrying charges on regulatory balances.
Other, net increased $4 million, or 57%, for 2021 compared to 2020 primarily due to lower pension expense and higher cash surrender value of corporate-owned life insurance policies.
Income tax expense increased $3 million, or 20%, for 2021 compared to 2020 primarily due to higher pretax income. The effective tax rate was 13% in 2021 and 12% in 2020.
Liquidity and Capital Resources
As of December 31, 2022, Sierra Pacific's total net liquidity was $299 million as follows (in millions):
| | | | | | | | |
| Cash and cash equivalents | | $ | 49 | |
| | |
Credit facilities(1) | | 250 | |
| | |
| | |
| | |
| | |
| Total net liquidity | | $ | 299 | |
| | |
| Credit facilities: | | |
| Maturity dates | | 2025 |
(1)Refer to Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion regarding Sierra Pacific's credit facility.
Operating Activities
Net cash flows from operating activities for the years ended December 31, 2022 and 2021 were $109 million and $183 million, respectively. The change was primarily due to higher payments related to fuel and energy costs and the timing of payments for operating costs, partially offset by higher collections from customers.
Net cash flows from operating activities for the years ended December 31, 2021 and 2020 were $183 million and $190 million, respectively. The change was primarily due to the timing of payments for fuel and energy costs, partially offset by higher collections from customers, the timing of payments for operating costs, lower inventory purchases and increased collections of customer advances.
The timing of Sierra Pacific's income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods selected and assumptions made for each payment date.
Investing Activities
Net cash flows from investing activities for the years ended December 31, 2022 and 2021 were $(351) million and $(300) million, respectively. The change was primarily due to increased capital expenditures. Refer to "Future Uses of Cash" for further discussion of capital expenditures.
Net cash flows from investing activities for the years ended December 31, 2021 and 2020 were $(300) million and $(246) million, respectively. The change was primarily due to increased capital expenditures. Refer to "Future Uses of Cash" for further discussion of capital expenditures.
Financing Activities
Net cash flows from financing activities for the years ended December 31, 2022 and 2021 were $282 million and $107 million, respectively. The change was primarily due to higher contributions from NV Energy, Inc. and greater proceeds from the issuance of long-term debt, partially offset by higher long-term debt reacquired, higher repayments of short-term debt and higher dividends paid to NV Energy, Inc.
Net cash flows from financing activities for the years ended December 31, 2021 and 2020 were $107 million and $50 million, respectively. The change was primarily due to higher proceeds from short-term debt and lower dividends paid to NV Energy, Inc., partially offset by lower proceeds from the issuance of long-term debt.
Ability to Issue Debt
Sierra Pacific's ability to issue debt is primarily impacted by its financing authority from the PUCN. As of December 31, 2022, Sierra Pacific has financing authority from the PUCN consisting of the ability to issue long-term and short-term debt securities so long as the total amount of debt outstanding (excluding borrowings under Sierra Pacific's $250 million secured credit facility) does not exceed $1.9 billion and to issue common and preferred stock so long as the total amounts outstanding do not exceed $2.2 billion and $500 million, respectively, as measured at the end of each calendar quarter. Sierra Pacific's revolving credit facility contains a financial maintenance covenant which Sierra Pacific was in compliance with as of December 31, 2022. 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 Investor Service or Standard & Poor's, Sierra Pacific would be subject to limitations under these covenants.
Ability to Issue General and Refunding Mortgage Securities
To the extent Sierra Pacific has the ability to issue debt under the most restrictive covenants in its financing agreements and has financing authority to do so from the PUCN, Sierra Pacific's ability to issue secured debt is limited by the amount of bondable property or retired bonds that can be used to issue debt under Sierra Pacific's indenture.
Sierra Pacific's indenture creates a lien on substantially all of Sierra Pacific's properties in Nevada. As of December 31, 2022, $4.9 billion of Sierra Pacific's assets were pledged. Sierra Pacific had the capacity to issue $2.0 billion of additional general and refunding mortgage securities as of December 31, 2022 determined on the basis of 70% of net utility property additions. Property additions include plant-in-service and specific assets in construction work-in-progress. The amount of bond capacity listed above does not include eligible property in construction work-in-progress. Sierra Pacific also has the ability to release property from the lien of Sierra Pacific's indenture on the basis of net property additions, cash or retired bonds. To the extent Sierra Pacific releases property from the lien of Sierra Pacific's indenture, it will reduce the amount of securities issuable under the indenture.
Long-Term Debt
In June 2022, Sierra Pacific purchased $60 million of its variable-rate tax-exempt Gas & Water Facilities Refunding Revenue Bonds, Series 2016B, due 2036, as required by the bond indenture. Sierra Pacific is holding these bonds and can re-offer them at a future date.
In May 2022, Sierra Pacific issued $250 million of 4.71% General and Refunding Mortgage bonds, Series W, due 2052. The net proceeds were used to repay the outstanding $200 million unsecured loan with NV Energy, Inc., repay amounts outstanding under its existing revolving credit facility and for general corporate purposes.
In April 2022, Sierra Pacific entered into a $200 million unsecured loan with NV Energy payable upon demand. The net proceeds were used to purchase certain tax-exempt refunding revenue bond obligations that were subject to mandatory purchase by Sierra Pacific in April 2022. The loan has an underlying variable interest rate based on 30-day U.S. dollar deposits offered on the London Interbank Offered Rate market plus a spread of 0.75%.
In April 2022, Sierra Pacific purchased the following series of bonds that were held by the public: $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; $25 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016E, due 2036; $75 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016F, due 2036; $20 million of its variable-rate tax-exempt Water Facilities Refunding Revenue Bonds, Series 2016G, due 2036; and $30 million of its variable-rate tax-exempt Pollution Control Refunding Revenue Bonds, Series 2016B, due 2029. Sierra Pacific purchased these bonds as required by the bond indentures. Sierra Pacific is holding these bonds and can re-offer them at a future date.
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 secured 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 Sierra Pacific has access to external financing depends on a variety of factors, including Sierra Pacific's credit ratings, investors' judgment of risk associated with Sierra Pacific and conditions in the overall capital markets, including the condition of the utility industry.
Capital 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. Prudently incurred expenditures for compliance-related items such as pollution-control technologies, replacement generation and associated operating costs are generally incorporated into Sierra Pacific's regulated retail rates. Expenditures for certain assets may ultimately include acquisition of existing assets.
Historical and forecasted capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, for the years ending December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Historical | | Forecast |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| | | | | | | | | | | |
| Electric distribution | $ | 128 | | | $ | 96 | | | $ | 113 | | | $ | 125 | | | $ | 112 | | | $ | 269 | |
| Electric transmission | 60 | | | 77 | | | 75 | | | 45 | | | 247 | | | 188 | |
| Solar generation | — | | | 17 | | | 36 | | | — | | | — | | | — | |
| Electric battery storage | — | | | 18 | | | — | | | — | | | 270 | | | 196 | |
| Other | 58 | | | 92 | | | 127 | | | 141 | | | 147 | | | 116 | |
| Total | $ | 246 | | | $ | 300 | | | $ | 351 | | | $ | 311 | | | $ | 776 | | | $ | 769 | |
Sierra Pacific received PUCN approval through its recent IRP filings for an increase in solar generation and electric transmission and has included estimates from its latest IRP filing in its forecast capital expenditures for 2022 through 2024. These estimates are likely to change as a result of the RFP process. Sierra Pacific's historical and forecast capital expenditures include the following:
•Electric distribution includes both growth projects and operating expenditures consisting of routine expenditures for distribution needed to serve existing and expected demand.
•Electric transmission includes both growth projects and operating expenditures. Growth projects primarily relate to the Nevada Utilities' Greenlink Nevada transmission expansion program. In this project, the company has received approval from the PUCN to build a 350-mile, 525-kV transmission line, known as Greenlink West, connecting the Ft. Churchill substation to the Northwest substation to the Harry Allen substation; a 235-mile, 525-kV transmission line, known as Greenlink North, connecting the new Ft. Churchill substation to the Robinson Summit substation; a 46-mile, 345-kV transmission line from the new Ft. Churchill substation to the Mira Loma substations; and a 38-mile, 345-kV transmission line from the new Ft. Churchill substation to the Robinson Summit substations. Operating expenditures consist of routine expenditures for transmission and other infrastructure needed to serve existing and expected demand.
•Solar generation includes solar photovoltaic panels procured for future growth projects.
•Electric battery storage includes a growth projects consisting of a 200-MW battery energy storage system that will be developed on the site of the Valmy generating station in Humboldt County, Nevada. Commercial operation is expected by the end of 2025.
•Other includes both growth projects and operating expenditures consisting of turbine upgrades at the Tracy generating facility, routine expenditures for generation, other operating projects and other infrastructure needed to serve existing and expected demand.
Material Cash Requirements
Sierra Pacific has cash requirements that may affect its consolidated financial condition that arise primarily from long- and short-term debt (refer to Notes 7 and 8), operating and financing leases (refer to Note 5), purchased electricity contracts (refer to Note 14), fuel contracts (refer to Note 14), construction and other development costs (refer to Liquidity and Capital Resources included within this Item 7 and Note 14) and AROs (refer to Note 11). Refer to the respective referenced note in Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
Sierra Pacific has cash requirements relating to interest payments of $647 million on long-term debt, including $48 million due in 2023.
Regulatory Matters
Sierra Pacific is subject to comprehensive regulation. Refer to the discussion contained in Item 1 of this Form 10-K for further information regarding Sierra Pacific's general regulatory framework and current regulatory matters.
Environmental Laws and Regulations
Sierra Pacific is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal and other environmental matters that have the potential to impact Sierra Pacific'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 various federal, state and local agencies. Sierra Pacific believes it is in material compliance with all applicable laws and regulations, although many are subject to interpretation that 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 financial results.
Refer to "Environmental Laws and Regulations" in Item 1 of this Form 10-K for further discussion regarding environmental laws and regulations.
Collateral and Contingent Features
Debt of Sierra Pacific is rated by credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of Sierra Pacific's ability to, in general, meet the obligations of its issued debt. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time.
Sierra Pacific has no credit rating downgrade triggers that would accelerate the maturity dates of outstanding debt, and a change in ratings is not an event of default under the applicable debt instruments. Sierra Pacific's secured revolving credit facility does not require the maintenance of a minimum credit rating level in order to draw upon its availability. However, commitment fees and interest rates under the credit facility are tied to credit ratings and increase or decrease when the ratings change. A ratings downgrade could also increase the future cost of commercial paper, short- and long-term debt issuances or new credit facilities.
In accordance with industry practice, certain wholesale agreements, including 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 recognized credit rating agencies. These agreements 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 December 31, 2022, the applicable credit ratings obtained from recognized credit rating agencies were investment grade. If all credit-risk-related contingent features or adequate assurance provisions for these agreements had been triggered as of December 31, 2022, Sierra Pacific would not have been required to post additional collateral. Sierra Pacific's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors.
Inflation
Historically, overall inflation and changing prices in the economies where Sierra Pacific operates has not had a significant impact on Sierra Pacific's financial results. Sierra Pacific operates under a cost-of-service based rate-setting structure administered by the PUCN and the FERC. Under this rate-setting structure, Sierra Pacific is allowed to include prudent costs in its rates, including the impact of inflation after Sierra Pacific experiences cost increases. Fuel and purchase power costs are recovered through a balancing account, minimizing the impact of inflation related to these costs. Sierra Pacific attempts to minimize the potential impact of inflation on its operations through the use of periodic rate adjustments for fuel and energy costs, by employing prudent risk management and hedging strategies and by considering, among other areas, its impact on purchases of energy, operating expenses, materials and equipment costs, contract negotiations, future capital spending programs and long-term debt issuances. There can be no assurance that such actions will be successful.
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. The following critical accounting estimates are impacted significantly by Sierra Pacific's methods, judgments and assumptions used in the preparation of the Consolidated Financial Statements and should be read in conjunction with Sierra Pacific's Summary of Significant Accounting Policies included in Sierra Pacific's Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Accounting for the Effects of Certain Types of Regulation
Sierra Pacific prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, Sierra Pacific defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur.
Sierra Pacific continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future regulated rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition that could limit Sierra Pacific's ability to recover its costs. Sierra Pacific believes its application of the guidance for regulated operations is appropriate and its existing regulatory assets and liabilities are probable of inclusion in future regulated rates. The evaluation reflects the current political and regulatory climate at both the federal and state levels. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be written off to net income, returned to customers or re-established as AOCI. Total regulatory assets were $611 million and total regulatory liabilities were $455 million as of December 31, 2022. Refer to Sierra Pacific's Note 6 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Sierra Pacific's regulatory assets and liabilities.
Impairment of Long-Lived Assets
Sierra Pacific evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. As substantially all property, plant and equipment was used in regulated businesses, the impacts of regulation are considered when evaluating the carrying value of regulated assets.
The estimate of cash flows arising from the future use of an asset, for the purposes of impairment analysis, requires the exercise of judgment. Circumstances that could significantly alter the calculation of fair value or the recoverable amount of an asset may include significant changes in the regulatory environment, the business climate, management's plans, legal factors, market price of the asset, the use of the asset, the physical condition of the asset, future market prices, load growth, competition and many other factors over the life of the asset. Any resulting impairment loss is highly dependent on the underlying assumptions and could significantly affect Sierra Pacific's results of operations.
Income Taxes
In determining Sierra Pacific's income taxes, management is required to interpret complex income tax laws and regulations, which includes consideration of regulatory implications imposed by Sierra Pacific's various regulatory commissions. Sierra Pacific's income tax returns are subject to continuous examinations by federal, state and local income tax authorities that may give rise to different interpretations of these complex laws and regulations. Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved. Sierra Pacific recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Although the ultimate resolution of Sierra Pacific's federal, state and local income tax examinations is uncertain, Sierra Pacific believes it has made adequate provisions for these income tax positions. The aggregate amount of any additional income tax liabilities that may result from these examinations is not expected to have a material impact on Sierra Pacific's financial results. Refer to Sierra Pacific's Note 9 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Sierra Pacific's income taxes.
It is probable that Sierra Pacific will pass income tax benefit and expense related to the federal tax rate change from 35% to 21% as a result of 2017 Tax Reform, certain property-related basis differences and other various differences on to its customers. As of December 31, 2022, these amounts were recognized as a net regulatory liability of $223 million and will be included in regulated rates when the temporary differences reverse.
Revenue Recognition - Unbilled Revenue
Revenue is recognized as electricity or natural gas is delivered or services are provided. The determination of customer billings is based on a systematic reading of meters. At the end of each month, energy provided to customers since their last billing is estimated, and the corresponding unbilled revenue is recorded. Unbilled revenue was $94 million as of December 31, 2022. Factors that can impact the estimate of unbilled energy include, but are not limited to, seasonal weather patterns, total volumes supplied to the system, line losses, economic impacts and composition of sales among customer classes. Estimates are reversed in the following month when actual revenue is recorded.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Sierra Pacific's Consolidated Balance Sheets include assets and liabilities with fair values that are subject to market risks. Sierra Pacific's significant market risks are primarily associated with commodity prices, interest rates and the extension of credit to counterparties with which Sierra Pacific transacts. The following discussion addresses the significant market risks associated with Sierra Pacific's business activities. Sierra Pacific has established guidelines for credit risk management. Refer to Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Sierra Pacific's contracts accounted for as derivatives.
Commodity Price Risk
Sierra Pacific is exposed to the impact of market fluctuations in commodity prices and interest rates. Sierra Pacific is principally exposed to electricity, natural gas and coal market fluctuations primarily through Sierra Pacific's obligation to serve retail customer load in its regulated service territory. Sierra Pacific'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. 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. Sierra Pacific does not engage in proprietary trading activities. To mitigate a portion of its commodity price risk, Sierra Pacific 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. Sierra Pacific does not hedge all of its commodity price risk, thereby exposing the unhedged portion to changes in market prices. Sierra Pacific's exposure to commodity price risk is generally limited by its ability to include commodity costs in regulated rates through its deferred energy mechanism, which is subject to disallowance and regulatory lag that occurs between the time the costs are incurred and when the costs are included in regulated rates, as well as the impact of any customer sharing resulting from cost adjustment mechanisms.
The table that follows summarizes Sierra Pacific's price risk on commodity contracts accounted for as derivatives and shows the effects of a hypothetical 10% increase and 10% decrease in forward market prices by the expected volumes for these contracts as of that date. The selected hypothetical change does not reflect what could be considered the best or worse case scenarios (dollars in millions).
| | | | | | | | | | | | | | | | | |
| Fair Value - | | Estimated Fair Value after |
| Net Asset | | Hypothetical Change in Price |
| (Liability) | | 10% increase | | 10% decrease |
| As of December 31, 2022: | | | | | |
| Total commodity derivative contracts | $ | (13) | | | $ | (3) | | | $ | (23) | |
| | | | | |
| As of December 31, 2021: | | | | | |
| Total commodity derivative contracts | $ | (33) | | | $ | (26) | | | $ | (40) | |
Sierra Pacific's commodity derivative contracts not designated as hedging contracts are recoverable from customers in regulated rates and therefore, net unrealized gains and losses associated with interim price movements on commodity derivative contracts do not expose Sierra Pacific to earnings volatility. As of December 31, 2022 and 2021, a net regulatory asset of $13 million and $33 million, respectively, was recorded related to the net derivative liability of $13 million and $33 million, respectively. The settled cost of these commodity derivative contracts is generally included in regulated rates.
Interest Rate Risk
Sierra Pacific is exposed to interest rate risk on its outstanding variable-rate short- and long-term debt and future debt issuances. Sierra Pacific 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. As a result of the fixed interest rates, Sierra Pacific's fixed-rate long-term debt does not expose Sierra Pacific to the risk of loss due to changes in market interest rates. Additionally, because fixed-rate long-term debt is not carried at fair value on the Consolidated Balance Sheets, changes in fair value would impact earnings and cash flows only if Sierra Pacific were to reacquire all or a portion of these instruments prior to their maturity. The nature and amount of Sierra Pacific's short- and long-term debt can be expected to vary from period to period as a result of future business requirements, market conditions and other factors. Refer to Notes 7 and 8 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional discussion of Sierra Pacific's short- and long-term debt.
As of December 31, 2022 and 2021, Sierra Pacific had short-term variable-rate obligations totaling $— million and $159 million, respectively, that expose Sierra Pacific to the risk of increased interest expense in the event of increases in short-term interest rates. If variable interest rates were to increase by 10% from December 31 levels, it would not have a material effect on Sierra Pacific's annual interest expense. The carrying value of the variable-rate obligations approximates fair value as of December 31, 2022 and 2021.
Credit Risk
Sierra Pacific 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 Sierra Pacific's counterparties have similar economic, industry or other characteristics and due to direct and indirect relationships among the counterparties. Before entering into a transaction, Sierra Pacific 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, Sierra Pacific 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, Sierra Pacific exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.
As of December 31, 2022, Sierra Pacific's aggregate credit exposure from energy related transactions were not material, based on settlement and mark-to-market exposures, net of collateral.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Sierra Pacific Power Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sierra Pacific Power Company and subsidiaries ("Sierra Pacific") as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in shareholder's equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Sierra Pacific as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of Sierra Pacific's management. Our responsibility is to express an opinion on Sierra Pacific's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Sierra Pacific in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Sierra Pacific is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Sierra Pacific's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 6 to the financial statements
Critical Audit Matter Description
Sierra Pacific is subject to rate regulation by a state public service commission as well as the Federal Energy Regulatory Commission (collectively, the "Commissions"), which have jurisdiction with respect to the rates of electric and natural gas companies in the respective service territories where Sierra Pacific operates. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economic effects of rate regulation has a pervasive effect on the financial statements.
Regulated rates are subject to regulatory rate-setting processes. Rates are determined, approved, and established based on a cost-of-service basis, which is designed to allow Sierra Pacific an opportunity to recover its prudently incurred costs of providing services and to earn a reasonable return on its invested capital. Regulatory decisions can have an effect on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. While Sierra Pacific Power Company has indicated it expects to recover costs from customers through regulated rates, there is a risk that changes to the Commissions' approach to setting rates or other regulatory actions could limit Sierra Pacific's ability to recover its costs.
We identified the effects of rate regulation on the financial statements as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs and (2) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:
•We evaluated Sierra Pacific's disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the Commissions, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected Sierra Pacific's filings with the Commissions and the filings with the Commissions by intervenors to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions' treatment of similar costs under similar circumstances.
•We inquired of management about property, plant, and equipment that may be abandoned. We inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management's assertion regarding probability of an abandonment.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
February 24, 2023
We have served as Sierra Pacific's auditor since 1996.
SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ASSETS |
| | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 49 | | | $ | 10 | |
| Trade receivables, net | 175 | | | 128 | |
| | | |
| Inventories | 79 | | | 65 | |
| Regulatory assets | 357 | | | 177 | |
| | | |
| Other current assets | 50 | | | 35 | |
| Total current assets | 710 | | | 415 | |
| | | |
| Property, plant and equipment, net | 3,587 | | | 3,340 | |
| Regulatory assets | 254 | | | 263 | |
| Other assets | 181 | | | 205 | |
| | | |
| Total assets | $ | 4,732 | | | $ | 4,223 | |
| | | |
| LIABILITIES AND SHAREHOLDER'S EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 224 | | | $ | 147 | |
| Note payable to affiliate | 70 | | | — | |
| | | |
| Short-term debt | — | | | 159 | |
| Current portion of long-term debt | 250 | | | — | |
| | | |
| | | |
| Other current liabilities | 108 | | | 108 | |
| Total current liabilities | 652 | | | 414 | |
| | | |
| Long-term debt | 898 | | | 1,164 | |
| Finance lease obligations | 100 | | | 106 | |
| Regulatory liabilities | 436 | | | 444 | |
| Deferred income taxes | 445 | | | 402 | |
| Other long-term liabilities | 153 | | | 158 | |
| Total liabilities | 2,684 | | | 2,688 | |
| | | |
| Commitments and contingencies (Note 14) | | | |
| | | |
| Shareholder's equity: | | | |
Common stock - $3.75 stated value, 20,000,000 shares authorized and 1,000 issued and outstanding | — | | | — | |
| Additional paid-in capital | 1,576 | | | 1,111 | |
| Retained earnings | 473 | | | 425 | |
| Accumulated other comprehensive loss, net | (1) | | | (1) | |
| Total shareholder's equity | 2,048 | | | 1,535 | |
| | | |
| Total liabilities and shareholder's equity | $ | 4,732 | | | $ | 4,223 | |
| | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Operating revenue: | | | | | |
| Regulated electric | $ | 1,025 | | | $ | 848 | | | $ | 738 | |
| Regulated natural gas | 168 | | | 117 | | | 116 | |
| Total operating revenue | 1,193 | | | 965 | | | 854 | |
| | | | | |
| Operating expenses: | | | | | |
| Cost of fuel and energy | 555 | | | 407 | | | 301 | |
| Cost of natural gas purchased for resale | 111 | | | 61 | | | 62 | |
| Operations and maintenance | 189 | | | 163 | | | 162 | |
| Depreciation and amortization | 149 | | | 143 | | | 141 | |
| Property and other taxes | 24 | | | 24 | | | 23 | |
| | | | | |
| Total operating expenses | 1,028 | | | 798 | | | 689 | |
| | | | | |
| Operating income | 165 | | | 167 | | | 165 | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense | (58) | | | (54) | | | (56) | |
| Allowance for borrowed funds | 3 | | | 2 | | | 2 | |
| Allowance for equity funds | 7 | | | 7 | | | 4 | |
| Interest and dividend income | 18 | | | 9 | | | 4 | |
| Other, net | 2 | | | 11 | | | 7 | |
| Total other income (expense) | (28) | | | (25) | | | (39) | |
| | | | | |
| Income before income tax expense | 137 | | | 142 | | | 126 | |
| Income tax expense | 19 | | | 18 | | | 15 | |
| Net income | $ | 118 | | | $ | 124 | | | $ | 111 | |
| | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Amounts in millions, except shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Retained | | Accumulated | | |
| | | | | | Other | | Earnings | | Other | | Total |
| | Common Stock | | Paid-in | | (Accumulated | | Comprehensive | | Shareholder's |
| | Shares | | Amount | | Capital | | Deficit) | | Loss, Net | | Equity |
| Balance, December 31, 2019 | | 1,000 | | | $ | — | | | $ | 1,111 | | | $ | 210 | | | $ | (1) | | | $ | 1,320 | |
| Net income | | — | | | — | | | — | | | 111 | | | — | | | 111 | |
| Dividends declared | | — | | | — | | | — | | | (20) | | | — | | | (20) | |
| | | | | | | | | | | | |
| Balance, December 31, 2020 | | 1,000 | | | — | | | 1,111 | | | 301 | | | (1) | | | 1,411 | |
| Net income | | — | | | — | | | — | | | 124 | | | — | | | 124 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Balance, December 31, 2021 | | 1,000 | | | — | | | 1,111 | | | 425 | | | (1) | | | 1,535 | |
| Net income | | — | | | — | | | — | | | 118 | | | — | | | 118 | |
| Dividends declared | | — | | | — | | | — | | | (70) | | | — | | | (70) | |
| Contributions | | — | | | — | | | 465 | | | — | | | — | | | 465 | |
| Balance, December 31, 2022 | | 1,000 | | | $ | — | | | $ | 1,576 | | | $ | 473 | | | $ | (1) | | | $ | 2,048 | |
| | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 118 | | | $ | 124 | | | $ | 111 | |
| Adjustments to reconcile net income to net cash flows from operating activities: | | | | | |
| | | | | |
| Depreciation and amortization | 149 | | | 143 | | | 141 | |
| Allowance for equity funds | (7) | | | (7) | | | (4) | |
| Deferred energy | (267) | | | (116) | | | (17) | |
| Amortization of deferred energy | 97 | | | 29 | | | (14) | |
| Other changes in regulatory assets and liabilities | (1) | | | (39) | | | (33) | |
| Deferred income taxes and amortization of investment tax credits | 31 | | | 13 | | | 12 | |
| Other, net | 3 | | | (1) | | | (2) | |
| Changes in other operating assets and liabilities: | | | | | |
| Trade receivables and other assets | (52) | | | (27) | | | (81) | |
| Inventories | (14) | | | 12 | | | (19) | |
| Accrued property, income and other taxes | (13) | | | 9 | | | 9 | |
| Accounts payable and other liabilities | 65 | | | 43 | | | 87 | |
| Net cash flows from operating activities | 109 | | | 183 | | | 190 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (351) | | | (300) | | | (246) | |
| | | | | |
| | | | | |
| Net cash flows from investing activities | (351) | | | (300) | | | (246) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from long-term debt | 248 | | | — | | | 30 | |
| Long-term debt reacquired | (265) | | | — | | | — | |
| Net (repayments of) proceeds from short-term debt | (159) | | | 114 | | | 45 | |
| Net proceeds from affiliate note payable | 70 | | | — | | | — | |
| Dividends paid | (70) | | | — | | | (20) | |
| Contributions from parent | 465 | | | — | | | — | |
| Other, net | (7) | | | (7) | | | (5) | |
| Net cash flows from financing activities | 282 | | | 107 | | | 50 | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 40 | | | (10) | | | (6) | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | 16 | | | 26 | | | 32 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 56 | | | $ | 16 | | | $ | 26 | |
| | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
SIERRA PACIFIC POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
Sierra Pacific Power Company and its subsidiaries ("Sierra Pacific") is a wholly owned subsidiary of NV Energy, Inc. ("NV Energy"), a holding company that also owns Nevada Power Company and its subsidiaries ("Nevada Power") and certain other subsidiaries. Sierra Pacific is a U.S. 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").
(2) Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The Consolidated Financial Statements include the accounts of Sierra Pacific and its subsidiaries in which it holds a controlling financial interest as of the financial statement date. Intercompany accounts and transactions have been eliminated. The Consolidated Statements of Comprehensive Income have been omitted as net income equals comprehensive income for the years ended December 31, 2022, 2021 and 2020.
Use of Estimates in Preparation of Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates include, but are not limited to, the effects of regulation; recovery of long-lived assets; certain assumptions made in accounting for pension and other postretirement benefits; asset retirement obligations ("AROs"); income taxes; unbilled revenue; valuation of certain financial assets and liabilities, including derivative contracts; and accounting for contingencies. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Accounting for the Effects of Certain Types of Regulation
Sierra Pacific prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, Sierra Pacific defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be written off to net income, returned to customers or re-established as accumulated other comprehensive income (loss) ("AOCI").
Fair Value Measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Different valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Cash and Cash Equivalents and Restricted Cash
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist of funds restricted by the PUCN for a certain renewable energy contract. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and December 31, 2021, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 49 | | | $ | 10 | |
| Restricted cash and cash equivalents included in other current assets | 7 | | | 6 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 56 | | | $ | 16 | |
Allowance for Credit Losses
Trade receivables are primarily short-term in nature with stated collection terms of less than one year from the date of origination and are stated at the outstanding principal amount, net of an estimated allowance for credit losses. The allowance for credit losses is based on Sierra Pacific's assessment of the collectability of amounts owed to Sierra Pacific by its customers. This assessment requires judgment regarding the ability of customers to pay or the outcome of any pending disputes. In measuring the allowance for credit losses for trade receivables, Sierra Pacific primarily utilizes credit loss history. However, Sierra Pacific may adjust the allowance for credit losses to reflect current conditions and reasonable and supportable forecasts that deviate from historical experience. Sierra Pacific also has the ability to assess deposits on customers who have delayed payments or who are deemed to be a credit risk. The changes in the balance of the allowance for credit losses, which is included in trade receivables, net on the Consolidated Balance Sheets, is summarized as follows for the years ended December 31, (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 1 | | | $ | 2 | | | $ | 2 | |
| Charged to operating costs and expenses, net | 2 | | | 2 | | | 2 | |
| Write-offs, net | (1) | | | (3) | | | (2) | |
| Ending balance | $ | 2 | | | $ | 1 | | | $ | 2 | |
Derivatives
Sierra Pacific employs a number of different derivative contracts, which may include forwards, futures, options, swaps and other agreements, to manage its commodity price and interest rate risk. 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. Derivative balances reflect offsetting permitted under master netting agreements with counterparties and cash collateral paid or received under such agreements.
Commodity derivatives used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases or normal sales. Normal purchases or normal sales contracts are not marked‑to‑market and settled amounts are recognized as cost of fuel, energy and capacity or natural gas purchased for resale on the Consolidated Statements of Operations.
For Sierra Pacific's derivative contracts, the settled amount is generally included in regulated rates. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of inclusion in regulated rates are recorded as regulatory assets and liabilities. For a derivative contract not probable of inclusion in rates, changes in the fair value are recognized in earnings.
