UNITED STATES
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
JUNE 30, 1999
Commission File No. 0-25551
MIDAMERICAN ENERGY HOLDINGS COMPANY
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(Exact name of registrant as specified in its charter)
Iowa 94-2213782
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, IA 50309
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(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
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Former name, former address and former fiscal year, if changed since last
report. N/A
------
61,161,585 shares of Common Stock, no par value, were outstanding as of June 30,
1999.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
PAGE NO.
ITEM 1. Financial Statements
Independent Accountants' Report.................................. 3
Consolidated Balance Sheets, June 30, 1999 and December 31, 1998. 4
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998............................ 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998........................ 6
Notes to Consolidated Financial Statements....................... 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 14
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 30
ITEM 2. Changes in Securities............................................ 30
ITEM 3. Defaults on Senior Securities.................................... 30
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 30
ITEM 5. Other Information................................................ 30
ITEM 6. Exhibits and Reports on Form 8-K................................. 31
Signatures................................................................. 32
Exhibit Index ............................................................. 33
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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 June 30, 1999, and the related
consolidated statements of operations for the three and six month periods ended
June 30, 1999 and 1998 and the related consolidated statements of cash flows for
the six month periods ended June 30, 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
July 26, 1999
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AS OF
---------------------------
JUNE 30 DECEMBER 31
1999 1998
------------ ------------
(UNAUDITED)
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ASSETS
Cash and investments ..................................................... $ 247,408 $ 1,606,148
Marketable securities .................................................... 130,079 -
Restricted cash and investments .......................................... 385,484 637,571
Accounts receivable ...................................................... 471,152 528,116
Properties, plant, contracts and equipment, net .......................... 5,661,656 4,236,039
Excess of cost over fair value of net assets acquired, net ............... 2,729,196 1,538,176
Regulatory assets ........................................................ 279,489 -
Equity investments ....................................................... 190,118 125,036
Deferred charges and other assets ........................................ 754,138 432,438
------------ -----------
TOTAL ASSETS ........................................................... $ 10,848,720 $ 9,103,524
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ......................................................... $ 336,285 $ 305,757
Accrued liabilities ...................................................... 1,750,757 1,009,091
Parent company debt ...................................................... 2,016,522 2,645,991
Subsidiary and project-level debt ........................................ 4,255,781 3,093,810
Deferred income taxes .................................................... 822,185 543,391
------------ -----------
Total Liabilities ...................................................... 9,181,530 7,598,040
------------ -----------
Deferred income .......................................................... 61,693 58,468
Preferred securities of subsidiaries ..................................... 147,196 66,033
Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary trusts .................. 450,000 553,930
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ........................................ 101,598 -
Commitments and contingencies (Note 6)
Stockholders' Equity:
Preferred stock - authorized 2,000 shares, no par value .................. - -
Common stock - authorized 180,000 shares, no par value;
82,980 shares issued; 61,162 and 59,605 shares outstanding
at June 30, 1999 and December 31, 1998, respectively ................... - -
Additional paid in capital ............................................... 1,239,517 1,238,690
Retained earnings ........................................................ 404,462 340,496
Accumulated other comprehensive income ................................... (23,721) 45
Treasury stock - 21,818 and 23,375 common shares at
June 30, 1999 and December 31, 1998, respectively, at cost ............. (713,555) (752,178)
------------ -----------
Total Stockholders' Equity ............................................. 906,703 827,053
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 10,848,720 $ 9,103,524
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
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<CAPTION>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------ ------------------------
1999 1998 1999 1998
----------- --------- ----------- -----------
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REVENUES:
Operating revenue ...................................... $ 1,003,602 $ 590,589 $ 1,801,487 $ 1,212,440
Interest and other income .............................. 33,617 29,929 73,577 52,389
Gain on sale of qualified facilities ................... - - 20,173 -
Gain on sale of McLeod ................................. 78,223 - 78,223 -
----------- --------- ----------- -----------
TOTAL REVENUES ........................................... 1,115,442 620,518 1,973,460 1,264,829
----------- --------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales .......................................... 499,868 269,768 947,066 582,413
Operating expense ...................................... 267,655 111,131 409,673 213,778
General and administration ............................. 11,050 10,814 22,902 22,858
Depreciation and amortization .......................... 111,395 85,659 190,746 165,584
Interest expense ....................................... 131,414 93,648 248,295 188,206
Less interest capitalized .............................. (16,669) (15,059) (32,710) (28,477)
----------- --------- ----------- -----------
TOTAL COSTS AND EXPENSES ................................. 1,004,713 555,961 1,785,972 1,144,362
----------- --------- ----------- -----------
Income before provision for income taxes ................. 110,729 64,557 187,488 120,467
Provision for income taxes ............................... 37,227 21,952 63,292 40,483
----------- --------- ----------- -----------
Income before minority interest .......................... 73,502 42,605 124,196 79,984
Minority interest ........................................ 12,441 10,139 23,344 20,223
----------- --------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM ......................... 61,061 32,466 100,852 59,761
Extraordinary item, net of tax ........................... (5,366) - (36,886) -
----------- --------- ----------- -----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS .............. $ 55,695 $ 32,466 $ 63,966 $ 59,761
=========== ========= =========== ===========
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM - BASIC.... $ 1.02 $ .54 $ 1.69 $ .99
Extraordinary item ....................................... (.09) - (.62) -
----------- ---------- ----------- -----------
NET INCOME PER SHARE...................................... $ .93 $ .54 $ 1.07 $ .99
=========== ========= =========== ===========
Average number of common shares outstanding ............. 60,037 60,235 59,622 60,658
=========== ========= =========== ===========
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM - DILUTED.. $ .91 $ .51 $ 1.53 $ .95
Extraordinary item ....................................... (.07) - (.51) -
----------- ----------- ----------- -----------
NET INCOME PER SHARE - DILUTED............................ $ .84 $ .51 $ 1.02 $ .95
=========== ========= =========== ===========
Diluted shares outstanding ............................... 72,638 74,346 72,945 74,641
=========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30
--------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 63,966 $ 59,761
Adjustments to reconcile to net cash flows from operating activities:
Gain on sale of QFs ...................................................... (20,173) -
Gain on sale of McLeod ................................................... (78,223) -
Extraordinary item, net of tax ........................................... 36,886 -
Depreciation and amortization ............................................ 162,206 143,598
Amortization of excess of cost over fair value of net assets acquired .... 28,540 21,986
Amortization of deferred financing costs and other costs ................. 10,907 8,458
Provision for deferred income taxes ...................................... (165,527) 21,316
Undistributed earnings on equity investments ............................. (5,939) 3,097
