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 MARCH 31, 2000
--------------
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ------------------------------------------ ------------------
333-90553 MIDAMERICAN FUNDING, LLC 47-0819200
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
5.85% Senior Secured Exchange Notes due 2001
6.339% Senior Secured Exchange Notes due 2009
6.927% Senior Secured Exchange Bonds due 2029
- -------------------------------------------------------------------------------
Title of each Class
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 registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
All of the member's equity of MidAmerican Funding, LLC is held by MidAmerican
Energy Holdings Company as of April 30, 2000.
<PAGE>
MIDAMERICAN FUNDING, LLC
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Independent Accountants' Report.......................... 3
Consolidated Statements of Income........................ 4
Consolidated Balance Sheets.............................. 5
Consolidated Statements of Cash Flows.................... 6
Notes to Consolidated Financial Statements............... 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ....................................... 25
ITEM 6. Exhibits and Reports on Form 8-K......................... 26
Signatures........................................................ 27
Exhibit Index..................................................... 28
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<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Funding, LLC (successor to MHC Inc.) and subsidiaries (the Company) as of March
31, 2000, and the related consolidated statements of income and cash flows for
the three month period ended March 31, 2000 and for the period January 1, 1999
to March 11, 1999 for MHC Inc. and for the period March 12, 1999 to March 31,
1999 for the Company. 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
MidAmerican Funding, LLC and subsidiaries as of December 31, 1999, and the
related consolidated statements of income, comprehensive income and cash flows
for the period January 1, 1999 to March 11, 1999 for MHC Inc. and March 12, 1999
to December 31, 1999 for the Company (not presented herein), and in our report
dated January 25, 2000, 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
April 21, 2000
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<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
------------------------------ -------------
THREE MARCH 12, 1999 JAN. 1, 1999
MONTHS THROUGH THROUGH
ENDED MARCH 31, MARCH 11,
MARCH 31, 2000 1999 1999
-------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUES
Regulated electric ...................................... $ 278,463 $ 53,165 $ 208,963
Regulated gas ........................................... 179,902 31,214 139,564
Nonregulated ............................................ 64,189 9,207 34,539
--------- --------- ---------
522,554 93,586 383,066
--------- --------- ---------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity .................... 57,360 10,557 40,232
Cost of gas sold ..................................... 111,497 16,949 79,910
Other operating expenses ............................. 96,520 24,710 93,940
Maintenance .......................................... 24,739 6,191 18,302
Depreciation and amortization ........................ 44,343 10,273 39,417
Property and other taxes ............................. 19,299 4,393 15,758
--------- --------- ---------
353,758 73,073 287,559
--------- --------- ---------
Nonregulated:
Cost of sales ........................................ 55,651 7,926 30,188
Other ................................................ 17,482 4,218 6,421
--------- --------- ---------
73,133 12,144 36,609
--------- --------- ---------
Total operating expenses ............................. 426,891 85,217 324,168
--------- --------- ---------
OPERATING INCOME ........................................ 95,663 8,369 58,898
--------- --------- ---------
NON-OPERATING INCOME
Interest income ......................................... 3,816 323 1,411
Dividend income ......................................... 1,113 336 1,331
Realized gains and losses on securities, net ............ 1,336 (10) 15,214
Other, net .............................................. (542) 839 (18,133)
--------- --------- ---------
5,723 1,488 (177)
--------- --------- ---------
FIXED CHARGES
Interest on long-term debt .............................. 27,248 6,505 14,814
Other interest expense .................................. 2,974 780 3,145
Preferred dividends of subsidiaries ..................... 3,234 402 2,831
Allowance for borrowed funds ............................ (379) (71) (235)
--------- --------- ---------
33,077 7,616 20,555
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................. 68,309 2,241 38,166
INCOME TAXES ............................................ 31,720 1,336 21,377
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ....................... 36,589 905 16,789
INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES) -- 1,199 421
--------- --------- ---------
NET INCOME .............................................. $ 36,589 $ 2,104 $ 17,210
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
-------------------------
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric ................................................................ $4,356,573 $4,209,281
Gas ..................................................................... 812,896 809,112
---------- ----------
5,169,469 5,018,393
Less accumulated depreciation and amortization .......................... 2,584,005 2,546,516
---------- ----------
2,585,464 2,471,877
Construction work in progress ........................................... 39,024 33,739
---------- ----------
2,624,488 2,505,616
---------- ----------
POWER PURCHASE CONTRACT ................................................. 90,412 --
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................................... 5,635 6,235
Receivables ............................................................. 189,004 215,361
Inventories ............................................................. 57,841 82,823
Prepaid taxes ........................................................... 22,889 22,889
Other ................................................................... 12,893 12,301
---------- ----------
288,262 339,609
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET .............................. 561,120 519,201
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET .................. 1,348,671 1,482,992
OTHER ASSETS ............................................................ 317,196 347,935
---------- ----------
TOTAL ASSETS ............................................................ $5,230,149 $5,195,353
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity ......................................................... $1,833,733 $1,800,416
MidAmerican Energy preferred securities, not subject to
mandatory redemption ................................................. 31,759 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities ............................. 50,000 50,000
MidAmerican Energy-obligated preferred securities of subsidiary trust
holding solely MidAmerican Energy junior subordinated debentures . 100,000 101,598
Long-term debt (excluding current portion) .............................. 1,309,484 1,508,394
---------- ----------
3,324,976 3,492,167
---------- ----------
CURRENT LIABILITIES
Notes payable ........................................................... 200,548 204,000
Current portion of long-term debt ....................................... 224,045 134,082
Current portion of power purchase contract .............................. 15,767 15,767
Accounts payable ........................................................ 211,864 165,915
Taxes accrued ........................................................... 110,450 110,592
Interest accrued ........................................................ 17,641 29,555
Other ................................................................... 41,847 42,392
---------- ----------
822,162 702,303
---------- ----------
OTHER LIABILITIES
Power purchase contract ................................................. 52,282 52,282
Deferred income taxes ................................................... 602,253 520,088
Investment tax credit ................................................... 70,292 71,757