Inventories
Inventories consist mainly of materials and supplies totaling $69 million and $62 million as of December 31, 2022 and 2021, respectively, and fuel, which includes coal stock, stored natural gas and fuel oil, totaling $10 million and $3 million as of December 31, 2022 and 2021, respectively. The cost is determined using the average cost method. Materials are charged to inventory when purchased and are expensed or capitalized to construction work in process, as appropriate, when used. Fuel costs are recovered from retail customers through the base tariff energy rates and deferred energy accounting adjustment charges approved by the Public Utilities Commission of Nevada ("PUCN").
Property, Plant and Equipment, Net
General
Additions to property, plant and equipment are recorded at cost. Sierra Pacific capitalizes all construction-related material, direct labor and contract services, as well as indirect construction costs. Indirect construction costs include debt allowance for funds used during construction ("AFUDC"), and equity AFUDC, as applicable. The cost of additions and betterments are capitalized, while costs incurred that do not improve or extend the useful lives of the related assets are generally expensed. The cost of repairs and minor replacements are charged to expense when incurred with the exception of costs for generation plant maintenance under certain long-term service agreements. Costs under these agreements are expensed straight-line over the term of the agreements as approved by the PUCN.
Depreciation and amortization are generally computed by applying the composite or straight-line method based on either estimated useful lives or mandated recovery periods as prescribed by Sierra Pacific's various regulatory authorities. Depreciation studies are completed by Sierra Pacific to determine the appropriate group lives, net salvage and group depreciation rates. These studies are reviewed and rates are ultimately approved by the applicable regulatory commission. Net salvage includes the estimated future residual values of the assets and any estimated removal costs recovered through approved depreciation rates. Estimated removal costs are recorded as a non-current regulatory liability on the Consolidated Balance Sheets. As actual removal costs are incurred, the associated liability is reduced.
Generally when Sierra Pacific retires or sells a component of regulated property, plant and equipment depreciated using the composite method, it charges the original cost, net of any proceeds from the disposition, to accumulated depreciation. Any gain or loss on disposals of all other assets is recorded through earnings with the exception of material gains or losses on regulated property, plant and equipment depreciated on a straight-line basis, which is then recorded to a regulatory asset or liability.
Debt and equity AFUDC, which represent the estimated costs of debt and equity funds necessary to finance the construction of regulated facilities, are capitalized as a component of property, plant and equipment, with offsetting credits to the Consolidated Statements of Operations. The rate applied to construction costs is the lower of the PUCN allowed rate of return and rates computed based on guidelines set forth by the Federal Energy Regulatory Commission ("FERC"). After construction is completed, Sierra Pacific is permitted to earn a return on these costs as a component of the related assets, as well as recover these costs through depreciation expense over the useful lives of the related assets. Sierra Pacific's AFUDC rate used during 2022 and 2021 was 5.52% and 6.75%, respectively, for electric, 5.09% and 5.75%, respectively, for natural gas and 5.23% and 6.65%, respectively, for common facilities.
Asset Retirement Obligations
Sierra Pacific recognizes AROs when it has a legal obligation to perform decommissioning, reclamation or removal activities upon retirement of an asset. Sierra Pacific's AROs are primarily associated with its generating facilities. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the ARO liability is adjusted for any revisions to the original estimate of undiscounted cash flows (with corresponding adjustments to property, plant and equipment, net) and for accretion of the ARO liability due to the passage of time. The difference between the ARO liability, the corresponding ARO asset included in property, plant and equipment, net and amounts recovered in rates to satisfy such liabilities is recorded as a regulatory asset or liability on the Consolidated Balance Sheets. The costs are not recovered in rates until the work has been completed.
Impairment of Long-Lived Assets
Sierra Pacific evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. As substantially all property, plant and equipment was used in regulated businesses, the impacts of regulation are considered when evaluating the carrying value of regulated assets.
Leases
Sierra Pacific has non-cancelable operating leases primarily for transmission and delivery assets, generating facilities, vehicles and office equipment and finance leases consisting primarily of transmission assets, generating facilities and vehicles. These leases generally require Sierra Pacific to pay for insurance, taxes and maintenance applicable to the leased property. Given the capital intensive nature of the utility industry, it is common for a portion of lease costs to be capitalized when used during construction or maintenance of assets, in which the associated costs will be capitalized with the corresponding asset and depreciated over the remaining life of that asset. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. Sierra Pacific does not include options in its lease calculations unless there is a triggering event indicating Sierra Pacific is reasonably certain to exercise the option. Sierra Pacific's accounting policy is to not recognize right-of-use assets and lease obligations for leases with contract terms of one year or less and not separate lease components from non-lease components and instead account for each separate lease component and the non-lease components associated with a lease as a single lease component. Leases will be evaluated for impairment in line with Accounting Standards Codification ("ASC") Topic 360, "Property, Plant and Equipment" when a triggering event has occurred that might affect the value and use of the assets being leased.
Sierra Pacific's leases of generating facilities generally are for the long-term purchase of electric energy, also known as power purchase agreements ("PPA"). PPAs are generally signed before or during the early stages of project construction and can yield a lease that has not yet commenced. These agreements are primarily for renewable energy and the payments are considered variable lease payments as they are based on the amount of output.
Sierra Pacific's operating and finance right-of-use assets are recorded in other assets and the operating and current finance lease liabilities are recorded in current and long-term other liabilities accordingly.
Revenue Recognition
Sierra Pacific uses a single five-step model to identify and recognize revenue from contracts with customers ("Customer Revenue") upon transfer of control of promised goods or services in an amount that reflects the consideration to which Sierra Pacific expects to be entitled in exchange for those goods or services. Sierra Pacific records sales, franchise and excise taxes collected directly from customers and remitted directly to the taxing authorities on a net basis on the Consolidated Statements of Operations.
Substantially all of Sierra Pacific's Customer Revenue is derived from tariff-based sales arrangements approved by various regulatory commissions. These tariff-based revenues are mainly comprised of energy, transmission, distribution and natural gas and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. Other revenue consists primarily of revenue recognized in accordance with ASC 842, "Leases" and amounts not considered Customer Revenue within ASC 606, "Revenue from Contracts with Customers."
Revenue recognized is equal to what Sierra Pacific has the right to invoice as it corresponds directly with the value to the customer of Sierra Pacific's performance to date and includes billed and unbilled amounts. As of December 31, 2022 and 2021, trade receivables, net on the Consolidated Balance Sheets relate substantially to Customer Revenue, including unbilled revenue of $94 million and $78 million, respectively. Payments for amounts billed are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued.
Unamortized Debt Premiums, Discounts and Issuance Costs
Premiums, discounts and financing costs incurred for the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Income Taxes
Berkshire Hathaway includes Sierra Pacific in its consolidated U.S. federal income tax return. Consistent with established regulatory practice, Sierra Pacific's provision for income taxes has been computed on a separate return basis.
Deferred income tax assets and liabilities are based on differences between the financial statement and income tax basis of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities associated with components of other comprehensive income ("OCI") are charged or credited directly to OCI. Changes in deferred income tax assets and liabilities associated with certain property-related basis differences and other various differences that Sierra Pacific deems probable to be passed on to its customers are charged or credited directly to a regulatory asset or liability and will be included in regulated rates when the temporary differences reverse. Other changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense or a regulatory asset or liability in the period of enactment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
Investment tax credits are deferred and amortized over the estimated useful lives of the related properties.
Sierra Pacific recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Sierra Pacific's unrecognized tax benefits are primarily included in other long-term liabilities on the Consolidated Balance Sheets. Estimated interest and penalties, if any, related to uncertain tax positions are included as a component of income tax expense on the Consolidated Statements of Operations.
(3) Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | 2022 | | 2021 |
| Utility plant: | | | | | |
| Electric generation | 25 - 60 years | | $ | 1,298 | | | $ | 1,163 | |
| Electric transmission | 50 - 100 years | | 993 | | | 940 | |
| Electric distribution | 20 - 100 years | | 1,983 | | | 1,846 | |
| Electric general and intangible plant | 5 - 70 years | | 219 | | | 204 | |
| Natural gas distribution | 35 - 70 years | | 455 | | | 438 | |
| Natural gas general and intangible plant | 5 - 70 years | | 15 | | | 14 | |
| Common general | 5 - 70 years | | 380 | | | 370 | |
| Utility plant | | | 5,343 | | | 4,975 | |
| Accumulated depreciation and amortization | | | (1,992) | | | (1,854) | |
| Utility plant, net | | | 3,351 | | | 3,121 | |
| | | | | |
| | | | | |
| Construction work-in-progress | | | 236 | | | 219 | |
| Property, plant and equipment, net | | | $ | 3,587 | | | $ | 3,340 | |
All of Sierra Pacific's plant is subject to the ratemaking jurisdiction of the PUCN and the FERC. Sierra Pacific's depreciation and amortization expense, as authorized by the PUCN, stated as a percentage of the depreciable property balances as of December 31, 2022, 2021 and 2020 was 3.0%, 3.1% and 3.2%, respectively. Sierra Pacific is required to file a utility plant depreciation study every six years as a companion filing with the triennial general rate review filings. The most recent study was filed in 2022.
Construction work-in-progress is primarily related to the construction of regulated assets.
(4) Jointly Owned Utility Facilities
Under joint facility ownership agreements, Sierra Pacific, as tenants in common, has undivided interests in jointly owned generation and transmission facilities. Sierra Pacific accounts for its proportionate share of each facility and each joint owner has provided financing for its share of each facility. Operating costs of each facility are assigned to joint owners based on their percentage of ownership or energy production, depending on the nature of the cost. Operating costs and expenses on the Consolidated Statements of Operations include Sierra Pacific's share of the expenses of these facilities.
The amounts shown in the table below represent Sierra Pacific's share in each jointly owned facility included in property, plant and equipment, net as of December 31, 2022 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Sierra | | | | | | Construction |
| Pacific's | | Utility | | Accumulated | | Work-in- |
| Share | | Plant | | Depreciation | | Progress |
| | | | | | | |
| Valmy Generating Station | 50 | % | | $ | 399 | | | $ | 327 | | | $ | 2 | |
| ON Line Transmission Line | 6 | | | 40 | | | 8 | | | — | |
| Valmy Transmission | 50 | | | 4 | | | 2 | | | 1 | |
| Total | | | $ | 443 | | | $ | 337 | | | $ | 3 | |
(5) Leases
The following table summarizes Sierra Pacific's leases recorded on the Consolidated Balance Sheet as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Right-of-use assets: | | | |
| Operating leases | $ | 16 | | | $ | 15 | |
| Finance leases | 105 | | | 111 | |
| Total right-of-use assets | $ | 121 | | | $ | 126 | |
| | | |
| Lease liabilities: | | | |
| Operating leases | $ | 15 | | | $ | 15 | |
| Finance leases | 108 | | | 115 | |
| Total lease liabilities | $ | 123 | | | $ | 130 | |
The following table summarizes Sierra Pacific's lease costs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Variable | $ | 103 | | | $ | 86 | | | $ | 78 | |
| Operating | 1 | | | 1 | | | 2 | |
| Finance: | | | | | |
| Amortization | 5 | | | 5 | | | 4 | |
| Interest | 8 | | | 9 | | | 9 | |
| | | | | |
| Total lease costs | $ | 117 | | | $ | 101 | | | $ | 93 | |
| | | | | |
| Weighted-average remaining lease term (years): | | | | | |
| Operating leases | 26.0 | | 27.4 | | 27.2 |
| Finance leases | 28.2 | | 28.4 | | 27.8 |
| | | | | |
| Weighted-average discount rate: | | | | | |
| Operating leases | 5.0 | % | | 5.0 | % | | 5.0 | % |
| Finance leases | 8.4 | % | | 8.2 | % | | 8.1 | % |
The following table summarizes Sierra Pacific's supplemental cash flow information relating to leases for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | (1) | | | $ | (1) | | | $ | (2) | |
| Operating cash flows from finance leases | (9) | | | (9) | | | (6) | |
| Financing cash flows from finance leases | (7) | | | (7) | | | (5) | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | | | |
| Operating leases | $ | 1 | | | $ | — | | | $ | — | |
| Finance leases | 1 | | | 1 | | | 89 | |
Sierra Pacific has the following remaining lease commitments as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Operating | | Finance | | Total |
| 2023 | $ | 1 | | | $ | 16 | | | $ | 17 | |
| 2024 | 1 | | | 15 | | | 16 | |
| 2025 | 1 | | | 16 | | | 17 | |
| 2026 | 1 | | | 15 | | | 16 | |
| 2027 | 1 | | | 13 | | | 14 | |
| Thereafter | 23 | | | 137 | | | 160 | |
| Total undiscounted lease payments | 28 | | | 212 | | | 240 | |
| Less - amounts representing interest | (13) | | | (104) | | | (117) | |
| Lease liabilities | $ | 15 | | | $ | 108 | | | $ | 123 | |
Operating and Finance Lease Obligations
Sierra Pacific's operating and finance lease obligations consist mainly of ON Line and Truckee-Carson Irrigation District ("TCID"). ON Line was placed in-service on December 31, 2013. Sierra Pacific and Nevada Power, collectively the ("Nevada Utilities"), entered into a long-term transmission use agreement, in which the Nevada Utilities have a 25% interest and Great Basin Transmission South, LLC has a 75% interest. The Nevada Utilities' share of the long-term transmission use agreement and ownership interest is split at 75% for Nevada Power and 25% for Sierra Pacific, previously split 95% for Nevada Power and 5% for Sierra Pacific. In December 2019, the PUCN ordered the Nevada Utilities to complete the necessary procedures to change the ownership split to 75% for Nevada Power and 25% for Sierra Pacific, effective January 1, 2020. In August 2020, the FERC approved the amended agreement between the Nevada Utilities and Great Basin Transmission, LLC that reallocated the PUCN-approved ownership percentage change from Nevada Power to Sierra Pacific. The term of the lease is 41 years with the agreement ending December 31, 2054. In 1999, Sierra Pacific entered into a 50-year agreement with TCID to lease electric distribution facilities. Total finance lease obligations of $107 million and $110 million were included on the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively, for these leases. See Note 2 for further discussion of Sierra Pacific's remaining lease obligations.
(6) Regulatory Matters
Regulatory Assets
Regulatory assets represent costs that are expected to be recovered in future rates. Sierra Pacific's regulatory assets reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
| Deferred energy costs | 1 year | | $ | 277 | | | $ | 107 | |
| Natural disaster protection plan | 1 year | | 69 | | | 62 | |
| Merger costs from 1999 merger | 24 years | | 63 | | | 66 | |
Employee benefit plans(1) | 8 years | | 57 | | | 46 | |
| Deferred operating costs | 7 years | | 35 | | | 31 | |
| Unrealized loss on regulated derivative contracts | 1 year | | 21 | | | 35 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Other | Various | | 89 | | | 93 | |
| Total regulatory assets | | | $ | 611 | | | $ | 440 | |
| | | | | |
| Reflected as: | | | | | |
| Current assets | | | $ | 357 | | | $ | 177 | |
| Noncurrent assets | | | 254 | | | 263 | |
| Total regulatory assets | | | $ | 611 | | | $ | 440 | |
(1)Represents amounts not yet recognized as a component of net periodic benefit cost that are expected to be included in regulated rates when recognized.
Sierra Pacific had regulatory assets not earning a return on investment of $143 million and $158 million as of December 31, 2022 and 2021, respectively. The regulatory assets not earning a return on investment primarily consist of merger costs from the 1999 merger, a portion of the employee benefit plans, losses on reacquired debt, AROs and legacy meters.
Regulatory Liabilities
Regulatory liabilities represent amounts that are expected to be returned to customers in future periods. Sierra Pacific's regulatory liabilities reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted | | | | |
| Average | | | | |
| Remaining Life | | 2022 | | 2021 |
| | | | | |
Deferred income taxes(1) | Various | | $ | 223 | | | $ | 234 | |
Cost of removal(2) | 35 years | | 200 | | | 201 | |
| | | | | |
| | | | | |
| Other | Various | | 32 | | | 28 | |
| Total regulatory liabilities | | | $ | 455 | | | $ | 463 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 19 | | | $ | 19 | |
| Noncurrent liabilities | | | 436 | | | 444 | |
| Total regulatory liabilities | | | $ | 455 | | | $ | 463 | |
(1)Amounts primarily represent income tax liabilities related to the federal tax rate change from 35% to 21% that are probable to be passed on to customers, offset by income tax benefits related to accelerated tax depreciation and certain property-related basis differences and other various differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
(2)Amounts represent estimated costs, as accrued through depreciation rates and exclusive of ARO liabilities, of removing regulated property, plant and equipment in accordance with accepted regulatory practices.
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 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 and would be included in the table above as deferred energy costs. 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 and is included in the table above as deferred energy costs. These excess amounts are reflected in quarterly adjustments to rates and recorded as cost of fuel, energy and capacity in future time periods.
Regulatory Rate Review
In June 2022, Sierra Pacific filed a regulatory rate review with the PUCN that requested an annual revenue increase of $88 million, or 9.7%. In addition, a filing was made to revise depreciation rates based on a study, the results of which are reflected in the proposed revenue requirement. In August 2022, Sierra Pacific filed an updated certification filing that requested an annual revenue increase of $77 million, or 8.5%. Parties to the review filed testimony and evidence in August and September 2022. Hearings in the cost of capital, revenue requirement, and rate design phases were held in September, October, and November 2022, respectively. In December 2022, the PUCN issued an order approving an increase in base rates of $58 million, effective January 1, 2023, reflecting a reduction in Sierra Pacific's requested rate of return, updated depreciation and amortization rates for its electric operations and updated time of use periods to reflect the changes in system costs due to the increased solar generation on the system.
(7) Short-term Debt and Credit Facilities
The following table summarizes Sierra Pacific's availability under its credit facilities as of December 31 (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Credit facilities | | $ | 250 | | | $ | 250 | |
| Short-term debt | | — | | | (159) | |
| | | | |
| Net credit facilities | | $ | 250 | | | $ | 91 | |
Sierra Pacific has a $250 million secured credit facility expiring in June 2025 with an unlimited number of maturity extension options, subject to lender consent. The credit facility, which is for general corporate purposes and provides for the issuance of letters of credit, has a variable interest rate based on the Secured Overnight Financing Rate or a base rate, at Sierra Pacific's option, plus a spread that varies based on Sierra Pacific's credit ratings for its senior secured long‑term debt securities. As of December 31, 2022 and 2021, Sierra Pacific had borrowings of $— million and $159 million, respectively, outstanding under the credit facility. As of December 31, 2022 and 2021, the weighted average interest rate on borrowings outstanding was —% and 0.86%, respectively. Amounts due under Sierra Pacific's credit facility are collateralized by Sierra Pacific's general and refunding mortgage bonds. The credit facility requires Sierra Pacific's ratio of debt, including current maturities, to total capitalization not exceed 0.65 to 1.0 as of the last day of each quarter.
(8) Long-term Debt
Sierra Pacific's long-term debt consists of the following, including unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| General and refunding mortgage securities: | | | | | |
3.375% Series T, due 2023 | $ | 250 | | | $ | 249 | | | $ | 249 | |
2.600% Series U, due 2026 | 400 | | | 397 | | | 397 | |
6.750% Series P, due 2037 | 252 | | | 254 | | | 253 | |
4.710% Series W, due 2052 | 250 | | | 248 | | | — | |
| Tax-exempt refunding revenue bond obligations: | | | | | |
| Fixed-rate series: | | | | | |
| | | | | |
1.850% Pollution Control Series 2016B, due 2029 | — | | | — | | | 30 | |
| | | | | |
3.000% Gas and Water Series 2016B, due 2036 | — | | | — | | | 60 | |
0.625% Water Facilities Series 2016C, due 2036 | — | | | — | | | 30 | |
2.050% Water Facilities Series 2016D, due 2036 | — | | | — | | | 25 | |
2.050% Water Facilities Series 2016E, due 2036 | — | | | — | | | 25 | |
2.050% Water Facilities Series 2016F, due 2036 | — | | | — | | | 75 | |
1.850% Water Facilities Series 2016G, due 2036 | — | | | — | | | 20 | |
| Total long-term debt | $ | 1,152 | | | $ | 1,148 | | | $ | 1,164 | |
| | | | | |
| Reflected as: | | | | | |
| Current portion of long-term debt | | | $ | 250 | | | $ | — | |
| Long-term debt | | | 898 | | | 1,164 | |
| Total long-term debt | | | $ | 1,148 | | | $ | 1,164 | |
Annual Payment on Long-Term Debt
The annual repayments of long-term debt for the years beginning January 1, 2023 and thereafter, are as follows (in millions):
| | | | | |
| |
| |
| |
| 2023 | $ | 250 | |
| |
| |
| 2026 | 400 | |
| |
| 2028 and thereafter | 502 | |
| Total | 1,152 | |
| Unamortized premium, discount and debt issuance cost | (4) | |
| |
| |
| Total | $ | 1,148 | |
The issuance of General and Refunding Mortgage Securities by Sierra Pacific is subject to PUCN approval and is limited by available property and other provisions of the mortgage indentures. As of December 31, 2022, approximately $4.9 billion (based on original cost) of Sierra Pacific's property was subject to the liens of the mortgages.
(9) Income Taxes
Income tax expense consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Current – Federal | $ | (12) | | | $ | 5 | | | $ | 3 | |
| | | | | |
| Deferred – Federal | 31 | | | 13 | | | 12 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total income tax expense | $ | 19 | | | $ | 18 | | | $ | 15 | |
A reconciliation of the federal statutory income rate to the effective income tax rate applicable to income before income tax expense is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| Effects of ratemaking | (7) | | | (8) | | | (9) | |
| | | | | |
| | | | | |
| | | | | |
| Effective income tax rate | 14 | % | | 13 | % | | 12 | % |
The net deferred income tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| | 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Regulatory liabilities | $ | 63 | | | $ | 64 | |
| | | |
| | | |
| Operating and finance leases | 26 | | | 27 | |
| Customer advances | 17 | | | 14 | |
| Unamortized contract value | 6 | | | 8 | |
| Other | 6 | | | 6 | |
| Total deferred income tax assets | 118 | | | 119 | |
| | | |
| Deferred income tax liabilities: | | | |
| Property related items | (387) | | | (379) | |
| Regulatory assets | (135) | | | (94) | |
| Operating and finance leases | (25) | | | (27) | |
| Other | (16) | | | (21) | |
| Total deferred income tax liabilities | (563) | | | (521) | |
| Net deferred income tax liability | $ | (445) | | | $ | (402) | |
| | | |
| | | |
| | | |
| | | |
| | | |
The U.S. Internal Revenue Service has closed or effectively settled its examination of Sierra Pacific's income tax return through the short year ended December 31, 2013. The closure of examinations, or the expiration of the statute of limitations, may not preclude the U.S. Internal Revenue Service from adjusting the federal net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
(10) 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. Sierra Pacific did not make any contributions to the Qualified Pension Plan for the years ended December 31, 2022, 2021 and 2020. Sierra Pacific contributed $1 million to the Non-Qualified Pension Plans for the years ended December 31, 2022, 2021 and 2020. Sierra Pacific contributed $5 million and $1 million to the Other Post Retirement Plans for the years ended December 31, 2022 and 2021, respectively. Sierra Pacific did not make any contributions to the Other Post Retirement Plans for the year ended December 31, 2020. 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.
Amounts receivable from (payable to) NV Energy are included on the Consolidated Balance Sheets and consist of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Qualified Pension Plan - | | | |
| Other non-current assets | $ | 43 | | | $ | 62 | |
| | | |
| | | |
| Non-Qualified Pension Plans: | | | |
| Other current liabilities | (1) | | | (1) | |
| Other long-term liabilities | (5) | | | (7) | |
| | | |
| Other Postretirement Plans - | | | |
| Other long-term liabilities | (2) | | | (10) | |
(11) Asset Retirement Obligations
Sierra Pacific estimates its 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.
Sierra Pacific does not recognize liabilities for AROs for which the fair value cannot be reasonably estimated. Due to the indeterminate removal date, the fair value of the associated liabilities on certain generation, transmission, distribution and other assets cannot currently be estimated, and no amounts are recognized on the Consolidated Financial Statements other than those included in the cost of removal regulatory liability established via approved depreciation rates in accordance with accepted regulatory practices. These accruals totaled $200 million and $201 million as of December 31, 2022 and 2021, respectively.
The following table presents Sierra Pacific's ARO liabilities by asset type as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Asbestos | $ | 5 | | | $ | 5 | |
| Evaporative ponds and dry ash landfills | 3 | | | 3 | |
| Other | 3 | | | 3 | |
| Total asset retirement obligations | $ | 11 | | | $ | 11 | |
Sierra Pacific's ARO liabilities beginning and ending balances totaled $11 million for the years ended December 31, 2022 and 2021. These balances are reflected as other long-term liabilities on the Consolidated Balance Sheets.
Certain of Sierra Pacific's decommissioning and reclamation obligations relate to jointly-owned facilities, and as such, Sierra Pacific is committed to pay a proportionate share of the decommissioning or reclamation costs. In the event of a default by any of the other joint participants, the respective subsidiary may be obligated to absorb, directly or by paying additional sums to the entity, a proportionate share of the defaulting party's liability. Sierra Pacific's estimated share of the decommissioning and reclamation obligations are primarily recorded as ARO liabilities in other long-term liabilities on the Consolidated Balance Sheets.
(12) Risk Management and Hedging Activities
Sierra Pacific is exposed to the impact of market fluctuations in commodity prices and interest rates. Sierra Pacific is principally exposed to electricity, natural gas and coal market fluctuations primarily through Sierra Pacific's obligation to serve retail customer load in its regulated service territory. Sierra Pacific'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. Sierra Pacific does not engage in proprietary trading activities.
Sierra Pacific has established a risk management process that is designed to identify, assess, manage and report on each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, Sierra Pacific 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. Sierra Pacific 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, Sierra Pacific may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate Sierra Pacific's exposure to interest rate risk. Sierra Pacific 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 Sierra Pacific's accounting policies related to derivatives. Refer to Notes 2 and 13 for additional information on derivative contracts.
The following table, which excludes contracts that have been designated as normal under the normal purchases and normal sales exception afforded by GAAP, summarizes the fair value of Sierra Pacific's derivative contracts, on a gross basis, and reconciles those amounts presented on a net basis on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | | | | Other | | Other | | |
| Current | | | | Current | | Long-term | | |
| Assets | | | | Liabilities | | Liabilities | | Total |
| | | | | | | | | |
| As of December 31, 2022: | | | | | | | | | |
Not designated as hedging contracts (1): | | | | | | | | | |
| Commodity assets | $ | 8 | | | | | $ | — | | | $ | — | | | $ | 8 | |
| Commodity liabilities | — | | | | | (14) | | | (7) | | | (21) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total derivative - net basis | $ | 8 | | | | | $ | (14) | | | $ | (7) | | | $ | (13) | |
| | | | | | | | | |
| As of December 31, 2021: | | | | | | | | | |
Not designated as hedging contracts(1): | | | | | | | | | |
| Commodity assets | $ | 2 | | | | | $ | — | | | $ | — | | | $ | 2 | |
| Commodity liabilities | — | | | | | (16) | | | (19) | | | (35) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total derivative - net basis | $ | 2 | | | | | $ | (16) | | | $ | (19) | | | $ | (33) | |
(1)Sierra Pacific's commodity derivatives not designated as hedging contracts are included in regulated rates. As of December 31, 2022 and 2021, a regulatory asset of $13 million and $33 million, respectively, was recorded related to the net derivative liability of $13 million and $33 million, respectively.
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 December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Unit of | | | | |
| Measure | | 2022 | | 2021 |
| | | | | |
| Electricity purchases | Megawatt hours | | 1 | | | 1 | |
| Natural gas purchases | Decatherms | | 52 | | | 53 | |
| | | | | |
Credit Risk
Sierra Pacific 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 Sierra Pacific's counterparties have similar economic, industry or other characteristics and due to direct and indirect relationships among the counterparties. Before entering into a transaction, Sierra Pacific 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, Sierra Pacific 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, Sierra Pacific 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 agreements, including 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 recognized credit rating agencies. These agreements 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" if there is a material adverse change in Sierra Pacific's creditworthiness. These rights can vary by contract and by counterparty. As of December 31, 2022, Sierra Pacific's credit ratings for its senior secured debt and its issuer credit ratings for senior unsecured debt from the recognized credit rating agencies were investment grade.
The aggregate fair value of Sierra Pacific's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $— million as of December 31, 2022 and 2021, respectively, 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. Sierra Pacific's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation or other factors.
(13) Fair Value Measurements
The carrying value of Sierra Pacific'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. Sierra Pacific 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 Sierra Pacific 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 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.
The following table presents Sierra Pacific's financial 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 December 31, 2022: | | | | | | | |
| Assets: | | | | | | | |
| Commodity derivatives | $ | — | | | $ | — | | | $ | 8 | | | $ | 8 | |
| Money market mutual funds | 49 | | | — | | | — | | | 49 | |
| Investment funds | 1 | | | — | | | — | | | 1 | |
| $ | 50 | | | $ | — | | | $ | 8 | | | $ | 58 | |
| | | | | | | |
| Liabilities - commodity derivatives | $ | — | | | $ | — | | | $ | (21) | | | $ | (21) | |
| | | | | | | |
| As of December 31, 2021: | | | | | | | |
| Assets: | | | | | | | |
| Commodity derivatives | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | |
| Money market mutual funds | 10 | | | — | | | — | | | 10 | |
| Investment funds | 1 | | | — | | | — | | | 1 | |
| $ | 11 | | | $ | — | | | $ | 2 | | | $ | 13 | |
| | | | | | | |
| Liabilities - commodity derivatives | $ | — | | | $ | — | | | $ | (35) | | | $ | (35) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Sierra Pacific's investments in money market mutual funds and investment funds are accounted for as available-for-sale securities and are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value.
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 Sierra Pacific transacts. When quoted prices for identical contracts are not available, Sierra Pacific uses forward price curves. Forward price curves represent Sierra Pacific's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. Sierra Pacific 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, Sierra Pacific 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. The determination of the fair value for derivative contracts not only includes counterparty risk, but also the impact of Sierra Pacific's nonperformance risk on its liabilities, which as of December 31, 2022, had an immaterial impact to the fair value of its derivative contracts. As such, Sierra Pacific considers its derivative contracts to be valued using Level 3 inputs.
Sierra Pacific's investments in money market mutual funds and equity securities are accounted for as available-for-sale securities and are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value.
