UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
-----------------
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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All of the member's equity of MidAmerican Funding, LLC is held by MidAmerican
Energy Holdings Company as of March 20, 2000.
MidAmerican Funding, LLC meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format specified in General Instruction I(2) of Form 10-K.
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MIDAMERICAN FUNDING, LLC
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I Page
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Item 1 Business
General Overview............................................. 3
Financial Information About Industry Segments................ 4
Description of Business...................................... 4
Business of MidAmerican Funding and MHC.................... 4
Business of MidAmerican Energy............................. 5
Regulated Electric Operations ............................. 7
Regulated Natural Gas Operations........................... 10
Nonregulated Operations.................................... 11
Regulation................................................. 12
Business of MidAmerican Capital............................ 16
Business of Midwest Capital................................ 18
Item 2 Properties....................................................... 18
Item 3 Legal Proceedings................................................ 20
Item 4 Submission of Matters to a Vote of Security Holders.............. 21
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters.................................. 22
Item 6 Selected Financial Data.......................................... 22
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 22
Item 8 Financial Statements and Supplementary Data...................... 22
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 22
Part III
Item 10 Directors and Executive Officers of the Registrant............... 23
Item 11 Executive Compensation........................................... 25
Item 12 Security Ownership of Certain Beneficial Owners
and Management............................................... 25
Item 13 Certain Relationships and Related Transactions................... 25
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 26
Signatures ............................................................... 91
Exhibits Index............................................................ 92
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PART I
ITEM 1. BUSINESS
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(A) GENERAL OVERVIEW
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, 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.
On March 14, 2000, an investor group including Berkshire Hathaway Inc.,
Walter Scott, Jr., David L. Sokol and Gregory E. Abel completed its acquisition
of MidAmerican Energy Holdings in accordance with a previously disclosed
agreement and plan of merger, dated October 24, 1999, among MidAmerican Energy
Holdings, Teton Formation L.L.C. and Teton Acquisition Corp. Mr. Scott is an
Omaha, Nebraska businessman and a director of MidAmerican Energy Holdings, Mr.
Sokol is Chairman and Chief Executive Officer of MidAmerican Energy Holdings and
Mr. Abel is Chief Operating Officer of MidAmerican Energy Holdings. In
accordance with the merger agreement, Teton Acquisition was merged with and into
MidAmerican Energy Holdings, maintaining the name MidAmerican Energy Holdings
Company. With the completion of the transaction, MidAmerican Energy Holdings is
now a privately owned company with publicly traded fixed-income securities.
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.
MidAmerican Energy is a public utility company headquartered in Des Moines,
Iowa, and incorporated in the state of Iowa. MidAmerican Energy was formed on
July 1, 1995, as a result of the merger of Iowa-Illinois Gas and Electric
Company, Midwest Resources Inc. and Midwest Power Systems Inc. On December 1,
1996, MidAmerican Energy became, through a corporate reorganization, a wholly
owned subsidiary of MHC Inc. MidAmerican Capital and Midwest Capital then became
direct subsidiaries of MHC.
CHANGES IN THE UTILITY INDUSTRY AND MIDAMERICAN ENERGY
The electric utility industry continues to undergo regulatory change.
Traditionally, prices charged by electric utility companies have been regulated
by federal and state commissions and have been based on cost of service. In
recent years, changes have been occurring that move the electric utility
industry toward a more competitive, market-based pricing environment. These
changes will have a significant impact on the way MidAmerican Energy does
business. Refer to the discussions under "Industry Evolution" and "Legislative
and Regulatory Evolution" in the "Operating Activities and Other Matters"
section of MD&A in Part IV, Item 14 of this Form 10-K.
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A substantial majority of MidAmerican Energy's business still operates in a
rate-regulated environment and, accordingly, many decisions for obtaining and
using resources are evaluated from an electric and gas regulated business
perspective. MidAmerican Energy also manages its operations as four distinct
business units: generation, transmission, energy distribution and retail. It is
under this framework that MidAmerican Energy believes it can best prepare for,
and succeed in, the energy business of the future. With these four business
units, MidAmerican Energy is better able to focus on the specific needs and
anticipated risks and opportunities of its major businesses. Certain
administrative functions are handled by a corporate services group which
supports all of the business units.
Although specific functions may be moved between business units as future
circumstances warrant, the main focus of each business unit has been
established. Presently, significant functions of the generation business unit
include the production of electricity, the purchase of electricity and natural
gas, and the sale of wholesale electricity and natural gas. The transmission
business unit coordinates all activities related to MidAmerican Energy's
electric transmission facilities, including monitoring access to and assuring
the reliability of the transmission system. The energy distribution business
unit distributes electricity and natural gas to end-users and conducts related
activities. Retail includes marketing, customer service and related functions
for core and complementary products and services.
MidAmerican Energy expects that, as the industry moves toward competition,
generation and retail functions will not be rate-regulated. Energy distribution
and transmission functions, though not unaffected by industry changes, are
expected to remain rate-regulated by state and federal commissions.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information on MidAmerican Funding's electric and gas segments of
business is included under the Note titled "Segment Information" in Notes to
Consolidated Financial Statements included in Part IV, Item 14 of this Form
10-K.
(C) DESCRIPTION OF BUSINESS
BUSINESS OF MIDAMERICAN FUNDING AND MHC
---------------------------------------
MidAmerican Funding conducts no business other than activities related to
the issuance of its debt securities and the ownership of MHC.
MHC conducts no business other than the ownership of its subsidiaries.
MHC's interests include 100% of the common stock of MidAmerican Energy,
MidAmerican Capital, Midwest Capital and MidAmerican Services. MidAmerican
Energy is primarily engaged in the business of generating, transmitting,
distributing and selling electric energy and in distributing, selling and
transporting natural gas. It accounts for the predominant part of MHC's assets
and earnings. MidAmerican Capital manages marketable securities and passive
investment activities, security services and other energy-related, nonregulated
activities. Midwest Capital functions as a regional business development company
in MidAmerican Energy's service territory. MidAmerican Services provides
comprehensive energy services to utilities and other companies. Prior to 1999,
MidAmerican Services was a subsidiary of MidAmerican Capital.
For the year ended December 31, 1999, 96.3% of MidAmerican Funding's
operating revenues were from MidAmerican Energy, 3.5% were from MidAmerican
Capital and 0.2% were from Midwest Capital.
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MidAmerican Funding and its subsidiaries had 3,889 full-time employees as
of December 31, 1999.
BUSINESS OF MIDAMERICAN ENERGY
------------------------------
MidAmerican Energy is the largest energy company headquartered in Iowa,
with assets and 1999 revenues totaling $3.6 billion and $1.8 billion,
respectively. MidAmerican Energy is principally engaged in the business of
generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican Energy
distributes electricity at retail in Council Bluffs, Des Moines, Fort Dodge,
Iowa City, Sioux City and Waterloo, Iowa, the Quad Cities (Davenport and
Bettendorf, Iowa and Rock Island, Moline and East Moline, Illinois) and a number
of adjacent communities and areas. It also distributes natural gas at retail in
Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa;
the Quad Cities; Sioux Falls, South Dakota; and a number of adjacent communities
and areas. As of December 31, 1999, MidAmerican Energy had 663,500 retail
electric customers and 638,000 retail natural gas customers.
In addition to retail sales, MidAmerican Energy 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.
MidAmerican Energy's regulated electric and gas operations are
conducted under franchises, certificates, permits and licenses obtained from
state and local authorities. The franchises, with various expiration dates, are
typically for 25-year terms.
MidAmerican Energy has a residential, agricultural, commercial and
diversified industrial customer group, in which no single industry or customer
accounted for more than 5% of its total 1999 electric operating revenues or 3%
of its total 1999 gas operating margin. Among the primary industries served by
MidAmerican Energy are those which are concerned with the manufacturing,
processing and fabrication of primary metals, real estate, food products, farm
and other non-electrical machinery, and cement and gypsum products.
MidAmerican Energy also conducts a number of nonregulated business
activities, including natural gas marketing. Refer to the "Nonregulated
Operations" section later in Part I for further discussion.
For the year ended December 31, 1999, MidAmerican Energy derived
approximately 66% of its gross operating revenues from its regulated electric
business, 25% from its regulated gas business and 9% from its nonregulated
business activities. For 1998 and 1997, the corresponding percentages were 69%
electric, 25% gas and 6% nonregulated; and 65% electric, 31% gas and 4%
nonregulated, respectively.
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Historical electric sales by customer class as a percent of total electric
sales and retail electric sales data by state as a percent of total retail
electric sales are shown below:
Total Electric Sales
By Customer Class
1999 1998 1997
---- ---- ----
Residential 21.0% 22.2% 20.9%
Small General Service 16.7 17.5 16.5
Large General Service 26.9 28.1 27.4
Other 4.5 4.4 4.4
Sales for Resale 30.9 27.8 30.8
----- ----- ------
Total 100.0% 100.0% 100.0%
===== ===== =====
Retail Electric Sales
By State
1999 1998 1997
---- ---- ----
Iowa 88.9% 88.4% 88.6%
Illinois 10.4 10.9 10.7
South Dakota 0.7 0.7 0.7
----- ----- -------
Total 100.0% 100.0% 100.0%
===== ===== =====
In Illinois beginning October 1, 1999, larger non-residential customers and
33% of the remaining non-residential customers were 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.
Historical regulated gas sales, excluding transportation throughput, by
customer class as a percent of total gas sales and by state as a percent of
total retail gas sales are shown below:
Total Regulated Gas Sales
By Customer Class
1999 1998 1997
---- ---- ----
Residential 62.0% 59.9% 60.8%
Small General Service 31.4 32.1 33.1
Large General Service 3.9 3.7 4.2
Other 2.7 4.3 1.9
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
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Retail Gas Sales
By State
1999 1998 1997
---- ---- ----
Iowa 78.8% 79.0% 79.1%
Illinois 10.3 10.2 10.4
South Dakota 10.1 10.1 9.8
Nebraska 0.8 0.7 0.7
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
There are seasonal variations in MidAmerican Energy's electric and gas
businesses which are principally related to the use of energy for air
conditioning and heating. In 1999, 39% of MidAmerican Energy's electric revenues
were reported in the months of June, July, August and September, and 55% of
MidAmerican Energy's gas revenues were reported in the months of January,
February, March and December.
At December 31, 1999, MidAmerican Energy had 3,690 full-time employees of
which 1,710 were covered by union contracts. MidAmerican Energy has eight
separate contracts with locals of the International Brotherhood of Electrical
Workers (IBEW), the United Association of Plumbers and Pipefitters and the
United Paper Workers International Union. The contracts covering most union
employees are as follows:
Employee Contract
Union Local Members Expiration Date
----- ----- -------- ---------------
IBEW 109 480 3/01/2000
IBEW 499 1,140 3/01/2000
The Local 499 members numbered above are covered under three separate
contracts based on the location of the Local 499 of which they are a member.
Negotiations for new contracts are in progress, and union members continue to
work under the terms of the expired contracts for a 90-day period.
REGULATED ELECTRIC OPERATIONS
The annual hourly peak demand on MidAmerican Energy's electric system
occurs principally as a result of air conditioning use during the cooling
season. In July 1999, MidAmerican Energy recorded an hourly peak demand of 3,833
MW, which was 190 MW more than MidAmerican Energy's previous record hourly peak
of 3,643 MW set in 1998.
MidAmerican Energy's accredited net generating capability in the summer of
1999 was 4,466 MW. Accredited net generating capability represents the amount of
generation available to meet the requirements on MidAmerican Energy's system,
net of the effect of capacity purchases and sales, and consists of MidAmerican
Energy-owned generation and generation under a long-term power purchase
contract. The net generating capability at any time may be less than it would
otherwise be due to regulatory restrictions, fuel restrictions and generating
units being temporarily out of service for inspection, maintenance, refueling or
modifications. Refer to Item 2, Properties, for detail of the accredited net
generating capability for the summer of 1999.
MidAmerican Energy is interconnected with Iowa utilities and utilities in
neighboring states and is involved in an electric power pooling agreement known
as Mid-Continent Area Power Pool. The
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Power Pool is a voluntary association of electric utilities doing business in
Iowa, Minnesota, Nebraska and North Dakota and portions of Illinois, Montana,
South Dakota and Wisconsin and the Canadian provinces of Saskatchewan and
Manitoba. Its membership also includes power marketers, regulatory agencies and
independent power producers. The Power Pool facilitates operation of the
transmission system, serves as a power and energy market clearing house and is
responsible for the safety and reliability of the bulk electric system.
Each Power Pool participant is required to maintain for emergency purposes
a net generating capability reserve of at least 15% above its system peak
demand. If a participant's capability reserve falls below the 15% minimum,
significant penalties could be contractually imposed by the Power Pool.
MidAmerican Energy's reserve margin for 1999 was approximately 16.5%.
MidAmerican Energy's transmission system connects its generating facilities
with distribution substations and interconnects with 14 other transmission
providers in Iowa and five adjacent states. Under normal operating conditions,
MidAmerican Energy's transmission system is unconstrained and has adequate
capacity to deliver energy to MidAmerican Energy's distribution system and to
export and import energy with other interconnected systems. As energy markets
open to competition, MidAmerican Energy believes its interconnections and
central location will provide valuable opportunities to serve other markets.
Refer to Item 2, Properties, for detail of transmission lines.
Fuel Supply for Electric Operations
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MidAmerican Energy's sources of fuel for electric generation were as
follows for the periods shown:
Year Ended December 31,
1999 1998 1997
----- ----- -----
Coal 70.9% 79.2% 76.3%
Nuclear* 28.2 19.5 23.0
Gas 0.7 1.1 0.6
Oil/Hydro 0.2 0.2 0.1
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
*Nuclear includes generation purchased through a long-term power purchase
agreement with Nebraska Public Power District. Refer to Item 2, Properties, for
detail of generating facilities.
Prior to July 1997, MidAmerican Energy was allowed to recover its energy
costs from most of its electric utility customers through energy adjustment
clauses. Beginning in July 1997, the Iowa energy adjustment clause was
eliminated as part of the Iowa pricing plan approved by the Iowa Utilities
Board. Accordingly, fluctuations in energy costs now may affect MidAmerican
Energy's earnings.
All of the coal-fired generating stations operated by MidAmerican Energy
are fueled by low-sulfur, western coal from the Powder River Basin and Hanna
Basin mines. The use of low-sulfur western coal enables MidAmerican Energy to
comply with the acid rain provisions of the Clean Air Act Amendments of 1990
without having to install additional costly emissions control equipment at its
generating stations. MidAmerican Energy's coal supply portfolio includes
multiple suppliers and mines under agreements of varying term and quantity
flexibility. MidAmerican Energy regularly monitors the western coal market,
looking for opportunities to improve its coal supply portfolio. MidAmerican
Energy believes its sources of coal supply are and will continue to be
satisfactory. Additional information
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regarding MidAmerican Energy's coal supply contracts is included in Note (4)(g)
of Notes to Consolidated Financial Statements in Part IV, Item 14, of this Form
10-K.
MidAmerican Energy uses both Union Pacific Railroad and Burlington Northern
and Santa Fe Railway as originating carriers of its coal supply. Coal is
delivered directly to Neal Energy Center by Union Pacific and to Council Bluffs
Energy Center by Union Pacific and Burlington Northern. Coal for MidAmerican
Energy's Louisa and Riverside Energy Centers is delivered to an interchange
point by Burlington Northern for transportation to its destination by the I&M
Rail Link. Competitive rail access is available to the Council Bluffs Energy
Center and to interchange points for deliveries to Louisa and Riverside Energy
Centers. MidAmerican Energy believes its coal transportation arrangements are
adequate to meet its coal delivery needs.
MidAmerican Energy uses natural gas and oil as fuel for peak demand
electric generation, transmission support and standby purposes. These sources
are presently in adequate supply and available to meet MidAmerican Energy's
needs.
MidAmerican Energy is a 25% joint owner of Quad Cities Nuclear Power
Station. Approximately one-third of the fuel in the core at the Quad Cities
Station units is replaced every 24 months. One unit had a refueling outage in
January 2000, and a refueling outage is scheduled for October 2000 at the other
unit.
