PACIFICORP /OR/ - Quarter Report: 2007 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act
of 1934
For
the
quarterly period ended June 30, 2007
or
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act
of 1934
For
the
transition period from ______ to _______
Commission
|
Exact
name of registrant as specified in its charter
|
IRS
Employer
|
||
File
Number
|
State
or other jurisdiction of incorporation or
organization
|
Identification No.
|
||
1-5152
|
PacifiCorp
|
93-0246090
|
||
(An
Oregon Corporation)
|
||||
825
N.E. Multnomah Street
|
||||
Portland,
Oregon 97232
|
||||
503-813-5000
|
||||
N/A
|
||||
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes T No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer T
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No T
As
of
July 31, 2007, all 357,060,915 outstanding shares of PacifiCorp’s common
stock were indirectly owned by MidAmerican Energy Holdings Company.
TABLE
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2
PART
I – FINANCIAL INFORMATION
Item
1. Financial
Statements.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of PacifiCorp:
We
have
reviewed the accompanying consolidated balance sheet of PacifiCorp and its
subsidiaries (“PacifiCorp”) as of June 30, 2007, the related consolidated
statements of income for the three- and six-month periods ended June 30,
2007 and the three-month period ended June 30, 2006, and the related
consolidated statement of cash flows for the six-month periods ended
June 30, 2007 and 2006. These interim financial statements are the
responsibility of PacifiCorp’s management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based
on
our reviews, we are not aware of any material modifications that should be
made
to such consolidated interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.
We
have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
PacifiCorp and its subsidiaries as of December 31, 2006, and the related
consolidated statements of income, common shareholder’s equity and comprehensive
income, and of cash flows for the nine-month period then ended (not presented
herein); and in our report dated February 27, 2007, we expressed an
unqualified opinion on those consolidated financial statements, which included
an explanatory paragraph related to the adoption of SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2006 is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/
Deloitte & Touche LLP
Portland,
Oregon
July 31,
2007
3
PACIFICORP
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
(Amounts
in millions)
Three-Month
Periods
|
Six-Month
Periods
|
|||||||||||||||
Ended June 30,
|
Ended June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Revenues
|
$ |
1,026
|
$ |
860
|
$ |
2,053
|
$ |
2,090
|
||||||||
Operating
expenses:
|
||||||||||||||||
Energy
costs
|
425
|
336
|
840
|
884
|
||||||||||||
Operations
and maintenance
|
255
|
260
|
517
|
534
|
||||||||||||
Depreciation
and amortization
|
122
|
116
|
243
|
229
|
||||||||||||
Taxes,
other than income taxes
|
23
|
26
|
51
|
50
|
||||||||||||
Total
|
825
|
738
|
1,651
|
1,697
|
||||||||||||
Income
from operations
|
201
|
122
|
402
|
393
|
||||||||||||
Interest
and other expense (income):
|
||||||||||||||||
Interest
expense
|
79
|
69
|
154
|
138
|
||||||||||||
Interest
income
|
(4 | ) | (2 | ) | (7 | ) | (4 | ) | ||||||||
Allowance
for borrowed funds
|
(9 | ) | (5 | ) | (16 | ) | (10 | ) | ||||||||
Allowance
for equity funds
|
(10 | ) | (6 | ) | (17 | ) | (12 | ) | ||||||||
Other
|
(2 | ) |
-
|
(2 | ) | (2 | ) | |||||||||
Total
|
54
|
56
|
112
|
110
|
||||||||||||
Income
before income tax expense
|
147
|
66
|
290
|
283
|
||||||||||||
Income
tax expense
|
42
|
23
|
86
|
93
|
||||||||||||
Net
income
|
$ |
105
|
$ |
43
|
$ |
204
|
$ |
190
|
The
accompanying notes are an integral part of these financial
statements.
4
PACIFICORP
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Unaudited)
(Amounts
in millions)
As
of
|
||||||||
June 30,
|
December 31,
|
|||||||
2007
|
2006
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ |
56
|
$ |
59
|
||||
Accounts
receivable, net
|
319
|
342
|
||||||
Unbilled
revenue
|
194
|
178
|
||||||
Amounts
due from affiliates
|
12
|
53
|
||||||
Inventories
at average costs:
|
||||||||
Materials
and supplies
|
160
|
140
|
||||||
Fuel
|
136
|
104
|
||||||
Derivative
contracts
|
109
|
151
|
||||||
Deferred
income taxes
|
69
|
28
|
||||||
Other
|
44
|
57
|
||||||
Total
current assets
|
1,099
|
1,112
|
||||||
Property,
plant and equipment
|
16,201
|
15,843
|
||||||
Accumulated
depreciation and amortization
|
(6,002 | ) | (5,842 | ) | ||||
10,199
|
10,001
|
|||||||
Construction
work-in-progress
|
1,147
|
809
|
||||||
Total
property, plant and equipment, net
|
11,346
|
10,810
|
||||||
Other
assets:
|
||||||||
Regulatory
assets
|
1,293
|
1,397
|
||||||
Derivative
contracts
|
208
|
235
|
||||||
Deferred
charges and other
|
304
|
298
|
||||||
Total
other assets
|
1,805
|
1,930
|
||||||
Total
assets
|
$ |
14,250
|
$ |
13,852
|
The
accompanying notes are an integral part of these financial
statements.
5
PACIFICORP
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Unaudited) (continued)
(Amounts
in millions)
As
of
|
||||||||
June 30,
|
December 31,
|
|||||||
2007
|
2006
|
|||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ |
477
|
$ |
385
|
||||
Amounts
due to affiliates
|
2
|
1
|
||||||
Accrued
employee expenses
|
119
|
85
|
||||||
Taxes
payable, other than income taxes
|
46
|
30
|
||||||
Interest
payable
|
66
|
57
|
||||||
Derivative
contracts
|
116
|
110
|
||||||
Long-term
debt and capital lease obligations, currently maturing
|
221
|
127
|
||||||
Preferred
stock subject to mandatory redemption, currently maturing
|
-
|
38
|
||||||
Short-term
debt
|
30
|
397
|
||||||
Other
|
132
|
135
|
||||||
Total
current liabilities
|
1,209
|
1,365
|
||||||
Deferred
credits:
|
||||||||
Deferred
income taxes
|
1,646
|
1,641
|
||||||
Investment
tax credits
|
58
|
62
|
||||||
Regulatory
liabilities
|
796
|
822
|
||||||
Derivative
contracts
|
474
|
504
|
||||||
Pension
and other post employment liabilities
|
523
|
691
|
||||||
Other
|
381
|
374
|
||||||
Total
deferred credits
|
3,878
|
4,094
|
||||||
Long-term
debt and capital lease obligations, net of current
maturities
|
4,366
|
3,967
|
||||||
Total
liabilities
|
9,453
|
9,426
|
||||||
Commitments
and contingencies (Note 5)
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock
|
41
|
41
|
||||||
Common
equity:
|
||||||||
Common
shareholder’s capital - 750 shares authorized, no par value, 357 shares
issued and outstanding
|
3,752
|
3,600
|
||||||
Retained
earnings
|
1,006
|
789
|
||||||
Accumulated
other comprehensive loss, net
|
(2 | ) | (4 | ) | ||||
Total
common equity
|
4,756
|
4,385
|
||||||
Total
shareholders’ equity
|
4,797
|
4,426
|
||||||
Total
liabilities and shareholders’ equity
|
$ |
14,250
|
$ |
13,852
|
The
accompanying notes are an integral part of these financial
statements.
6
PACIFICORP
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts
in millions)
Six-Month
Periods
|
||||||||
Ended June 30,
|
||||||||
2007
|
2006
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ |
204
|
$ |
190
|
||||
Adjustments to reconcile net income to net cash provided by operating
activities:
|
||||||||
Unrealized
loss (gain) on derivative contracts, net
|
2
|
(21 | ) | |||||
Depreciation
and amortization
|
243
|
229
|
||||||
Deferred
income taxes and investment tax credits, net
|
(1 | ) | (5 | ) | ||||
Regulatory
asset/liability establishment and amortization
|
(24 | ) |
19
|
|||||
Other
|
11
|
20
|
||||||
Changes
in:
|
||||||||
Accounts
receivable, net and other assets
|
2
|
(8 | ) | |||||
Inventories
|
(52 | ) | (38 | ) | ||||
Amounts
due to/from affiliates - MEHC, net
|
42
|
(1 | ) | |||||
Accounts
payable and other liabilities
|
34
|
(2 | ) | |||||
Net
cash provided by operating activities
|
461
|
383
|
||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(731 | ) | (623 | ) | ||||
Proceeds
from sale of assets
|
7
|
-
|
||||||
Proceeds
from available-for-sale securities
|
19
|
71
|
||||||
Purchases
of available-for-sale securities
|
(17 | ) | (78 | ) | ||||
Other
|
17
|
(1 | ) | |||||
Net
cash used in investing activities
|
(705 | ) | (631 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Changes
in short-term debt
|
(367 | ) |
90
|
|||||
Proceeds
from long-term debt, net of issuance costs
|
600
|
-
|
||||||
Proceeds
from equity contributions
|
150
|
184
|
||||||
Dividends
paid
|
(1 | ) | (18 | ) | ||||
Repayments and redemptions on long-term debt, preferred stock subject
to
mandatory redemption and capital lease obligations
|
(145 | ) | (108 | ) | ||||
Other
|
4
|
9
|
||||||
Net
cash provided by financing activities
|
241
|
157
|
||||||
Change
in cash and cash equivalents
|
(3 | ) | (91 | ) | ||||
Cash
and cash equivalents at beginning of period
|
59
|
164
|
||||||
Cash
and cash equivalents at end of period
|
$ |
56
|
$ |
73
|
The
accompanying notes are an integral part of these financial
statements.
