Impacts of Tax Cuts and Jobs Act

January 25, 2018 Workshop

Iowa Utilities Board
 MidAmerican Energy’s Approach…
Balanced Outcomes for Customers
• MidAmerican believes that customers should get the benefits of the Tax Cuts and Jobs Act of
2017 (the “Act”) – MidAmerican is focused on how to provide benefits to customers while
maintaining balanced outcomes for customers
• MidAmerican believes the impacts of the Act should be implemented in a way that retains the
balance created over years of work with the Board, the OCA and other stakeholders
• Ratemaking principles for wind developments and renewable re-powering projects along with
MidAmerican’s revenue sharing mechanism create balanced outcomes for current and future
electric customers. This balance includes:
– Development of renewable generation at no net cost to customers
– Low and stable rates now and many years into the future
– Accelerated depreciation to lower rate base to mitigate the need for future rate changes
• MidAmerican has and will continue to actively manage the gas business to continue to
provide customers with long-term rate stability
• For MidAmerican’s unique situation, the Board should consider mechanisms to implement the
Act in a way that will maintain the long-term balance that is currently in place for MidAmerican
customers, and continues MidAmerican’s ability to achieve its 100% renewable vision 2
 Components of the Act
Impacting MidAmerican
• Congress passed the Act in December 2017 and the President signed it on
December 22, 2017; most of the changes to corporate income taxes became
effective January 1, 2018
• Major provisions of the bill affecting MidAmerican include:
- Reduction of the corporate federal income tax rate from 35% to 21%
- “Excess” deferred income taxes due to rate reduction required to be normalized
and returned to customers over the remaining book lives of the related assets
(technically referred to as the average rate assumption method “ARAM”)
- Elimination of bonus tax depreciation for utility property except for projects with
a binding contract in place as of September 27, 2017 (subject to
interpretation/guidance from the IRS)
- Repeal of qualified production activities income deduction

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 Tax Cuts and Jobs Act
Impact on Balanced Outcomes
• The lower corporate federal income tax rate will reduce income tax expense for both
Iowa electric and gas operations
• However, tax reform will increase rate base due to elimination of bonus tax
depreciation and lower deferred income taxes from the reduction in the tax rate
• MidAmerican’s revenue sharing mechanism establishes a long-term balance between
current and future electric customers by allowing benefits of new wind developments
and repowering (that are not included in customer rates) to reduce rate base and
delay or reduce the need for a future rate case
– Projections from the Wind XI case showed that, prior to the Act, a rate case was not
expected until the 2029 timeframe
• Depending on the action taken in response to the Act, revenue sharing from Wind XI
and repowering could be reduced or eliminated and the opportunity for new
renewable projects minimized

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 Workshop Questions
Question 1
Question 1: What is the estimated effect of the Act on the utility’s federal
income tax expense and Iowa revenue requirement as determined in the
utility’s most recent general rate review proceeding?
• Electric
– The test year tax expense decreases from $147.9 million (at the 35% tax rate) to
$68.8 million (at the 21% tax rate)
– The electric revenue requirement is reduced by $112.3 million due to the tax
expense change
• Gas
– The test year tax expense decreases from $13.8 million (at the 35% tax rate) to
$8.5 million (at the 21% tax rate)
– The gas revenue requirement is reduced by $7.5 million due to the tax expense
change

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 Workshop Questions
Question 2
Question 2: What is the estimated effect of the Act on the utility’s federal
income tax expense and Iowa revenue requirement as determine by the
most recent calendar year for which information is available?
• Electric (2016 data)
– The calendar year tax benefit increases from $180.8 million (at the 35% tax rate)
to $246.0 million (at the 21% tax rate)
– The electric revenue requirement is reduced by $90.8 million due to the tax
benefit change
• Gas (2016 data)
– The calendar year tax expense decreases from $16.3 million (at the 35% tax
rate) to $10.3 million (at the 21% tax rate)
– The gas revenue requirement is reduced by $8.4 million due to the tax expense
change

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 Workshop Questions
Questions 3 and 4
Question 3: Does the utility agree that its retail rates in Iowa should be
adjusted to reflect the effect of the Act? If not, explain the basis of the utility’s
position.
Question 4: Regardless of the utility’s answer to the preceding question, if
the utility is required to adjust retail rates to reflect the effect of the Act,
describe any preferred mechanism or mechanisms for doing so?
• MidAmerican combines its responses since the answer to #3 is a qualified “yes”
• Customers should receive benefits from the tax rate change, but the benefits should
consider the existing balance between current and future customers
• To maintain the balance between current and future electric customers, some portion
of the benefits should be provided to customers through the revenue sharing
calculation and some portion should be provided to customers through a Tax
Expense Reduction Mechanism (TERM) that decreases current customer bills
• A split between revenue sharing and a TERM retains the balanced outcome for
MidAmerican’s electric customers 7
 Workshop Questions
Questions 3 and 4 (continued)
• For MidAmerican’s gas customers, the Act potentially impacts the long-term
goal of maintaining low rates and rate stability
– MidAmerican proposes a regulatory liability account be created reflecting the tax
expense difference to maintain the long-term rate stability
– MidAmerican proposes that the account be used to offset rate base
• The amount to be recorded in the regulatory liability account would be
calculated on an annual basis for gas operations to account for the tax
expense difference in each year

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 Workshop Questions
Question 5
Question 5: Does the utility have any other comments regarding this
matter?
• MidAmerican’s situation is unique; revenue sharing, advance ratemaking and
repowering establish a long-term balance between current and future customers
• MidAmerican plans to file tariff changes to implement the Act in a way that will
preserve the long-term balance and looks forward to working with the Board, OCA
and other stakeholders to implement these changes quickly
• Rating agencies are watching to see if regulatory agencies implement the tax reform
changes in ways that mitigate potential negative ratings impacts of the Act. Negative
ratings can impact interest rates, resulting in increased costs to customers
• MidAmerican identifies that the Board’s January 18, 2018 order may conflict with the
prohibition on retroactive ratemaking; however, MidAmerican plans to voluntarily
provide customer benefits through revenue sharing and the TERM back to January 1,
2018
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