MidAmerican Energy has been advised by Commonwealth Edison, the joint owner
and operator of Quad Cities Station, that the majority of its uranium
concentrate and uranium conversion requirements for Quad Cities Station through
2001 can be met under existing supplies or commitments. ComEd foresees no
problem in obtaining the remaining requirements now or obtaining future
requirements. ComEd further advises that all enrichment requirements have been
contracted through 2003. Commitments for fuel fabrication have been obtained at
least through 2005. ComEd does not anticipate that it will have difficulty in
contracting for uranium concentrates for conversion, enrichment or fabrication
of nuclear fuel needed to operate Quad Cities Station.
MidAmerican Energy purchases one-half of the power and energy of Cooper
Nuclear Station through a long-term power purchase contract with Nebraska Public
Power District. Approximately 30% of the fuel in the core at Cooper must be
replaced every 18 months. A refueling outage began in March 2000. Nebraska
Public Power District has informed MidAmerican Energy that it either has
sufficient materials and services available to meet foreseeable Cooper
requirements or that such materials and services are readily available from
suppliers.
Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy
is responsible for the selection and development of repositories for, and the
permanent disposal of, spent nuclear fuel and high-level radioactive wastes.
ComEd and Nebraska Public Power District, as required by the Nuclear Waste Act,
each signed a contract with the Department of Energy to provide for the disposal
of spent nuclear fuel and high-level radioactive waste beginning not later than
January 1998. The Department of Energy did not begin receiving spent nuclear
fuel on the scheduled date, and it is expected that the schedule will be
significantly delayed. The costs incurred by the Department of Energy for
disposal activities are being financed by fees charged to owners and generators
of the waste. The Nebraska Public Power District has informed MidAmerican Energy
that there is on-site storage capability at Cooper sufficient to permit such
interim storage at least through 2004, the remaining term of the long-term power
purchase contract. ComEd has informed MidAmerican Energy that existing on-site
storage capability at Quad Cities Station is sufficient to permit interim
storage into 2006. Meeting spent nuclear fuel storage requirements at Quad
Cities Station beyond such time could require modifications to the spent fuel
storage pools or new and separate storage facilities. For Quad Cities Station,
ComEd has informed
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MidAmerican Energy that they plan to develop interim spent fuel storage
installation at Quad Cities Station to store additional spent nuclear fuel in
dry casks.
REGULATED NATURAL GAS OPERATIONS
MidAmerican Energy is engaged in the procurement, transportation, storage
and distribution of natural gas for utility and end-use customers in the
Midwest. MidAmerican Energy purchases natural gas from various suppliers,
transports it from the production area to MidAmerican Energy's service territory
under contracts with interstate pipelines, stores it in various storage
facilities to manage fluctuations in system demand and seasonal pricing, and
distributes it to customers through MidAmerican Energy's distribution system.
MidAmerican Energy also transports through its distribution system natural
gas purchased independently by a number of end-use customers. During 1999,
approximately 43% of total gas delivered on MidAmerican Energy's system was
under gas transportation service.
Fuel Supply and Capacity
- ------------------------
MidAmerican Energy purchases gas supplies from producers and third party
marketers. To ensure system reliability, a geographically diverse supply
portfolio with varying terms and contract conditions is utilized for the gas
supplies.
MidAmerican Energy has rights to firm pipeline capacity to transport gas to
its service territory through direct interconnects to the pipeline systems of
Northern Natural Gas, Natural Gas Pipeline Company of America, Northern Border
Pipeline Company and ANR Pipeline Company. Firm capacity in excess of
MidAmerican Energy's system needs, resulting from differences between the
capacity portfolio and seasonal system demand, can be resold to other companies
to achieve optimum use of the available capacity. Past Iowa Utilities Board
rulings have allowed MidAmerican Energy to retain 30% of Iowa margins earned on
the resold capacity, with the remaining 70% being returned to customers through
the purchased gas adjustment clause.
MidAmerican Energy's cost of gas is recovered from customers through
purchased gas adjustment clauses. In 1995, the Iowa Utilities Board approved
MidAmerican Energy's Incentive Gas Supply Procurement Program for a three-year
test period which expired in November 1998. On May 28, 1999, the Iowa Utilities
Board approved a settlement that continues the program through October 31, 2000.
Under the program as amended, MidAmerican Energy is required to file with the
Iowa Utilities Board every six months a comparison of its gas procurement costs
to an index-based reference price. If MidAmerican Energy's cost of gas for the
period is less or greater than an established tolerance band around the
reference price, then MidAmerican Energy shares a portion of the savings or cost
with customers. Since the implementation of the program, MidAmerican Energy has
successfully achieved and shared in savings for its natural gas customers.
MidAmerican Energy utilizes leased gas storage to meet peak day
requirements and to manage the daily changes in demand due to changes in
weather. The storage gas is typically replaced during the summer months. In
addition, MidAmerican Energy also utilizes three liquefied natural gas plants
and two propane-air plants to meet peak day demands.
On February 2, 1996, MidAmerican Energy had its highest peak-day delivery
of 1,143,026 MMBtus. This peak-day delivery consisted of approximately 88%
traditional sales service and 12%
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transportation service of customer-owned gas. MidAmerican Energy's 1999/2000
winter heating season peak-day delivery of 931,518 MMBtus was reached on
December 20, 1999. This peak-day delivery included approximately 74% traditional
sales service and 26% transportation service.
The supply sources utilized by MidAmerican Energy to meet its 1999/2000
peak-day deliveries to its sales service customers were:
Thousands Percent
of of
MMBtus Total
------ -------
Leased Storage and Peak Shaving Plants 303.1 43.1%
Firm Supply 400.3 56.9
----- -----
Total 703.4 100.0%
===== =====
MidAmerican Energy has strategically built multiple pipeline
interconnections into several of its larger communities. MidAmerican Energy
operates interconnects with Northern Natural Gas, Natural Gas Pipeline, Northern
Border, and ANR Pipeline Company into the Quad Cities; with Northern Natural
Gas, Natural Gas Pipeline, and Northern Border into Cedar Rapids/Iowa City; and
with Northern Natural Gas and Natural Gas Pipeline into Des Moines. Multiple
pipeline interconnects create competition among pipeline suppliers for
transportation capacity in those communities, thus reducing costs. In addition,
multiple pipeline interconnects give MidAmerican Energy the ability to optimize
delivery of the lowest cost supply from the various pipeline supply basins into
these communities and increase delivery reliability. Benefits to MidAmerican
Energy's system customers are shared with all jurisdictions through a
consolidated purchased gas adjustment clause.
MidAmerican Energy does not anticipate difficulties in meeting its future
demands through the use of its supply portfolio and pipeline interconnections
for the foreseeable future.
NONREGULATED OPERATIONS
MidAmerican Energy's nonregulated operations include a variety of
activities outside of the traditional regulated electric and gas services. A
majority of MidAmerican Energy's nonregulated revenue is generated by its
nonregulated natural gas marketing services. MidAmerican Energy purchases gas
from producers and third party marketers and sells it to wholesalers and
end-users. Beginning in May 1998, contracts previously serviced by a
nonregulated subsidiary of MHC were renewed as MidAmerican Energy contracts,
creating a significant increase in these operations at MidAmerican Energy. In
addition, MidAmerican Energy manages gas supplies for a number of small
commercial end-users and sells these customers gas to meet their supply
requirements. Sales volumes for these nonregulated gas marketing services
totaled 58 million MMBtus, 39 million MMBtus and 21 million MMBtus for 1999,
1998 and 1997, respectively.
MidAmerican Energy's nonregulated revenues for 1999 reflect revenues from
its market access service project, which began in the third quarter of 1999. The
pilot project allows Iowa customers with at least 4 MW 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, continue to be reflected in
regulated electric revenues.
Nonregulated revenues of MidAmerican Energy also include awards received
for successful performance under its Incentive Gas Supply Procurement Plan
discussed in the "Regulated Natural Gas Operations" section.
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REGULATION
General Utility Regulation
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MidAmerican Energy is a public utility within the meaning of the Federal
Power Act and a natural gas company within the meaning of the Natural Gas Act.
Therefore, it is subject to regulation by the Federal Energy Regulatory
Commission in regard to numerous activities, including the issuance of
securities, accounting policies and practices, sales for resale rates, the
establishment and regulation of electric interconnections and transmission
services and replacement of certain gas utility property.
MidAmerican Energy is regulated by the Illinois Commerce Commission as to
bundled retail rates, unbundled delivery services, services that have not been
declared to be competitive, accounts, issuance of securities, affiliate
transactions, construction, acquisition and sale of utility property,
acquisition and sale of securities and in other respects as provided by the laws
of Illinois. MidAmerican Energy is regulated by the Iowa Utilities Board as to
retail rates, services, accounts, construction of utility property and in other
respects as provided by the laws of Iowa. MidAmerican Energy is also subject to
regulation by the South Dakota Public Utility Commission as to electric and gas
retail rates and service as provided by the laws of South Dakota.
Rate Regulation
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Under Iowa law, temporary collection of higher rates can begin, subject to
refund, 90 days after filing with the Iowa Utilities Board for that portion of
such higher rates approved by the Iowa Utilities Board based on prior ratemaking
principles and a rate of return on common equity previously approved. If the
Iowa Utilities Board has not issued a final order within ten months after the
filing date, the temporary rates cease to be subject to refund and any balance
of the requested rate increase may then be collected subject to refund.
Exceptions to the ten-month limitation provide for extensions due to a utility's
lack of due diligence in the rate proceeding, judicial appeals and situations
involving new generating units being placed in service. MidAmerican Energy's
cost of gas is reflected in its Iowa gas rates through the Iowa Uniform
Purchased Gas Adjustment Clause.
South Dakota law authorizes its Public Utility Commission to suspend new
rates for up to six months during the pendency of rate proceedings; however, the
rates are permitted to be implemented after six months subject to refund pending
a final order in the proceeding.
Under Illinois law, new rates may become effective 45 days after filing
with the Illinois Commerce Commission, or on such earlier date as the Illinois
Commerce Commission may approve, subject to its authority to suspend the
proposed new rates, subject to hearing, for a period not to exceed approximately
eleven months after filing. Under Illinois electric tariffs, MidAmerican
Energy's Fuel Cost Adjustment Clause reflects changes in the cost of all fuels
used for electric generation, including certain fuel transportation costs,
nuclear fuel disposition costs and the effects of energy transactions (other
than capacity and margins on interchange sales) with other utilities.
MidAmerican Energy's cost of gas is reflected in its Illinois gas rates through
the Illinois Uniform Purchased Gas Adjustment Clause.
In December 1997, Illinois enacted a new law to restructure Illinois'
electric utility industry. The law changes how and what electric services are
regulated by the Illinois Commerce Commission and transitions portions of the
traditional electric services to a competitive environment. In general, the new
law limits the Illinois Commerce Commission's regulatory authority over a
utility's generation and also relaxes its regulatory authority over many
corporate transactions, such as the transfer of generation assets to affiliates.
Special authority and limitations of authority apply during the transition to a
competitive
-12-
<PAGE>
marketplace. Also, the law permits utilities to eliminate their fuel adjustment
clauses and incorporates provisions by which earnings in excess of allowed
amounts are either partially refunded to customers or are used to accelerate a
company's regulatory asset cost recovery. Electric rates are frozen, subject to
certain exceptions, until 2005.
Refer to the information under the caption "Legislative and Regulatory
Evolution" in the "Operating Activities and Other Matters" section of MD&A in
Part IV, Item 14 of this Form 10-K for additional discussion of matters
affecting utility regulation.
Iowa law requires electric and gas utilities to spend a portion of their
annual Iowa jurisdictional revenues on energy efficiency programs. Utilities are
allowed to recover the cost of energy efficiency programs from their customers,
subject to Iowa Utilities Board review. MidAmerican Energy is recovering its
historical energy efficiency program costs, which were deferred until recovery
in accordance with prior energy efficiency regulations. MidAmerican Energy is
also recovering the current costs of its ongoing energy efficiency programs.
Refer to the discussion under "Energy Efficiency" in the "Operating Activities
and Other Matters" section of MD&A in Part IV, Item 14 of this Form 10-K.
Nuclear Regulation
- ------------------
MidAmerican Energy is subject to the jurisdiction of the Nuclear Regulatory
Commission with respect to its license and 25% ownership interest in Quad Cities
Station Units 1 and 2. ComEd is the operator of Quad Cities Station and is under
contract with MidAmerican Energy to secure and keep in effect all necessary
Nuclear Regulatory Commission licenses and authorizations.
Under the terms of a long-term power purchase contract with Nebraska Public
Power District, or NPPD, MidAmerican Energy has contracted to purchase through
September 21, 2004, one-half of the power and energy from Cooper, which is
located near Brownville, Nebraska. MidAmerican Energy pays for one-half of the
fixed and operating costs of Cooper (excluding depreciation but including debt
service) and MidAmerican Energy's share of fuel costs (including the Department
of Energy disposal fee) based upon energy delivered. MidAmerican Energy is not
subject to the jurisdiction of the Nuclear Regulatory Commission with respect to
Cooper and the long-term power purchase contract with Nebraska Public Power
District. Nebraska Public Power District, as the sole owner, licensee and
operator of Cooper, is thereby the only entity subject to the jurisdiction of
the Nuclear Regulatory Commission with respect to Cooper. Under the terms of the
long-term power purchase contract, Nebraska Public Power District is required to
assure that Cooper is in compliance with all of the Nuclear Regulatory
Commission regulations.
The Nuclear Regulatory Commission's regulations control the granting of
permits and licenses for the construction and operation of nuclear generating
stations and subject such stations to continuing review and regulation. The
Nuclear Regulatory Commission review and regulatory process covers, among other
things, operations, maintenance, and environmental and radiological aspects of
such stations. The Nuclear Regulatory Commission may modify, suspend or revoke
licenses and impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations under such Act or the terms of such licenses.
Federal regulations provide that any nuclear operating facility may be
required to cease operation if the Nuclear Regulatory Commission determines
there are deficiencies in state, local or utility emergency preparedness plans
relating to such facility, and the deficiencies are not corrected. ComEd and
Nebraska Public Power District have advised MidAmerican Energy that emergency
preparedness plans for Quad Cities Station and Cooper, respectively, have been
approved by the Nuclear Regulatory Commission. ComEd and Nebraska Public Power
District have also advised MidAmerican Energy that
-13-
<PAGE>
state and local plans relating to Quad Cities Station and Cooper, respectively,
have been approved by the Federal Emergency Management Agency.
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 Nuclear Regulatory Commission's three new
categories, removing the station from the Trending (adversely) Letter status
initiated in January 1998. During 1999, the 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.
The Nuclear Regulatory Commission also regulates the decommissioning of
nuclear power plants including the planning and funding for the eventual
decommissioning of the plants. In response to these regulations, MidAmerican
Energy submitted a report to the Nuclear Regulatory Commission in July 1990
indicating that it will provide "reasonable assurance" that funds will be
available to pay the costs of decommissioning its share of Quad Cities Station.
Nebraska Public Power District has advised MidAmerican Energy that a report
addressing decommissioning funding for Cooper has been submitted and approved by
the Nuclear Regulatory Commission.
MidAmerican Energy has established external trusts for the investment of
funds collected for nuclear decommissioning associated with Quad Cities Station.
Nebraska Public Power District maintains an internal account and an external
trust for decommissioning funds associated with Cooper. MidAmerican Energy makes
contributions to Nebraska Public Power District related to decommissioning and
reflects those contributions in MidAmerican Energy's power purchase costs.
Electric tariffs currently in effect include provisions for annualized
collection of estimated decommissioning costs at Quad Cities Station and Cooper.
In Illinois, nuclear decommissioning costs are included in customer billings
through a mechanism that permits annual adjustments. In Iowa, such costs are
reflected in base rates. MidAmerican Energy's cost related to decommissioning
funding in 1999 was $21.7 million. Refer to "Cooper Litigation" under "Legal
Proceedings" in Part I, Item 3 of this form 10-K for discussion of a proceeding
related to the Cooper power purchase agreement.
Environmental Regulations
- -------------------------
MidAmerican Energy is subject to numerous legislative and regulatory
environmental protection requirements involving air and water pollution, waste
management, hazardous chemical use, noise abatement, land use aesthetics and
atomic radiation.