7
PACIFICORP
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
PacifiCorp
(which includes PacifiCorp and its subsidiaries) is a United States electric
utility company serving retail customers in portions of the states of Utah,
Oregon, Wyoming, Washington, Idaho and California. PacifiCorp generates
electricity and also engages in electricity sales and purchases on a wholesale
basis. The subsidiaries of PacifiCorp support its electric utility operations
by
providing coal mining facilities and services, steam delivery services and
environmental remediation. PacifiCorp is an indirect subsidiary of MidAmerican
Energy Holdings Company (“MEHC”), which is a consolidated subsidiary of
Berkshire Hathaway Inc. (“Berkshire Hathaway”).
The
accompanying unaudited Consolidated Financial Statements have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”) for interim financial information and the U.S. Securities and
Exchange Commission’s (the “SEC”) rules and regulations for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
disclosures required by GAAP for annual financial statements. Management
believes the unaudited Consolidated Financial Statements include all adjustments
(consisting only of normal recurring adjustments) considered necessary for
fair
presentation of the financial statements as of June 30, 2007 and for the
three- and six-month periods ended June 30, 2007 and 2006. A portion of
PacifiCorp’s business is of a seasonal nature and, therefore, results of
operations for the three- and six-month periods ended June 30, 2007 and
2006 are not necessarily indicative of the results for a full year.
The
accompanying unaudited Consolidated Financial Statements include the accounts
of
PacifiCorp and its subsidiaries in which it holds a controlling financial
interest. Intercompany accounts and transactions have been
eliminated.
The
preparation of the unaudited Consolidated Financial Statements in conformity
with GAAP requires management to make estimates and assumptions that affect
the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results may differ from the estimates used in preparing the unaudited
Consolidated Financial Statements. Note 2 of Notes to Consolidated
Financial Statements included in PacifiCorp’s Transition Report on Form 10-K for
the nine-month period ended December 31, 2006, describes the most
significant accounting estimates and policies used in the preparation of the
Consolidated Financial Statements. There have been no significant changes in
PacifiCorp’s assumptions regarding significant accounting policies during the
first six months of 2007, except as described in Note 2.
(2) New
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (the “FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an
interpretation of FASB Statement
No. 109” (“FIN 48”). PacifiCorp adopted the
provisions of FIN 48 effective January 1, 2007. Under FIN 48, tax
benefits are recognized only for tax positions that are more likely than not
to
be sustained upon examination by tax authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50% likely to
be
realized upon ultimate settlement. Unrecognized tax benefits are tax benefits
claimed in PacifiCorp’s tax returns that do not meet these recognition and
measurements standards.
As
of
January 1, 2007, PacifiCorp had an asset of $22 million for uncertain
tax positions. PacifiCorp recognized a net increase in the asset of
$22 million as a cumulative effect of adopting FIN 48, which was
offset by increases in beginning retained earnings of $13 million and
deferred income tax liabilities of $9 million in the Consolidated Balance
Sheet. The $22 million as of January 1, 2007, is included in other
deferred credits in the Consolidated Balance Sheet.
8
Included
in the asset of $22 million is $14 million of net uncertain tax
positions that, if recognized, would have an impact on the effective tax rate.
The remaining amounts 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 positions, other than applicable
interest and penalties, would not affect PacifiCorp’s effective tax rate.
PacifiCorp recognizes interest and penalties accrued related to uncertain tax
positions in income tax expense. As of January 1, 2007, PacifiCorp had
$7 million accrued for the receipt of interest, which is included in the
asset for uncertain tax positions.
Prior
to
2006, PacifiCorp filed income tax returns in the U.S. federal jurisdiction
and
various state jurisdictions. The U.S. Internal Revenue Service has closed
examination of PacifiCorp’s income tax returns through its tax year ended
March 31, 2000. In addition, open tax years related to a number of state
jurisdictions remain subject to examination. As a result of the sale of
PacifiCorp to MEHC on March 21, 2006, Berkshire Hathaway commenced
including PacifiCorp in its U.S. Federal income tax returns.
As
of
June 30, 2007, PacifiCorp had an asset of $28 million for uncertain
tax positions.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - including an amendment to SFAS No. 115” (“SFAS
No. 159”). SFAS No. 159 permits entities to elect to measure many
financial instruments and certain other items at fair value. Upon adoption
of
SFAS No. 159, an entity may elect the fair value option for eligible items
that exist at the adoption date. Subsequent to the initial adoption, the
election of the fair value option should only be made at initial recognition
of
the asset or liability or upon a remeasurement event that gives rise to
new-basis accounting. The decision about whether to elect the fair value option
is applied on an instrument-by-instrument basis, is irrevocable and is applied
only to an entire instrument and not only to specified risks, cash flows or
portions of that instrument. SFAS No. 159 does not affect any existing
accounting standards that require certain assets and liabilities to be carried
at fair value nor does it eliminate disclosure requirements included in other
accounting standards. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. PacifiCorp is currently evaluating the impact of
adopting SFAS No. 159 on its consolidated financial position and results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not impose
fair value measurements on items not already accounted for at fair value;
rather, it applies, with certain exceptions, to other accounting pronouncements
that either require or permit fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. PacifiCorp is currently evaluating the impact
of adopting SFAS No. 157 on its consolidated financial position and results
of operations.
(3) Recent
Debt Transactions
In
June
2007, PacifiCorp redeemed $38 million of outstanding preferred stock
subject to mandatory redemption, representing the remaining outstanding shares
of PacifiCorp’s $7.48 No Par Serial Preferred Stock series.
In
March
2007, PacifiCorp issued $600 million of its 5.75% First Mortgage Bonds due
April 1, 2037. The proceeds were used to repay short-term debt and for
other general corporate purposes.
9
(4) Risk
Management and Hedging Activities
PacifiCorp
is directly exposed to the impact of market fluctuations in the prices of
natural gas and electricity. PacifiCorp is exposed to interest rate risk as
a
result of the issuance of fixed and variable-rate debt. PacifiCorp employs
established policies and procedures to manage its risks associated with these
market fluctuations using various commodity and financial derivative
instruments, including forward contracts, swaps and options. The risk management
process established by PacifiCorp is designed to identify, measure, assess,
report and manage each of the various types of risk involved in its business.
PacifiCorp’s portfolio of energy derivatives is substantially used for
non-trading purposes. As of June 30, 2007 and December 31, 2006,
PacifiCorp had no financial derivatives in effect relating to interest rate
exposure.
The
following table summarizes the various derivative mark-to-market positions
included in the accompanying Consolidated Balance Sheet as of June 30, 2007
(in millions):
Accumulated
|
||||||||||||||||||||
Regulatory
|
Other
|
|||||||||||||||||||
Derivative
Net Assets (Liabilities)
|
Net
Assets
|
Comprehensive
|
||||||||||||||||||
Assets
|
Liabilities
|
Net
|
(Liabilities)
|
(Income)
Loss (1)
|
||||||||||||||||
Commodity
derivatives
|
$ |
316
|
$ | (590 | ) | $ | (274 | ) | $ |
276
|
$ | (5 | ) | |||||||
Foreign
currency contracts
|
1
|
-
|
1
|
(1 | ) |
-
|
||||||||||||||
Total
|
$ |
317
|
$ | (590 | ) | $ | (273 | ) | $ |
275
|
$ | (5 | ) | |||||||
Current
|
$ |
109
|
$ | (116 | ) | $ | (7 | ) | ||||||||||||
Non-current
|
208
|
(474 | ) | (266 | ) | |||||||||||||||
Total
|
$ |
317
|
$ | (590 | ) | $ | (273 | ) |
(1)
|
Before
income taxes.
|
The
following table summarizes the various derivative mark-to-market positions
included in the accompanying Consolidated Balance Sheet as of December 31,
2006 (in millions):
Accumulated
|
||||||||||||||||||||
Regulatory
|
Other
|
|||||||||||||||||||
Derivative
Net Assets (Liabilities)
|
Net
Assets
|
Comprehensive
|
||||||||||||||||||
Assets
|
Liabilities
|
Net
|
(Liabilities)
|
(Income)
Loss (1)
|
||||||||||||||||
Commodity
derivatives
|
$ |
383
|
$ | (614 | ) | $ | (231 | ) | $ |
233
|
$ | (3 | ) | |||||||
Foreign
currency contracts
|
3
|
-
|
3
|
(3 | ) |
-
|
||||||||||||||
Total
|
$ |
386
|
$ | (614 | ) | $ | (228 | ) | $ |
230
|
$ | (3 | ) | |||||||
Current
|
$ |
151
|
$ | (110 | ) | $ |
41
|
|||||||||||||
Non-current
|
235
|
(504 | ) | (269 | ) | |||||||||||||||
Total
|
$ |
386
|
$ | (614 | ) | $ | (228 | ) |
(1)
|
Before
income taxes.
