SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
______________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended
March 31, 1999
Commission File No. 0-25551
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Iowa 94-2213782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, IA 50309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515)242-4300
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 X No
Former name, former address and former fiscal year, if changed
since last report. N/A
58,848,905 shares of Common Stock, no par value, were
outstanding as of March 31, 1999.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
Form 10-Q
March 31, 1999
_____________
C O N T E N T S
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Independent Accountants' Report 3
Consolidated Balance Sheets, March 31, 1999 and
December 31, 1998 4
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities 35
Item 3. Defaults on Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 37
Exhibit Index 38
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of
MidAmerican Energy Holdings Company and subsidiaries as of March
31, 1999, and the related consolidated statements of operations
and of cash flows for the three month periods ended March 31, 1999
and 1998. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, 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 review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of MidAmerican
Energy Holdings Company and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not
presented herein), and in our report dated January 28, 1999 (March
12, 1999 as to Note 3 and Note 21), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance
sheet as of December 31, 1998 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which
it has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
April 28, 1999
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
________________________________
March 31 December 31
1999 1998
(unaudited)
ASSETS
Cash and cash equivalents $ 118,422 $ 1,606,148
Restricted cash and investments 455,343 637,571
Marketable securities 409,436 ---
Accounts receivable 476,460 528,116
Properties, plants, contracts and
equipment, net 5,791,659 4,236,039
Excess of cost over fair value of
net assets acquired, net 2,663,052 1,538,176
Equity investments 184,010 125,036
Regulatory assets 292,274 ---
Deferred charges and other assets 750,172 432,438
Total assets $ 11,140,828 $ 9,103,524
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 453,700 $ 305,757
Other accrued liabilities 1,598,859 1,009,091
Parent company debt 2,080,701 2,645,991
Subsidiary and project debt 4,372,200 3,093,810
Deferred income taxes 973,172 543,391
Total liabilities 9,478,632 7,598,040
Deferred income 58,267 58,468
Company-obligated mandatorily redeemable
convertible preferred securities of
subsidiary trusts 553,930 553,930
Company-obligated mandatorily redeemable
preferred securities of
subsidiary trusts 101,598 ---
Preferred securities of subsidiary 147,787 66,033
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - authorized 2,000 shares,
no par value --- ---
Common stock - no par value,
authorized 180,000 shares, issued 82,980
shares, outstanding 58,849 and 59,605
at March 31, 1999 and December 31, 1998,
respectively --- 5,602
Additional paid in capital 1,238,214 1,233,088
Retained earnings 348,767 340,496
Treasury stock - 24,131 and 23,375 common
shares at March 31, 1999 and December 31,
1998, respectively, at cost (773,332) (752,178)
Accumulated other comprehensive income (13,035) 45
Total stockholders' equity 800,614 827,053
Total liabilities and stockholders'
equity $ 11,140,828 $ 9,103,524
The accompanying notes are an integral part of these financial statements.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
____________(unaudited)___________
Three Months Ended
March 31,
1999 1998
Revenues:
Operating revenue $ 797,885 $ 621,851
Interest and other income 39,960 22,460
Gain on sale of qualified facilities 20,173 ---
Total revenues 858,018 644,311
Costs and expenses:
Cost of sales 447,198 312,645
Operating expense 142,018 102,647
General and administration 11,852 12,044
Depreciation and amortization 79,351 79,925
Interest expense 116,881 94,558
Less interest capitalized (16,041) (13,418)
Total costs and expenses 781,259 588,401
Income before provision for income taxes 76,759 55,910
Provision for income taxes 26,065 18,531
Income before minority interest 50,694 37,379
Minority interest 10,903 10,084
Income before extraordinary item 39,791 27,295
Extraordinary item, net of tax (31,520) ---
Net income available to common stockholders $ 8,271 $ 27,295
Net income per share before extraordinary item $ .67 $ .45
Extraordinary item (.53) ---
Net income per share - basic $ .14 $ .45
Basic common shares outstanding 59,205 61,081
Net income per share before
extraordinary item - diluted $ .62 $ .43
Extraordinary item (.43) ---
Net income per share - diluted $ .19 $ .43
Diluted shares outstanding 73,244 69,343
The accompanying notes are an integral part of these financial
statements.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31
1999 1998
Cash flows from operating activities:
Net income $ 8,271 $27,295
Adjustments to reconcile net cash flow from operating activities:
Gain on sale of qualified facilities (20,173) ---
Extraordinary item, net of tax 31,520 ---
Depreciation and amortization 67,953 69,314
Amortization of excess of cost over fair value of
net assets acquired 11,398 10,611
Amortization of deferred financing and other costs 6,032 4,638
Provision for deferred income taxes (78,545) 13,146
Income on equity investments (5,882) (482)
Income applicable to minority interest 1,901 1,093
Changes in other items:
Accounts receivable 31,326 8,354
Accounts payable and accrued liabilities 27,073 4,071
Deferred income 4,087 5,038
Net cash flows from operating activities 52,477 143,078
Cash flows from investing activities:
Purchase of MidAmerican and Kiewit Interests,
net of cash acquired (2,501,425) (502,916)
Proceeds from sales of qualified facilities,
net of cash disposed 365,074 ---
Distributions from equity investments 6,713 2,187
Philippine construction (16,674) (31,891)
Construction and other development costs (14,392) (67,075)
Capital expenditures relating to operations 1,936 (98,927)
Decrease (increase) in restricted cash and investments 43,988 (19,317)
Decrease (increase) in other assets 2,050 (24,227)
Net cash flows from investing activities (2,112,730) (742,164)
Cash flows from financing activities:
Proceeds from exercise of stock options 564 423
Proceeds from securitization 161,430 ---
Repayment of parent company debt (605,822) ---
Proceeds from subsidiary and project debt 1,118,617 47,342
Repayments of subsidiary and project debt (77,045) (3,202)
Deferred charges relating to debt financing 10,057 (3,915)
Purchase of treasury stock (22,194) (674,652)
Other --- 8,370
Net cash flows from financing activities 585,607 (625,634)
Effect of exchange rate changes, net (13,080) 10,847
Net decrease in cash and cash equivalents (1,487,726)(1,213,873)
Cash and cash equivalents at beginning of period 1,606,148 1,451,410
Cash and cash equivalents at end of period $ 118,422 $ 237,537
Supplemental disclosures:
Interest paid, net of amount capitalized $ 108,646 $ 55,118
Income taxes paid $ 7,661 $ 20,759
The accompanying notes are an integral part of these financial
statements.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________
1. General:
In the opinion of management of MidAmerican Energy Holdings
Company (the "Company"), the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the
financial position as of March 31, 1999 and the results of
operations for the three months ended March 31, 1999 and 1998,
and cash flows for the three months ended March 31, 1999 and
1998. The results of operations for the three months ended March
31, 1999 and 1998 are not necessarily indicative of the results
to be expected for the full year.
The consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. Other
investments and corporate joint ventures, including CE Generation
(defined herein) where the Company has the ability to exercise
significant influence are accounted for under the equity method.
Investments, where the Company's ability to influence is limited,
are accounted for under the cost method of accounting.
Certain amounts in the 1998 financial statements and supporting
footnote disclosures have been reclassified to conform to the
1999 presentation. Such reclassification did not impact
previously reported net income or retained earnings.
Reference is made to the Company's most recently issued annual
report that included information necessary or useful to the
understanding of the Company's business and financial statement
presentations.
2. MidAmerican Merger:
On August 11, 1998, the Company entered into an Agreement and
Plan of Merger ("MidAmerican Merger") with MHC, Inc., formerly
MidAmerican Energy Holdings Company ("MHC"). The MidAmerican
Merger closed on March 12, 1999 and the Company paid $27.15 in
cash for each outstanding share of MHC common stock for a total
of approximately $2.42 billion in a merger pursuant to which MHC
became an indirect wholly owned subsidiary of the Company.
Additionally, the Company reincorporated in the State of Iowa and
was renamed MidAmerican Energy Holdings Company and upon closing
became an exempt public utility holding company.
The consummation of the MidAmerican Merger was conditioned upon
receipt of a number of regulatory and shareholder approvals. In
addition, regulatory approval required the disposition of partial
interests in certain of the Company's independent power
generating facilities prior to the consummation of the
MidAmerican Merger in order to maintain the qualifying facilities
status of such power generating facilities. See Note 3.
The MidAmerican Merger has been accounted for as a purchase
business combination and as such the results of operations of the
Company include the results of MHC beginning March 12, 1999. The
purchase price has been allocated to assets acquired and
liabilities assumed based on preliminary valuations and the
Company is awaiting final valuations. The Company recorded
goodwill of approximately $1.3 billion which is being amortized using
the straight line method over a 40 year period.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
2. MidAmerican Merger (continued):
On March 11, 1999, MidAmerican Funding, LLC, a wholly-owned
subsidiary of the Company, issued $200 million of 5.85% Senior
Secured Notes due 2001, $175 million of 6.339% Senior Secured
Notes due 2009, and $325 million of 6.927% Senior Secured Bonds
due 2029. The proceeds from the offering were used to complete
the MidAmerican Merger.
Unaudited pro forma combined revenue, income before extraordinary
item, net income and basic earnings per share of the Company and
MHC for the three months ended March 31, 1999 and 1998, as if the
acquisition had occurred at the beginning of the year after
giving effect to certain pro forma adjustments related to the
acquisitions, including the sales of the qualified facilities,
the issuance of senior secured bonds and the redemption of
limited recourse notes, and the redemption of the senior discount
notes, were $1.26 billion, $53.7 million, $22.1 million and $.37,
respectively, compared to $961.9 million, $21.4 million, $21.4
million and $.35 for the same period last year.