The following table reconciles the beginning and ending balances of Sierra Pacific's net commodity derivative assets or liabilities measured at fair value on a recurring basis using significant Level 3 inputs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Beginning balance | | $ | (33) | | | $ | 7 | | | $ | (1) | |
| Changes in fair value recognized in regulatory assets or liabilities | | (21) | | | (25) | | | (2) | |
| | | | | | |
| Settlements | | 41 | | | (15) | | | 10 | |
| Ending balance | | $ | (13) | | | $ | (33) | | | $ | 7 | |
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 following table presents the carrying value and estimated fair value of Sierra Pacific's long-term debt as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying | | Fair | | Carrying | | Fair |
| Value | | Value | | Value | | Value |
| | | | | | | |
| Long-term debt | $ | 1,148 | | | $ | 1,111 | | | $ | 1,164 | | | $ | 1,316 | |
(14) Commitments and Contingencies
Commitments
Sierra Pacific has the following firm commitments that are not reflected on the Consolidated Balance Sheet. Minimum payments as of December 31, 2022 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2028 and | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Contract type: | | | | | | | | | | | | | |
Fuel, capacity and transmission contract commitments | $ | 413 | | | $ | 244 | | | $ | 184 | | | $ | 134 | | | $ | 127 | | | $ | 1,447 | | | $ | 2,549 | |
Fuel and capacity contract commitments (not commercially operable) | 8 | | | 11 | | | 12 | | | 12 | | | 11 | | | 236 | | | 290 | |
| Construction commitments | 500 | | | 741 | | | 86 | | | 268 | | | — | | | — | | | 1,595 | |
| | | | | | | | | | | | | |
| Easements | 2 | | | 2 | | | 2 | | | 2 | | | 2 | | | 33 | | | 43 | |
| Maintenance, service and other contracts | 7 | | | 5 | | | 5 | | | 3 | | | — | | | 5 | | | 25 | |
| Total commitments | $ | 930 | | | $ | 1,003 | | | $ | 289 | | | $ | 419 | | | $ | 140 | | | $ | 1,721 | | | $ | 4,502 | |
Fuel and Capacity Contract Commitments
Purchased Power
Sierra Pacific has several contracts for long-term purchase of electric energy which have been approved by the PUCN. The expiration of these contracts range from 2025 to 2047. Purchased power includes estimated payments for contracts which meet the definition of a lease and payments are based on the amount of energy expected to be generated. See Note 5 for further discussion of Sierra Pacific's lease commitments.
Coal and Natural Gas
Sierra Pacific has a long-term contract for the transport of coal that expires in 2024. Additionally, gas transportation contracts expire from 2023 to 2046 and the gas supply contracts expire from 2023 to 2024.
Fuel and Capacity Contract Commitments - Not Commercially Operable
Sierra Pacific has several contracts for long-term purchase of electric energy in which the facility remains under development. Amounts represent the estimated payments under renewable energy power purchase contracts, which have been approved by the PUCN and are contingent upon the developers obtaining commercial operation and their ability to deliver power.
Construction Commitments
Sierra Pacific's construction commitments included in the table above relate to firm commitments and include costs associated with two solar photovoltaic facility projects and solar photovoltaic panels for future projects. The first project is a 250-MW solar photovoltaic facility with an additional 200 MWs of co-located battery storage that will be developed in Humboldt County, Nevada. The second project is a 350-MW solar photovoltaic facility with an additional 280 MWs of co-located battery storage that will be developed in Humboldt County, Nevada. Commercial operation has been delayed for both projects to an undetermined date. Both facilities will be jointly owned and operated by Nevada Power and Sierra Pacific.
Easements
Sierra Pacific has non-cancelable easements for land. Operating and maintenance expense on non-cancelable easements totaled $2 million for the years ended December 31, 2022, 2021 and 2020.
Maintenance, Service and Other Contracts
Sierra Pacific has long-term service agreements for the performance of maintenance on generation units. Obligation amounts are based on estimated usage. The estimated expiration of these service agreements range from 2026 to 2046.
Environmental Laws and Regulations
Sierra Pacific is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality, coal ash disposal and other environmental matters that have the potential to impact its 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 financial results. Sierra Pacific 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.
(15) Revenues from Contracts with Customers
The following table summarizes Sierra Pacific's Customer Revenue by customer class, including a reconciliation to Sierra Pacific's reportable segment information included in Note 18, for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Electric | | Natural Gas | | Total | | Electric | | Natural Gas | | Total | | Electric | | Natural Gas | | Total |
| Customer Revenue: | | | | | | | | | | | | | | | | | |
| Retail: | | | | | | | | | | | | | | | | | |
| Residential | $ | 365 | | | $ | 105 | | | $ | 470 | | | $ | 307 | | | $ | 76 | | | $ | 383 | | | $ | 273 | | | $ | 76 | | | $ | 349 | |
| Commercial | 333 | | | 45 | | | 378 | | | 267 | | | 29 | | | 296 | | | 233 | | | 29 | | | 262 | |
| Industrial | 229 | | | 16 | | | 245 | | | 202 | | | 10 | | | 212 | | | 170 | | | 9 | | | 179 | |
| Other | 6 | | | 1 | | | 7 | | | 5 | | | — | | | 5 | | | 5 | | | — | | | 5 | |
| Total fully bundled | 933 | | | 167 | | | 1,100 | | | 781 | | | 115 | | | 896 | | | 681 | | | 114 | | | 795 | |
| Distribution only service | 5 | | | — | | | 5 | | | 3 | | | — | | | 3 | | | 4 | | | — | | | 4 | |
| Total retail | 938 | | | 167 | | | 1,105 | | | 784 | | | 115 | | | 899 | | | 685 | | | 114 | | | 799 | |
| Wholesale, transmission and other | 86 | | | — | | | 86 | | | 62 | | | — | | | 62 | | | 50 | | | — | | | 50 | |
| Total Customer Revenue | 1,024 | | | 167 | | | 1,191 | | | 846 | | | 115 | | | 961 | | | 735 | | | 114 | | | 849 | |
| Other revenue | 1 | | | 1 | | | 2 | | | 2 | | | 2 | | | 4 | | | 3 | | | 2 | | | 5 | |
| Total operating revenue | $ | 1,025 | | | $ | 168 | | | $ | 1,193 | | | $ | 848 | | | $ | 117 | | | $ | 965 | | | $ | 738 | | | $ | 116 | | | $ | 854 | |
(16) Supplemental Cash Flow Disclosures
The summary of supplemental cash flow disclosures as of and for the years ended December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 45 | | | $ | 41 | | | $ | 42 | |
| Income taxes (refunded) paid | $ | (1) | | | $ | (3) | | | $ | 2 | |
| | | | | |
| Supplemental disclosure of non-cash investing and financing transactions: | | | | | |
| Accruals related to property, plant and equipment additions | $ | 57 | | | $ | 27 | | | $ | 17 | |
(17) Related Party Transactions
Sierra Pacific has an intercompany administrative services agreement with BHE and its subsidiaries. Amounts charged to Sierra Pacific under this agreement, either directly or through NV Energy, totaled $23 million, $14 million and $4 million for the years ended December 31, 2022, 2021 and 2020. Amounts charged to Sierra Pacific in 2022 and 2021 primarily relate to information technology projects billed at a consolidated level and passed through to affiliates.
Sierra Pacific provided electricity to Nevada Power of $86 million, $43 million and $34 million for the years ended December 31, 2022, 2021 and 2020, respectively. Receivables associated with these transactions were $5 million and $— million as of December 31, 2022 and 2021, respectively. Sierra Pacific purchased electricity from Nevada Power of $362 million, $179 million and $106 million for the years ended December 31, 2022, 2021 and 2020, respectively. Payables associated with these transactions were $41 million and $13 million as of December 31, 2022 and 2021, respectively.
Sierra Pacific incurs intercompany administrative and shared facility costs with NV Energy and Nevada Power. These transactions are governed by an intercompany service agreement and are priced at cost. NV Energy provided services to Sierra Pacific of $5 million for the years ending December 31, 2022, 2021 and 2020, respectively. Sierra Pacific provided services to Nevada Power of $16 million, $15 million, and $15 million for the years ended December 31, 2022, 2021 and 2020, respectively. Nevada Power provided services to Sierra Pacific of $25 million, $25 million, and $26 million for the years ended December 31, 2022, 2021 and 2020, respectively. Sierra Pacific provided services to NV Energy of $1 million, $— million, and $— million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, Sierra Pacific's Consolidated Balance Sheets included amounts due to NV Energy of $47 million and $19 million, respectively. There were no receivables due from NV Energy as of December 31, 2022 and 2021. In November 2022, Sierra Pacific entered into a $100 million unsecured note with NV Energy payable upon demand and $70 million was outstanding as of December 31, 2022. As of December 31, 2022 and 2021, Sierra Pacific's Consolidated Balance Sheets included payables due to Nevada Power of $33 million and $2 million, respectively. There were no receivables due from Nevada Power as of December 31, 2022 and 2021.
Sierra Pacific is party to a tax-sharing agreement with NV Energy and NV Energy is part of the Berkshire Hathaway consolidated U.S. federal income tax return. As of December 31, 2022 and 2021 federal income taxes receivable from NV Energy were $11 million and $— million, respectively. Sierra Pacific received cash refunds of $1 million and $3 million for federal income taxes for the years ended December 31, 2022 and 2021, respectively, and made cash payments of $2 million for federal income taxes for the year ended December 31, 2020.
Certain disbursements for accounts payable and payroll are made by NV Energy on behalf of Sierra Pacific and reimbursed automatically when settled by the bank. These amounts are recorded as accounts payable at the time of disbursement.
(18) 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.
The following tables provide information on a reportable segment basis (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Operating revenue: | | | | | | |
| Regulated electric | | $ | 1,025 | | | $ | 848 | | | $ | 738 | |
| Regulated natural gas | | 168 | | | 117 | | | 116 | |
| Total operating revenue | | $ | 1,193 | | | $ | 965 | | | $ | 854 | |
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| | | | | | |
| Operating income: | | | | | | |
| Regulated electric | | $ | 146 | | | $ | 148 | | | $ | 147 | |
| Regulated natural gas | | 19 | | | 19 | | | 18 | |
| Total operating income | | 165 | | | 167 | | | 165 | |
| Interest expense | | (58) | | | (54) | | | (56) | |
| Allowance for borrowed funds | | 3 | | | 2 | | | 2 | |
| Allowance for equity funds | | 7 | | | 7 | | | 4 | |
| Interest and dividend income | | 18 | | | 9 | | | 4 | |
| Other, net | | 2 | | | 11 | | | 7 | |
| Income before income tax expense | | $ | 137 | | | $ | 142 | | | $ | 126 | |
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| | As of December 31, |
| | 2022 | | 2021 | | 2020 |
| Assets | | | | | | |
| Regulated electric | | $ | 4,224 | | | $ | 3,829 | | | $ | 3,540 | |
| Regulated natural gas | | 441 | | | 365 | | | 342 | |
Regulated common assets(1) | | 67 | | | 29 | | | 37 | |
| Total assets | | $ | 4,732 | | | $ | 4,223 | | | $ | 3,919 | |
(1) Consists principally of cash and cash equivalents not included in either the regulated electric or regulated natural gas segments.
Eastern Energy Gas Holdings, LLC and its subsidiaries
Consolidated Financial Section
Item 7. 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 Eastern Energy Gas during the periods included herein. This discussion should be read in conjunction with Eastern Energy Gas' historical Consolidated Financial Statements and Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. Eastern Energy Gas' actual results in the future could differ significantly from the historical results.
Results of Operations
Overview
Net income attributable to Eastern Energy Gas for the year ended December 31, 2022 was $426 million, an increase of $164 million, or 63%, compared to 2021, primarily due to higher margin from EGTS' regulated gas transmission and storage operations of $128 million, a benefit from the settlement of regulated tax matters in the Iroquois rate case and a decrease due to the settlement of depreciation rates in EGTS' general rate case, partially offset by an increase in income tax expense primarily due to higher pre-tax income.
Net income attributable to Eastern Energy Gas for the year ended December 31, 2021 was $262 million, an increase of $153 million, or 140%, compared to 2020, primarily due to a 2020 charge associated with the abandonment of a significant portion of a project in connection with the Atlantic Coast Pipeline project ("Supply Header Project") and a 2020 charge for cash flow hedges of debt-related items that were probable of not occurring as a result of the GT&S Transaction. These increases were partially offset by an increase in net income attributable to DEI's 50% noncontrolling interest in Cove Point and the November 2020 disposition of Questar Pipeline Group of $75 million, both of which were a result of the GT&S Transaction, and an increase in income tax expense primarily due to higher pre-tax income.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Operating revenue increased $136 million, or 7%, for 2022 compared to 2021, primarily due to an increase in regulated gas transmission and storage services revenues due to the settlement of EGTS' general rate case of $101 million, an increase in Cove Point LNG variable revenue of $69 million and an increase in variable revenue related to park and loan activity of $24 million, partially offset by a decrease in regulated gas sales for operational and system balancing purposes primarily due to decreased volumes of $49 million and decreased LNG service as a result of increased scheduled maintenance days of $13 million.
(Excess) cost of gas was a credit of $30 million for 2022 compared to an expense of $12 million for 2021. The change is primarily due to a decrease in volumes sold of $62 million, partially offset by an unfavorable change to operational and system balancing volumes of $20 million.
Operations and maintenance increased $15 million, or 3%, for 2022 compared to 2021, primarily due to a 2021 benefit from the finalization of entries for the disallowance of capitalized AFUDC of $11 million and higher corporate charges of $11 million, partially offset by lower long-term incentive plan expenses of $8 million.
Depreciation and amortization decreased $7 million, or 2%, for 2022 compared to 2021, primarily due to the settlement of depreciation rates in EGTS' general rate case of $23 million, partially offset by higher plant placed in-service of $16 million.
Property and other taxes decreased $10 million, or 7%, for 2022 compared to 2021, primarily due to lower than estimated 2021 tax assessments.
Interest expense decreased $4 million, or 3%, for 2022 compared to 2021, primarily due to the repayment of $500 million of long-term debt in the second quarter of 2021.
Interest and dividend income increased $7 million for 2022 compared to 2021, primarily due to interest income from BHE GT&S' intercompany revolving credit agreement with Eastern Energy Gas.
Other, net was an expense of $1 million for 2022 compared to a credit of $1 million for 2021. The change is primarily due to losses on marketable securities.
Income tax expense (benefit) increased $50 million, or 43%, for 2022 compared to 2021 and the effective tax rate was 18% for 2022 and 16% for 2021. The effective tax rate increased primarily due to the revaluation of deferred taxes from changes in various state income tax rates.
Equity income increased $59 million for 2022 compared 2021, primarily due to a benefit from the settlement of regulated tax matters in the Iroquois rate case of $45 million and higher operating revenues at Iroquois due to favorable fixed negotiated rate agreements and hedges of $15 million.
Net income attributable to noncontrolling interests increased $33 million for 2022 compared to 2021, primarily due to an increase in Cove Point LNG variable revenue, partially offset by decreased LNG service as a result of increased scheduled maintenance days.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Operating revenue decreased $220 million, or 11%, for 2021 compared to 2020, primarily due to the November 2020 disposition of Questar Pipeline Group of $197 million and a decrease in services performed for Atlantic Coast Pipeline of $43 million, which is offset in operations and maintenance expense, partially offset by an increase in regulated gas revenues for operational and system balancing purposes primarily due to increased prices of $15 million.
Cost of gas decreased $12 million, or 50%, for 2021 compared to 2020, primarily due to a favorable change in natural gas prices of $55 million and the November 2020 disposition of Questar Pipeline Group of $3 million, partially offset by an increase in prices of natural gas sold of $49 million.
Operations and maintenance decreased $627 million, or 55%, for 2021 compared to 2020, primarily due to a 2020 charge associated with the abandonment of the Supply Header Project of $463 million, a decrease in services performed for Atlantic Coast Pipeline of $45 million, the November 2020 disposition of Questar Pipeline Group of $43 million, a 2020 charge for disallowance of capitalized AFUDC due to the resolution of EGTS' 2015 FERC audit of $43 million, the 2020 write-off of certain items in connection with the GT&S Transaction of $17 million and a 2021 benefit from the finalization of entries for the disallowance of capitalized AFUDC of $11 million.
Depreciation and amortization decreased $38 million, or 10%, for 2021 compared to 2020, primarily due the November 2020 disposition of Questar Pipeline Group.
Property and other taxes increased $9 million, or 6%, for 2021 compared to 2020, primarily due to higher tax assessments.
Interest expense decreased $188 million, or 55%, for 2021 compared to 2020, primarily due to a charge in 2020 for cash flow hedges of $141 million of debt-related items that were probable of not occurring as a result of the GT&S Transaction, the November 2020 disposition of Questar Pipeline Group of $16 million and lower interest expense of $17 million from the repayment of $700 million of long-term debt in the fourth quarter of 2020 and $5 million from the repayment of $500 million of long-term debt in the second quarter of 2021.
Allowance for borrowed funds decreased $4 million, or 67%, for 2021 compared to 2020, primarily due to the 2020 abandonment of the Supply Header Project.
Allowance for equity funds decreased $6 million, or 46%, for 2021 compared to 2020, primarily due to the 2020 abandonment of the Supply Header Project.
Interest and dividend income decreased $67 million for 2021 compared to 2020, primarily due to interest income from the East Ohio Gas Company of $33 million and DEI of $32 million recognized in 2020.
Other, net decreased $41 million, or 98%, for 2021 compared to 2020, primarily due to non-service cost credits recognized in 2020 related to certain Eastern Energy Gas benefit plans that were retained by DEI as a result of the GT&S Transaction.
Income tax expense (benefit) was an expense of $117 million for 2021 compared to a benefit of $24 million for 2020. The effective tax rate was 16% in 2021 and (12)% in 2020. The effective tax rate increased primarily due to the change in the noncontrolling interest of Cove Point as a result of the GT&S Transaction, lower pre-tax income driven by charges associated with the Supply Header Project in 2020 and the finalization of the effects from the change in tax status of certain Eastern Energy Gas subsidiaries in 2020.
Net income attributable to noncontrolling interests increased $226 million for 2021 compared to 2020, primarily due to DEI's 50% noncontrolling interest in Cove Point effective with the GT&S Transaction.
Liquidity and Capital Resources
As of December 31, 2022, Eastern Energy Gas' total net liquidity was as follows (in millions):
| | | | | | | | |
| Cash and cash equivalents | | $ | 65 | |
Intercompany revolving credit agreement(1) | | 400 | |
| | |
| | |
| | |
| | |
| | |
| | |
| Total net liquidity | | $ | 465 | |
| | |
| Intercompany credit agreement: | | |
| Maturity date | | 2023 |
(1)Refer to Note 19 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion regarding Eastern Energy Gas' intercompany revolving credit agreement.
Operating Activities
Net cash flows from operating activities for the years ended December 31, 2022 and 2021 were $1.3 billion and $1.1 billion, respectively. The change was primarily due to the impacts from the proposed rate increase in effect April 1, 2022 for the EGTS general rate case, timing of income tax payments and other changes in working capital, partially offset by lower collections from customers.
Net cash flows from operating activities for the years ended December 31, 2021 and 2020 were $1.1 billion and $1.3 billion, respectively. The change was primarily due to lower collections from affiliates, the November 2020 disposition of Questar Pipeline Group and the timing of payments of operating costs, partially offset by the settlement of interest rate swaps in 2020 and higher income tax receipts.
The timing of Eastern Energy Gas' income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods elected and assumptions made for each payment date.
Investing Activities
Net cash flows from investing activities for the years ended December 31, 2022 and 2021 were $(778) million and $(486) million, respectively. The change was primarily due to higher loans to affiliates of $381 million and lower repayments of loans by affiliates of $266 million, partially offset by equity method distribution of $150 million in 2022, equity method contributions of $154 million in 2021 and a decrease in capital expenditures of $55 million.
Net cash flows from investing activities for the years ended December 31, 2021 and 2020 were $(486) million and $3.1 billion, respectively. The change was primarily due to lower repayments of loans by affiliates of $3.1 billion, loans to affiliates of $183 million and higher funding of equity method investments of $152 million.
Financing Activities
Net cash flows from financing activities for the year ended December 31, 2022 were $(515) million and consisted of distributions to noncontrolling interests from Cove Point.
Net cash flows from financing activities for the year ended December 31, 2021 were $(615) million. Sources of cash totaled $346 million and consisted of proceeds from equity contributions, that included a contribution from its indirect parent, BHE, to Eastern Energy Gas to assist in the repayment of $500 million of debt. Uses of cash totaled $961 million and consisted mainly of repayments of long-term debt of $500 million, distributions to noncontrolling interests from Cove Point of $450 million and repayment of notes to affiliates of $9 million.
Net cash flows from financing activities for the year ended December 31, 2020 were $(4.3) billion. Sources of cash totaled $1.2 billion and consisted of proceeds from equity contributions, that included a contribution from its indirect parent BHE to Eastern Energy Gas to repay its $700 million of debt. Uses of cash totaled $5.5 billion and consisted mainly of distributions of $4.5 billion, repayments of long-term debt of $700 million and net repayments of affiliated current borrowings of $251 million as required by the GT&S Transaction.
Future Uses of Cash
Capital 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, new growth projects and the timing of growth projects; changes in environmental and other rules and regulations; impacts to customers' rates; outcomes of regulatory proceedings; changes in income tax laws; general business conditions; system reliability standards; the cost and efficiency of construction labor, equipment and materials; commodity prices; and the cost and availability of capital.
Eastern Energy Gas' historical and forecasted capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, for the years ending December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Historical | | Forecast |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| | | | | | | | | | | |
| Natural gas transmission and storage | $ | 112 | | | $ | 16 | | | $ | 43 | | | $ | 15 | | | $ | 46 | | | $ | 147 | |
| Other | 262 | | | 426 | | | 344 | | | 336 | | | 285 | | | 245 | |
| Total | $ | 374 | | | $ | 442 | | | $ | 387 | | | $ | 351 | | | $ | 331 | | | $ | 392 | |
Eastern Energy Gas' natural gas transmission and storage capital expenditures primarily include growth capital expenditures related to planned regulated projects. Eastern Energy Gas' other capital expenditures consist primarily of nonregulated and routine capital expenditures for natural gas transmission, storage and LNG terminalling infrastructure needed to serve existing and expected demand.
Off-Balance Sheet Arrangements
Eastern Energy Gas has certain investments that are accounted for under the equity method in accordance with GAAP. Accordingly, an amount is recorded on Eastern Energy Gas' Consolidated Balance Sheets as an equity investment and is increased or decreased for Eastern Energy Gas' pro-rata share of earnings or losses, respectively, less any dividends from such investments.
As of December 31, 2022, Eastern Energy Gas' investments that are accounted for under the equity method had short- and long-term debt of $307 million and an unused revolving credit facility of $10 million. As of December 31, 2022, Eastern Energy Gas' pro-rata share of such short- and long-term debt was $154 million and unused revolving credit facility was $5 million. The entire amount of Eastern Energy Gas' pro-rata share of the outstanding short- and long-term debt and unused revolving credit facility is non-recourse to Eastern Energy Gas. Although Eastern Energy Gas is generally not required to support debt service obligations of its equity investees, default with respect to this non-recourse short- and long-term debt could result in a loss of invested equity.
Material Cash Requirements
The following table summarizes Eastern Energy Gas' material cash requirements as of December 31, 2022 (in millions):
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| | Payments Due by Periods |
| | 2023 | | 2024-2025 | | 2026-2027 | | 2028 and thereafter | | Total |
| | | | | | | | | | |
Interest payments on long-term debt(1) | | $ | 136 | | | $ | 205 | | | $ | 164 | | | $ | 1,012 | | | $ | 1,517 | |
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Natural gas supply and transmission(1) | | 49 | | | 98 | | | 98 | | | — | | | 245 | |
| Total cash requirements | | $ | 185 | | | $ | 303 | | | $ | 262 | | | $ | 1,012 | | | $ | 1,762 | |
(1)Not reflected on the Consolidated Balance Sheets.
In addition, Eastern Energy Gas also has cash requirements that may affect its consolidated financial condition that arise from long-term debt (refer to Note 8), construction and other development costs (refer to Liquidity and Capital Resources included within this Item 7), uncertain tax positions (refer to Note 9) and AROs (refer to Note 11). Refer, where applicable, to the respective referenced note in Notes to Consolidated Financial Statements in Item 8 of this Form 10‑K for additional information.
Regulatory Matters
Eastern Energy Gas is subject to comprehensive regulation. Refer to the discussion contained in Item 1 of this Form 10-K for further information regarding Eastern Energy Gas' general regulatory framework and current regulatory matters.
Environmental Laws and Regulations
Eastern Energy Gas is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality and other environmental matters that have the potential to impact its 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 various federal, state and local agencies. Eastern Energy Gas believes it is in material compliance with all applicable laws and regulations, although many are subject to interpretation that may ultimately be resolved by the courts. Environmental laws and regulations continue to evolve, and Eastern Energy Gas is unable to predict the impact of the changing laws and regulations on its operations and financial results.
Refer to "Environmental Laws and Regulations" in Item 1 of this Form 10-K for further discussion regarding environmental laws and regulations.
Collateral and Contingent Features
Debt of Eastern Energy Gas is rated by credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of Eastern Energy Gas' ability to, in general, meet the obligations of its issued debt. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time.
Eastern Energy Gas has no credit rating downgrade triggers that would accelerate the maturity dates of outstanding debt, and a change in ratings is not an event of default under the applicable debt instruments.
Inflation
Historically, overall inflation and changing prices in the economies where Eastern Energy Gas operates have not had a significant impact on Eastern Energy Gas' consolidated financial results. Eastern Energy Gas and its subsidiaries primarily operate under cost-of-service based rate-setting structures administered by the FERC. Under these rate-setting structures, Eastern Energy Gas is allowed to include prudent costs in its rates, including the impact of inflation. Eastern Energy Gas attempts to minimize the potential impact of inflation on its operations by employing prudent risk management and hedging strategies and by considering, among other areas, its impact on purchases of energy, operating expenses, materials and equipment costs, contract negotiations, future capital spending programs and long-term debt issuances. There can be no assurance that such actions will be successful.
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. The following critical accounting estimates are impacted significantly by Eastern Energy Gas' methods, judgments and assumptions used in the preparation of the Consolidated Financial Statements and should be read in conjunction with Eastern Energy Gas' Summary of Significant Accounting Policies included in Eastern Energy Gas' Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Accounting for the Effects of Certain Types of Regulation
Eastern Energy Gas prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, Eastern Energy Gas defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur.
Eastern Energy Gas continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future regulated rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition that could limit Eastern Energy Gas' ability to recover its costs. Eastern Energy Gas believes its application of the guidance for regulated operations is appropriate and its existing regulatory assets and liabilities are probable of inclusion in future regulated rates. The evaluation reflects the current political and regulatory climate at the federal level. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as AOCI. Total regulatory assets were $48 million and total regulatory liabilities were $722 million as of December 31, 2022. Refer to Eastern Energy Gas' Note 6 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Eastern Energy Gas' regulatory assets and liabilities.
Impairment of Goodwill and Long-Lived Assets
Eastern Energy Gas' Consolidated Balance Sheet as of December 31, 2022 includes goodwill of acquired businesses of $1.3 billion. Eastern Energy Gas evaluates goodwill for impairment at least annually and completed its annual review as of October 31, 2022. Additionally, no indicators of impairment were identified as of December 31, 2022. Significant judgment is required in estimating the fair value of the reporting unit and performing goodwill impairment tests. Eastern Energy Gas uses a variety of methods to estimate a reporting unit's fair value, principally discounted projected future net cash flows. Key assumptions used include, but are not limited to, the use of estimated future cash flows; multiples of earnings; and an appropriate discount rate. Estimated future cash flows are impacted by, among other factors, growth rates, changes in regulations and rates, ability to renew contracts and estimates of future commodity prices. In estimating future cash flows, Eastern Energy Gas incorporates current market information, as well as historical factors.
Eastern Energy Gas evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. The impacts of regulation are considered when evaluating the carrying value of regulated assets.
The estimate of cash flows arising from the future use of an asset, for the purposes of impairment analysis, requires the exercise of judgment. Circumstances that could significantly alter the calculation of fair value or the recoverable amount of an asset may include significant changes in the regulatory environment, the business climate, management's plans, legal factors, market price of the asset, the use of the asset, the physical condition of the asset, future market prices, competition and many other factors over the life of the asset. Any resulting impairment loss is highly dependent on the underlying assumptions and could significantly affect Eastern Energy Gas' results of operations.
Income Taxes
In determining Eastern Energy Gas' income taxes, management is required to interpret complex income tax laws and regulations, which includes consideration of regulatory implications imposed by the FERC. Eastern Energy Gas' income tax returns are subject to continuous examinations by federal, state and local income tax authorities that may give rise to different interpretations of these complex laws and regulations. Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved. Eastern Energy Gas recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Although the ultimate resolution of Eastern Energy Gas' federal, state and local income tax examinations is uncertain, Eastern Energy Gas believes it has made adequate provisions for these income tax positions. The aggregate amount of any additional income tax liabilities that may result from these examinations is not expected to have a material impact on Eastern Energy Gas' consolidated financial results. Refer to Eastern Energy Gas' Note 9 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Eastern Energy Gas' income taxes.
It is probable that Eastern Energy Gas will pass income tax benefit and expense related to the federal tax rate change from 35% to 21% as a result of 2017 Tax Reform, certain property-related basis differences and other various differences on to their customers. As of December 31, 2022, these amounts were recognized as a net regulatory liability of $406 million and will be included in regulated rates when the temporary differences reverse.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Eastern Energy Gas' Consolidated Balance Sheets include assets and liabilities with fair values that are subject to market risks. Eastern Energy Gas' significant market risks are primarily associated with commodity prices, interest rates, foreign currency and the extension of credit to counterparties with which Eastern Energy Gas transacts. The following discussion addresses the significant market risks associated with Eastern Energy Gas' business activities. Eastern Energy Gas has established guidelines for credit risk management. Refer to Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding Eastern Energy Gas' contracts accounted for as derivatives.
Commodity Price Risk
Eastern Energy Gas is exposed to the impact of market fluctuations in commodity prices. Eastern Energy Gas is principally exposed to natural gas market fluctuations primarily through fuel retained and used during the operation of the pipeline system as well as lost and unaccounted for gas. Eastern Energy Gas is exposed to the risk of fuel retention, meaning customers have a fixed fuel retention percentage assessed on transmission and storage quantities, and the pipeline bears the risk of under-recovery and benefits from any over-recovery of volumes. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, facility availability, customer usage, storage and transmission constraints. Eastern Energy Gas does not engage in proprietary trading activities. To mitigate a portion of its commodity price risk, Eastern Energy Gas uses commodity derivative contracts, which may include forwards, futures, options, swaps and other agreements, to effectively secure future supply quantities or sell future supply quantities generally at fixed prices. Eastern Energy Gas does not hedge all of its commodity price risk, thereby exposing the unhedged portion to changes in market prices. As of February 2023, all of Eastern Energy Gas' regulated operations recover their cost of gas through fuel trackers and are no longer subject to significant commodity price risk.