|
10
The
following table summarizes the amount of the pre-tax unrealized gains and losses
included within the Consolidated Statements of Income associated with changes
in
the fair value of PacifiCorp’s derivative contracts that are not included in
rates (in millions):
Three-Month
Periods
|
Six-Month
Periods
|
|||||||||||||||
Ended
June 30,
|
Ended
June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Revenues
|
$ |
19
|
$ | (26 | ) | $ |
25
|
$ |
252
|
|||||||
Operating
expenses:
|
||||||||||||||||
Energy
costs
|
(24 | ) | (7 | ) | (27 | ) | (230 | ) | ||||||||
Operations
and maintenance
|
-
|
1
|
-
|
(1 | ) | |||||||||||
Total
unrealized gain (loss) on derivative contracts
|
$ | (5 | ) | $ | (32 | ) | $ | (2 | ) | $ |
21
|
(5) Commitments
and Contingencies
Environmental
Matters
PacifiCorp
is subject to numerous federal, state and local environmental laws and
regulations, including the Clean Air Act, related air quality standards
promulgated by the Environmental Protection Agency (“EPA”) and various state air
quality laws; the Endangered Species Act; the Comprehensive Environmental
Response, Compensation and Liability Act, relating to environmental cleanups;
the Resource Conservation and Recovery Act and similar state laws relating
to
the storage and handling of hazardous materials; and the Clean Water Act, and
similar state laws relating to water quality. These laws have the potential
to
impact PacifiCorp’s current and future operations. Current and future Clean Air
Act and associated requirements will impact the operations of PacifiCorp’s
generating facilities and will require PacifiCorp to reduce sulfur dioxide,
nitrogen oxides and mercury emissions from current levels through the
installation of additional or improved emission controls, the purchase of
additional emission allowances, or some combination thereof. PacifiCorp is
also
subject to various state renewables portfolio standards. The cost of complying
with applicable environmental laws, regulations and rules is expected to be
material to PacifiCorp’s generation facilities. Additionally, the adoption of
stringent limits on greenhouse emissions could significantly impact PacifiCorp’s
fossil-fueled facilities, and, therefore, its financial results. PacifiCorp
believes it is in material compliance with current environmental
requirements.
Accrued
Environmental Costs
PacifiCorp
is fully or partly responsible for environmental remediation at various
contaminated sites, including sites that are or were part of PacifiCorp’s
operations and sites owned by third parties. PacifiCorp accrues environmental
remediation expenses when the expense is believed to be probable and can be
reasonably estimated. The quantification of environmental exposures is based
on
many factors, including changing laws and regulations, advancements in
environmental technologies, the quality of available site-specific information,
site investigation results, expected remediation or settlement timelines,
PacifiCorp’s proportionate responsibility, contractual indemnities and coverage
provided by insurance policies. The liability recorded as of June 30, 2007
and December 31, 2006 was $21 million and $40 million,
respectively, and is included in other liabilities and other deferred credits
on
the accompanying Consolidated Balance Sheets. Environmental remediation
liabilities that separately result from the normal operation of long-lived
assets and that are associated with the retirement of those assets are
separately accounted for as asset retirement obligations.
11
Hydroelectric
Relicensing
PacifiCorp’s
hydroelectric portfolio consists of 49 plants with an aggregate plant net owned
capacity of 1,160 megawatts (“MW”). The Federal Energy Regulatory
Commission (the “FERC”) regulates 98% of the net capacity of this portfolio
through 18 individual licenses. Several of PacifiCorp’s hydroelectric projects
are in some stage of relicensing with the FERC. Hydroelectric relicensing and
the related environmental compliance requirements and litigation are subject
to
uncertainties. PacifiCorp expects that future costs relating to these matters
may be significant and will consist primarily of additional relicensing costs,
operations and maintenance expense, and capital expenditures. Electricity
generation reductions may result from the additional environmental requirements.
PacifiCorp had incurred $83 million and $79 million in costs at
June 30, 2007 and December 31, 2006, respectively, for ongoing
hydroelectric relicensing, which are reflected in construction work-in-progress
on the Consolidated Balance Sheets.
In
February 2004, PacifiCorp filed with the FERC a final application for a new
license to operate the 169-MW nameplate-rated Klamath hydroelectric project
in
anticipation of the March 2006 expiration of the existing license. PacifiCorp
is
currently operating under an annual license issued by the FERC and expects
to
continue to operate under annual licenses until the new operating license is
issued. As part of the relicensing process, the United States Departments of
Interior and Commerce filed proposed licensing terms and conditions with the
FERC in March 2006, which proposed that PacifiCorp construct upstream and
downstream fish passage facilities at the Klamath hydroelectric project’s four
mainstem dams. In April 2006, PacifiCorp filed alternatives to the federal
agencies’ proposal and requested an administrative hearing to challenge some of
the federal agencies’ factual assumptions supporting their proposal for the
construction of the fish passage facilities. A hearing was held in August 2006
before an administrative law judge. The administrative law judge issued a ruling
in September 2006 generally supporting the federal agencies’ factual
assumptions. In January 2007, the United States Departments of Interior and
Commerce filed modified terms and conditions consistent with March 2006 filings
and rejected the alternatives proposed by PacifiCorp. PacifiCorp is prepared
to
meet and implement the federal agencies’ terms and conditions as part of the
project’s relicensing. However, PacifiCorp expects to continue in settlement
discussions with various parties in the Klamath Basin area who have intervened
with the FERC licensing proceeding to try to achieve a mutually acceptable
outcome for the project.
Also,
as
part of the relicensing process, the FERC is required to perform an
environmental review. In September 2006, the FERC issued its draft environmental
impact statement on the Klamath hydroelectric project license. The public
comment period on the draft environmental impact statement closed on
December 1, 2006. The FERC is expected to issue its final environmental
impact statement in summer 2007. Other federal agencies are also working to
complete their endangered species analyses. PacifiCorp will need to obtain
water
quality certifications from Oregon and California prior to the FERC issuing
a
final license.
In
the
relicensing of the Klamath hydroelectric project, PacifiCorp had incurred
$45 million and $42 million in costs at June 30, 2007 and
December 31, 2006, respectively, which are reflected in construction
work-in-progress in the accompanying Consolidated Balance Sheets. While the
costs of implementing new license provisions cannot be determined until such
time as a new license is issued, such costs could be material.
12
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
effect 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 and penalties in substantial amounts and are described
below.
In
February 2007, the Sierra Club and the Wyoming Outdoor Council filed a complaint
against PacifiCorp in the federal district court in Cheyenne, Wyoming, alleging
violations of the Clean Air Act’s opacity standards at PacifiCorp’s Jim
Bridger plant in Wyoming. Opacity is an indication of the amount of light that
is obscured in the flue of a generating facility. The complaint alleges
thousands of violations of asserted six-minute compliance periods and seeks
an
injunction ordering the Jim Bridger plant’s compliance with opacity limits,
civil penalties of $32,500 per day per violation, and the plaintiffs’ costs of
litigation. PacifiCorp believes it has a number of defenses to the claims.
PacifiCorp intends to vigorously oppose the lawsuit but cannot predict its
outcome at this time. PacifiCorp has already committed to invest at least
$812 million in pollution control equipment at its generating facilities,
including the Jim Bridger plant. This commitment is expected to significantly
reduce system-wide emissions, including emissions at the Jim Bridger
plant.
FERC
Issues
California
Refund
Case
On
June 21, 2007, the FERC approved PacifiCorp’s settlement and release of
claims agreement (“Settlement”) with Pacific Gas and Electric Company, Southern
California Edison Company, San Diego Gas & Electric Company, the People of
the State of California, ex rel. Edmund G. Brown Jr., Attorney General, the
California Electricity Oversight Board, and the California Public Utilities
Commission (collectively, the “California Parties”), certain of which purchased
energy in the California Independent System Operator (“ISO”) and the California
Power Exchange (“PX”) markets during past periods of high energy prices in 2000
and 2001. The Settlement, which was executed by PacifiCorp on April 11,
2007, settles claims brought by the California Parties against PacifiCorp for
refunds and remedies in numerous related proceedings (together, the “FERC
Proceedings”), as well as certain potential civil claims, arising from events
and transactions in Western United States energy markets during the period
January 1, 2000 through June 20, 2001 (the “Refund Period”). Under the
Settlement, PacifiCorp made cash payments to escrows controlled by the
California Parties in the amount of $16 million in April 2007, and upon
FERC approval of the agreement in June 2007, PacifiCorp allowed the PX to
release an additional $12 million to such escrows, which represented
PacifiCorp’s estimated unpaid receivable from the transactions in the PX and ISO
markets during the Refund Periods, plus interest. The monies held in escrow
are
for distribution to buyers from the ISO and PX markets that purchased power
during the Refund Period. The agreement provides for the release of claims
by
the California Parties (as well as additional parties that chose to join in
the
Settlement) against PacifiCorp for refunds, disgorgement of profits, or other
monetary or non-monetary remedies in the FERC Proceedings, and provides a mutual
release of claims for civil damages and equitable relief.
13
(6) Employee
Benefit Plans
In
December 2006, non-bargaining employees were notified that PacifiCorp would
switch from a traditional final average pay formula for the PacifiCorp
Retirement Plan to a cash balance formula effective June 1, 2007. As a
result of the change, benefits under the traditional final average pay formula
were frozen as of May 31, 2007, and PacifiCorp’s pension liability and
regulatory assets each decreased by $111 million.