3. Qualified Facilities Dispositions:
The consummation of the MidAmerican Merger was conditioned upon
receipt of a number of regulatory approvals. Regulatory approval
required the disposition of partial interests in certain of the
Company's independent power generating facilities prior to the
consummation of the MidAmerican Merger in order to maintain the
qualifying facilities status of such power generating facilities.
To accomplish this disposition, the following events occurred in
the first quarter of 1999:
On February 8, 1999, the Company created a new subsidiary, CE
Generation LLC ("CE Generation") and subsequently transferred its
interest in the Company's power generation assets in the Imperial
Valley and the Gas Plants to CE Generation.
On February 26, 1999, the Company closed the sale of all of its
indirect ownership interests in the Coso Joint Ventures ("Coso")
to Caithness Energy LLC. The price includes $205 million in cash
and $5 million in contingent payments.
On March 2, 1999, CE Generation closed the sale of $400 million
aggregate principal amount of its 7.416% Senior Secured Bonds due
2018 and distributed the proceeds to the Company.
On March 3, 1999, the Company closed the sale of 50% of its
ownership interests in CE Generation to an affiliate of El Paso
Energy Corporation for an aggregate consideration of
approximately $247 million in cash, $6.5 million in contingent
payments and $23.5 million in equity commitments. Including the
gross proceeds from the CE Generation debt offering, the
aggregate consideration was approximately $677 million. Due to
the sale of 50% of its interests in CE Generation, the Company
has accounted for CE Generation as an equity investment beginning
March 3, 1999.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________
4. Extraordinary Items:
The remaining outstanding Senior Discount Notes were redeemed on
January 15, 1999 at a redemption price of 105.125% plus accrued
interest. Due to the early extinguishment of the Senior Discount
Notes, the Company recorded an extraordinary item of
approximately $14 million, net of tax.
On January 29, 1999, the Company commenced a cash offer for all
of its outstanding Limited Recourse Notes. The Company received
tenders from holders of an aggregate of approximately $195.8
million principal which were paid on March 3, 1999, at a
redemption price of 110.025% plus accrued interest. Due to the
early retirement of the Limited Recourse Notes, the Company
recorded an extraordinary item of approximately $17.5 million,
net of tax.
5. Properties, Plants, Contracts and Equipment:
Properties, plants, contracts and equipment comprise the
following (in thousands):
March 31, December 31,
1999 1998
(unaudited)
Operating assets:
Distribution system $3,919,533 $1,305,806
Power plants 830,296 1,868,002
Wells and resource development 154,010 473,237
Power sales agreements 107,837 193,868
Other assets 302,880 313,029
Total operating assets 5,314,556 4,153,942
Less accumulated depreciation
and amortization (381,659) (769,526)
Net operating assets 4,932,897 3,384,416
Mineral and gas reserves and exploration
assets, net 379,334 375,208
Construction in progress:
Casecnan 260,622 243,948
Indonesia 187,220 190,175
Zinc recovery project, Salton Sea V
and other 31,586 42,292
Total $ 5,791,659 $ 4,236,039
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________
6. Commitments and Contingencies:
Indonesia
On December 2, 1994, subsidiaries of the Company, Himpurna
California Energy Ltd. ("HCE") and Patuha Power, Ltd. ("PPL",
together with HCE, the "Indonesian Subsidiaries") executed
separate joint operation contracts for the development of
geothermal steam fields and geothermal power facilities located
in Central Java in Indonesia with Perusahaan Pertambangan Minyak
Dan Gas Bumi Negara ("Pertamina"), the Indonesian national oil
company, and executed separate "take-or-pay" energy sales
contracts ("ESCs") with both Pertamina and P.T. PLN (Persero)
("PLN"), the Indonesian national electric utility. The
Government of Indonesia provided sovereign guarantees of the
obligations under the joint operating and "take-or-pay"
contracts.
In 1997 and 1998 a series of Indonesian government decrees and
other actions (including the non-payment of all monthly invoices
from HCE's Dieng Unit I, which became operational in March 1998)
have created significant uncertainty as to whether PLN and the
Indonesian government will honor their contractual obligations to
the Indonesian Subsidiaries. The Indonesian Subsidiaries in 1998
initiated dispute resolution procedures under the ESCs and
sovereign performance undertakings with PLN and the Government of
Indonesia, respectively, and subsequently commenced arbitration
to resolve the dispute and they intend to continue to take
actions to require the Government of Indonesia to honor its
contractual obligations. However, actions by the Government of
Indonesia have created significant risks to the Indonesian
Subsidiaries. Dieng Unit I was operationally and contractually
completed in March 1998 when the "take-or-pay" obligations under
its contract with PLN commenced. However, PLN has defaulted on
the contractually required and sovereign guaranteed "take-or-pay"
payment obligations.
Accordingly, the Indonesian Subsidiaries commenced arbitration
proceedings, as provided under the Indonesian Subsidiaries'
contracts with PLN. On May 4, 1999 the Company announced that an
international arbitration panel entered unanimous awards in favor
of the Indonesian Subsidiaries in the arbitration matters brought
by them against PLN. Finding that PLN had breached the
provisions of the ESCs between PLN and both HCE and PPL, the
arbitration panel awarded HCE approximately $391.7 million and
PPL approximately $180.6 million in damages and ordered PLN to
pay these amounts immediately. If the above amounts are not paid
to HCE and PPL, as required by the arbitration panel, HCE and PPL
will proceed against the Government of Indonesia under the
sovereign performance undertakings provided to HCE and PPL by the
Ministry of Finance.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________
6. Commitments and Contingencies (continued):
NYSEG
On February 14, 1995, New York State Electric & Gas ("NYSEG")
filed with the Federal Energy Regulatory Commission ("FERC") a
Petition for a Declaratory Order, Complaint, and Request for
Modification of Rates in Power Purchase Agreements Imposed
Pursuant to the Public Utility Regulatory Policies Act of 1978
("Petition") seeking FERC (i) to declare that the rates NYSEG
pays under the Saranac Power Purchase Agreement ("Saranac PPA"),
which was approved by the New York Public Service Commission (the
"PSC"), were in excess of the level permitted under PURPA and
(ii) to authorize the PSC to reform the Saranac PPA. On March
14, 1995, the Saranac Partnership intervened in opposition to the
Petition asserting, inter alia, that the Saranac PPA fully
complied with PURPA, that NYSEG's action was untimely and that
the FERC lacked authority to modify the Saranac PPA. On March
15, 1995, the Company intervened also in opposition to the
Petition and asserted similar arguments. On April 12, 1995, the
FERC by a unanimous (5-0) decision issued an order denying the
various forms of relief requested by NYSEG and finding that the
rates required under the Saranac PPA were consistent with PURPA
and the FERC's regulations. On May 11, 1995, NYSEG requested
rehearing of the order and, by order issued July 19, 1995, the
FERC unanimously (5-0) denied NYSEG's request. On June 14, 1995,
NYSEG petitioned the United States Court of Appeals for the
District of Columbia Circuit (the "Court of Appeals") for review
of FERC's April 12, 1995 order. FERC moved to dismiss NYSEG's
petition for review on July 28, 1995. On October 30, 1996, all
parties filed final briefs and the Court of Appeals heard oral
arguments on December 2, 1996. On July 11, 1997, the Court of
Appeals dismissed NYSEG's appeal from FERC's denial of the
petition on jurisdictional grounds.
On August 7, 1997, NYSEG filed a complaint in the U.S. District
Court for the Northern District of New York against the FERC, the
PSC (and the Chairman, Deputy Chairman and the Commissioners of
the PSC as individuals in their official capacity), the Saranac
Partnership and Lockport Energy Associates, L.P. ("Lockport")
concerning the power purchase agreements that NYSEG entered into
with Saranac Partners and Lockport. NYSEG's suit asserts that
the PSC and the FERC improperly implemented PURPA in authorizing
the pricing terms that NYSEG, the Saranac Partnership and
Lockport agreed to in those contracts. The action raises similar
legal arguments to those rejected by the FERC in its April and
July 1995 orders. NYSEG in addition asks for retroactive
reformation of the contracts as of the date of commercial
operation and seeks a refund of $281 million from the Saranac
Partnership. The Saranac Partnership and other parties have
filed motions to dismiss and oral arguments on those motions
which were heard on March 2, 1998 and again on March 3, 1999.
The Saranac Partnership believes that NYSEG's claims are without
merit for the same reasons described in the FERC's orders.
Cooper Litigation
On July 23, 1997, Nebraska Public Power District ("NPPD") filed a
Complaint, in the United States District Court for the District
of Nebraska, naming MidAmerican Energy Company ("MEC"), an
indirectly wholly owned subsidiary of the Company, as the
defendant and seeking declaratory judgment as to three issues
under the parties' long-term power purchase
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________
6. Commitments and Contingencies (continued):
agreement for Cooper Nuclear Station ("Cooper") capacity and
energy. More specifically, NPPD seeks a declaratory judgment in
the following respects: (1) that MEC is obligated to pay 50% of
all costs and expenses associated with decommissioning Cooper,
and that in the event NPPD continues to operate Cooper after
expiration of the power purchase agreement (September 2004), MEC
is not entitled to reimbursement of any decommissioning funds it
has paid to date or will pay in the future; (2) that the current
method of allocating transition costs as a part of the
decommissioning cost is proper under the power purchase
agreement; and (3) that the current method of investing
decommissioning funds is proper under the power purchase
agreement.