Income applicable to minority interest ................................... 6,085 2,242
Changes in other items:
Accounts receivable .................................................... 36,634 (86,712)
Accounts payable, accrued liabilities and deferred income .............. 22,998 (2,177)
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES ................................... 98,360 171,569
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of MidAmerican and Kiewit's interests, net of cash acquired ....... (2,501,425) (502,916)
Proceeds from sale of QFs, net of cash disposed ............................ 365,074 -
Purchase of marketable securities .......................................... (22,366) -
Proceeds from sale of marketable securities ................................ 382,374 -
Capital expenditures relating to operating projects ........................ (64,909) (120,615)
Acquisition of CE Gas assets ............................................... - (35,677)
Domestic - construction in progress ........................................ (58,668) -
Indonesian and other development costs net of recoveries.................... 4,881 (86,846)
Philippine-construction in progress ........................................ (30,319) (61,002)
Decrease in restricted cash and investments ................................ 113,847 160,850
Increase in other assets ................................................... (2,878) (25,340)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES ................................... (1,814,389) (671,546)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subsidiary and project debt .................................. 1,100,000 107,234
Proceeds from securitization ............................................... 161,430 -
Repayment of subsidiary and project debt ................................... (148,018) (103,402)
Repayment of parent company debt ........................................... (676,971) -
Deferred financing costs ................................................... 7,685 (20,094)
Purchase of treasury stock ................................................. (64,730) (689,592)
Other ...................................................................... 2,020 18,538
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES ................................... 381,416 (687,316)
----------- -----------
Effect of exchange rate changes on cash .................................... (24,127) 8,329
----------- -----------
Net decrease in cash and cash equivalents .................................. (1,358,740) (1,178,964)
Cash and cash equivalents at beginning of period ........................... 1,606,148 1,451,410
----------- -----------
Cash and cash equivalents at end of period ................................. $ 247,408 $ 272,446
=========== ===========
Interest paid, net of amount capitalized................................... $ 178,961 $ 139,395
=========== ===========
Income taxes paid.......................................................... $ 47,192 $ 29,417
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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 June 30, 1999 and the results of
operations for the three and six months ended June 30, 1999 and 1998, and cash
flows for the six months ended June 30, 1999 and 1998. The results of operations
for the three and six months ended June 30, 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
it's 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
$1.5 billion which is being amortized using the straight line method over a 40
year period.
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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 six months
ended June 30, 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 notes and bonds and the redemptions of certain
limited recourse notes and senior discount notes, were $2.38 billion, $114.7
million, $77.8 million and $1.31, respectively, compared to $1.81 billion, $29.5
million, $29.5 million and $.49, respectively, 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 $245 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 $675 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.
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 loss 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
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early retirement of the Limited Recourse Notes, the Company recorded an
extraordinary loss of approximately $17.5 million, net of tax.
The Company redeemed $64.3 million in principal value of the 9.5% Senior Notes
at an aggregate price of $71.1 million throughout the second quarter of 1999.
Due to the early extinguishment of this debt, the Company recorded an
extraordinary loss of $5.4 million net of tax.
5. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT:
Properties, plants, contracts and equipment comprise the following (in
thousands):
June 30 December 31
1999 1998
----------- -----------
(Unaudited)
Operating assets:
Utility system ................................... $ 3,822,365 $ 1,305,806
Power plants ..................................... 851,266 1,868,002
Wells and resource development ................... 171,479 473,237
Power sales agreements ........................... 105,276 193,868
Other assets ..................................... 297,963 313,029
----------- -----------
Total operating assets ........................... 5,248,349 4,153,942
Less accumulated depreciation and amortization ... (473,294) (769,526)
----------- -----------
Net operating assets ............................. 4,775,055 3,384,416
Mineral and gas reserves
and exploration assets, net .................... 385,687 375,208
Construction in progress:
Casecnan .................................... 274,267 243,948
Indonesia ................................... 190,502 190,175
Zinc recovery project, Salton Sea V and other 36,145 42,292
----------- -----------
Total ............................................ $ 5,661,656 $ 4,236,039
=========== ===========
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 performance undertakings of the obligations under
the joint operating and "take-or-pay" contracts.
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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) created significant uncertainty as to
whether PLN and the Indonesian government would honor their contractual
obligations to the Indonesian Subsidiaries.
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. Since the above amounts have not
been paid to HCE and PPL, as required by the arbitration panel, HCE and PPL are
proceeding with arbitration against the Government of Indonesia under the
sovereign performance undertakings provided to HCE and PPL by the Ministry of
Finance.
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 were heard on
March 2, 1998 and again on March 3, 1999. The Court's decision is pending. The
Saranac
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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 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 for the three months ended June 30, 1999 and 1998 was $45.0
million and $30.0 million, respectively, and for the six months ended June 30,
1999 and 1998 was $40.2 million and $68.1 million, respectively. Comprehensive
income differs from net income due primarily 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
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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 was amended by SFAS No. 137 which delayed
implementation. This statement is now effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is in the process of
evaluating the impact of this accounting pronouncement.
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 are shown below (in thousands).
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
REVENUE:
Domestic generation ......... $ 4,855 $ 142,213 $ 87,365 $ 264,808
Foreign generation .......... 50,832 55,755 103,060 112,328
Domestic utility ............ 582,830 - 702,554 -
Foreign utility ............. 475,924 419,935 1,038,113 882,377
---------- ---------- ---------- ----------
Segment revenue ............. 1,114,441 617,903 1,931,092 1,259,513
Corporate ................... 1,001 2,615 42,368 5,316
---------- ---------- ---------- ----------
$1,115,442 $ 620,518 $1,973,460 $1,264,829
========== ========== ========== ==========
OPERATING INCOME: (1)
Domestic generation ......... $ 4,381 $ 72,658 $ 49,379 $ 131,541
Foreign generation .......... 29,902 33,213 60,929 71,455
Domestic utility ............ 146,661 - 158,748 -
Foreign utility ............. 56,164 44,430 117,134 94,326
---------- ---------- ---------- ----------
Segment operating income .... 237,108 150,301 386,190 297,322
Corporate ................... (11,634) (7,155) 16,883 (17,126)
---------- ---------- ---------- ----------
$ 225,474 $ 143,146 $ 403,073 $ 280,196
========== ========== ========== ==========
CAPITAL EXPENDITURES:
Domestic generation ......... $ 36,291 $ 25,149 $ 64,844 $ 42,364
Foreign generation .......... 20,180 41,013 38,849 128,243
Domestic utility ............ 73,603 - 78,634 -
Foreign utility (2) ......... 19,910 12,330 45,826 105,466
---------- ---------- ---------- ----------
Segment capital expenditures 149,984 78,492 228,153 276,073
Corporate ................... 15 734 52 1,044
---------- ---------- ---------- ----------
$ 149,999 $ 79,226 $ 228,205 $ 277,117
========== ========== ========== ==========
(1) Operating income excludes interest expense, net of capitalized interest.