The
components of net periodic benefit cost for the three- and six-month periods
ended June 30 were as follows (in millions):
Three-Month
Periods
|
Six-Month
Periods
|
|||||||||||||||
Ended
June 30,
|
Ended
June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Pension:
|
||||||||||||||||
Service
cost
|
$ |
6
|
$ |
7
|
$ |
14
|
$ |
15
|
||||||||
Interest
cost
|
19
|
19
|
38
|
38
|
||||||||||||
Expected
return on plan assets
|
(17 | ) | (18 | ) | (34 | ) | (37 | ) | ||||||||
Net
amortization and other costs
|
6
|
9
|
14
|
18
|
||||||||||||
Net
periodic benefit cost
|
$ |
14
|
$ |
17
|
$ |
32
|
$ |
34
|
Other
postretirement:
|
||||||||||||||||
Service
cost
|
$ |
2
|
$ |
2
|
$ |
4
|
$ |
4
|
||||||||
Interest
cost
|
9
|
8
|
17
|
16
|
||||||||||||
Expected
return on plan assets
|
(7 | ) | (6 | ) | (13 | ) | (13 | ) | ||||||||
Net
amortization and other costs
|
4
|
5
|
9
|
10
|
||||||||||||
Net
periodic benefit cost
|
$ |
8
|
$ |
9
|
$ |
17
|
$ |
17
|
Excluded
from the tables above are contributions to certain multi-employer and joint
trust union plans of $3 million and $2 million for the three-month
periods ended June 30, 2007 and 2006, respectively, and $6 million and
$4 million for the six-month periods ended June 30, 2007 and 2006,
respectively.
Employer
Contributions
Employer
contributions to the pension plans and the other postretirement plan are
expected to be approximately $88 million and $34 million,
respectively, in 2007. As of June 30, 2007, $63 million and
$17 million of contributions had been made to the pension plans and the
other postretirement plan, respectively.
Severance
PacifiCorp
has reviewed its organization and workforce requirements. As a result,
PacifiCorp incurred severance expense of $3 million and $8 million
during the three-month periods ended June 30, 2007 and 2006, respectively;
and $9 million and $20 million during the six-month periods ended
June 30, 2007 and 2006, respectively. In June 2007, PacifiCorp established
a regulatory asset of $2 million thereby reducing severance expense to
$1 million and $7 million during the three- and six-month periods
ended June 30, 2007, respectively. The regulatory asset was established as
a result of receiving regulatory approval for recovery of a portion of
previously incurred severance costs.
14
(7) Comprehensive
Income and Components of Accumulated Other Comprehensive Income
(Loss)
The
components of comprehensive income are as follows (in millions):
Three-Month
Periods
|
Six-Month
Periods
|
|||||||||||||||
Ended
June 30,
|
Ended
June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Net
income
|
$ |
105
|
$ |
43
|
$ |
204
|
$ |
190
|
||||||||
Other
comprehensive income:
|
||||||||||||||||
Unrecognized
amounts on retirement benefits, net of tax of $-; $-; $-; and
$-
|
1
|
-
|
1
|
-
|
||||||||||||
Fair
value adjustment on cash flow hedges, net of tax of $3; $(3); $1;
and
$(3)
|
5
|
(4 | ) |
1
|
(4 | ) | ||||||||||
Minimum
pension liability, net of tax of $-; $-; $-; and $3
|
-
|
-
|
-
|
5
|
||||||||||||
Unrealized
losses on marketable securities, net of tax of $-; $(1); $-; and
$(1)
|
-
|
(2 | ) |
-
|
(3 | ) | ||||||||||
Total
other comprehensive income (loss)
|
6
|
(6 | ) |
2
|
(2 | ) | ||||||||||
Comprehensive
income
|
$ |
111
|
$ |
37
|
$ |
206
|
$ |
188
|
Accumulated
other comprehensive loss is included in shareholders’ equity in the Consolidated
Balance Sheets and consists of the following components, net of tax (in
millions):
As
of
|
||||||||
June 30,
|
December 31,
|
|||||||
2007
|
2006
|
|||||||
Unrecognized
amounts on retirement benefits, net of tax of $(4) and
$(4)
|
$ | (5 | ) | $ | (6 | ) | ||
Fair
value adjustment on cash flow hedges, net of tax of $2 and
$1
|
3
|
2
|
||||||
Total
accumulated other comprehensive loss, net
|
$ | (2 | ) | $ | (4 | ) |
15
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following is management’s discussion and analysis of certain significant factors
which have affected the financial condition and results of operations of
PacifiCorp and its subsidiaries (collectively, “PacifiCorp”) during the periods
included herein. Explanations include management’s best estimate of the impact
of weather, customer growth and other factors. This discussion should be read
in
conjunction with PacifiCorp’s historical unaudited Consolidated Financial
Statements and the notes thereto included elsewhere in Item 1. PacifiCorp’s
actual results in the future could differ significantly from the historical
results.
Forward-Looking
Statements
This
report contains statements that do not directly or exclusively relate to
historical facts. These statements are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are typically identified by the use of forward-looking words, such
as
“may,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,”
“continue,” “potential,” “plan,” “forecast,” “intend,” and similar terms. These
statements are based on PacifiCorp’s current intentions, assumptions,
expectations and beliefs and are subject to risks, uncertainties and other
important factors. Many of these factors are outside PacifiCorp’s control and
could cause actual results to differ materially from those expressed or implied
by PacifiCorp’s forward-looking statements. These factors include, among
others:
|
·
|
The
outcome of general rate cases and other proceedings conducted by
regulatory commissions or other governmental and legal
bodies;
|
|
·
|
Changes
in prices and availability for both purchases and sales of wholesale
electricity and purchases of coal, natural gas and other fuel sources
that
could have a significant impact on generation capacity and energy
costs;
|
|
·
|
Changes
in regulatory requirements or other legislation, including limits
on the
ability of public utilities to recover income tax expense in rates
such as
Oregon Senate Bill 408;
|
|
·
|
Changes
in economic, industry or weather conditions, as well as demographic
trends, that could affect customer growth and electricity usage or
supply;
|
|
·
|
A
high degree of variance between actual and forecasted load and prices
that
could impact the hedging strategy and costs to balance electricity
load
and supply;
|
|
·
|
Hydroelectric
conditions, as well as the cost, feasibility and eventual outcome
of
hydroelectric relicensing proceedings, that could have a significant
impact on electric capacity and cost and on PacifiCorp’s ability to
generate electricity;
|
|
·
|
Performance
of PacifiCorp’s generation facilities, including unscheduled outages or
repairs;
|
|
·
|
Changes
in, and compliance with, environmental and endangered species laws,
regulations, decisions and policies that could increase operating
and
capital improvement costs, reduce plant output and/or delay plant
construction;
|
|
·
|
The
impact of new accounting pronouncements or changes in current accounting
estimates and assumptions on financial position and results of
operations;
|
|
·
|
The
impact of increases in healthcare costs, changes in interest rates
and
investment performance on pension and other post-retirement benefits
expense, as well as the impact of changes in legislation on funding
requirements;
|
|
·
|
Availability,
terms and deployment of capital;
|
|
·
|
Financial
condition and creditworthiness of significant customers and
suppliers;
|
16
|
·
|
The
impact of derivative instruments used to mitigate or manage volume
and
price risk and interest rate risk and changes in the commodity prices,
interest rates and other conditions that affect the value of the
derivatives;
|
|
·
|
Changes
in PacifiCorp’s credit ratings;
|
|
·
|
Timely
and appropriate completion of PacifiCorp’s resource procurement process;
unanticipated construction delays, changes in costs, receipt of required
permits and authorizations, ability to fund capital projects and
other
factors that could affect future generation plants and infrastructure
additions;
|
|
·
|
Other
risks or unforeseen events, including wars, the effects of terrorism,
embargos and other catastrophic events;
and
|
|
·
|
Other
business or investment considerations that may be disclosed from
time to
time in the U.S. Securities and Exchange Commission (the “SEC”) filings or
in other publicly disseminated written
documents.
|
Further
details of the potential risks and uncertainties affecting PacifiCorp are
described in PacifiCorp’s filings with the SEC including Item 1A. and other
discussions contained in this Form 10-Q. PacifiCorp undertakes no obligation
to
publicly update or revise any forward-looking statements, whether as a result
of
new information, future events or otherwise. The foregoing review of factors
should not be construed as exclusive.
Results
of Operations
Overview
PacifiCorp’s
net income increased $14 million during the six-month period ended
June 30, 2007, to $204 million compared to $190 million for the
six-month period ended June 30, 2006, primarily due to higher retail
revenues and higher net wholesale sales and purchases, partially offset by
higher fuel costs. PacifiCorp’s retail load continues to rise due to growth in
the number of retail customers and usage. The improved financial results were
primarily due to higher retail prices approved by regulators and higher output
at PacifiCorp’s thermal plants serving the higher retail load, partially offset
by higher prices of coal and natural gas and lower hydroelectric generation.
Output from PacifiCorp’s thermal plants for the six-month period ended
June 30, 2007, increased by 2,326,813 megawatt-hours (“MWh”), or 10%,
compared to the six-month period ended June 30, 2006, primarily due to the
Currant Creek plant becoming fully operational at the end of March 2006. Output
from PacifiCorp’s hydroelectric facilities decreased by 634,832 MWh, or
22%, during the six-month period ended June 30, 2007, compared to the
six-month period ended June 30, 2006, primarily due to drier than normal
conditions in the current period.
