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
September 30, 2000
Commission File No. 0-25551
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Iowa 94-2213782
-------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, IA 50309
--------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 242-4300
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
------- ------------
As of November 13, 2000 all 9,281,087 shares of common stock of MidAmerican
Energy Holdings Company were held by a limited group of investors.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Page No.
ITEM 1. Financial Statements
Independent Accountants' Report............................ 1
Consolidated Balance Sheets................................ 2
Consolidated Statements of Operations...................... 3
Consolidated Statements of Cash Flows...................... 4
Notes to Consolidated Financial Statements................. 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 9
Part II: Other Information
ITEM 1. Legal Proceedings.......................................... 22
ITEM 2. Changes in Securities...................................... 22
ITEM 3. Defaults on Senior Securities.............................. 22
ITEM 4. Submission of Matters to a Vote of Security Holders........ 22
ITEM 5. Other Information.......................................... 22
ITEM 6. Exhibits and Reports on Form 8-K........................... 22
Signatures ........................................................... 23
Exhibit Index ........................................................... 24
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Holdings Company (successor to MidAmerican Energy Holdings Company
(Predecessor), referred to as "MEHC (Predecessor)") and subsidiaries (the
"Company") as of September 30, 2000, and the related consolidated statements of
operations for the three-month period ended September 30, 2000 and for the
period March 14, 2000 to September 30, 2000 for the Company and for the period
January 1, 2000 to March 13, 2000 and for the three-month and nine-month periods
ended September 30, 1999 for MEHC (Predecessor) and the related consolidated
statements of cash flows for the period March 14, 2000 to September 30, 2000 for
the Company and for the period January 1, 2000 to March 13, 2000 and for the
nine-month period ended September 30, 1999 for MEHC (Predecessor). 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of MEHC
(Predecessor) and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 25,
2000 (March 14, 2000 as to Note 3), 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, 1999 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
October 27, 2000
<PAGE>
<TABLE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
MEHC
(Predecessor)
As of
-----------------------------------
September 30, December 31,
2000 1999
---------------- ---------------
(Unaudited)
Assets
Current Assets:
<S>
<C> <C> <C>
Cash and cash equivalents........................... $ 85,549 $ 316,327
Restricted cash and short-term investments.......... 34,373 36,294
Accounts receivable................................. 493,679 600,564
Other current assets................................ 196,112 185,128
------------ --------------
Total Current Assets.............................. 809,713 1,138,313
------------ --------------
Property, plant, contracts and equipment, net.......... 5,594,435 5,463,329
Excess of cost over fair value of net assets acquired,
net.................................................. 3,415,509 2,712,677
Regulatory assets...................................... 245,378 278,757
Long-term restricted cash.............................. 29,027 133,265
Long-term restricted investments....................... 98,181 122,175
Nuclear decommissioning trust fund and other marketable
securities........................................... 218,803 226,298
Equity investments..................................... 251,712 208,023
Deferred charges, other investments and other assets... 744,786 483,515
------------ -------------
Total Assets........................................ $ 11,407,544 $ 10,766,352
============ =============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable.................................... $ 383,596 $ 449,203
Other accrued liabilities........................... 484,091 458,667
Short-term debt.................................... 122,730 379,523
Current portion of long-term debt................... 330,695 235,202
------------ -------------
Total Current Liabilities......................... 1,321,112 1,522,595
------------ -------------
Other long-term accrued liabilities.................... 961,550 1,054,440
Parent company debt.................................... 1,829,048 1,856,318
Subsidiary and project debt............................ 3,553,071 3,642,703
Deferred income taxes.................................. 1,068,243 902,868
------------ -------------
Total Liabilities................................... 8,733,024 8,978,924
------------ -------------
Deferred income........................................ 76,925 65,509
Minority interest...................................... 28,691 29,127
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trusts........... 331,300 450,000
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts..................... 454,772 -
Subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts........... 100,000 101,598
Preferred securities of subsidiary..................... 145,985 146,606
Shareholders' Equity:
Zero coupon convertible preferred stock - authorized
50,000 shares, no par value, 34,563 shares
outstanding......................................... - -
Common stock - authorized 60,000 and 180,000 shares,
no par value; 9,281 and 82,980 shares issued, 9,281
and 59,944 shares outstanding, at September 30, 2000
and December 31, 1999, respectively................. - -
Additional paid in capital............................. 1,553,073 1,249,079
Retained earnings...................................... 49,380 507,726
Accumulated other comprehensive loss................... (65,606) (12,029)
Treasury stock - 23,036 common shares at December 31,
1999, at cost....................................... - (750,188)
----------- ------------
Total Shareholders' Equity.......................... 1,536,847 994,588
------------ -------------
Total Liabilities and Shareholders' Equity............. $ 11,407,544 $ 10,766,352
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<CAPTION>
MEHC
(Predecessor) MEHC (Predecessor)
------------- ------------------------------
March 14, January 1,
2000 2000 Nine Months
Three Months through through Ended
Ended September 30, September 30, March 13, September 30,
-------------------------------
2000 1999 2000 2000 1999
------------- --------------- ------------- ------------- -------------
Revenues:
<S>
<C> <C> <C> <C> <C> <C>
Operating revenue............................ $ 1,153,915 $ 1,062,560 $ 2,493,072 $ 1,043,072 $ 2,864,047
Interest and other income.................... 32,977 32,850 60,333 19,484 110,644
Gain on non-recurring items.................. - - - - 98,396
----------- ------------ ---------- ----------- -----------
Total revenues............................... 1,186,892 1,095,410 2,553,405 1,062,556 3,073,087
----------- ------------ ---------- ------------ -----------
Costs and expenses:
Cost of sales................................ 611,232 515,430 1,333,526 561,386 1,462,496
Operating expense............................ 270,211 268,776 594,404 219,303 705,568
Depreciation and amortization................ 117,648 115,630 260,087 97,278 306,376
Interest expense............................. 124,226 124,593 272,250 101,330 372,888
Less interest capitalized.................... (27,220) (18,391) (57,914) (15,516) (51,101)
Loss on non-recurring item................... - - - 7,605 -
----------- ------------ ---------- ----------- -----------
Total costs and expenses........................ 1,096,097 1,006,038 2,402,353 971,386 2,796,227
----------- ------------ ----------- ------------ -----------
Income before provision for income taxes........ 90,795 89,372 151,052 91,170 276,860