Interest Rate Risk
Eastern Energy Gas is exposed to interest rate risk on its outstanding variable-rate short- and long-term debt and future debt issuances. Eastern Energy Gas 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. As a result of the fixed interest rates, Eastern Energy Gas' fixed-rate long-term debt does not expose Eastern Energy Gas to the risk of loss due to changes in market interest rates. Additionally, because fixed-rate long-term debt is not carried at fair value on the Consolidated Balance Sheets, changes in fair value would impact earnings and cash flows only if Eastern Energy Gas were to reacquire all or a portion of these instruments prior to their maturity. The nature and amount of Eastern Energy Gas' short- and long-term debt can be expected to vary from period to period as a result of future business requirements, market conditions and other factors. Refer to Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional discussion of Eastern Energy Gas' long-term debt.
Eastern Energy Gas holds foreign currency swaps with the purpose of hedging the foreign currency exchange risk associated with Euro denominated debt. As of December 31, 2022 and 2021, Eastern Energy Gas had €250 million in aggregate notional amounts of these foreign currency swaps outstanding. A hypothetical 10% decrease in market interest rates would not have resulted in a material decrease in fair value of Eastern Energy Gas' foreign currency swaps as of December 31, 2022 and 2021.
The impact of a change in interest rates on the Eastern Energy Gas' interest rate-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net gains and/or losses from interest rate derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction.
Credit Risk
Eastern Energy Gas is exposed to counterparty credit risk associated with natural gas transmission and storage service contracts with utilities, natural gas producers, power generators, industrials, energy marketing companies, financial institutions and other market participants. Credit risk may be concentrated to the extent Eastern Energy Gas' counterparties have similar economic, industry or other characteristics and due to direct and indirect relationships among the counterparties. Before entering into a transaction, Eastern Energy Gas analyzes the financial condition of each 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 counterparty credit risk, Eastern Energy Gas obtains third-party guarantees, letters of credit, financial guarantee bonds and cash deposits. If required, Eastern Energy Gas exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.
Eastern Energy Gas' gross credit exposure for each counterparty is calculated as outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights. Gross credit exposure is calculated prior to the application of collateral. As of December 31, 2022, Eastern Energy Gas' credit exposure totaled $90 million. Of this amount, investment grade counterparties, including those internally rated, represented 98%, with three investment grade counterparties representing 57%.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Eastern Energy Gas Holdings, LLC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eastern Energy Gas Holdings, LLC and subsidiaries ("Eastern Energy Gas") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Eastern Energy Gas as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of Eastern Energy Gas' management. Our responsibility is to express an opinion on Eastern Energy Gas' financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Eastern Energy Gas in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Eastern Energy Gas is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Eastern Energy Gas' internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 6 to the Financial Statements
Critical Audit Matter Description
Eastern Energy Gas, through its subsidiaries, is subject to rate regulation by the Federal Energy Regulatory Commission (the "FERC"), which has jurisdiction with respect to the rates of interstate natural gas transmission companies. Management has determined its rate regulated subsidiaries meet the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation has a pervasive effect on the financial statements.
Revenue provided by the Eastern Energy Gas interstate natural gas transmission operations is based primarily on rates approved by the FERC. Eastern Energy Gas defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur. Eastern Energy Gas continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition that could limit Eastern Energy Gas' ability to recover its costs. The evaluation reflects the current political and regulatory climate. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as accumulated other comprehensive income (loss).
We identified the effects of rate regulation on the financial statements as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs and (2) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the FERC, auditing these judgments required specialized knowledge of the accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the FERC included the following, among others:
•We evaluated the Eastern Energy Gas disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the FERC, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory asset and liability balances for completeness.
•For regulatory matters in process, we inspected Eastern Energy Gas' filings with the FERC, and the filings with the FERC by intervenors to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the FERC's treatment of similar costs under similar circumstances.
/s/ Deloitte & Touche LLP
Richmond, Virginia
February 24, 2023
We have served as Eastern Energy Gas' auditor since 2012.
EASTERN ENERGY GAS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 65 | | | $ | 22 | |
| Restricted cash and cash equivalents | 30 | | | 17 | |
| Trade receivables, net | 202 | | | 183 | |
| Receivables from affiliates | 30 | | | 47 | |
| | | |
| Notes receivable from affiliates | 536 | | | 7 | |
| Inventories | 127 | | | 122 | |
| Prepayments | 78 | | | 76 | |
| Natural gas imbalances | 193 | | | 100 | |
| Other current assets | 42 | | | 47 | |
| Total current assets | 1,303 | | | 621 | |
| | | |
| Property, plant and equipment, net | 10,202 | | | 10,200 | |
| Goodwill | 1,286 | | | 1,286 | |
| | | |
| Investments | 278 | | | 412 | |
| | | |
| Other assets | 95 | | | 129 | |
| | | |
| Total assets | $ | 13,164 | | | $ | 12,648 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN ENERGY GAS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| LIABILITIES AND EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 86 | | | $ | 79 | |
| Accounts payable to affiliates | 10 | | | 38 | |
| Accrued interest | 19 | | | 19 | |
| Accrued property, income and other taxes | 77 | | | 89 | |
| Accrued employee expenses | 14 | | | 13 | |
| | | |
| Regulatory liabilities | 126 | | | 40 | |
| Asset retirement obligations | 25 | | | 33 | |
| Current portion of long-term debt | 649 | | | — | |
| Other current liabilities | 107 | | | 54 | |
| Total current liabilities | 1,113 | | | 365 | |
| | | |
| Long-term debt | 3,243 | | | 3,906 | |
| | | |
| | | |
| Regulatory liabilities | 596 | | | 645 | |
| | | |
| Other long-term liabilities | 324 | | | 238 | |
| Total liabilities | 5,276 | | | 5,154 | |
| | | |
Commitments and contingencies (Note 14) | | | |
| | | |
| Equity: | | | |
| Member's equity: | | | |
| | | |
| Membership interests | 3,983 | | | 3,501 | |
| | | |
| | | |
| Accumulated other comprehensive loss, net | (42) | | | (43) | |
| Total member's equity | 3,941 | | | 3,458 | |
| Noncontrolling interests | 3,947 | | | 4,036 | |
| Total equity | 7,888 | | | 7,494 | |
| | | |
| Total liabilities and equity | $ | 13,164 | | | $ | 12,648 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN ENERGY GAS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Operating revenue | $ | 2,006 | | | $ | 1,870 | | | $ | 2,090 | |
| | | | | | |
| Operating expenses: | | | | | |
| | | | | |
| (Excess) cost of gas | (30) | | | 12 | | | 24 | |
| Operations and maintenance | 530 | | | 515 | | | 1,142 | |
| Depreciation and amortization | 321 | | | 328 | | | 366 | |
| Property and other taxes | 139 | | | 149 | | | 140 | |
| | | | | |
| Total operating expenses | 960 | | | 1,004 | | | 1,672 | |
| | | | | | |
| Operating income | 1,046 | | | 866 | | | 418 | |
| | | | | | |
| Other income (expense): | | | | | |
| Interest expense | (147) | | | (151) | | | (339) | |
| Allowance for borrowed funds | 2 | | | 2 | | | 6 | |
| Allowance for equity funds | 6 | | | 7 | | | 13 | |
| Interest and dividend income | 7 | | | — | | | 67 | |
| | | | | |
| Other, net | (1) | | | 1 | | | 42 | |
| Total other income (expense) | (133) | | | (141) | | | (211) | |
| | | | | | |
| Income before income tax expense (benefit) and equity income | 913 | | | 725 | | | 207 | |
| Income tax expense (benefit) | 167 | | | 117 | | | (24) | |
| Equity income | 103 | | | 44 | | | 42 | |
| Net income | 849 | | | 652 | | | 273 | |
| Net income attributable to noncontrolling interests | 423 | | | 390 | | | 164 | |
| Net income attributable to Eastern Energy Gas | $ | 426 | | | $ | 262 | | | $ | 109 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN ENERGY GAS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Net income | $ | 849 | | | $ | 652 | | | $ | 273 | |
| | | | | | |
| Other comprehensive income, net of tax: | | | | | |
Unrecognized amounts on retirement benefits, net of tax of $—, $— and $40 | 5 | | | 6 | | | 94 | |
| | | | | |
| | | | | |
Unrealized (losses) gains on cash flow hedges, net of tax of $—, $1 and $10 | (1) | | | 9 | | | 30 | |
| Total other comprehensive income, net of tax | 4 | | | 15 | | | 124 | |
| | | | | | |
| Comprehensive income | 853 | | | 667 | | | 397 | |
| Comprehensive income attributable to noncontrolling interests | 426 | | | 395 | | | 154 | |
| Comprehensive income attributable to Eastern Energy Gas | $ | 427 | | | $ | 272 | | | $ | 243 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN ENERGY GAS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated | | | | |
| | | | | | | | | Other | | | | |
| | | | | | | Membership | | Comprehensive | | Noncontrolling | | Total |
| | | | | | | Interests | | Loss, Net | | Interests | | Equity |
| | | | | | | | | | | | | |
| Balance, December 31, 2019 | | | | | | | $ | 9,031 | | | $ | (187) | | | $ | 1,385 | | | $ | 10,229 | |
| Net income | | | | | | | 109 | | | — | | | 164 | | | 273 | |
| Other comprehensive income (loss) | | | | | | | — | | | 134 | | | (10) | | | 124 | |
| Distributions | | | | | | | (4,282) | | | — | | | (216) | | | (4,498) | |
| Contributions | | | | | | | 1,223 | | | — | | | — | | | 1,223 | |
| Distribution of Questar Pipeline Group | | | | | | | (699) | | | — | | | — | | | (699) | |
Distribution of 50% interest in Cove Point | | | | | | | (2,765) | | | — | | | 2,765 | | | — | |
| Acquisition of Eastern Energy Gas by BHE | | | | | | | 343 | | | — | | | — | | | 343 | |
| Other equity transactions | | | | | | | (3) | | | — | | | 3 | | | — | |
| Balance, December 31, 2020 | | | | | | | 2,957 | | | (53) | | | 4,091 | | | 6,995 | |
| Net income | | | | | | | 262 | | | — | | | 390 | | | 652 | |
| Other comprehensive income | | | | | | | — | | | 10 | | | 5 | | | 15 | |
| Distributions | | | | | | | (137) | | | — | | | (450) | | | (587) | |
| Contributions | | | | | | | 419 | | | — | | | — | | | 419 | |
| | | | | | | | | | | | | |
| Balance, December 31, 2021 | | | | | | | 3,501 | | | (43) | | | 4,036 | | | 7,494 | |
| Net income | | | | | | | 426 | | | — | | | 423 | | | 849 | |
| Other comprehensive income | | | | | | | — | | | 1 | | | 3 | | | 4 | |
| Distributions | | | | | | | (42) | | | — | | | (515) | | | (557) | |
| Contributions | | | | | | | 98 | | | — | | | — | | | 98 | |
| | | | | | | | | | | | | |
| Balance, December 31, 2022 | | | | | | | $ | 3,983 | | | $ | (42) | | | $ | 3,947 | | | $ | 7,888 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN ENERGY GAS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 849 | | | $ | 652 | | | $ | 273 | |
| Adjustments to reconcile net income to net cash flows from operating activities: | | | | | |
| Losses (gains) on other items, net | 5 | | | (3) | | | 531 | |
| Depreciation and amortization | 321 | | | 328 | | | 366 | |
| Allowance for equity funds | (6) | | | (7) | | | (13) | |
| Equity (income) loss, net of distributions | (58) | | | — | | | 35 | |
| Changes in regulatory assets and liabilities | 56 | | | (20) | | | (37) | |
| Deferred income taxes | 126 | | | 186 | | | (5) | |
| Other, net | 8 | | | (19) | | | 23 | |
| Changes in other operating assets and liabilities: | | | | | |
| Trade receivables and other assets | (77) | | | 7 | | | 346 | |
| Derivative collateral, net | (1) | | | 10 | | | (140) | |
| Pension and other postretirement benefit plans | — | | | — | | | (88) | |
| Accrued property, income and other taxes | 27 | | | (30) | | | 23 | |
| Accounts payable and other liabilities | 99 | | | (12) | | | (40) | |
| Net cash flows from operating activities | 1,349 | | | 1,092 | | | 1,274 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (387) | | | (442) | | | (374) | |
| | | | | |
| | | | | |
| Loans to affiliates | (564) | | | (183) | | | — | |
| Repayment of loans by affiliates | 39 | | | 305 | | | 3,422 | |
| Equity method investments | 150 | | | (154) | | | (2) | |
| Other, net | (16) | | | (12) | | | 18 | |
| Net cash flows from investing activities | (778) | | | (486) | | | 3,064 | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| | | | | |
| Repayments of long-term debt | — | | | (500) | | | (700) | |
| Net (repayments of) proceeds from short-term debt | — | | | — | | | (62) | |
| Repayment of affiliated current borrowings, net | — | | | (9) | | | (251) | |
| | | | | |
| Proceeds from equity contributions | — | | | 346 | | | 1,223 | |
| Distributions to parent | — | | | — | | | (4,323) | |
| Distributions to noncontrolling interests | (515) | | | (450) | | | (216) | |
| Other, net | — | | | (2) | | | — | |
| Net cash flows from financing activities | (515) | | | (615) | | | (4,329) | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 56 | | | (9) | | | 9 | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | 39 | | | 48 | | | 39 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 95 | | | $ | 39 | | | $ | 48 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN ENERGY GAS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
Eastern Energy Gas Holdings, LLC is a holding company, and together with its subsidiaries ("Eastern Energy Gas") conducts business activities consisting of Federal Energy Regulatory Commission ("FERC")-regulated interstate natural gas transmission pipeline and underground storage operations in the eastern region of the U.S. and operates Cove Point LNG, LP ("Cove Point"), a liquefied natural gas ("LNG") export, import and storage facility. Eastern Energy Gas owns 100% of the general partner interest and 25% of the limited partnership interest in Cove Point. In addition, Eastern Energy Gas owns a 50% noncontrolling interest in Iroquois Gas Transmission System, L.P. ("Iroquois"), a 416-mile FERC-regulated interstate natural gas transmission pipeline. On November 1, 2020, Berkshire Hathaway Energy Company ("BHE") completed its acquisition of substantially all of the natural gas transmission and storage business of Dominion Energy, Inc. ("DEI") (the "GT&S Transaction"). As a result of the GT&S Transaction, Eastern Energy Gas became an indirect wholly owned subsidiary of BHE. BHE is a holding company based in Des Moines, Iowa that owns subsidiaries principally engaged in the energy industry. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway"). See Note 3 for more information regarding the GT&S Transaction.
(2) Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The Consolidated Financial Statements include the accounts of Eastern Energy Gas and its subsidiaries in which it holds a controlling financial interest as of the financial statement date. Eastern Energy Gas consolidates variable interest entities ("VIE") in which it possesses both (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE. Intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates include, but are not limited to, the effects of regulation; impairment of goodwill; recovery of long-lived assets; certain assumptions made in accounting for pension and other postretirement benefits; asset retirement obligations ("AROs"); income taxes; unbilled revenue; valuation of certain financial assets and liabilities, including derivative contracts; and accounting for contingencies. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Accounting for the Effects of Certain Types of Regulation
Eastern Energy Gas prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, Eastern Energy Gas defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur.
If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as accumulated other comprehensive income (loss) ("AOCI").
Fair Value Measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist of customer deposits as allowed under the FERC gas tariffs. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and 2021, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 65 | | | $ | 22 | |
| Restricted cash and cash equivalents | 30 | | | 17 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 95 | | | $ | 39 | |
Investments
Eastern Energy Gas utilizes the equity method of accounting with respect to investments when it possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, Eastern Energy Gas records the investment at cost and subsequently increases or decreases the carrying value of the investment by Eastern Energy Gas' share of the net earnings or losses and other comprehensive income ("OCI") of the investee. Eastern Energy Gas records dividends or other equity distributions as reductions in the carrying value of the investment.
Allowance for Credit Losses
Trade receivables are primarily short-term in nature and are stated at the outstanding principal amount, net of an estimated allowance for credit losses. The allowance for credit losses is based on Eastern Energy Gas' assessment of the collectability of amounts owed to Eastern Energy Gas by its customers. This assessment requires judgment regarding the ability of customers to pay or the outcome of any pending disputes. In measuring the allowance for credit losses for trade receivables, Eastern Energy Gas primarily evaluates the financial condition of the individual customer and the nature of any disputed amount.
The changes in the balance of the allowance for credit losses, which is included in trades receivables, net on the Consolidated Balance Sheets, is summarized as follows for the years ended December 31, (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 6 | | | $ | 5 | | | $ | 2 | |
| Charged to operating costs and expenses, net | — | | | 1 | | | 4 | |
| Write-offs, net | (3) | | | — | | | (1) | |
| Ending balance | $ | 3 | | | $ | 6 | | | $ | 5 | |
Derivatives
Eastern Energy Gas employs a number of different derivative contracts, which may include forwards, futures, options, swaps and other agreements, to manage its commodity price, interest rate, and foreign currency exchange rate risk. 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. Derivative balances reflect offsetting permitted under master netting agreements with counterparties and cash collateral paid or received under such agreements. Cash collateral received from or paid to counterparties to secure derivative contract assets or liabilities in excess of amounts offset is included in other current assets or other current liabilities on the Consolidated Balance Sheets.
Commodity derivatives used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases or normal sales. Normal purchases or normal sales contracts are not marked-to-market and settled amounts are recognized as operating revenue or cost of gas on the Consolidated Statements of Operations.
For Eastern Energy Gas' derivatives not designated as hedging contracts, unrealized gains and losses are recognized on the Consolidated Statements of Operations as operating revenue for derivatives related to natural gas sales contracts.
For Eastern Energy Gas' derivatives designated as hedging contracts, Eastern Energy Gas formally assesses, at inception and thereafter, whether the hedging contract is highly effective in offsetting changes in the hedged item. Eastern Energy Gas formally documents hedging activity by transaction type and risk management strategy. For derivative instruments that are accounted for as cash flow hedges or fair value hedges, the cash flows from the derivatives and from the related hedged items are classified in operating cash flows.
Changes in the estimated fair value of a derivative contract designated and qualified as a cash flow hedge, to the extent effective, are included on the Consolidated Statements of Changes in Equity as AOCI, net of tax, until the contract settles and the hedged item is recognized in earnings. Eastern Energy Gas discontinues hedge accounting prospectively when it has determined that a derivative contract no longer qualifies as an effective hedge, or when it is no longer probable that the hedged forecasted transaction will occur. When hedge accounting is discontinued because the derivative contract no longer qualifies as an effective hedge, future changes in the estimated fair value of the derivative contract are charged to earnings. Gains and losses related to discontinued hedges that were previously recorded in AOCI will remain in AOCI until the contract settles and the hedged item is recognized in earnings, unless it becomes probable that the hedged forecasted transaction will not occur at which time associated deferred amounts in AOCI are immediately recognized in earnings.
Inventories
Inventories consist mainly of materials and supplies and are determined using the average cost method.
Natural Gas Imbalances
Natural gas imbalances occur when the physical amount of natural gas delivered from, or received by, a pipeline system or storage facility differs from the contractual amount of natural gas delivered or received. Eastern Energy Gas values these imbalances due to, or from, shippers and operators at an appropriate index price at period end, subject to the terms of its tariff for regulated entities. Imbalances are primarily settled in-kind. Imbalances due to Eastern Energy Gas from other parties are reported in natural gas imbalances and imbalances that Eastern Energy Gas owes to other parties are reported in other current liabilities on the Consolidated Balance Sheets.
Property, Plant and Equipment, Net
General
Additions to property, plant and equipment are recorded at cost. Eastern Energy Gas capitalizes all construction-related materials, direct labor and contract services, as well as indirect construction costs. Indirect construction costs include capitalized interest, including debt allowance for funds used during construction ("AFUDC"), and equity AFUDC, as applicable. The cost of additions and betterments are capitalized, while costs incurred that do not improve or extend the useful lives of the related assets are generally expensed.
Depreciation and amortization are generally computed by applying the composite or straight-line method based on estimated useful lives. Depreciation studies are completed by Eastern Energy Gas to determine the appropriate group lives, net salvage and group depreciation rates. These studies are reviewed and rates are ultimately approved by the FERC. See Note 6 for the prospective impacts related to changes in depreciation rates. Net salvage includes the estimated future residual values of the assets and any estimated removal costs recovered through approved depreciation rates. Estimated removal costs are recorded as either a cost of removal regulatory liability or an ARO liability on the Consolidated Balance Sheets, depending on whether the obligation meets the requirements of an ARO. As actual removal costs are incurred, the associated liability is reduced.
Generally when Eastern Energy Gas retires or sells a component of regulated property, plant and equipment, it charges the original cost, net of any proceeds from the disposition, to accumulated depreciation. Any gain or loss on disposals of all other assets is recorded through earnings.
Debt and equity AFUDC, which represent the estimated costs of debt and equity funds necessary to finance the construction of regulated facilities, is capitalized by Eastern Energy Gas as a component of property, plant and equipment, with offsetting credits to the Consolidated Statements of Operations. AFUDC is computed based on guidelines set forth by the FERC. After construction is completed, Eastern Energy Gas is permitted to earn a return on these costs as a component of the related assets, as well as recover these costs through depreciation expense over the useful lives of the related assets.
Asset Retirement Obligations
Eastern Energy Gas recognizes AROs when it has a legal obligation to perform decommissioning, reclamation or removal activities upon retirement of an asset. Eastern Energy Gas' AROs are primarily related to the obligations associated with its natural gas pipeline and storage well assets. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the ARO liability is adjusted for any revisions to the original estimate of undiscounted cash flows (with corresponding adjustments to property, plant and equipment, net) and for accretion of the ARO liability due to the passage of time. For Eastern Energy Gas, the difference between the ARO liability, the corresponding ARO asset included in property, plant and equipment, net and amounts recovered in rates to satisfy such liabilities is recorded as a regulatory asset or liability.
Impairment
Eastern Energy Gas evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. The impacts of regulation are considered when evaluating the carrying value of regulated assets. See Note 6 for more information.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Eastern Energy Gas evaluates goodwill for impairment at least annually and completed its annual review as of October 31, 2022. When evaluating goodwill for impairment, Eastern Energy Gas estimates the fair value of its reporting unit. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to earnings as an impairment loss. Significant judgment is required in estimating the fair value of the reporting unit and performing goodwill impairment tests. The determination of fair value incorporates significant unobservable inputs. During 2022, 2021 and 2020, Eastern Energy Gas did not record any goodwill impairments.
Eastern Energy Gas records goodwill adjustments for changes to the purchase price allocation prior to the end of the measurement period, which is not to exceed one year from the acquisition date.
Revenue Recognition
Eastern Energy Gas uses a single five-step model to identify and recognize revenue from contracts with customers ("Customer Revenue") upon transfer of control of promised goods or services in an amount that reflects the consideration to which Eastern Energy Gas expects to be entitled in exchange for those goods or services. Eastern Energy Gas records sales and excise taxes collected directly from customers and remitted directly to the taxing authorities on a net basis on the Consolidated Statements of Operations.
A majority of Eastern Energy Gas' Customer Revenue is derived from tariff-based sales arrangements approved by the FERC. These tariff-based revenues are mainly comprised of natural gas transmission and storage services and have performance obligations which are satisfied over time as services are provided. Eastern Energy Gas' revenue that is nonregulated primarily relates to LNG terminalling services.
Revenue recognized is equal to the value to the customer of Eastern Energy Gas' performance to date and includes billed and unbilled amounts. As of December 31, 2022 and 2021, trade receivables, net on the Consolidated Balance Sheets relate substantially to Customer Revenue, including unbilled revenue of $18 million and $36 million, respectively. Payments for amounts billed are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued. See Note 6 for discussion surrounding the Eastern Gas Transmission and Storage, Inc. ("EGTS") provision for rate refund. In the event one of the parties to a contract has performed before the other, Eastern Energy Gas would recognize a contract asset or contract liability depending on the relationship between Eastern Energy Gas' performance and the customer's payment. Eastern Energy Gas has recognized contract assets of $10 million and $19 million as of December 31, 2022 and 2021, respectively, and $80 million and $18 million of contract liabilities as of December 31, 2022 and 2021, respectively, due to Eastern Energy Gas' performance on certain contracts.
Unamortized Debt Premiums, Discounts and Debt Issuance Costs
Premiums, discounts and debt issuance costs incurred for the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Income Taxes
Prior to the GT&S Transaction, DEI included Eastern Energy Gas in its consolidated U.S. federal income tax return. Subsequent to the GT&S Transaction, Berkshire Hathaway includes Eastern Energy Gas in its consolidated U.S. federal income tax return. Consistent with established regulatory practice, Eastern Energy Gas' provision for income taxes has been computed on a stand-alone basis.
Deferred income tax assets and liabilities are based on differences between the financial statement and income tax basis of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities associated with components of OCI are charged or credited directly to OCI. Changes in deferred income tax assets and liabilities associated with certain property-related basis differences and other various differences that Eastern Energy Gas' regulated businesses deems probable to be passed on to its customers are charged or credited directly to a regulatory asset or liability and will be included in regulated rates when the temporary differences reverse. Other changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense or a regulatory asset or liability in the period of enactment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
Eastern Energy Gas recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Estimated interest and penalties, if any, related to uncertain tax positions are included as a component of income tax expense (benefit) on the Consolidated Statements of Operations.
Segment Information
Eastern Energy Gas currently has one segment, which includes its natural gas pipeline, storage and LNG operations.
(3) Business Acquisitions and Dispositions
Acquisition of Eastern Energy Gas by BHE
In July 2020, DEI entered into an agreement to sell substantially all of its natural gas transmission and storage operations, including Eastern Energy Gas and a 25% limited partnership interest in Cove Point, to BHE. Approval of the transaction under the Hart-Scott-Rodino Act was not obtained within 75 days and DEI and BHE mutually agreed to a dual-phase closing consisting of two separate disposal groups identified as the GT&S Transaction and the proposed sale of Dominion Energy Questar Pipeline, LLC and related entities ("the Questar Pipeline Group") by DEI to BHE pursuant to a purchase and sale agreement entered into on October 5, 2020 ("Q-Pipe Transaction"). In July 2021, Dominion Energy Questar Corporation ("Dominion Questar") and DEI delivered a written notice to BHE stating that BHE and Dominion Questar mutually elected to terminate the Q-Pipe Transaction. Prior to the completion of the GT&S Transaction, Eastern Energy Gas finalized a restructuring whereby Eastern Energy Gas distributed the Questar Pipeline Group and a 50% noncontrolling interest in Cove Point to DEI. This restructuring was accounted for by Eastern Energy Gas as a reorganization of entities under common control and the disposition was reflected as an equity transaction. The disposition was not reported as a discontinued operation as the disposal did not represent a strategic shift in the way management had intended to run the business.
In November 2020, the GT&S Transaction was completed and Eastern Energy Gas, with the exception of the Questar Pipeline Group as discussed above, became an indirect wholly-owned subsidiary of BHE. DEI retained a 50% noncontrolling interest in Cove Point as well as the assets and obligations of the pension and other postretirement employee benefit plans associated with the operations sold and relating to services provided before closing. The GT&S Transaction was treated as a deemed asset sale for federal and state income tax purposes and all deferred taxes at Eastern Energy Gas were reset to reflect financial and tax basis differences as of November 1, 2020. See Notes 9 and 16 for more information on the GT&S Transaction.
Eastern Energy Gas recorded a distribution of net assets of $699 million, including goodwill of $185 million and $41 million of cash, for the distribution of the Questar Pipeline Group to DEI and recorded an approximately $2.8 billion increase in noncontrolling interests for DEI's retained 50% noncontrolling interest in Cove Point. Additionally, in accordance with the terms of the GT&S Transaction, DEI retained certain assets and liabilities associated with Eastern Energy Gas and settled all affiliated balances. As a result, Eastern Energy Gas recorded a contribution for the reset of deferred taxes of $1.3 billion, net of distributions of $895 million related to the pension and other postretirement employee benefit plans retained by DEI and $107 million related to the settlement of affiliated balances.
(4) Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | 2022 | | 2021 |
| Utility Plant: | | | | | |
| | | | | |
| Interstate natural gas pipeline and storage assets | 21 - 52 years | | $ | 8,922 | | | $ | 8,675 | |
| Intangible plant | 5 - 18 years | | 113 | | | 110 | |
| Utility plant in-service | | | 9,035 | | | 8,785 | |
| Accumulated depreciation and amortization | | | (3,039) | | | (2,901) | |
| Utility plant in-service, net | | | 5,996 | | | 5,884 | |
| | | | | |
| Nonutility Plant: | | | | | |
| | | | | |
| LNG facility | 40 years | | 4,522 | | | 4,475 | |
| Intangible plant | 14 years | | 25 | | | 25 | |
| Nonutility plant | | | 4,547 | | | 4,500 | |
| Accumulated depreciation and amortization | | | (542) | | | (423) | |
| Nonutility plant, net | | | 4,005 | | | 4,077 | |
| | | | | |
| | | 10,001 | | | 9,961 | |
| Construction work- in-progress | | | 201 | | | 239 | |
| Property, plant and equipment, net | | | $ | 10,202 | | | $ | 10,200 | |
Construction work-in-progress includes $181 million and $209 million as of December 31, 2022 and 2021, respectively, related to the construction of utility plant.
(5) Jointly Owned Utility Facilities
Under joint facility ownership agreements with other utilities, Eastern Energy Gas, as a tenant in common, has undivided interests in jointly owned transmission and storage facilities. Eastern Energy Gas accounts for its proportionate share of each facility, and each joint owner has provided financing for its share of each facility. Operating costs of each facility are assigned to joint owners primarily based on their percentage of ownership. Operating costs and expenses on the Consolidated Statements of Operations include Eastern Energy Gas' share of the expenses of these facilities.