17
Three-Month
Period Ended June 30, 2007 Compared to Three-Month Period Ended
June 30, 2006
Revenues
(in millions)
Three-Month
Periods
|
||||||||||||||||
Ended June 30,
|
Favorable/(Unfavorable)
|
|||||||||||||||
2007
|
2006
|
$
Change
|
%
Change
|
|||||||||||||
Retail
|
$ |
774
|
$ |
695
|
$ |
79
|
11 | % | ||||||||
Wholesale
sales and other
|
252
|
165
|
87
|
53
|
||||||||||||
Total
revenues
|
$ |
1,026
|
$ |
860
|
$ |
166
|
19
|
|||||||||
Retail
energy sales (gigawatt - hours)
|
12,790
|
12,167
|
623
|
5
|
||||||||||||
Wholesale
energy sales (gigawatt - hours)
|
3,492
|
3,202
|
290
|
9
|
||||||||||||
Average
retail customers (in thousands)
|
1,679
|
1,644
|
35
|
2
|
Retail
revenues increased $79 million, or 11%, primarily due to:
|
·
|
$43 million
of increases from higher retail prices approved by
regulators;
|
|
·
|
$27 million
of increases due to higher average customer usage resulting from
warmer
weather and an earlier start of the irrigation season in the current
period as compared to the prior
period;
|
|
·
|
$12 million
of increases due to growth in the number of customers; partially
offset
by,
|
|
·
|
$3 million
of decreases primarily due to changes in customer usage at different
tariff levels.
|
Wholesale
sales and other revenues increased $87 million, or 53%, primarily due
to:
|
·
|
$45 million
of increases due to changes in the fair value of derivative
contracts;
|
|
·
|
$35 million
of increases in wholesale electric sales primarily due to higher
average
prices; and
|
|
·
|
$4 million
of increases resulting from higher sales of sulfur dioxide emission
allowances in the current period.
|
Operating
Expenses (in millions)
Three-Month
Periods
|
||||||||||||||||
Ended June 30,
|
Favorable/(Unfavorable)
|
|||||||||||||||
2007
|
2006
|
$
Change
|
%
Change
|
|||||||||||||
Energy
costs
|
$ |
425
|
$ |
336
|
$ | (89 | ) | (26 | )% | |||||||
Operations
and maintenance
|
255
|
260
|
5
|
2
|
||||||||||||
Depreciation
and amortization
|
122
|
116
|
(6 | ) | (5 | ) | ||||||||||
Taxes,
other than income taxes
|
23
|
26
|
3
|
12
|
||||||||||||
Total
operating expenses
|
$ |
825
|
$ |
738
|
$ | (87 | ) | (12 | ) |
18
Energy
costs increased $89 million, or 26%, primarily due to:
|
·
|
$63 million
of increases primarily due to higher volumes of natural gas consumed,
as
well as higher average prices;
|
|
·
|
$25 million
of increases in the cost of coal primarily due to higher average
prices;
|
|
·
|
$17 million
of increases due to changes in the fair value of derivative
contracts;
|
|
·
|
$5 million
of increases in purchased electricity due to higher average prices,
substantially offset by lower volumes; partially offset
by,
|
|
·
|
$12 million
of decreases primarily due to the deferral of incurred power costs
in
accordance with the Wyoming power cost adjustment mechanism;
and
|
|
·
|
$9 million
in decreases due to the prior period loss on the streamflow weather
derivative contract.
|
Operations
and maintenance expense decreased $5 million, or 2%, primarily due
to:
|
·
|
$7 million
of decreases in employee severance
costs;
|
|
·
|
$7 million
of decreases in employee expenses, primarily due to reduced
workforce;
|
|
·
|
$6 million
of decreases due to changes in environmental accruals; partially
offset
by,
|
|
·
|
$11 million
of increases in maintenance costs and related contracts, primarily
associated with generation plant overhauls;
and
|
|
·
|
$3 million
of increases due to asset
write-offs.
|
Depreciation
and amortization expense increased
$6 million, or 5%, primarily due to higher plant in service.
Interest
and Other Expense (Income) (in millions)
Three-Month
Periods
|
||||||||||||||||
Ended June 30,
|
Favorable/(Unfavorable)
|
|||||||||||||||
2007
|
2006
|
$
Change
|
%
Change
|
|||||||||||||
Interest
expense
|
$ |
79
|
$ |
69
|
$ | (10 | ) | (14 | )% | |||||||
Interest
income
|
(4 | ) | (2 | ) |
2
|
100
|
||||||||||
Allowance
for borrowed funds
|
(9 | ) | (5 | ) |
4
|
80
|
||||||||||
Allowance
for equity funds
|
(10 | ) | (6 | ) |
4
|
67
|
||||||||||
Other
|
(2 | ) |
-
|
2
|
100
|
|||||||||||
Total
|
$ |
54
|
$ |
56
|
$ |
2
|
4
|
Interest
expense increased $10 million, or 14%, primarily due to higher average
debt balances during the three-month period ended June 30,
2007.
Allowance
for borrowed and equity funds increased $8 million, primarily due to
higher qualified construction work-in-progress balances during the three-month
period ended June 30, 2007.
19
Income
Tax Expense
Income
tax expense for the three-month period ended June 30, 2007, increased
$19 million to $42 million from the comparable period in 2006,
primarily due to higher pre-tax earnings, partially offset by increases in
tax
credits associated with renewable energy. The effective tax rates were 29%
and
35% for the three-month periods ended June 30, 2007 and 2006,
respectively.
Six-Month
Period Ended June 30, 2007 Compared to Six-Month Period Ended June 30,
2006
Revenues
(in millions)
Six-Month
Periods
|
||||||||||||||||
Ended June 30,
|
Favorable/(Unfavorable)
|
|||||||||||||||
2007
|
2006
|
$
Change
|
%
Change
|
|||||||||||||
Retail
|
$ |
1,551
|
$ |
1,409
|
$ |
142
|
10 | % | ||||||||
Wholesale
sales and other
|
502
|
681
|
(179 | ) | (26 | ) | ||||||||||
Total
revenues
|
$ |
2,053
|
$ |
2,090
|
$ | (37 | ) | (2 | ) | |||||||
Retail
energy sales (gigawatt - hours)
|
25,866
|
24,933
|
933
|
4
|
||||||||||||
Wholesale
energy sales (gigawatt - hours)
|
6,985
|
6,682
|
303
|
5
|
||||||||||||
Average
retail customers (in thousands)
|
1,677
|
1,641
|
36
|
2
|
Retail
revenues increased $142 million, or 10%, primarily due
to:
|
·
|
$85 million
of increases from higher retail prices approved by
regulators;
|
|
·
|
$33 million
of increases due to higher average customer usage, primarily as a
result
of more extreme weather conditions and an earlier start to the irrigation
season in the current period as compared to the prior period;
and
|
|
·
|
$24 million
of increases due to growth in the number of
customers.
|
Wholesale
sales and other revenues decreased $179 million, or 26%, primarily due
to:
|
·
|
$227 million
of decreases due to changes in the fair value of derivative
contracts;
|
|
·
|
$7 million
of decreases resulting from higher sales of sulfur dioxide emission
allowances in the prior period; partially offset
by,
|
|
·
|
$40 million
of increases due to higher margins on non-physically settled
system-balancing transactions; and
|
|
·
|
$20 million
of increases on wholesale electric sales primarily due to higher
volumes.
|
20
Operating
Expenses (in millions)
Six-Month
Periods
|
||||||||||||||||
Ended June 30,
|
Favorable/(Unfavorable)
|
|||||||||||||||
2007
|
2006
|
$
Change
|
%
Change
|
|||||||||||||
Energy
costs
|
$ |
840
|
$ |
884
|
$ |
44
|
5 | % | ||||||||
Operations
and maintenance
|
517
|
534
|
17
|
3
|
||||||||||||
Depreciation
and amortization
|
243
|
229
|
(14 | ) | (6 | ) | ||||||||||
Taxes,
other than income taxes
|
51
|
50
|
(1 | ) | (2 | ) | ||||||||||
Total
operating expenses
|
$ |
1,651
|
$ |
1,697
|
$ |
46
|
3
|
Energy
costs decreased $44 million, or 5%, primarily due to:
|
·
|
$203 million
of decreases due to changes in the fair value of derivative
contracts;
|
|
·
|
$12 million
of decreases primarily due to the deferral of incurred power costs
in
accordance with the Wyoming power cost adjustment
mechanism;
|
|
·
|
$9 million
in decreases due to the prior period loss on the streamflow weather
derivative contract; partially offset
by,
|
|
·
|
$96 million
of increases due to higher volumes of natural gas consumed and higher
average prices;
|
|
·
|
$44 million
of increases in the cost of coal substantially due to higher average
prices; and
|
|
·
|
$37 million
of increases in purchased electricity primarily due to higher average
prices, partially offset by lower
volumes.
|
Operations
and maintenance expense decreased $17 million, or 3%, primarily due
to:
|
·
|
$13 million
of decreases in employee severance
costs;
|
|
·
|
$13 million
of decreases in employee expenses, primarily due to reduced
workforce;
|
|
·
|
$8 million
of decreases due to changes in environmental
accruals;
|
|
·
|
$4 million
of decreases due to the initial assessment of penalties related to
compliance with the FERC standards of conduct for transmission in
the
prior period; partially offset by,
|
|
·
|
$19 million
of increases in maintenance costs and related contracts, primarily
associated with generation plant overhauls;
and
|
|
·
|
$6 million
of increases due to asset
write-offs.
|
Depreciation
and amortization expense increased
$14 million, or 6%, primarily due to higher plant in
service.
21
Interest
and Other Expense (Income) (in millions)
Six-Month
Periods
|
||||||||||||||||
Ended June 30,
|
Favorable/(Unfavorable)
|
|||||||||||||||
2007
|
2006
|
$
Change
|
%
Change
|
|||||||||||||
Interest
expense
|
$ |
154
|
$ |
138
|
$ | (16 | ) | (12 | )% | |||||||
Interest
income
|
(7 | ) | (4 | ) |
3
|
75
|
||||||||||
Allowance
for borrowed funds
|
(16 | ) | (10 | ) |
6
|
60
|
||||||||||
Allowance
for equity funds
|
(17 | ) | (12 | ) |
5
|
42
|
||||||||||
Other
|
(2 | ) | (2 | ) |
-
|
-
|
||||||||||
Total
|
$ |
112
|
$ |
110
|
$ | (2 | ) | (2 | ) |
Interest
expense increased $16 million, or 12%, primarily due to higher average
debt balances during the six-month period ended June 30, 2007.