Other ................................................................... 358,184 356,756
---------- ----------
1,083,011 1,000,883
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES .................................... $5,230,149 $5,195,353
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
---------------------------------- -------------
THREE MARCH 12, 1999 JAN. 1, 1999
MONTHS THROUGH THROUGH
ENDED MARCH 31, MARCH 11,
MARCH 31, 2000 1999 1999
-------------- --------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 36,589 $ 2,104 $ 17,210
Adjustments to reconcile net income to net cash provided:
Income from discontinued operations ..................... -- (1,198) (421)
Depreciation and amortization ........................... 54,423 12,236 39,865
Deferred income taxes and investment tax credit, net .... (157) (1,338) (2,327)
Amortization of other assets and liabilities ............ 5,015 2,334 12,035
Gain on sale of securities, assets and other investments (1,461) 3 (15,478)
Cash inflows (outflows) of accounts receivable
securitization ........................................ 12,877 -- 10,000
Impact of changes in working capital, net of effects
from discontinued operations ......................... 69,247 (2,797) 38,190
Other ................................................... (576) (609) 4,878
--------- ----------- ---------
Net cash provided by continuing operations ............ 175,957 10,735 103,952
Net cash provided by (used in) discontinued operations. -- 2,553 (429)
--------- ----------- ---------
Net cash provided by operating activities ............. 175,957 13,288 103,523
--------- ----------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures .......................... (28,988) (8,917) (16,924)
Quad Cities Nuclear Power Station decommissioning
trust fund .............................................. (2,075) (625) (2,189)
Nonregulated capital expenditures .......................... (687) (2,957) (6,058)
Purchase of assets and long-term investments ............... (2,571) (1,858) (140)
Purchase of available-for-sale securities .................. (7,806) (2,713) (12,307)
Proceeds from sale of securities
Available for sale ...................................... 11,643 2,553 72,468
Held to maturity ........................................ -- -- 2,984
Proceeds from sale of assets and other investments ......... 264 8 1,097
Notes receivable from affiliate ............................ (31,300) -- --
Purchase of MHC, net of cash received ...................... -- (2,429,532) --
Other investing activities, net ............................ (1,443) (3,660) (7,754)
--------- ----------- ---------
Net cash provided by (used in) continuing operations .... (62,963) (2,447,701) 31,177
Net cash used in discontinued operations ................ -- (1,107) (1,056)
--------- ----------- ---------
Net cash used in investing activities ................... (62,963) (2,448,808) 30,121
--------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
------------------------------- ------------
THREE MARCH 12, 1999 JAN. 1, 1999
MONTHS THROUGH THROUGH
ENDED MARCH 31, MARCH 11,
MARCH 31, 2000 1999 1999
-------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ......................................... $ -- $ -- $ (30,359)
Issuance of long-term debt, net of issuance costs and rate swap -- 706,525 --
Retirement of long-term debt, including reacquisition cost .... (110,142) (7) (127)
Reacquisition of common shares ................................ -- -- (50,629)
Equity contribution from parent ............................... -- 1,727,651 --
Repayment of MidAmerican Capital Company unsecured
revolving credit facility .................................. -- -- (34,600)
Net increase (decrease) in notes payable ...................... (3,452) 18,433 (15,274)
--------- ----------- ---------
Net cash provided by (used in) continuing operations ....... (113,594) 2,452,602 (130,989)
Net cash provided by (used in) discontinued operations ..... -- (1,876) 1,719
--------- ----------- ---------
Net cash provided by (used in) financing activities ........ (113,594) 2,450,706 (129,270)
--------- ----------- ---------
NET (INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS
OF DISCONTINUED OPERATIONS ................................. -- 450 (234)
--------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... (600) 15,636 4,140
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 6,235 -- 6,107
--------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 5,635 $ 15,636 $ 10,247
========= =========== =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ..................... $ 40,783 $ 2,327 $ 15,458
========= =========== =========
Income taxes paid ............................................. $ 15,182 $ -- $ 8,401
========= =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
-7-
<PAGE>
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:
The consolidated financial statements included herein have been prepared by
MidAmerican Funding, LLC, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of MidAmerican Funding, all adjustments,
consisting of normal recurring adjustments, have been made to present fairly the
financial position, the results of operations and the changes in cash flows for
the periods presented. Prior year amounts have been reclassified to a basis
consistent with the current year presentation. All significant intercompany
transactions have been eliminated. Although MidAmerican Funding believes that
the disclosures are adequate to make the information presented not misleading,
it is suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Funding's latest Annual Report on Form 10-K.
MidAmerican Funding is an Iowa limited liability company and a direct
wholly owned subsidiary of MidAmerican Energy Holdings Company. MidAmerican
Funding's direct wholly owned subsidiary is MHC Inc., an exempt public utility
holding company. MHC's principal subsidiary is MidAmerican Energy Company, a
public utility with electric and natural gas operations. Other direct wholly
owned subsidiaries of MHC include MidAmerican Capital Company, Midwest Capital
Group, Inc. and MidAmerican Services Company.
B. ENVIRONMENTAL MATTERS:
(1) MANUFACTURED GAS PLANT FACILITIES -
The United States Environmental Protection Agency and the 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 such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy 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 MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is currently conducting field investigations
at eighteen sites and has conducted interim removal actions at six of the
eighteen sites. In addition, MidAmerican Energy has completed investigations and
removals at four sites. MidAmerican Energy is continuing to evaluate several of
the sites to determine the future liability, if any, for conducting site
investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $22 million to
$68 million. MidAmerican Energy's estimate of the probable cost for these sites
as of March 31, 2000 was $28 million. The estimate consists of $3 million for
investigation costs, $10 million for remediation costs, $13 million for
groundwater treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 10 years.
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<PAGE>
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican Energy has potential legal
liability for the site and whether information exists to indicate that
contaminated wastes remain at the site. If so, the costs of performing a
preliminary investigation and the costs of removing known contaminated soil are
accrued. As the investigation is performed and if it is determined remedial
action is required, the best estimate of remedial costs is accrued. If
necessary, the estimate is revised when a consent order is issued. The estimated
recorded liabilities for these properties include incremental direct costs of
the remediation effort, costs for future monitoring at sites and costs of
compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liabilities for these properties are
based upon preliminary data. Thus, actual costs could vary significantly from
the estimates. The estimate could change materially based on facts and
circumstances derived from site investigations, changes in required remedial
action and changes in technology relating to remedial alternatives. In addition,
insurance recoveries for some or all of the costs may be possible, but the
liabilities recorded have not been reduced by any estimate of such recoveries.