The amounts shown in the table below represent Eastern Energy Gas' share in each jointly owned facility included in property, plant and equipment, net as of December 31, 2022 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated | | Construction |
| Eastern Energy Gas' | | Facility in | | Depreciation and | | Work-in- |
| Share | | Service | | Amortization | | Progress |
| | | | | | | |
| Ellisburg Pool | 39 | % | | $ | 32 | | | $ | 11 | | | $ | — | |
| Ellisburg Station | 50 | | | 26 | | | 8 | | | 3 | |
| Harrison | 50 | | | 53 | | | 18 | | | — | |
| Leidy | 50 | | | 143 | | | 47 | | | 1 | |
| Oakford | 50 | | | 202 | | | 70 | | | 4 | |
| Tioga | 56 | | | 69 | | | 30 | | | 2 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | | | $ | 456 | | | $ | 154 | | | $ | 8 | |
(6) Regulatory Matters
Regulatory Assets
Regulatory assets represent costs that are expected to be recovered in future regulated rates. Eastern Energy Gas' regulatory assets reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| Weighted Average Remaining Life | | 2022 | | 2021 |
| | | | | |
Employee benefit plans(1) | 11 years | | $ | 32 | | | $ | 62 | |
| | | | | |
| | | | | |
| Other | Various | | 16 | | | 12 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total regulatory assets | | | $ | 48 | | | $ | 74 | |
| | | | | |
| Reflected as: | | | | | |
| Other current assets | | | $ | 8 | | | $ | 6 | |
| Other assets | | | 40 | | | 68 | |
| Total regulatory assets | | | $ | 48 | | | $ | 74 | |
(1)Represents costs expected to be recovered through future rates generally over the expected remaining service period of plan participants by certain rate-regulated subsidiaries.
Eastern Energy Gas had regulatory assets not earning a return on investment of $44 million and $8 million as of December 31, 2022 and 2021, respectively.
Regulatory Liabilities
Regulatory liabilities represent income to be recognized or amounts expected to be returned to customers in future periods. Eastern Energy Gas' regulatory liabilities reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| Weighted Average Remaining Life | | 2022 | | 2021 |
| | | | | |
Income taxes refundable through future rates(1) | Various | | $ | 406 | | | $ | 468 | |
Other postretirement benefit costs(2) | Various | | 123 | | | 116 | |
Provision for rate refunds(3) | | | 90 | | | — | |
Cost of removal(4) | 53 years | | 82 | | | 73 | |
| | | | | |
| Other | Various | | 21 | | | 28 | |
| | | | | |
| Total regulatory liabilities | | | $ | 722 | | | $ | 685 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 126 | | | $ | 40 | |
| Noncurrent liabilities | | | 596 | | | 645 | |
| Total regulatory liabilities | | | $ | 722 | | | $ | 685 | |
(1)Amounts primarily represent income tax liabilities related to the federal tax rate change from 35% to 21% that are probable to be passed on to customers, offset by income tax benefits related to certain property-related basis differences and other various differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
(2)Reflects a regulatory liability for the collection of postretirement benefit costs allowed in rates in excess of expense incurred.
(3)Reflects amounts expected to be refunded to customers in late February 2023 in connection with the EGTS rate case. See below for more information.
(4)Amounts represent estimated costs, as accrued through depreciation rates and exclusive of ARO liabilities, of removing regulated property, plant and equipment in accordance with accepted regulatory practices. Refer to Note 11 for more information.
Regulatory Matters
Eastern Gas Transmission and Storage, Inc.
In September 2021, EGTS filed a general rate case for its FERC-jurisdictional services, with proposed rates to be effective November 1, 2021. EGTS' previous general rate case was settled in 1998. EGTS proposed an annual cost-of-service of approximately $1.1 billion, and requested increases in various rates, including general system storage rates by 85% and general system transmission rates by 60%. In October 2021, the FERC issued an order that accepted the November 1, 2021 effective date for certain changes in rates, while suspending the other changes for five months following the proposed effective date, until April 1, 2022, subject to refund. In September 2022, a settlement agreement was filed with the FERC, resolving EGTS' general rate case for its FERC-jurisdictional services and providing for increased service rates and decreased depreciation rates. Under the terms of the settlement agreement, EGTS' rates result in an increase to annual firm transmission and storage revenues of approximately $160 million and a decrease in annual depreciation expense of approximately $30 million, compared to the rates in effect prior to April 1, 2022. As of December 31, 2022, EGTS' provision for rate refund for April 2022 through December 2022 totaled $90 million and was included in current regulatory liabilities on the Consolidated Balance Sheet. In November 2022, the FERC approved the settlement agreement.
In July 2017, the FERC audit staff communicated to EGTS that it had substantially completed an audit of EGTS' compliance with the accounting and reporting requirements of the FERC's Uniform System of Accounts and provided a description of matters and preliminary recommendations. In November 2017, the FERC audit staff issued its audit report. In December 2017, EGTS provided its response to the audit report. EGTS requested FERC review of the contested findings and submitted its plan for compliance with the uncontested portions of the report. EGTS reached resolution of certain matters with the FERC in the fourth quarter of 2018. EGTS recognized a charge for a disallowance of plant, originally established beginning in 2012, for the resolution of one matter with the FERC. In December 2020, the FERC issued a final ruling on the remaining matter, which resulted in a $43 million ($31 million after-tax) estimated charge for disallowance of capitalized AFUDC, recorded within operations and maintenance expense in the Consolidated Statement of Operations. As a condition of the December 2020 ruling, EGTS filed its proposed accounting entries and supporting documentation with the FERC during the second quarter of 2021. During the finalization of these entries, EGTS refined the estimated charge for disallowance of capitalized AFUDC, which resulted in a reduction to the estimated charge of $11 million ($8 million after-tax) that was recorded in operations and maintenance expense in the Consolidated Statement of Operations in the second quarter of 2021. In September 2021, the FERC approved EGTS' accounting entries and supporting documentation.
In December 2014, EGTS entered into a precedent agreement with Atlantic Coast Pipeline, LLC ("Atlantic Cost Pipeline") for the project previously intended for EGTS to provide approximately 1,500,000 decatherms ("Dth") of firm transmission service to various customers in connection with the Atlantic Coast Pipeline project ("Supply Header Project"). As a result of the cancellation of the Atlantic Coast Pipeline project, in the second quarter of 2020 Eastern Energy Gas recorded a charge of $482 million ($359 million after-tax) in operations and maintenance expense in its Consolidated Statement of Operations associated with the probable abandonment of a significant portion of the project as well as the establishment of a $75 million ARO. In the third quarter of 2020, Eastern Energy Gas recorded an additional charge of $10 million ($7 million after-tax) associated with the probable abandonment of a significant portion of the project and a $29 million ($20 million after-tax) benefit from a revision to the previously established ARO, both of which were recorded in operations and maintenance expense in Eastern Energy Gas' Consolidated Statement of Operations. As EGTS evaluates its future use, approximately $40 million remains within property, plant and equipment for a potential modified project.
Cove Point
In January 2020, pursuant to the terms of a previous settlement, Cove Point filed a general rate case for its FERC-jurisdictional services, with proposed rates to be effective March 1, 2020. Cove Point proposed an annual cost-of-service of $182 million. In February 2020, FERC approved suspending the changes in rates for five months following the proposed effective date, until August 1, 2020, subject to refund. In November 2020, Cove Point reached an agreement in principle with the active participants in the general rate case proceeding. Under the terms of the agreement in principle, Cove Point's rates effective August 1, 2020 resulted in an increase to annual revenues of $4 million and a decrease in annual depreciation expense of $1 million, compared to the rates in effect prior to August 1, 2020. The interim settlement rates were implemented November 1, 2020, and Cove Point's provision for rate refunds for August 2020 through October 2020 totaled $7 million. The agreement in principle was reflected in a stipulation and agreement filed with the FERC in January 2021. In March 2021, the FERC approved the stipulation and agreement and the rate refunds to customers were processed in late April 2021.
(7) Investments and Restricted Cash and Cash Equivalents
Investments and restricted cash and cash equivalents consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Investments: | | | |
| Investment funds | $ | 14 | | | $ | 13 | |
| | | |
| Equity method investments: | | | |
| Iroquois | 264 | | | 399 | |
| Total investments | 278 | | | 412 | |
| | | |
| Restricted cash and cash equivalents: | | | |
| Customer deposits | 30 | | | 17 | |
| Total restricted cash and cash equivalents | 30 | | | 17 | |
| | | |
| Total investments and restricted cash and cash equivalents | $ | 308 | | | $ | 429 | |
| | | |
| Reflected as: | | | |
| Current assets | $ | 30 | | | $ | 17 | |
| Noncurrent assets | 278 | | | 412 | |
| Total investments and restricted cash and cash equivalents | $ | 308 | | | $ | 429 | |
Equity Method Investments
Eastern Energy Gas, through subsidiaries, owns 50% of Iroquois, which owns and operates an interstate natural gas pipeline located in the states of New York and Connecticut. Prior to the GT&S Transaction, Eastern Energy Gas, through the Questar Pipeline Group, owned 50% of White River Hub, which owns and operates a natural gas pipeline in northwest Colorado.
As of both December 31, 2022 and 2021, the carrying amount of Eastern Energy Gas' investments exceeded its share of underlying equity in net assets by $130 million. The difference reflects equity method goodwill and is not being amortized. Eastern Energy Gas made contributions of $154 million in 2021. Eastern Energy Gas received distributions from its investments of $195 million, $44 million and $77 million for the years ended December 31, 2022, 2021 and 2020, respectively. In the third quarter of 2022, in connection with the settlement of regulated tax matters in the Iroquois rate case, Eastern Energy Gas released a long-term regulatory liability and recognized a $45 million benefit that was recorded in equity income in its Consolidated Statements of Operations.
(8) Long-term Debt
On June 30, 2021, as part of an intercompany transaction with its wholly owned subsidiary EGTS, Eastern Energy Gas exchanged a total of $1.6 billion of its issued and outstanding third party notes, making EGTS the primary obligor of the exchanged notes. The intercompany debt exchange was a common control transaction accounted for as a debt modification with no gain or loss recognized on the Consolidated Financial Statements.
Eastern Energy Gas' long-term debt consists of the following, including unamortized premiums, discounts and debt issuance costs, as of December 31 (dollars and euros in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| | | | | |
| Eastern Energy Gas: | | | | | |
| | | | | |
2.875% Senior Notes, due 2023 | $ | 250 | | | $ | 250 | | | $ | 250 | |
3.55% Senior Notes, due 2023 | 400 | | | 399 | | | 399 | |
2.50% Senior Notes, due 2024 | 600 | | | 598 | | | 597 | |
3.60% Senior Notes, due 2024 | 339 | | | 338 | | | 338 | |
3.32% Senior Notes, due 2026 (€250)(1) | 268 | | | 267 | | | 283 | |
| | | | | |
3.00% Senior Notes, due 2029 | 174 | | | 173 | | | 173 | |
3.80% Senior Notes, due 2031 | 150 | | | 150 | | | 150 | |
| | | | | |
| | | | | |
4.80% Senior Notes, due 2043 | 54 | | | 53 | | | 53 | |
4.60% Senior Notes, due 2044 | 56 | | | 56 | | | 56 | |
3.90% Senior Notes, due 2049 | 27 | | | 26 | | | 26 | |
| | | | | |
| EGTS: | | | | | |
3.60% Senior Notes, due 2024 | 111 | | | 110 | | | 110 | |
3.00% Senior Notes, due 2029 | 426 | | | 422 | | | 422 | |
4.80% Senior Notes, due 2043 | 346 | | | 342 | | | 341 | |
4.60% Senior Notes, due 2044 | 444 | | | 437 | | | 437 | |
3.90% Senior Notes, due 2049 | 273 | | | 271 | | | 271 | |
| Total long-term debt | $ | 3,918 | | | $ | 3,892 | | | $ | 3,906 | |
| | | | | |
| Reflected as: | | | | | |
| Current portion of long-term debt | | | $ | 649 | | | $ | — | |
| Long-term debt | | | 3,243 | | | 3,906 | |
| Total long-term debt | | | $ | 3,892 | | | $ | 3,906 | |
(1)The senior notes are denominated in Euros with an outstanding principal balance of €250 million and a fixed interest rate of 1.45%. Eastern Energy Gas has entered into cross currency swaps that fix USD payments for 100% of the notes. The fixed USD outstanding principal when combined with the swaps is $280 million, with fixed interest rates as of both December 31, 2022 and 2021 that averaged 3.32%.
Annual Payment on Long-Term Debt
The annual repayments of long-term debt for the years beginning January 1, 2023 and thereafter, are as follows (in millions):
| | | | | |
| 2023 | $ | 650 | |
| 2024 | 1,050 | |
| 2025 | — | |
| 2026 | 268 | |
| 2027 | — | |
| 2028 and thereafter | 1,950 | |
| Total | 3,918 | |
| Unamortized premium, discount and debt issuance cost | (26) | |
| Total | $ | 3,892 | |
(9) Income Taxes
Income tax expense (benefit) consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 12 | | | $ | (47) | | | $ | (20) | |
| State | 29 | | | (21) | | | 1 | |
| 41 | | | (68) | | | (19) | |
| Deferred: | | | | | |
| Federal | 88 | | | 129 | | | 23 | |
| State | 38 | | | 56 | | | (28) | |
| 126 | | | 185 | | | (5) | |
| | | | | |
| Total | $ | 167 | | | $ | 117 | | | $ | (24) | |
A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax expense (benefit) is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| | | | | |
| State income tax, net of federal income tax benefit | 6 | | | 3 | | | (13) | |
| | | | | |
| | | | | |
| | | | | |
| Equity interest | 2 | | | 1 | | | 4 | |
| Effects of ratemaking | (1) | | | 1 | | | (2) | |
| | | | | |
| | | | | |
| Change in tax status | — | | | — | | | (9) | |
| | | | | |
| AFUDC-equity | — | | | — | | | (1) | |
| Noncontrolling interest | (10) | | | (11) | | | (16) | |
| Write-off of regulatory assets | — | | | — | | | 3 | |
| Other, net | — | | | 1 | | | 1 | |
| Effective income tax rate | 18 | % | | 16 | % | | (12) | % |
For the year ended December 31, 2022, Eastern Energy Gas' reconciliation of the federal statutory income tax rate to the effective income tax rate is driven primarily by the absence of tax on noncontrolling interest.
The net deferred income tax liability consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Federal and state carryforwards | $ | 23 | | | $ | 7 | |
| | | |
| | | |
| Employee benefits | 22 | | | 33 | |
| Intangibles | 112 | | | 150 | |
| Derivatives and hedges | 16 | | | 16 | |
| | | |
| | | |
| Other | 7 | | | 9 | |
| Total deferred income tax assets | 180 | | | 215 | |
| | | |
| | | |
| | | |
| Deferred income tax liabilities: | | | |
| Property related items | (214) | | | (129) | |
| | | |
| Partnership investments | (51) | | | (49) | |
| Debt exchange | (53) | | | (60) | |
| | | |
| Deferred state income taxes | (4) | | | (16) | |
| | | |
| | | |
| Other | (12) | | | (16) | |
| Total deferred income tax liabilities | (334) | | | (270) | |
Net deferred income tax liability(1) | $ | (154) | | | $ | (55) | |
(1)Net deferred income tax liability, as of both December 31, 2022 and 2021, is presented in other assets and other long-term liabilities in the Consolidated Balance Sheet.
As of December 31, 2022, Eastern Energy Gas' state tax carryforwards, entirely related to $23 million of net operating losses, expire at various intervals between 2036 and indefinite.
Through October 31, 2020, Eastern Energy Gas was included in DEI's consolidated federal income tax return and, where applicable, combined state income tax returns. As a result of the GT&S Transaction, DEI retained the rights and obligations of Eastern Energy Gas' federal and state income tax returns through October 31, 2020. The U.S. Internal Revenue Service has not closed or effectively settled an examination of Eastern Energy Gas' income tax returns for any tax years beginning on or after November 1, 2020. The statute of limitations for Eastern Energy Gas' states remains open for periods beginning on or after November 1, 2020. The closure of examinations, or the expiration of the statute of limitations, for state filings may not preclude the state from adjusting the state net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
(10) Employee Benefit Plans
As discussed in Note 3, in November 2020, the GT&S Transaction was completed and the assets and obligations of the pension and other postretirement employee benefit plans associated with the operations sold and relating to services provided before closing were retained by DEI. As a result, just prior to completing the sale, net benefit plan assets of $895 million were distributed through an equity transaction with DEI.
Subsequent to the GT&S Transaction
Subsequent to the GT&S Transaction, Eastern Energy Gas is a participant in benefit plans sponsored by MidAmerican Energy Company ("MidAmerican Energy"), an affiliate. The MidAmerican Energy Company Retirement Plan includes a qualified pension plan ("Qualified Pension Plan") that provides pension benefits for eligible employees. The MidAmerican Energy Company Welfare Benefit Plan provides certain postretirement health care and life insurance benefits for eligible retirees ("Other Postretirement Plans") on behalf of Eastern Energy Gas. Eastern Energy Gas made $14 million, $18 million and $3 million of contributions to the MidAmerican Energy Company Retirement Plan for the years ended December 31, 2022, 2021 and 2020, respectively. Eastern Energy Gas made $2 million, $10 million and $2 million of contributions to the MidAmerican Energy Company Welfare Benefit Plan for the years ended December 31, 2022, 2021 and 2020, respectively. Contributions related to these plans are reflected as net periodic benefit cost in operations and maintenance expense in the Consolidated Statements of Operations. Amounts attributable to Eastern Energy Gas were allocated from MidAmerican Energy in accordance with the intercompany administrative service agreement. 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.
Eastern Energy Gas participates in the BHE GT&S, LLC ("BHE GT&S") defined contribution employee savings plan subsequent to the GT&S Transaction. Eastern Energy Gas' matching contributions are based on each participant's level of contribution. Contributions cannot exceed the maximum allowable for tax purposes. Eastern Energy Gas' contributions to the 401(k) plan were $6 million, $5 million and $1 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Prior to the GT&S Transaction
Defined Benefit Plans
Prior to the GT&S Transaction, certain Eastern Energy Gas employees not represented by collective bargaining units were covered by the Dominion Energy Pension Plan, a defined benefit pension plan sponsored by DEI that provides benefits to multiple DEI subsidiaries. As participating employers, Eastern Energy Gas was subject to DEI's funding policy, which was to contribute annually an amount that is in accordance with the Employee Retirement Income Security Act of 1974. Eastern Energy Gas' net periodic pension credit related to this plan was $14 million for the year ended December 31, 2020. Net periodic pension credit is reflected in other operations and maintenance expense in the Consolidated Statement of Operations. The funded status of various DEI subsidiary groups and employee compensation are the basis for determining the share of total pension costs for participating DEI subsidiaries.
Prior to the GT&S Transaction, certain retiree healthcare and life insurance benefits for Eastern Energy Gas employees not represented by collective bargaining units were covered by the Dominion Energy Retiree Health and Welfare Plan, a plan sponsored by DEI that provides certain retiree healthcare and life insurance benefits to multiple DEI subsidiaries. Eastern Energy Gas' net periodic benefit credit related to this plan was $5 million for the year ended December 31, 2020. Net periodic benefit credit is reflected in other operations and maintenance expense in the Consolidated Statement of Operations. Employee headcount is the basis for determining the share of total other postretirement benefit costs for participating DEI subsidiaries.
Pension benefits for Eastern Energy Gas employees represented by collective bargaining units were covered by a separate pension plan that provides benefits to employees of both EGTS and Hope Gas, Inc. ("Hope"). Employee compensation was the basis for allocating pension costs and obligations between EGTS and Hope. Retiree healthcare and life insurance benefits for Eastern Energy Gas employees represented by collective bargaining units were covered by a separate other postretirement benefit plan that provides benefits to both EGTS and Hope. Employee headcount was the basis for allocating other postretirement benefit costs and obligations between EGTS and Hope.
Pension Remeasurement
In the third quarter of 2020, Eastern Energy Gas remeasured a pension plan due to a curtailment resulting from the agreement for DEI to retain the assets and obligations of the pension benefit plan associated with the GT&S Transaction. The remeasurement resulted in an increase in the pension benefit obligation of $3 million and a decrease in the fair value of the pension plan assets of $7 million for Eastern Energy Gas. The impact of the remeasurement on net periodic pension benefit credit was recognized prospectively from the remeasurement date and was not material. The discount rate used for the remeasurement was 3.16%. All other assumptions used for the remeasurement were consistent with the measurement as of December 31, 2019.
Net Periodic Benefit Credit
Net periodic benefit credit for the plans included the following components for the year ended December 31, 2020 (in millions):
| | | | | | | | | | | |
| Pension | | Other Postretirement |
| | | |
| | | |
| Service cost | $ | 5 | | | $ | 1 | |
| Interest cost | 8 | | | 4 | |
| Expected return on plan assets | (47) | | | (16) | |
| | | |
| Net amortization | 5 | | | (3) | |
| Net periodic benefit credit | $ | (29) | | | $ | (14) | |
Significant assumptions used to determine periodic credits for the year ended December 31, 2020:
| | | | | | | | | | | |
| Pension | | Other Postretirement |
| | | |
| | | |
| Discount rate | 3.16% - 3.63% | | 3.44 | % |
| Expected long-term rate of return on plan assets | 8.60 | % | | 8.50 | % |
| Weighted average rate of increase for compensation | 4.73 | % | | N/A |
| Healthcare cost trend rate | | | 6.50 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | | 5.00 | % |
| Year that the rate reached the ultimate trend rate | | | 2026 |
Defined Contribution Plans
Eastern Energy Gas participated in the DEI defined contribution employee savings plans prior to the GT&S Transaction. Eastern Energy Gas' matching contributions were based on each participant's level of contribution. Contributions could not exceed the maximum allowable for tax purposes. Eastern Energy Gas' contributions to the 401(k) plan were $3 million for the year ended December 31, 2020.
(11) Asset Retirement Obligations
Eastern Energy Gas estimates its 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.
Eastern Energy Gas does not recognize liabilities for AROs for which the fair value cannot be reasonably estimated. Due to the indeterminate removal date, the fair value of the associated liabilities on the Cove Point LNG facility, interim removal of natural gas pipelines and certain storage wells in EGTS' underground natural gas storage network cannot currently be estimated, and no amounts are recognized on the Consolidated Financial Statements other than those included in the cost of removal regulatory liability established via approved depreciation rates in accordance with accepted regulatory practices. Cost of removal regulatory liabilities totaled $82 million and $73 million as of December 31, 2022 and 2021, respectively. Eastern Energy Gas will continue to monitor operational and strategic developments to identify if sufficient information exists to reasonably estimate a retirement date for these assets.
The following table reconciles the beginning and ending balances of Eastern Energy Gas' ARO liabilities for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 55 | | | $ | 71 | |
| | | |
| Additions | 4 | | | — | |
| Retirements | (12) | | | (17) | |
| | | |
| Accretion | 1 | | | 1 | |
| Ending balance | $ | 48 | | | $ | 55 | |
| | | |
| Reflected as: | | | |
| Current liabilities | $ | 25 | | | $ | 33 | |
| Other long-term liabilities | 23 | | | 22 | |
| Total ARO liability | $ | 48 | | | $ | 55 | |
(12) Risk Management and Hedging Activities
Eastern Energy Gas is exposed to the impact of market fluctuations in commodity prices, interest rates, and foreign currency exchange rates. Eastern Energy Gas is principally exposed to natural gas market fluctuations primarily through fuel retained and used during the operation of the pipeline system as well as lost and unaccounted for gas, to interest rate risk on its outstanding variable-rate short- and long-term debt and future debt issuances, and to foreign currency exchange risk associated with Euro denominated debt. Eastern Energy Gas has established a risk management process that is designed to identify, assess, manage and report on each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, Eastern Energy Gas 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. Eastern Energy Gas also uses interest rate swaps to hedge its exposure to variable interest rates on long-term debt as well as foreign currency swaps to hedge its exposure to principal and interest payments denominated in Euros. Eastern Energy Gas 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 Eastern Energy Gas' accounting policies related to derivatives. Refer to Notes 2 and 13 for additional information on derivative contracts.
Derivative Contract Volumes
The following table summarizes the net notional amounts of outstanding commodity and foreign currency derivative contracts with fixed price terms that comprise the mark-to-market values as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Unit of | | | | |
| | Measure | | 2022 | | 2021 |
| | | | | | |
| Foreign currency | | Euro € | | 250 | | | 250 | |
| Natural gas | | Dth | | 3 | | | 2 | |
| | | | | | |
Credit Risk
Eastern Energy Gas 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 Eastern Energy Gas' counterparties have similar economic, industry or other characteristics and due to direct or indirect relationships among the counterparties. Before entering into a transaction, Eastern Energy Gas 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, Eastern Energy Gas 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, Eastern Energy Gas exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.
Upon the Cove Point LNG export/liquefaction facility commencing commercial operations, the majority of Cove Point's revenue and earnings are from annual reservation payments under certain terminalling, storage and transmission contracts with ST Cove Point, LLC, a joint venture of Sumitomo Corporation and Tokyo Gas Co., LTD., and GAIL Global (USA) LNG, LLC (the "Export Customers"). If such agreements were terminated and Cove Point was unable to replace such agreements on comparable terms, there could be a material impact on results of operations, financial condition and/or cash flows.
The Export Customers comprised approximately 38% and 40% of Eastern Energy Gas' operating revenues for the years ended December 31, 2022 and 2021, respectively, with Eastern Energy Gas' largest customer representing approximately 20% of such amounts.
For the year ended December 31, 2022, EGTS provided service to 266 customers with approximately 95% of its storage and transmission revenue being provided through firm services. The 10 largest customers provided approximately 38% of the total storage and transmission revenue and the thirty largest provided approximately 71% of the total storage and transmission revenue.
(13) Fair Value Measurements
The carrying value of Eastern Energy Gas' cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. Eastern Energy Gas 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 Eastern Energy Gas 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 Eastern Energy Gas' judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. Eastern Energy Gas develops these inputs based on the best information available, including its own data.
The following table presents Eastern Energy Gas' financial 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 December 31, 2022 | | | | | | | | |
| Assets: | | | | | | | | |
| Commodity derivative | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
| Money market mutual funds | | 42 | | | — | | | — | | | 42 | |
| Equity securities: | | | | | | | | |
| Investment funds | | 14 | | | — | | | — | | | 14 | |
| | $ | 56 | | | $ | 1 | | | $ | — | | | $ | 57 | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Foreign currency exchange rate derivatives | | $ | — | | | $ | (20) | | | $ | — | | | $ | (20) | |
| | | | | | | | |
| | $ | — | | | $ | (20) | | | $ | — | | | $ | (20) | |
| | | | | | | | |
| As of December 31, 2021 | | | | | | | | |
| Assets: | | | | | | | | |
| Foreign currency exchange rate derivatives | | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | |
| Equity securities: | | | | | | | | |
| Investment funds | | 13 | | | — | | | — | | | 13 | |
| | | | | | | | |
| | $ | 13 | | | $ | 3 | | | $ | — | | | $ | 16 | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Foreign currency exchange rate derivatives | | $ | — | | | $ | (3) | | | $ | — | | | $ | (3) | |
| | | | | | | | |
| | $ | — | | | $ | (3) | | | $ | — | | | $ | (3) | |
Eastern Energy Gas' investments in money market mutual funds and investment funds 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.
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 purchase 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 Eastern Energy Gas transacts. When quoted prices for identical contracts are not available, Eastern Energy Gas uses forward price curves. Forward price curves represent Eastern Energy Gas' estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. Eastern Energy Gas 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 Eastern Energy Gas. Market price quotations are generally readily obtainable for the applicable term of Eastern Energy Gas' outstanding derivative contracts; therefore, Eastern Energy Gas' forward price curves reflect observable market quotes. Market price quotations for certain natural gas trading hubs are not as readily obtainable due to the length of the contracts. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, Eastern Energy Gas 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.
Eastern Energy Gas' long-term debt is carried at cost, including unamortized premiums, discounts and debt issuance costs as applicable, on the Consolidated Financial Statements. The fair value of Eastern Energy Gas' 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 Eastern Energy Gas' 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 Eastern Energy Gas' long-term debt as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | Carrying | | Fair | | Carrying | | Fair |
| | Value | | Value | | Value | | Value |
| | | | | | | | |
| Long-term debt | | $ | 3,892 | | | $ | 3,510 | | | $ | 3,906 | | | $ | 4,266 | |
(14) Commitments and Contingencies
Environmental Laws and Regulations
Eastern Energy Gas is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality and other environmental matters that have the potential to impact its current and future operations. Eastern Energy Gas believes it is in material compliance with all applicable laws and regulations.
Carbon Regulations
In August 2016, the EPA issued a draft rule proposing to reaffirm that a source's obligation to obtain a prevention of significant deterioration or Title V permit for greenhouse gases ("GHG") is triggered only if such permitting requirements are first triggered by non-GHG, or conventional, pollutants that are regulated by the New Source Review program, and to set a significant emissions rate at 75,000 tons per year of carbon dioxide equivalent emissions under which a source would not be required to apply best available control technology for its GHG emissions. Until the EPA ultimately takes final action on this rulemaking, Eastern Energy Gas cannot predict the impact to its results of operations, financial condition and/or cash flows.
Legal Matters
Eastern Energy Gas is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. Eastern Energy Gas does not believe that such normal and routine litigation will have a material impact on its consolidated financial results.
Surety Bonds
As of December 31, 2022, Eastern Energy Gas had purchased $19 million of surety bonds. Under the terms of the surety bonds, Eastern Energy Gas is obligated to indemnify the respective surety bond company for any amounts paid.
(15) Revenue from Contracts with Customers
The following table summarizes Eastern Energy Gas' Customer Revenue by regulated and nonregulated, with further disaggregation of regulated by line of business, for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Customer Revenue: | | | | | |
| Regulated: | | | | | |
| Gas transmission and storage | $ | 1,179 | | | $ | 1,044 | | | $ | 1,242 | |
| Wholesale | 8 | | | 57 | | | 43 | |
| Other | 1 | | | (2) | | | 4 | |
| Total regulated | 1,188 | | | 1,099 | | | 1,289 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Nonregulated | 821 | | | 767 | | | 798 | |
| Total Customer Revenue | 2,009 | | | 1,866 | | | 2,087 | |
Other revenue(1) | (3) | | | 4 | | | 3 | |
| Total operating revenue | $ | 2,006 | | | $ | 1,870 | | | $ | 2,090 | |
(1)Other revenue consists primarily of revenue recognized in accordance with Accounting Standards Codification 815, "Derivative and Hedging" and includes unrealized gains and losses for derivatives not designated as hedges related to natural gas sales contracts.