Provision for income taxes...................... 28,829 27,491 42,646 31,008 90,783
----------- ------------ ---------- ----------- -----------
Income before minority interest................. 61,966 61,881 108,406 60,162 186,077
Minority interest............................... 27,071 12,185 59,026 8,850 35,529
----------- ------------ ---------- ----------- -----------
Income before extraordinary item................ 34,895 49,696 49,380 51,312 150,548
Extraordinary item, net of tax.................. - (3,170) - - (40,056)
----------- ------------ ---------- ----------- -----------
Net income available to common
shareholders................................. $ 34,895 $ 46,526 $ 49,380 $ 51,312 $ 110,492
=========== ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
MEHC (Predecessor)
---------------------------------------
March 14, 2000 January 1, 2000 Nine
Through Through Months Ended
September 30, 2000 March 13, September 30,
2000 2000 1999
------------------- ------------------- ----------------
Cash flows from operating activities:
<S>
<C> <C> <C> <C>
Net income..................................................... $ 49,380 $ 51,312 $ 110,492
Adjustments to reconcile to net cash flows from
operating activities:
Gain on non-recurring items.................................... - - (98,396)
Extraordinary item, net of tax................................. - - 40,056
Depreciation and amortization.................................. 209,081 83,194 261,882
Amortization of excess of cost over fair value of
net assets acquired......................................... 51,006 14,084 44,494
Amortization of deferred financing costs and other costs....... 13,406 4,334 15,844
Provision for deferred income taxes............................ 23,348 (9,342) (69,243)
Undistributed earnings on equity investments................... (29,519) (3,459) (17,194)
Changes in other items:
Accounts receivable and other current assets................ 37,781 46,436 207,289
Accounts payable, accrued liabilities, deferred income
and other................................................... (182,081) 80,524 43,428
-------------- ------------- -------------
Net cash flows from operating activities....................... 172,402 267,083 538,652
-------------- ------------- -------------
Cash flows from investing activities:
Purchase of MEHC (Predecessor) and MidAmerican, net of
cash acquired............................................... (2,048,266) - (2,501,425)
Proceeds from sale of qualified facilities, net of cash
disposed.................................................... - - 365,074
Purchase of marketable securities.............................. (29,581) (8,251) (62,022)
Proceeds from sale of marketable securities.................... 47,711 10,665 451,234
Capital expenditures relating to operating projects............ (55,887) (21,685) (243,079)
Acquisition of CE Gas assets................................... - - (72,272)
Construction and other development costs....................... (142,612) (56,720) (94,403)
Philippine-construction in progress............................ (35,571) (22,736) (42,631)
Decrease in restricted cash and investments.................... 87,344 42,809 114,783
Decrease (increase) in other assets............................ 60,803 (74,765) (52,620)
---------- ------------- -------------
Net cash flows from investing activities....................... (2,116,059) (130,683) (2,137,361)
-------------- ------------- --------------
Cash flows from financing activities:
Proceeds from issuances of common and preferred stock.......... 1,428,024 - -
Proceeds from issuance of trust preferred securities........... 454,772 - -
Proceeds from subsidiary and project debt...................... 94,133 6,043 1,304,373
Proceeds from parent company debt.............................. 96,000 - -
Repayment of subsidiary and project debt....................... (248,366) (133,060) (325,408)
Repayment of parent company debt............................... (4,225) - (720,473)
Purchase of treasury stock..................................... - - (104,847)
Redemption of preferred trust securities of subsidiaries....... (20,064) - (588)
Other.......................................................... (3,832) (149) 10,770
-------------- ------------- -------------
Net cash flows from financing activities................... 1,796,442 (127,166) 163,827
-------------- ------------- -------------
Effect of exchange rate changes on cash..................... (70,847) (21,950) (4,002)
-------------- ------------- -------------
Net decrease in cash and cash equivalents...................... (218,062) (12,716) (1,438,884)
Cash and cash equivalents at beginning of period............... 303,611 316,327 1,606,148
-------------- -------------- -------------
Cash and cash equivalents at end of period..................... $ 85,549 $ 303,611 $ 167,264
============== ============== ==============
Interest paid, net of amount capitalized....................... $ 224,521 $ 35,057 $ 298,542
============== ============== ==============
Income taxes paid.............................................. $ 65,612 $ - $ 91,728
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management of MidAmerican Energy Holdings Company (successor
to MidAmerican Energy Holdings Company (Predecessor), referred to as "MEHC
(Predecessor)") and subsidiaries (collectively referred to as 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 September 30, 2000 and the results of
operations for the period March 14, 2000 to September 30, 2000 and for the three
months ended September 30, 2000 for the Company and for the period January 1,
2000 to March 13, 2000 and for the three and nine months ended September 30,
1999 for MEHC (Predecessor) and the related consolidated statements of cash
flows for the period March 14, 2000 to September 30, 2000 for the Company and
for the period January 1, 2000 to March 13, 2000 and for the nine month period
ended September 30, 1999 for MEHC (Predecessor). The results of operations for
the three months ended September 30, 2000, and the period March 14, 2000 to
September 30, 2000 for the Company and for the period January 1, 2000 to March
13, 2000 and for the three and nine months ended September 30, 1999 for MEHC
(Predecessor) are not necessarily indicative of the results to be expected for
the full year.
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries. Other investments and corporate
joint ventures, 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 1999 financial statements and supporting footnote
disclosures have been reclassified to conform to the 2000 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. Teton Transaction
On October 24, 1999, the Company and entities representing an investor group
comprised of Berkshire Hathaway Inc. ("Berkshire Hathaway"), Walter Scott, Jr.,
a director of the Company, and David L. Sokol, Chairman and Chief Executive
Officer of the Company, executed a definitive agreement and plan of merger
whereby the investor group would acquire all of the outstanding common stock of
the Company for $35.05 per share in cash, representing a total purchase price of
approximately $2.2 billion, including transaction costs (the "Teton
Transaction"). The Teton Transaction closed on March 14, 2000 and Berkshire
Hathaway invested approximately $1.24 billion in common stock and non-dividend
paying convertible preferred stock and approximately $455 million in 11%
non-transferable trust preferred securities due March 14, 2010. The 11% trust
preferred securities have a liquidation preference of $25 each and are subject
to mandatory redemption in ten equal semi-annual installments, commencing
December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief Operating
Officer of the Company, contributed cash and current securities of the Company
having a value of approximately $310 million. The remaining purchase price was
funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of
the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr.
Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately
1% of the voting stock.