The Illinois Commerce Commission has approved the use of a tariff rider
which permits recovery of the actual costs of litigation, investigation and
remediation relating to former manufactured gas plant sites. MidAmerican
Energy's present rates in Iowa provide for a fixed annual recovery of
manufactured gas plant costs. MidAmerican Energy intends to pursue recovery of
the remediation costs from other potentially responsible parties and its
insurance carriers.
Although the timing of potential incurred costs and recovery of such 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 MidAmerican Energy's financial position or results of operations.
(2) CLEAN AIR ACT -
On July 18, 1997, the Environmental Protection Agency adopted revisions to
the National Ambient Air Quality Standards for ozone and a new standard for fine
particulate matter. Based on data to be obtained from monitors located
throughout each state, the Environmental Protection Agency will determine which
states have areas that do not meet the air quality standards (i.e., areas that
are classified as nonattainment). If a state has area(s) classified as
nonattainment area(s), the state is required to submit a State Implementation
Plan specifying how it will reach attainment of the standards through emission
reductions or other means. In August 1998, the Iowa Environmental Protection
Commission adopted by reference the National Ambient Air Quality Standards for
ozone and fine particulate matter.
In May 1999, the United States Court of Appeals for the District of
Columbia Circuit remanded the standards adopted in July 1997 back to the
Environmental Protection Agency indicating the Environmental Protection Agency
had not expressed sufficient justification for the basis of establishing the
standards and ruling that the Environmental Protection Agency has exceeded its
constitutionally-delegated authority in setting the standards. The Environmental
Protection Agency's appeal of the court's ruling to the full panel of the United
States District Court of Appeals for the District of Columbia was denied. The
Environmental Protection Agency filed a petition for a writ of certiorari to the
United States Supreme Court on January 27, 2000, seeking review of the lower
court's decision.
As a result of the court's initial decision and the current status of the
standards, the impact of any new standards on MidAmerican Energy is currently
unknown. If the Environmental Protection Agency successfully appeals the court's
decision, however, and the new standards are implemented, then MidAmerican
Energy's fossil fuel generating stations may be subject to emission reductions
if the stations are located in nonattainment areas. As part of an overall state
plan to achieve attainment of the standards, MidAmerican Energy could be
required to install control equipment on its fossil fuel generating stations
-9-
<PAGE>
or decrease the number of hours during which these stations operate. The degree
to which MidAmerican Energy may be required to install control equipment or
decrease operating hours under a nonattainment scenario will be determined by
the state's assessment of MidAmerican Energy's relative contribution, along with
other emission sources, to the nonattainment status. The installation of control
equipment would result in increased costs to MidAmerican Energy. A decrease in
the number of hours during which the affected stations operate would decrease
the revenues of MidAmerican Energy.
C. RATE MATTERS:
Under a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, electric prices for 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 MidAmerican Energy incurs to
fulfill these contracts will vary. On an aggregate basis the annual revenues
under contract are approximately $180 million.
If MidAmerican Energy's annual Iowa electric jurisdictional return on
common equity exceeds 12%, then earnings above the 12% level will be shared
equally between customers and MidAmerican Energy; if the return exceeds 14%,
then two-thirds of MidAmerican Energy's share of those earnings above the 14%
level will be used for accelerated recovery of regulatory assets. The 1997
pricing plan settlement agreement precludes MidAmerican Energy 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%.
Under an Illinois restructuring law enacted in 1997, a similar sharing
mechanism is in place for MidAmerican Energy's Illinois electric operations. A
two-year average return on common equity greater than a two-year average
benchmark will trigger an equal sharing of earnings on the excess. The benchmark
is a calculation of average 30-year Treasury Bond rates plus 5.5% for 1998 and
1999 and 8.5% for 2000 through 2004. The initial calculation, which was due
March 31, 2000, was based on 1998 and 1999 results.
D. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
MidAmerican Energy's utility operations are subject to the regulation of
the Iowa Utilities Board, the Illinois Commerce Commission, the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission.
MidAmerican Energy's accounting policies and the accompanying consolidated
financial statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
Statement of Financial Accounting Standards No. 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 possible
consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71.
-10-
<PAGE>
With the exception of the generation operations serving the Illinois
jurisdiction, MidAmerican Energy's electric and gas utility operations currently
meet the criteria of SFAS 71, but its applicability is periodically reexamined.
If portions of its utility operations no longer meet the criteria of SFAS 71,
MidAmerican Energy 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.
E. SEGMENT INFORMATION:
MidAmerican Funding has two reportable operating segments: electric and
gas. The electric segment derives most of its revenue from retail sales of
regulated electricity to residential, commercial, and industrial customers and
sales to other utilities. The gas segment derives most of its revenue from
retail sales of regulated natural gas to residential, commercial, and industrial
customers and also earns significant revenues by transporting gas owned by
others through its distribution systems. Pricing for electric and gas sales are
established separately by regulatory agencies; therefore, management also
reviews each segment separately to make decisions regarding allocation of
resources and in evaluating performance. Common operating costs interest income,
interest expense, income tax expense and equity in the net loss of investees are
allocated to each segment.
The following table provides MidAmerican Funding information on an
operating segment basis (in thousands):
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
------------------------------- ------------
THREE MARCH 12, 1999 JAN. 1, 1999
MONTHS THROUGH THROUGH
ENDED MARCH 31, MARCH 11,
MARCH 31, 2000 1999 1999
-------------- -------------- ------------
Revenues
Electric.................... $278,463 $53,165 $208,963
Gas......................... 179,902 31,214 139,564
Nonregulated and other (a).. 64,189 9,207 34,539
-------- ------- --------
522,554 93,586 383,066
======== ======= ========
Net Income:
Electric.................... $ 27,771 $ 797 $ 11,878
Gas......................... 14,838 1,311 13,010
Nonregulated and other (a).. (6,020) (4) (7,678)
-------- ------- --------
36,589 2,104 17,210
======== ======= ========
(a) "Nonregulated and other" consists of nonregulated gas operations, CBEC
Railway and other nonregulated activities.