State and federal environmental laws and regulations currently have, and
future modifications may have, the effect of (i) increasing the lead time for
the construction of new facilities, (ii) significantly increasing the total cost
of new facilities, (iii) requiring modification of MidAmerican Energy's existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing MidAmerican Energy's cost of waste disposal and (vi) reducing the
reliability of service provided by MidAmerican Energy and the amount of energy
available from MidAmerican Energy's facilities. Any of such items could have a
substantial impact on amounts required to be expended by MidAmerican Energy in
the future.
Air Quality -
The Clean Air Act Amendments of 1990 were signed into law in November 1990.
Essentially all utility generating units are subject to the provisions of those
amendments which address continuous emissions monitoring, permit requirements
and fees and emissions of certain substances. MidAmerican Energy has five
jointly owned and six wholly owned coal-fired generating units, which represent
-14-
<PAGE>
approximately 65% of MidAmerican Energy's electric generating capability.
MidAmerican Energy's generating units meet all requirements under Title IV of
the Clear Air Act Amendments of 1990 through 2007. Title IV, which is also known
as the Acid Rain Program, sets forth requirements for the emission of sulfur
dioxide and nitrogen oxides at electric utility generating stations.
Refer to the discussion under the caption "Environmental Matters" in the
"Operating Activities and Other Matters" section of MD&A in Part IV, Item 14, of
this Form 10-K for additional information regarding air quality regulation.
Water Quality -
Under the Federal Water Pollution Control Act Amendments of 1972, as
amended, MidAmerican Energy is required to obtain National Pollutant Discharge
Elimination System permits to discharge effluents (including thermal discharges)
from its properties into various waterways. The permits are subject to renewal
after specified time periods not to exceed five years. MidAmerican Energy has
obtained all necessary National Pollutant Discharge Elimination System permits
for its generating stations, and when those permits are expected to expire,
MidAmerican Energy will file applications for renewal.
Hazardous Materials and Waste Management -
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at certain
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 estimates the range of possible costs for investigation,
remediation and monitoring for these sites to be $22 million to $68 million.
MidAmerican Energy has evaluated or is evaluating 27 properties which were, at
one time, sites of gas manufacturing plants in which MidAmerican Energy may be a
potentially responsible party. MidAmerican Energy's estimate of the probable
cost for these sites as of December 31, 1999, was $28 million. 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.
Additional information relating to MidAmerican Energy's manufactured gas
plant facilities is included under Note (4)(b) in Notes to Consolidated
Financial Statements in Part IV, Item 14 of this Form 10-K.
Pursuant to the Toxic Substances Control Act, a federal law administered by
the EPA, MidAmerican Energy developed a comprehensive program for the use,
handling, control and disposal of all polychlorinated biphenyls, referred to
herein as PCBs, contained in electrical equipment. The future use of equipment
containing PCBs will be minimized. Capacitors, transformers and other
miscellaneous equipment are being purchased with a non-PCB dielectric fluid.
MidAmerican Energy's exposure to PCB liability has been reduced through the
orderly replacement of a number of such electrical devices with similar non-PCB
electrical devices.
Other -
A number of studies have examined the possibility of adverse health effects
from electric and magnetic fields without conclusive results. Electric and
magnetic fields are produced by all devices
-15-
<PAGE>
carrying or using electricity, including transmission and distribution lines and
home appliances. MidAmerican Energy cannot predict the effect on construction
costs of electric utility facilities or operating costs if electric and magnetic
field regulations related to were to be adopted. Although MidAmerican Energy is
not the subject of any suit involving electric and magnetic fields, litigation
has been filed in a number of jurisdictions against a variety of defendants
alleging that electric and magnetic fields had an adverse effect on health. If
such litigation were successful, the impact on MidAmerican Energy and on the
electric utility industry in general could be material. However, MidAmerican
Energy does not believe there is any merit to these potential claims.
In December 1997, negotiators from more than 150 nations met in Kyoto,
Japan to negotiate an international agreement designed to address global climate
change impacts by attempting to reduce so-called greenhouse gas emissions. Some
scientists contend that these gases build up in the Earth's atmosphere and cause
global temperatures to rise. The primary target of these emissions is carbon
dioxide, or CO2, which is formed by, among other things, the combustion of
fossil fuels. The agreement currently calls for the United States to reduce its
emissions of CO2 and other greenhouse gases to 7 percent below 1990 levels in
the 2008-2012 time frame. The United States became a signatory to the agreement
on November 12, 1998. In order for the agreement to become binding upon the
United States, ratification by the U.S. Senate is necessary. The cost to
MidAmerican Energy of reducing its CO2 emissions levels by 7 percent below 1990
levels would depend on available technology at the time, but could be material.
In accordance with the requirements of Section 112 of the Clear Air Act
Amendments of 1990, the EPA has performed a study of the hazards to public
health reasonably anticipated to occur as a result of emissions of hazardous air
pollutants by electric utility steam generating units. In February 1998, EPA
issued its Final Report to Congress, indicating that mercury is the hazardous
air pollutant of greatest potential concern from coal-fired generating units and
that additional research and monitoring are necessary. As such the EPA has
issued a request under Section 114 of the Clean Air Act Amendments of 1990
requiring all electric utilities to provide information that will allow the EPA
to calculate the annual mercury emissions from each coal-fired generating unit
for the calendar year 1999. This information will be used to assist the EPA in
determining whether it is appropriate and necessary to regulate mercury
emissions from coal-fired generating units. The cost to MidAmerican Energy of
reducing its mercury emissions would depend on available technology at the time,
but could be material.
BUSINESS OF MIDAMERICAN CAPITAL
-------------------------------
MidAmerican Capital is a wholly owned nonregulated subsidiary of MHC. The
nonregulated activities emphasize energy and complementary service-related
businesses, credit quality and liquidity. MidAmerican Capital manages these
activities through its nonregulated investment and operating companies. Assets
of MidAmerican Capital totaled $262 million as of December 31, 1999.
INVESTMENTS
MidAmerican Capital's investments totaled $234 million and $520 million at
December 31, 1999 and 1998, respectively. A majority of the investment dollars
relate to investment grade marketable securities and equipment leases, most of
which are held by InterCoast Capital Company and MHC Investment Company. As
discussed below, MidAmerican Capital and its subsidiaries also have investments
in energy projects, technology development interests and venture capital funds.
MidAmerican Capital's marketable securities portfolio, totaling $85 million
and $394 million at December 31, 1999 and 1998, respectively, consists
substantially of a managed preferred stock portfolio and, as of December 31,
1998, an investment in the common stock of McLeodUSA. Substantially all of
-16-
<PAGE>
the investment in McLeodUSA stock was sold in May 1999. The preferred stocks
have been issued by companies having investment grade senior debt ratings by
Moody's or Standard & Poor's. As of December 31, 1999 and 1998, the investment
in McLeodUSA stock was recorded at a market value of $4 million and $239
million, respectively. In January 2000, MidAmerican Capital sold its remaining
investment in McLeodUSA stock. In addition, MidAmerican Capital has investments
in independently managed mutual funds.
MidAmerican Capital holds equity participations in equipment leases
primarily for passenger and freight transport aircraft. These investments
totaled $49 million and $72 million at December 31, 1999 and 1998, respectively.
In addition, MidAmerican Capital and several of its subsidiaries have
indirect investments in a variety of nonregulated energy production
technologies.
OPERATING COMPANIES
MidAmerican Capital owns a majority, controlling interest in AAA Security
Systems, Inc., one of the largest residential and commercial security systems
companies in the Midwest. MidAmerican Capital, through its security
subsidiaries, also owns the stock or assets of 6 additional midwestern security
companies. MidAmerican Capital's security operations have more than 20,000
security customers in the Midwest.
-17-
<PAGE>
BUSINESS OF MIDWEST CAPITAL
---------------------------
Midwest Capital is a wholly owned nonregulated subsidiary of MHC with total
assets of $10 million as of December 31, 1999. Midwest Capital's primary
activity is the management of utility service area investments to support
economic development. Midwest Capital's principal interest is a 2,000-acre
master planned residential and business community in southeastern South Dakota.
The major construction phase of the planned community is complete, and the
marketing phase to sell developed residential and commercial lots is in
progress.
ITEM 2. PROPERTIES
- -------------------
MidAmerican Energy's utility properties consist of physical assets
necessary and appropriate to render electric and gas service in its service
territories. Electric property consists primarily of generation, transmission
and distribution facilities. Gas property consists primarily of distribution
plant, including feeder lines to communities served from natural gas pipelines
owned by others. It is the opinion of management that the principal depreciable
properties owned by MidAmerican Energy are in good operating condition and well
maintained.
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<PAGE>
The net accredited generating capacity of MidAmerican Energy, along with
the participation purchases and sales, net, and firm purchases and sales, net,
are shown for summer 1999 accreditation.
Company's Share
of Accredited
Percent Generating
Plant Ownership Fuel Capability (MW)
--------------------------------- --------- ---- --------------
Steam Electric Generating Plants:
Council Bluffs Energy Center
Unit No. 1 100.0 Coal 43
Unit No. 2 100.0 Coal 88
Unit No. 3 79.1 Coal 534
George Neal Station
Unit No. 1 100.0 Coal 135
Unit No. 2 100.0 Coal 300
Unit No. 3 72.0 Coal 371
Unit No. 4 40.6 Coal 253
Louisa Unit 88.0 Coal 616
Ottumwa Unit 52.0 Coal 372
Riverside Station
Unit No. 3 100.0 Coal 5
Unit No. 5 100.0 Coal 130
-----
2,847
-----
Combustion Turbines:
Coralville - 4 units 100.0 Gas/Oil 64
Electrifarm - 3 units 100.0 Gas/Oil 200
Moline - 4 units 100.0 Gas/Oil 64
Parr - 2 units 100.0 Gas/Oil 32
Pleasant Hill Energy Center - 3 units 100.0 Oil 160
River Hills Energy Center - 8 units 100.0 Gas/Oil 120
Sycamore Energy Center - 2 units 100.0 Gas/Oil 149
-----
789
-----
Nuclear:
Cooper (1) (1) Nuclear 387
Quad-Cities Station
Unit No. 1 25.0 Nuclear 192
Unit No. 2 25.0 Nuclear 190
-----
769
-----
Hydro:
Moline - 4 units 100.0 Water 3
-----
Net Accredited Generating Capacity 4,408
Participation Purchases and Sales, Net 58
-----
Total Net Accredited Generating Capability 4,466
=====
(1) Cooper is owned by the Nebraska Public Power District and the
amount shown is MidAmerican Energy's entitlement (50%) of Cooper's
accredited capacity under a power purchase agreement extending to
the year 2004.
-19-
<PAGE>
The electric transmission system of MidAmerican Energy at December 31,
1999, included 897 miles of 345-kV lines, 1,299 miles of 161-kV lines, 1,806
miles of 69-kV lines and 219 miles of 34.5-kV lines.
The gas distribution facilities of MidAmerican Energy at December 31, 1999,
included 19,907 miles of gas mains and services.
Substantially all the former Iowa-Illinois Gas and Electric Company utility
property and franchises, and substantially all of the former Midwest Power
Stations electric utility property located in Iowa, or approximately 80% of
gross utility plant, is pledged to secure mortgage bonds.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
MidAmerican Energy and its subsidiaries have no material legal proceedings
except for the following:
Environmental Matters
- ---------------------
Information on MidAmerican Energy's environmental matters is included in
Item 1 - Business and under "Environmental Matters" within "Operating Activities
and Other Matters" in Management's Discussion and Analysis in Part IV, Item 14
of this Form 10-K.
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.
-20-
<PAGE>
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;
(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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- --------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
MidAmerican Funding is an Iowa limited liability company whose membership
interest is held solely by MidAmerican Energy Holdings. MidAmerican Funding has
not paid any cash dividends to MidAmerican Energy Holdings.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Reference is made to Part IV of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Reference is made to Part IV of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
Reference is made to the "Quantitative and Qualitative Disclosure About
Market Risk" Section of MD&A in Part IV, Item 14, of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Reference is made to Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- --------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
As a result of the merger transaction with CalEnergy on March 12, 1999,
Deloitte & Touche LLP is MidAmerican Funding's and MHC's independent accountant
for accounting periods subsequent to the fiscal year ended December 31, 1998.
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PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- -------------------------------------------------
Information concerning the current managers and executive officers of
MidAmerican Funding is as follows:
(A) IDENTIFICATION
Served in Served
Present as
Present Position Director
Name Age Position Since Since
---- --- -------- --------- --------
David L. Sokol 43 Chairman, Chief Executive
Officer and Manager 1999 1999
Gregory E. Abel 37 President and Chief Operating
Officer 1999 1999
Patrick J. Goodman 33 Vice President and Treasurer 1999 1999
Delbert D. Weber 67 Independent Manager 1999 1999
Steven A. McArthur 42 Vice President, Secretary
and Manager 1999 1999
John A. Rasmussen, Jr. 54 Vice President and
General Counsel 1999 1999
Officers are elected annually by the Board of Managers. There are no family
relationships among these officers, nor any arrangements or understanding
between any officer and any other person pursuant to which the officer was
selected.
(B) BUSINESS EXPERIENCE
DAVID L. SOKOL, has been MidAmerican Funding's Chairman and Chief Executive
Officer and Chairman of the Board of Managers since MidAmerican Funding's
formation in March 1999. Mr. Sokol has been Chief Executive Officer of
MidAmerican Energy Holdings since April 19, 1993 and served as President of
MidAmerican Energy Holdings from April 19, 1993 until January 21, 1995. He has
been Chairman of the Board of Directors of MidAmerican Energy Holdings since May
1994 and a director since March 1991. Formerly, among other positions held in
the independent power industry, Mr. Sokol served as President and Chief
Executive Officer of Kiewit Energy Company and Ogden Projects, Inc.
GREGORY E. ABEL, has been MidAmerican Funding's President and Chief
Operating Officer since its formation in March 1999. Mr. Abel joined MidAmerican
Energy Holdings in 1992. Mr. Abel is a Chartered Accountant and from 1984 to
1992 he was employed by PriceWaterhouse. As a Manager in the San Francisco
office of PriceWaterhouse, he was responsible for clients in the energy
industry.
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<PAGE>
PATRICK J. GOODMAN, has been MidAmerican Funding's Vice President and
Treasurer since April 1999. Mr. Goodman joined MidAmerican Energy Holdings in
June 1995, and served as Manager of Consolidation Accounting until September
1996 when he was promoted to Controller. Prior to joining MidAmerican Energy
Holdings, Mr. Goodman was a financial manager for National Indemnity Company and
a senior associate at Coopers & Lybrand.
STEVEN A. MCARTHUR, has been MidAmerican Funding's Vice President and
Secretary and a member of its Board of Managers since MidAmerican Funding's
formation in March 1999. Mr. McArthur joined MidAmerican Energy Holdings in
February 1991. From 1988 to 1991 he was an attorney in the Corporate Finance
Group at Shearman & Sterling in San Francisco. From 1984 to 1988 he was an
attorney in the Corporate Finance Group at Winthrop, Stimson, Putnam & Roberts
in New York.
JOHN A. RASMUSSEN, JR., has been MidAmerican Funding's Vice President and
General Counsel since March 1999. Mr. Rasmussen has been Senior Vice President,
General Counsel and Director of MidAmerican Energy since November 1, 1996, and
Group Vice President and General Counsel of MidAmerican Energy from July 1,
1995, to November 1, 1996. Vice President and General Counsel of Midwest
Resources from 1993 to 1995.
DELBERT D. WEBER, has been MidAmerican Funding's Independent Manager since
March 1999. Dr. Weber serves as President of the Omaha Community Foundation, a
position he assumed on September 1, 1998. He retired in July 1997 as Chancellor
Emeritus, after serving as Chancellor of the University of Nebraska at Omaha for
20 years. Dr. Weber has also served on the boards of directors of several
prominent Omaha-based charities and community organizations.
-24-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information required by Item 11 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required by Item 12 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information required by Item 13 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
-25-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- -----------------------------------------------------------------
FORM 8-K
--------
(A)1. FINANCIAL STATEMENTS (INCLUDED HEREIN)
Page No.