(2) Capital expenditures at the foreign utility exclude the effect of exchange
rate changes.
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JUNE 30 DECEMBER 31
1999 1998
----------- -----------
IDENTIFIABLE ASSETS:
Domestic generation ................. $ 703,242 $2,458,842
Foreign generation .................. 1,781,491 1,956,387
Domestic utility .................... 5,173,685 -
Foreign utility ..................... 2,753,647 3,095,839
----------- ----------
Segment identifiable assets ......... 10,412,065 7,511,068
Corporate ........................... 436,655 1,592,456
----------- ----------
$10,848,720 $9,103,524
=========== ==========
LONG-LIVED ASSETS:
Domestic generation ................. $ 473,808 $1,930,347
Foreign generation .................. 1,410,300 1,305,190
Domestic utility .................... 4,193,361 -
Foreign utility ..................... 2,276,202 2,519,615
----------- ----------
Segment long-lived assets ........... 8,353,671 5,755,152
Corporate ........................... 37,181 19,063
----------- ----------
$ 8,390,852 $5,774,215
=========== ==========
The remaining differences from the segment amounts to the consolidated amounts
described as "Corporate" 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.
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<PAGE>
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 $245 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 $675 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, 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 ten states including residential brokerage,
relocation, title, abstract and mortgage services.
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<PAGE>
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.
BUSINESS OF NORTHERN:
The operations of Northern Electric plc ("Northern"), an indirect wholly owned
subsidiary of the Company, consist primarily of the distribution and supply of
electricity, supply of natural gas and other auxiliary businesses in the United
Kingdom. 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 of electricity demand, Northern has significantly increased its sales during
1998 and 1999. In the April 1999 contract round, sales increased by an
additional 85% over the amount of business that was at risk. Northern is now the
third largest electricity supplier in this sector of the U.K. 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 expects to more than double
its annual gas sales in 1999 from 1997. In the residential market Northern
currently supplies gas to 550,000 customers and has approximately 100,000
additional customers progressing through the registration system. Northern is
now the third largest gas supplier in the U.K. 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
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<PAGE>
consideration of approximately $245 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 $675 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. Prior to that date, CE Generation results were fully
consolidated.
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. Capacity amounts for Upper Mahiao, Malitbog and Mahanagdong
(collectively, the "Philippine Projects") are 119, 216 and 165 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.
On February 26, 1999, the Company closed the sale of all of its ownership
interests in the Navy I, Navy II and BLM, collectively 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 THE PERIODS ENDED JUNE 30, 1999 AND 1998:
Operating revenue increased in the second quarter of 1999 to $1,003.6 million
from $590.6 million for the same period in 1998, a 69.9% increase. Operating
revenue increased in the six months ended June 30, 1999 to $1,801.5 million from
$1,212.4 million for the same period in 1998, a 48.6% increase. Northern's
operating revenue increased in the second quarter of 1999 to $463.5 million from
$412.4 million for the same period in 1998 and for the six months ended June 30,
1999 to $1,025.0 million from $872.6 million for the same period in 1998,
primarily due to higher volumes of gas supplied as well as higher electricity
supply revenues. Operating revenue decreased due to the sales of Coso and the
50% interest in CE Generation. The acquisition of MHC accounted for $492.4
million in operating revenue in the second quarter of 1999 and $611.2 million in
the six months ended June 30, 1999.
The following data represents the supply and distribution operations in the
U.K.:
Three Months Six Months
Ended June 30 Ended June 30
-------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
Electricity Supplied (GWh) ........ 4,077 3,554 8,641 7,305
Electricity Distributed (GWh) ..... 3,635 3,783 7,859 7,954
Gas Supplied (Therms in millions) . 93.5 64.1 277.2 152.5
The increases in electricity supplied for the three months ended June 30, 1999
and the six months ended June 1999 from the same periods in 1998 are due
primarily to the increase in supply volumes for customers
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<PAGE>
outside of the franchise area. The decreases in electricity distributed for the
three months ended June 30, 1999 and year to date ended June 1999 from the same
periods in 1998 are due to lower demand in the franchise area which is expected
to grow later in the year. 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.
The following data represents sales from utility operations for MEC. The
financial results of MEC are consolidated with the Company beginning on March
12, 1999.
Three Months Six Months
Ended June 30 Ended June 30
--------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
Electric Retail Sales (GWh) ........... 3,840 3,898 7,678 7,682
Electric Sales for Resale (GWh) ....... 1,572 1,272 3,368 2,809
Gas Throughput (Therms in millions) .. 245 242 811 787
The following operating data represents the aggregate capacity and electricity
production of the domestic geothermal projects:
Three Months Six Months
Ended June 30 Ended June 30
--------------------- ---------------------
1999 1998 1999* 1998
--------- --------- --------- ---------
Overall capacity factor ...... 94.0% 96.4% 95.7% 95.1%
kWh produced (in thousands) .. 549,200 1,068,200 1,441,900 2,096,200
Capacity (net MW) ............ 267.4 507.4 346.9 507.4
* The six months ended June 30, 1999 is a weighted average for the disposition
of the Coso Project.
The capacity factor for the three months ended June 30, 1999 decreased compared
to the same period in 1998, due to scheduled turbine overhauls at Del Ranch,
Leathers and Elmore. The decrease in kWh produced for both the three and six
month periods ending June 1999 compared to June 1998 is the result of the sale
of Coso.