The merger has been accounted for as a purchase business combination. The
purchase price has been allocated to assets acquired and liabilities assumed
based on preliminary valuations. The final purchase price allocation has not
been completed. The Company recorded the estimated excess of cost over fair
value of net assets acquired which is being amortized using the straight-line
method over a 40-year period.
<PAGE>
Unaudited pro forma combined revenue, income before extraordinary items and net
income of the Company and MEHC (Predecessor) for the nine months ended September
30, 2000 and 1999, as if the Teton Transaction and the MidAmerican merger had
occurred at the beginning of each year after giving effect to pro forma
adjustments related to the acquisitions, including the sales of the qualified
facilities, the redemption of limited recourse notes, the redemption of the
senior discount notes, and the issuance of the 11% trust preferred securities,
were $3,616.0 million, $90.8 million and $90.8 million, respectively, compared
to $3,465.7 million, $125.6 million and $85.6 million, respectively.
3. Property, Plant, Contracts and Equipment
Property, plant, contracts and equipment comprise the following (in thousands):
<TABLE>
<CAPTION>
MEHC
(Predecessor)
-------------
September 30, December 31,
2000 1999
------------- -------------
Operating assets:
<S>
<C>
Utility generation and distribution system.......... $ 6,496,863 $ 6,362,975
Independent power plants............................ 736,318 705,346
Wells and resource development...................... 56,311 123,845
Power sales agreement............................... 95,970 -
Other development................................... 375,978 377,897
------------- -------------
Total operating assets.............................. 7,761,440 7,570,063
Less accumulated depreciation and amortization...... (3,274,563) (3,062,387)
------------- -------------
Net operating assets................................ 4,486,877 4,507,676
Mineral and gas reserves and exploration assets,
net.............................................. 384,143 476,416
Construction in process:
Casecnan......................................... 364,314 306,007
Zinc recovery project............................ 159,821 92,794
Cordova.......................................... 199,280 79,982
Other............................................ - 454
------------- -------------
Total............................................... $ 5,594,435 $ 5,463,329
============= =============
</TABLE>
4. Comprehensive Income
Comprehensive income for the three months ended September 30, 2000, and 1999 was
$13.5 million and $66.0 million, respectively. Comprehensive loss for the period
March 14, 2000 to September 30, 2000 was $(16.2) million. Comprehensive income
of MEHC (Predecessor) for the period January 1, 2000 to March 13, 2000, and nine
months ended September 30, 1999 was $26.0 million and $106.2 million,
respectively. Comprehensive income differs from net income due primarily to
foreign currency translation adjustments and unrealized gain and losses from
marketable securities.
5. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was delayed by SFAS No. 137 and
amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for the Company beginning January 1, 2001. The
Company is in the process of evaluating the impact of this accounting
pronouncement.
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition." SAB 101 provides additional
guidance on revenue recognition criteria and related disclosure requirements.
This SAB is effective beginning in the fourth quarter of 2000. Management does
not anticipate that the final adoption of SAB 101 will have a material impact on
the Company's consolidated financial statements.
6. Segment Information
The Company has identified five reportable business segments principally based
on management structure: CalEnergy Generation-Domestic, CalEnergy
Generation-Foreign (primarily the Philippines), MidAmerican (domestic utility
operations), Northern (foreign utility operations), and HomeServices (real
estate operations). Information related to the Company's reportable operating
segments is shown below (in thousands).
<TABLE>
<CAPTION>
MEHC
(Predecessor) MEHC (Predecessor)
-------------
----------------------------------------
Three Months March 14, 2000 January 1, 2000 Nine
Ended September 30, Through Through Months Ended
-------------------
2000 1999 September 30, 2000 March 13, 2000 September 30, 1999
<S> ---- ---- ------------------ -------------- ------------------
<C> <C> <C> <C> <C> <C>
Revenue: (1)
CalEnergy Generation -
Domestic...................... $ 18,933 $ 13,189 $ 28,876 $ 4,520 $ 98,496
CalEnergy Generation -
Foreign........................ 47,182 54,406 104,733 42,726 157,427
MidAmerican.................... 563,768 474,311 1,128,464 447,583 971,029
Northern....................... 423,289 430,176 1,000,347 499,017 1,468,289
HomeServices................... 134,457 123,464 294,651 66,880 255,294
------------ -------------- ----------- ----------- ------------
Segment revenue................ 1,187,629 1,095,546 2,557,071 1,060,726 2,950,535
Corporate...................... (737) (136) (3,666) 1,830 24,156
------------ --------------- ----------- ----------- ------------
$1,186,892 $ 1,095,410 $2,553,405 $1,062,556 $ 2,974,691
========== ============== ========== ========== ============
Operating Income: (1) (2)
CalEnergy Generation -
Domestic...................... $ 16,417 $ 12,817 $ 24,204 $ 3,670 $60,134
CalEnergy Generation -
Foreign........................ 23,748 33,204 55,965 25,689 94,611
MidAmerican.................... 126,310 115,693 204,229 87,894 184,606
Northern....................... 25,928 33,717 92,886 79,862 150,851
HomeServices................... 13,810 9,780 27,765 (4,144) 21,400
------------ -------------- ----------- ------------ ------------
Segment operating income....... 206,213 205,219 405,049 192,971 511,602
Corporate...................... (18,412) (9,645) (39,661) (8,382) (11,351)
-------------- -------------- ----------- ------------ -------------
$ 187,801 $ 195,574 $ 365,388 $ 184,589 $ 500,251
============== ============== =========== =========== ============
</TABLE>
(1) Before non-recurring items.
(2) Operating income excludes interest expense, net of capitalized interest.
<PAGE>
MEHC
(Predecessor)
-------------
September 30, December 31,
2000 1999
----------------- --------------
Identifiable assets:
CalEnergy Generation - Domestic........... $ 966,597 $ 858,812
CalEnergy Generation - Foreign........ 1,218,277 1,263,026
MidAmerican............................... 5,147,498 5,052,466
Northern.................................. 2,795,730 2,972,705
HomeServices.............................. 178,821 162,714
------------- -------------
Segment identifiable assets............... 10,306,923 10,309,723
Corporate................................. 1,100,621 456,629
------------- -------------
$ 11,407,544 $ 10,766,352
============= =============
Long-lived assets:
CalEnergy Generation - Domestic...... $ 699,389 $ 595,607
CalEnergy Generation - Foreign........... 951,087 952,415
MidAmerican.............................. 4,055,074 3,995,763
Northern................................. 2,143,588 2,438,877
HomeServices............................. 125,604 128,024
------------- -------------
Segment long-lived assets................ 7,974,742 8,110,686
Corporate................................ 1,035,202 65,320
------------- -------------
$ 9,009,944 $ 8,176,006
============= =============
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, unallocated
goodwill and related goodwill amortization, intersegment eliminations and fair
value adjustments relating to acquisitions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and results of
operations during the periods included in the accompanying statements of
operations.