MEC filed its answer and contingent counterclaims. The
contingent counterclaims filed by MEC are generally as follows:
(1) that MEC has no duty under the power purchase agreement to
reimburse or pay 50% of the decommissioning costs unless certain
conditions occur; (2) that NPPD has the duty to repay all amounts
that MEC has prefunded for decommissioning in the event NPPD
operates the plant after the term of the power purchase
agreement; (3) that NPPD is equitably estopped from continuing to
operate the plant after the term of the power purchase agreement;
(4) that NPPD has granted MEC an option to continue taking 50% of
the power from the plant; (5) that the term "monthly power costs"
as defined in the power purchase agreement does not include costs
and expenses associated with decommissioning the plant; (6) that
MEC has no duty to pay for nuclear fuel, O&M projects or capital
improvements that have useful lives after the term of the power
purchase agreement; (7) that transition costs are not included in
any decommissioning costs and expenses; (8) that NPPD has
breached its duty to MEC in making investments of certain funds;
(9) that reserves in certain accounts are excessive and should be
refunded to MEC; and (10) that NPPD must credit MEC for certain
payments by MEC for low-level radioactive waste disposal.
MEC and NPPD are currently involved in discovery. The trial in
this case is presently scheduled for November 1999. MEC is
vigorously defending and pursuing its interest in this
proceeding.
7. Comprehensive Income:
Comprehensive income (loss) for the three months ended March 31,
1999 and 1998 was $(4.8) million and $38.1 million, respectively.
Comprehensive income differs from net income due to foreign
currency translation adjustments.
8. Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
which established accounting and reporting standards for
derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for
all fiscal quarters of fiscal years beginning after June 15,
1999. The Company is in the process of evaluating the impact of
this accounting pronouncement.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________
9. Segment Information:
The Company has identified four reportable business segments
principally based on geographic area: Domestic electricity
generation, foreign electricity generation (primarily the
Philippines), domestic utility operations and foreign utility
operations (primarily the United Kingdom). Information related to
the Company's reportable operating segments is shown below (in
thousands).
Three Months Ended
March 31,
1999 1998
Revenue:
Domestic generation $ 82,510 $ 122,595
Foreign generation 52,388 55,264
Domestic utility 119,724 ---
Foreign utility 562,189 462,442
Segment revenue 816,811 640,301
Corporate 41,207 4,010
$858,018 $ 644,311
Operating income: (1)
Domestic generation $ 44,998 $ 58,883
Foreign generation 31,187 35,625
Domestic utility 12,087 ---
Foreign utility 60,970 49,896
Segment operating income 149,242 144,404
Corporate 28,357 (7,354)
$177,599 $ 137,050
Capital expenditures:
Domestic generation $ 28,553 $ 17,215
Foreign generation 18,669 87,230
Domestic utility 5,031 ---
Foreign utility (2) 25,916 93,136
Segment capital expenditures 78,169 197,581
Corporate 374 310
$ 78,543 $ 197,891
(1) Operating income excludes interest expense, net of
capitalized interest.
(2) Capital expenditures at the foreign utility exclude the
effect of exchange rate changes.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________
9. Segment Information (continued):
March 31, December 31,
1999 1998
Identifiable assets:
Domestic generation $ 702,422 $ 2,458,842
Foreign generation 1,863,371 1,956,387
Domestic utility 5,468,165 ---
Foreign utility 2,947,335 3,095,839
Segment identifiable assets 10,981,293 7,511,068
Corporate 159,535 1,592,456
$11,140,828 $ 9,103,524
Long-lived assets:
Domestic generation $ 433,708 $ 1,930,347
Foreign generation 1,314,437 1,305,190
Domestic utility 4,240,220 ---
Foreign utility 2,445,953 2,519,615
Segment long-lived assets 8,434,318 5,755,152
Corporate 20,393 19,063
$ 8,454,711 $ 5,774,215
The remaining differences from the segment amounts to the
consolidated amounts relate principally to the corporate
functions including administrative costs, corporate cash and
related interest income as well as the gain on the sale of the
qualified facilities.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Results of Operations:
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and results of operations during the periods included
in the accompanying statements of operations.
As a result of the acquisition of MHC and the sales of Coso and
an interest in CE Generation, the Company's future results will
differ significantly from the Company's historical results.
Acquisitions:
On August 11, 1998, the Company entered into an Agreement and
Plan of Merger with MHC. The MidAmerican Merger closed on March
12, 1999 and the Company paid $27.15 in cash for each outstanding
share of MHC common stock for a total of approximately $2.42
billion in a merger, pursuant to which MHC became an indirect
wholly owned subsidiary of the Company. Additionally, the
Company reincorporated in the State of Iowa, was renamed
MidAmerican Energy Holdings Company and upon closing became an
exempt public utility holding company.
The consummation of the MidAmerican Merger was conditioned upon
receipt of a number of regulatory and shareholder approvals and
the disposition of partial interests in certain of the Company's
power generating facilities in order to maintain the qualifying
facilities status of such independent power generating
facilities. On February 26, 1999, the Company closed the sale of
all of its ownership interests in the Coso Project to Caithness
Energy LLC ("Caithness"). The price includes $205 million in
cash and $5 million in contingent payments plus the assumption of
approximately $67.7 million in debt. On February 8, 1999, the
Company created a new subsidiary, CE Generation LLC ("CE
Generation") and subsequently transferred its interest in the
Imperial Valley Projects and Gas Plants to CE Generation. On
March 2, 1999, CE Generation closed the sale of $400 million
aggregate principal amount of its 7.416% Senior Secured Bonds due
2018. On March 3, 1999, the Company closed the sale of 50% of
its ownership interests in CE Generation to an affiliate of El
Paso Energy Corporation for an aggregate consideration of
approximately $247 million in cash, $6.5 million in contingent
payments and $23.5 million in equity commitments. Including the
gross proceeds from the CE Generation debt offering, the
aggregate consideration was approximately $677 million.
Business of MHC:
MHC's interests include 100% of the common stock of MEC,
MidAmerican Capital Company and Midwest Capital Group and 95% of
the common stock of MidAmerican Realty Services. MEC is primarily
engaged in the business of generating, transmitting, distributing
and selling electricity and in distributing, selling and
transporting natural gas. MidAmerican Capital Company manages
marketable securities and passive investment activities,
nonregulated wholesale and retail natural gas businesses,
security services and other energy-related, nonregulated
activities. Midwest Capital Group functions as a regional
business development company in MEC's service territory.
MidAmerican Realty Services includes MHC's real estate brokerage
operations and offers integrated real estate services in seven
states including residential brokerage, relocation, title,
abstract and mortgage services.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Business of MHC (continued):
Currently, MEC has gas and electric operations in Iowa, Illinois
and South Dakota and gas operations in Nebraska. Most of MEC's
business is conducted in a rate-regulated environment and
accordingly, many of its decisions as to the source and use of
resources and other strategic matters are evaluated from a
utility business perspective. However, beginning January 1,
1998, MEC began managing its operations as four distinct business
units: generation, transmission, energy delivery and retail.
Certain administrative functions are handled by a corporate
services group which supports all of the business units.
Although specific functions may be moved between business units
as future circumstances warrant, the principal focus of each
business unit has been established. Presently, significant
functions of the generation business unit include the production
and purchase of energy and the sale of wholesale energy. The
transmission business unit coordinates all activities related to
MEC's transmission facilities, including monitoring access to and
assuring the reliability of the transmission system. Energy
delivery includes the distribution of electricity and natural gas
to end-users, and related activities. Retail includes marketing,
customer service and related functions for core and complementary
products and services.
Business of Northern:
A significant portion of the Company's results of operations are
attributable to Northern Electric plc ("Northern") operations
which consist primarily of the distribution and supply of
electricity, supply of natural gas and other auxiliary
businesses. Northern's operations are seasonal in nature with a
disproportionate percentage of revenues and earnings historically
being earned in the Company's first and fourth quarters.
Northern receives electricity from the national grid transmission
system and distributes it to customers' premises using its
network of transformers, switchgear and cables. Substantially all
of the customers in Northern's authorized area are connected to
Northern's network and can only be delivered electricity through
Northern's distribution system, regardless of whether it is
supplied by Northern's own supply business or by other suppliers,
thus providing Northern with distribution volume that is stable
from year to year. Northern charges access fees for the use of
the distribution system. The prices for distribution are
controlled by a prescribed formula that limits increases (and may
require decreases) based upon the rate of inflation in the United
Kingdom and other regulatory action.
Northern's supply business primarily involves the bulk purchase
of electricity, through a central pool, and subsequent resale to
individual customers. The supply business generally is a high
volume business which tends to operate at lower profitability
levels than the distribution business. Prior to November 4, 1998,
Northern was the exclusive supplier of electricity to premises in
its authorized area, except where the maximum demand of a
customer was greater than 100kW. The income received by the
supply business from customers with demand under 100kW was
controlled by a prescribed formula, while income received from
other customers was not regulated. In the competitive market
between 100kW and 1MW, Northern has significantly increased its
sales during 1998 and 1999. In the April 1999 contract round
there has been a further increase of 85%. Northern is now the
third largest electricity supplier in this sector of the
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Business of Northern (continued):
market. Beginning November 4, 1998, liberalization of the entire
market in Northern's area commenced in stages with complete
liberalization achieved in Northern's authorized area by the end
of April, 1999.
Northern also competes to supply gas inside and outside its
authorized area. In the supply of gas to the business market
Northern has increased its annual gas sales from 50 million
therms in 1997 to its present level of 200 million therms. In
the residential market Northern currently supplies gas to 550,000
customers and has over 100,000 additional customers progressing
through the registration system. Northern is now the third
largest gas supplier in the residential market. Northern
continues to expand its electricity and gas supply customer base
through the Dual Fuel marketing program.
Power Generation Projects:
On February 8, 1999, the Company created a new subsidiary, CE
Generation LLC ("CE Generation") and subsequently transferred its
interest in the Imperial Valley Projects and Gas Plants to CE
Generation. On March 2, 1999, CE Generation closed the sale of
$400 million aggregate principal amount of its 7.416% Senior
Secured Bonds due 2018. On March 3, 1999, the Company closed the
sale of 50% of its ownership interests in CE Generation to an
affiliate of El Paso Energy Corporation for an aggregate
consideration of approximately $247 million in cash, $6.5 million
in contingent payments and $23.5 million in equity commitments.