F. OTHER COMPREHENSIVE INCOME:
For the three months ended March 31, 2000, and for the periods March 12,
1999 through March 31, 1999, and January 1, 1999, through March 11, 1999,
MidAmerican Funding's total comprehensive income was $34.1 million, $2.1 million
and $58.8 million, respectively. The differences from Net Income are due to
unrealized holding gains and losses of marketable securities during the periods.
Accumulated other comprehensive income (loss) was $(2.5) million and zero as of
March 31, 2000, and December 31, 1999, respectively.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
------------
MidAmerican Funding, LLC is an Iowa limited liability company that was
formed in March 1999. MidAmerican Funding is a direct wholly owned subsidiary of
MidAmerican Energy Holdings Company. MidAmerican Funding owns all of the
outstanding common stock of MHC Inc., formerly known as MidAmerican Energy
Holdings Company, which owns all of the common stock of MidAmerican Energy
Company, MidAmerican Capital Company, Midwest Capital Group, Inc. and
MidAmerican Services Company.
On March 12, 1999, MidAmerican Funding acquired MHC. As a part of this
transaction, the former CalEnergy Company, Inc, a Delaware corporation, was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings Company. As a result, MHC and all direct and indirect subsidiaries of
MHC each became a subsidiary of MidAmerican Funding.
Prior to October 1999, MidAmerican Energy Holdings' real estate brokerage
and related services were conducted through MHC's subsidiary, MidAmerican Realty
Services. In October 1999, MidAmerican Realty, was dividended from MHC and
MidAmerican Funding to MidAmerican Energy Holdings.
DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis (MD&A) addresses the financial
statements of MidAmerican Funding and MHC. The financial statements of
MidAmerican Funding include the results of MHC beginning March 12, 1999. As
discussed above, MHC's investment in MidAmerican Realty was distributed to
MidAmerican Energy Holdings in October 1999. Accordingly, the operating results
of MidAmerican Realty, which was acquired in 1998, are reflected as discontinued
operations in the 1999 periods.
Final valuations associated with the purchase of MHC were established in
the first quarter of 2000. Due to the failure of electric restructuring
legislation to pass in the Iowa legislature's 2000 session, adjustments were
made to utility assets and liabilities, primarily impacting Electric Plant,
Power Purchase Contract, and Excess of Cost Over Fair Value of Assets Acquired,
Net on the Consolidated Balance Sheet as of March 31, 2000.
FORWARD-LOOKING STATEMENTS
From time to time, MidAmerican Funding or one of its subsidiaries
individually may make forward-looking statements within the meaning of the
federal securities laws that involve judgments, assumptions and other
uncertainties beyond the control of MidAmerican Funding or any of its
subsidiaries individually. These forward-looking statements may include, among
others, statements concerning revenue and cost trends, cost recovery, cost
reduction strategies and anticipated outcomes, pricing strategies, changes in
the utility industry, planned capital expenditures, financing needs and
availability, statements of MidAmerican Funding's expectations, beliefs, future
plans and strategies, anticipated events or trends and similar comments
concerning matters that are not historical facts. These type of forward-looking
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 MidAmerican Funding to differ materially from any expected future
results or performance, expressed or implied, by the
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forward-looking statements. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, MidAmerican Funding has
identified important factors that could cause actual results to differ
materially from those expectations, including weather effects on sales and
revenues, fuel prices, fuel transportation and other operating uncertainties,
acquisition uncertainty, uncertainties relating to economic and political
conditions and uncertainties regarding the impact of regulations, changes in
government policy, utility industry deregulation and competition. MidAmerican
Funding assumes no responsibility to update forward-looking information
contained herein.
RESULTS OF OPERATIONS
---------------------
The following is a discussion of the historical results of MidAmerican
Funding for the quarter ended March 31, 2000, and for the period March 12, 1999,
through March 31, 1999, and of its predecessor, MHC, for the year to date period
ended March 11, 1999. Results for MidAmerican Funding include the results of MHC
beginning March 12, 1999, in conjunction with the acquisition of MHC by
MidAmerican Energy Holdings. The impact of the acquisition is reflected in
MidAmerican Funding's results of operations, predominately interest costs on
debt issued by MidAmerican Funding to complete the acquisition and the effects
of purchase accounting, including goodwill amortization and fair value
adjustments to the carrying value of assets and liabilities. Since the periods
discussed are not comparable to a similar prior period, the emphasis is on
fluctuations from "normal" or unusual items that may cause the reported results
of operations to not necessarily be indicative of future operating results.
RESULTS OF OPERATIONS OF MIDAMERICAN FUNDING FOR THE THREE MONTHS ENDED
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MARCH 31, 2000
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UTILITY GROSS MARGIN
Regulated Electric Gross Margin -
MidAmerican Energy's electric gross margin for the three months ended March
31, 2000, totaled $220 million. Temperatures during the period were 19% warmer
than normal, reducing electric margin by approximately $8 million. MidAmerican
Energy's electric revenues from the recovery of energy efficiency program costs
totaled $8.9 million for the period. Revenues from energy efficiency cost
recovery are substantially offset by corresponding costs in other operating
expenses. MidAmerican Energy also recorded an accrual for a revenue sharing
arrangement under its 1997 pricing plan settlement. The accrual reduced revenues
and electric margin by $3.4 million for the quarter.
Regulated Gas Gross Margin -
MidAmerican Energy's regulated gas gross margin totaled $69 million for the
three months ended March 31, 2000. Temperatures during the period were 19%
warmer than normal temperature conditions, resulting in a decrease in gas gross
margin of approximately $12 million. Revenues from recovery of gas energy
efficiency program costs totaled $2.9 million for the period. Again, revenues
from energy efficiency cost recovery are substantially offset by corresponding
costs in other operating expenses.
The quarter ended March 31, 2000, reflects rate increases which were
implemented since March 31, 1999. On January 22, 1999, the Iowa Utilities Board
approved a $6.7 million annual interim increase in gas rates for Iowa retail
customers effective immediately. An additional increase was implemented on
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May 27, 1999, as a result of the Iowa Utilities Board's approval of a final rate
increase of $13.9 million annually. Rates for South Dakota customers increased
$2.4 million annually effective May 1, 1999.