--------
Selected Consolidated Financial Data.......................... 27
Management's Discussion and Analysis of Financial Condition
And Results of Operations................................... 29
Consolidated Statements of Income
For the Year Ended December 31, 1999, 1998 and 1997......... 50
Consolidated Statements of Comprehensive Income
For the Year Ended December 31, 1999, 1998 and 1997......... 51
Consolidated Balance Sheets
As of December 31, 1999 and 1998 ........................... 52
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1999, 1998 and 1997......... 53
Consolidated Statements of Capitalization
As of December 31, 1999 and 1998 ........................... 55
Consolidated Statements of Retained Earnings
For the Year Ended December 31, 1999, 1998 and 1997......... 56
Notes to Consolidated Financial Statements.................... 57
Report of Independent Accountants............................. 89
(A)2. FINANCIAL STATEMENT SCHEDULES (INCLUDED HEREIN)
The following schedules should be read in conjunction with the
aforementioned financial statements.
Page No.
--------
Consolidated Valuation and Qualifying Accounts (Schedule II) .. 90
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
(A)3. EXHIBITS
See Exhibit Index on page 92.
(B) REPORTS ON FORM 8-K
None.
-26-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
------------- ------------ -------------------------------------------------
MAR. 12, 1999 JAN. 1, 1999
THROUGH THROUGH
DECEMBER 31, MARCH 11, YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues......................... $1,433,046 $383,066 $1,775,924 $1,969,537 $1,911,204 $1,655,474
Operating income (a)............. 227,133 58,898 271,412 276,726 349,399 292,464
Income from continuing
operations (b)................. 124,077 16,789 127,154 139,332 143,761 119,705
Net income ...................... 135,335 17,210 131,318 135,104 131,046 122,764
AS OF DECEMBER 31,
AS OF -------------------------------------------------
DECEMBER 31, 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets..................... $5,195,353 $4,244,336 $4,278,091 $4,521,848 $4,470,097
Long-term debt (c)............... 1,642,476 1,045,548 1,178,769 1,474,701 1,468,617
Power purchase obligation (c).... 68,049 83,127 97,504 111,222 125,729
Short-term borrowings............ 204,000 339,826 138,054 161,990 184,800
Preferred securities not subject
to mandatory redemption........ 31,759 31,759 31,763 31,769 89,945
Preferred securities subject
to mandatory redemption (d).... 151,598 150,000 150,000 150,000 50,000
Member's equity (e).............. 1,800,416 1,200,950 1,301,286 1,239,946 1,225,715
</TABLE>
(a) MHC's 1995 operating income reflects $33.4 million of costs related to a
restructuring and work force reduction plan implemented and completed in
1995.
(b) In May 1999, MidAmerican Funding sold most of its investment in the common
stock of McLeodUSA and recorded an after-tax gain of $47.1 million. For the
period ended March 11, 1999, MHC expensed $18.6 million for transaction
costs related to its acquisition by MidAmerican Energy Holdings. In 1998,
MHC recorded after-tax gains totaling $15.7 million for sales of several
properties and investments, including a portion of its investment in the
common stock of McLeodUSA, Inc. Also, in 1998, MHC expensed $4.2 million
for transaction costs related to the acquisition by MidAmerican Energy
Holdings of MHC. 1997 reflects after-tax gains totaling $11.2 million for
sales of assets of railcar businesses and a portion of its investment in
McLeodUSA common stock. MHC recorded after-tax losses of $10.2 million and
$9.4 million for the write-down of nonregulated assets during 1995 and
1996, respectively. In 1996, MHC incurred $8.7 million of costs in
connection with its merger proposal to IES Industries, Inc.
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(c) Includes amounts due within one year.
(d) Post-1995 years include MidAmerican Energy-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely MidAmerican Energy
junior subordinated debentures.
(e) For MHC the amounts represent common shareholders' equity. Common equity
increased in 1997 primarily due to the adoption of SFAS 115 and recording
the market value of an investment in McLeodUSA common stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
------------
COMPANY STRUCTURE
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, 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.
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 1998 and 1999 periods.
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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 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 - 1999 PERIODS
The following is a discussion of the historical results for MidAmerican
Funding for the period March 12, 1999, through December 31, 1999, and its
predecessor MHC for the year to date period ending 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 1999 periods discussed are not compared 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 PERIOD MARCH 12, 1999
- --------------------------------------------------------------------------
THROUGH DECEMBER 31, 1999
- --------------------------
UTILITY GROSS MARGIN
Regulated Electric Gross Margin -
MidAmerican Energy's electric gross margin for the period March 12, 1999
through December 31, 1999, totaled $790 million. Approximately $30 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.
Refer to the discussion under "Energy Efficiency" in the "Operating Activities
and Other Matters" section of MD&A for further discussion.
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Temperatures during the period were milder than normal, reducing electric
margin by approximately $10 million compared to normal temperature conditions.
Additionally, MidAmerican Energy recorded an accrual for a revenue sharing
arrangement under its 1997 pricing plan settlement. The accrual reduced revenues
and electric margin by $14 million during the period.
Regulated Gas Gross Margin -
MidAmerican Energy's regulated gas gross margin totaled $136 million for
the period March 12, 1999 through December 31, 1999. Revenues from recovery of
gas energy efficiency program costs totaled approximately $11 million for the
period. Again, revenues from energy efficiency cost recovery are substantially
offset by corresponding costs in other operating expenses. Refer to the
discussion under "Energy Efficiency" in the "Operating Activities and Other
Matters" section of MD&A for further discussion.
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 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 MidAmerican Energy's South Dakota gas customers increased
$2.4 million annually effective May 1, 1999. Accordingly, the period ended
December 31, 1999, includes only a partial-year effect of these final rate
increases.
Temperatures during the heating months were warmer than normal, resulting
in a decrease in gas gross margin of approximately $10 million.
REGULATED OPERATING EXPENSES
Other operating expenses totaled $348 million for the period March 12, 1999
through December 31, 1999. As mentioned in the gross margin discussions, other
operating expenses includes energy efficiency program costs. For MidAmerican
Funding's period ended December 31, 1999, such costs totaled approximately $36
million. MidAmerican Energy incurred approximately $3 million in operating costs
related to its year 2000 readiness efforts during the period.
Property and other taxes were reduced by an adjustment of $0.8 million for
property taxes related to periods prior to the March 12, 1999 merger.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Revenues from nonregulated operations include $113 million from
nonregulated natural gas activities. Nonregulated cost of sales reflects $109
million of related cost of gas.
Approximately $11 million of nonregulated revenues related to MidAmerican
Energy's market access service project, which began in the third quarter of
1999. Related cost of sales for the period totaled $10 million. This pilot
project allows Iowa customers with at least 4 MW of load that are participating
in the project to choose their electric power supplier. Since the project is a
pilot, or test project, the level of future revenues and possibility of a
similar program continuing beyond the project is not determinable. Revenues from
project participants related to non-supply services, such as distribution and
transmission, continue to be reflected in MidAmerican Energy's regulated
electric revenues.
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Nonregulated other operating costs for the period March 12, 1999 through
December 31, 1999, include approximately $30 million from amortization of
goodwill at MidAmerican Funding associated with the acquisition by MidAmerican
Energy Holdings of MHC. Additionally, nonregulated other operating costs include
$11 million from nonregulated marketing initiatives at MidAmerican Energy.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and Dividend Income -
Interest income reflects interest on temporary cash investments which
include proceeds from the sale of McLeodUSA common stock described below.
Realized Gains and Losses on Securities, Net -
In May 1999 most of the shares of McLeodUSA common stock held by MHC were
sold in a secondary offering by McLeodUSA. A pre-tax gain of $78.2 million
resulting from this transaction is reflected in realized gains and losses on
securities, net.
Other, Net -
Other, net reflects $4.7 million of pre-tax gains on sales of railcar
assets.
Fixed Charges -
Interest on long-term debt includes $35.7 million of interest expense on
the $700 million in debt issued by MidAmerican Funding in conjunction with
MidAmerican Energy Holdings acquisition of MHC.
RESULTS OF OPERATIONS OF MHC FOR THE PERIOD JANUARY 1, 1999 THROUGH
- -------------------------------------------------------------------
MARCH 11, 1999
- --------------
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. Refer to the "Regulated Electric Gross Margin"
section of "Results of Operation - 1998 vs. 1997" for more discussion of energy
efficiency revenues and costs. 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
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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.
NON-OPERATING INCOME AND INTEREST EXPENSE
Realized Gains and Losses on Securities, Net -
Realized gains and losses on securities for the year to date period ending
March 11, 1999, net 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.
RESULTS OF OPERATIONS - 1998 vs. 1997
-------------------------------------
The following tables provide a summary of the earnings contributions of
MHC's operations for each of the periods presented:
1998 1997
------ ------
(in millions)
Net Income
Continuing operations
MidAmerican Energy $110.6 $119.5
Nonregulated operations 16.5 19.8
Discontinued operations 4.2 (4.2)
------ -------
Consolidated earnings $131.3 $135.1
====== ======
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EARNINGS DISCUSSION
The following discussion addresses significant impacts on the results of
operations for MHC, the predecessor to MidAmerican Funding, for the years ended
December 31, 1998 and 1997.
Although utility earnings for 1998 were lower than in the prior year, a
reduction was anticipated because of the electric pricing settlements achieved
in 1996 and 1997 in Iowa and Illinois. Warmer-than-normal temperatures during
the heating season also had a negative impact on 1998 earnings. Growth in the
number of customers and in other sales factors contributed positively to
earnings in 1998. Additionally, MidAmerican Energy's successful performance in
the non-retail (off-system) energy market helped offset decreases from weather
and reductions in electric retail prices. Utility operating expenses increased
as MidAmerican Energy continued strengthening its customer service and marketing
capabilities and adding to its information technology resources.
Beginning in the second half of 1997 and continuing through 1998,
MidAmerican Energy charged to expense additional amortization of deferred energy
efficiency costs, ongoing energy efficiency costs and certain Cooper Nuclear
Station costs consistent with ratemaking treatment. These items significantly
increased other operating expenses. In conjunction with expensing these items,
MidAmerican Energy began recovery of these costs from its customers, which
resulted in additional revenues.
Realized after-tax gains on the sale of McLeodUSA stock and other
nonregulated investments are also included in 1998 earnings.
Discontinued Operations -
During 1996, MHC discontinued some of its nonregulated operations. The
income or loss from those operations and the losses on disposal are reflected as
discontinued operations in each of the periods presented in the Consolidated
Statements of Income of MHC.
In the fourth quarter of 1996, MHC and KCS Energy, Inc. (KCS) of Edison,
New Jersey, signed a definitive agreement to sell a portion of MHC's
nonregulated operations to KCS for $210 million in cash and warrants to purchase
KCS common stock. The sale, which included MHC's oil and gas exploration and
development operations, was completed in January 1997. MHC recorded an after-tax
loss of $7.1 million for the transaction in 1996 and an additional $0.9 million
in 1997.
In October 1997, MHC also divested a subsidiary that developed and operated
a computerized information system which facilitated real-time exchange of power
in the electric industry. MHC recorded a $4.0 million anticipated after-tax loss
on disposal of those operations in September 1996 and an additional $3.2 million
after-tax loss on disposal in September 1997.
In October 1999, MHC distributed its investment in MidAmerican Realty to
MidAmerican Energy Holdings in conjunction with an initial public offering of
common stock of HomeServices.Com, a successor company to MidAmerican Realty.
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UTILITY GROSS MARGIN
Regulated Electric Gross Margin -
1998 1997
------ ------
(In millions)
Operating revenues $1,170 $1,126
Cost of fuel, energy and capacity 226 236
------ ------
Electric gross margin $ 944 $ 890
====== ======
Electric gross margin improved $54 million in 1998 compared to 1997. An
increase in revenues from energy efficiency cost recovery and the Cooper
Tracker, which is discussed below, accounted for $26.1 million and $2.5 million,
respectively, of the increase in margin. Increases in revenues from these
factors are substantially offset by increases in other operating expenses.
Regarding the increase in energy efficiency revenues, on September 29,
1997, MidAmerican Energy began recovering from customers its remaining deferred
energy efficiency costs and current, ongoing energy efficiency costs. Deferred
energy efficiency costs are costs previously incurred by MidAmerican Energy
which, in accordance with rate treatment, were not charged to expense until
recovery from customers began. Recovery of deferred energy efficiency costs
occurs over a four-year period from the date collection begins. Approximately
$44.4 million of MidAmerican Energy's 1998 electric revenues were from the
recovery of energy efficiency program costs compared to $18.3 million in 1997.
Collection of deferred energy efficiency costs will decrease starting in 1999 as
various recovery periods are completed. Refer to the discussion under "Energy
Efficiency" in the "Operating Activities And Other Matters" section of MD&A for
further discussion.
The Cooper Tracker allows MidAmerican Energy to collect on a current basis
the Iowa portion of expenses for Cooper Nuclear Station capital improvement
advances. Prior to the Cooper Tracker, which began in July 1997, capital
improvement advances were capitalized when incurred and amortized over future
periods in accordance with rate treatment.
Electric margin also improved due to an increase in sales volume. In total,
electric retail sales for 1998 increased 2.7% compared to 1997. Moderate but
steady growth in the number of customers increased electric gross margin by $8.6
million compared to 1997. An increase in sales that are not dependent on weather
contributed $15.5 million to the increase. Compared to 1997, the effect of
temperatures in 1998 improved gross margin by $2 million in 1998. Compared to
normal, the impact of temperatures resulted in an estimated $2 million reduction
of electric gross margin for 1998. Temperatures in 1998 were warmer than normal
during the heating seasons and hotter than normal during the cooling season.
As anticipated, the effect of rate proceedings in 1996 and 1997 reduced
electric gross margin for 1998 compared to 1997. In addition to the price
reductions discussed under the "1999 vs. 1998" section above, revenues in 1998
reflect the full-year effect of a June 1997 price reduction for Illinois
customers. The combined effect of price reductions decreased revenues and
electric margin by $17.0 million for 1998 compared to 1997.
Prior to July 11, 1997, MidAmerican Energy was allowed to recover its
energy costs from most of its electric utility customers through energy
adjustment clauses included in revenues. Effective July 11, 1997, the energy
adjustment clause was eliminated for Iowa customers as part of MidAmerican
Energy's Iowa pricing plan. Previously, variations in energy costs did not
affect gross margin or net income due to corresponding changes in revenues
collected through the energy adjustment clause. With
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the elimination of the Iowa energy adjustment clause, fluctuations in energy
costs now may have an impact on gross margin and net income. This change
resulted in a positive impact on 1998 gross margin.
Electric margin in 1998 reflects MidAmerican Energy's strong performance in
that off-system market relative to 1997. Margins on off-system sales,
contributed $14.2 million more to gross margin in 1998 than in 1997. Though
related sales volumes decreased 11.5% compared to the 1997 level, MidAmerican
Energy obtained improved margins per unit for the 1998 sales. This was due in
part to price volatility in the wholesale energy market during some periods of
high demand for energy in the Midwest. Refer to comments on the energy market
under "Industry Evolution" in the "Operating Activities And Other Matters"
section of MD&A.
Regulated Gas Gross Margin -
1998 1997
----- -----
(In millions)
Operating revenues $ 430 $ 536
Cost of gas sold 243 346
----- -----
Gas gross margin $ 187 $ 190
===== =====
MidAmerican Energy's regulated gas revenues include purchase gas adjustment
clauses through which MidAmerican Funding is allowed to recover the cost of gas
sold from most of its gas utility customers. Consequently, fluctuations in the
cost of gas sold do not affect gross margin or net income because revenues
reflect comparable fluctuations in revenues from purchase gas adjustment
clauses. A decrease in the 1998 per-unit cost of gas compared to 1997 reduced
revenues and cost of gas sold by approximately $59 million.
Recovery of gas energy efficiency costs resulted in a $9.2 million increase
in revenues and gross margin for 1998 compared to 1997. As discussed in the
"Regulated Electric Gross Margin" section, on September 29, 1997, MidAmerican
Energy began recovery of its deferred energy efficiency costs that had not
previously been approved for recovery. Approximately $17.5 million of
MidAmerican Energy's 1998 gas revenues were from the recovery of energy
efficiency program costs compared to $8.3 million in 1997. Again, increases in
revenues from energy efficiency cost recovery are substantially offset by
corresponding increases in other operating expenses.