Including the gross proceeds from the CE Generation debt
offering, the aggregate consideration was approximately $677
million. Due to the sale of 50% of its interests in CE
Generation, the Company has accounted for CE Generation as an
equity investment beginning March 3, 1999.
For purposes of consistent presentation, plant capacity factors
for Vulcan, Hoch (Del Ranch), Elmore and Leathers (collectively
the "Partnership Project") are based on capacity amounts of 34,
38, 38, and 38 net MW respectively, and for Salton Sea I, Salton
Sea II, Salton Sea III and Salton Sea IV plants (collectively the
"Salton Sea Project") are based on capacity amounts of 10, 20,
49.8 and 39.6 net MW respectively (the Partnership Project and
the Salton Sea Project are collectively referred to as the
"Imperial Valley Project"). Plant capacity factors for Saranac,
Power Resources, NorCon and Yuma (collectively the "Gas Plants")
are based on capacity amounts of 240, 200, 80, and 50 net MW,
respectively. Each plant possesses an operating margin which
allows for production in excess of the amount listed above.
Utilization of this operating margin is based upon a variety of
factors and can be expected to vary between calendar quarters,
under normal operating conditions.
The Partnership Project sells all electricity generated by the
respective plants pursuant to four separate long-term agreements
("SO4 Agreements") between the respective projects and Southern
California Edison Company ("Edison"). These SO4 Agreements
provide for capacity payments, capacity bonus payments and energy
payments. Edison makes fixed annual capacity payments and
capacity bonus payments to the projects to the extent that
capacity factors exceed certain benchmarks. The price for
capacity and capacity bonus payments is fixed for the life of
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Power Generation Projects: (continued)
the SO4 Agreements and the capacity payment is significantly
higher in the months of June through September. Energy is sold at
increasing scheduled rates for the first ten years after firm
operation and thereafter at Edison's avoided cost of energy.
The scheduled energy price periods of the Partnership Project SO4
Agreements extended until February 1996 for the Vulcan
Partnership, December 1998 for the Hoch (Del Ranch) and Elmore
Partnerships, and extend until December 1999 for the Leathers
Partnership.
For 1999, Navy I, Vulcan, Hoch and Elmore are receiving Edison's
avoided cost of energy pursuant to their respective SO4
Agreements. The SO4 Agreement for Leathers provides for energy
rates of 15.6 cents per kWh in 1999.
Salton Sea I sells electricity to Edison pursuant to a 30-year
negotiated power purchase agreement, as amended (the "Salton Sea
I PPA"), which provides for capacity and energy payments. The
energy payment is calculated using a base price which is subject
to quarterly adjustments based on a basket of indices. The time
period weighted average energy payment for Salton Sea I was 5.4 cents
per kWh during the three months ended March 31, 1999. As the
Salton Sea I PPA is not an SO4 Agreement, the energy payments do
not revert to Edison's avoided cost of energy.
Salton Sea II and Salton Sea III sell electricity to Edison
pursuant to 30-year modified SO4 Agreements that provide for
capacity payments, capacity bonus payments and energy payments.
The price for contract capacity and contract capacity bonus
payments is fixed for the life of the modified SO4 Agreements.
The energy payments for the first ten year period, which expires
in April 2000 for Salton Sea II and expired in February 1999 for
Salton Sea III, are levelized at a time period weighted average
of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II and Salton
Sea III, respectively. Thereafter, the monthly energy payments
will be Edison's avoided cost of energy. For Salton Sea II only,
Edison is entitled to receive, at no cost, 5% of all energy
delivered in excess of 80% of contract capacity through September
30, 2004.
Salton Sea IV sells electricity to Edison pursuant to a modified
SO4 agreement which provides for contract capacity payments on 34
MW of capacity at two different rates based on the respective
contract capacities deemed attributable to the original Salton
Sea PPA option (20 MW) and to the original Fish Lake PPA (14 MW).
The capacity payment price for the 20 MW portion adjusts
quarterly based upon specified indices and the capacity payment
price for the 14 MW portion is a fixed levelized rate. The
energy payment (for deliveries up to a rate of 39.6 MW) is at a
fixed price for 55.6% of the total energy delivered by Salton Sea
IV and is based on an energy payment schedule for 44.4% of the
total energy delivered by Salton Sea IV. The contract has a 30-
year term but Edison is not required to purchase the 20 MW of
capacity and energy originally attributable to the Salton Sea I
PPA option after September 30, 2017, the original termination
date of the Salton Sea I PPA.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Power Generation Projects: (continued)
For the three months ended March 31, 1999, Edison's average
avoided cost of energy was 2.6 cents per kWh. Estimates of Edison's
future avoided cost of energy vary substantially from year to
year. The Company cannot predict the likely level of avoided cost
of energy prices under the SO4 Agreements and the modified SO4
Agreements at the expiration of the scheduled payment periods.
The revenues generated by each of the projects operating under
SO4 Agreements will likely decline significantly after the
expiration of the respective scheduled payment periods.
The Saranac Project sells electricity to New York State Electric
& Gas ("NYSEG") pursuant to a 15-year negotiated power purchase
agreement (the "Saranac PPA"), which provides for capacity and
energy payments. Capacity payments, which in 1999 total 2.4 cents per
kWh, are received for electricity produced during "peak hours" as
defined in the Saranac PPA and escalate at approximately 4.1%
annually for the remaining term of the contract. Energy payments,
which average 7.0 cents per kWh in 1999, escalate at approximately
4.4% annually for the remaining term of the contract. The
Saranac PPA expires in June of 2009. See Note 6 to the financial
statements regarding NYSEG Petition.
The Power Resources Project sells electricity to Texas Utilities
Electric Company ("TUEC") pursuant to a 15-year negotiated power
purchase agreement (the "Power Resources PPA"), which provides
for capacity and energy payments. Capacity payments and energy
payments, which in 1999 are approximately $3.2 million per month
and 3.1 cents per kWh, respectively, escalate at 3.5% annually for the
remaining term of the contract. The Power Resources PPA expires
in September 2003.
The NorCon Project sells electricity to Niagara Mohawk Power
Corporation ("NIMO") pursuant to a 25-year negotiated power
purchase agreement (the "NorCon PPA") which provides for energy
payments calculated pursuant to an adjusting formula based on
NIMO's ongoing Tariff Avoided Cost and the contractual Long-Run
Avoided Cost. The NorCon PPA term extends through December 2017.
The Yuma Project sells electricity to San Diego Gas & Electric
Company ("SDG&E") under an existing 30-year power purchase
contract. The energy is sold at SDG&E's avoided cost of energy
and the capacity is sold to SDG&E at a fixed price for the life
of the power purchase contract. The contract term extends
through May 2024.
The Upper Mahiao Project (the "Upper Mahiao Project") was deemed
complete in June 1996 and began receiving capacity payments
pursuant to the Upper Mahiao Energy Conversion Agreement
("ECA") in July of 1996. The Upper Mahiao Project is structured
as a ten year build-own-operate-transfer ("BOOT"), in which the
Company's subsidiary CE Cebu Geothermal Power Company, Inc. ("CE
Cebu"), the project company, is responsible for providing
operations and maintenance during the ten year BOOT period. The
electricity generated by the Upper Mahiao geothermal power plant
is sold to PNOC - Energy Development Corporation ("PNOC-EDC"),
which is also responsible for supplying the facility with the
geothermal steam. After the ten year cooperation period, during
which the Company will recover its capital investment plus
incremental return, the plant will be transferred to PNOC-EDC at
no cost.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Power Generation Projects: (continued)
PNOC-EDC is obligated to pay for electric capacity that is
nominated each year by CE Cebu, irrespective of whether PNOC-EDC
is willing or able to accept delivery of such capacity. PNOC-EDC
pays to CE Cebu a fee (the "Capacity Fee") based on the plant
capacity nominated to PNOC-EDC in any year (which, at the plant's
design capacity, is approximately 95% of total contract revenues)
and a fee (the "Energy Fee") based on the electricity actually
delivered to PNOC-EDC (approximately 5% of total contract
revenues).
Payments under the Upper Mahiao ECA are denominated in U.S.
dollars, or computed in U.S. dollars and paid in Philippine pesos
at the then-current exchange rate, except for the Energy Fee,
which is paid in U.S. dollars. Significant portions of the
Capacity Fee and Energy Fee are indexed to U.S. and Philippine
inflation rates, respectively. PNOC-EDC's payment requirements,
and its other obligations under the Upper Mahiao ECA, are
supported by the Government of the Philippines through a
performance undertaking.
Unit I of the Malitbog Project (the "Malitbog Project") was
deemed complete in July 1996 and Units II and III in July 1997 at
which times such units commenced receiving capacity payments
under the Malitbog ECA. The Malitbog Project is owned and
operated by Visayas Geothermal Power Company ("VGPC"), a
Philippine general partnership that is wholly owned, indirectly,
by the Company. Under its contract, VGPC is to sell 100% of its
output on substantially the same basis as described above for the
Upper Mahiao Project to PNOC-EDC, which will in turn sell the
power to the National Power Corporation of the Philippines
("NPC"). However, VGPC receives 100% of its revenues from such
sales in the form of capacity payments. As with the Upper Mahiao
Project,
the Malitbog Project is structured as a ten year BOOT, in which
the Company is responsible for providing operations and
maintenance for the ten year BOOT period. After a ten year
cooperation period, during which the Company will recover its
capital investment plus incremental return, the plant will be
transferred to PNOC-EDC at no cost.