Allowance
for borrowed and equity funds increased $11 million, primarily due to
higher qualified construction work-in-progress balances during the six-month
period ended June 30, 2007.
Income
Tax Expense
Income
tax expense for the six-month period ended June 30, 2007, decreased
$7 million to $86 million from the comparable period in 2006,
partially due to increases in tax credits associated with renewable energy.
The
effective tax rates were 30% and 33% for the six-month periods ended
June 30, 2007 and 2006, respectively.
22
Liquidity
and Capital Resources
Sources
and Uses of Cash
PacifiCorp
depends on both internal and external sources of liquidity to provide working
capital and to fund capital requirements. Short-term cash requirements not
met
by cash provided by operating activities are generally satisfied with proceeds
from short-term borrowings. Long-term cash needs are met through long-term
debt
issuances and through cash capital contributions from PacifiCorp’s direct parent
company, PPW Holdings LLC (“PPW”). PacifiCorp expects it will need additional
periodic equity contributions from its parent over the next several years.
Issuance of long-term securities is influenced by levels of short-term debt,
cash from operations, capital expenditures, market conditions, regulatory
approvals and other considerations.
Operating
Activities
Net
cash
flows provided by operating activities increased $78 million to
$461 million for the six-month period ended June 30, 2007, compared to
$383 million for the six-month period ended June 30, 2006, primarily
due to higher retail revenues, higher net wholesale sales and purchases and
the
timing of cash collections and payments, partially offset by higher fuel
costs.
Investing
Activities
Net
cash
used in investing activities increased $74 million to $705 million for
the six-month period ended June 30, 2007, compared to $631 million for
the six-month period ended June 30, 2006, primarily due to higher capital
expenditures compared to the prior period. Capital expenditures totaled
$731 million for the six-month period ended June 30, 2007, compared to
$623 million for the six-month period ended June 30, 2006. Capital
spending increased primarily due to wind generation investments. Additional
increases resulted from the construction and installation of emission
control equipment and various capital projects related to transmission and
distribution and other generation facilities. PacifiCorp spent approximately
$63 million and $35 million, excluding non-cash allowance for equity
funds used during construction, on emission control environmental projects
during the six-month periods ended June 30, 2007 and 2006, respectively.
These increases were partially offset by decreases in expenditures for the
construction of the Currant Creek plant, which commenced full combined-cycle
operation in March 2006, and decreases in expenditures for the construction
of
the 534 megawatt (“MW”) Lake Side plant, as compared to the previous
period.
Financing
Activities
Short-Term
Debt
PacifiCorp’s
short-term debt decreased by $367 million during the six-month period ended
June 30, 2007, primarily due to the proceeds from the issuance of long-term
debt and the capital contribution received during the period, partially offset
by capital expenditures and maturities of long-term securities in excess of
net
cash provided by operating activities.
Regulatory
authorities limit PacifiCorp to $1.5 billion of short-term debt, of which
an aggregate principal amount of $30 million of commercial paper was
outstanding at June 30, 2007, with a weighted-average interest rate of
5.4%.
23
Revolving
Credit and Other Financing Agreements
PacifiCorp
has an unsecured revolving credit facility with total bank commitments of
$800 million through July 2011 and $760 million for the subsequent
year ending July 2012. The credit facility supports PacifiCorp’s commercial
paper program and includes a variable-rate borrowing option based on the London
Interbank Offered Rate (LIBOR) plus 0.195% that varies based on PacifiCorp’s
credit ratings for its senior unsecured long-term debt securities. At
June 30, 2007, there were no borrowings outstanding under this facility. In
addition to this committed bank facility, PacifiCorp had $36 million in
money market accounts included in cash and cash equivalents at June 30,
2007, available to meet its liquidity needs, as well as provide for future
capital expenditures and contractual obligations. See “Future Uses of Cash”
below.
At
June 30, 2007, PacifiCorp had $518 million of standby letters of
credit and standby bond purchase agreements available to provide credit
enhancement and liquidity support for variable-rate pollution-control revenue
bond obligations. In addition, PacifiCorp had approximately $22 million of
standby letters of credit available to provide credit support for certain
transactions as requested by third parties. These committed bank arrangements
were all fully available at June 30, 2007 and expire periodically through
May 2012.
PacifiCorp’s
revolving credit and other financing agreements contain customary covenants
and
default provisions, including a covenant not to exceed a specified
debt-to-capitalization ratio of 0.65 to 1. At June 30, 2007, PacifiCorp was
in compliance with the covenants of its revolving credit and other financing
agreements.
Long-Term
Debt
During
the six-month period ended June 30, 2007, PacifiCorp issued
$600 million of its 5.75% First Mortgage Bonds due April 1, 2037 and
made scheduled long-term debt repayments of $106 million.
At
June 30, 2007, PacifiCorp had $900 million available under currently
effective SEC shelf registration statements covering future first mortgage
bond
and unsecured debt issuances. Also at June 30, 2007, PacifiCorp had
available state regulatory authority from the Oregon Public Utility Commission
(“OPUC”) and the Idaho Public Utility Commission (“IPUC”) to issue up to an
additional $900 million of long-term debt. An additional filing would be
required by the Washington Utilities and Transportation Commission (“WUTC”)
prior to any future issuances. In May 2007, PacifiCorp was granted an exemption
from obtaining prior written approval from the Utah Public Service Commission
(“UPSC”) for additional long-term debt issuances. The exemption generally
remains in effect as long as PacifiCorp’s senior secured debt maintains
investment grade ratings.
Common
Shareholder’s Capital
In
June
2007, PacifiCorp received capital contributions from PPW of
$150 million.
Preferred
Stock Redemptions
In
June
2007, PacifiCorp redeemed $38 million of outstanding preferred stock
subject to mandatory redemption, representing all remaining outstanding shares
of PacifiCorp’s $7.48 No Par Serial Preferred Stock series.
Future
Uses of Cash
Dividends
PacifiCorp
does not currently anticipate that it will declare or pay dividends on common
stock during the remainder of the year ending December 31,
2007.
24
Capital
Expenditure Program
As
of
June 30, 2007, estimated capital expenditures, which exclude non-cash
allowances for equity funds used during construction, for the year ending
December 31, 2007, are expected to be approximately $1,803 million,
which includes $810 million for ongoing operations projects, including new
connections related to customer growth, $861 million for generation
development and the related transmission projects, and $132 million for
emission control equipment to address current and anticipated air quality
regulations.
The
capital expenditures estimate for generation development projects for the year
ending December 31, 2007, includes $758 million for costs related to
wind generation projects as PacifiCorp continues to pursue additional
cost-effective wind-powered generation. The estimate also includes the remaining
costs to complete the 534-MW Lake Side plant, as well as upgrades of other
generation plant equipment. The Lake Side plant is expected to cost
approximately $347 million, including non-cash allowance for equity funds
used during construction, of which $308 million, including approximately
$15 million of non-cash allowance for equity funds used during
construction, had been incurred through June 30, 2007. The Lake Side plant
is expected to be placed into service in the third quarter of 2007.
In
funding its capital expenditure program, PacifiCorp expects to obtain funds
required for construction and other purposes from sources similar to those
used
in the past, including cash provided by operating activities, the issuance
of
new long-term debt and cash capital contributions from PPW. The availability
of
capital will influence actual expenditures.
The
capital expenditure estimates are subject to a high degree of variability based
on several factors, including, among others highlighted in “Forward-Looking
Statements” above, future decisions arising from PacifiCorp’s Integrated
Resource Plan process, changes in regulations, laws and market conditions,
as
well as the outcomes of rate-making proceedings. Additionally, capital
expenditure needs are regularly reviewed by management and may change
significantly as a result of such reviews.
Integrated
Resource Plans
As
required by state regulators, PacifiCorp uses Integrated Resource Plans (“IRP”)
to develop a long-term view of prudent future actions required to help ensure
that PacifiCorp continues to provide reliable and cost-effective electric
service to its customers. The IRP process identifies the amount and timing
of
PacifiCorp’s expected future resource needs and an associated optimal future
resource mix that accounts for planning uncertainty, risks, reliability impacts
and other factors. The IRP is a coordinated effort with stakeholders in each
of
the six states where PacifiCorp operates. Each state commission that has IRP
adequacy rules judges whether the IRP reasonably meets its standards and
guidelines at the time the IRP is filed. PacifiCorp requests “acknowledgement”
of its IRP filing from the UPSC, the OPUC and the WUTC pursuant to those state’s
IRP adequacy rules. The IRP can be used as evidence by parties in rate-making
or
other regulatory proceedings. PacifiCorp files its IRP on a biennial basis.
Additionally, PacifiCorp is required to file draft requests for proposals with
the UPSC and the OPUC prior to issuance to the market.
In
May
2007, PacifiCorp released its 2007 Integrated Resource Plan. The 2007 Integrated
Resource Plan identified a need for approximately 3,171 MW of additional
resources by summer 2016, to be met with a combination of thermal generation,
combined heat and power and load control programs. PacifiCorp also plans to
procure economic renewable resources, implement energy conservation programs
and
to use wholesale electricity transactions to make up for the remaining
difference between retail load obligations and available resources. PacifiCorp
is currently seeking acknowledgement of its 2007 Integrated Resource Plan from
state regulators and expects the acknowledgement process to be complete in
2008.