Teton Transaction
On October 24, 1999, the Company and entities representing an investor group
comprised of Berkshire Hathaway Inc. ("Berkshire Hathaway"), Walter Scott, Jr.,
a director of the Company, and David L. Sokol, Chairman and Chief Executive
Officer of the Company, executed a definitive agreement and plan of merger
whereby the investor group would acquire all of the outstanding common stock of
the Company for $35.05 per share in cash, representing a total purchase price of
approximately $2.2 billion, including transaction costs (the "Teton
Transaction"). The Teton Transaction closed on March 14, 2000 and Berkshire
Hathaway invested approximately $1.24 billion in common stock and non-dividend
paying convertible preferred stock and approximately $455 million in 11%
non-transferable trust preferred securities due March 14, 2010. The 11% trust
preferred securities have a liquidation preference of $25 each and are subject
to mandatory redemption in ten equal semi-annual installments, commencing
December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief Operating
Officer of the Company, contributed cash and current securities of the Company
having a value of approximately $310 million. The remaining purchase price was
funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of
the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr.
Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately
1% of the voting stock.
Business of MEHC
MidAmerican Energy Holdings Company (the "Company" or "MEHC"), is a United
States-based privately owned global energy company with publicly traded fixed
income securities that generates, distributes and supplies energy to utilities,
government entities, retail customers and other customers located throughout the
world. Through its subsidiaries the Company is organized and managed on three
separate platforms:
MidAmerican
MidAmerican Energy Company ("MEC") is a regulated public utility principally
engaged in the business of generating, transmitting, distributing and selling
electric energy and in distributing, selling and transporting natural gas. MEC
distributes electricity at the retail level in Iowa, Illinois and South Dakota.
It also distributes natural gas at the retail level in Iowa, Illinois, South
Dakota and Nebraska. As of September 30, 2000, MEC had 666,000 retail electric
customers and 639,000 retail natural gas customers.
In addition to retail sales, MEC delivers electric energy to other utilities,
marketers and municipalities who distribute it to end-use customers. These sales
are referred to as sales for resale or off-system sales. It also transports
natural gas through its distribution system for a number of end-use customers
who have independently secured their supply of natural gas.
MEC's operations are seasonal in nature with a disproportionate percentage of
revenues and earnings historically being earned in the Company's first and third
quarters.
<PAGE>
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 throughout
the U.K. The supply business generally is a high volume business that tends to
operate at lower profitability levels than the distribution business. As of
September 30, 2000, Northern supplied electricity to approximately 1.2 million
customers.
Northern also competes to supply gas throughout the U.K. As of September 30,
2000, Northern supplied gas to approximately 508,000 customers.
CalEnergy
The Company indirectly owns the Upper Mahiao, Malitbog and Mahanagdong Projects
(collectively, the "Philippine Projects"), which are geothermal power plants
located on the island of Leyte in the Philippines. For purposes of consistent
presentation, capacity amounts for Upper Mahiao, Malitbog and Mahanagdong are
119, 216 and 165 net MW, respectively.
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. For purposes of consistent
presentation, plant capacity factors for Vulcan, Hoch (Del Ranch), Elmore and
Leathers (collectively the "Partnership Projects") 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 Projects")
are based on capacity amounts of 10, 20, 49.8 and 39.6 net MW, respectively (the
Partnership Projects and the Salton Sea Projects are collectively referred to as
the "Imperial Valley Projects"). Plant capacity factors for Saranac, Power
Resources and Yuma (collectively the "Gas Plants") are based on capacity amounts
of 240, 200, and 50 net MW, respectively. Each plant possesses an operating
margin that 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.
Due to the sale of 50% of its interest 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.
On February 26, 1999, the Company closed the sale of all of its ownership
interests in the Navy I, Navy II and BLM, (collectively "Coso"), to Caithness
Energy, LLC for $205 million in cash.
<PAGE>
Results of Operations for the Quarters Ended September 30, 2000 and 1999:
Operating revenue increased in the third quarter of 2000 to $1,153.9 million
from $1,062.6 million for the same period in 1999, an 8.6% increase. Northern's
operating revenue decreased in the third quarter of 2000 to $421.4 million from
$424.2 million for the same period in 1999, primarily due to a lower foreign
exchange rate and lower volumes of electricity supplied within its authorized
area partially offset by higher volumes of electricity supplied outside of its
authorized area. MidAmerican operating revenue increased in the third quarter of
2000 to $553.5 million from $463.9 million for the same period in 1999,
primarily due to increases in volumes of non-regulated gas and higher rates in
regulated gas. Operating revenue of HomeServices, a majority owned subsidiary of
the Company, increased in the third quarter of 2000 to $133.5 million from
$123.4 million for the same period in 1999, primarily due to acquisitions.
The following data represent the supply and distribution operations in the U.K.:
Three Months
Ended September 30,
--------------------------
2000 1999
---- ----
Electricity Supplied (GWh)................ 4,633 4,208
Electricity Distributed (GWh)............. 3,701 3,719
Gas Supplied (Thousands of MMBtus)........ 5,401 5,156
The increase in electricity supplied for the three months ended September 30,
2000 from the same periods in 1999 is due primarily to the increase in supply
volumes for customers outside the authorized area. The decrease in electricity
distributed for the three months ended September 30, 2000 from the same period
in 1999 is due to changes in demand in the authorized area. The increase in gas
supplied in 2000 from 1999, principally reflects higher volume in the U.K.
industrial and commercial markets.
The following data represent sales from MEC:
Three Months
Ended September 30,
--------------------------
2000 1999
---- ----
Electricity Retail Sales (GWh)............ 4,734 4,584
Electricity Sales for Resale (GWh)........ 1,541 1,442
Regulated and Non-Regulated Gas Supplied
(Thousands of MMBtus)..................... 31,170 19,822
MEC electric retail sales increased in the third quarter 2000 from the third
quarter 1999 due to increased customers and non-weather related sales, partially
offset by more moderate temperatures. MEC electric sales for resale increased
6.9% in the third quarter 2000 from the third quarter 1999 due to improved
availability in 2000 of MEC's base load coal plants and favorable market condi-
tions. MEC regulated and non-regulated gas supplied increased in the third
quarter due to growth in the non-regulated markets.