The Mahanagdong Project (the "Mahanagdong Project") was deemed
complete in July 1997 and began receiving capacity payments
pursuant to the Mahanagdong ECA in August of 1997. The
Mahanagdong Project is owned and operated by CE Luzon Geothermal
Power Company, Inc., a Philippine corporation, that is indirectly
owned by the Company with a minority partner participation. The
electricity generated by the Mahanagdong Project is sold to PNOC-
EDC on a "take or pay" basis, which is also responsible for
supplying the facility with the geothermal steam. The terms of
the Mahanagdong ECA are substantially similar to those of the
Upper Mahiao ECA. All of PNOC-EDC's obligations under the
Mahanagdong ECA are supported by the Government of the
Philippines through a performance undertaking. The capacity fees
are approximately 97% of total revenues at the design capacity
levels and the energy fees are approximately 3% of such total
revenues.
Plant capacity factors for Navy I, Navy II, and BLM (collectively
the "Coso Project") are based upon a capacity amount of 80 net MW
for each plant. The Coso Project sold all electricity generated
by the respective plants pursuant to three separate SO4
Agreements between the respective projects and Edison.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Power Generation Projects: (continued)
The scheduled energy price periods of the Coso Project SO4
Agreements extended until at least August 1997 for each of the
units operated by the Navy I Partnership and March 1999 and
January 2000 for each of the units operated by the BLM and Navy
II Partnerships, respectively.
On February 26, 1999, the Company closed the sale of all of its
ownership interests in the Coso Project to Caithness. The price
includes $205 million in cash and $5 million in contingent
payments plus the assumption of approximately $67.7 million in
debt.
Results of Operations for Three Months Ended March 31, 1999 and
1998:
Operating revenue increased in the first quarter of 1999 to
$797.9 million from $621.9 million for the same period in 1998, a
28.3% increase. Northern's operating revenue increased in the
first quarter of 1999 to $561.5 million from $460.2 million for
the same period in 1998 primarily due to higher volumes of gas
supplied as well as higher electricity revenues. Operating
revenue also increased due to the acquisition of MHC partially
offset by the sales of Coso and an interest in CE Generation.
The following data represents the supply and distribution
operations in the U.K.:
Three Months Ended
March 31,
1999 1998
Electricity Supplied (GWh) 4,564 3,761
Electricity Distributed (GWh) 4,224 4,171
Gas Supplied (Therms in millions) 183.7 88.4
The increase in electricity supplied for the three months ended
March 31, 1999 from the same period in 1998 is due primarily to
the increase in contract volumes in the competitive greater than
100 kW market. The increase in electricity distributed for the
three months ended March 31, 1999 from the same period in 1998 is
due to increased activity in the local economy. The increase in
gas supplied in 1999 from 1998 reflects the increased volume as
the domestic gas supply business in the U.K. opened up to
competition as a result of regulatory changes and the successful
dual fuel marketing campaign.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Results of Operations for Three Months Ended March 31, 1999 and
1998 (continued):
The following operating data represents the aggregate capacity
and electricity production of the domestic geothermal projects:
Three Months Ended
March 31,
1999 1998
Overall capacity factor 96.7% 93.8%
kWh produced (in thousands) 892,700 1,028,000
Capacity NMW* 427.4 507.4
* The three months ended March 31, 1999 is a weighted average
for the disposition of the Coso Project.
The capacity factor for the three months ended March 31, 1999
increased compared to the same period in 1998, due to scheduled
turbine overhauls at Elmore, Leathers and Salton Sea in 1998.
The following operating data represents the aggregate capacity
and electricity production of the Gas Plants:
Three Months Ended
March 31,
1999 1998
Overall capacity factor 84.6% 75.7%
kWh produced (in thousands) 1,041,500 931,500
Capacity NMW 570 570
The capacity factor of the Gas Plants reflects certain
contractual curtailments. Excluding these contractual
curtailments, the capacity factors would be 98.2% for the three
months ended March 31, 1999, compared with 86.0% for the same
period in 1998. The increase from the prior period was primarily
due to the severe winter snow and ice storms which caused
transmission curtailments at Saranac, as well as a turbine
overhaul at PRI in the first quarter of 1998.
Interest and other income increased in the first quarter of 1999
to $40.0 million from $22.5 million for the same period in 1998,
a 77.8% increase. The increase is primarily due to increased
interest income.
As a result of the sales of Coso and an interest in CE
Generation, the Company recorded a gain of $20.2 million.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Results of Operations for Three Months Ended March 31, 1999 and
1998 (continued):
Cost of sales increased in the first quarter of 1999 to $447.2
million from $312.6 million for the same period in 1998, an 43.0%
increase. The increase is primarily due to higher volumes of gas
and electricity supplied and the acquisition of MHC.
Operating expense increased in the first quarter of 1999 to
$142.0 million from $102.6 million for the same period in 1998, a
38.4% increase. The increase is primarily due to the acquisition
of MHC partially offset by the sales of Coso and an interest in
CE Generation.
General and administration costs decreased in the first quarter
of 1999 to $11.9 million from $12.0 million for the same period
in 1998, a 1.6% decrease. The decrease is primarily due to the
continuing integration of Northern's corporate costs.
Depreciation and amortization decreased marginally in the first
quarter of 1999 to $79.4 million from $79.9 million for the same
period in 1998. The decrease is due to the sales of Coso and an
interest in CE Generation offset by the acquisition of MHC.
Interest expense, less amounts capitalized, increased in the
first quarter of 1999 to $100.8 million from $81.1 million for
the same period in 1998, a 24.3% increase. The increase is
primarily due to the acquisition of MHC and the greater average
outstanding debt balances.
The provision for income taxes increased in the first quarter of
1999 to $26.1 million from $18.5 million for the same period in
1998, a 40.7% increase. The increase is due to higher pretax
income during the first quarter of 1999.
Minority interest increased in the first quarter to $10.9 million
from $10.1 million for the same period in 1998, a 8.1% increase.
The increase is primarily due to the acquisition of MHC.
Income before extraordinary item increased in the first quarter
of 1999 to $39.8 million or $.67 per share, from $27.3 million or
$.45 per share for the same period in 1998.
On January 15, 1999, the Company redeemed its remaining
outstanding Senior Discount Notes at a redemption price of
105.125% plus accrued interest. On January 29, 1999, the Company
commenced a cash offer for all of its outstanding Limited
Recourse Notes. The Company received tenders from holders of an
aggregate of approximately $195.8 million principal which were
paid on March 3, 1999, at a redemption price of 110.025% plus
accrued interest. Due to the early retirement of the Senior
Discount Notes and Limited Recourse Notes, the Company recorded
an extraordinary item of approximately $31.5 million, net of tax.
Liquidity and Capital Resources:
The Company has available a variety of sources of liquidity and
capital resources, both internal and external. These resources
provide funds required for current operations, construction
expenditures, debt retirement and other capital requirements.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
The Company's cash and cash equivalents were $118.4 million at
March 31, 1999 as compared to $1,604.5 million at December 31,
1998. The majority of this decrease was due to the cash used to
acquire MHC. In addition, the Company recorded separately
restricted cash and investments of $455.3 million and $637.6
million at March 31, 1999 and December 31, 1998, respectively.
The restricted cash balance as of March 31, 1999 is comprised
primarily of amounts deposited in restricted accounts from which
the Company will fund the various projects under construction.
Additionally, the accounts include the Dieng Project and the
Patuha Project restricted cash accounts; and the Upper Mahiao
Project, the Mahanagdong Project and the Malitbog Project cash
reserves for the debt service reserve funds.
As of March 31, 1999, the Company held 24.1 million shares of
treasury stock at a cost of $773.3 million. The treasury shares
will provide shares for issuance under the Company's employee
stock option and share purchase plan and other outstanding
convertible securities. The repurchase plan minimizes the
dilutive effect of the additional shares issued under these
plans.
On August 11, 1998, the Company entered into an Agreement and
Plan of Merger with MHC. The MidAmerican Merger closed on March
12, 1999 and the Company paid $27.15 in cash for each outstanding
share of MHC common stock for a total of approximately $2.42
billion in a merger, pursuant to which MHC became an indirect
wholly owned subsidiary of the Company. Additionally, the Company
reincorporated in the State of Iowa, was renamed MidAmerican
Energy Holdings Company and upon closing became an exempt public
utility holding company.
The consummation of the MidAmerican Merger was conditioned upon
receipt of a number of regulatory and shareholder approvals. In
addition, the disposition of partial interests in certain of the
Company's power generating facilities was required prior to the
consummation of the MidAmerican Merger in order to maintain the
qualifying facilities status of such independent power generating
facilities.
On January 29, 1999, the Company commenced a cash offer for all
of its outstanding Limited Recourse Notes. The Company received
tenders from holders of an aggregate of $195.8 million of
principal amount of Notes which were paid on March 3, 1999, at a
redemption price of 110.025% plus accrued interest.
On February 26, 1999, the Company closed the sale of all of its
indirect ownership interest in the Coso Project to Caithness.
The price includes $205 million in cash and $5 million in
contingent payments plus the assumption of approximately $67.7
million in debt.
On February 8, 1999, the Company created a new subsidiary, CE
Generation and subsequently transferred its interest in the
Imperial Valley Projects and Gas Plants to CE Generation. On
March 2, 1999, CE Generation closed the sale of $400 million
aggregate principal amount of its 7.416% Senior Secured Bonds due
2018. On March 3, 1999, the Company closed the sale of 50% of
its ownership interests in CE Generation to an affiliate of El
Paso Energy Corporation for an aggregate consideration of
approximately $247 million in cash, $6.5 million in contingent
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
payments and $23.5 million in equity commitments. Including the
gross proceeds from the CE Generation debt offering, the
aggregate consideration was approximately $677 million.
On March 11, 1999, MidAmerican Funding, LLC, a wholly-owned
subsidiary of the Company, issued $200 million of 5.85% Senior
Secured Notes due 2001, $175 million of 6.339% Senior Secured
Notes due 2009, and $325 million of 6.927% Senior Secured Bonds
due 2029. The proceeds from the offering were used to complete
the MidAmerican Merger.