Remaining Performance Obligations
The following table summarizes Eastern Energy Gas' revenue it expects to recognize in future periods related to significant unsatisfied remaining performance obligations for fixed contracts with expected durations in excess of one year as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Performance obligations expected to be satisfied | | |
| Less than 12 months | | More than 12 months | | Total |
| | | | | |
| Eastern Energy Gas | $ | 1,694 | | | $ | 15,598 | | | $ | 17,292 | |
(16) Components of Accumulated Other Comprehensive Loss, Net
The following table shows the change in accumulated other comprehensive loss by each component of other comprehensive income (loss), net of applicable income taxes, for the year ended December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Unrecognized | | | | | | Unrealized | | | | Accumulated |
| | Amounts On | | | | | | Losses On | | | | Other |
| | Retirement | | | | | | Cash Flow | | Noncontrolling | | Comprehensive |
| | Benefits | | | | | | Hedges | | Interests | | Loss, Net |
| | | | | | | | | | | | |
| Balance, December 31, 2019 | | $ | (106) | | | | | | | $ | (81) | | | $ | — | | | $ | (187) | |
| Other comprehensive income | | 94 | | | | | | | 30 | | | 10 | | | 134 | |
| Balance, December 31, 2020 | | (12) | | | | | | | (51) | | | 10 | | | (53) | |
| Other comprehensive income (loss) | | 6 | | | | | | | 9 | | | (5) | | | 10 | |
| Balance, December 31, 2021 | | (6) | | | | | | | (42) | | | 5 | | | (43) | |
| Other comprehensive income (loss) | | 5 | | | | | | | (1) | | | (3) | | | 1 | |
| Balance, December 31, 2022 | | $ | (1) | | | | | | | $ | (43) | | | $ | 2 | | | $ | (42) | |
The following table shows the reclassifications from AOCI to net income for the year ended December 31 (in millions):
| | | | | | | | | | | | | | |
| | Amounts | | Affected Line Item In The |
| | Reclassified | | Consolidated Statements |
| | From AOCI | | of Operations |
| 2022 | | | | |
| Deferred (gains) and losses on derivatives-hedging activities: | | | | |
| | | | |
| Interest rate contracts | | $ | 3 | | | Interest expense |
| Foreign currency contracts | | 1 | | | Other, net |
| Total | | 4 | | | |
| Tax | | (1) | | | Income tax expense (benefit) |
| Total, net of tax | | $ | 3 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 2021 | | | | |
| Deferred (gains) and losses on derivatives-hedging activities: | | | | |
| | | | |
| Interest rate contracts | | $ | 6 | | | Interest expense |
| Foreign currency contracts | | 21 | | | Other, net |
| Total | | 27 | | | |
| Tax | | (7) | | | Income tax expense (benefit) |
| Total, net of tax | | $ | 20 | | | |
| | | | |
| 2020 | | | | |
| Deferred (gains) and losses on derivatives-hedging activities: | | | | |
| Interest rate contracts | | $ | 157 | | | Interest expense |
| Foreign currency contracts | | (25) | | | Other, net |
| Total | | 132 | | | |
| Tax | | (34) | | | Income tax expense (benefit) |
| Total, net of tax | | $ | 98 | | | |
| Unrecognized pension costs: | | | | |
| Actuarial losses | | $ | 6 | | | Other, net |
| Total | | 6 | | | |
| Tax | | (2) | | | Income tax expense (benefit) |
| Total, net of tax | | $ | 4 | | | |
The following table presents selected information related to losses on cash flow hedges included in AOCI in Eastern Energy Gas' Consolidated Balance Sheet as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | AOCI After-Tax | | Amounts Expected to be Reclassified to Earnings During the Next 12 Months After-Tax | | Maximum Term |
| | | | | | |
| Interest rate | | $ | (37) | | | $ | (3) | | | 264 months |
| Foreign currency | | (6) | | | (4) | | | 42 months |
| Total | | $ | (43) | | | $ | (7) | | | |
The amounts that will be reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., interest payments) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies and will vary from the expected amounts presented above as a result of changes in interest rates and foreign currency exchange rates.
In July 2020, Eastern Energy Gas recorded a loss of $141 million ($105 million after-tax) in interest expense in the Consolidated Statement of Operations, for cash flow hedges of debt-related items that are probable of not occurring as a result of the GT&S Transaction. The derivatives related to these hedges were settled in October 2020 for a cash payment of $165 million.
(17) Variable Interest Entities and Noncontrolling Interests
The primary beneficiary of a VIE is required to consolidate the VIE and to disclose certain information about its significant variable interests in the VIE. The primary beneficiary of a VIE is the entity that has both 1) the power to direct the activities that most significantly impact the entity's economic performance and 2) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE.
In November 2019, DEI contributed to Eastern Energy Gas a 75% controlling limited partner interest in Cove Point. In December 2019, DEI sold its retained 25% noncontrolling limited partner interest in Cove Point. As discussed in Note 3, as part of the GT&S Transaction, Eastern Energy Gas finalized a restructuring which included the disposition of a 50% noncontrolling interest in Cove Point to DEI, which resulted in Eastern Energy Gas owning 100% of the general partner interest and 25% of the limited partnership interest in Cove Point. Eastern Energy Gas concluded that Cove Point is a VIE due to the limited partners lacking the characteristics of a controlling financial interest. Eastern Energy Gas is the primary beneficiary of Cove Point as it has the power to direct the activities that most significantly impact its economic performance as well as the obligation to absorb losses and benefits which could be significant to it.
Eastern Energy Gas purchased shared services from Carolina Gas Services, Inc. ("Carolina Gas Services") an affiliated VIE, of $12 million for each of the years ended December 31, 2022, 2021 and 2020. Eastern Energy Gas' Consolidated Balance Sheets included amounts due to Carolina Gas Services of $1 million and $7 million as of December 31, 2022 and 2021, respectively. Eastern Energy Gas determined that neither it nor any of its consolidated entities is the primary beneficiary of Carolina Gas Services as neither it nor any of its consolidated entities has both the power to direct the activities that most significantly impact its economic performance as well as the obligation to absorb losses and benefits which could be significant to them. Carolina Gas Services provides marketing and operational services. Neither Eastern Energy Gas nor any of its consolidated entities has any obligation to absorb more than its allocated share of Carolina Gas Services costs.
Prior to the GT&S Transaction, Eastern Energy Gas purchased shared services from Dominion Energy Questar Pipeline Services, Inc. ("DEQPS"), an affiliated VIE, of $23 million for the year ended December 31, 2020. Eastern Energy Gas determined that neither it nor any of its consolidated entities was the primary beneficiary of DEQPS, as neither it nor any of its consolidated entities has both the power to direct the activities that most significantly impact their economic performance as well as the obligation to absorb losses and benefits which could be significant to them. DEQPS provided marketing and operational services. Neither Eastern Energy Gas nor any of its consolidated entities had any obligation to absorb more than its allocated share of DEQPS costs.
Prior to the GT&S Transaction, Eastern Energy Gas purchased shared services from Dominion Energy Services, Inc. ("DES"), an affiliated VIE, of $90 million for the year ended December 31, 2020. Eastern Energy Gas determined that neither it nor any of its consolidated entities was the primary beneficiary of DES as neither it nor any of its consolidated entities had both the power to direct the activities that most significantly impact their economic performance as well as the obligation to absorb losses and benefits which could be significant to them. DES provided accounting, legal, finance and certain administrative and technical services. Neither Eastern Energy Gas nor any of its consolidated entities had any obligation to absorb more than its allocated share of DES costs.
Included in noncontrolling interests in the Consolidated Financial Statements are DEI's 50% interest in Cove Point (effective November 2020) and Brookfield Super-Core Infrastructure Partner's 25% interest in Cove Point.
(18) Supplemental Cash Flow Disclosures
The summary of supplemental cash flow disclosures as of and for the years ended December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 143 | | | $ | 144 | | | $ | 317 | |
| Income taxes paid (received), net | $ | 2 | | | $ | (60) | | | $ | 31 | |
| | | | | |
| Supplemental disclosure of non-cash investing and financing transactions: | | | | | |
| Accruals related to property, plant and equipment additions | $ | 29 | | | $ | 42 | | | $ | 30 | |
Equity distributions(1) | $ | (42) | | | $ | (137) | | | $ | — | |
Equity contributions(1) | $ | 98 | | | $ | 73 | | | $ | — | |
| Distribution of Questar Pipeline Group | $ | — | | | $ | — | | | $ | (699) | |
Distribution of 50% interest in Cove Point | $ | — | | | $ | — | | | $ | (2,765) | |
| Acquisition of Eastern Energy Gas by BHE | $ | — | | | $ | — | | | $ | 343 | |
(1)Amounts primarily represent the forgiveness of affiliated receivables/payables.
(19) Related Party Transactions
Transactions Prior to the GT&S Transaction
Prior to the GT&S Transaction, Eastern Energy Gas engaged in related party transactions primarily with other DEI subsidiaries (affiliates). Eastern Energy Gas' receivable and payable balances with affiliates were settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. Through October 31, 2020, Eastern Energy Gas was included in DEI's consolidated federal income tax return and, where applicable, combined state income tax returns. All affiliate payables or receivables were settled with DEI prior to the closing date of the GT&S Transaction.
Eastern Energy Gas transacted with affiliates for certain quantities of natural gas and other commodities at market prices in the ordinary course of business. Additionally, Eastern Energy Gas provided transmission and storage services to affiliates. Eastern Energy Gas also entered into certain other contracts with affiliates, and related parties, including construction services, which were presented separately from contracts involving commodities or services. Eastern Energy Gas participated in certain DEI benefit plans as described in Note 10.
DES, Carolina Gas Services, DEQPS and other affiliates provided accounting, legal, finance and certain administrative and technical services to Eastern Energy Gas. Eastern Energy Gas provided certain services to related parties, including technical services.
The financial statements for the year ended December 31, 2020 include costs for certain general, administrative and corporate expenses assigned by DES, Carolina Gas Services and DEQPS to Eastern Energy Gas on the basis of direct and allocated methods in accordance with Eastern Energy Gas' services agreements with DES, Carolina Gas Services and DEQPS. Where costs incurred cannot be determined by specific identification, the costs were allocated based on the proportional level of effort devoted by DES, Carolina Gas Services and DEQPS resources that is attributable to the entity, determined by reference to number of employees, salaries and wages and other similar measures for the relevant DES service. Management believes the assumptions and methodologies underlying the allocation of general corporate overhead expenses are reasonable.
Subsequent to the GT&S Transaction, and with the exception of Cove Point, Eastern Energy Gas' transactions with other DEI subsidiaries are no longer related party transactions.
Presented below are Eastern Energy Gas' significant transactions with DES, Carolina Gas Services, DEQPS and other affiliated and related parties for the year ended December 31 (in millions):
| | | | | | | | |
| | 2020 |
| | |
| Sales of natural gas and transmission and storage services | | $ | 207 | |
| Purchases of natural gas and transmission and storage services | | 10 | |
Services provided by related parties(1) | | 129 | |
Services provided to related parties(2) | | 83 | |
(1)Includes capitalized expenditures of $14 million.
(2)Includes amounts attributable to Atlantic Coast Pipeline, a related party VIE prior to the GT&S Transaction. See below for more information.
EGTS provided services to Atlantic Coast Pipeline, which totaled $46 million for the year ended December 31, 2020, included in operating revenue in the Consolidated Statement of Operations.
Interest income related to the affiliated notes receivable under the DEI money pool was $3 million for the year ended December 31, 2020.
Eastern Energy Gas' affiliated notes receivable from DEI totaled $1.8 billion as of December 31, 2019. In August 2020, DEI repaid the remaining principal balance outstanding. Interest income on the promissory notes was $32 million for the year ended December 31, 2020.
As of December 31, 2019, Eastern Energy Gas' affiliated notes receivable from the East Ohio Gas Company totaled $1.7 billion. In June 2020, the East Ohio Gas Company repaid the remaining principal balance outstanding. Interest income on these promissory notes was $33 million for the year ended December 31, 2020.
Interest charges related to Eastern Energy Gas' total borrowings under an intercompany revolving credit agreement with DEI were $3 million for the year ended December 31, 2020.
Interest charges related to CPMLP Holdings Company LLC's total borrowings from DES were $3 million for the year ended December 31, 2020.
For the year ended December 31, 2020, Eastern Energy Gas distributed $4.3 billion to DEI.
Transactions Subsequent to the GT&S Transaction
Eastern Energy Gas is party to a tax-sharing agreement and is part of the Berkshire Hathaway consolidated U.S. federal income tax return. For current federal and state income taxes, Eastern Energy Gas had a receivable from BHE of $16 million and $8 million as of December 31, 2022 and 2021, respectively. Eastern Energy Gas received net cash receipts for federal and state income taxes from BHE totaling $47 million and $76 million for the years ended December 31, 2021 and 2020, respectively.
Other assets included amounts due from an affiliate of $3 million as of December 31, 2021.
As of December 31, 2022 and 2021, Eastern Energy Gas had $1 million and $5 million, respectively, of natural gas imbalances payable to affiliates, presented in other current liabilities on the Consolidated Balance Sheets.
Presented below are Eastern Energy Gas' significant transactions with affiliated and related parties for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Sales of natural gas and transmission and storage services | $ | 27 | | | $ | 32 | | | $ | 4 | |
| Purchases of natural gas and transmission and storage services | 4 | | | 5 | | | — | |
Services provided by related parties(1) | 83 | | | 51 | | | 4 | |
| Services provided to related parties | 38 | | | 32 | | | 7 | |
(1)Includes capitalized expenditures.
Eastern Energy Gas participates in certain MidAmerican Energy benefit plans as described in Note 10. As of December 31, 2022 and 2021, Eastern Energy Gas' amount due to MidAmerican Energy associated with these plans and reflected in other long-term liabilities on the Consolidated Balance Sheets was $51 million and $95 million, respectively.
Borrowings with BHE GT&S
Eastern Energy Gas has a $400 million intercompany revolving credit agreement from its parent, BHE GT&S, expiring in November 2023. The credit facility, which is for general corporate purposes and provides for the issuance of letters of credit, has a variable interest rate based on the Secured Overnight Financing Rate ("SOFR") plus a fixed spread. There were no amounts outstanding under the credit agreement as of both December 31, 2022 and 2021.
BHE GT&S has an intercompany revolving credit agreement from Eastern Energy Gas expiring in November 2023. In March 2021, BHE GT&S increased its credit facility limit from $200 million to $400 million and to $650 million in November 2022. The credit agreement has a variable interest rate based on SOFR plus a fixed spread. As of December 31, 2022 and 2021, $536 million and $7 million, respectively, was outstanding under the credit agreement. Interest income related to this borrowing totaled $7 million for the year ended December 31, 2022.
Eastern Gas Transmission and Storage, Inc. and its subsidiaries
Consolidated Financial Section
Item 7. 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 EGTS during the periods included herein. This discussion should be read in conjunction with EGTS' historical Consolidated Financial Statements and Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. EGTS' actual results in the future could differ significantly from the historical results.
Results of Operations
Overview
Net income for the year ended December 31, 2022 was $261 million, an increase of $105 million, or 67%, compared to 2021, primarily due to higher margin from regulated gas transmission and storage operations of $128 million and a decrease due to the settlement of depreciation rates in EGTS' general rate case, partially offset by an increase in income tax expense primarily due to higher pre-tax income.
Net income for the year ended December 31, 2021 was $156 million compared to a net loss of $181 million for 2020, primarily due to a 2020 charge associated with the abandonment of a significant portion of a project in connection with the Atlantic Coast Pipeline project ("Supply Header Project") and a 2020 charge for disallowance of capitalized AFUDC due to the resolution of EGTS' 2015 FERC audit, partially offset by a decrease of $50 million due to non-service cost credits recognized in 2020 related to certain Eastern Energy Gas over-funded benefit plans that were retained DEI as a result of the GT&S Transaction and an increase in income tax expense primarily due to higher pre-tax income.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Operating revenue increased $82 million, or 9%, for 2022 compared to 2021, primarily due to an increase in regulated gas transmission and storage services revenues due to the settlement of EGTS' general rate case of $101 million and an increase in variable revenue related to park and loan activity of $24 million, partially offset by a decrease in regulated gas sales for operational and system balancing purposes primarily due to decreased volumes of $49 million.
(Excess) cost of gas was a credit of $33 million for 2022 compared to an expense of $13 million for 2021. The change is primarily due to a decrease in volumes sold of $62 million, partially offset by unfavorable change to operational and system balancing volumes of $20 million.
Operations and maintenance decreased $12 million, or 3%, for 2022 compared to 2021, primarily due to a decrease in post-retirement benefit related costs.
Depreciation and amortization decreased $14 million, or 8%, for 2022 compared to 2021, primarily due to the settlement of depreciation rates in EGTS' general rate case of $23 million, partially offset by higher plant placed in-service of $9 million.
Property and other taxes decreased $8 million, or 13%, for 2022 compared to 2021, primarily due to lower than estimated 2021 tax assessments.
Disallowance and abandonment of utility plant was a credit of $11 million for 2021. The change is due to a 2021 benefit from the finalization of entries for the disallowance of capitalized AFUDC.
Interest expense decreased $9 million, or 12%, for 2022 compared to 2021, primarily due to lower expense of $44 million related to the elimination of long-term indebtedness to Eastern Energy Gas following the Debt Exchange Transaction in June 2021. These decreases were partially offset by $32 million of interest expense incurred under the senior notes issued in connection with that transaction, which bear lower interest rates than the original long-term indebtedness to Eastern Energy Gas.
Other, net was an expense of $2 million for 2022 compared to a credit of $2 million in 2021. The change is primarily due to losses on marketable securities.
Income tax expense (benefit) increased $48 million, or 79%, for 2022 compared to 2021 and the effective tax rate was 29% in 2022 and 28% in 2021. The effective tax rate increased primarily due to the revaluation of deferred taxes from changes in various state income tax rates.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Operating revenue decreased $25 million, or 3%, for 2021 compared to 2020, primarily due to $43 million of lower fees earned for services performed for Atlantic Coast Pipeline, partially offset by an increase in regulated natural gas sales of $15 million for operational and system balancing purposes primarily due to higher natural gas prices.
Cost of gas decreased $8 million, or 38%, for 2021 compared to 2020, primarily due to favorable valuations of system gas of $55 million, partially offset by an increase in prices of natural gas sold of $49 million.
Operations and maintenance decreased $16 million, or 4%, for 2021 compared to 2020, primarily due to lower expenses incurred in connection with services performed for Atlantic Coast Pipeline in connection with the cancelled Atlantic Coast Pipeline project of $45 million, partially offset by a $27 million increase in salaries, wages and benefits and general administrative expenses.
Depreciation and amortization increased $3 million, or 2%, for 2021 compared to 2020, primarily due to higher plant placed in-service during 2021.
Property and other taxes increased $9 million, or 17%, for 2021 compared to 2020, primarily due to higher property tax assessments.
Disallowance and abandonment of utility plant was a credit of $11 million for 2021 compared to an expense of $525 million for 2020. The change is primarily due to a 2020 charge associated with the abandonment of the Supply Header Project of $463 million, a 2020 charge for disallowance of capitalized AFUDC due to the resolution of EGTS' 2015 FERC audit of $43 million, the 2020 write-off of certain items in connection with the GT&S Transaction of $18 million and a 2021 benefit from the finalization of entries for the disallowance of capitalized AFUDC of $11 million.
Interest expense decreased $11 million, or 12%, for 2021 compared to 2020, primarily due to lower expense of $44 million related to the elimination of long-term indebtedness to Eastern Energy Gas following the Debt Exchange Transaction in June 2021. These decreases were partially offset by $32 million of interest expense incurred under the senior notes issued in connection with that transaction, which bear lower interest rates than the original long-term indebtedness to Eastern Energy Gas.
Allowance for equity funds decreased $6 million, or 50%, for 2021 compared to 2020, primarily due to lower capital expenditures related to the Supply Header Project as a result of the abandonment of the project.
Other, net decreased $60 million, or 97%, for the year ended December 31, 2021 compared to 2020, primarily due to non-service cost credits recognized in 2020 related to the overfunded status of certain DEI benefit plans in which EGTS' employees participated prior to the GT&S Transaction.
Income tax expense (benefit) was an expense of $61 million for 2021 compared to a benefit of $67 million for 2020. The effective tax rate was 28% in 2021 and 27% in 2020.
Liquidity and Capital Resources
As of December 31, 2022, EGTS' total net liquidity was as follows (in millions):
| | | | | | | | |
| Cash and cash equivalents | | $ | 16 | |
| | |
Intercompany revolving credit agreement(1) | | 400 | |
| Less: | | |
| Notes payable to affiliates | | 36 | |
| | |
| Net intercompany revolving credit agreement | | 364 | |
| | |
| Total net liquidity | | $ | 380 | |
| | |
| Intercompany credit agreement: | | |
| Maturity date | | 2023 |
(1)Refer to Note 19 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion regarding EGTS' intercompany revolving credit agreement.
Operating Activities
Net cash flows from operating activities for the years ended December 31, 2022 and 2021 were $552 million and $367 million, respectively. The change was primarily due to the impacts from the proposed rate increase in effect April 1, 2022 for the EGTS general rate case, timing of income tax payments, higher collections of receivables from affiliates and other working capital adjustments.
Net cash flows from operating activities for each of the years ended December 31, 2021 and 2020 were $367 million. Higher collections of non-trade receivables and lower payments on outstanding accounts payable balances were offset by lower collections from affiliates and other changes in working capital amounts.
The timing of EGTS' income tax cash flows from period to period can be significantly affected by the estimated federal income tax payment methods selected and assumptions made for each payment date.
Investing Activities
Net cash flows from investing activities for the years ended December 31, 2022 and 2021 were $(286) million and $(357) million, respectively. The change was primarily due to a decrease in capital expenditures of $83 million and lower loans to affiliates of $6 million, partially offset by lower repayments of loans by affiliates of $8 million.
Net cash flows from investing activities for the years ended December 31, 2021 and 2020 were $(357) million and $(265) million, respectively. The change was primarily due to increases in capital expenditures of $95 million related to increased pipeline integrity work.
Financing Activities
Net cash flows from financing activities for the year ended December 31, 2022 were $(247) million and consisted of dividends paid to Eastern Energy Gas of $215 million and net repayment of notes payable to Eastern Energy Gas of $32 million.
Net cash flows from financing activities for the year ended December 31, 2021 were $(7) million, primarily reflecting dividends paid of $18 million and the net repayment of notes payable to Eastern Energy Gas of $13 million, partially offset by a $20 million equity contribution from Eastern Energy Gas.
Net cash flows from financing activities for the year ended December 31, 2020 were $(91) million, reflecting dividends paid of $125 million, partially offset by the issuance of notes payable from Eastern Energy Gas of $34 million.
Short-term Debt
As of December 31, 2022, EGTS had $36 million of an outstanding note payable to an affiliate at a weighted average interest rate of 1.43%. As of December 31, 2021, EGTS had $68 million of an outstanding note payable to an affiliate at a weighted average interest rate of 0.51%. For further discussion, refer to Note 19 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Future Uses of Cash
Capital 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, new growth projects and the timing of growth projects; changes in environmental and other rules and regulations; impacts to customers' rates; outcomes of regulatory proceedings; changes in income tax laws; general business conditions; system reliability standards; the cost and efficiency of construction labor, equipment and materials; commodity prices; and the cost and availability of capital.
EGTS' historical and forecasted capital expenditures, each of which exclude amounts for non-cash equity AFUDC and other non-cash items, for the years ending December 31 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Historical | | Forecast |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| | | | | | | | | | | |
| Natural gas transmission and storage | $ | 110 | | | $ | 10 | | | $ | 35 | | | $ | 9 | | | $ | 40 | | | $ | 107 | |
| Other | 153 | | | 348 | | | 240 | | | 191 | | | 173 | | | 173 | |
| Total | $ | 263 | | | $ | 358 | | | $ | 275 | | | $ | 200 | | | $ | 213 | | | $ | 280 | |
EGTS' natural gas transmission and storage capital expenditures primarily include growth capital expenditures related to planned regulated projects. EGTS' other capital expenditures consist primarily of pipeline integrity work, automation and controls upgrades, underground storage, corrosion control, unit exchanges, compressor modifications and projects related to Pipeline Hazardous Materials Safety Administration natural gas storage rules. The amounts also include EGTS' asset modernization program, which includes projects for vintage pipeline replacement, compression replacement, pipeline assessment and underground storage integrity.
Material Cash Requirements
The following table summarizes EGTS' material cash requirements as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Periods |
| | 2023 | | 2024-2025 | | 2026-2027 | | 2028 and thereafter | | Total |
| | | | | | | | | | |
Interest payments on long-term debt(1) | | $ | 64 | | | $ | 125 | | | $ | 121 | | | $ | 873 | | | $ | 1,183 | |
Natural gas supply and transmission(1) | | 49 | | | 98 | | | 98 | | | — | | | 245 | |
| Total cash requirements | | $ | 113 | | | $ | 223 | | | $ | 219 | | | $ | 873 | | | $ | 1,428 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1)Not reflected on the Consolidated Balance Sheets.
In addition, EGTS also has cash requirements that may affect its consolidated financial condition that arise from operating leases (refer to Note 6), long-term debt (refer to Note 9), construction and other development costs (refer to Liquidity and Capital Resources included within this Item 7), uncertain tax positions (refer to Note 10) and AROs (refer to Note 12). Refer, where applicable, to the respective referenced note in Notes to Consolidated Financial Statements in Item 8 of this Form 10‑K for additional information.
Regulatory Matters
EGTS is subject to comprehensive regulation. Refer to the discussion contained in Item 1 of this Form 10-K for further information regarding EGTS' general regulatory framework and current regulatory matters.
Environmental Laws and Regulations
EGTS is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality 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 various federal, state and local agencies. EGTS 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. Environmental laws and regulations continue to evolve, and EGTS is unable to predict the impact of the changing laws and regulations on its operations and financial results.
Refer to "Environmental Laws and Regulations" in Item 1 of this Form 10-K for further discussion regarding environmental laws and regulations.
Collateral and Contingent Features
Debt of EGTS is rated by credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of EGTS' ability to, in general, meet the obligations of its issued debt. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time.
EGTS has no credit rating downgrade triggers that would accelerate the maturity dates of outstanding debt, and a change in ratings is not an event of default under the applicable debt instruments.
Inflation
Historically, overall inflation and changing prices in the economies where EGTS operates have not had a significant impact on EGTS' consolidated financial results. EGTS operates under cost-of-service based rate-setting structures administered by the FERC. Under these rate-setting structures, EGTS is allowed to include prudent costs in its rates, including the impact of inflation. EGTS attempts to minimize the potential impact of inflation on its operations by employing prudent risk management and hedging strategies and by considering, among other areas, its impact on purchases of energy, operating expenses, materials and equipment costs, contract negotiations, future capital spending programs and long-term debt issuances. There can be no assurance that such actions will be successful.
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. The following critical accounting estimates are impacted significantly by EGTS' methods, judgments and assumptions used in the preparation of the Consolidated Financial Statements and should be read in conjunction with EGTS' Summary of Significant Accounting Policies included in EGTS' Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Accounting for the Effects of Certain Types of Regulation
EGTS prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, EGTS defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur.
EGTS continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future regulated rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition that could limit EGTS' ability to recover its costs. EGTS believes its application of the guidance for regulated operations is appropriate and its existing regulatory assets and liabilities are probable of inclusion in future regulated rates. The evaluation reflects the current political and regulatory climate at the federal level. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as AOCI. Total regulatory assets were $39 million and total regulatory liabilities were $627 million as of December 31, 2022. Refer to EGTS' Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding EGTS' regulatory assets and liabilities.
Impairment of Long-Lived Assets
EGTS evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. As substantially all property, plant and equipment supports EGTS' regulated businesses, the impacts of regulation are considered when evaluating the carrying value of regulated assets.
The estimate of cash flows arising from the future use of an asset, for the purposes of impairment analysis, requires the exercise of judgment. Circumstances that could significantly alter the calculation of fair value or the recoverable amount of an asset may include significant changes in the regulatory environment, the business climate, management's plans, legal factors, market price of the asset, the use of the asset, the physical condition of the asset, future market prices, competition and many other factors over the life of the asset. Any resulting impairment loss is highly dependent on the underlying assumptions and could significantly affect EGTS' results of operations.
Income Taxes
In determining EGTS' income taxes, management is required to interpret complex income tax laws and regulations, which includes consideration of regulatory implications imposed by the FERC. EGTS' income tax returns are subject to continuous examinations by federal, state and local income tax authorities that may give rise to different interpretations of these complex laws and regulations. Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved. EGTS recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Although the ultimate resolution of EGTS' federal, state and local income tax examinations is uncertain, EGTS believes it has made adequate provisions for these income tax positions. The aggregate amount of any additional income tax liabilities that may result from these examinations is not expected to have a material impact on EGTS' consolidated financial results. Refer to EGTS' Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding EGTS' income taxes.
It is probable that EGTS will pass income tax benefit and expense related to the federal tax rate change from 35% to 21% as a result of 2017 Tax Reform, certain property-related basis differences and other various differences on to their customers. As of December 31, 2022, these amounts were recognized as a net regulatory liability of $382 million and will be included in regulated rates when the temporary differences reverse.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
EGTS' Consolidated Balance Sheets include assets and liabilities with fair values that are subject to market risks. EGTS' significant market risks are primarily associated with commodity prices, interest rates and the extension of credit to counterparties with which EGTS transacts. The following discussion addresses the significant market risks associated with EGTS' business activities. EGTS has established guidelines for credit risk management. Refer to Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding EGTS' contracts accounted for as derivatives.
Commodity Price Risk
EGTS is exposed to the impact of market fluctuations in commodity prices. EGTS is principally exposed to natural gas market fluctuations primarily through fuel retained and used during the operation of the pipeline system as well as lost and unaccounted for gas. EGTS is exposed to the risk of fuel retention, meaning customers have a fixed fuel retention percentage assessed on transmission and storage quantities, and the pipeline bears the risk of under-recovery and benefits from any over-recovery of volumes. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, facility availability, customer usage, storage and transmission constraints. EGTS does not engage in proprietary trading activities. To mitigate a portion of its commodity price risk, EGTS uses commodity derivative contracts, which may include forwards, futures, options, swaps and other agreements, to effectively secure future supply quantities or sell future supply quantities generally at fixed prices. EGTS does not hedge all of its commodity price risk, thereby exposing the unhedged portion to changes in market prices. As of February 2023, EGTS recovers its cost of gas through a fuel tracker and is no longer subject to significant commodity price risk.
Interest Rate Risk
EGTS is exposed to interest rate risk on its outstanding variable-rate short- and long-term debt and future debt issuances. EGTS 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. As a result of the fixed interest rates, EGTS' fixed-rate long-term debt does not expose EGTS to the risk of loss due to changes in market interest rates. Additionally, because fixed-rate long-term debt is not carried at fair value on the Consolidated Balance Sheets, changes in fair value would impact earnings and cash flows only if EGTS were to reacquire all or a portion of these instruments prior to their maturity. The nature and amount of EGTS' short- and long-term debt can be expected to vary from period to period as a result of future business requirements, market conditions and other factors. Refer to Note 9 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional discussion of EGTS' long-term debt.