REGULATED OPERATING EXPENSES
Other operating expenses totaled $96.5 million for the three months ended
March 31, 2000. As mentioned in the gross margin discussions, other operating
expenses include energy efficiency program costs. These costs totaled $10.2
million for the period.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
For the year to date period ended March 31, 2000, nonregulated natural gas
marketing activities accounted for $47.8 million and $46.3 million of
nonregulated revenues and nonregulated cost of sales, respectively.
Revenues include $4.2 million from MidAmerican Energy's market access
service project, which began in the third quarter of 1999. The pilot project
allows Iowa customers with at least 4 megawatts of load that are participating
in the project to choose their electric power supplier. MidAmerican Energy's
revenues from project participants related to non-supply services, such as
distribution and transmission, are reflected in regulated electric revenues.
Cost of sales for the first quarter of 2000 includes $4.6 million related to the
market access service project.
Beginning October 1, 1999, some non-residential customers in Illinois are
allowed to select their electric power supplier. MidAmerican Energy's revenues
related to these supply services are included in nonregulated revenues and
totaled $1.5 million.
MidAmerican Energy's nonregulated revenues also include pre-tax income from
awards for successful performance under its incentive gas procurement program.
Under the program, if MidAmerican Energy's cost of gas varies from an
established reference price range, then the savings or cost is shared between
customers and shareholders. The first quarter of 2000 reflects an award of $1.0
million.
Nonregulated revenues include $4.4 million from security system operations
which were sold in April 2000.
Nonregulated other operating costs include $9.5 million of goodwill
amortization related to the acquisition of MHC.
NON-OPERATING INCOME AND INTEREST EXPENSE
Realized Gains and Losses on Securities, Net -
Net realized gains and losses on securities for the year to date period
ended March 31, 2000, reflects a $2.0 million pre-tax gain on the sale of the
remaining shares of McLeodUSA common stock held by MidAmerican Funding.
Other, Net -
Other, net non-operating income for the period ended March 31, 2000
includes $2.1 million of expense related to MidAmerican Energy's accounts
receivables sold.
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RESULTS OF OPERATIONS OF MIDAMERICAN FUNDING FOR THE PERIOD MARCH 12, 1999,
- ----------------------------------------------------------------------------
THROUGH MARCH 31, 1999
- ----------------------
There are no material unusual items reflected in the results of operations
for the period March 12, 1999, through March 31, 1999.
RESULTS OF OPERATIONS OF MHC FOR THE PERIOD JANUARY 1, 1999 THROUGH
- -------------------------------------------------------------------
MARCH 11, 1999
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UTILITY GROSS MARGIN
Regulated Electric Gross Margin -
MidAmerican Energy's electric gross margin for the period January 1, 1999,
through March 12, 1999, totaled $169 million. Temperatures during the period
were warmer than normal, reducing electric margin by approximately $4 million.
Approximately $7 million of MidAmerican Energy's electric revenues for the
period were from the recovery of energy efficiency program costs. Revenues from
energy efficiency cost recovery are substantially offset by corresponding costs
in other operating expenses. MidAmerican Energy also recorded an accrual for a
revenue sharing arrangement under its 1997 pricing plan settlement. The accrual
reduced revenues and electric margin by $3 million during the period.
Regulated Gas Gross Margin -
MidAmerican Energy's regulated gas gross margin totaled $60 million for the
period January 1, 1999, through March 11, 1999. Revenues from recovery of gas
energy efficiency program costs totaled approximately $3 million for the period.
Again, revenues from energy efficiency cost recovery are substantially offset by
corresponding costs in other operating expenses.
On January 22, 1999, the Iowa Utilities Board approved a $6.7 million
annual interim increase in gas rates for Iowa retail customers effective
immediately. Temperatures during the period were warmer than normal, resulting
in a decrease in gas gross margin of approximately $4 million.
REGULATED OPERATING EXPENSES
Other operating expenses totaled $94 million for the period January 1, 1999
through March 11, 1999. As mentioned in the gross margin discussions, other
operating expenses includes energy efficiency program costs. These costs totaled
$8 million for the period. MidAmerican Energy also incurred approximately $2
million in operating costs related to its year 2000 readiness efforts.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
For the year to date period ended March 11, 1999, nonregulated natural gas
marketing activities accounted for $29 million and $28 million of nonregulated
revenues and nonregulated cost of sales, respectively.
Nonregulated other operating costs include $3 million from nonregulated
marketing initiatives at MidAmerican Energy.
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NON-OPERATING INCOME AND INTEREST EXPENSE
Realized Gains and Losses on Securities, Net -
Realized gains and losses on securities net for the year to date period
ending March 11, 1999, reflects a $16 million pre-tax gain on the sale of shares
of McLeodUSA common stock held by MHC.
Other, Net -
Other, net non-operating income for the period ended March 11, 1999
includes approximately $19 million of costs related to the acquisition of MHC by
MidAmerican Energy Holdings. In addition, it includes $2 million of expense
related to accounts receivables sold.
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LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
MidAmerican Funding 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, dividends, debt
retirement and other capital requirements.
As reflected on the Consolidated Statements of Cash Flows, MidAmerican
Funding's net cash provided from continuing operating activities was $176
million for the three months ended March 31, 2000 and $13 million for the period
March 12, 1999, through March 31, 1999. MHC's net cash from continuing
operations totaled $104 million for the period January 1, 1999, through March
11, 1999.
INVESTING ACTIVITIES AND PLANS
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first three months of 2000, utility construction
expenditures totaled $29 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases. All such expenditures were met with cash generated from utility
operations.
Forecasted utility construction expenditures, including allowance for funds
used during construction for 2000 are $211 million and $732 million for 2001
through 2004. Capital expenditure needs are reviewed regularly by management and
may change significantly as a result of such reviews. MidAmerican Energy
presently expects that all utility construction expenditures for the next five
years will be met with cash generated from utility operations, net of dividends.
The actual level of cash generated from utility operations is affected by, among
other things, economic conditions in the utility service territory, weather and
federal and state regulatory actions.
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,
MidAmerican Energy 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. 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.