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<PAGE>
The following operating data represents the aggregate capacity and electricity
production of the Gas Plants:
Three Months Six Months
Ended June 30 Ended June 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Overall capacity factor .... 89.0% 81.8% 86.8% 78.8%
kWh produced (in thousands) 1,107,900 1,018,540 2,149,400 1,950,040
Capacity NMW ............... 570 570 570 570
The capacity factor of the Gas Plants reflects certain contractual curtailments.
The increases 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 second quarter of 1999 to $33.6
million from $29.9 million for the same period in 1998, a 12.4% increase. The
increase is primarily due to increased earnings in equity investments. Interest
and other income increased for the year to date period ended June 1999 to $73.6
million from $52.4 million in the same period in 1998. Higher corporate cash
balances and the addition of MHC amounts due to the acquisition accounted for
the increase.
On May 18,1999, the Company announced the sale of approximately 6.74 million
shares of McLeodUSA ("McLeod") Class A common stock, through a secondary
offering by McLeod, at $55.625 per share. Proceeds from the sale exceeded $375
million, with a resulting after-tax gain to the Company of approximately $47.1
million or $0.65 per diluted share.
Cost of sales increased in the second quarter of 1999 to $499.9 million from
$269.8 million for the same period in 1998, an 85.3% increase. Cost of sales
increased in the six months ended June 1999 to $947.1 million from $582.4
million from the same period in 1998, a 62.6% increase. The increases are
primarily due to higher volumes of gas and electricity supplied at Northern and
the acquisition of MHC.
Operating expense increased in the second quarter of 1999 to $267.7 million from
$111.1 million for the same period in 1998, a 141.0% increase. Operating
expenses increased in the year to date ended June 1999 to $409.7 million from
$213.8 million for the same period in 1998, a 91.6% increase. The increases are
primarily due to the acquisition of MHC partially offset by the sales of Coso
and an interest in CE Generation.
General and administration costs increased marginally in the second quarter of
1999 to $11.1 million from $10.8 million for the same period in 1998, a 2.8%
increase. General and administration costs were constant for the six months
ended June 1999 at $22.9 million compared with the same period in 1998.
Depreciation and amortization increased in the second quarter of 1999 to $111.4
million from $85.7 million for the same period in 1998. Depreciation and
amortization increased in the year to date June 1999 to $190.7 from $165.6
million in the same period in 1998, a 15.2% increase. The increases are due to
the acquisition of MHC, partially offset by the sales of Coso and the 50%
interest in CE Generation.
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<PAGE>
Interest expense, less amounts capitalized, increased in the second quarter of
1999 to $114.7 million from $78.6 million for the same period in 1998, a 45.9%
increase. Interest expense, less amounts capitalized, increased in the year to
date June 1999 to $215.6 million from $159.7 million, a 35.0% increase. The
increases are primarily due to the acquisition of MHC and the greater average
outstanding debt balances.
The provision for income taxes increased in the second quarter of 1999 to $37.2
million from $22.0 million for the same period in 1998, a 69.1% increase. The
provision for income taxes increased in the year to date ended June 1999 to
$63.3 million from $40.5 million for the same period in 1998, a 56.3% increase.
The increases are due to higher pretax income during the comparable periods of
1999.
Minority interest increased in the second quarter to $12.4 million from $10.1
million for the same period in 1998, a 22.8% increase. Minority interest
increased in the six months ended June 1999 to $23.3 million from $20.2 million
in the same period in 1998, a 15.3% increase. The increase is primarily due to
the acquisition of MHC which has minority interests in the form of preferred
stock outstanding.
Income before extraordinary items increased in the second quarter of 1999 to
$61.1 million or $1.02 per share, from $32.5 million or $.54 per share for the
same period in 1998. Income before extraordinary items increased in the year to
date ended June 1999 to $100.9 million or $1.69 per share from $59.8 million or
$0.99 per share for the same period in 1998.
Due to the early retirements of the Senior Discount Notes, the Limited Recourse
Notes and the 9.5% Senior Notes, the Company recorded extraordinary losses of
approximately $5.4 million and $36.9 million, net of tax, in the three and six
months ended June 30, 1999, respectively.
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.
The Company's cash and cash equivalents were $247.4 million at June 30, 1999 as
compared to $1,606.1 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 $385.5 million and $637.6 million
at June 30, 1999 and December 31, 1998, respectively. The restricted cash
balance as of June 30, 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 Philippine Projects' cash
reserves for the debt service reserve funds.
Financing Activity
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.
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<PAGE>
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 of principal which were paid on
March 3, 1999, at a redemption price of 110.025% plus accrued interest.
The Company redeemed $64.3 million in principal value of the 9.5% Senior Notes
at an aggregate price of $71.1 million throughout the second quarter of 1999.
Due to the early extinguishment of this debt, the Company recorded an
extraordinary loss of $5.4 million.
As of June 30, 1999, the Company held 21.8 million shares of treasury stock at a
cost of $713.6 million. On May 25, 1999 the Company announced that it had
increased to 3.75 million the number of shares of its common stock authorized
for repurchase on the open market. The Company has repurchased 2.0 million
shares of common stock in 1999 at an aggregate cost of $64.7 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 stock repurchase plan minimizes the dilutive effect of the
additional shares issued under these plans.
On May 18, 1999, CalEnergy Capital Trust, a subsidiary of the Company, effected
the conversion of $103.8 million of 6 1/4% Convertible Preferred Securities into
approximately 3.5 million shares of common stock of the Company. The Securities
were converted at a rate of 1.6728 shares of common stock of the Company for
each Security, equivalent to a conversion price of $29.89 per share of Company
common stock.
Acquisitions and Dispositions
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 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 $245 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 $675 million.
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<PAGE>
On May 18,1999, the Company announced the sale of approximately 6.74 million
shares of McLeodUSA ("McLeod") Class A common stock, through a secondary
offering by McLeod, at $55.625 per share. Proceeds from the sale exceeded $375
million, with a resulting after-tax gain to the Company of approximately $47.1
million or $0.65 per diluted share.
In July 1999, the Company's wholly-owned subsidiary, CE Gas, closed its
acquisition of a 67% interest in the Anglia Field located in the Southern Gas
Basin in the North Sea. The producing field is expected to provide the Company
with 89 billion cubic feet of natural gas reserves, which will give the Company
further options in support of its growing gas supply business in the U.K.
On July 16, 1999, the Company announced that HomeServices.Com Inc., a subsidiary
of the Company, filed a registration statement with the Securities and Exchange
Commission ("SEC") for an initial public offering of common stock.
