Berkshire Hathaway 2005 Annual Report Download - page 36

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(2) Investments in MidAmerican Energy Holdings Company (Continued)
MidAmerican owns a combined electric and natural gas utility company in the United States, two interstate natural gas pipeline
companies in the United States, two electricity distribution companies in the United Kingdom, a diversified portfolio of domestic and
international electric power projects and the second largest residential real estate brokerage firm in the United States.
Through its investments in MidAmerican common and convertible preferred stock, at December 31, 2005, Berkshire possessed
9.7% of the voting rights and 83.4% (80.5% diluted) of the economic rights in MidAmerican. Each share of convertible preferred
stock was convertible into a share of common stock only upon the occurrence of specified events, including the elimination of the
Public Utility Holding Company Act of 1935 (“PUHCA”). Walter Scott, Jr., a member of Berkshire’ s Board of Directors, controlled
approximately 86% of the voting interest in MidAmerican at December 31, 2005.
During the three year period ending December 31, 2005, Berkshire possessed the ability to exercise significant influence on the
operations of MidAmerican through its investments in common and convertible preferred stock of MidAmerican. The convertible
preferred stock, although generally non-voting, was substantially an identical subordinate interest to a share of common stock and
economically equivalent to common stock. Therefore, during this period, Berkshire accounted for its investments in MidAmerican
pursuant to the equity method.
The Energy Policy Act of 2005 was enacted on August 8, 2005 and included the repeal of PUHCA, which became effective on
February 8, 2006. On February 9, 2006, Berkshire Hathaway converted its preferred stock to common stock and upon conversion,
owned approximately 83.4% (80.5% diluted) of the voting common stock interests. As of that date, Berkshire is deemed to control
MidAmerican for financial reporting purposes. The accounts of MidAmerican will be consolidated in Berkshire’ s Consolidated
Financial Statements beginning February 2006. However, there will be no changes in MidAmerican’ s operations, management or
capital structure as a result of the consolidation of MidAmerican. Specifically, MidAmerican’ s debt is currently not guaranteed by
Berkshire. However, Berkshire has made a commitment until February 28, 2011 that would allow MidAmerican to request up to $3.5
billion of capital to pay its debt obligations or to provide funding to its regulated subsidiaries.
Beginning in 2006, Berkshire’ s Consolidated Financial Statements will consolidate the accounts of MidAmerican. Although the
consolidation of MidAmerican will have a significant impact on consolidated revenues and expenses, the only difference in
consolidated net earnings or shareholders’ equity from the equity method amounts will pertain to deferred income taxes. Berkshire
will cease accruing deferred income taxes with respect to its investments in MidAmerican in accordance with SFAS No. 109. Due to
the significance of this change in accounting on future Consolidated Financial Statement presentations, an unaudited pro forma
balance sheet has been included on the face of Berkshire’ s Consolidated Balance Sheets which reflects the consolidation of
MidAmerican as of December 31, 2005. Berkshire management believes that such unaudited pro forma information is meaningful
and relevant to investors, creditors and other financial statement users.
Condensed consolidated balance sheets and statements of earnings of MidAmerican are as follows (in millions).
December 31, December 31,
Balance Sheets 2005 2004
Assets:
Properties, plants, and equipment, net........................................................................................... $11,915 $11,607
Goodwill ....................................................................................................................................... 4,156 4,307
Other assets................................................................................................................................... 4,122 3,990
$20,193 $19,904
Liabilities and shareholders’ equity:
Debt, except debt owed to Berkshire............................................................................................. $10,296 $10,528
Debt owed to Berkshire................................................................................................................. 1,289 1,478
Other liabilities and minority interests .......................................................................................... 5,223 4,927
16,808 16,933
Shareholders’ equity ..................................................................................................................... 3,385 2,971
$20,193 $19,904
Statements of Earnings 2005 2004 2003
Operating revenue and other income............................................................................... $7,279 $6,727 $6,143
Costs and expenses:
Cost of sales and operating expenses .............................................................................. 4,978 4,390 3,913
Depreciation and amortization ........................................................................................ 608 638 603
Interest expense – debt held by Berkshire....................................................................... 157 170 184
Other interest expense..................................................................................................... 717 713 716
6,460 5,911 5,416
Earnings before taxes...................................................................................................... 819 816 727
Income taxes and minority interests................................................................................ 261 278 284
Earnings from continuing operations .............................................................................. 558 538 443
Gain (loss) on discontinued operations ........................................................................... 5 (368) (27)
Net earnings .................................................................................................................... $ 563 $ 170 $ 416