In addition, MidAmerican Energy makes payments to the Nebraska Public Power
District related to decommissioning Cooper. These payments are reflected in
other operating expenses in the Consolidated Statements of Income. NPPD
estimates call for MidAmerican Energy to pay approximately $57 million to NPPD
for Cooper decommissioning during the period 2000 through 2004. The Nebraska
Public Power District invests the funds predominately in U.S. Treasury Bonds and
other U.S. Government securities. Approximately 20% was invested in domestic
corporate debt. MidAmerican Energy'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, the Nebraska Public Power District
filed a lawsuit in United States District Court for the District of Nebraska
naming MidAmerican Energy as the defendant and seeking a declaration of
MidAmerican Energy's rights and obligations in connection with Cooper nuclear
decommissioning funding. Refer to Part I, Item 3. Legal Proceedings, for further
discussion of the litigation.
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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. Cooper decommissioning
costs charged to Illinois customers are recovered through a rate rider on
customer billings that is reviewed annually.
Investments -
MidAmerican Capital invests in a variety of marketable securities which it
holds for indefinite periods of time. In the Consolidated Statements of Cash
Flows, the line "Purchase of Available-for-Sale Securities" and the line under
"Proceeds from Sale of Securities" consist primarily of the gross amounts of
these activities, including realized gains and losses on investments in
marketable securities.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
Issuance of MidAmerican Funding Debt -
On March 11, 1999, MidAmerican Funding issued $200 million of 5.85% Senior
Secured Notes due March 2001, $175 million of 6.339% Senior Secured Notes due
2009, and $325 million of 6.927% Senior Secured Bonds due 2029. Prior to the
offering, MidAmerican Funding entered into three separate rate swap arrangements
of $125 million each, which at closing created a $13.6 million cash payment to
MidAmerican Funding due to an increase in interest rates. The net amount of the
rate swap arrangements and $7.0 million of debt offering costs are being
amortized using the effective interest method over the life of each of the three
traunches. The proceeds from the offering were used to complete the acquisition
of MHC. On March 7, 2000, MidAmerican Funding exchanged its senior secured notes
for like senior secured exchange notes.
MidAmerican Energy Debt Authorizations and Credit Facilities -
MidAmerican Energy currently has authority from the Federal Energy
Regulatory Commission to issue short-term debt in the form of commercial paper
and bank notes aggregating $400 million. As of March 31, 2000, MidAmerican
Energy had in place a $325 million commercial paper program which is supported
by $325 million of revolving credit facilities. In addition, MidAmerican Energy
has a $5 million bank line of credit. MidAmerican Energy also has a revolving
credit facility which is dedicated to providing liquidity for its obligations
under outstanding pollution control revenue bonds that are periodically
remarketed.
MidAmerican Energy has on file with the Securities and Exchange Commission
a registration statement to issue approximately $130 million of preferred
securities and long-term debt. MidAmerican Energy has authorization from the
Federal Energy Regulatory Commission to issue up to an additional $500 million
in various forms of long-term debt. MidAmerican Energy will also need
authorization from the Illinois Commerce Commission prior to issuing any
securities. If 90% or more of the proceeds from a securities issuance are used
for refinancing purposes, MidAmerican Energy need only provide the commission
with an "informational statement" prior to the issuance which sets forth the
type, amount and use of the proceeds of the securities to be issued. If less
than 90% of the proceeds are used for refinancing, MidAmerican must file a
comprehensive application seeking authorization prior to issuance. The Illinois
Commerce Commission is required to hold a hearing before issuing its
authorization.
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Accounts Receivable Sold -
In 1997, MidAmerican Energy 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, a
special purpose entity established to purchase accounts receivable from
MidAmerican Energy. Funding Corp. in turn sells receivable interests to outside
investors. In consideration for the sale, MidAmerican Energy received $70
million in cash and the remaining balance in the form of a subordinated note,
bearing interest at 8%, from Funding Corp. As of March 31, 2000, the revolving
cash balance was $70 million, and the amount outstanding under the subordinated
note was $62 million. As part of the agreement, 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 MidAmerican Energy or its creditors. Therefore, the
accounts receivable sold are not reflected on MidAmerican Funding's Consolidated
Balance Sheets. As of March 31, 2000, $134.2 million of accounts receivable, net
of reserves, were sold under the agreement.
Other Financing Information -
MidAmerican Funding uses distributions that it receives from its
subsidiaries to make payments on the Notes and Bonds. These subsidiaries must
make payments on their own indebtedness before making distributions to
MidAmerican Funding. The distributions are also subject to utility regulatory
restrictions agreed to by MidAmerican Energy in March 1999 whereby it committed
to the Iowa Utilities Board to use commercially reasonable efforts to maintain
an investment grade rating on its long-term debt and to maintain its common
equity level above 42% of total capitalization unless circumstances beyond its
control result in the common equity level decreasing to below 39% of total
capitalization. MidAmerican Energy must seek the approval of the Iowa Utilities
Board of a reasonable utility capital structure if MidAmerican Energy's common
equity level decreases below 42% of total capitalization, unless the decrease is
beyond the control of MidAmerican Funding. MidAmerican Funding is also required
to seek the approval of the Iowa Utilities Board if MidAmerican Energy's equity
level decreases to below 39%, even if the decrease is due to circumstances
beyond the control of MidAmerican Funding.
Each of MidAmerican Funding's direct or indirect subsidiaries is organized
as a legal entity separate and apart from MidAmerican Funding and its other
subsidiaries. It should not be assumed that any asset of any subsidiary of
MidAmerican Funding will be available to satisfy the obligations of MidAmerican
Funding or any of its other subsidiaries; provided however, that unrestricted
cash or other assets which are available for distribution may, subject to
applicable law and the terms of financing arrangements of such parties, be
advanced, loaned, paid as dividends or otherwise distributed or contributed to
MidAmerican Funding, one of its subsidiaries or affiliates thereof.
Approximately 80% of MidAmerican Energy's gross utility plant has been
encumbered to secure mortgage bonds.
As of March 31, 2000, MHC had lines of credit totaling $44 million to
provide for short-term financing needs, under which $20 million was outstanding.
As of March 31, 2000, MidAmerican Capital had unsecured revolving credit
facilities in the amount of $6 million, under which no debt was outstanding.
MidAmerican Capital has $70 million of long-term debt outstanding at March 31,
2000, which will mature by the end of 2002.
Midwest Capital currently has a $25 million line of credit with MidAmerican
Energy, of which $5 million was outstanding at March 31, 2000.