Interest and other income increased marginally in the third quarter of 2000 to
$33.0 million from $32.9 million for the same period in 1999. The change is
composed of higher equity investment earnings partially offset by lower interest
and other income.
Cost of sales increased in the third quarter of 2000 to $611.2 million from
$515.4 million for the same period in 1999, an 18.6% increase. The increase is
primarily due to higher volumes of electricity supplied at Northern and higher
volumes of non-regulated gas supplied at MEC.
<PAGE>
Operating expense increased marginally in the third quarter of 2000 to $270.2
million from $268.8 million for the same period in 1999.
Depreciation and amortization increased in the third quarter of 2000 to $117.6
million from $115.6 million for the same period in 1999, a 1.7% increase. The
increase is primarily due to goodwill amortization from the Teton Transaction,
partially offset by lower depreciation at MidAmerican.
Interest expense, less amounts capitalized, decreased in the third quarter of
2000 to $97.0 million from $106.2 million for the same period in 1999, an 8.7%
decrease. The decrease is due to the lower average outstanding debt balances and
increased capitalized interest related to the construction of Casecnan, Cordova
and Zinc.
The provision for income taxes increased in the third quarter of 2000 to $28.8
million from $27.5 million for the same period in 1999, a 4.7% increase. The
increase primarily is due to greater non-deductible goodwill amortization and a
greater percentage of income from higher taxed entities.
Minority interest increased in the third quarter of 2000 to $27.1 million from
$12.2 million for the same period in 1999, a 122.1% increase. The increase is
primarily due to the issuance of $455 million of 11% Company-obligated
mandatorily redeemable preferred securities of subsidiary trust associated with
the Teton Transaction and higher minority interest from HomeServices.
Income before extraordinary items decreased in the third quarter of 2000 to
$34.9 million from $49.7 million for the same period in 1999.
The Company redeemed $39.6 million in principal value of the 9.5% Senior Notes
at an aggregate price of $43.5 million throughout the third quarter of 1999. Due
to the early extinguishment of this debt, the Company recorded an extraordinary
loss, net of tax, of $3.2 million, in the three months ended September 30, 1999.
Results of Operations for the Periods March 14, 2000 through September 30, 2000,
January 1, 2000 through March 13, 2000 and for the Nine Months Ended September
30, 1999:
The following is a discussion of the historical results of the Company for the
period March 14, 2000 through September 30, 2000, and of its predecessor
(referred to as "MEHC (Predecessor)") for the period January 1, 2000, through
March 13, 2000, and for the nine months ended September 30, 1999. Results for
the Company include the results of MEHC (Predecessor) beginning March 14, 2000,
in conjunction with the Teton Transaction. The impact of the transaction is
reflected in the Company's results of operations, predominately minority
interest costs on issuance of Company-obligated mandatorily redeemable preferred
securities of subsidiary trust and the effects of purchase accounting, including
goodwill amortization and fair value adjustments to the carrying value of assets
and liabilities. In order to provide comparability between periods, the Company
has prepared pro forma results as if the Teton Transaction and the MidAmerican
Merger had occurred at the beginning of each year after giving effect to pro
forma adjustments related to the acquisitions, including the sales of the
qualified facilities, the redemption of limited recourse notes, the redemption
of the senior discount notes and the issuance of the 11% trust preferred
securities. The discussion therefore will highlight any significant variances on
a pro forma basis from the nine months ended September 30, 1999 to the nine
months ended September 30, 2000.
<PAGE>
Pro forma operating revenue for the nine months ended September 30, 2000 was
$3,536.1 million compared with $3,252.3 million for the same period in 1999, an
increase of 8.7%. Northern Electric operating revenue increased for the nine
months ended September 30, 2000 to $1,489.5 million from $1,449.2 million for
the same period in 1999, primarily due to higher volumes of electricity supplied
and distribution revenue from access charges. MidAmerican operating revenue
increased for the nine months ended September 30, 2000 to $1,546.2 million from
$1,326.6 million for the same period in 1999, primarily due to increases in
non-regulated gas and higher rates in regulated gas. The remaining increase
primarily relates to the increase of revenue at HomeServices, a majority owned
subsidiary of the Company, due to acquisitions in 1999.
The following data represents the supply and distribution operations in the
U.K.:
Nine Months
Ended September 30,
--------------------------
2000 1999
------ ------
Electricity Supplied (GWh)............... 14,548 12,849
Electricity Distributed (GWh)............ 11,911 11,578
Gas Supplied (Thousands of MMBtus)....... 30,846 32,873
The increase in electricity supplied for the nine months ended September 30,
2000 is due primarily to the increase in volumes for customers outside of the
authorized area. The increase in electricity distributed for the nine months
ended September 30, 2000 is due to changes in demand in the authorized area. The
reduction in gas supplied in 2000 from 1999 reflects lower volume in the U.K.
industrial and commercial markets.
The following data represents sales from MEC:
Nine Months
Ended September 30,
----------------------------
2000 1999
------ ------
Electricity Retail Sales (GWh)............ 12,618 12,290
Electricity Sales for Resale (GWh)........ 4,984 4,810
Regulated and Non-Regulated Gas Supplied
(Thousands of MMBtus)..................... 113,740 98,051
MEC electric retail sales increased for the nine months ended September 30, 2000
from the same period in 1999 due to increased customers and non-weather related
sales partially offset by more moderate temperatures. Electric sales for resale
increased for the nine months ended September 30, 2000 from the same period in
1999 due to improved availability in 2000 of MEC's base load coal plants and
favorable market conditions. Retail gas supplied decreased due to milder
temperatures for the nine months ended September 30, 2000 compared to the same
period in 1999, resulting in less heating load.
Pro forma interest and other income for the nine months ended September 30, 2000
was $79.8 million compared with $115.0 million for the same period in 1999. The
decrease was due primarily to the reduced interest income resulting from lower
cash balances, lower dividends from Teesside and gains on other asset sales in
1999.
The gain on non-recurring items resulted from the sale of approximately 6.74
million shares of 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.
<PAGE>
As a result of the sales of Coso and an interest in CE Generation, the Company
recorded a gain of $20.2 million in the first quarter of 1999.