The remaining outstanding Senior Discount Notes were redeemed on
January 15, 1999 at a redemption price of 105.125% plus accrued
interest.
Minerals Extraction
The Company developed and owns the rights to a proprietary
process for the extraction of minerals from elements in solution
in the geothermal brine and fluids utilized at its Imperial
Valley plants (the "Salton Sea Extraction Project") as well as
the production of power to be used in the extraction process. A
pilot plant has successfully produced commercial quality zinc at
the
Company's Imperial Valley Project. The Company intends to
sequentially develop facilities for the extraction of manganese,
silver, gold, lead, boron, lithium and other products as it
further develops the extraction technology. The Company is also
investigating producing silica as an extraction project. Silica
is used as a filler for such products as paint, plastics and high
temperature cement.
Minerals LLC, an indirect wholly-owned subsidiary of the Company
is constructing the Zinc Recovery Project which will recover zinc
from the geothermal brine (the "Zinc Recovery Project").
Facilities will be installed near Imperial Valley Project sites
to extract a zinc chloride solution from the geothermal brine
through an ion exchange process. This solution will be
transported to a central processing plant where zinc ingots will
be produced through solvent extraction, electrowinning and
casting processes. The Zinc Recovery Project is designed to have
a capacity of approximately 30,000 metric tonnes per year and is
scheduled to commence commercial operation in mid-2000. The zinc
produced by the Zinc Recovery Project is expected to be sold
primarily to U.S. West Coast customers such as steel companies,
alloyers and galvanizers.
The Zinc Recovery Project is being constructed by Kvaerner U.S.
Inc. ("Kvaerner") pursuant to a date certain, fixed-price,
turnkey engineering, procurement and construction contract (the
"Zinc Recovery Project EPC Contract"). Kvaerner is a wholly-
owned indirect subsidiary of Kvaerner ASA, an internationally
recognized engineering and construction firm experienced in the
metals, mining and processing industries. Total project costs of
the Zinc Recovery Project are expected to be approximately $200.9
million. The Company has incurred $31.5 million of such costs
through March 31, 1999.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
Imperial Valley Construction Projects
Power LLC, an indirect wholly owned subsidiary of CE Generation,
is constructing Salton Sea V. Salton Sea V will be a 49 net MW
geothermal power plant which will sell approximately one-third of
its net output to the Zinc Recovery Project. The remainder will
be sold through the California Power Exchange ("PX").
Salton Sea V will be constructed pursuant to a date certain,
fixed price, turnkey engineering, procurement and construction
contract (the "Salton Sea V EPC Contract") by Stone & Webster
Engineering Corporation ("SWEC"). SWEC is one of the world's
leading engineering and construction firms for the construction
of electric power plants and, in particular, geothermal power
plants. Salton Sea V is scheduled to commence commercial
operation in mid-2000. Total project costs of Salton Sea V are
expected to be approximately $119.1 million.
Turbo LLC, an indirect wholly-owned subsidiary of CE Generation
is constructing the CE Turbo Project. The CE Turbo Project will
have a capacity of 10 net MW. The net output of the CE Turbo
Project will be sold to the Zinc Recovery Project or sold through
the PX.
The Partnership Projects are upgrading the geothermal brine
processing facilities at the Vulcan and Del Ranch Projects with
the Region 2 brine facilities construction. In addition to
incorporating the pH modification process, which has reduced
operating costs at the Salton Sea Projects, the more efficient
facilities are expected to achieve additional economies through
improved brine processing systems and the utilization of more
modern equipment. The Partnership Projects expect these
improvements will reduce brine-handling operating costs at the
Vulcan Project and the Del Ranch Project.
The CE Turbo Project and the Region 2 brine facilities
construction are being constructed by SWEC pursuant to a date
certain, fixed price, turnkey engineering, procurement and
construction contract (the "Region 2 Upgrade EPC Contract"). The
obligations of SWEC are guaranteed by Stone & Webster,
Incorporated. The CE Turbo Project is scheduled to commence
initial operations in mid-2000 and the Region 2 brine facilities
construction is scheduled to be completed in early-2000. Total
project costs for both the CE Turbo Project and the Region 2
brine facilities construction are expected to be approximately
$63.7 million.
Casecnan
CE Casecnan Water and Energy Company, Inc., a Philippine
Corporation ("CE Casecnan") which at completion of the Casecnan
Project is expected to be at least 70% indirectly owned by the
Company, is constructing the Casecnan Project, a combined
irrigation and 150 net MW hydroelectric power generation project
(the "Casecnan Project") located in the central part of the
island of Luzon in the Republic of the Philippines.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
CE Casecnan has entered into a fixed-price, date certain, turnkey
engineering, procurement and construction contract to complete
the construction of the Casecnan Project (the "Casecnan
Construction Contract"). The work under the Casecnan
Construction Contract is being conducted by a consortium
consisting of Cooperativa Muratori Cementisti CMC di Ravenna and
Impresa Pizzarotti & C. Spa working together with Siemens A.G.,
Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering
Ltd. Construction of the Casecnan Project is expected to be
completed in 2000. No further equity funding is expected.
Indonesia
On December 2, 1994, subsidiaries of the Company, Himpurna
California Energy Ltd. ("HCE") and Patuha Power, Ltd. ("PPL",
together with HCE, the "Indonesian Subsidiaries") executed
separate joint operation contracts for the development of
geothermal steam fields and geothermal power facilities located
in Central Java in Indonesia with Perusahaan Pertambangan Minyak
Dan Gas Bumi Negara ("Pertamina"), the Indonesian national oil
company, and executed separate "take-or-pay" energy sales
contracts ("ESCs") with both Pertamina and P.T. PLN (Persero)
("PLN"), the Indonesian national electric utility. The
Government of Indonesia provided sovereign guarantees of the
obligations under the joint operating and "take-or-pay"
contracts.
In 1997 and 1998 a series of Indonesian government decrees and
other actions (including the non-payment of all monthly invoices
from HCE's Dieng Unit I, which became operational in March 1998)
have created significant uncertainty as to whether PLN and the
Indonesian government will honor their contractual obligations to
the Indonesian Subsidiaries. The Indonesian Subsidiaries in 1998
initiated dispute resolution procedures under the ESCs and
sovereign performance undertakings with PLN and the Government of
Indonesia, respectively, and subsequently commenced arbitration
to resolve the dispute and they intend to continue to take
actions to require the Government of Indonesia to honor its
contractual obligations. However, actions by the Government of
Indonesia have created significant risks to the Indonesian
Subsidiaries. Dieng Unit I was operationally and contractually
completed in March 1998 when the "take-or-pay" obligations under
its contract with PLN commenced. However, PLN has defaulted on
the contractually required and sovereign guaranteed "take-or-pay"
payment obligations.
Accordingly, the Indonesian Subsidiaries commenced arbitration
proceedings as provided under the Indonesian Subsidiaries'
contracts with PLN. On May 4, 1999 the Company announced that
an international arbitration panel entered unanimous awards in
favor of the Indonesian Subsidiaries in the arbitration matters
brought by them against PLN. Finding that PLN had breached the
provisions of the ESCs between PLN and both HCE and PPL, the
arbitration panel awarded HCE approximately $391.7 million and
PPL approximately $180.6 million in damages and ordered PLN to
pay these amounts immediately. If the above amounts are not paid
to HCE and PPL, as required by the arbitration panel, HCE and PPL
will proceed against the Government of Indonesia under the
sovereign performance undertakings provided to HCE and PPL by the
Ministry of Finance.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
Evolution of the Domestic Utility Industry
The utility industry continues to evolve into an increasingly
competitive environment. In virtually every region of the
country, legislative and regulatory actions are being taken which
result in customers having more choices in their energy
decisions.
In the electric industry, the traditional vertical integration of
generation, delivery and marketing is being unbundled, with the
generation and marketing functions being deregulated. For local
gas distribution businesses, the supply, local delivery and
marketing functions are similarly being separated and opened to
competitors for all classes of customers. While retail electric
competition is presently not permitted in Iowa, MEC's primary
market, legislation to do so was introduced in Iowa's legislature
during the last session. Deregulation of the gas supply function
related to small volume customers is also being considered by the
Iowa Utilities Board ("IUB"). MEC is actively participating in
the legislative and regulatory processes shaping the new
environment in which its businesses will operate.
The generation and retail portions of MEC's electric business
will be most affected by competition. The introduction of
competition in the wholesale market has resulted in a
proliferation of power marketers and a substantial increase in
market activity. As retail choice evolves, competition from
other traditional utilities, power marketers and customer-owned
generation could put pressure on utility margins.
During the transition to full competition, increased volatility
in the marketplace can be expected. With the elimination of the
energy adjustment clause in Iowa, MEC is exposed to movements in
energy prices. Although MEC, under current expectations, has
sufficient generation for its retail electric needs,
recent wholesale market volatility underscores the increased risk
and opportunity associated with the energy business as it
transitions to competition.
Legislative and Regulatory Evolution
In December 1997, the Governor of Illinois signed into law a bill
to restructure Illinois' electric utility industry and transition
it to a competitive market. Under the law, larger non-
residential customers in Illinois and 33% of the remaining non-
residential Illinois customers will be allowed to select their
provider of electric supply services, beginning October 1, 1999.
All other non-residential customers will have supplier choice
starting December 31, 2000. Residential customers all receive
the opportunity to select their electric supplier on May 1, 2002.
In addition, the law provides for Illinois earnings above a
certain level of return on common equity ("ROE") to be shared
equally between customers and MEC beginning in April 2000. MEC's
ROE level will be based on a rolling two-year average, with the
first determination being based on an average of 1998 and 1999.