Unusually mild temperatures during the 1998 heating seasons resulted in a
decrease in gas margin for 1998. Temperatures in 1998 were 15.6% warmer than
normal, reducing gas gross margin in 1998 by an estimated $18 million compared
to normal. Compared to 1997, gas margin decreased $16 million in 1998 due to the
variation in temperatures. Customer growth, which contributed $1.6 million to
gas margin in 1998, and other sales factors helped mitigate the negative effect
of weather on the 1998 margin. In total, retail sales of natural gas in 1998
decreased 12.7% compared to 1997.
REGULATED OPERATING EXPENSES
Other Operating Expenses -
Regulated other operating expenses increased $32.3 million for 1998
compared to 1997. An increase in energy efficiency costs accounted for $31.6
million of the increase in other operating expenses compared to 1997. Refer to
the "Regulated Electric Gross Margin" section for further comments on energy
efficiency costs.
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Operating expenses related to Cooper increased due in part to the
ratemaking treatment for Cooper capital improvements, as discussed in the
"Regulated Electric Gross Margin" section. Cooper capital improvement advances
are now expensed when incurred. MidAmerican Energy is recovering the Iowa
portion of these costs through the Cooper Tracker, while recovery in Illinois is
included in base rates. This change accounted for a $1.7 million increase in
nuclear operations costs compared to 1997. Excluding those costs, nuclear
operations expenses decreased $8.2 million for 1998 compared to 1997 due to an
extended outage at Quad Cities Station.
MidAmerican Energy continued its focus on customer service and reliability
during 1998. Further emphasis on customer service operations and
marketing-related efforts, resulted in increases in customer service costs, IT
consulting costs, advertising costs and other related expenses. Increases in
such expenses accounted for a majority of the remaining increase. The impact of
these items was partially offset by a decrease in employee benefits expenses.
Maintenance -
Maintenance expenses increased $9.8 million in 1998 compared to 1997. An
increase in maintenance costs at Quad Cities Station accounted for $8.0 million
of the total. Additionally, MidAmerican Energy incurred repair costs for storms
in June 1998, totaling $3.8 million, compared to $2.0 million in 1997 for costs
related to a snowstorm in October of that year.
Depreciation and Amortization -
The increase in 1998 expense compared to 1997 is due to additional
decommissioning funding for Quad Cities Station, an increase in utility plant
and the accelerated amortization of regulatory assets for MidAmerican Energy's
Illinois operations.
Property and Other Taxes -
Deregulation of the Illinois electric utility industry resulted in changes
in the way public utility taxes are assessed in Illinois. The changes resulted
in a decrease in MidAmerican Energy's tax expense for 1998 compared to 1997. One
of the taxes is now assessed directly on the energy consumer instead of through
the utility. Accordingly, MidAmerican Energy's electric revenues reflect an
equal reduction in 1998.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Revenues and Cost of Sales -
Revenues from nonregulated natural gas marketing operations decreased
$131.1 million in 1998 compared to 1997 due primarily to lower volumetric sales
associated with the expiration of wholesale gas contracts which were not
replaced. The decrease in sales volumes accounted for $99.8 million of the
decrease in revenues. In addition, a decrease in the average price per unit,
reflective of a lower cost of gas per unit, accounted for the remaining $31.3
million of the decrease. Beginning in May 1998, MidAmerican Energy began
providing gas for gas marketing contracts previously serviced by MHC's
nonregulated gas marketing subsidiaries. Cost of sales related to natural gas
marketing for 1998 reflects the decrease in sales and the average cost of gas
per unit. Total gross margin (total price less cost of gas) on nonregulated
natural gas sales was unchanged compared to 1997.
Other activities contributing to the increase in nonregulated revenues for
1998 relate to work for other utilities and work beyond the meter for customers.
In addition, the 1998 amount includes revenues
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of CBEC Railway, a subsidiary of MidAmerican Energy that operates rail services
on a section of railroad track it owns. MidAmerican Energy's revenues in 1998
and 1997 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 awards totaled
$4.3 million and $4.9 million in 1998 and 1997, respectively.
Other Nonregulated Operating Expenses -
Other operating expenses increased in 1998 compared to 1997 due to costs
related to work for other utilities, costs of work beyond the meter for
MidAmerican Energy customers, MidAmerican Energy's costs of appliance services
and costs of initiatives for MidAmerican Energy's new products and services in
preparation for deregulation.
Other operating expenses for 1998 reflect a decrease of approximately $5.7
million due to corporate administrative costs in 1997 which are no longer
incurred because of the absence of the oil and gas exploration and development
operations MHC sold in early 1997.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest Income-
In December 1997, MidAmerican Energy sold its billed accounts receivable. A
portion of the consideration for the sale was a subordinated note from the
purchaser. Interest income on that note caused the increase in 1998 compared to
1997. Refer to FINANCING ACTIVITIES, PLANS AND AVAILABILITY later in MD&A for
discussion of the sale.
Dividend Income -
Dividend income decreased for 1998 due to MidAmerican Capital's reduced
holdings of preferred stock.
Realized Gains and Losses on Securities, Net -
Net realized gains on securities for 1998 includes a $14.0 million pre-tax
gain on the sale of shares of McLeodUSA common stock. Realized gains on
securities in 1997 also includes an $8.0 million pre-tax gain on the sale of
shares of McLeodUSA common stock.
Other, Net -
Other, Net reflects MidAmerican Energy's discount on sold accounts
receivable, net of a subservicer fee charged to MidAmerican Energy Funding
Corporation for servicing the accounts. The discount is designed to cover the
expenses of MidAmerican Energy Funding Corporation, including bad debt expense,
subservicer fees, monthly administrative costs and interest. The discount is
recorded in Other, Net because it is not reflected in utility cost of services
for regulatory purposes. The discount, net of the subservicer fee, reduced
Other, Net by $7.0 million and $0.3 million in 1998 and 1997, respectively.
In September 1997, MidAmerican Energy received a $15 million cash payment
from Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by
MidAmerican Energy against NPPD. Approximately $12 million was refunded to
MidAmerican Energy's customers. The remaining amount
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was retained by MidAmerican Energy for recovery of litigation costs in the
lawsuit. Other, Net for 1997 reflects $2.2 million of pre-tax income for
recovery of litigation costs incurred in prior years.
Other, Net includes the recognition of deferred income from energy
efficiency programs totaling $0.2 million and $5.0 million for 1998 and 1997,
respectively. As discussed in the gross margin sections, MidAmerican Energy
started recovery of its remaining deferred energy efficiency costs in September
1997. Accordingly, carrying costs for, or return on, deferred balances are now
being collected from customers and are reflected in revenues.
Other, Net for 1997 reflects MidAmerican Energy's net loss on reacquired
long-term debt of $0.9 million and a $0.8 million gain related to its sale of
storage gas supplies.
Other, net for 1998 includes $4.7 million from the divestment of
nonregulated assets in the first quarter, including the sale of MHC's interest
in a financial management company, the sale of a commercial office building and
liquidation of a partnership interest concurrent with the sale of its commercial
property. MHC also recorded $2.1 million of income from an equity investment in
a venture capital fund.
Additionally, Other, net for 1998 includes a $2.7 million gain on the sale
of railcars and a $2.9 million gain on the sale of real estate. During 1997, MHC
sold all of the assets of its railcar repair services subsidiary and most of the
assets of its railcar leasing subsidiary and recorded pre-tax gains totaling
$10.0 million.
Fixed Charges and Preferred Dividends -
During 1998, MidAmerican Energy reduced its long-term debt through
maturities and refinancing, which resulted in a reduction in related interest
expense. Preferred dividends include net gains or losses on the reacquisition of
MidAmerican Energy preferred shares. Net losses on reacquisitions totaled $1.4
million for 1997.
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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 $121
million for March 12, 1999, through December 31, 1999. MHC's net cash from
continuing operations totaled $104 million for the period January 1, 1999,
through March 11, 1999, and $332 million and $388 million for the years 1998 and
1997, respectively.
INVESTING ACTIVITIES AND PLANS
Acquisition of MHC -
In conjunction with the merger transaction discussed in the "Company
Structure" section of MD&A, MidAmerican Funding paid $27.15 in cash for each
outstanding share of MHC common stock for a total of approximately $2.42 billion
in a merger pursuant to which MHC became a direct wholly owned subsidiary of
MidAmerican Funding.
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the period March 12, 1999, through December 31, 1999, utility
construction expenditures totaled $187 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, net of dividends.
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
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<PAGE>
$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.
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.
Nonregulated Capital Expenditures -
Nonregulated capital expenditures in both the MidAmerican Funding and MHC
1999 periods consist primarily of expenditures for a subsidiary which was
transferred to MidAmerican Energy Holdings through a dividend in mid-1999. In
total, the related capital expenditures were $21 million.
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 lines under "Purchase of Securities" and "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 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.
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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 December 31, 1999, MidAmerican
Energy had in place a $250 million commercial paper program which is supported
by a $250 million revolving credit facility. 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. In
March 2000, MidAmerican Energy's revolving credit facility was increased to $325
million.
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.
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 December 31, 1999, the
revolving cash balance was $57 million due to a decline in accounts receivable
available for sale. The amount outstanding under the subordinated note was $47
million at December 31, 1999. 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 December 31, 1999, $107.5 million of accounts
receivable, net of reserves, were sold under the agreement.
Other Financing Information -
As of December 31, 1999, MHC had lines of credit totaling $24 million to
provide for short-term financing needs, under which no debt was outstanding. In
February 2000, MHC increased its line of credit by $20 million.
As of December 31, 1999, 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 December
31, 1999, all of which will have matured 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 December 31, 1999.
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OPERATING ACTIVITIES AND OTHER MATTERS
Industry Evolution -
The utility industry continues to evolve into an increasingly competitive
environment. In virtually every region of the country, legislative and
regulatory actions are being taken which result in customers having more choices
in their energy decisions.
In the electric industry, the traditional vertical integration of
generation, delivery and marketing is being unbundled, with the generation and
marketing functions 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. While retail electric
competition is presently not permitted in Iowa, MidAmerican Energy's primary
market, legislation to do so was introduced in the Iowa legislature in the last
session. While this legislation has not passed, it is being considered again by
the Iowa legislature in 2000. Deregulation of the gas supply function related to
small volume customers is also being considered by the Iowa Utilities Board.
MidAmerican Energy is actively participating 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 increases
the benchmark for 2000 through 2004 to 8.5% above the 30-year Treasury bond
rate. The level above which sharing must occur for 1998 and 1999 is 11.21%.
Using the same 30-year Treasury bond average, the computed level of return would
be 14.21% for 2000 through 2004. The law allows MidAmerican Energy to mitigate
the sharing of earnings above the threshold return on common equity through
accelerated cost recognition.
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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 Iowa, a replacement of the prior utility property tax system, which was
supported by MidAmerican Energy, went into effect on January 1, 1999. With
resolution of the utility property tax issue, MidAmerican Energy is pursuing the
adoption of electric utility industry restructuring legislation in the 2000
legislative session.
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 SFAS
71 may no longer apply. SFAS 71 sets forth accounting principles for operations
that are regulated and meet certain criteria. For operations that meet the
criteria, SFAS 71 allows, among other things, the deferral of costs that would
otherwise be expensed when incurred. A majority of MidAmerican Energy's electric
and gas utility operations currently meet the criteria required by SFAS 71, but
its applicability is periodically reexamined. On December 16, 1997, MidAmerican
Energy's generation operations serving Illinois were no longer subject to the
provisions of SFAS 71 due to passage of industry restructuring legislation in
Illinois. Thus, in 1997 MidAmerican Energy was required to write off the
regulatory assets and liabilities from its balance sheet related to its Illinois
generation operations. The net amount of such write-offs was not material. If
other 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 December 31, 1999,
MidAmerican Energy had $279 million of regulatory assets on its Consolidated
Balance Sheet.
Energy Efficiency -
MidAmerican Energy's regulatory assets as of December 31, 1999, included
$46.5 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 -
Through several steps from mid-1997 to the end of 1998, electric prices for
Iowa industrial customers were reduced by an amount which had a $6 million
annual impact on revenues, and electric prices for Iowa commercial customers
were reduced by an amount which had a $4 million annual impact
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on revenues. The reductions were achieved through a retail access pilot project,
negotiated individual electric contracts and a $1.5 million tariffed rate
reduction for certain non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as
well as prices. The contracts range in length from five to ten years, and some
have price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 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 a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, 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%. On April 14, 1999, the Iowa Utilities Board approved,
subject to additional refund, MidAmerican Energy's calculation of the 1998
return on common equity. During the second quarter of 1999, MidAmerican Energy
credited $2.2 million to its Iowa non-contract customers related to the return
calculation for 1998. 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. In 1999, MidAmerican Energy accrued $15.0 million for customer
credits relating to 1999 operations.
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 December 31, 1999, 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 (4)(b) of Notes to Consolidated Financial Statements for
further discussion of MidAmerican Energy's environmental activities related to
manufactured gas plant sites and cost recovery.
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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.
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.
Based on data to be obtained from monitors located throughout the states, the
EPA will make a determination of whether the states have any 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 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. The EPA's appeal of the court's ruling to
the full panel of the U.S. District Court of Appeals for the District of
Columbia Circuit was denied. 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'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 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 would 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.
In December 1997, negotiators from more than 150 nations met in Kyoto,
Japan to negotiate an international agreement designed to address global climate
change impacts by attempting to reduce so-called greenhouse gas emissions. Some
scientists contend that these gases build up in the earth's atmosphere and cause
global temperatures to rise. The primary target of these emissions is carbon
dioxide which is formed by, among other things, the combustion of fossil fuels.
The agreement currently calls for the United States to reduce its emissions of
carbon dioxide and other greenhouse gases to 7% below 1990 levels in the
2008-2012 time frame. The United States became a signatory to the agreement on
November 12, 1998. In order for the agreement to become binding upon the United
States, ratification by the U.S. Senate is necessary. The cost to the utility
industry in general, and to MidAmerican Energy, of reducing its carbon dioxide
emissions levels by 7% below 1990 levels would depend on available technology at
the time, but could be material.
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.
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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
Power Pool 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 Power Pool.
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 fiscal years beginning after June 15,
2000. 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. To manage the price
volatility relating to these exposures, MidAmerican Funding enters into various
financial derivative instruments. Senior management provides the overall
direction, structure, conduct and control of MidAmerican Funding's risk
management activities, including the use of financial derivative instruments,
authorization and communication of risk management policies and procedures,
strategic hedging program guidelines, appropriate market and credit risk limits,
and appropriate systems for recording, monitoring and reporting the results of
transactional and risk management activities.
MidAmerican Funding uses hedge accounting for derivative instruments
pertaining to its natural gas purchasing and preferred stock investing
operations.
Commodity Price Risk -
Under the current regulatory framework, MidAmerican Energy is allowed to
recover in revenues the cost of gas sold from all of its regulated gas customers
through a purchased gas adjustment clause. Because the majority of MidAmerican
Energy's firm natural gas supply contracts contain pricing provisions based on a
daily or monthly market index, MidAmerican Energy's regulated gas customers,
although ensured of the availability of gas supplies, retain the risk associated
with market price volatility.
MidAmerican Energy enters into natural gas futures and swap agreements to
mitigate a portion of the market risk retained by its regulated gas customers
through the purchased gas adjustment clause. These financial derivative
activities are recorded as hedge accounting transactions, with net amounts
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exchanged or accrued under swap agreements and realized gains or losses on
futures contracts included in the cost of gas sold and recovered in revenues
from regulated gas customers.
MidAmerican Energy also derives revenues from nonregulated sales of natural
gas. Pricing provisions are individually negotiated with these customers and may
include fixed prices or prices based on a daily or monthly market index.