Pro forma cost of sales for the nine months ended September 30, 2000 was
$1,894.9 million compared with $1,661.4 million for the same period in 1999, an
increase of 14.1%. The increase relates to increased revenue at Northern, MEC
and HomeServices.
Pro forma operating expenses for the nine months ended September 30, 2000 was
$813.5 million compared with $822.4 million for the same period in 1999. The
decrease was due to lower costs at both Northern and MEC.
Pro forma depreciation and amortization for the nine months ended September 30,
2000 was $360.3 million compared with $353.6 million for the same period in
1999. This increase was due to higher depreciation at Northern primarily due to
higher production at CE Gas.
Pro forma interest expense, less amounts capitalized, for the nine months ended
September 30, 2000 was $300.9 million compared with $339.7 million for the same
period in 1999, a decrease of 11.4%. This decrease was due to the repayment of
the 9.5% Senior Notes in 1999 and other reduced indebtedness and an increase in
capitalized interest related to the construction of Casecnan, Cordova and Zinc.
The loss on non-recurring items of $7.6 million in the period from January 1,
2000 through March 13, 2000 represents the costs related to the Teton
Transaction.
Pro forma tax expense for the nine months ended September 30, 2000 was $69.4
million compared with $85.5 million for the same period in 1999. The decrease is
due primarily to lower pretax income in 2000.
Pro forma minority interest for the nine months ended September 30, 2000 was
$78.6 million compared with $77.5 million for the same period in 1999. Minority
interest includes the dividends on the $455 million of Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts.
On January 15, 1999, the Company redeemed its remaining outstanding Senior
Discount Notes at a redemption price of 105.125% plus accrued interest. On
January 29, 1999, the Company commenced a cash offer for all of its outstanding
Limited Recourse Notes. The Company received tenders from holders of an
aggregate of approximately $195.8 million principal that were paid on March 3,
1999 at a redemption price of 110.025% plus accrued interest. The Company
redeemed $103.9 million in principal value of the 9.5% Senior Notes at an
aggregate price of $114.6 million throughout the second and third quarter of
1999. Due to the early retirement of the Senior Discount Notes, the Limited
Recourse Notes, and the 9.5% Senior Notes, the Company recorded an extraordinary
item of approximately $40.1 million, net of tax, in the nine months ended
September 30, 1999.
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 $85.5 million at September 30, 2000
as compared to $316.3 million at December 31, 1999. The majority of this
decrease was due to the cash used in the Teton Transaction. In addition, the
Company recorded separately restricted cash and investments of $161.6 million
and $291.7 million at September 30, 2000 and December 31, 1999, respectively.
The restricted cash balance as of September 30, 2000 is comprised primarily of
amounts deposited in restricted accounts from which the Company will fund the
various projects under construction. Additionally, the Philippine Projects'
restricted cash is reserved for the service of debt obligations.
<PAGE>
Teton Transaction
On October 24, 1999, the Company and entities representing an investor group
comprised of Berkshire Hathaway Inc., Walter Scott, Jr., a director of the
Company, and David L. Sokol, Chairman and Chief Executive Officer of the
Company, executed a definitive agreement and plan of merger whereby the investor
group would acquire all of the outstanding common stock of the Company for
$35.05 per share in cash, representing a total purchase price of approximately
$2.2 billion, including transaction costs. The Teton Transaction closed on March
14, 2000 and Berkshire Hathaway invested approximately $1.24 billion in common
stock and non-dividend paying convertible preferred stock and approximately $455
million in 11% non-transferable trust preferred securities due March 14, 2010.
The 11% trust preferred securities have a liquidation preference of $25 each and
are subject to mandatory redemption in ten equal semi-annual installments,
commencing December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief
Operating Officer of the Company, contributed cash and current securities of the
Company having a value of approximately $310 million. The remaining purchase
price was funded with the Company's cash. Berkshire Hathaway owns approximately
9.7% of the voting stock, Mr. Scott owns approximately 86% of the voting stock,
Mr. Sokol owns approximately 3% of the voting stock and Mr. Abel owns
approximately 1% of the voting stock.
Construction
Minerals Extraction
CalEnergy Minerals LLC, an indirect wholly owned subsidiary of the Company, is
constructing the Zinc Recovery Project that will recover zinc from the
geothermal brine. Facilities are being installed near the Imperial Valley
Projects 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 expected to
commence commercial operation by the end of 2000 or early 2001. In September
1999, CalEnergy Minerals LLC entered into a sales agreement whereby all zinc
produced by the Zinc Recovery Project will be sold to Cominco, LTD. The initial
term of the agreement expires in December 2005.
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. 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, including financing costs, of the Zinc Recovery Project are expected to
be approximately $200.9 million. The Company has incurred $172.2 million of
construction costs through September 30, 2000.
Casecnan
CE Casecnan Water and Energy Company, Inc., a Philippines 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
Cooperative Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa
working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and
Colenco Power Engineering Ltd. (collectively, the "Contractor").
<PAGE>
On November 20, 1999, following a request by the Contractor, the EPC Contract
was amended, inter alia, to extend the Guaranteed Substantial Completion Date
for the Casecnan Project to March 31, 2001. In connection with such extension,
Stone & Webster, the Casecnan Project's independent engineer, confirmed that the
revised construction budget and schedule was reasonable and that funds remaining
available to CE Casecnan should be sufficient to complete the Casecnan Project.
Accordingly, the Casecnan Project is currently scheduled to become operational
by the second quarter of 2001, subject to any further completion date extensions
resulting from contractor delays.
The Republic of the Philippines ("RP") has recently been experiencing a period
of political unrest and governmental uncertainty relating to the impeachment of
President Estrada which could result in a change in the Presidency and related
changes to the RP cabinet and overall government administration.
Although the obligations of the National Irrigation Administration ("NIA") to
make payments to CE Casecnan for water and electricity fees under the Project
Agreement with NIA and the obligations of the RP under the related sovereign
performance undertaking are in no way dependent on maintaining any particular RP
administration in place or on any particular government's annual budgetary
appropriations, it is possible that the current Philippine governmental
uncertainty could have an adverse impact on the Casecnan Project, which , as
noted above, is scheduled to commence commercial operation and commence
receiving payments in 2001.
Under the Project Agreement, if NIA has completed certain work on its irrigation
system, CE Casecnan is liable to pay NIA $5,000 per day for each day of delay
in completion of the Casecnan Project beyond July 27, 2000, increasing to
$13,500 per day for each day of delay in completion beyond November 27, 2000. CE
Casecnan believes NIA has not completed such work, and therefore, is not
currently making such payments.