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OPERATING ACTIVITIES AND OTHER MATTERS
Industry Evolution -
The utility industry continues to evolve into an increasingly competitive
environment. In many regions of the country, legislative and regulatory actions
are being taken which result in customers having more choices in their energy
decisions.
In the electric industry, the traditional vertical integration of
generation, delivery and marketing is being unbundled, with the generation and
marketing functions becoming 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. Retail electric
competition is presently not permitted in Iowa, MidAmerican Energy's primary
market. Legislation to initiate competition was introduced in the Iowa
legislature in the 2000 session, but it did not pass. MidAmerican Energy cannot
predict the timing or ultimate outcome of any potential electric restructuring
legislation in Iowa. Deregulation of the gas supply function related to small
volume customers is also being considered by the Iowa Utilities Board.
MidAmerican Energy has actively participated in the legislative and regulatory
processes.
The generation and retail portions of MidAmerican Energy'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, MidAmerican Energy is financially exposed to movements in energy
prices. Although MidAmerican Energy has sufficient low cost generation under
typical operating conditions for its retail electric needs, a loss of adequate
generation by MidAmerican Energy at a time of high market prices could subject
MidAmerican Energy 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, 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.
In addition to rate reductions implemented in 1998, the law provides for
Illinois earnings above a certain level of return on common equity to be shared
equally between customers and MidAmerican Energy beginning in April 2000.
MidAmerican Energy's return on common equity level will be based on a rolling
two-year average, with the first determination being based on an average of 1998
and 1999. The level of return at which MidAmerican Energy 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 increased
the benchmark for 2000 through 2004 to 8.5% above the 30-year Treasury bond
rate. The two-year average above which sharing must occur for 1999 was 11.21%.
Using the same 30-year Treasury bond average, the computed level of return would
be 12.71% for 2000 and 14.21% for 2001 through
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2004. The law allows MidAmerican Energy to mitigate the sharing of earnings
above the threshold return on common equity through accelerated cost
recognition.
MidAmerican Energy continues its involvement in proceedings which detail
the new competitive environment and to evaluate the impact of the law on its
operations and the opportunities the law presents, including proceedings
involving the unbundling of customer billing and meter reading.
In December 1999, the Federal Energy Regulatory Commission issued Order No.
2000 establishing among other things minimum characteristics and functions for
regional transmission organizations. Public utilities that were not a member of
an independent system operator at the time of the order are required to submit a
plan by which its transmission facilities would be transferred to a regional
transmission organization on a schedule that would allow the regional
transmission organization to commence operating by December 15, 2001.
MidAmerican Energy, which was not a member of an independent system operator, is
presently analyzing the impact that the order may have on its operations.
Accounting Effects of Industry Restructuring -
A possible consequence of competition in the utility industry is that
Statement of Financial Accounting Standards 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. A majority of MidAmerican Energy'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, MidAmerican Energy 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
March 31, 2000, MidAmerican Energy had $269 million of net regulatory assets on
its Consolidated Balance Sheet.
Energy Efficiency -
MidAmerican Energy's regulatory assets as of March 31, 2000, included $38.1
million of deferred energy efficiency costs. Based on the current level of
recovery, MidAmerican Energy expects to recover these costs by the end of 2001.
MidAmerican Energy is also allowed to recover its ongoing energy efficiency
costs on a current basis. Recovery of these costs is being collected from
customers based on projected annual costs of $17.4 million, which may be
adjusted annually. Amortization of the deferred energy efficiency costs and
current expenditures for energy efficiency costs will be reflected in other
operating expenses over the related periods of recovery. The total of such costs
for the years 2000 and 2001 is estimated to be $40 million and $35 million,
respectively.
Rate Matters: Electric -
Under a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, electric prices for MidAmerican Energy'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
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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 MidAmerican
Energy incurs to fulfill these contracts will vary. MidAmerican Energy 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 MidAmerican Energy's
annual Iowa electric jurisdictional return on common equity exceeds 12%, then
earnings above the 12% level will be shared equally between customers and
MidAmerican Energy. If the return exceeds 14%, then two-thirds of MidAmerican
Energy'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 MidAmerican Energy 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%. The agreement also eliminated
MidAmerican Energy's energy adjustment clause, and, as a result, the cost of
fuel is not directly passed on to customers.
Rate Matters: Gas -
On September 1, 1999, MidAmerican Energy filed with the Illinois Commerce
Commission requesting a rate increase totaling $3.2 million annually for its
Illinois retail gas customers. A decision by the Illinois Commerce Commission is
anticipated prior to August 2000.
Environmental Matters -
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.
MidAmerican Energy 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 MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy's estimate of the probable costs for these
sites as of March 31, 2000, was $28 million. This estimate has been recorded as
a liability and a regulatory asset for future recovery through the regulatory
process. Refer to Note B(1) of Notes to Consolidated Financial Statements for
further discussion of MidAmerican Energy's environmental activities related to
manufactured gas plant sites and cost recovery.
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 MidAmerican Energy's financial position or results of operations.
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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
MidAmerican Energy is currently unknown. If the EPA successfully appeals the
court's decision, however, and the new standards are implemented, then
MidAmerican Energy would incur increased costs and a decrease in revenues. Refer
to Note B(2) of Notes to Consolidated Financial Statements for further
discussion of this issue.
Quad Cities Nuclear Power Station -
Quad Cities Station is operated by, and 75% owned by, Commonwealth Edison
Company. On May 3, 1999, the Nuclear Regulatory Commission advised ComEd that it
had classified Quad Cities Station in its Routine Oversight category for nuclear
power plants, which is the best of the commission's three new categories,
removing the station from the Trending (adversely) Letter status initiated in
January 1998. During 1999, Quad Cities Station's capacity factor based on
maximum dependable capacity was in excess of 96.0% compared to 51.7% for 1998.
The lower capacity factor in 1998 reflects the extended outages at both of the
Quad Cities Station units during the first five months of 1998.
Generating Capability -
In July 1999, retail customer usage of electricity caused an hourly peak
demand of 3,833 MW on MidAmerican Energy's energy system. MidAmerican Energy is
interconnected with Iowa and neighboring utilities and is involved in an
electric power pooling agreement known as Mid-Continent Area Power Pool. Each
MAPP participant is required to maintain for emergency purposes a net generating
capability reserve of at least 15% above its system peak demand. MidAmerican
Energy was able to maintain its capacity reserve requirement during the hot
weather in July 1999 and was not adversely affected by the resultant high prices
in the off-system market.