HomeServices.Com, which will be the surviving entity of a merger with
MidAmerican Realty Services, intends to use the net proceeds received by it in
the offering for general corporate purposes, which are expected to include
acquisitions and the continued development of its E-commerce operations.
Minerals Extraction
The Company developed and owns the rights to proprietary processes 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.
CalEnergy 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
tons 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
international 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 $43.2 million of such costs through June 30, 1999.
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Imperial Valley Construction Projects
Salton Sea 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. Salton Sea
Power LLC has incurred approximately $32.4 million of such costs through June
30, 1999.
CE 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.
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
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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 performance undertakings 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) created significant uncertainty as to
whether PLN and the Indonesian government would honor their contractual
obligations to the Indonesian Subsidiaries.
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. Since the above amounts have not
been paid to HCE and PPL, as required by the arbitration panel, HCE and PPL are
proceeding with arbitration against the Government of Indonesia under the
sovereign performance undertakings provided to HCE and PPL by the Ministry of
Finance.
Cordova
Cordova Energy Company LLC, ("Cordova") an indirect wholly owned subsidiary of
the Company, proposes to construct a 537 MW gas-fired power plant in the Quad
Cities, Illinois area (the "Cordova Project"). Cordova has entered into an
engineering, procurement and construction contract with SWEC to build the
project, estimated to cost $247 million, excluding financing, contingencies and
interest during construction. The Company has also entered into a power sales
agreement with a unit of El Paso Energy Corporation ("El Paso"). Under the power
sales agreement, El Paso will purchase all the capacity and energy from the
project until December 31, 2019. However, Cordova has the option to elect on an
annual basis to retain up to 50% of the project output for sales to others. The
construction of the Cordova Project is expected to commence in August 1999 and
to be completed in mid-2001.
Evolution of the Domestic Utility Industry
The U.S. 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.
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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 has
sufficient low cost generation under typical operating conditions for its retail
electric needs, a loss of adequate generation by MEC at a time of high market
prices could subject MEC to losses on its energy sales.
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. MidAmerican'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
1998 and 1999. Legislation passed in July 1999 increases the benchmark for 2000
through 2004 to 8.5% above the 30-year Treasury bond rate. 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%
for 1998 and 1999 and 13.6% for 2000 - 2004. The law allows MEC to mitigate the
sharing of earnings above the threshold ROE through accelerated cost recognition
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
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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 June 30, 1999, MEC had $279 million of regulatory assets on its balance
sheet.
Domestic Rate Matters: Electric
Electric revenue from 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 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. During the second
quarter of 1999, MEC refunded $2.2 million to its Iowa non-contract customers
related to the 1998 ROE calculation. The agreement also eliminated MEC's energy
adjustment clause, and, as a result, the cost of fuel is not directly passed on
to customers.
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. The nonattainment of the "downwind states" is based on the
ozone standard established prior to the 1997 revisions discussed below. 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
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<PAGE>
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 May 1999, the U.S. District Court of Appeals for the District of Columbia
Circuit remanded the standards adopted in July 1997 back to the EPA indicating
the EPA had not expressed sufficient justification for the basis of establishing
the standards and ruling that the EPA has exceeded its
constitutionally-delegated authority in setting the standards. The EPA has
appealed the court's ruling to the full panel of the U.S. District Court of
Appeals for the District of Columbia Circuit. Argument in the appeal proceeding
is scheduled for the fall of 1999. As a result of the court's decision and the
current status of the standards, the impact of any new standards on MidAmerican
is currently unknown.
Nuclear Decommissioning
Each licensee of a nuclear facility is required to provide financial assurance
for the cost of decommissioning its licensed 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 65% 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 and other U.S.
Government securities. Approximately 20% was invested in domestic corporate
debt. 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
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the balance sheet. As of June 30, 1999, $87.4 million of accounts receivable,
net of reserves, were sold under the agreement.
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 electricity accounts
receivable and to borrow against its unbilled electricity accounts receivable.
In March 1999, Northern received $161 million in cash associated with the
agreement, $143 million of which was accounted for as a sale and $18 million of
which was accounted for as a loan.
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.
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.
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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 June 30, 1999, the Company
is approximately 98% 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
and contingency planning, are expected to total approximately $22.3 million.
Through June 30, 1999, the Company has paid approximately $14.8 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.
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
finalized in the third quarter of 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.
Forward-looking Statements
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
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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.
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PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
- ------ ------------------
As of June 30, 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.
- ------ ----------------------------------------------------
The Company held its 1999 Annual Meeting of Shareholders on May 20,
1999. At the Annual Meeting, shareholders voted on two issues. The
results of the votes are as follows:
1. Vote regarding election of Class I directors nominated by the Board
of Directors.
For Withheld
---------- ---------
Judith E. Ayres 48,441,474 1,463,635
Stanley J. Bright 48,441,240 1,463,869
Jack W. Eugster 48,433,529 1,471,580
David L. Sokol 48,431,031 1,474,078
David E. Wit 48,433,696 1,471,413
2. Vote regarding ratification of the appointment of Deloitte &
Touche as the Company's auditors for fiscal year 1999.
For Against Abstaining
---------- ------- ----------
49,828,538 53,691 22,880
ITEM 5 OTHER INFORMATION.
- ------ ------------------
Not applicable.
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
- ------ ---------------------------------
(A) EXHIBITS:
Exhibits Filed Herewith
- -----------------------
Exhibit 10 - Restated Deferred Compensation Plan - Board of Directors
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 June 30, 1999 the Company filed the following:
(i) Form 8-K/A dated May 14, 1999 amending Form 8-K dated February
26, 1999 and filed on March 15, 1999 and Form 8-K dated March 12,
1999 and filed March 26, 1999, and providing required financial
information relating to the MHC Inc. (formerly MidAmerican Energy
Holdings Company) merger, the CE Generation sale and the Coso
Partnerships sale.
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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
-----------------------------------
(Registrant)
Date: August 11, 1999 /s/ Patrick J. Goodman
-----------------------------------------------
Patrick J. Goodman
Senior Vice President & Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
- -----------
10 Restated Deferred Compensation Plan - Board of Directors
11 Calculation of Earnings Per Share
15 Awareness Letter of Independent Accountants
27 Financial Data Schedule
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MIDAMERICAN ENERGY HOLDINGS COMPANY
RESTATED DEFERRED COMPENSATION PLAN
BOARD OF DIRECTORS
ARTICLE I
ESTABLISHMENT AND PURPOSE
1.1 BACKGROUND OF PLAN. MidAmerican Energy Holdings Company presently
maintains a deferred compensation plan for its Board of Directors.