MidAmerican Energy enters into natural gas futures and swap agreements to offset
the financial impact of variations in natural gas commodity prices for physical
delivery to nonregulated customers. These financial derivative activities are
also recorded as hedge accounting transactions. MidAmerican Energy had the
following financial derivative instruments for its natural gas operations as of
December 31:
1999 1998
---- ----
Futures Contracts:
Net Contract Volumes- Long 2,700,000 MMBtu 6,970,000 MMBtu
Net Contract Volumes - Short 3,250,000 MMBtu 7,320,000 MMBtu
Unrealized Loss, in thousands $ (410) $(1,815)
Swap Contracts:
Pay Fixed, Receive Variable Volumes 4,343,065 MMBtu 16,322,181 MMBtu
Receive Fixed, Pay Variable Volumes 2,754,094 MMBtu -
Pay Variable, Receive Variable Volumes 78,423,283 MMBtu -
Unrealized Loss, in thousands $(1,576) $(2,896)
A $0.05 increase in underlying natural gas prices would increase unrealized
losses on the futures contracts held at December 31, 1999 by approximately
$28,000 and would reduce unrealized losses on the above swap contracts by
approximately $79,000.
Interest Rate Risk -
MidAmerican Capital is exposed to market value risk from changes in
interest rates on its preferred stock investments. MidAmerican Capital reviews
the interest rate sensitivity of these securities and purchases put options and
enters into "short" positions in futures contracts on U.S. Treasury securities
for other than trading purposes in order to reduce related interest rate risk.
MidAmerican Capital's intent is to manage the risk arising from changes in the
general level of interest rates with a change in market value of the hedging
instruments. MidAmerican Capital does not purchase or sell hedging instruments
for speculative purposes.
The following table demonstrates the impact of varying interest rate
changes to the market value at December 31, 1999 (amounts in thousands)
Total Change in
Preferred Futures and Portfolio Market Value
Stock Market Options Market Market of Total
Value Value Value Portfolio
Interest Rate Change:
200 basis pt decrease $84,192 $ 1 $84,193 $8,581
100 basis pt decrease 78,692 152 78,844 3,231
Current interest rates 72,983 2,629 75,612 -
100 basis pt increase 67,461 7,866 75,327 (286)
200 basis pt increase 62,387 12,367 74,754 (859)
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The number of hedging instrument contracts entered into, or their notional
amount, is dependent on, among other things, the duration of the portfolio,
specific call provisions of each fixed rate preferred stock, the slope of the
Treasury yield curve, the expected volatility of Treasury yields and the cost of
using futures and/or options. The notional amount of MidAmerican Capital's
hedging instruments at December 31, 1999 and 1998, respectively, are set forth
in the following table (dollars in thousands):
1999 1998
Contracts Notional Amt. Contracts Notional Amt.
--------- ------------- --------- -------------
Put Options 500 $45,469 697 $89,063
Futures Contracts - - 33 4,217
--- ------- --- -------
Total 500 $45,469 730 $93,280
=== ======= === =======
The notional amounts of these hedging instruments do not represent the
amounts exchanged by the parties and are not a measure of MidAmerican Capital's
financial exposure through its use of these hedging instruments. MidAmerican
Capital is exposed only to the initial purchase price of the put options and to
changes in the market value of the futures contracts.
At December 31, 1999, MidAmerican Funding had fixed-rate long-term debt and
mandatorily redeemable preferred securities and preferred securities of
subsidiary trust totaling $1,670 million with a fair value of $1,581 million.
These instruments are fixed-rate and therefore do not expose MidAmerican Funding
to the risk of earnings loss due to changes in market interest rates. However,
the fair value of these instruments would decrease by approximately $64 million
if interest rates were to increase by 10% from their levels at December 31,
1999. In general, such a decrease in fair value would impact earnings and cash
flows only if MidAmerican Funding were to reacquire all or a portion of these
instruments prior to their maturity.
At December 31, 1999, MidAmerican Funding had long-term floating rate
obligations totaling $120 million and short-term floating rate obligations
totaling $204 million which expose the company to risk of increased interest
expense in the event of increases in short-term interest rates. This market risk
in not hedged. The carrying value of the long-term and short-term floating rate
obligations at December 31, 1999 approximated fair value. If the floating
interest rates were to increase by 10% from December 31, 1999 levels,
MidAmerican Funding's interest expense for the floating rate obligations would
increase by approximately $1.8 million annually based on December 31, 1999
principal balances.
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MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
-------------- --------------------------------------------
MARCH 12, 1999 JAN. 1, 1999 YEAR YEAR
THROUGH THROUGH ENDED ENDED
DECEMBER 31, MARCH 11, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated electric ........................ $ 969,739 $ 208,963 $ 1,169,810 $ 1,126,300
Regulated gas ............................. 315,238 139,564 429,870 536,306
Nonregulated .............................. 148,069 34,539 176,244 306,931
----------- ----------- ----------- -----------
1,433,046 383,066 1,775,924 1,969,537
----------- ----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ....... 179,915 40,232 225,736 235,760
Cost of gas sold ........................ 179,048 79,910 243,451 346,016
Other operating expenses ................ 348,440 93,940 470,328 438,007
Maintenance ............................. 97,787 18,302 110,387 100,543
Depreciation and amortization ........... 151,130 39,417 182,211 170,540
Property and other taxes ................ 61,259 15,758 87,276 90,651
----------- ----------- ----------- -----------
1,017,579 287,559 1,319,389 1,381,517
----------- ----------- ----------- -----------
Nonregulated:
Cost of sales ........................... 131,093 30,188 144,417 276,711
Other ................................... 57,241 6,421 40,706 34,583
----------- ----------- ----------- -----------
188,334 36,609 185,123 311,294
----------- ----------- ----------- -----------
Total operating expenses ................ 1,205,913 324,168 1,504,512 1,692,811
----------- ----------- ----------- -----------
OPERATING INCOME .......................... 227,133 58,898 271,412 276,726
----------- ----------- ----------- -----------
NON-OPERATING INCOME
Interest income ........................... 18,034 1,411 9,262 5,318
Dividend income ........................... 4,255 1,331 10,251 13,792
Realized gains and losses
on securities, net ...................... 77,983 15,214 11,204 7,798
Other, net ................................ 2,325 (18,133) 5,096 15,891
----------- ----------- ----------- -----------
102,597 (177) 35,813 42,799
----------- ----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ................ 93,533 14,814 80,908 89,898
Other interest expense .................... 7,536 3,145 12,682 10,034
Preferred dividends of subsidiaries ....... 9,561 2,831 12,932 14,468
Allowance for borrowed funds .............. (1,022) (235) (3,377) (2,597)
----------- ----------- ----------- -----------
109,608 20,555 103,145 111,803
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................... 220,122 38,166 204,080 207,722
INCOME TAXES .............................. 96,045 21,377 76,926 68,390
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ......... 124,077 16,789 127,154 139,332
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS
Income (Loss) from operations
(net of income taxes) ................... 11,258 421 4,164 (118)
Loss on disposal (net of income taxes) .... -- -- -- (4,110)
----------- ----------- ----------- -----------
11,258 421 4,164 (4,228)
----------- ----------- ----------- -----------
NET INCOME ................................ $ 135,335 $ 17,210 $ 131,318 $ 135,104
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-50-
<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
-------------- ------------------------------------------
MARCH 12, 1999 JAN. 1, 1999 YEAR YEAR
THROUGH THROUGH ENDED ENDED
DECEMBER 31, MARCH 11, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1997
-------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME .......................................... $ 135,335 $ 17,210 $ 131,318 $135,104
--------- -------- --------- --------
OTHER COMPREHENSIVE INCOME, NET
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period ..... 77,942 79,236 (14,743) 223,927
Less reclassification adjustment for realized gains
(losses) reflected in net income during period .. 77,983 15,214 11,204 7,787
--------- -------- --------- --------
(41) 64,022 (25,947) 216,140
Income tax expense (benefit) ........................ (14) 22,408 (9,002) 75,567
--------- -------- --------- --------
Other comprehensive income (loss), net .............. (27) 41,614 (16,945) 140,573
--------- -------- --------- --------
COMPREHENSIVE INCOME ................................ $ 135,308 $ 58,824 $ 114,373 $275,677
========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
-51-
<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
1999 1998
----------- -------------
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric .................................................. $4,209,281 $4,255,058
Gas ....................................................... 809,112 786,169
---------- ----------
5,018,393 5,041,227
Less accumulated depreciation and amortization ............ 2,546,516 2,426,564
---------- ----------
2,471,877 2,614,663
Construction work in progress ............................. 33,739 26,369
---------- ----------
2,505,616 2,641,032
---------- ----------
POWER PURCHASE CONTRACT ................................... -- 150,401
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ................................. 6,235 6,107
Receivables, less reserves of $469 and $503, respectively . 215,361 181,817
Inventories ............................................... 82,823 94,771
Prepaid taxes ............................................. 22,889 22,889
Other ..................................................... 12,301 17,541
---------- ----------
339,609 323,125
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ................ 519,201 749,508
INVESTMENT IN DISCONTINUED OPERATIONS ..................... -- 43,907
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET .... 1,482,992 12,552
OTHER ASSETS .............................................. 347,935 323,811
---------- ----------
TOTAL ASSETS .............................................. $5,195,353 $4,244,336
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity ........................................... $1,800,416 $1,200,950
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 ................... 101,598 100,000
Long-term debt (excluding current portion) ................ 1,508,394 939,553
---------- ----------
3,492,167 2,322,262
---------- ----------
CURRENT LIABILITIES
Notes payable ............................................. 204,000 339,826
Current portion of long-term debt ......................... 134,082 105,995
Current portion of power purchase contract ................ 15,767 15,034
Accounts payable .......................................... 165,915 167,348
Taxes accrued ............................................. 110,592 107,332
Interest accrued .......................................... 29,555 15,533
Other ..................................................... 42,392 51,316
---------- ----------
702,303 802,384
---------- ----------
OTHER LIABILITIES
Power purchase contract ................................... 52,282 68,093
Deferred income taxes ..................................... 520,088 733,448
Investment tax credit ..................................... 71,757 77,421
Other ..................................................... 356,756 240,728
---------- ----------
1,000,883 1,119,690
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ...................... $5,195,353 $4,244,336
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-52-
<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
-------------- --------------------------------------------
MARCH 12, 1999 JAN. 1, 1999 YEAR YEAR
THROUGH THROUGH ENDED ENDED
DECEMBER 31, MARCH 11, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 135,335 $ 17,210 $ 131,318 $ 135,104
Adjustments to reconcile net income to net cash provided:
(Income)/loss from discontinued operations ............. (11,258) (421) (4,164) 4,228
Depreciation and amortization .......................... 181,763 39,865 200,920 197,454
Net decrease in deferred income taxes and investment
tax credit, net ..................................... (114,775) (2,327) (24,800) (71,191)
Amortization of other assets and liabilities ........... 29,272 12,035 40,264 33,761
Gain on sale of securities, assets and other investments (78,906) (15,478) (24,629) (9,996)
Other-than-temporary decline in value of investments ... -- -- 273 3,795
Cash inflows (outflows) of accounts receivable
securitization ....................................... (12,877) 10,000 (10,000) 70,000
Impact of changes in working capital, net of effects
from discontinued operations ........................ (25,637) 38,190 42,046 32,973
Other .................................................. 18,078 4,878 (18,845) (15,904)
----------- ----------- ----------- -----------
Net cash provided by continuing operations ........... 120,995 103,952 332,383 380,224
Net cash provided by discontinued operations ......... 28,967 (429) 6,754 8,189
----------- ----------- ----------- -----------
Net cash provided by operating activities ............ 149,962 103,523 339,137 388,413
----------- ----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................ (186,651) (16,924) (193,354) (166,932)
Quad Cities Nuclear Power Station decommissioning
trust fund ............................................. (8,181) (2,189) (11,409) (9,819)
Deferred energy efficiency expenditures .................. -- -- -- (12,258)
Nonregulated capital expenditures ........................ (16,295) (6,058) (45,466) (14,066)
Purchase of securities
Available for sale ..................................... (110,785) (12,307) (142,963) (159,190)
Held to maturity ....................................... -- -- (361) (580)
Proceeds from sale of securities
Available for sale ..................................... 517,127 72,468 213,563 180,570
Held to maturity ....................................... -- 2,984 3,896 320
Proceeds from sale of assets and other investments ....... 1,964 1,097 38,162 57,433
Notes receivable from affiliate .......................... (122,565) -- -- --
Purchase of MHC, net of cash received .................... (2,429,532) -- -- --
Proceeds from sales of discontinued operations,
net of liabilities settled ............................. -- -- -- 193,342
Investments in discontinued operations ................... (7,751) -- (37,990) --
Other investing activities, net .......................... 5,553 (7,894) (3,618) (1,360)
----------- ----------- ----------- -----------
Net cash provided by (used in) continuing operations ... (2,357,116) 31,177 (179,540) 67,460
Net cash provided by (used in) discontinued operations . (35,079) (1,056) (29,757) (1,517)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities .... (2,392,195) 30,121 (209,297) 65,943
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
-53-
<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
-------------- ------------------------------------------
MARCH 12, 1999 JAN. 1, 1999 YEAR YEAR
THROUGH THROUGH ENDED ENDED
DECEMBER 31, MARCH 11, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid .................................... $ -- $ (30,359) $(113,144) $(117,605)
Issuance of long-term debt, net of
issuance costs and rate swap ........................... 706,525 -- 158,414 --
Retirement of long-term debt, including reacquisition cost (105,868) (127) (302,477) (122,300)
Reacquisition of preferred shares ........................ -- -- (4) (6)
Reacquisition of common shares ........................... -- (50,629) (101,765) (96,618)
Equity contribution from parent .......................... 1,727,651 -- -- --
Increase in MidAmerican Capital Company
unsecured revolving credit facility ................... -- -- 51,000 7,900
Repayment of MidAmerican Capital Company unsecured
revolving credit facility ............................. -- (34,600) (16,400) (182,400)
Net increase (decrease) in notes payable ................. (85,952) (15,274) 167,172 (23,936)
----------- --------- --------- ----------
Net cash used in continuing operations ................ 2,242,356 (130,989) (157,204) (534,965)
Net cash provided by (used in) discontinued operations 12,661 1,719 17,014 (6,602)
----------- --------- --------- ----------
Net cash provided by (used in) financing activities ... 2,255,017 (129,270) (140,190) (541,567)
----------- --------- --------- ----------
NET (INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS
OF DISCONTINUED OPERATIONS ............................ (6,549) (234) 5,989 (70)
----------- --------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 6,235 4,140 (4,361) (87,281)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... -- 6,107 10,468 97,749
----------- --------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 6,235 $ 10,247 $ 6,107 $ 10,468
=========== ========= ========= ==========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ................ $ 84,753 $ 15,458 $ 90,801 $ 96,805
=========== ========= ========= ==========
Income taxes paid ........................................ $ 203,192 $ 8,401 $ 100,917 $ 130,521
=========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-54-
<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-------------------------------------------
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
1999 1998
-------------------- -------------------
<S> <C> <C> <C> <C>
MEMBER'S EQUITY
Paid in Capital....................................... $1,670,866 $ 724,778
Retained earnings..................................... 129,577 355,000
Accumulated other comprehensive income (loss), net.... (27) 121,172
---------- ----------
1,800,416 51.6% 1,200,950 51.7%
---------- ----- ---------- -----
MIDAMERICAN ENERGY PREFERRED SECURITIES
(100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding not
subject to mandatory redemption:
$3.30 Series, 49,451 shares....................... 4,945 4,945
$3.75 Series, 38,305 shares....................... 3,831 3,831
$3.90 Series, 32,630 shares....................... 3,263 3,263
$4.20 Series, 47,362 shares....................... 4,736 4,736
$4.35 Series, 49,945 shares....................... 4,994 4,994
$4.40 Series, 50,000 shares....................... 5,000 5,000
$4.80 Series, 49,898 shares....................... 4,990 4,990
--------- ----------
31,759 0.9% 31,759 1.4%
--------- ----- ---------- -----
Cumulative shares outstanding;
subject to mandatory redemption:
$5.25 Series, 100,000 shares.................... 10,000 10,000
$7.80 Series, 400,000 shares.................... 40,000 40,000
---------- ---------
50,000 1.4% 50,000 2.1%
---------- ----- --------- -----
MIDAMERICAN ENERGY-OBLIGATED PREFERRED SECURITIES
MidAmerican Energy-obligated mandatorily redeemable
cumulative preferred securities of subsidiary
trust holding solely MidAmerican Energy
junior subordinated debentures:
7.98% Series, 4,000,000 shares................... 101,598 2.9% 100,000 4.3%
--------- ----- ---------- -----
LONG-TERM DEBT
MidAmerican Energy mortgage bonds:
6% Series, due 2000................................. - 35,000
6.75% Series, due 2000.............................. - 75,000
7.125% Series, due 2003............................. 100,000 100,000
7.70% Series, due 2004.............................. 55,630 55,630
7% Series, due 2005................................. 90,500 90,500
7.375% Series, due 2008............................. 75,000 75,000
7.45% Series, due 2023.............................. 6,940 6,940
6.95% Series, due 2025.............................. 12,500 12,500
MidAmerican Energy pollution
control revenue obligations:
5.75% Series, due periodically through 2003....... 7,200 7,704
6.7% Series, due 2003.............................. 1,000 1,000
6.1% Series, due 2007.............................. 1,000 1,000
5.95% Series, due 2023
(secured by general mortgage bonds)............. 29,030 29,030
</TABLE>
The accompanying notes are an integral part of these statements.