MidAmerican Energy believes it has adequate electric capacity reserve and
continues to manage its generating resources to ensure an adequate reserve in
the future. However, significantly higher-than-normal temperatures during the
cooling season could cause MidAmerican Energy's reserve to fall below the 15%
minimum. If MidAmerican Energy fails to maintain the appropriate reserve,
significant penalties could be contractually imposed by MAPP.
Sale of Security System Companies -
In April 2000, MidAmerican Capital sold all of its interest in its security
systems subsidiaries. The sale included AAA Security, one of the largest
residential and commercial security systems companies in the Midwest. In total,
MidAmerican Capital's security operations had more than 20,000 security
customers in the Midwest. Revenues and net income in the quarter ended March 31,
2000, for the security operations sold were $4.4 million and less than $0.1
million, respectively.
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ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and is effective for MidAmerican Funding beginning January
1, 2001. SFAS 133 requires an entity to recognize all of its derivatives as
either assets or liabilities in its statement of financial position and measure
those instruments at fair value. MidAmerican Funding is in the process of
evaluating the impact of this accounting standard.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MidAmerican Funding is exposed to market risk, including changes in the
market price of certain commodities and interest rates. The exposure to changes
in market prices and interest rates at March 31, 2000, is not materially
different than at December 31,1999.
-24-
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
MidAmerican Energy and its subsidiaries have no material legal proceedings
except for the following:
Environmental Matters
- ---------------------
For information relating to MidAmerican Energy's environmental matters'
reference is made to Note B of Notes to Consolidated Financial Statements.
Cooper Litigation
- -----------------
On July 23, 1997, the Nebraska Public Power District filed a complaint, in
the United States District Court for the District of Nebraska, naming
MidAmerican Energy as the defendant and seeking declaratory judgment as to three
issues under the parties' long-term power purchase agreement for Cooper capacity
and energy. More specifically, the Nebraska Public Power District sought a
declaratory judgment in the following respects:
(1) that MidAmerican Energy is obligated to pay 50% of all costs and
expenses associated with decommissioning Cooper, and that in the event
the Nebraska Public Power District continues to operate Cooper after
expiration of the power purchase agreement (September 2004),
MidAmerican Energy 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.
MidAmerican Energy filed its answer and contingent counterclaims. The
contingent counterclaims filed by MidAmerican Energy are generally as follows:
(1) that MidAmerican Energy has no duty under the power purchase agreement
to reimburse or pay 50% of the decommissioning costs unless conditions
to reimbursement occur;
(2) that the Nebraska Public Power District has the duty to repay all
amounts that MidAmerican Energy has prefunded for decommissioning in
the event the Nebraska Public Power District operates the plant after
the term of the power purchase agreement;
(3) that the Nebraska Public Power District is equitably estopped from
continuing to operate the plant after the term of the power purchase
agreement;
(4) that the Nebraska Public Power District has granted MidAmerican Energy
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;
-25-
<PAGE>
(6) that MidAmerican Energy has no duty to pay for nuclear fuel,
operations and maintenance 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 the Nebraska Public Power District has breached its duty to
MidAmerican Energy in making investments of decommissioning funds;
(9) that reserves in named accounts are excessive and should be refunded
to MidAmerican Energy; and
(10) that the Nebraska Public Power District must credit MidAmerican Energy
for payments by MidAmerican Energy for low-level radioactive waste
disposal.
On October 6, 1999, the court rendered summary judgment for the Nebraska
Public Power District on the above-mentioned issue concerning liability for
decommissioning (issue one in the first paragraph above) and the related
contingent counterclaims filed by MidAmerican Energy (issues one, two, three and
five in the second paragraph above). The court referred all remaining issues in
the case to mediation, and cancelled the November 1999 trial date. MidAmerican
Energy has appealed the court's summary judgment ruling and is participating in
ongoing mediation efforts.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(A) EXHIBITS
Exhibits Filed Herewith
- -----------------------
Exhibit 27 - Financial Data Schedules (for electronic filing only).
(B) REPORTS ON FORM 8-K
None.
-26-
<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 FUNDING, LLC
----------------------------
(Registrant)
Date May 10, 2000 /s/ Patrick J. Goodman
-------------- ----------------------------
Patrick J. Goodman
Vice President and Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
27 Financial Data Schedule (for electronic filing only)
-28-
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains Summary Financial Information extracted from the
consolidated balance sheet of MidAmerican Funding, LLC as of March 31, 2000,
and the related consolidated statements of income and cash flows for the
three-month period ended March 31, 2000, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001098296
<NAME> MIDAMERICAN FUNDING, LLC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,624,488
<OTHER-PROPERTY-AND-INVEST> 561,120
<TOTAL-CURRENT-ASSETS> 288,262
<TOTAL-DEFERRED-CHARGES> 317,196
<OTHER-ASSETS> 1,439,083
<TOTAL-ASSETS> 5,230,149
<COMMON> 1,670,115
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 166,165
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,833,733
150,000
31,759
<LONG-TERM-DEBT-NET> 1,309,484
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 200,548
<LONG-TERM-DEBT-CURRENT-PORT> 224,045
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,480,580
<TOT-CAPITALIZATION-AND-LIAB> 5,230,149
<GROSS-OPERATING-REVENUE> 522,554
<INCOME-TAX-EXPENSE> 31,720 <F1>
<OTHER-OPERATING-EXPENSES> 426,891
<TOTAL-OPERATING-EXPENSES> 426,891
<OPERATING-INCOME-LOSS> 95,663
<OTHER-INCOME-NET> 5,723
<INCOME-BEFORE-INTEREST-EXPEN> 101,386
<TOTAL-INTEREST-EXPENSE> 33,077
<NET-INCOME> 36,589
0
<EARNINGS-AVAILABLE-FOR-COMM> 36,589
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 27,248
<CASH-FLOW-OPERATIONS> 175,957
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>
Income Tax Expense includes all income taxes for continuing operations and is
excluded from Total Operating Expenses on the Consolidated Statement of Income.
</FN>
</TABLE>