The ROE level at which MEC will be required to share earnings is
a multi-step calculation of average 30-year Treasury Bond rates
plus 5.50% for
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
1998 and 1999 and 6.50% for 2000 through 2004. If the resulting
average Treasury Bond rate were equal to the December 1998 30-
year Treasury Bond rate, the ROE level above which sharing must
occur would be approximately 10.6%. The law allows MEC to
mitigate the sharing of earnings above the threshold ROE through
accelerating depreciation or other non-cash methods that would
reduce MEC's earnings. MEC continues to evaluate its strategy
regarding the sharing mechanism.
Accounting Effects of Industry Restructuring
A possible consequence of competition in the utility industry is
that SFAS 71 may no longer apply. SFAS 71 sets forth accounting
principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71 allows,
among other things, the deferral of costs that would otherwise be
expensed when incurred. A majority of MEC's electric and gas
utility operations currently meet the criteria required by SFAS
71, but its applicability is periodically reexamined. If
portions of its utility operations no longer meet the criteria of
SFAS 71, MEC could be required to write off the related
regulatory assets and liabilities from its balance sheet, and
thus, a material adjustment to earnings in that period could
result. As of March 31, 1999, MEC had $292 million of regulatory
assets on its balance sheet.
Rate Matters: Electric
Electric prices for MEC's Iowa industrial customers were reduced
by $6 million annually and electric prices for MEC's Iowa
commercial customers were reduced by $4 million annually through
several steps from mid-1997 to the end of 1998. The reductions were
achieved through a retail access pilot project, negotiated
individual electric contracts and a $1.5 million tariffed rate
reduction for certain non-contract commercial customers.
The negotiated electric contracts have differing terms and
conditions as well as prices. The contracts range in length from
five to ten years, and some have price renegotiation and early
termination provisions exercisable by either party. The vast
majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 10-year contracts.
Prices are set as fixed prices; however, many contracts allow for
potential price adjustments with respect to environmental costs,
government imposed public purpose programs, tax changes, and
transition costs. While the contract prices are fixed (except
for the potential adjustment elements), the costs MEC incurs to
fulfill these contracts will vary. On an aggregate basis the
annual revenues under contract are approximately $180 million.
If MEC's annual Iowa electric jurisdictional ROE exceeds 12%,
then earnings above the 12% level will be shared equally between
customers and MEC; if the ROE exceeds 14%, then two-thirds of
MEC's share of those earnings will be used for accelerated
recovery of certain regulatory assets. A 1997 pricing plan settlement
agreement precludes MEC from filing for increased rates prior to 2001
unless the ROE falls below 9%. Other parties signing the agreement are
prohibited from filing
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
for reduced rates prior to 2001 unless the ROE, after reflecting
credits to customers, exceeds 14%. On April 14, 1999, the IUB
approved, subject to additional refund, MEC's ROE calculation and
its proposed $2.2 million refund to non-contract customers. MEC
has accrued for this refund. The agreement also eliminated MEC's
energy adjustment clause, and, as a result, the cost of fuel is
not directly passed on to customers.
Rate Matters: Gas
In October 1998, MEC made a filing with the IUB requesting a rate
increase for its Iowa retail gas customers. An interim rate
increase of approximately $6.7 million annually was approved by
the IUB on January 22, 1999, effective immediately. On April 23,
1999, the IUB issued an order approving a settlement agreement
between MEC, the OCA and other parties which provides for an
annual increase of $13.9 million. MEC anticipates the new rates
will be implemented by June 1999.
In November 1998, MEC filed with the South Dakota Public
Utilities Commission (SDPUC) requesting a rate increase for its
South Dakota retail gas customers. The SDPUC in April 1999
approved a rate increase of $2.4 million annually, effective May
1, 1999.
Environmental Matters
Following recommendations provided by the Ozone Transport
Assessment Group, the EPA, in November 1997, issued a Notice of
Proposed Rulemaking which identified 22 states and the District
of Columbia as making a significant contribution to nonattainment
of the ozone standard in downwind states in the eastern half of
the United States. In September 1998, the EPA issued its final
rules in this proceeding. Iowa is not subject to the emissions
reduction requirements in the final rules, and, as such, MEC's
facilities are not currently subject to additional emissions
reductions as a result of this initiative.
On July 18, 1997, the EPA adopted revisions to the National
Ambient Air Quality Standards (NAAQS) for ozone and a new
standard for fine particulate matter. Based on data to be
obtained from monitors located throughout each state, the EPA
will determine which states have areas that do not meet the air
quality standards (i.e., areas that are classified as
nonattainment). If a state has area(s) classified as
nonattainment area(s), the state is required to submit a State
Implementation Plan specifying how it will reach attainment of
the standards through emission reductions or other means. In
August 1998, the Iowa Environmental Protection Commission adopted
by reference the NAAQS for ozone and fine particulate matter.
The impact of the new standards on MEC will depend on the
attainment status of the areas surrounding MEC's operations and
MEC's relative contribution to the nonattainment status. The
attainment status of areas in the state of Iowa will not be known
for two to three years. However, if MEC's operations are
determined to contribute to nonattainment, the installation of
additional control equipment, such as scrubbers and/or selective
catalytic reduction, on MEC's
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
units could be required. The cost to install such equipment could
be significant. MEC will continue to follow the attainment
status of the areas in which it operates and evaluate the
potential impact of the status of these areas on MEC under the
new regulations.
Nuclear Decommissioning
Each owner of a nuclear facility is required to set aside funds
to provide for the cost of decommissioning its nuclear facility.
In general, decommissioning of a nuclear facility means to safely
remove the facility from service and restore the property to a
condition allowing unrestricted use by the operator. Based on
information presently available, MEC expects to contribute
approximately $42 million during the period 1999 through 2003 to
an external trust established for the investment of funds for
decommissioning the Quad Cities Station. Approximately 60% of the
trust's funds are now invested in domestic corporate debt and
common equity securities. The remainder is invested in
investment grade municipal and U.S. Treasury bonds.
MEC makes payments to Nebraska Public Power District ("NPPD")
related to decommissioning Cooper. These payments are reflected
in operating expenses in the income statement. NPPD estimates
call for MEC to pay approximately $57 million to NPPD for Cooper
decommissioning during the period 1999 through 2003. NPPD
invests the funds predominately in U.S. Treasury Bonds. MEC's
obligation for Cooper decommissioning may be affected by the
actual plant shutdown date and the status of the power purchase
contract at that time. In July 1997, NPPD filed a lawsuit in
United States District Court for the District of Nebraska naming
MEC as the defendant and seeking a declaration of MEC's rights
and obligations in connection with Cooper nuclear decommissioning
funding. See Note 6 to the financial statements regarding Cooper
litigation.
Cooper and Quad Cities Station decommissioning costs charged to
Iowa customers are included in base rates, and recovery of
increases in those amounts must be sought through the normal
ratemaking process. MEC currently recovers Quad Cities Station
decommissioning costs charged to Illinois customers through a
rate rider on customer billings.
Securitization of Accounts Receivable
In 1997, MEC entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the
majority of its billed accounts receivable to MidAmerican Energy
Funding Corporation (Funding Corp.), a special purpose entity
established to purchase accounts receivable from MEC. Funding
Corp. in turn sold receivable interests to outside investors. In
consideration for the sale, MEC received $70 million in cash and
the remaining balance in the form of a subordinated note from
Funding Corp. The agreement is structured as a true sale, as
determined by SFAS No. 125, under which the creditors of Funding
Corp. will be entitled to be satisfied out of the assets of
Funding Corp. prior to any value being returned to MEC or its
creditors. Therefore, the accounts receivable sold are not
reflected on the balance sheet. As of March 31, 1999, $112.3
million of accounts receivable, net of reserves, were sold under
the agreement.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
In December 1998, Northern entered into a revolving receivable
purchase agreement with Kitty Hawk Funding Corporation ("Kitty
Hawk"), an unaffiliated special purpose entity established to
purchase accounts receivable. The agreement, which expires in
December 1999, allows Northern to sell all of its rights, title
and interest in the majority of its billed accounts receivable
and to borrow against its unbilled accounts receivable. In March
1999, Northern sold a significant portion of its accounts
receivable and received approximately $161 million in cash. As
the transaction was structured as a true sale, the accounts
receivable are not reflected on the Company's balance sheet. As
of March 31, 1999, $161 million of accounts receivable, net of
reserves, were sold under the agreement.
Development Activity
The Company is actively seeking to develop, construct, own and
operate new energy projects, both domestically and
internationally, the completion of any of which is subject to
substantial risk. Development can require the Company to expend
significant sums for preliminary engineering, permitting, fuel
supply, resource exploration, legal and other expenses in
preparation for competitive bids which the Company may not win or
before it can be determined whether a project is feasible,
economically attractive or capable of being financed. Successful
development and construction is contingent upon, among other
things, negotiation on terms satisfactory to the Company of
engineering, construction, fuel supply and power sales contracts
with other project participants, receipt of required governmental
permits and consents and timely implementation of construction.
There can be no assurance that development efforts on any
particular project, or the Company's development efforts
generally, will be successful.
The Company believes that the international independent power
market holds opportunities for financially attractive energy
product development. The financing, construction and development
of projects outside the United States entail significant
political and financial risks (including, without limitation,
uncertainties associated with first time privatization efforts in
the countries involved, currency exchange rate fluctuations,
currency repatriation restrictions, political instability, civil
unrest and expropriation) and other structuring issues that have
the potential to cause substantial delays or material impairment
of the value of the project being developed, which the Company
may not be fully capable of insuring against. The uncertainty of
the legal environment in certain foreign countries in which the
Company may develop or acquire projects could make it more
difficult for the Company to enforce its rights under agreements
relating to such projects. In addition, the laws and regulations
of certain countries may limit the ability of the Company to hold
a majority interest in some of the projects that it may develop
or acquire. The Company's international projects may, in certain
cases, be terminated by a government. Projects in operation,
construction and development are subject to a number of
uncertainties more specifically described in the Company's Form 8-
K, dated March 26, 1999, filed with the Securities and Exchange
Commission.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
Year 2000
What is generally known as the year 2000 ("Y2K") computer issue
arose because many existing computer programs and embedded
systems use only the last two digits to refer to a year.