This restated Plan shall replace that Plan if the Merger, as defined in Section
1.4 below closes in 1999, and shall replace that Plan as of the closing date of
the Merger.
The Plan shall be maintained as an unfunded plan of deferred compensation for
its Board of Directors.
1.2 PURPOSE OF PLAN. The purpose of this Plan is to provide the Company's
Board of Directors with an additional way to defer portions of their Board of
Directors fees.
1.3 APPLICABILITY OF PLAN. The provisions of this Plan are applicable to
members of the Company's Board of Directors who serve on the Board on or after
January 1, 1999, and, with respect to amounts deferred under any Predecessor
Plan, are applicable to participants who still have account balances under any
such Plan. This Plan shall not accept any deferrals with respect to any Director
fees payable after the closing date of the Merger.
1.4 MERGER OF PREDECESSOR PLANS. For ease of administration, and in
recognition of the need to change earnings credit and method of valuation in the
Predecessor Plan in light of the anticipated acquisition of MidAmerican Energy
Holdings Company by CalEnergy Company, Inc. (through a merger of a subsidiary of
CalEnergy with and into MidAmerican Energy Holdings Company ("Merger")), the
accounts under the Predecessor Plan are hereby merged into the Plan, effective
as of the date of closing of the Merger.
ARTICLE 2
DEFINITIONS
Whenever used in this Plan, the following terms shall have the meanings set
forth below unless otherwise expressly provided. When the defined meaning is
intended, the term is capitalized. The definition of any term in the singular
shall also include the plural, whichever is appropriate in the context.
2.1 ACCOUNT. Account means the bookkeeping account maintained for each
Participant that represents the Participant's total interest
<PAGE>
under the Plan as of any Valuation Date. It shall also consist of any accounts
transferred from Predecessor Plans. A Participant shall have a fully vested and
nonforfeitable interest at all times in his or her Account.
2.2 BENEFICIARY. Beneficiary means the person or persons designated by the
Participant to receive any benefits payable from the Participant's Account after
his or her death. Each Participant shall designate his or her Beneficiary (or
change this designation) at a time and in a manner specified by the Committee.
If no person is designated as a Beneficiary, if a designation is revoked, or if
no designated Beneficiary survives the Participant, the Beneficiary shall be the
Participant's estate.
2.3 CODE. Code means the Internal Revenue Code of 1986, as amended, or as it
may be amended from time to time. A reference to a particular section of the
Code shall also include the regulations promulgated under such section.
2.4 COMMITTEE. Committee means the Compensation Committee established by the
Board of Directors of the Company.
2.5 COMPANY. Company means MidAmerican Energy Holdings Company.
2.6 DIRECTOR. Director means any person serving as a member of the Board of
Directors of the Company.
2.7 INVESTMENT FUND. Investment Fund means an investment benchmark or fund
designated by the Committee as an investment medium for the hypothetical
investment of a Participant's Account. There shall be a choice between the S&P
500 Stock Index Benchmark, the Lehman Brothers Aggregate Bond Index Benchmark
and the Stable Fund Fixed Rate Benchmark. The Committee shall have the
discretion to establish and terminate investment benchmarks or funds as it may
deem appropriate.
(a) S&P 500 Stock Index Benchmark means the S&P 500 Stock Index
Value as published by Standard and Poor as of the end of each
business day, including dividends reinvested.
(b) Lehman Brothers Aggregate Bond Index Benchmark means the
Aggregate Bond Index Value as published by Lehman Brothers as
of the end of each business day.
(c) Stable Fund Fixed Rate Benchmark shall be an account in which
the credits in the account do not fluctuate in value, and the
values in the account are credited with an annual interest
rate, compounded annually. The annual interest rate shall be
set for each calendar year based on the one-year U.S. Treasury
Bill rate on October 15 in
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the prior year (or the previous business day if October 15 is not a
business day), except that for 1999, the rate shall be 4.3%.
2.8 PARTICIPANT. Participant means a Director who has elected to participate
in the Plan. It also means any person with an account balance under this Plan.
2.9 PLAN. Subsequent to the closing date of the Merger, Plan means this
MidAmerican Energy Holdings Company Restated Deferred Compensation Plan - Board
of Directors, as it may be amended from time to time. Prior to the closing date
of the Merger, Plan means the MidAmerican Energy Holdings Company Deferred
Compensation Plan - Board of Directors in existence prior to this restated Plan.
2.10 PLAN YEAR. Plan Year means the calendar year.
2.11 PREDECESSOR PLAN. The following plan shall be considered a Predecessor
Plan:
(a) MidAmerican Energy Holdings Company Deferred Compensation Plan -
Board of Directors
2.12 VALUATION DATE. Valuation Date means the last business day of each
calendar year and any other date that the Committee selects in its sole
discretion for the revaluation and adjustment of Accounts.
ARTICLE 3
PARTICIPATION
3.1 PARTICIPATION. A Participant with an Account under the Plan as of the
closing date of the Plan shall continue to be a Participant under the Plan until
all amounts have been distributed from his or her Account.
ARTICLE 4
DEFERRAL ELECTIONS
4.1 NO DEFERRALS AFTER MERGER. Following the closing date of the Merger, no
additional deferrals shall be made or credited under this Plan with respect to
any Director fees payable after such date except for Director fees earned for
services rendered before such date.
ARTICLE 5
PARTICIPANTS' ACCOUNTS
5.1 INVESTMENT OF 1999 DEFERRALS. With respect to each deferral election a
Participant made under this Plan for 1999 prior to the closing date of the
Merger, the Participant shall elect in writing,
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prior to the closing date of the Merger, to hypothetically deem to have the
deferrals made on his or her behalf invested in any one or more of the
Investment Funds in 1 percent increments. The account value for each amount
deferred shall be determined based on the Investment Fund's value on the date
the amount deferred would have otherwise been paid. This investment election
shall supersede and replace the investment election made by the Participant with
respect to amounts deferred for 1999 under the Plan prior to the closing date of
the Merger.