CE Casecnan's ability to make payments on any of its existing and future
obligations is dependent on NIA's and the Republic of the Philippines'
performance of their obligations under the Project Agreement and the Performance
Undertaking, respectively. No shareholders, partners or affiliates of CE
Casecnan, including the Company, and no directors, officers or employees of the
Company will guarantee or be in any way liable for payment of CE Casecnan's
obligations. As a result, payment of CE Casecnan's obligations depends upon the
availability of sufficient revenues from CE Casecnan's business after the
payment of operating expenses.
NIA's payments of obligations under the Project Agreement are substantially
denominated in United States dollars and are expected to be CE Casecnan's sole
source of operating revenues. Because of CE Casecnan's dependence on NIA, any
material failure of NIA to fulfill its obligations under the Project Agreement
and any material failure of the Republic of the Philippines to fulfill its
obligations under the Performance Undertaking would significantly impair the
ability of CE Casecnan to meet its existing and future obligations.
Cordova
Cordova Energy Company LLC ("Cordova Energy"), an indirect wholly owned
subsidiary of the Company, has commenced construction of a 537 MW gas-fired
power plant in the Quad Cities, Illinois area (the "Cordova Project"). Cordova
Energy has entered into an engineering, procurement and construction ("EPC")
contract with Stone & Webster Engineering Corporation to build the project.
Total project costs are estimated to be approximately $288.9 million. The
construction of the Cordova Project is expected to be completed in mid-2001.
Cordova Energy had 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 Energy has the option to elect on an annual basis to retain up
to 50% of the project capacity and energy for sales to others. Cordova Energy
has exercised this option for the full 50% for the first 3 years and has entered
into a power sales agreement to sell this capacity and energy to MEC.
On September 10, 1999, Cordova Funding Corporation ("Cordova Funding"), a wholly
owned subsidiary of the Company, closed the $225 million aggregate principal
amount financing for the construction of the Cordova Project. As part of the
financing, approximately $93.5 million of 8.64% Series A-1 Senior Secured Bonds
due in 2019 were issued. An additional $31.3 million of 8.79% Series A-2 Senior
Secured Bonds were issued on December 15, 1999, $29.3 million of 9.07% Series
A-3 Senior Secured Bonds were issued on March 15, 2000, $58.1 million of 8.82%
Series A-4 Senior Secured Bonds were issued on June 15, 2000 and $12.8 million
of 8.48% Series A-5 Senior Secured Bonds were issued September 15, 2000. Cordova
Funding has loaned the proceeds to Cordova Energy. The Company has incurred
$199.3 million of construction costs through September 30, 2000. Total equity
funding is expected to be approximately $63.9 million.
<PAGE>
The EPC contractor's parent, Stone & Webster, Incorporated, voluntarily filed
Chapter 11 bankruptcy on September 2, 2000 and has sold substantially all of its
assets to Shaw Group, Inc. Shaw Group, Inc. has agreed to complete substantially
all of Stone & Webster's contracts for current and future projects including the
Cordova Project. The Company does not believe this situation will cause any
material adverse effect on the final completion of the Cordova Project or the
Company.
Accounting Effects of Industry Restructuring
A possible consequence of deregulation in the utility industry is that Statement
of Financial Accounting Standards ("SFAS") No. 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. With the exception of the generation operations serving the Illinois
jurisdiction, MEC's electric and gas utility operations currently meet the
criteria required by SFAS 71, but its applicability is periodically reexamined.
If portions of its utility operations no longer meet the criteria of SFAS 71,
MEC could be required to write off the related regulatory assets and liabilities
from its balance sheet, and thus, a material adjustment to earnings in that
period could result if regulatory assets are not recovered in transition
provisions of any resulting legislation. As of September 30, 2000, the Company
had $245.4 million of net regulatory assets on its consolidated balance sheet.
U.K. Rate Matters
Distribution
Northern charges access fees for the use of the distribution system. Most
revenue of the distribution business is controlled by a distribution price
control formula. The current formula requires that regulated distribution income
per unit is increased or decreased each year by RPI-Xd where RPI reflects the
average of the twelve months' inflation rates recorded for the previous July to
December period and Xd is set at 3%. The formula also takes account of the
changes in system electrical losses, the number of customers connected and the
voltage at which customers receive the units of electricity distributed. The
formula determines the maximum average price per unit of electricity distributed
(in pence per kilowatt hour) which a Regional Electricity Company ("REC") is
entitled to charge. The price control does not seek to constrain the profits of
a REC from year to year. It is a control on revenue that operates independently
of the REC's costs. During the lifetime of the price control, additional cost
savings therefore contribute directly to profit.
The previous distribution price control period expired on March 31, 2000.
Changes to the formula took effect from April 1, 2000 resulting in a one-off
reduction in allowed income per unit distributed of 23%. As part of the review,
the Xd factor remains at 3%. The distribution prices allowable under the current
distribution price control formula are expected to be reviewed by the Office of
Gas and Electricity Markets ("Ofgem") at the expiration of the formula's
scheduled five-year duration in 2005. The formula may be reviewed at other times
at the discretion of Ofgem, including in connection with certain proposed
regulatory incentive initiatives.
As a result of the new distribution price control, Northern implemented a review
of expenditure and staffing requirements primarily in its distribution business.
Subsequently Northern implemented a series of cost reduction initiatives
including a redundancy program, following discussions with the trade unions,
which has resulted in 496 employees leaving Northern prior to September 30,
2000.
<PAGE>
Supply
In December 1999, Ofgem announced revised electric price controls. From April
2000, these have applied to most domestic and small commercial customers in the
below 100kW market of Northern's designated area, and result in a further
lowering of price caps. The new price control applies for two years to March
2002.
While the impact of the latest regulatory review varied across companies, the
anticipated impact on a standard Northern customer was a real price reduction of
approximately 11%.
The supply companies are able to propose and amend the detailed structure of
tariffs, but these must be submitted to Ofgem to ensure their consistency with
the prescribed price caps. Prices are then monitored on an ongoing basis, and
any proposed further amendments must be submitted to Ofgem for review.
In addition to the constraint of regulatory price caps, competitive pressures
from other suppliers are exerted against Northern's tariffs and contracts. The
costs of fulfilling customer requirements are also subject to market pressures,
energy prices varying on a half hourly basis. At present, electric prices are
established on a national half hourly basis through the electric pool. Northern
principally employs contracts to hedge the risk contingent on movements in pool
price.