As of December 31, 2022 and 2021, EGTS had short- and long-term variable-rate obligations totaling $36 million and $68 million, respectively, that expose EGTS to the risk of increased interest expense in the event of increases in short-term interest rates. If variable interest rates were to increase by 10% from December 31 levels, it would not have a material effect on EGTS' annual interest expense. The carrying value of the variable-rate obligations approximates fair value as of December 31, 2022 and 2021.
Credit Risk
EGTS is exposed to counterparty credit risk associated with natural gas transmission and storage service contracts with utilities, natural gas producers, power generators, industrials, energy marketing companies, financial institutions and other market participants. Credit risk may be concentrated to the extent EGTS' counterparties have similar economic, industry or other characteristics and due to direct and indirect relationships among the counterparties. Before entering into a transaction, EGTS analyzes the financial condition of each 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 counterparty credit risk, EGTS obtains third-party guarantees, letters of credit, financial guarantee bonds and cash deposits. If required, EGTS exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.
EGTS' gross credit exposure for each counterparty is calculated as outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights. Gross credit exposure is calculated prior to the application of collateral. As of December 31, 2022, EGTS credit exposure totaled $90 million. Of this amount, investment grade counterparties, including those internally rated, represented 98%, with three investment grade counterparties representing 57%.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Eastern Gas Transmission and Storage, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eastern Gas Transmission and Storage, Inc., and subsidiaries ("EGTS") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in shareholder's equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of EGTS as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of EGTS' management. Our responsibility is to express an opinion on EGTS' financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to EGTS in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. EGTS is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of EGTS' internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Matters — Effects of Rate Regulation on the Financial Statements — Refer to Notes 2 and 7 to the Financial Statements
Critical Audit Matter Description
EGTS prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Management has determined EGTS meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accordingly, EGTS defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur. Furthermore, revenue provided by EGTS' interstate natural gas transmission operations is based primarily on rates approved by the Federal Energy Regulatory Commission ("FERC").
EGTS continually evaluates the applicability of the guidance for regulated operations and whether its regulatory assets and liabilities are probable of inclusion in future regulated rates by considering factors such as a change in the regulator's approach to setting rates from cost-based ratemaking to another form of regulation, other regulatory actions or the impact of competition that could limit EGTS' ability to recover its costs. The evaluation reflects the current political and regulatory climate. If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers, or re-established as accumulated comprehensive income (loss). Accounting for the economics of rate regulation has a pervasive effect on the financial statements.
We identified the effects of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs and (2) a refund to customers. Given that management's accounting judgments are based on assumptions about the outcome of future decisions by the FERC, auditing these judgments required specialized knowledge of the accounting for rate regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assessment of whether recovery of regulatory assets through future rates or a regulatory liability due to customers is probable included the following, among others:
•We evaluated EGTS' disclosures related to the effects of rate regulation, including the balances recorded and regulatory developments.
•We read relevant regulatory orders issued by the FERC, as well as relevant regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other external information. We evaluated the external information and compared to management's recorded regulatory assets and liability balances for completeness and to assess whether this external information was properly considered by management in concluding upon the financial statement impacts of rate regulation.
•For regulatory matters in process, we inspected EGTS' filings with the FERC, and the filings with the FERC by intervenors to assess the likelihood of recovery in future rates or of refunds due to customers based on precedents of the FERC's treatment of similar costs under similar circumstances.
/s/ Deloitte & Touche LLP
Richmond, Virginia
February 24, 2023
We have served as EGTS' auditor since 2000.
EASTERN GAS TRANSMISSION AND STORAGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 16 | | | $ | 11 | |
| Restricted cash and cash equivalents | 29 | | | 15 | |
| Trade receivables, net | 113 | | | 98 | |
| Receivables from affiliates | 13 | | | 9 | |
| | | |
| Inventories | 50 | | | 48 | |
| Income taxes receivable | 21 | | | 19 | |
| Prepayments | 36 | | | 35 | |
| Natural gas imbalances | 193 | | | 94 | |
| Other current assets | 9 | | | 10 | |
| Total current assets | 480 | | | 339 | |
| | | |
| Property, plant and equipment, net | 4,504 | | | 4,440 | |
| | | |
| | | |
| | | |
| | | |
| Notes receivable from affiliates | — | | | 3 | |
| Other assets | 190 | | | 319 | |
| | | |
| Total assets | $ | 5,174 | | | $ | 5,101 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN GAS TRANSMISSION AND STORAGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in millions, except share data)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| LIABILITIES AND SHAREHOLDER'S EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 46 | | | $ | 54 | |
| Accounts payable to affiliates | 5 | | | 13 | |
| | | |
| Accrued property, income and other taxes | 71 | | | 71 | |
| Accrued employee expenses | 13 | | | 12 | |
| Notes payable to affiliates | 36 | | | 68 | |
| Regulatory liabilities | 109 | | | 25 | |
| Customer and security deposits | 29 | | | 15 | |
| Asset retirement obligations | 25 | | | 33 | |
| | | |
| Other current liabilities | 39 | | | 37 | |
| Total current liabilities | 373 | | | 328 | |
| | | |
| Long-term debt | 1,582 | | | 1,581 | |
| | | |
| | | |
| Regulatory liabilities | 518 | | | 507 | |
| | | |
| Other long-term liabilities | 101 | | | 145 | |
| Total liabilities | 2,574 | | | 2,561 | |
| | | |
| Commitments and contingencies (Note 15) | | | |
| | | |
| Shareholder's equity: | | | |
| | | |
Common stock - 75,000 shares authorized, $10,000 par value, 60,101 issued and outstanding | 609 | | | 609 | |
| Additional paid-in capital | 1,275 | | | 1,241 | |
| | | |
| Retained earnings | 746 | | | 721 | |
| Accumulated other comprehensive loss, net | (30) | | | (31) | |
| Total shareholder's equity | 2,600 | | | 2,540 | |
| | | |
| | | |
| | | |
| Total liabilities and shareholder's equity | $ | 5,174 | | | $ | 5,101 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN GAS TRANSMISSION AND STORAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Operating revenue | $ | 973 | | | $ | 891 | | | $ | 916 | |
| | | | | |
| Operating expenses: | | | | | |
| | | | | |
| (Excess) cost of gas | (33) | | | 13 | | | 21 | |
| Operations and maintenance | 364 | | | 376 | | | 392 | |
| Depreciation and amortization | 152 | | | 166 | | | 163 | |
| Property and other taxes | 54 | | | 62 | | | 53 | |
| Disallowance and abandonment of utility plant | — | | | (11) | | | 525 | |
| Total operating expenses | 537 | | | 606 | | | 1,154 | |
| | | | | |
| Operating income (loss) | 436 | | | 285 | | | (238) | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense | (69) | | | (78) | | | (89) | |
| Allowance for borrowed funds | 1 | | | 2 | | | 5 | |
| Allowance for equity funds | 4 | | | 6 | | | 12 | |
| | | | | |
| | | | | |
| Other, net | (2) | | | 2 | | | 62 | |
| Total other income (expense) | (66) | | | (68) | | | (10) | |
| | | | | |
| Income (loss) before income tax expense (benefit) | 370 | | | 217 | | | (248) | |
| Income tax expense (benefit) | 109 | | | 61 | | | (67) | |
| | | | | |
| | | | | |
| | | | | |
| Net income (loss) | $ | 261 | | | $ | 156 | | | $ | (181) | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN GAS TRANSMISSION AND STORAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Net income (loss) | $ | 261 | | | $ | 156 | | | $ | (181) | |
| | | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
Unrealized gains (losses) on cash flow hedges, net of tax of $1, $(12) and $— | 1 | | | (31) | | | — | |
| | | | | |
| | | | | |
Unrecognized amounts on retirement benefits, net of tax of $—, $— and $30 | — | | | — | | | 77 | |
| Total other comprehensive income (loss), net of tax | 1 | | | (31) | | | 77 | |
| | | | | |
| Comprehensive income (loss) | $ | 262 | | | $ | 125 | | | $ | (104) | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN GAS TRANSMISSION AND STORAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Amounts in millions, except shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | Additional | | | | Other | | Total |
| Common Stock | | | | | | Paid-in | | Retained | | Comprehensive | | Shareholder's |
| Shares | | Amount | | | | | | Capital | | Earnings | | Loss, Net | | Equity |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2019 | 60,101 | | | $ | 609 | | | | | | | $ | 889 | | | $ | 947 | | | $ | (77) | | | $ | 2,368 | |
| Net loss | — | | | — | | | | | | | — | | | (181) | | | — | | | (181) | |
| Other comprehensive income | — | | | — | | | | | | | — | | | — | | | 77 | | | 77 | |
| Dividends declared | — | | | — | | | | | | | — | | | (125) | | | — | | | (125) | |
| Acquisition of EGTS by BHE | — | | | — | | | | | | | 40 | | | — | | | — | | | 40 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2020 | 60,101 | | | 609 | | | | | | | 929 | | | 641 | | | — | | | 2,179 | |
| Net income | — | | | — | | | | | | | — | | | 156 | | | — | | | 156 | |
| Other comprehensive loss | — | | | — | | | | | | | — | | | — | | | (31) | | | (31) | |
| Dividends declared | | | — | | | | | | | — | | | (76) | | | — | | | (76) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Contributions | — | | | — | | | | | | | 312 | | | — | | | — | | | 312 | |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2021 | 60,101 | | | 609 | | | | | | | 1,241 | | | 721 | | | (31) | | | 2,540 | |
| Net income | — | | | — | | | | | | | — | | | 261 | | | — | | | 261 | |
| Other comprehensive income | — | | | — | | | | | | | — | | | — | | | 1 | | | 1 | |
| Dividends declared | — | | | — | | | | | | | — | | | (236) | | | — | | | (236) | |
| Contributions | — | | | — | | | | | | | 34 | | | — | | | — | | | 34 | |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2022 | 60,101 | | | $ | 609 | | | | | | | $ | 1,275 | | | $ | 746 | | | $ | (30) | | | $ | 2,600 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN GAS TRANSMISSION AND STORAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 261 | | | $ | 156 | | | $ | (181) | |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | | |
| Losses (gains) on other items, net | 1 | | | (8) | | | 517 | |
| Depreciation and amortization | 152 | | | 166 | | | 163 | |
| Allowance for equity funds | (4) | | | (6) | | | (12) | |
| | | | | |
| Changes in regulatory assets and liabilities | 61 | | | — | | | 24 | |
| Deferred income taxes | 92 | | | 93 | | | (121) | |
| Other, net | 6 | | | (7) | | | 26 | |
| Changes in other operating assets and liabilities: | | | | | |
| Trade receivables and other assets | (48) | | | 48 | | | 49 | |
| Receivables from affiliates | (4) | | | (46) | | | 4 | |
| Pension and other postretirement benefit plans | — | | | (17) | | | (85) | |
| Accrued property, income and other taxes | 18 | | | (23) | | | 10 | |
| Accounts payable and other liabilities | 25 | | | — | | | 5 | |
| Accounts payable to affiliates | (8) | | | 11 | | | (32) | |
| Net cash flows from operating activities | 552 | | | 367 | | | 367 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (275) | | | (358) | | | (263) | |
| | | | | |
| | | | | |
| Loans to affiliates | (8) | | | (14) | | | — | |
| Repayment of loans by affiliates | 11 | | | 19 | | | — | |
| | | | | |
| Other, net | (14) | | | (4) | | | (2) | |
| Net cash flows from investing activities | (286) | | | (357) | | | (265) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| | | | | |
| (Repayment) issuance of notes payable, net | (32) | | | (13) | | | 34 | |
| | | | | |
| | | | | |
| | | | | |
| Proceeds from equity contributions | — | | | 20 | | | — | |
| Dividends paid | (215) | | | (18) | | | (125) | |
| | | | | |
| Other, net | — | | | 4 | | | — | |
| Net cash flows from financing activities | (247) | | | (7) | | | (91) | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash and cash equivalents | 19 | | | 3 | | | 11 | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | 26 | | | 23 | | | 12 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 45 | | | $ | 26 | | | $ | 23 | |
The accompanying notes are an integral part of these consolidated financial statements.
EASTERN GAS TRANSMISSION AND STORAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Operations
Eastern Gas Transmission and Storage, Inc. and its subsidiaries ("EGTS") conduct business activities consisting of Federal Energy Regulatory Commission ("FERC")-regulated interstate natural gas transmission pipeline and underground storage. EGTS' operations include transmission pipelines in Maryland, New York, Ohio, Pennsylvania, Virginia and West Virginia. EGTS also operates one of the nation's largest underground natural gas storage systems located in New York, Pennsylvania and West Virginia. EGTS is a wholly-owned subsidiary of Eastern Energy Gas Holdings, LLC ("Eastern Energy Gas"). On November 1, 2020, Berkshire Hathaway Energy Company ("BHE") completed its acquisition of substantially all of the natural gas transmission and storage business of Dominion Energy, Inc. ("DEI") (the "GT&S Transaction"). As a result of the GT&S Transaction, EGTS became an indirect wholly-owned subsidiary of BHE. BHE is a holding company based in Des Moines, Iowa that owns subsidiaries principally engaged in the energy industry. BHE is a consolidated subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway"). See Note 3 for more information regarding the GT&S Transaction.
(2) Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The Consolidated Financial Statements include the accounts of EGTS and its subsidiaries in which it holds a controlling financial interest as of the financial statement date. Intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. These estimates include, but are not limited to, the effects of regulation; recovery of long-lived assets; certain assumptions made in accounting for pension and other postretirement benefits; asset retirement obligations ("AROs"); income taxes; unbilled revenue; valuation of certain financial assets and liabilities, including derivative contracts; and accounting for contingencies. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Accounting for the Effects of Certain Types of Regulation
EGTS prepares its Consolidated Financial Statements in accordance with authoritative guidance for regulated operations, which recognizes the economic effects of regulation. Accordingly, EGTS defers the recognition of certain costs or income if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in future regulated rates. Regulatory assets and liabilities are established to reflect the impacts of these deferrals, which will be recognized in earnings in the periods the corresponding changes in regulated rates occur.
If it becomes no longer probable that the deferred costs or income will be included in future regulated rates, the related regulatory assets and liabilities will be recognized in net income, returned to customers or re-established as accumulated other comprehensive income (loss) ("AOCI").
Fair Value Measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or credit risk is considered when determining fair value. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash equivalents consist of funds invested in money market mutual funds, U.S. Treasury Bills and other investments with a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is restricted by legal requirements, loan agreements or other contractual provisions. Restricted cash and cash equivalents consist of customer deposits as allowed under the FERC gas tariff. A reconciliation of cash and cash equivalents and restricted cash and cash equivalents as of December 31, 2022 and 2021, as presented in the Consolidated Statements of Cash Flows is outlined below and disaggregated by the line items in which they appear on the Consolidated Balance Sheets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 16 | | | $ | 11 | |
| Restricted cash and cash equivalents | 29 | | | 15 | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 45 | | | $ | 26 | |
Allowance for Credit Losses
Trade receivables are primarily short-term in nature and are stated at the outstanding principal amount, net of an estimated allowance for credit losses. The allowance for credit losses is based on EGTS' assessment of the collectability of amounts owed to EGTS by its customers. This assessment requires judgment regarding the ability of customers to pay or the outcome of any pending disputes. In measuring the allowance for credit losses for trade receivables, EGTS primarily evaluates the financial condition of the individual customer and the nature of any disputed amount.
The changes in the balance of the allowance for credit losses, which is included in trades receivables, net on the Consolidated Balance Sheets, is summarized as follows for the years ended December 31, (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 3 | | | $ | 2 | | | $ | 1 | |
| Charged to operating costs and expenses, net | — | | | 1 | | | 1 | |
| Write-offs, net | (3) | | | — | | | — | |
| Ending balance | $ | — | | | $ | 3 | | | $ | 2 | |
Derivatives
EGTS employs a number of different derivative contracts, which may include forwards, futures, options, swaps and other agreements, to manage its commodity price and interest rate risks. 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. Derivative balances reflect offsetting permitted under master netting agreements with counterparties and cash collateral paid or received under such agreements. Cash collateral received from or paid to counterparties to secure derivative contract assets or liabilities in excess of amounts offset is included in other current assets or other current liabilities on the Consolidated Balance Sheets.
Commodity derivatives used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases or normal sales. Normal purchases or normal sales contracts are not marked-to-market and settled amounts are recognized as operating revenue or cost of gas on the Consolidated Statements of Operations.
For EGTS' derivatives not designated as hedging contracts, unrealized gains and losses are recognized on the Consolidated Statements of Operations as operating revenue for derivatives related to natural gas sales contracts.
For EGTS' derivatives designated as hedging contracts, EGTS formally assesses, at inception and thereafter, whether the hedging contract is highly effective in offsetting changes in the hedged item. EGTS formally documents hedging activity by transaction type and risk management strategy. For derivative instruments that are accounted for as cash flow hedges or fair value hedges, the cash flows from the derivatives and from the related hedged items are classified in operating cash flows.
Changes in the estimated fair value of a derivative contract designated and qualified as a cash flow hedge, to the extent effective, are included on the Consolidated Statements of Changes in Equity as AOCI, net of tax, until the contract settles and the hedged item is recognized in earnings. EGTS discontinues hedge accounting prospectively when it has determined that a derivative contract no longer qualifies as an effective hedge, or when it is no longer probable that the hedged forecasted transaction will occur. When hedge accounting is discontinued because the derivative contract no longer qualifies as an effective hedge, future changes in the estimated fair value of the derivative contract are charged to earnings. Gains and losses related to discontinued hedges that were previously recorded in AOCI will remain in AOCI until the contract settles and the hedged item is recognized in earnings, unless it becomes probable that the hedged forecasted transaction will not occur at which time associated deferred amounts in AOCI are immediately recognized in earnings.
Inventories
Inventories consist mainly of materials and supplies and are determined using the average cost method.
Natural Gas Imbalances
Natural gas imbalances occur when the physical amount of natural gas delivered from, or received by, a pipeline system or storage facility differs from the contractual amount of natural gas delivered or received. EGTS values these imbalances due to, or from, shippers and operators at an appropriate index price at period end, subject to the terms of its tariff for regulated entities. Imbalances are primarily settled in-kind. Imbalances due to EGTS from other parties are reported in natural gas imbalances and imbalances that EGTS owes to other parties are reported in other current liabilities on the Consolidated Balance Sheets.
Property, Plant and Equipment, Net
General
Additions to property, plant and equipment are recorded at cost. EGTS capitalizes all construction-related materials, direct labor and contract services, as well as indirect construction costs. Indirect construction costs include debt and equity allowance for funds used during construction ("AFUDC"), as applicable. The cost of additions and betterments are capitalized, while costs incurred that do not improve or extend the useful lives of the related assets are generally expensed.
Depreciation and amortization are generally computed by applying the composite or straight-line method based on estimated useful lives. Depreciation studies are completed by EGTS to determine the appropriate group lives, net salvage and group depreciation rates. These studies are reviewed and rates are ultimately approved by the FERC. See Note 7 for the prospective impacts related to changes in depreciation rates. Net salvage includes the estimated future residual values of the assets and any estimated removal costs recovered through approved depreciation rates. Estimated removal costs are recorded as either a cost of removal regulatory liability or an ARO liability on the Consolidated Balance Sheets, depending on whether the obligation meets the requirements of an ARO. As actual removal costs are incurred, the associated liability is reduced.
Generally when EGTS retires or sells a component of regulated property, plant and equipment, it charges the original cost, net of any proceeds from the disposition, to accumulated depreciation. Any gain or loss on disposals of all other assets is recorded through earnings.
Debt and equity AFUDC, which represent the estimated costs of debt and equity funds necessary to finance the construction of regulated facilities, is capitalized by EGTS as a component of property, plant and equipment, with offsetting credits to the Consolidated Statements of Operations. AFUDC is computed based on guidelines set forth by the FERC. After construction is completed, EGTS is permitted to earn a return on these costs as a component of the related assets, as well as recover these costs through depreciation expense over the useful lives of the related assets.
Asset Retirement Obligations
EGTS recognizes AROs when it has a legal obligation to perform decommissioning, reclamation or removal activities upon retirement of an asset. EGTS' AROs are primarily related to the obligations associated with its natural gas pipeline and storage well assets. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset. Subsequent to the initial recognition, the ARO liability is adjusted for any revisions to the original estimate of undiscounted cash flows (with corresponding adjustments to property, plant and equipment, net) and for accretion of the ARO liability due to the passage of time. For EGTS, the difference between the ARO liability, the corresponding ARO asset included in property, plant and equipment, net and amounts recovered in rates to satisfy such liabilities is recorded as a regulatory asset or liability.
Impairment
EGTS evaluates long-lived assets for impairment, including property, plant and equipment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected on the Consolidated Statements of Operations. As substantially all property, plant and equipment supports EGTS' regulated businesses, the impacts of regulation are considered when evaluating the carrying value of regulated assets. See Note 7 for more information.
Leases
EGTS has non-cancelable operating leases primarily for office space, office equipment and land and finance leases consisting primarily of natural gas pipeline facilities and vehicles. These leases generally require EGTS to pay for insurance, taxes and maintenance applicable to the leased property. Given the capital intensive nature of the utility industry, it is common for a portion of lease costs to be capitalized when used during construction or maintenance of assets, in which the associated costs will be capitalized with the corresponding asset and depreciated over the remaining life of that asset. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. EGTS does not include options in its lease calculations unless there is a triggering event indicating EGTS is reasonably certain to exercise the option. EGTS' accounting policy is to not recognize right-of-use assets and lease obligations for leases with contract terms of one year or less and not separate lease components from non-lease components and instead account for each separate lease component and the non-lease components associated with a lease as a single lease component. Leases will be evaluated for impairment in line with Accounting Standards Codification 360, "Property, Plant and Equipment" when a triggering event has occurred that might affect the value and use of the assets being leased.
EGTS' operating and finance right-of-use assets are recorded in other assets and the operating and finance lease liabilities are recorded in current and long-term other liabilities accordingly.
Revenue Recognition
EGTS uses a single five-step model to identify and recognize revenue from contracts with customers ("Customer Revenue") upon transfer of control of promised goods or services in an amount that reflects the consideration to which EGTS expects to be entitled in exchange for those goods or services. EGTS records sales and excise taxes collected directly from customers and remitted directly to the taxing authorities on a net basis on the Consolidated Statements of Operations.
A majority of EGTS' Customer Revenue is derived from tariff-based sales arrangements approved by the FERC. These tariff-based revenues are mainly comprised of natural gas transmission and storage services and have performance obligations which are satisfied over time as services are provided.
Revenue recognized is equal to what EGTS has the right to invoice as it corresponds directly with the value to the customer of EGTS' performance to date and includes billed and unbilled amounts. As of December 31, 2022 and 2021, trade receivables, net on the Consolidated Balance Sheets relate substantially to Customer Revenue, including unbilled revenue of $9 million and $28 million, respectively. Payments for amounts billed are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued. See Note 7 for discussion surrounding EGTS' provision for rate refund. In the event one of the parties to a contract has performed before the other, EGTS would recognize a contract asset or contract liability depending on the relationship between EGTS' performance and the customer's payment. EGTS has recognized contract assets of $10 million and $19 million as of December 31, 2022 and 2021, respectively, and $9 million and $3 million of contract liabilities as of December 31, 2022 and 2021, respectively, due to EGTS' performance on certain contracts.
Unamortized Debt Premiums, Discounts and Debt Issuance Costs
Premiums, discounts and debt issuance costs incurred for the issuance of long-term debt are amortized over the term of the related financing using the effective interest method.
Income Taxes
Prior to the GT&S Transaction, DEI included EGTS in its consolidated U.S. federal income tax return. Subsequent to the GT&S Transaction, Berkshire Hathaway includes EGTS in its consolidated U.S. federal income tax return. Consistent with established regulatory practice, EGTS' provision for income taxes has been computed on a stand-alone basis.
Deferred income tax assets and liabilities are based on differences between the financial statement and income tax basis of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities associated with components of OCI are charged or credited directly to OCI. Changes in deferred income tax assets and liabilities associated with certain property-related basis differences and other various differences that EGTS' regulated businesses deems probable to be passed on to its customers are charged or credited directly to a regulatory asset or liability and will be included in regulated rates when the temporary differences reverse. Other changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense or a regulatory asset or liability in the period of enactment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
EGTS recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. Estimated interest and penalties, if any, related to uncertain tax positions are included as a component of income tax expense (benefit) on the Consolidated Statements of Operations.
Segment Information
EGTS currently has one segment, which includes its natural gas pipeline and storage operations.
(3) Business Acquisitions and Dispositions
Acquisition of EGTS by BHE
In July 2020, DEI entered into an agreement to sell substantially all of its natural gas transmission and storage operations, including EGTS, to BHE. In November 2020, the GT&S Transaction was completed and EGTS became an indirect wholly-owned subsidiary of BHE. DEI retained the assets and obligations of the pension and other postretirement employee benefit plans associated with the operations sold and relating to services provided before closing. The GT&S Transaction was treated as a deemed asset sale for federal and state income tax purposes and all deferred taxes at EGTS were reset to reflect financial and tax basis differences as of November 1, 2020. See Notes 10 and 11 for more information on the GT&S Transaction.
In accordance with the terms of the GT&S Transaction, DEI retained certain assets and liabilities associated with EGTS and settled all affiliated balances. As a result, EGTS recorded a contribution for the reset of deferred taxes of $1.0 billion and $34 million for retained tax liabilities payable to EGTS by DEI, net of distributions of $904 million related to the pension and other postretirement employee benefit plans retained by DEI and $107 million of other pension related amounts. In addition, EGTS decided to forgo recovery of $18 million of certain property, plant and equipment as a result of the GT&S Transaction, included in disallowance and abandonment of utility plant on the Consolidated Statement of Operations.
(4) Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | 2022 | | 2021 |
| | | | | |
| | | | | |
| Interstate natural gas pipeline and storage assets | 28 - 50 years | | $ | 6,724 | | | $ | 6,517 | |
| Intangible plant | 12 - 20 years | | 79 | | | 74 | |
| Plant in-service | | | 6,803 | | | 6,591 | |
| Accumulated depreciation and amortization | | | (2,440) | | | (2,339) | |
| | | 4,363 | | | 4,252 | |
| Construction work-in-progress | | | 141 | | | 188 | |
| Property, plant and equipment, net | | | $ | 4,504 | | | $ | 4,440 | |
(5) Jointly Owned Utility Facilities
Under joint facility ownership agreements with other utilities, EGTS, as a tenant in common, has undivided interests in jointly owned transmission and storage facilities. EGTS accounts for its proportionate share of each facility, and each joint owner has provided financing for its share of each facility. Operating costs of each facility are assigned to joint owners primarily based on their percentage of ownership. Operating costs and expenses on the Consolidated Statements of Operations include EGTS' share of the expenses of these facilities.
The amounts shown in the table below represent EGTS' share in each jointly owned facility included in property, plant and equipment, net as of December 31, 2022 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated | | Construction |
| EGTS' | | Facility in | | Depreciation and | | Work-in- |
| Share | | Service | | Amortization | | Progress |
| | | | | | | |
| Ellisburg Pool | 39 | % | | $ | 32 | | | $ | 11 | | | $ | — | |
| Ellisburg Station | 50 | | | 26 | | | 8 | | | 3 | |
| Harrison | 50 | | | 53 | | | 18 | | | — | |
| Leidy | 50 | | | 143 | | | 47 | | | 1 | |
| Oakford | 50 | | | 202 | | | 70 | | | 4 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | | | $ | 456 | | | $ | 154 | | | $ | 8 | |
(6) Leases
The following table summarizes EGTS' leases recorded on the Consolidated Balance Sheets as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Right-of-use assets: | | | |
| Operating leases | $ | 19 | | | $ | 20 | |
| | | |
| Total right-of-use assets | $ | 19 | | | $ | 20 | |
| | | |
| Lease liabilities: | | | |
| Operating leases | $ | 18 | | | $ | 18 | |
| | | |
| Total lease liabilities | $ | 18 | | | $ | 18 | |
The following table summarizes EGTS' lease costs for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Operating | $ | 2 | | | $ | 3 | | | $ | 6 | |
| | | | | |
| | | | | |
| | | | | |
| Short-term | — | | | — | | | 3 | |
| Total lease costs | $ | 2 | | | $ | 3 | | | $ | 9 | |
| | | | | |
| Weighted-average remaining lease term (years): | | | | | |
| Operating leases | 13.7 | | 14.7 | | 11.7 |
| Finance leases | 0.0 | | 0.0 | | 4.6 |
| | | | | |
| Weighted-average discount rate: | | | | | |
| Operating leases | 4.3 | % | | 4.3 | % | | 4.4 | % |
| Finance leases | — | % | | — | % | | 2.6 | % |
The following table summarizes EGTS' supplemental cash flow information relating to leases for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 2 | | | $ | 3 | | | $ | 9 | |
| Operating cash flows from finance leases | — | | | 1 | | | — | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | | | |
| Finance leases | $ | — | | | $ | — | | | $ | 1 | |
EGTS has the following remaining operating lease commitments as of December 31, 2022 (in millions):
| | | | | | | | | |
| 2023 | $ | 2 | | | | | |
| 2024 | 2 | | | | | |
| 2025 | 2 | | | | | |
| 2026 | 2 | | | | | |
| 2027 | 2 | | | | | |
| Thereafter | 14 | | | | | |
| Total undiscounted lease payments | 24 | | | | | |
| Less - amounts representing interest | (6) | | | | | |
| Lease liabilities | $ | 18 | | | | | |
(7) Regulatory Matters
Regulatory Assets
Regulatory assets represent costs that are expected to be recovered in future regulated rates. EGTS' regulatory assets reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| Weighted Average Remaining Life | | 2022 | | 2021 |
| | | | | |
Employee benefit plans(1) | 11 years | | $ | 31 | | | $ | 58 | |
| | | | | |
| | | | | |
| Other | Various | | 8 | | | 6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total regulatory assets | | | $ | 39 | | | $ | 64 | |
| | | | | |
| Reflected as: | | | | | |
| Current assets | | | $ | 5 | | | $ | 2 | |
| Noncurrent assets | | | 34 | | | 62 | |
| Total regulatory assets | | | $ | 39 | | | $ | 64 | |
(1)Represents costs expected to be recovered through future rates generally over the expected remaining service period of plan participants.
EGTS had regulatory assets not earning a return on investment of $39 million and $64 million as of December 31, 2022 and 2021, respectively.