5.2 INVESTMENT CHANGES FOR PREDECESSOR PLANS. With respect to account balances
in the Predecessor Plan, if the valuation of any account is dependent upon the
book value or fair market value of MidAmerican Energy Holdings Company common
stock, or if earnings on an account are determined by the dividend rate on
MidAmerican Energy Holdings Company common stock, each Participant who has such
an account balance shall file an election form with the Committee prior to, or
within fifteen (15) days after, the closing date of the Merger, designating,
pursuant to the procedures in section 5.1, the Investment Funds in which such
account is deemed to be invested. To the extent the value of an account, as of
the closing date of the Merger, is based on the value of MidAmerican Energy
Holdings Company common stock, the value of each stock unit in any such account
shall be deemed to be $27.15. In any account based on a fixed value with
crediting of interest only, but which varies in the interest rate credited from
time to time, interest on the account shall be credited through date of closing
of the Merger. Amounts converted to the Investment Funds as of the closing date
of the Merger shall be converted based on the Investment Fund benchmark values
on the date of closing.
5.3 CHANGES IN INVESTMENTS. A Participant may change the hypothetical
investment allocation in his or her account no more than once during any
calendar quarter by filing an appropriate form with the Committee (or its
designated administrative representative) specifying the change to be made. The
change shall be processed within five (5) business days of receipt of the change
request by the Committee.
5.4 VALUATION OF ACCOUNTS.
(a) ALLOCATION OF EARNINGS AND LOSSES. A Participant's Account
shall be adjusted as of each Valuation Date to reflect any
gains or losses that would have been credited or debited to
the Account if it had actually been invested in the manner
described in section 5.1. Accounts where an investment change
request has been received between these dates will be credited
or charged for any investment gains or losses since the last
Valuation Date through the effective date of the investment
change.
-4-
<PAGE>
(b) CHARGES AGAINST ACCOUNT. Any payments made to a Participant or
Beneficiary under Article 6 shall be charged against the
Participant's Account.
5.5 FINANCING. The benefits under this Plan shall be paid out of the general
assets of the Company, except to the extent they are paid from the assets of a
grantor trust established by the Company to pay these benefits.
5.6 UNSECURED INTEREST. No Participant shall have any interest whatsoever in
any specific asset of the Company. To the extent that any person acquires a
right to receive payments under this Plan, this right shall be no greater than
the right of any unsecured general creditor of the Company.
5.7 NONTRANSFERABILITY. In no event shall the Company make any payments under
this Plan to any assignee or creditor of a Participant or Beneficiary. Prior to
the time of payment hereunder, no Participant or Beneficiary shall have any
right by way of anticipation or otherwise to assign or otherwise dispose of any
interest under this Plan, nor shall rights be assigned or transferred by
operation of law.
ARTICLE 6
PAYMENT OF ACCOUNTS
6.1 CONDITIONS ON RIGHT TO RECEIVE PAYMENT. A Participant shall not be
entitled to payment of any deferred compensation from his or her account until
the time elected by the Participant as set forth on the written deferral
election form filed with the Corporate Secretary of the Company, or until his or
her death or permanent disability, whichever occurs first. The election form
shall state the date the payment shall commence and the period over which
payment shall be made. The Participant may elect to receive deferred
compensation and accumulated earnings thereon in his or her Account either in a
lump sum payment or in annual installments. Once an election is filed, it shall
not be changed except by approval of the Board of Directors of the Company. If
annual installments are selected, each annual installment shall not be less than
an amount equal to the value of the account at the beginning of the Plan Year in
which distribution is to be made divided by the life expectancy of the
Participant at the beginning of such Plan Year (or the joint life expectancy of
the Participant and spouse if the Participant is married). Each annual
installment shall be made within fifteen (15) days following the first day of
each Plan Year. If an election is made to receive a lump sum payment, payment
shall be made within fifteen (15) days following the first day of the Plan Year
in which payment is to be made, and the amount of the lump sum payment shall be
equal to the value of the account as of December 31 of the preceding Plan Year.
Payment of a lump sum amount or any annual installment shall be made in cash.
-5-
<PAGE>
6.2 CHANGE IN ELECTION UNDER PREDECESSOR PLAN. Except as provided below, with
respect to elections filed for deferred amounts under a Predecessor Plan, such
election as to method and timing of payment shall continue to be applicable to
the accounts transferred from a Predecessor Plan. A Participant may file a
revised election with respect to the account transferred from a Predecessor
Plan. The revised election form shall specify the new timing and method of
payout (either lump sum or annual installments). If the new election serves to
accelerate the payout of a lump sum or to elect a lump sum payment where annual
installments had been previously elected, and if the new lump sum election is
for payment to occur within three years of the date of closing of the Merger,
the value of the account shall be reduced by 6% as of the new date elected for
payout. If the new election form does not accelerate payments to within three
years following the date of closing of the Merger, no reduction shall be made in
the value of the account to be paid. A change may be made with respect to
revising the timing of payout of substantially equal annual installments as long
as the final annual payment does not occur any earlier than January 1, 2002. Any
new elections as to timing or method of payout must be made within fifteen (15)
days following the closing date of the Merger.
6.3 PAYMENT IN THE EVENT OF DEATH. In the event of the death of a Participant
occurring either before the commencement of payment or before the full balance
of the Participant's account has been paid, the unpaid balance in the Account
shall be paid in a lump sum to the Participant's designated beneficiary or
estate, payment shall be made within thirty (30) days following the date of
death. The value of the Account shall be based upon the value of the Investment
Funds in his or her account on the date of death (or on the preceding business
day, if date of death is not a business day).
ARTICLE 7
GENERAL PROVISIONS
7.1 GENERAL PROVISIONS.
(a) UNFUNDED PLAN.
(i) This Plan is intended to be an unfunded plan maintained primarily
to provide benefits to a "select group of management or highly
compensated employees" within the meaning of Section 201, 301 and
401 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and as amended from time to time or any
successor thereto, and, therefore, is further intended to be
exempt from the provisions of Parts 2, 3 and 4 of
-6-
<PAGE>
Title I of ERISA. Accordingly, the Compensation Committee may
terminate the Plan for any or all Participants in order to
achieve and maintain this intended result, provided that
previously accrued benefits hereunder shall not be reduced or
otherwise adversely affected without the written consent of the
affected Participants.
(ii) The obligations hereunder shall at all times be unsecured and
payments with respect to any benefits hereunder shall be paid out
of the general operating revenue of the Company. A trust may be
established to provide for the payment of benefits to
Participants hereunder as long as the assets of such trust are
subject to the claims of general creditors of the Company with
respect to the deferrals (and earnings thereon, if applicable).