It is expected from March 2001, New Electricity Trading Arrangements ("NETA")
will be introduced to replace the Pool with market arrangements more reflective
of other commodities. The bulk of energy settlement under this system should
occur either bilaterally or through power exchanges. Risk mitigation should be
dependent on the establishment of effective load forecasting tools, addressing
short and longer-term requirements. In addition, it is expected that new hedging
facilities will be established, although the form of these has yet to be
defined.
Domestic Rate Matters: Electric
Under a 1997 pricing plan settlement agreement resulting from an Iowa Utilities
Board rate proceeding, electric prices for MEC's Iowa industrial and commercial
customers were reduced through a retail access pilot project, negotiated
individual electric contracts and a tariffed rate reduction for some
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 ten-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. MEC presently intends to manage this risk through hedging
and other similar arrangements. On an aggregate basis, the annual revenues under
contract are approximately $180 million.
Under the 1997 pricing plan settlement agreement, if MEC's annual Iowa electric
jurisdictional return on common equity exceeds 12%, then earnings above the 12%
level will be shared equally between customers and MEC. If the return exceeds
14%, then two-thirds of MEC's share of those earnings above the 14% level will
be used for accelerated recovery of certain regulatory assets. The pricing plan
settlement agreement precludes MEC from filing for increased rates prior to 2001
unless the return falls below 9%. Other parties signing the agreement are
prohibited from filing for reduced rates prior to 2001 unless the return, after
reflecting credits to customers, exceeds 14%.
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, beginning October 1, 1999, larger non-residential customers in
Illinois and 33% of the remaining non-residential Illinois customers are allowed
to select their provider of electric supply services. 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.
<PAGE>
Environmental Matters - Domestic
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.
MEC has evaluated or is evaluating 27 properties which were, at one time, sites
of gas manufacturing plants in which it may be a potentially responsible party.
The purpose of these evaluations is to determine whether waste materials are
present, whether the materials constitute an environmental or health risk, and
whether MEC has any responsibility for remedial action. MEC's estimate of the
probable costs for these sites as of September 30, 2000, was $26 million. This
estimate has been recorded as a liability and a regulatory asset for future
recovery through the regulatory process.
Although the timing of potential incurred costs and recovery of costs in rates
may affect the results of operations in individual periods, management believes
that the outcome of these issues will not have a material adverse effect on the
Company's financial position or results of operations.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. In May 1999,
the U.S. 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. As a result of the court's initial decision and the
current status of the standards, the impact of any new standards on MEC is
currently unknown. If the EPA successfully appeals the court's decision,
however, and the new standards are implemented, then MEC would incur increased
costs and a decrease in revenues.
Environmental Matters - U.K.
Northern carries out its activities in such a manner as to minimize the impact
of its works and operations on the environment and in accordance with
environmental legislation and good practice. There have been no significant
environmental compliance issues.
The U.K. Government introduced new contaminated land legislation in April 2000
that requires companies to:
o Put in place a program for investigating the company's history to identify
problem sites for which it is responsible; o make a clear commitment to meeting
responsibilities for cleaning up those sites; o provide funding to make sure
that this can happen; and o make commitments public.
Northern is in the process of completing the evaluation work on the seven sites
which may be subject to the legislation. A compliance strategy will then be
developed. Exploratory work with an environmental remediation company is
expected to minimize any clean up costs.
The Environmental Protection Act (Disposal of PCB's and other Dangerous
Substances) Regulations 2000 were introduced on May 5, 2000. The Regulations
required that transformers containing over 50 parts per million (PPM) be
registered with the Environment Agency by July 31, 2000. Transformers containing
500 PPM must be de-contaminated by December 31, 2000. Northern has registered 62
items above 50 PPM, de-contaminated 4 items and informed the Environment Agency
that it is continuing with its sampling, labeling and registration program.
<PAGE>
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 2000 through 2004 to an external
trust established for the investment of funds for decommissioning Quad Cities
Station.
In addition, MEC makes payments to the Nebraska Public Power District ("NPPD")
related to decommissioning the Cooper power station. These payments are
reflected as operating expense. NPPD estimates call for MEC to pay approximately
$57 million to NPPD for Cooper decommissioning during the period 2000 through
2004. 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 obligations in connection with Cooper nuclear decommissioning funding.
Cooper and Quad Cities Station decommissioning costs charged to Iowa customers
are to a large extent included in base rates, and recovery of increases in those
amounts must be sought through the normal ratemaking process. Cooper
decommissioning costs charged to Illinois customers are recovered through a rate
rider on customer billings that is reviewed annually.
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 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.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
delayed by SFAS No. 137 and amended by SFAS No. 138. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the Company beginning
January 1, 2001. The Company is in the process of evaluating the impact of this
accounting pronouncement.
<PAGE>
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 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 and construction
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
economic and political conditions and uncertainties regarding the impact of
regulations, changes in government policy, industry deregulation and
competition. Reference is made to all of the Company's SEC filings, including
the Company's Report on Form 8-K dated March 26, 1999, incorporated herein by
reference, for a description of such factors. The Company assumes no
responsibility to update forward-looking information contained herein.
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal proceedings.
As of September 30, 2000, there are no material outstanding lawsuits
against the Company; however as discussed in the Company's December 31,
1999 Form 10-K, several of the Company's projects and subsidiaries are
involved in ongoing litigation.
Item 2 Changes in Securities and Use of Proceeds.
Not applicable.
Item 3 Defaults on Senior Securities.
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
Not applicable.
Item 5 Other Information.
Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibits Filed Herewith
Exhibit 15 - Awareness Letter of Independent Accountants.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Registrant)
Date: November 14, 2000 /s/ Patrick J. Goodman
------------------------------------
Patrick J. Goodman
Senior Vice President & Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Page No.
----------- --------
15 Awareness Letter of Independent Accountants 25
27 Financial Data Schedule 26
<PAGE>
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 consolidated interim
financial information of MidAmerican Energy Holdings Company and subsidiaries
for the period March 14, 2000 to September 30, 2000 and for the three-month
period ended September 30, 2000 for MidAmerican Energy Holdings Company and for
the period January 1, 2000 to March 13, 2000 and for the three-month and
nine-month periods ended September 30, 1999 for MidAmerican Energy Holdings
Company (Predecessor), as indicated in our report dated October 27, 2000;
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 September 30, 2000, is
incorporated by reference in 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
November 14, 2000
<PAGE>