Regulatory Liabilities
Regulatory liabilities represent income to be recognized or amounts expected to be returned to customers in future periods. EGTS' regulatory liabilities reflected on the Consolidated Balance Sheets consist of the following as of December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| Weighted Average Remaining Life | | 2022 | | 2021 |
| | | | | |
Income taxes refundable through future rates(1) | Various | | $ | 382 | | | $ | 391 | |
Other postretirement benefit costs(2) | Various | | 123 | | | 116 | |
Provision for rate refunds(3) | | | 90 | | | — | |
Cost of removal(4) | 53 years | | 24 | | | 16 | |
| | | | | |
| Other | Various | | 8 | | | 9 | |
| Total regulatory liabilities | | | $ | 627 | | | $ | 532 | |
| | | | | |
| Reflected as: | | | | | |
| Current liabilities | | | $ | 109 | | | $ | 25 | |
| Noncurrent liabilities | | | 518 | | | 507 | |
| Total regulatory liabilities | | | $ | 627 | | | $ | 532 | |
(1)Amounts primarily represent income tax liabilities related to the federal tax rate change from 35% to 21% that are probable to be passed on to customers, offset by income tax benefits related to certain property-related basis differences and other various differences that were previously passed on to customers and will be included in regulated rates when the temporary differences reverse.
(2)Reflects a regulatory liability for the collection of postretirement benefit costs allowed in rates in excess of expense incurred.
(3)Reflects amounts expected to be refunded to customers in late February 2023 in connection with the EGTS rate case. See below for more information.
(4)Amounts represent estimated costs, as accrued through depreciation rates and exclusive of ARO liabilities, of removing regulated property, plant and equipment in accordance with accepted regulatory practices. Refer to Note 12 for more information.
Regulatory Matters
In September 2021, EGTS filed a general rate case for its FERC-jurisdictional services, with proposed rates to be effective November 1, 2021. EGTS' previous general rate case was settled in 1998. EGTS proposed an annual cost-of-service of approximately $1.1 billion, and requested increases in various rates, including general system storage rates by 85% and general system transmission rates by 60%. In October 2021, the FERC issued an order that accepted the November 1, 2021 effective date for certain changes in rates, while suspending the other changes for five months following the proposed effective date, until April 1, 2022, subject to refund. In September 2022, a settlement agreement was filed with the FERC, resolving EGTS' general rate case for its FERC-jurisdictional services and providing for increased service rates and decreased depreciation rates. Under the terms of the settlement agreement, EGTS' rates result in an increase to annual firm transmission and storage revenues of approximately $160 million and a decrease in annual depreciation expense of approximately $30 million, compared to the rates in effect prior to April 1, 2022. As of December 31, 2022, EGTS' provision for rate refund for April 2022 through December 2022 totaled $90 million and was included in current regulatory liabilities on the Consolidated Balance Sheet. In November 2022, the FERC approved the settlement agreement.
In July 2017, the FERC audit staff communicated to EGTS that it had substantially completed an audit of EGTS' compliance with the accounting and reporting requirements of the FERC's Uniform System of Accounts and provided a description of matters and preliminary recommendations. In November 2017, the FERC audit staff issued its audit report. In December 2017, EGTS provided its response to the audit report. EGTS requested FERC review of the contested findings and submitted its plan for compliance with the uncontested portions of the report. EGTS reached resolution of certain matters with the FERC in the fourth quarter of 2018. EGTS recognized a charge for a disallowance of plant, originally established beginning in 2012, for the resolution of one matter with the FERC. In December 2020, the FERC issued a final ruling on the remaining matter, which resulted in a $43 million ($31 million after-tax) estimated charge for disallowance of capitalized AFUDC, recorded in disallowance and abandonment of utility plant on the Consolidated Statement of Operations. As a condition of the December 2020 ruling, EGTS filed its proposed accounting entries and supporting documentation with the FERC during the second quarter of 2021. During the finalization of these entries, EGTS refined the estimated charge for disallowance of capitalized AFUDC, which resulted in a reduction to the estimated charge of $11 million ($8 million after-tax) that was recorded in disallowance and abandonment of utility plant on the Consolidated Statement of Operations in the second quarter of 2021. In September 2021, the FERC approved EGTS' accounting entries and supporting documentation.
In December 2014, EGTS entered into a precedent agreement with Atlantic Coast Pipeline, LLC ("Atlantic Cost Pipeline") for the project previously intended for EGTS to provide approximately 1,500,000 decatherms ("Dth") of firm transmission service to various customers in connection with the Atlantic Coast Pipeline project ("Supply Header Project"). As a result of the cancellation of the Atlantic Coast Pipeline project, in the second quarter of 2020 EGTS recorded a charge of $482 million ($359 million after-tax) in disallowance and abandonment of utility plant on the Consolidated Statement of Operations associated with the probable abandonment of a significant portion of the project as well as the establishment of a $75 million ARO. In the third quarter of 2020, EGTS recorded an additional charge of $10 million ($7 million after-tax) associated with the probable abandonment of a significant portion of the project and a $29 million ($20 million after-tax) benefit from a revision to the previously established ARO, both of which were recorded in disallowance and abandonment of utility plant on the Consolidated Statement of Operations. As EGTS evaluates its future use, approximately $40 million remains within property, plant and equipment for a potential modified project.
(8) Investments and Restricted Cash and Cash Equivalents
Investments and restricted cash and cash equivalents consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Investments: | | | |
| Investment funds | $ | 14 | | | $ | 13 | |
| | | |
| Restricted cash and cash equivalents: | | | |
| Customer deposits | 29 | | | 15 | |
| Total restricted cash and cash equivalents | 29 | | | 15 | |
| | | |
| Total investments and restricted cash and cash equivalents | $ | 43 | | | $ | 28 | |
| | | |
| Reflected as: | | | |
| Current assets | $ | 29 | | | $ | 15 | |
| Noncurrent assets | 14 | | | 13 | |
| Total investments and restricted cash and cash equivalents | $ | 43 | | | $ | 28 | |
(9) Long-term Debt
On June 30, 2021, Eastern Energy Gas exchanged a total of $1.6 billion of its issued and outstanding third-party notes for new notes, making EGTS the primary obligor of the new notes. The terms of the new notes are substantially similar to the terms of the original Eastern Energy Gas notes. The debt exchange was a common control transaction accounted for as a debt modification. As such, no gain or loss was recognized on the Consolidated Statements of Operations and approximately $17 million of unamortized discounts and debt issuance costs and $32 million of deferred losses on previously settled interest rate swaps remaining in AOCI were contributed to EGTS by Eastern Energy Gas in connection with the transaction. In addition, new fees of $2 million paid directly to note holders in connection with the exchange were deferred as additional debt issuance costs that will be amortized over the lives of the respective notes. As a result of the transaction, EGTS' $1.9 billion of long-term indebtedness to Eastern Energy Gas was cancelled in full and the remaining balance was satisfied through a capital contribution.
EGTS' long-term debt consists of the following, including unamortized discounts and debt issuance costs, as of December 31 (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Par Value | | 2022 | | 2021 |
| | | | | |
3.60% Senior Notes, due 2024 | $ | 111 | | | $ | 110 | | | $ | 110 | |
3.00% Senior Notes, due 2029 | 426 | | | 422 | | | 422 | |
4.80% Senior Notes, due 2043 | 346 | | | 342 | | | 341 | |
4.60% Senior Notes, due 2044 | 444 | | | 437 | | | 437 | |
3.90% Senior Notes, due 2049 | 273 | | | 271 | | | 271 | |
| Total long-term debt | $ | 1,600 | | | $ | 1,582 | | | $ | 1,581 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Annual Payment on Long-Term Debt
The annual repayments of long-term debt for the years beginning January 1, 2023 and thereafter, are as follows (in millions):
| | | | | |
| 2023 | $ | — | |
| 2024 | 111 | |
| 2025 | — | |
| 2026 | — | |
| 2027 | — | |
| 2028 and thereafter | 1,489 | |
| Total | 1,600 | |
| Unamortized discounts and debt issuance costs | (18) | |
| Total | $ | 1,582 | |
AOCI
The following table presents selected information related to losses on interest rate cash flow hedges included in AOCI in EGTS' Consolidated Balance Sheet as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | AOCI After-Tax | | Amounts Expected to be Reclassified to Earnings During the Next 12 Months After-Tax | | Maximum Term |
| | | | | | |
| Interest rate | | $ | (30) | | | $ | (2) | | | 264 months |
EGTS reclassified $2 million and $1 million from AOCI to interest expense for the years ended December 31, 2022 and 2021, respectively.
(10) Income Taxes
Income tax expense (benefit) consists of the following for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 5 | | | $ | (22) | | | $ | 48 | |
| State | 12 | | | (10) | | | 6 | |
| 17 | | | (32) | | | 54 | |
| Deferred: | | | | | |
| Federal | 64 | | | 67 | | | (93) | |
| State | 28 | | | 26 | | | (28) | |
| 92 | | | 93 | | | (121) | |
| | | | | |
| Total | $ | 109 | | | $ | 61 | | | $ | (67) | |
A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income (loss) before income tax expense (benefit) is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Federal statutory income tax rate | 21 | % | | 21 | % | | 21 | % |
| | | | | |
| State income tax, net of federal income tax benefit | 9 | | | 8 | | | 7 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Effects of ratemaking | — | | | — | | | 2 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| AFUDC-equity | — | | | — | | | 1 | |
| | | | | |
| Write-off of regulatory assets | — | | | — | | | (3) | |
| Other, net | (1) | | | (1) | | | (1) | |
| Effective income tax rate | 29 | % | | 28 | % | | 27 | % |
The net deferred income tax asset consists of the following as of December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Federal and state carryforwards | $ | 6 | | | $ | — | |
| | | |
| | | |
| Employee benefits | 22 | | | 31 | |
| Intangibles and goodwill | 265 | | | 298 | |
| Derivatives and hedges | 11 | | | 12 | |
| | | |
| | | |
| Other | 4 | | | 4 | |
| Total deferred income tax assets | 308 | | | 345 | |
| | | |
| | | |
| | | |
| Deferred income tax liabilities: | | | |
| Property related items | (146) | | | (77) | |
| | | |
| | | |
| Debt exchange | (53) | | | (60) | |
| Employee benefits | (4) | | | (9) | |
| | | |
| | | |
| | | |
| | | |
| Total deferred income tax liabilities | (203) | | | (146) | |
Net deferred income tax asset(1) | $ | 105 | | | $ | 199 | |
(1)Net deferred income tax asset, as of both December 31, 2022 and 2021, is presented in other assets in the Consolidated Balance Sheet.
As of December 31, 2022, EGTS' state tax carryforwards, entirely related to $6 million of net operating losses, expire at various intervals between 2036 and indefinite.
Through October 31, 2020, EGTS was included in DEI's consolidated federal income tax return and, where applicable, combined state income tax returns. As a result of the GT&S Transaction, DEI retained the rights and obligations of EGTS' federal and state income tax returns through October 31, 2020. The U.S. Internal Revenue Service has not closed or effectively settled an examination of EGTS' income tax returns for any tax years beginning on or after November 1, 2020. The statute of limitations for EGTS' states remains open for periods beginning on or after November 1, 2020. The closure of examinations, or the expiration of the statute of limitations, for state filings may not preclude the state from adjusting the state net operating loss carryforward utilized in a year for which the statute of limitations is not closed.
(11) Employee Benefit Plans
As discussed in Note 3, in November 2020, the GT&S Transaction was completed and the assets and obligations of the pension and other postretirement employee benefit plans associated with the operations sold and relating to services provided before closing were retained by DEI. As a result, just prior to completing the sale, net benefit plan assets of $904 million were distributed through an equity transaction with DEI.
Subsequent to the GT&S Transaction
Defined Benefit Plans
Subsequent to the GT&S Transaction, EGTS is a participant in benefit plans sponsored by MidAmerican Energy, an affiliate. The MidAmerican Energy Company Retirement Plan includes a qualified pension plan that provides pension benefits for eligible employees. The MidAmerican Energy Company Welfare Benefit Plan provides certain postretirement health care and life insurance benefits for eligible retirees on behalf of EGTS. EGTS made $12 million, $16 million and $2 million of contributions to the MidAmerican Energy Company Retirement Plan for the years ended December 31, 2022, 2021 and 2020, respectively. EGTS made $2 million, $9 million and $2 million of contributions to the MidAmerican Energy Company Welfare Benefit Plan for the years ended December 31, 2022, 2021 and 2020, respectively. Contributions related to these plans are reflected as net periodic benefit cost in operations and maintenance expense in the Consolidated Statements of Operations. Amounts attributable to EGTS were allocated from MidAmerican Energy in accordance with the intercompany administrative service agreement. 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.
Defined Contribution Plan
EGTS participates in the BHE GT&S defined contribution employee savings plan subsequent to the GT&S Transaction. EGTS' matching contributions are based on each participant's level of contribution. Contributions cannot exceed the maximum allowable for tax purposes. EGTS' contributions to the 401(k) plan were $5 million and $4 million and $1 million for the years ended December 31, 2022, 2021 and 2020, respectively
Prior to the GT&S Transaction
Defined Benefit Plans
Prior to the GT&S Transaction, certain EGTS employees not represented by collective bargaining units were covered by the Dominion Energy Pension Plan, a defined benefit pension plan sponsored by DEI that provides benefits to multiple DEI subsidiaries. As participating employers, EGTS was subject to DEI's funding policy, which was to contribute annually an amount that is in accordance with the Employee Retirement Income Security Act of 1974. EGTS' net periodic pension credit related to this plan was $17 million for the year ended December 31, 2020, reflected in operations and maintenance expense in the Consolidated Statement of Operations. The funded status of various DEI subsidiary groups and employee compensation are the basis for determining the share of total pension costs for participating DEI subsidiaries.
Prior to the GT&S Transaction, certain retiree healthcare and life insurance benefits for EGTS employees not represented by collective bargaining units were covered by the Dominion Energy Retiree Health and Welfare Plan, a plan sponsored by DEI that provides certain retiree healthcare and life insurance benefits to multiple DEI subsidiaries. EGTS' net periodic benefit credit related to this plan was $5 million for the year ended December 31, 2020, reflected in operations and maintenance expense in the Consolidated Statement of Operations. Employee headcount is the basis for determining the share of total other postretirement benefit costs for participating DEI subsidiaries.
Pension benefits for EGTS employees represented by collective bargaining units were covered by a separate pension plan that provides benefits to employees of both EGTS and Hope Gas, Inc. ("Hope"). Employee compensation was the basis for allocating pension costs and obligations between EGTS and Hope. Retiree healthcare and life insurance benefits, for EGTS employees represented by a collective bargaining unit, were covered by a separate other postretirement benefit plan that provides benefits to both EGTS and Hope. Employee headcount was the basis for allocating other postretirement benefit costs and obligations between EGTS and Hope.
Pension Remeasurement
In the third quarter of 2020, EGTS remeasured a pension plan due to a curtailment resulting from the agreement for DEI to retain the assets and obligations of the pension benefit plan associated with the GT&S Transaction. The remeasurement resulted in an increase in the pension benefit obligation of $3 million and a decrease in the fair value of the pension plan assets of $7 million for EGTS. The impact of the remeasurement on net periodic pension benefit credit was recognized prospectively from the remeasurement date and was not material. The discount rate used for the remeasurement was 3.16%. All other assumptions used for the remeasurement were consistent with the measurement as of December 31, 2019.
Net Periodic Benefit Credit
Net periodic benefit credit for the plans included the following components for the year ended December 31, 2020 (in millions):
| | | | | | | | | | | |
| Pension | | Other Postretirement |
| | | |
| Service cost | $ | 5 | | | $ | 1 | |
| Interest cost | 8 | | | 4 | |
| Expected return on plan assets | (47) | | | (16) | |
| | | |
| Net amortization | 3 | | | (3) | |
| Net periodic benefit credit | $ | (31) | | | $ | (14) | |
Significant assumptions used to determine periodic credits for the year ended December 31, 2020:
| | | | | | | | | | | |
| Pension | | Other Postretirement |
| | | |
| Discount rate | 3.16% - 3.63% | | 3.44 | % |
| Expected long-term rate of return on plan assets | 8.60 | % | | 8.50 | % |
| Weighted average rate of increase for compensation | 4.73 | % | | N/A |
| Healthcare cost trend rate | | | 6.50 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | | 5.00 | % |
| Year that the rate reached the ultimate trend rate | | | 2026 |
Defined Contribution Plans
EGTS participated in the DEI defined contribution employee savings plans prior to the GT&S Transaction. EGTS' matching contributions were based on each participant's level of contribution. Contributions could not exceed the maximum allowable for tax purposes. EGTS' contributions to the 401(k) plan were $2 million for the year ended December 31, 2020.
(12) Asset Retirement Obligations
EGTS estimates its 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.
EGTS does not recognize liabilities for AROs for which the fair value cannot be reasonably estimated. Due to the indeterminate removal date, the fair value of the interim removal of natural gas pipelines and certain storage wells in EGTS' underground natural gas storage network cannot currently be estimated, and no amounts are recognized on the Consolidated Financial Statements other than those included in the cost of removal regulatory liability established via approved depreciation rates in accordance with accepted regulatory practices. Cost of removal regulatory liabilities totaled $24 million and $16 million as of December 31, 2022 and 2021, respectively. EGTS will continue to monitor operational and strategic developments to identify if sufficient information exists to reasonably estimate a retirement date for these assets.
The following table reconciles the beginning and ending balances of EGTS' ARO liabilities for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| Beginning balance | $ | 55 | | | $ | 71 | |
| | | |
| Additions | 4 | | | — | |
| Retirements | (12) | | | (17) | |
| Accretion | 1 | | | 1 | |
| Ending balance | $ | 48 | | | $ | 55 | |
| | | |
| Reflected as: | | | |
| Current liabilities | $ | 25 | | | $ | 33 | |
| Other long-term liabilities | 23 | | | 22 | |
| Total ARO liability | $ | 48 | | | $ | 55 | |
(13) Risk Management and Hedging Activities
EGTS is exposed to the impact of market fluctuations in commodity prices, principally, to natural gas market fluctuations primarily related to fuel retained and used during the operation of the pipeline system as well as lost and unaccounted for gas. EGTS 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, EGTS 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. EGTS does not hedge all of its commodity price risk, thereby exposing the unhedged portion to changes in market prices. See Note 14 for further information about fair value measurements and associated valuation methods for derivatives.
There have been no significant changes in EGTS' accounting policies related to derivatives. Refer to Notes 2 and 14 for additional information on derivative contracts.
Credit Risk
EGTS 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 EGTS' counterparties have similar economic, industry or other characteristics and due to direct or indirect relationships among the counterparties. For the year ended December 31, 2022, the ten largest customers provided 38% of the total storage and transmission revenues. Before entering into a transaction, EGTS 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, EGTS 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, EGTS exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.
(14) Fair Value Measurements
The carrying value of EGTS' cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. EGTS 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 EGTS 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 EGTS' judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. EGTS develops these inputs based on the best information available, including its own data.
The following table presents EGTS' financial 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 December 31, 2022 | | | | | | | | |
| Assets: | | | | | | | | |
| Commodity derivatives | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
| Money market mutual funds | | 8 | | | — | | | — | | | 8 | |
| Equity securities: | | | | | | | | |
| Investment funds | | 14 | | | — | | | — | | | 14 | |
| | $ | 22 | | | $ | 1 | | | $ | — | | | $ | 23 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| As of December 31, 2021 | | | | | | | | |
| Assets: | | | | | | | | |
| Equity securities: | | | | | | | | |
| Investment funds | | $ | 13 | | | $ | — | | | $ | — | | | $ | 13 | |
| | $ | 13 | | | $ | — | | | $ | — | | | $ | 13 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
EGTS' investments in money market mutual funds and investment funds 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.
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 purchase 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 EGTS transacts. When quoted prices for identical contracts are not available, EGTS uses forward price curves. Forward price curves represent EGTS' estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. EGTS 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 EGTS. Market price quotations are generally readily obtainable for the applicable term of EGTS' outstanding derivative contracts; therefore, EGTS' forward price curves reflect observable market quotes. Market price quotations for certain natural gas trading hubs are not as readily obtainable due to the length of the contracts. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, EGTS 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, related volatility, counterparty creditworthiness and duration of contracts.
EGTS' long-term debt is carried at cost, including unamortized premiums, discounts and debt issuance costs as applicable, on the Consolidated Financial Statements. The fair value of EGTS' 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 following table presents the carrying value and estimated fair value of EGTS' long-term debt as of December 31 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | Carrying | | Fair | | Carrying | | Fair |
| | Value | | Value | | Value | | Value |
| | | | | | | | |
| Long-term debt | | $ | 1,582 | | | $ | 1,337 | | | $ | 1,581 | | | $ | 1,812 | |
(15) Commitments and Contingencies
Environmental Laws and Regulations
EGTS is subject to federal, state and local laws and regulations regarding air quality, climate change, emissions performance standards, water quality and other environmental matters that have the potential to impact its current and future operations. EGTS believes it is in material compliance with all applicable laws and regulations.
Carbon Regulations
In August 2016, the EPA issued a draft rule proposing to reaffirm that a source's obligation to obtain a prevention of significant deterioration or Title V permit for greenhouse gases ("GHG") is triggered only if such permitting requirements are first triggered by non-GHG, or conventional, pollutants that are regulated by the New Source Review program, and to set a significant emissions rate at 75,000 tons per year of carbon dioxide equivalent emissions under which a source would not be required to apply best available control technology for its GHG emissions. Until the EPA ultimately takes final action on this rulemaking, EGTS cannot predict the impact to its results of operations, financial condition and/or cash flows.
Legal Matters
EGTS is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. EGTS does not believe that such normal and routine litigation will have a material impact on its consolidated financial results.
Surety Bonds
As of December 31, 2022, EGTS had purchased $16 million of surety bonds. Under the terms of the surety bonds, Eastern Energy Gas is obligated to indemnify the respective surety bond company for any amounts paid.
(16) Revenue from Contracts with Customers
The following table summarizes EGTS' Customer Revenue by regulated and other, with further disaggregation of regulated by line of business, for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Customer Revenue: | | | | | |
| Regulated: | | | | | |
| Gas transmission | $ | 644 | | | $ | 574 | | | $ | 583 | |
| Gas storage | 248 | | | 188 | | | 191 | |
| Wholesale | 8 | | | 57 | | | 41 | |
| | | | | |
| Total regulated | 900 | | | 819 | | | 815 | |
| Management services and other revenues | 79 | | | 73 | | | 100 | |
| Total Customer Revenue | 979 | | | 892 | | | 915 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other revenue(1) | (6) | | | (1) | | | 1 | |
| Total operating revenue | $ | 973 | | | $ | 891 | | | $ | 916 | |
(1)Other revenue consists primarily of revenue recognized in accordance with Accounting Standards Codification 815, "Derivative and Hedging" and includes unrealized gains and losses for derivatives not designated as hedges related to natural gas sales contracts.
Remaining Performance Obligations
The following table summarizes EGTS' revenue it expects to recognize in future periods related to significant unsatisfied remaining performance obligations for fixed contracts with expected durations in excess of one year as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Performance obligations expected to be satisfied | | |
| Less than 12 months | | More than 12 months | | Total |
| | | | | |
| EGTS | $ | 766 | | | $ | 3,431 | | | $ | 4,197 | |
(17) Variable Interest Entities
The primary beneficiary of a variable interest entity ("VIE") is required to consolidate the VIE and to disclose certain information about its significant variable interests in the VIE. The primary beneficiary of a VIE is the entity that has both: (1) the power to direct the activities that most significantly impact the entity's economic performance and (2) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE.
EGTS had been engaged to oversee the construction of, and to subsequently operate and maintain, the projects undertaken by Atlantic Coast Pipeline based on the overall direction and oversight of Atlantic Coast Pipeline's members. Prior to the GT&S Transaction, an affiliate of EGTS held a membership interest in Atlantic Coast Pipeline; therefore, EGTS was considered to have a variable interest in Atlantic Coast Pipeline. Prior to the cancellation of the project in 2020, the members of Atlantic Coast Pipeline held the power to direct the construction, operations and maintenance activities of the entity. EGTS concluded it was not the primary beneficiary of Atlantic Coast Pipeline as it did not have the power to direct the activities of Atlantic Coast Pipeline that most significantly impacted its economic performance. EGTS had no obligation to absorb any losses of the VIE.
Prior to the GT&S Transaction, EGTS purchased shared services from Dominion Energy Services, Inc. ("DES"), an affiliated VIE, of $53 million for the year ended December 31, 2020. EGTS determined that neither it nor any of its consolidated entities was the primary beneficiary of DES as neither it nor any of its consolidated entities had both the power to direct the activities that most significantly impact their economic performance as well as the obligation to absorb losses and benefits which could be significant to them. DES provided accounting, legal, finance and certain administrative and technical services. Neither EGTS nor any of its consolidated entities had any obligation to absorb more than its allocated share of DES costs.
(18) Supplemental Cash Flow Disclosures
The summary of supplemental cash flow disclosures as of and for the years ended December 31 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 67 | | | $ | 71 | | | $ | 82 | |
| Income taxes paid (received), net | $ | 2 | | | $ | (12) | | | $ | 58 | |
| | | | | |
| Supplemental disclosure of non-cash investing and financing transactions: | | | | | |
| Accruals related to property, plant and equipment additions | $ | 15 | | | $ | 29 | | | $ | 25 | |
Equity dividends(1) | $ | (21) | | | $ | (58) | | | $ | — | |
Equity contributions(2) | $ | 34 | | | $ | 292 | | | $ | — | |
| Acquisition of EGTS by BHE | $ | — | | | $ | — | | | $ | 40 | |
| | | | | |
(1)Equity dividends represents the forgiveness of affiliated receivables.
(2)Equity contributions for the year ended December 31, 2021 primarily reflect the impacts from the intercompany debt exchange with Eastern Energy Gas. See Note 9 for more information regarding the intercompany debt exchange with Eastern Energy Gas.
(19) Related Party Transactions
Transactions Prior to the GT&S Transaction
Prior to the GT&S Transaction, EGTS engaged in related party transactions primarily with other DEI subsidiaries (affiliates). EGTS' receivable and payable balances with affiliates were settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. Through October 31, 2020, EGTS was included in DEI's consolidated federal income tax return and, where applicable, combined state income tax returns. All affiliate payables or receivables were settled with DEI prior to the closing date of the GT&S Transaction.
EGTS transacted with affiliates for certain quantities of natural gas and other commodities at market prices in the ordinary course of business. Additionally, EGTS provided transmission and storage services to affiliates. EGTS also entered into certain other contracts with affiliates, and related parties, including construction services, which were presented separately from contracts involving commodities or services. EGTS participated in certain DEI benefit plans as described in Note 11.
DES and other affiliates provided accounting, legal, finance and certain administrative and technical services to EGTS. EGTS provided certain services to related parties, including technical services.
The financial statements for the year ended 2020 includes costs for certain general, administrative and corporate expenses assigned by DES to EGTS on the basis of direct and allocated methods in accordance with EGTS' services agreements with DES. Where costs incurred cannot be determined by specific identification, the costs were allocated based on the proportional level of effort devoted by DES resources that is attributable to the entity, determined by reference to number of employees, salaries and wages and other similar measures for the relevant DES service. Management believes the assumptions and methodologies underlying the allocation of general corporate overhead expenses are reasonable.
Subsequent to the GT&S Transaction EGTS' transactions with other DEI subsidiaries are no longer related party transactions.
Presented below are EGTS' significant transactions with DES and other affiliated and related parties for the year ended December 31 (in millions):
| | | | | | | | | | | |
| | | 2020 |
| | | |
| Sales of natural gas and transmission and storage services | | | $ | 71 | |
| Purchases of natural gas and transmission and storage services | | | 7 | |
Services provided by related parties(1) | | | 67 | |
Services provided to related parties(2) | | | 86 | |
(1)Includes capitalized expenditures of $14 million.
(2)Includes amounts attributable to Atlantic Coast Pipeline, a related party VIE prior to the GT&S Transaction. See below for more information.
EGTS provided services to Atlantic Coast Pipeline, which totaled $46 million for the year ended December 31, 2020, included in operating revenue in the Consolidated Statement of Operations.
Transactions Subsequent to the GT&S Transaction
EGTS is party to a tax-sharing agreement and is part of the Berkshire Hathaway Inc. consolidated U.S. federal income tax return. For current federal and state income taxes, EGTS had a receivable from BHE of $21 million and $11 million as of December 31, 2022 and 2021, respectively. EGTS received net cash receipts for federal and state income taxes from BHE totaling $10 million for the year ended December 31, 2021, and paid net cash payments for federal and state income taxes to BHE totaling $7 million for the year ended December 31, 2020.
Trade receivables, net as of both December 31, 2022 and 2021 included $2 million of accrued unbilled revenue. This revenue is based on estimated amounts of services provided but not yet billed to an affiliate.
As of December 31, 2022 and 2021, EGTS had $10 million and $8 million, respectively, of natural gas imbalances payable to affiliates, presented in other current liabilities on the Consolidated Balance Sheets.
EGTS participates in certain MidAmerican Energy benefit plans as described in Note 11. As of December 31, 2022 and 2021, EGTS' amount due to MidAmerican Energy associated with these plans and reflected in other long-term liabilities on the Consolidated Balance Sheets was $47 million and $85 million, respectively.
Presented below are EGTS' significant transactions with related parties for the years ended December 31 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Sales of natural gas and transmission and storage services | $ | 26 | | | $ | 28 | | | $ | 4 | |
| Purchases of natural gas and transmission and storage services | 4 | | | 5 | | | — | |
| Services provided by related parties | 46 | | | 26 | | | 2 | |
| Services provided to related parties | 62 | | | 57 | | | 10 | |
Borrowings With Eastern Energy Gas
EGTS has a $400 million intercompany revolving credit agreement from its parent, Eastern Energy Gas, expiring in November 2023. The credit agreement, which is for general corporate purposes, has a variable interest rate based on the Secured Overnight Financing Rate ("SOFR") plus a fixed spread. Net outstanding borrowings totaled $36 million with a weighted-average interest rate of 1.43% as of December 31, 2022 and $68 million with a weighted-average interest rate of 0.51% as of December 31, 2021. Interest expense related to these borrowings totaled $1 million for the year ended December 31, 2020.
In March 2021, Eastern Energy Gas entered into a $400 million intercompany revolving credit agreement from EGTS that currently expires in March 2024. The credit agreement, which is for general corporate purposes, has a variable interest rate based on SOFR plus a fixed spread. Net outstanding borrowings totaled $2,071 as of December 31, 2021. Interest income related to this borrowing totaled $2,071 for the year ended December 31, 2021.
EGTS had also borrowed from Eastern Energy Gas pursuant to a series of long-term notes with fixed interest rates ranging from 3.6% to 5.0%, due 2024 to 2047. EGTS incurred interest charges related to these borrowings of $44 million and $88 million for the years ended December 31, 2021 and 2020, respectively. Refer to Note 9 for more information.