(b) WITHHOLDING. The Company shall have the right to require Participants
to remit to the Company an amount sufficient to satisfy Federal, state
and local tax withholding requirements, or to deduct from any or all
payments made pursuant to the Plan amounts sufficient to satisfy such
withholding tax requirements.
(c) COSTS OF THE PLAN. All costs of implementing and administering the
Plan shall be borne by the Company.
(d) NON-ALIENATION OF BENEFITS. No right or benefit under this Plan shall
be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance, or charge, and any attempt to anticipate, alienate, sell,
assign, pledge, encumber, or charge the same shall be void. No right
or benefit hereunder shall in any manner be liable for or subject to
the debts, contracts, liabilities, or claims of the person entitled to
such benefit. If any Participant or designated beneficiary hereunder
should become bankrupt or attempt to anticipate, alienate, sell,
assign, pledge, encumber, or charge any right or benefit hereunder,
then such right or benefit shall, in the discretion of the
Compensation Committee, cease, and in such event, the Company may hold
or apply the same or any part thereof for the benefit of the
Participant or the designated beneficiary, his or her spouse,
children, or other dependents, or any of them, in such manner and in
such proportion as the Compensation Committee may deem proper.
(e) SUCCESSORS. All obligations of the Company under the Plan shall be
binding upon and inure to the benefit of any successor to the Company,
whether the existence of such successor is the direct or indirect
result of a merger or reorganization involving the Company or the
purchase or other
-7-
<PAGE>
acquisition, of all or substantially all of the business or assets of
the Company.
(f) AMENDMENT OR TERMINATION OF PLAN.
(i) The Board of Directors reserves the right at any time and from
time to time to amend, suspend or terminate the Plan without the
consent of any Participant or other person claiming a right under
the Plan.
(ii) Any amendment or termination of this Plan shall not adversely
affect the rights of Participants or designated beneficiaries to
payments of amounts credited to Participants in their Account at
the time of such amendment or termination.
(g) SEPARABILITY. If any term or provision of this Plan as presently in
effect or as amended from time to time, or the application thereof to
any payments or circumstances, shall to any extent be invalid or
unenforceable, the remainder of the Plan, and the application of such
term or provision to payments or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby,
and each term or provision of the Plan shall be valid and enforced to
the fullest extent permitted by law.
(h) CONSTRUCTION. The provisions of this Plan shall be construed,
administered and enforced according to the laws of the State of Iowa.
(i) TITLES. The titles of the Articles and Sections herein are included
for convenience of reference only and shall not be construed as part
of this Plan, or have any effect upon the meaning of the provisions
hereof.
(j) IMPOSSIBILITY OF ACTION. In case it becomes impossible for the Company
to perform any act under this Plan, that act shall be preformed which
in the judgment of the Company will most nearly carry out the intent
and purposes of this Plan. All parties concerned shall be bound by any
such acts performed under such conditions.
(k) AUTHORIZED OFFICERS. Whenever the Company under the terms of the Plan
is permitted and required to perform any act or matter or thing, it
shall be done and performed by a duly authorized officer of the
Company.
-8-
L:\TCH\MIDAMER\EXHIBIT.I
<TABLE>
<CAPTION>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CALCULATION OF EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Actual weighted average shares
outstanding for the period ............. 60,037,264 60,234,895 59,621,665 60,658,253
Dilutive stock options and warrants
using average market prices ............ 955,190 784,037 841,625 655,885
Additional dilutive stock options assuming
conversion of convertible preferred
securities of subsidiary trusts ........ 11,645,456 13,326,683 12,481,425 13,326,683
------------ ----------- ------------ -----------
Diluted shares outstanding ............... 72,637,910 74,345,615 72,944,715 74,640,821
============ =========== ============ ===========
Income before extraordinary item ......... $ 61,061 $ 32,466 $ 100,852 $ 59,761
Extraordinary item, net of tax ........... (5,366) - (36,886) -
------------ ----------- ------------ -----------
Net income available to
common stockholders .................... $ 55,695 $ 32,466 $ 63,966 $ 59,761
============ =========== ============ ===========
Income per share before
extraordinary item ..................... $ 1.02 $ .54 $ 1.69 $ .99
Extraordinary item ....................... (.09) - (.62) -
------------ ----------- ------------ -----------
Net income per share ..................... $ .93 $ .54 $ 1.07 $ .99
============ =========== ============ ===========
Diluted income per share before
extraordinary item(1) .................. $ .91 $ .51 $ 1.53 $ .95
============ =========== ============ ===========
Diluted income per share based on SEC
interpretive release No. 34-9083(1) .... $ .84 $ .51 $ 1.02 $ .95
============ =========== ============ ===========
</TABLE>
(1)-Net income available to common stockholders for the three and six months
ended June 30, 1999 was increased by dividends on convertible preferred
securities of subsidiary trusts, net of tax effect, of $4,984 and $10,455,
respectively, compared with $5,471 and $10,942, respectively, for the same
periods in 1998.
EXHIBIT 15
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
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 and six month
periods ended June 30, 1999 and 1998 as indicated in our report dated July 26,
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 June 30, 1999, is
incorporated by reference in Registration Statements No. 33-26256, 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. 333-30537, No. 333-45615
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
August 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of MidAmerican Energy Holdings Company as of June 30,
1999, and the related consolidated statements of operations and cash flows for
the six months ended June 30, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001081316
<NAME> MIDAMERICAN ENERGY HOLDINGS COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 632,892
<SECURITIES> 130,079
<RECEIVABLES> 471,152
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,148,451
<DEPRECIATION> 486,795
<TOTAL-ASSETS> 10,848,720
<CURRENT-LIABILITIES> 0
<BONDS> 6,272,303
551,598
147,196
<COMMON> 0
<OTHER-SE> 906,703
<TOTAL-LIABILITY-AND-EQUITY> 10,848,720
<SALES> 0
<TOTAL-REVENUES> 1,973,460
<CGS> 0
<TOTAL-COSTS> 1,356,739
<OTHER-EXPENSES> 22,902
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215,585
<INCOME-PRETAX> 187,488
<INCOME-TAX> 63,292
<INCOME-CONTINUING> 100,852
<DISCONTINUED> 0
<EXTRAORDINARY> (36,886)
<CHANGES> 0
<NET-INCOME> 63,966
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.02
</TABLE>