25
Transmission
Investment
In
May
2007, PacifiCorp announced plans to build in excess of 1,200 miles of
new transmission lines originating in Wyoming and connecting into Utah, Idaho,
Oregon and the desert Southwest. The estimated $4 billion investment plan
includes projects that will address customers’ increasing electric energy use,
improve system reliability and deliver wind and other renewable generation
resources to more customers throughout PacifiCorp’s six-state service area and
the western region. These transmission lines are expected to be placed into
service beginning 2010 through 2014.
Credit
Ratings
PacifiCorp’s
credit ratings at June 30, 2007, were as follows:
Moody’s
|
Standard
& Poor’s
|
||
Issuer/Corporate
|
Baa1
|
A-
|
|
Senior
secured debt
|
A3
|
A-
|
|
Senior
unsecured debt
|
Baa1
|
BBB+
|
|
Preferred
stock
|
Baa3
|
BBB
|
|
Commercial
paper
|
P-2
|
A-1
|
|
Outlook
|
Stable
|
Stable
|
In
conjunction with its risk management activities, PacifiCorp must meet credit
quality standards as required by counterparties. In accordance with industry
practice, contractual agreements that govern PacifiCorp’s energy management
activities either specifically provide bilateral rights to demand cash or other
security if credit exposures on a net basis exceed certain ratings-dependent
threshold levels, or provide the right for counterparties to demand “adequate
assurances” in the event of a material adverse change in PacifiCorp’s
creditworthiness. If one or more of PacifiCorp’s credit ratings decline below
investment grade, PacifiCorp would be required to post cash collateral, letters
of credit or other similar credit support to facilitate ongoing wholesale energy
management activities. At June 30, 2007, PacifiCorp’s credit ratings from
Standard & Poor’s and Moody’s were investment grade; however, if the ratings
fell more than one rating below investment grade, PacifiCorp’s estimated
potential collateral requirements would total approximately $425 million.
PacifiCorp’s potential collateral requirements could fluctuate considerably due
to seasonality, market prices and their volatility, a loss of key PacifiCorp
generating facilities or other related factors.
For
a
further discussion of PacifiCorp’s credit ratings and their effect on
PacifiCorp’s business, refer to Item 7 of PacifiCorp’s Transition Report on Form
10-K for the nine-month period ended December 31, 2006.
Contractual
Obligations and Commercial Commitments
During
the six-month period ended June 30, 2007, there were no material changes
outside the ordinary course of business in the contractual obligations and
commercial commitments from the information provided in Item 7 of PacifiCorp’s
Transition Report on Form 10-K for the nine-month period ended
December 31, 2006, other than as described above, PacifiCorp’s March 2007
issuance of $600 million of its 5.75% First Mortgage Bonds due
April 1, 2037.
26
Regulatory
Matters
In
addition to the discussion contained herein regarding updates to regulatory
matters based upon material changes that occurred during the six-month period
ended June 30, 2007, refer to Note 5 of Notes to Consolidated
Financial Statements included in Item 1 for additional regulatory matter
updates.
Federal
Regulatory Matters
The
Bonneville Power Administration Residential Exchange Program
The
Northwest Power Act, through the Residential Exchange Program, provides access
to the benefits of low-cost federal hydroelectricity to the residential and
small-farm customers of the region’s investor-owned utilities. The program is
administered by the Bonneville Power Administration (the “BPA”) in accordance
with federal law. Pursuant to agreements between the BPA and PacifiCorp,
benefits from the BPA are passed through to PacifiCorp’s Oregon, Washington and
Idaho residential and small-farm customers in the form of electricity bill
credits. In October 2000, PacifiCorp entered into a settlement agreement with
the BPA that provided Residential Exchange Program benefits to PacifiCorp’s
customers from October 2001 through September 2006. In May 2004, PacifiCorp,
the
BPA and other parties executed an additional agreement that provides for a
guaranteed range of benefits to customers from October 2006 through September
2011.
Several
publicly owned utilities, cooperatives and the BPA’s direct-service industry
customers filed lawsuits against the BPA with the United States Ninth Circuit
Court of Appeals seeking review of certain aspects of the BPA’s Residential
Exchange Program, as well as challenging the level of benefits previously paid
to investor-owned utility customers. On May 3, 2007, the United
States Ninth Circuit Court of Appeals issued two decisions. The first decision
sets aside the October 2000 Residential Exchange Program settlement agreement
as
being inconsistent with the BPA’s settlement authority. The second decision
holds, among other things, that the BPA acted contrary to law when it
allocated to its preference customers, which include public utilities,
cooperatives and federal agencies, part of the costs of the October 2000
settlement the BPA reached with its investor-owned utility customers. As a
result of the ruling, on May 21, 2007, the BPA notified the Pacific
Northwest’s six utilities, including PacifiCorp that it was immediately
suspending payments. This has resulted in increases to PacifiCorp’s residential
and small farm customers’ electric bills in Oregon, Washington and Idaho.
Because the benefit payments from the BPA are passed through to PacifiCorp’s
customers, the outcome of this matter is not expected to have a significant
effect on PacifiCorp’s consolidated financial results. There are several
other lawsuits challenging certain aspects of the BPA’s Residential Exchange
Program pending at the United States Ninth Circuit Court of Appeals for which
the outcomes remain unknown.
Hydroelectric
Decommissioning
Powerdale
Hydroelectric Project – (Hood River, Oregon)
In
June
2003, PacifiCorp entered into a settlement agreement to remove the 6-MW
nameplate-rated Powerdale plant rather than pursue a new license, based on
an
analysis of the costs and benefits of relicensing versus decommissioning.
Removal of the Powerdale plant and associated project features, which is subject
to the FERC and other regulatory approvals, is projected to cost $6 million
excluding inflation. Removal of the plant is scheduled to commence in 2010.
However, in November 2006, flooding damaged the Powerdale plant and rendered
its
generating capabilities inoperable. In February 2007, the FERC granted
PacifiCorp’s request to cease generation at the project until decommissioning
activities begin. Also in February 2007, PacifiCorp submitted a request to
the
FERC to allow it to defer the remaining net book value and any additional
removal costs of this project as a regulatory asset. In May 2007, the FERC
issued an order which approved PacifiCorp’s proposed accounting entries, thereby
allowing PacifiCorp to reclassify the net book value and the estimated removal
costs to a regulatory asset. PacifiCorp has filed with its state commissions
to
recover these costs.
27
State
Regulatory Actions
The
following discussion provides a state-by-state update based upon significant
changes that occurred during the six-month period ended June 30,
2007:
Utah
In
June
2007, the second phase of PacifiCorp’s general rate case filed in March 2006
became effective, adjusting the rate increase from $85 million to
$115 million. Under the terms of the stipulation in the case, PacifiCorp
has agreed not to file another rate case before December 11, 2007, with new
rates to become effective no earlier than August 2008.
Oregon
In
April
2007, PacifiCorp filed its annual compliance filing with the OPUC to update
forecasted net power costs, requesting an increase of approximately
$36 million, or an average price increase of 4%, to take effect
January 1, 2008. The annual filing, called the transition adjustment
mechanism (“TAM”), is due each April but will be adjusted for new contracts
through October 2007 and for other changes to forecasted net power costs, such
as coal and natural gas prices, through November 2007. In June 2007, parties
to
the case filed their responses, recommending smaller increases in the range
of
$13 million to $19 million. In July 2007, PacifiCorp filed the first
of three updates to the TAM, adjusting its requested increase from $36 million
to $30 million, as well as filed a rebuttal of the other parties’ positions.
PacifiCorp expects a ruling from OPUC this fall.
Wyoming
In
June
2007, PacifiCorp filed a general rate case with the Wyoming Public Service
Commission requesting an increase of $36 million annually, or an average
price increase of 8%. In addition, PacifiCorp requested approval of a new
renewable resource mechanism and a marginal cost pricing tariff to better
reflect the cost of adding new generation. PacifiCorp expects the rates to
become effective by May 2008.
Washington
In
October 2006, PacifiCorp filed a general rate case with the WUTC for an annual
increase of $23 million, or 10%. As part of the filing, PacifiCorp proposed
a Washington-only cost-allocation methodology, which is based on PacifiCorp’s
western resources. The rate case included a five-year pilot period on the
proposed allocation methodology and a power cost adjustment mechanism (“PCAM”).
On June 21, 2007, the WUTC issued an order approving a rate increase of
$14 million, or an average price increase of 6%, effective June 27,
2007, and accepted PacifiCorp’s
proposed allocation methodology for a five-year pilot period. The WUTC found
that PacifiCorp demonstrated the need for a PCAM, but it did not approve the
design of the proposal in this case. The order authorized PacifiCorp to file
a
revised PCAM proposal, with or without a request to file power cost-only rate
cases, outside the context of a general rate case within 12 months of the
order.
Idaho
In
June
2007, PacifiCorp filed a general rate case with the IPUC for an annual increase
of $18 million, or an average price increase of 10%, with a request for an
effective date of January 1, 2008.
28
Environmental
Matters
In
addition to the discussion contained herein, refer to Note 5 of Notes to
Consolidated Financial Statements included in Item 1 of this report and Item
1
of PacifiCorp’s Transition Report on Form 10-K for the nine-month period
ended December 31, 2006, for additional information regarding certain
environmental matters affecting PacifiCorp’s operations.