Therefore, those computer programs do not properly distinguish
between a year that begins with "20" instead of "19". If not
corrected, many computer applications could fail or create
erroneous results. The failure to correct a material Y2K item
could result in an interruption in, or a failure of, certain
normal business activities or operations including the
generation, distribution, and supply of electricity and natural
gas. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial
condition.
The Y2K issue creates uncertainty for the Company from potential
issues with its own computer systems and from third parties with
whom the Company deals on transactions worldwide. The Company's
operations utilize systems and equipment provided by other
organizations. As a result, Y2K readiness of suppliers, vendors,
service providers or customers could impact the Company's
operations. The Company is assessing the readiness of such
constituent entities and the impacts on those entities that rely
upon the Company's services. The Company is unable to determine
at this time whether the consequences of Y2K failures of third
parties will have a material impact on the Company's results of
operations, liquidity or financial condition.
The Company has commenced, for all of its information systems, a
Y2K date conversion project to address all necessary code
changes, testing and implementation in order to resolve the Y2K
issue. The Company created a worldwide Y2K project team to
identify, assess and correct all of its information technology
(IT) and non-IT systems, as well as, identify and assess third
party systems.
The Company has identified and assessed substantially all of its
IT and non-IT systems and is currently in the process of
repairing or replacing those systems which it believes are not
Year 2000 compliant. As of March 31, 1999, the Company is
approximately 91% complete in repairing or replacing those
systems. The Company expects to be 100% complete of correcting,
testing, and compliance by October 1999.
Total Y2K expenditures, for both repairing or replacing non-
compliant systems, are expected to total approximately $27.8
million. Through March 31, 1999, the Company has incurred
approximately $11 million of Y2K expenditures. The Company has
renovated or replaced several non-compliant systems to gain
enhanced functionalities. The cost of these types of renovations
and replacements is not reported herein since their development
and installation were not driven by Y2K concerns. The Company is
not aware of any additional material costs necessary to bring all
of its systems into compliance however, there is no assurance
that additional costs will not be incurred.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________
Liquidity and Capital Resources (continued):
A contingency plan identifying credible worst-case scenarios is
being developed. The contingency plan is comprised of both
mitigation and recovery aspects. Mitigation entails planning to
reduce the impact of unresolved year 2000 problems, and recovery
entails planning to restore services in the event that year 2000
problems occur. It is expected that the contingency plan will be
complete by mid-year 1999.
MEC participated in a contingency planning drill coordinated by
the North American Electric Reliability Council on April 9, 1999,
and intends to participate in a second drill on September 8-9,
1999.
Although management believes that the Y2K project will be
substantially complete before January 1, 2000, any unforeseen
failures of the Company's and/or third parties' computer systems
could have a material impact on the Company's ability to conduct
its business.
Certain information included in this report contains forward-
looking statements made pursuant to the Private Securities
Litigation Reform Act of 1995 ("Reform Act"). Such statements
are based on current expectations and involve a number of known
and unknown risks and uncertainties that could cause the actual
results and performance of the Company to differ materially from
any expected future results or performance, expressed or implied,
by the forward-looking statements. In connection with the safe
harbor provisions of the Reform Act, the Company has identified
important factors that could cause actual results to differ
materially from such expectations, including development
uncertainty, operating uncertainty, acquisition uncertainty,
uncertainties relating to doing business outside of the United
States, uncertainties relating to geothermal resources,
uncertainties relating to domestic and international (and in
particular, Indonesia) economic and political conditions and
uncertainties regarding the impact of regulations, changes in
government policy, industry deregulation and competition.
Reference is made to all of the Company's SEC filings, including
the Company's Report on Form 8-K dated March 26, 1999,
incorporated herein by reference, for a description of such
factors. The Company assumes no responsibility to update forward-
looking information contained herein.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
PART II - OTHER INFORMATION
Item 1 - Legal proceedings.
As of March 31, 1999, there are no material outstanding
lawsuits against the Company; however see Note 6,
Commitments and Contingencies regarding litigation involving
the Company's projects and subsidiaries.
Item 2 - Changes in Securities.
Not applicable.
Item 3 - Defaults on 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 and Reports on Form 8-K.
(a) Exhibits:
Exhibit 11 - Calculation of earnings per share.
Exhibit 15 - Awareness letter of Independent Accountants.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
During the quarter ended March 31, 1999 the Company filed
the following:
(i) Form 8-K dated January 19, 1999 announcing that the Company
redeemed in full its outstanding 10 1/4% Senior Discount Notes
due 2004.
(ii)Form 8-K dated January 25, 1999 announcing that the
Company signed an agreement to sell its minority
ownership interests in the Coso Geothermal Power
projects to Caithness Energy LLC.
(iii) Form 8-K dated January 29, 1999 announcing that
the Company had commenced a cash offer for all of
its outstanding 9 7/8% Limited Recourse Senior
Secured Notes due 2003.
(iv)Form 8-K dated February 23, 1999 announcing that the
Company has signed an agreement to sell 50% of its
ownership interests in CE Generation LLC to an
affiliate of El Paso Energy Corporation.
<PAGE>
(v) Form 8-K dated February 25, 1999 announcing that the
Company had established the final pricing for the
tender of its 9 7/8% Limited Recourse Senior Notes
due 2003. On March 1, 1999 CalEnergy announced that
it had received tenders from the holders of an
aggregate of $195,765,000 principal amount of its 9
7/8% Limited Recourse Senior Secured Notes.
(vi)Form 8-K dated February 26, 1999 reporting that the
Company had completed the sale of its ownership
interest in the Coso geothermal projects to
Caithness Energy LLC and that it closed the sale of
50% of its ownership interests in CE Generation LLC
to El Paso Power Holding Company.
(vii) Form 8-K dated March 11, 1999 reporting that
based on the pending consummation of the Company's
acquisition, it has received investment grade
ratings on its senior debt securities from all of
the securities rating agencies which issue ratings
on their securities.
(viii) Form 8-K dated March 11, 1999 reporting that
its subsidiary MidAmerican Funding, LLC closed the
sale of $700 million aggregate principal amount of
Senior Secured Notes and Bonds and that Registrant
announced that CalEnergy Company, Inc. incorporated
in Iowa (thereby forming the new Registrant) and had
closed its acquisition of MidAmerican Energy
Holdings Company, which had been renamed MHC, Inc.
(ix)Form 8-K dated March 12, 1999 reporting that
CalEnergy Company, Inc. had reincorporated in Iowa
by merging with and into the Registrant and changed
its name to MidAmerican Energy Holdings Company.
(x) Form 8-K dated March 26, 1999 reporting that in
connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995,
the Company is filing cautionary statements.
<PAGE>
SIGNATURES
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.
MIDAMERICAN ENERGY HOLDINGS COMPANY
Date: May 17, 1999 /s/ Patrick J. Goodman
Patrick J. Goodman
Senior Vice President & Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. No.
11 Calculation of Earnings Per Share 39
15 Awareness Letter of Independent Accountants 40
27 Financial Data Schedule 41
<PAGE>
Exhibit 11
MIDAMERICAN ENERGY HOLDINGS COMPANY
CALCULATION OF EARNINGS PER SHARE
(dollars in thousands, except per share amounts)
___________________
Three Months Ended
March 31,
1999 1998
Actual weighted average shares
outstanding for the period 59,205,397 61,081,469
Dilutive stock options and warrants
using average market prices 711,797 588,240
Additional dilutive stock options assuming
conversion of convertible preferred
securities of subsidiary trusts 13,326,683 7,672,883
Diluted shares outstanding 73,243,877 69,342,592
Net income per share before
extraordinary item $ 39,791 $ 27,295
Extraordinary item, net of tax (31,520) -
Net income available to
common stockholders $ 8,271 $ 27,295
Net income per share before
extraordinary item $ .67 $ .45
Extraordinary item (.53) -
Net income per share $ .14 $ .45
Diluted income per share before
extraordinary item(1) $ .62 $ .43
Diluted income per share based on SEC
interpretive release No. 34-9083(1) $ .19 $ .43
(1)-Net income available to common stockholders for the three
months ended March 31, 1999 and 1998 was increased by dividends
on convertible preferred securities of subsidiary trusts, net of
tax effect, of $5,471 and $2,751, respectively.
<PAGE>
Exhibit 15
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of MidAmerican Energy
Holdings Company for the three month periods ended March 31, 1999
and 1998 as indicated in our report dated April 28, 1999; because
we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included
in your Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is incorporated by reference in Registration Statements
No. 33-38431, No. 33-41152, No. 33-44934, No. 33-52147, No. 33-
64897, No. 333-30395 and No. 333-74691 on Form S-8 and
Registration Statements No. 33-51363, No. 333-32821 and No. 333-
62697 on Form S-3.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered a
part of a Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
May 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 573,765
<SECURITIES> 409,436
<RECEIVABLES> 476,460
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,173,318
<DEPRECIATION> 381,659
<TOTAL-ASSETS> 11,140,828
<CURRENT-LIABILITIES> 0
<BONDS> 6,452,901
655,528
147,787
<COMMON> 0
<OTHER-SE> 800,614
<TOTAL-LIABILITY-AND-EQUITY> 11,140,828
<SALES> 797,885
<TOTAL-REVENUES> 858,018
<CGS> 447,198
<TOTAL-COSTS> 142,018
<OTHER-EXPENSES> 11,852
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,840
<INCOME-PRETAX> 76,759
<INCOME-TAX> 26,065
<INCOME-CONTINUING> 39,791
<DISCONTINUED> 0
<EXTRAORDINARY> (31,520)
<CHANGES> 0
<NET-INCOME> 8,271
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.19
</TABLE>