-55-
<PAGE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-------------------------------------------
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
1999 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017, 3.95% and 3.7%, respectively... $ 37,600 $ 37,600
Due 2023 (secured by general mortgage bonds,
3.95% and 3.7%, respectively)................... 28,295 28,295
Due 2023, 3.95% and 3.7%, respectively............ 6,850 6,850
Due 2024, 3.95% and 3.7%, respectively............ 34,900 34,900
Due 2025, 3.95% and 3.7%, respectively............ 12,750 12,750
MidAmerican Energy notes:
8.75% Series, due 2002............................ 240 240
6.5% Series, due 2001............................. 100,000 100,000
6.375% Series, due 2006........................... 160,000 160,000
Obligation under capital lease........................ 1,698 1,539
Unamortized debt premium and discount, net............ (1,495) (1,925)
--------- ---------
Total utility................................... 759,638 21.8% 869,553 37.5%
--------- ------ --------- ------
Nonregulated subsidiaries notes:
8.52% Series, due 2000 through 2002............... 46,667 1.3% 70,000 3.0%
--------- ------ --------- ------
MidAmerican Funding Parent Debt
5.85% Senior Secured Notes due 2001............... 200,000 -
6.339% Senior Secured Notes Due 2009.............. 175,000 -
6.927% Senior Secured Notes Due 2029.............. 325,000
Other............................................. 2,089 -
---------
Total MidAmerican Funding Parent................ 702,089 20.1% - -
--------- ------ -------- ------
1,508,394 43.2% 939,553 40.5%
---------- ------ -------- ------
TOTAL CAPITALIZATION.................................. $3,492,167 100.0% $2,322,262 100.0%
========== ====== ========== ======
</TABLE>
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
-------------- ------------------------------------------
MARCH 12, 1999 JAN. 1, 1999 YEAR YEAR
THROUGH THROUGH ENDED ENDED
DECEMBER 31, MARCH 11, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BEGINNING OF YEAR...................... $ - $355,000 $409,296 $440,971
-------- -------- -------- --------
NET INCOME............................. 135,335 17,210 131,318 135,104
-------- -------- -------- --------
DEDUCT (ADD):
Repurchase of common shares............ - 33,134 72,470 49,174
Dividends declared on common shares.... - 30,359 113,144 117,605
Distribution of subsidiary to parent... 5,758 - - -
-------- -------- -------- --------
5,758 63,493 185,614 166,779
-------- -------- -------- --------
END OF YEAR............................ $129,577 $308,717 $355,000 $409,296
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-56-
<PAGE>
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) COMPANY STRUCTURE:
MidAmerican Funding, LLC 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., a public utility holding
company. MHC's principal subsidiary is MidAmerican Energy Company, a public
utility with electric and natural gas operations. Other significant wholly-owned
subsidiaries of MHC include MidAmerican Capital Company, Midwest Capital Group,
Inc. and MidAmerican Services Company.
The current corporate structure is the result of a merger transaction
completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings
Company) and CalEnergy Company, Inc. CalEnergy, through a reincorporation
transaction, was renamed MidAmerican Energy Holdings Company. MidAmerican
Holdings is an exempt public utility holding company headquartered in Des
Moines, Iowa.
In conjunction with the transaction, MidAmerican Funding paid $27.15 in
cash for each outstanding share of MHC common stock for a total of approximately
$2.42 billion in a merger pursuant to which MHC became a direct wholly-owned
subsidiary of MidAmerican Funding. 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; however, MidAmerican Funding
does not anticipate any material changes based on currently available
information. MidAmerican Funding recorded the estimated excess of cost over fair
value of net assets acquired of approximately $1.5 billion which is being
amortized using the straight-line method over a 40 year period.
Unaudited pro forma consolidated revenue and net income of MidAmerican
Funding and MHC for the twelve months ended December 31, 1999 and 1998, as if
the acquisition had occurred at the beginning of the year after giving effect to
pro forma adjustments related to the acquisition, including the senior secured
notes and bonds, were $1.82 billion and $157.7 million respectively, compared to
$1.78 billion and $78.8 million respectively, for 1998.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include MidAmerican
Funding and its wholly owned subsidiaries. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Certain classification of amounts for 1999 are different than that of prior
years. Accordingly historical amounts have been reclassified. Amounts related to
MidAmerican Realty are reflected as discontinued operations (refer to Note 9).
All significant intercompany transactions have been eliminated.
-57-
<PAGE>
(C) 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 (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet criteria set
forth in SFAS 71. 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. The majority of MidAmerican Energy's
electric and gas utility operations currently meet the criteria of SFAS 71, but
its applicability is periodically reexamined. On December 16, 1997, MidAmerican
Energy's generation operations serving Illinois were no longer subject to the
provisions of SFAS 71 due to passage of industry restructuring legislation in
Illinois. Thus, in 1997, MidAmerican Energy was required to write off the
regulatory assets and liabilities from its balance sheet related to its Illinois
generation operations. The net amount of these write-offs was not material. If
other 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. The following regulatory
assets, primarily included in Other Assets in the Consolidated Balance Sheets,
represent probable future revenue to MidAmerican Energy because these costs are
expected to be recovered in charges to utility customers (in thousands):
<TABLE>
<CAPTION>
Weighted Average MidAmerican MHC
Future Recovery Funding (Predecessor)
Period 1999 1998
---------------- ----------- -------------
<S> <C> <C> <C>
Deferred income taxes................. 13 years $140,658 $148,036
Energy efficiency costs............... 3 years 46,514 74,509
Debt refinancing costs................ 6 years 34,650 40,233
Nuclear generation assets............. 6 years 19,581 -
Environmental costs................... 10 years 27,837 23,427
Enrichment facilities decommissioning. 6 years 6,953 8,659
Unamortized costs of retired plant.... 1 year 1,303 3,537
Other................................. Various 1,261 7,088
-------- --------
Total.......................... $278,757 $305,489
======== ========
</TABLE>
A return is generally not earned on the regulatory assets in setting rates
due to the fact that a cash outlay was not required for amounts listed as income
taxes, environmental costs and enrichment facilities decommissioning. The
amortization of the assets is recoverable over periods shown above.
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
Energy records unbilled revenues representing the estimated amount customers
will be billed for services rendered between the meter-reading dates in a
particular month and the end of that month. Accrued unbilled revenues were $93.4
million and $79.8 million at December 31, 1999 and 1998, respectively, and are
included in Receivables on the Consolidated Balance Sheets.
-58-
<PAGE>
MidAmerican Energy's Illinois and South Dakota jurisdictional sales, or
approximately 11% of total retail electric sales, and all of its retail gas
sales are subject to adjustment clauses. These clauses allow MidAmerican Energy
to adjust the amounts charged for electric and gas service as the costs of gas,
fuel for generation or purchased power change. The costs recovered in revenues
through use of the adjustment clauses are charged to expense in the same period.
(E) DEPRECIATION AND AMORTIZATION:
MidAmerican Energy's provisions for depreciation and amortization for its
utility operations are based on straight-line composite rates. The average
depreciation and amortization rates for the years ended December 31 were as
follows:
MidAmerican MHC (Predecessor)
Funding -----------------
1999 1998 1997
----------- ---- ----
Electric... 4.0% 3.9% 3.8%
Gas .... 3.5% 3.4% 3.4%
Utility plant is stated at original cost which includes overhead costs,
administrative costs and an allowance for funds used during construction.
The cost of repairs and minor replacements is charged to maintenance
expense. Property additions and major property replacements are charged to plant
accounts. The cost of depreciable units of utility plant retired or disposed of
in the normal course of business is eliminated from the utility plant accounts
and such cost, plus net removal cost, is charged to accumulated depreciation.
An allowance for the estimated annual decommissioning costs of the Quad
Cities Nuclear Power Station equal to the level of funding is included in
depreciation expense. See Note 4(e) for additional information regarding
decommissioning costs.
(F) INVESTMENTS AND NONREGULATED PROPERTY, NET:
Investments, managed primarily through MidAmerican Funding's nonregulated
subsidiaries, include the following amounts as of December 31 (in thousands):
MidAmerican MHC
Funding (Predecessor)
1999 1998
----------- -----------
Marketable securities................. $ 84,652 $393,554
Nuclear decommissioning trust fund.... 141,646 116,973
Notes with parent..................... 122,565 -
Corporate owned life insurance........ 64,836 43,945
Equipment leases...................... 48,834 72,068
Energy projects....................... 1,997 14,154
Special-purpose funds................. 4,262 9,069
Real estate........................... 7,438 42,413
Coal transportation property.......... 11,792 12,538
Communications........................ 7,431 19,750
Security.............................. 722 849
Other................................. 23,026 24,195
-------- --------
Total............................ $519,201 $749,508
======== ========
-59-
<PAGE>
Marketable securities generally consist of preferred stocks, common stocks
and mutual funds held by MidAmerican Capital. Investments in marketable
securities classified as available-for-sale are reported at fair value (see Note
(12)) with net unrealized gains and losses reported as a net of tax amount in
Member's Equity until realized. Investments in marketable securities that are
classified as held-to-maturity are reported at amortized cost. An
other-than-temporary decline in the value of a marketable security is recognized
through a write-down of the investment to earnings.
Equipment leases, which are held by MidAmerican Capital, are comprised of
equity financing provided for five commercial passenger aircraft leased to major
United States airlines and a seven percent undivided interest in an electric
generating station, which is leased to a utility located in Arizona. The base
lease terms vary from 20 years to 30 years. MidAmerican Capital's initial equity
investment in the aircraft represented 20% - 34% of the purchase price; the
remaining amount was furnished by third-party non-recourse lenders. MidAmerican
Capital has also invested in two safe harbor lease transactions involving subway
cars with a metropolitan transit authority located on the east coast and ferry
boats to entities engaged in providing recreational boat tours. The base lease
terms vary from 13.5 years to 27 years. The investments are exposed to the
credit risk of the lessees.
Notes with parent at December 31, 1999, are comprised of the unsecured
outstanding balances of a note with a subsidiary of MHC carrying interest of
5.7% annually and a $100 million revolving credit arrangement with MHC carrying
interest at the 30-day LIBOR rate plus 25 basis points. Both balances are due on
demand.
Investments held by the nuclear decommissioning trust fund for the Quad
Cities Station units are classified as available-for-sale and are reported at
fair value with net unrealized gains and losses reported as adjustments to the
accumulated provision for nuclear decommissioning.
Energy projects consist of investments in solar electric generating
facilities, a hydroelectric development company, energy marketing assets and a
gas-fired cogeneration plant. The investments are supported by long-term sales
contracts to electric utilities primarily based on market price.
Investment in real estate is comprised primarily of a 1,920 acre planned
residential and commercial development community located in the southeast corner
of South Dakota. As of December 31, 1999, 28.5% of the development available for
sale had been sold.
The investment in corporate owned life insurance represents the cash value
of life insurance policies on certain key executives.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
MidAmerican Funding considers all cash and highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
-60-
<PAGE>
Net cash provided (used) from changes in working capital, net of effects
from discontinued operations was as follows (in thousands):
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- ------------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Receivables............... $(35,976) $ 5,310 $35,654 $34,544
Inventories............... (11,753) 23,701 (8,680) 4,773
Prepaid taxes............. - - (22,889) -
Other current assets...... (158) 5,398 911 (7,421)
Accounts payable.......... 24,560 (25,994) 21,493 (23,950)
Taxes accrued............. 7,956 10,410 14,703 10,375
Interest accrued.......... 13,098 923 (6,821) (6,158)
Other current liabilities. (23,364) 18,442 7,675 20,810
-------- -------- ------- -------
Total............... $(25,637) $38,190 $42,046 $32,973
======== ======= ======= =======
</TABLE>
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Under a long-term power purchase contract with Nebraska Public Power
District, expiring in 2004, MidAmerican Energy purchases one-half of the output
of the 778-megawatt Cooper Nuclear Station. The Consolidated Balance Sheets
include a liability for MidAmerican Energy's fixed obligation to pay 50% of the
Nebraska Public Power District's Nuclear Facility Revenue Bonds and other fixed
liabilities.
Cooper capital improvement costs prior to 1997, including carrying costs,
were deferred in accordance with then applicable rate regulation and are being
amortized and recovered in rates over either a five-year period or the term of
the power purchase contract. Beginning July 11, 1997, the Iowa portion of
capital improvement costs is recovered currently from customers and is expensed
as incurred. MidAmerican Energy began charging the remaining Cooper capital
improvement costs to expense for jurisdictions other than Iowa as incurred in
January 1997.
The fuel cost portion of the power purchase contract is included in Cost of
Fuel, Energy and Capacity on the Consolidated Statements of Income. All other
costs MidAmerican Energy incurs in relation to its long-term power purchase
contract with Nebraska Public Power District are included in Other Operating
Expenses on the Consolidated Statements of Income.
See Notes 4(d), 4(e) and 4(f) for additional information regarding the
power purchase contract.
(I) ACCOUNTING FOR DERIVATIVES:
1) Preferred Stock Hedge Instruments:
MidAmerican Funding is exposed to market value risk from changes in
interest rates for fixed rate sinking fund preferred and perpetual preferred
stocks (fixed rate preferred stocks) included in Investments and Nonregulated
Property, Net on the Consolidated Balance Sheets. MidAmerican Funding reviews
the interest rate sensitivity of these securities and purchases put options on
U.S. Treasury securities (put options) to reduce interest rate risk on preferred
stocks. MidAmerican Funding does not purchase or sell put options for
speculative purposes. MidAmerican Funding's intent is to substantially offset
any change in market value of the fixed rate
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preferred stocks due to a change in interest rates with a change in market value
of the put options. Because the put options are purchased options, MidAmerican
Funding is at risk for the premiums paid for the options. Aggregate premiums
paid for options outstanding at December 31, 1999 and 1998 were $1.8 million and
$3.6 million respectively.
The preferred stocks are publicly traded securities and, as such, changes
in their fair value are reported, net of income taxes, as a part of accumulated
other comprehensive income, net in Member's Equity. Unrealized gains and losses
on the associated put options are included in the determination of the fair
value of the preferred stocks. The fair value of the put options, including
unrealized gains and losses, included in the determination of the fair value of
the preferred securities as of December 31, 1999 and 1998, was $2.6 million and
$2.9 million, respectively. Realized gains and losses on the put options are
included in Realized Gains and Losses on Securities, Net in the Consolidated
Statements of Income in the period the underlying hedged fixed rate preferred
stocks are sold. At December 31, 1999 and 1998, put options were outstanding
with a notional value of $45.5 million and $89.1 million, respectively.