Renewable
Portfolio Standards
The
renewable portfolio standards (“RPS”) described below could significantly impact
PacifiCorp’s financial results. Resources that meet the qualifying electricity
requirements under the RPS vary from state-to-state. Each state’s RPS require
some form of compliance reporting and PacifiCorp can be subject to penalties
in
the event of non-compliance.
In
November 2006, Washington voters approved a ballot initiative establishing
RPS.
The WUTC has undertaken a rulemaking proceeding to implement the initiative.
Until final action is undertaken to implement the rules, PacifiCorp cannot
predict the impact of the Washington RPS on its financial results.
In June
2007, the Oregon Renewable Energy Act (the “Act”) was adopted, providing a
comprehensive renewable energy policy for Oregon. Subject to certain exemptions
and cost limitations established in the Act, a qualifying electric utility
must
meet minimum qualifying electricity requirements for electricity sold to retail
customers of at least 5% in 2011 through 2014, 15% in 2015 through 2019, 20%
in
2020 through 2024, and 25% in 2025 and subsequent years. The Act requires the
OPUC to establish an automatic adjustment clause or other timely mechanism
to
allow the electric utility to recover prudently incurred costs of its
investments in renewable energy facilities and associated transmission
costs.
California
law requires electric utilities to increase their procurement of renewable
resources by at least 1% of their annual retail electricity sales per year
so
that 20% of their annual electricity sales are procured from renewable resources
by no later than December 31, 2010. However, PacifiCorp and other small
multi-jurisdictional utilities (“SMJU”) are currently awaiting further guidance
from the California Public Utilities Commission (“CPUC”) on the treatment of
SMJUs in the California RPS program. PacifiCorp has filed comments requesting
SMJU rules for flexible compliance with annual targets. PacifiCorp expects
rules
governing the treatment of SMJUs and any specific flexible compliance mechanisms
to be released by CPUC staff for public review in 2007. Absent further direction
from the CPUC on treatment of SMJUs, PacifiCorp cannot predict the impact of
the
California RPS on its financial results.
29
Climate
Change
As
a
result of increased attention to climate change in the United States, numerous
bills have been introduced in the current session of the United States Congress
that would reduce greenhouse gas emissions in the United States. Congressional
leadership has made climate change legislation a priority, and many
congressional observers expect to see the passage of climate change legislation
within the next several years. In addition, nongovernmental organizations have
become more active in initiating citizen suits under existing environmental
and
other laws. In April 2007, a United States Supreme Court decision concluded
that
the Environmental Protection Agency (“EPA”) has
the
authority under the Clean Air Act to regulate emissions of greenhouse gases
from
motor vehicles. In addition, pending cases that address the potential public
nuisance from greenhouse gas emissions from electricity generators and the
EPA’s
failure to regulate greenhouse gas emissions from new and existing coal-fired
plants are expected to become active. Furthermore, while debate continues at
the
national level over the direction of domestic climate policy, several states
have developed state-specific laws or regional legislative initiatives to reduce
greenhouse gas emissions, including Oregon, Washington, California and several
Northeastern states and individual state actions to regulate greenhouse gas
emissions are likely to increase. The impact of any pending judicial proceedings
and any pending or enacted federal and state climate change legislation and
regulation cannot be determined at this time; however, adoption of stringent
limits on greenhouse gas emissions could significantly impact PacifiCorp’s
current and future fossil-fueled facilities, and, therefore, its financial
results.
In
February 2007, the governors of California, Arizona, New Mexico, Oregon and
Washington signed the Western Regional Climate Action Initiative (the
“Initiative”) that directs their respective states to develop a regional target
for reducing greenhouse gases by August 2007. By August 2008, they are expected
to devise a market-based program, such as a load-based cap-and-trade program
to
reach the target. The five states also have agreed to participate in a
multi-state registry to track and manage greenhouse gas emissions in the region.
In May 2007, the Utah governor also signed the Initiative.
The
Washington and Oregon legislatures enacted legislation in May 2007 and June
2007, respectively, establishing goals for the reduction of greenhouse gas
emissions in their respective states. Washington’s goals seek to, (i) by
2020,
reduce emissions to 1990 levels; (ii) by 2035, reduce emissions to 25% below
1990 levels; and (iii) by 2050, reduce emissions to 50% below 1990 levels,
or
70% below Washington’s forecasted emissions in 2050. Oregon’s goals seek to, (i)
by 2010, cease the growth of Oregon greenhouse gas emissions; (ii) by 2020,
reduce greenhouse gas levels to 10% below 1990 levels; and (iii) by 2050, reduce
greenhouse gas levels to at least 75% below 1990 levels. Each state’s
legislation also calls for state government-developed policy recommendations
in
the future to assist in the monitoring and achievement of these
goals.
New
Accounting Pronouncements
For
a
discussion of new accounting pronouncements affecting PacifiCorp, refer to
Note
2 of Notes to Consolidated Financial Statements included in
Item 1.
Critical
Accounting Policies
Certain
accounting policies require management to make estimates and judgments
concerning transactions that will be settled in the future. Amounts recognized
in the financial statements from such estimates are necessarily based on
numerous assumptions involving varying and potentially significant degrees
of
judgment and uncertainty. Accordingly, the amounts currently reflected in the
financial statements will likely increase or decrease in the future as
additional information becomes available. Estimates are used for, but not
limited to, accounting for the effects of certain types of regulation,
derivatives, pension and postretirement obligations, income taxes and revenue
recognition - unbilled revenues.
For
additional discussion of PacifiCorp’s critical accounting policies, see
Item 7 of PacifiCorp’s Transition Report on Form 10-K for the
nine-month period ended December 31, 2006. PacifiCorp’s critical accounting
policies have not changed materially since December 31, 2006, other than
the adoption of Financial Accounting Standards Board Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109.”
30
Item
3. Quantitative
and Qualitative Disclosures About Market Risk.
For
quantitative and qualitative disclosures about market risk affecting PacifiCorp,
see Item 7A of PacifiCorp’s Transition Report on Form 10-K for the
nine-month period ended December 31, 2006. PacifiCorp’s exposure to market
risk has not changed materially since December 31, 2006, except as
described below.
Commodity
Price Risk
PacifiCorp
measures the market risk in its electricity and natural gas portfolio daily,
utilizing a historical Value-at-Risk ("VaR") approach and other measurements
of
net position. VaR represents an estimate of possible changes at a given level
of
confidence in fair value that would be measured on its portfolio assuming
hypothetical movements in forward market prices and is not necessarily
indicative of actual results that may occur. One of the key assumptions utilized
in the VaR computations is expected retail load levels. In May 2007, PacifiCorp
completed its periodic update of its estimated long-term retail load
levels, which affected the VaR computation. The updated estimate indicates
an
increase in PacifiCorp’s long-term retail loads due to higher levels of
industrial activity, primarily in the natural resource development and
manufacturing industries, in several states. The increase also reflects
accelerated expected growth rates in the number of retail customers and usage
in
Oregon and Utah.
As
of
June 30, 2007, PacifiCorp’s estimated potential one-day unfavorable impact
on fair value of the electricity and natural gas commodity portfolio over the
next 48 months was $10 million, as measured by the VaR computations
described above, compared to $16 million as of December 31, 2006. The
minimum, average and maximum daily VaR (one-day holding periods) for the three-
and six-month periods ended June 30, 2007, are as follows (in
millions):
Minimum
VaR (measured)
|
$ |
9
|
||
Average
VaR (calculated)
|
15
|
|||
Maximum
VaR (measured)
|
20
|
PacifiCorp
maintained compliance with its VaR limit procedures during the six-month period
ended June 30, 2007. Changes in markets inconsistent with historical trends
or assumptions used could cause actual results to exceed predicted
limits.
Item
4. Controls
and Procedures.
An
evaluation was performed under the supervision and with the participation of
PacifiCorp’s management, including the chief executive officer and chief
financial officer, regarding the effectiveness of the design and operation
of
PacifiCorp’s disclosure controls and procedures (as defined in
Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934,
as amended) as of June 30, 2007. Based on that evaluation, PacifiCorp’s
management, including the chief executive officer and chief financial officer,
concluded that PacifiCorp’s disclosure controls and procedures were effective.
There have been no changes during the quarter covered by this report in
PacifiCorp’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, PacifiCorp’s internal
control over financial reporting.
31
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
For
a
description of certain legal proceedings affecting PacifiCorp, refer to Item
3
of PacifiCorp’s Transition Report on Form 10-K for the nine-month period
ended December 31, 2006. Material developments to these proceedings during
the six-month period ended June 30, 2007, are included in Note 5 of
Notes to Consolidated Financial Statements included in Item 1.
Item
1A.
Risk Factors.
There
has
been no material change to PacifiCorp’s risk factors from those disclosed in
Item 1A of PacifiCorp’s Transition Report on Form 10-K for the
nine-month period ended December 31, 2006.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
Not
applicable.
Item
3. Defaults
Upon Senior Securities.
Not
applicable.
Item
4. Submission
of Matters to a Vote of Security Holders.
Not
applicable.
Item
5. Other
Information.
Not
applicable.
Item
6. Exhibits.
The
exhibits listed on the accompanying Exhibit Index are filed as part of this
Quarterly Report.
32
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PACIFICORP
|
|
(Registrant)
|
|
Date:
August 3, 2007
|
/s/
David J. Mendez
|
David
J. Mendez
|
|
Senior
Vice President and Chief Financial
Officer
|
33
Exhibit
No.
|
Description
|
15
|
Letter
Re: Unaudited Interim Financial Information.
|
31.1
|
Chief
Executive Officer’s Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Chief
Financial Officer’s Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Chief
Executive Officer’s Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
Chief
Financial Officer’s Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
34