2) Gas Futures Contracts and Swaps:
MidAmerican Energy uses gas futures contracts and swap contracts to reduce
the volatility in the price of natural gas purchased to meet the needs of its
customers. Investments in natural gas futures contracts, which total $0.6
million and $0.3 million as of December 31, 1999 and 1998, respectively, are
included in Receivables on the Consolidated Balance Sheets. Gains and losses on
gas futures contracts that qualify for hedge accounting are deferred and
reflected as adjustments to the carrying value of the hedged item or included in
Other Assets on the Consolidated Balance Sheets until the underlying physical
transaction is recorded if the instrument is used to hedge an anticipated future
transaction. The net gain or loss on gas futures contracts is included in the
determination of income in the same period as the expense for the physical
delivery of the natural gas. Realized gains and losses on gas futures contracts
and the net amounts exchanged or accrued under the natural gas swap contracts
are included in Cost of Gas Sold or Nonregulated Costs of Sales consistent with
the expense for the physical commodity. Deferred net losses related to
MidAmerican Energy's gas futures contracts are $(0.4) million and $(1.9) million
as of December 31, 1999 and 1998, respectively.
MidAmerican Energy periodically evaluates the effectiveness of its natural
gas hedging programs. If a high degree of correlation between prices for the
hedging instruments and prices for the physical delivery is not achieved, the
contracts are recorded at fair value and the gains or losses are included in the
determination of income. The following hedging instruments were outstanding at
December 31:
<TABLE>
<CAPTION>
MidAmerican Funding MHC (Predecessor)
1999 1998
----------------------- ----------------------
Notional Market Notional Market
Volume Value Volumes Value
(MMBtu) (Per MMBtu) (MMBtu) (Per MMBtu)
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Natural Gas Futures (Long)... 2,700,000 $ 2.340 6,970,000 $ 1.857
Natural Gas Futures (Short).. 3,250,000 $ 2.342 7,320,000 $ 1.854
Natural Gas Swaps............ 85,520,442 $(0.018) 16,322,181 $(0.177)
</TABLE>
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<PAGE>
3) New Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments and
for hedging activities. SFAS 133 is effective for MidAmerican Funding on 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. If the conditions specified in SFAS 133 are
met, those instruments may be designated as hedges. Changes in the value of
hedge instruments would not impact earnings, except to the extent that the
instrument is not perfectly effective as a hedge. MidAmerican Funding is in the
process of evaluating the impact of this accounting pronouncement.
(J) GOODWILL:
The Consolidated Balance Sheets include goodwill related to various
acquisitions. The following schedule summarizes the goodwill, net of accumulated
amortization, remaining on the Consolidated Balance Sheets as of December 31 (in
thousands):
MidAmerican MHC
Amortization Funding (Predecessor)
Period 1999 1998
------------ ----------- ------------
Utility operations......... 40 years $1,474,552 $ -
Nonregulated natural gas
marketing companies...... - - 3,736
Security companies......... 25 years 8,440 8,816
---------- -------
$1,482,992 $12,552
========== =======
Goodwill is amortized using the straight-line method. Amortization expense
is included in Other Nonregulated Expense in the Consolidated Statements of
Income and totaled $34.1 million, $0.7 million and $0.6 million for 1999, 1998
and 1997, respectively.
(K) DETAIL OF OTHER COMPREHENSIVE INCOME:
Comprehensive income refers, in general, to changes in MidAmerican
Funding's equity, except those resulting from transactions with MidAmerican
Energy Holdings Company. "Unrealized holding gains (losses) during period"
reflects the overall increase (decrease) in the market value of marketable
securities held by MidAmerican Funding as available-for-sale. The
"reclassification adjustment" removes any gains (losses) that have been realized
from sales of those securities and reflected in MidAmerican Funding's Net
Income. The following table shows the income tax expense or benefit related to
each component (in thousands):
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<PAGE>
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- ----------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unrealized holding gains (losses) during period:
Before income taxes........................... $77,942 $79,236 $(14,743) $223,927
Income tax (expense)/benefit.................. (27,280) (27,733) 5,081 (78,289)
------- ------- -------- --------
50,662 51,503 (9,662) 145,638
------- ------- -------- --------
Less reclassification adjustment
for realized gains (losses) reflected
in net income during period:
Before income taxes......................... 77,983 15,214 11,204 7,787
Income tax (expense)/benefit................ (27,294) (5,325) (3,921) (2,722)
------- ------- -------- --------
50,689 9,889 7,283 5,065
------- ------- -------- --------
Other comprehensive income (loss), net.......... $ (27) $41,614 $(16,945) $140,573
======= ======= ======== ========
</TABLE>
(2) LONG-TERM DEBT:
MidAmerican Funding's sinking fund requirements and maturities of long-term
debt for 2000 through 2004 are $134 million, $327 million, $26 million, $106
million and $56 million, respectively.
MidAmerican Energy's Variable Rate Pollution Control Revenue Obligations
bear interest at rates that are periodically established through remarketing of
the bonds in the short-term tax-exempt market. MidAmerican Energy, at its
option, may change the mode of interest calculation for these bonds by selecting
from among several alternative floating or fixed rate modes. The interest rate
shown in the Consolidated Statements of Capitalization is the weighted average
interest rate as of December 31, 1999 and 1998. MidAmerican Energy maintains
dedicated revolving credit facility agreements or renewable lines of credit to
provide liquidity for holders of these issues.
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises, and substantially all of
the former Midwest Power Systems Inc., a predecessor company, electric utility
property in Iowa, or approximately 80% of gross utility plant, is pledged to
secure mortgage bonds.
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
Energy had undivided interests at December 31, 1999, in jointly owned generating
plants as shown in the table below.
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<PAGE>
The dollar amounts below represent MidAmerican Energy's share in each
jointly owned unit. Each participant has provided financing for its share of
each unit. Operating Expenses on the Consolidated Statements of Income include
MidAmerican Energy's share of the expenses of these units (dollars in millions).
<TABLE>
<CAPTION>
Nuclear Coal Fired
----------- ------------------------------------------
Council
Quad Cities Neal Bluffs Neal Ottumwa Louisa
Units Units Unit Unit Unit Unit
No.1 & 2 No. 3 No. 3 No. 4 No. 1 No. 1
----------- ----- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
In service date.......... 1972 1975 1978 1979 1981 1983
Utility plant in service. $223 $134 $298 $167 $212 $536
Accumulated depreciation. $ 99 $ 84 $183 $ 98 $115 $268
Unit capacity-MW......... 1,523 515 675 630 708 700
Percent ownership........ 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES:
(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 2000 are estimated to be $211
million, including $19 million for Quad Cities Station nuclear fuel.
Nonregulated capital expenditures depend upon the availability of investment
opportunities and other factors. During 2000, these expenditures are estimated
to be approximately $2 million.
(B) 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 December 31, 1999 was $28 million. The estimate consists of $3 million for
investigation costs, $10 million for remediation costs, $13 million for ground
water 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 Funding projects that these
amounts will be paid or incurred over the next 10 years.
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
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<PAGE>
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 Funding's financial position or results of operations.
(C) 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 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
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<PAGE>
number of hours during which the affected stations operate would decrease the
revenues of MidAmerican Energy. An increase in costs incurred by MidAmerican
Energy or a decrease in the revenues earned by MidAmerican Energy would decrease
the amount of funds MidAmerican Energy has available to make distributions to
MidAmerican Funding.
(D) LONG-TERM POWER PURCHASE CONTRACT:
Payments to the Nebraska Public Power District cover one-half of the fixed
and operating costs of Cooper (excluding depreciation but including debt
service) and MidAmerican Energy's share of nuclear fuel cost (including nuclear
fuel disposal) based on energy delivered. The debt service portion is
approximately $1.5 million per month for 1999 and is not contingent upon the
plant being in service. In addition, MidAmerican Energy pays one-half of the
Nebraska Public Power District's decommissioning funding related to Cooper.
The debt amortization and Department of Energy enrichment plant
decontamination and decommissioning component of MidAmerican Energy's payments
to the Nebraska Public Power District were $15.1 million, $14.4 million and
$13.8 million and the net interest component, which is included in Other
Operating Expenses in the Consolidated Statements of Income, was $2.5 million,
$2.9 million and $3.8 million each for the years 1999, 1998 and 1997,
respectively.
MidAmerican Energy's payments for the debt principal portion of the power
purchase contract obligation and the Department of Energy enrichment plant
decontamination and decommissioning payments are $15.8 million, $16.6 million,
$17.4 million and $18.3 million for 2000 through 2003, respectively.
(E) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican Energy's share of expected decommissioning costs for Cooper and Quad
Cities Station, in 1999 dollars, is $267 million and $255 million, respectively.
In Illinois, nuclear decommissioning costs are included in customer billings
through a mechanism that permits annual adjustments. These costs are reflected
as base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, the
Nebraska Public Power District assumes that decommissioning costs will escalate
at an annual rate of 4.0%. Although Cooper's operating license expires in 2014,
the funding plan assumes decommissioning will start in 2004, the anticipated
plant shutdown date.
As of December 31, 1999, MidAmerican Energy's share of funds set aside by
the Nebraska Public Power District in internal and external accounts for
decommissioning was $109.8 million. In addition, the funding plan also assumes
various funds and reserves currently held to satisfy the Nebraska Public Power
District bond resolution requirements will be available for plant
decommissioning costs after the bonds are retired in early 2004. The funding
schedule assumes a long-term return on funds in the trust of 6.75% annually.
Certain funds will be required to be invested on a short-term basis when
decommissioning begins and are assumed to earn at a rate of 4.0% annually.
MidAmerican Energy makes payments to the Nebraska Public Power District related
to decommissioning Cooper. The Cooper decommissioning component of MidAmerican
Energy's payments to the Nebraska Public Power District was $11.3 million, $7.9
million and $11.3 million for the years 1999, 1998, and 1997, respectively, and
is included in Other Operating Expenses in the Consolidated Statements of
Income. Earnings from the internal account and external trust fund, which are
recognized by the Nebraska Public Power District as the owner of the plant, are
tax exempt and serve to reduce future funding requirements.
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External trusts have been established for the investment of funds for
decommissioning the Quad Cities Station. The total accrued balance as of
December 31, 1999, was $141.6 million and is included in Other Liabilities and a
like amount is reflected in Investments and represents the fair value of the
assets held in the trusts.
MidAmerican Energy's provision for depreciation included costs for Quad
Cities Station nuclear decommissioning of $10.4 million, $11.4 million and $9.8
million for 1999, 1998 and 1997, respectively. The provision charged to expense
is equal to the funding that is being collected in rates. The decommissioning
funding component of MidAmerican Energy's Illinois and Iowa tariffs assumes
decommissioning costs, related to the Quad Cities Station, will escalate at an
annual rate of 5.0% and the assumed annual return on funds in the trust is 6.9%.
Earnings, net of investment fees, on the assets in the trust fund were $1.9
million, $1.7 million and $4.5 million for 1999, 1998 and 1997, respectively.
See Note (12) for information regarding unrealized gains and losses.
(F) NUCLEAR INSURANCE:
MidAmerican Energy maintains financial protection against catastrophic loss
associated with its interest in Quad Cities Station and Cooper through a
combination of insurance purchased by the Nebraska Public Power District (the
owner and operator of Cooper) and ComEd (the joint owner and operator of Quad
Cities Station), insurance purchased directly by MidAmerican Energy, and the
mandatory industry-wide loss funding mechanism afforded under the Price-Anderson
Amendments Act of 1988. The general types of coverage are: nuclear liability,
property coverage and nuclear worker liability.
The Nebraska Public Power District and ComEd each purchase nuclear
liability insurance for Cooper and Quad Cities Station, respectively, in the
maximum available amount of $200 million. In accordance with the Price-Anderson
Amendments Act of 1988, excess liability protection above that amount is
provided by a mandatory industry-wide program under which the licensees of
nuclear generating facilities could be assessed for liability incurred due to a
serious nuclear incident at any commercial nuclear reactor in the United States.
Currently, MidAmerican Energy's aggregate maximum potential share of an
assessment for Cooper and Quad Cities Station combined is $88.1 million per
incident, payable in installments not to exceed $10 million annually.
The property coverage provides for property damage, stabilization and
decontamination of the facility, disposal of the decontaminated material and
premature decommissioning. For Quad Cities Station, ComEd purchases primary and
excess property insurance protection for the combined interests in Quad Cities,
with coverage limits totaling $2.1 billion. For Cooper, MidAmerican Energy and
the Nebraska Public Power District separately purchase primary and excess
property insurance protection for their respective obligations, with coverage
limits of $1.375 billion each. This structure provides that both MidAmerican
Energy and the Nebraska Public Power District are covered for their respective
50% obligation in the event of a loss totaling up to $2.75 billion. MidAmerican
Energy also directly purchases extra expense/business interruption coverage for
its share of replacement power and/or other extra expenses in the event of a
covered accidental outage at Cooper or Quad Cities Station. The coverages
purchased directly by MidAmerican Energy, and the property coverages purchased
by ComEd, which includes the interests of MidAmerican Energy, are underwritten
by an industry mutual insurance company and contain provisions for retrospective
premium assessments should two or more full policy-limit losses occur in one
policy year. Currently, the maximum retrospective amounts that could be assessed
against MidAmerican Energy from industry mutual policies for its obligations
associated with Cooper and Quad Cities Station combined, total $11.6 million.
The master nuclear worker liability coverage, which is purchased by the
Nebraska Public Power District and ComEd for Cooper and Quad Cities Station,
respectively, is an industry-wide guaranteed-cost policy with an aggregate limit
of $200 million for the nuclear industry as a whole, which is in effect to cover
tort claims of workers in nuclear-related industries.
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<PAGE>
(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican Energy has entered into supply and related transportation
contracts for its fossil fueled generating stations. The contracts, with
expiration dates ranging from 2000 to 2007, require minimum payments of $89.4
million, $74.5 million, $56.3 million, $50.1 million and $48.3 million for the
years 2000 through 2004, respectively and $70.0 million for the total of the
years thereafter. MidAmerican Energy expects to supplement these coal contracts
with spot market purchases to fulfill its future fossil fuel needs.
MidAmerican Energy has entered into various natural gas supply and
transportation contracts for its utility operations. The minimum commitments
under these contracts are $145.8 million, $82.0 million, $58.6 million, $46.4
million and $26.9 million for the years 2000 through 2004, respectively, and
$77.3 million for the total of the years thereafter.
(H) OPERATING LEASE COMMITMENTS:
MidAmerican Funding has entered into various operating lease agreements
covering facilities, computer and transportation equipment. Rental payments on
operating leases were $15.8 million for 1999, $23.7 million for 1998 and $20.8
million for 1997. The approximate future minimum annual commitments under all
operating leases are $11.3 million, $7.0 million, $5.5 million, $3.4 million and
$1.9 million for the years 2000 through 2004, respectively, and $2.0 million for
the total of the years thereafter.
(I) OTHER COMMITMENTS AND CONTINGENCIES:
MidAmerican Funding is involved in a number of other legal proceedings and
claims. While management is unable to predict the ultimate outcome of these
matters, it is not expected that their resolution will have a material adverse
effect on the results of operations and financial condition.
(5) RETIREMENT PLANS:
MidAmerican Funding has primarily noncontributory cash balance defined
benefit pension plans covering substantially all employees of MidAmerican Energy
Holdings and its domestic subsidiaries. Benefit obligations under the plans are
based on participants' compensation, years of service and age at retirement.
Funding is based upon the actuarially determined costs of the plans and the
requirements of the Internal Revenue Code and the Employee Retirement Income
Security Act. MidAmerican Energy has been allowed to recover pension costs
related to its employees in rates.
MidAmerican Funding currently provides certain health care and life
insurance (postretirement) benefits for retired employees of MidAmerican Energy
Holdings and its domestic subsidiaries. Under the plans, substantially all of
MidAmerican Funding's employees may become eligible for these benefits if they
reach retirement age while working for MidAmerican Funding. However, MidAmerican
Funding retains the right to change these benefits anytime at its discretion.
MidAmerican Funding expenses postretirement benefit costs on an accrual basis
and includes provisions for these costs in rates.
In 1999, the noncontributory cash balance defined benefit pension plans,
the noncontributory, nonqualified supplemental executive retirement plan, and
the postretirement plans were amended to include participants from MidAmerican
Energy Holdings and its domestic subsidiaries. Prior to the amendment, these
plans included only employees and participants of MidAmerican Energy,
MidAmerican Capital and Midwest Capital. This inclusion increased the benefit
obligation by $14.8 million for the pension and nonqualified supplemental
retirement plans and $2.8 million for the postretirement plans and is reflected
in the Benefit Obligation of MidAmerican Funding as of December 31, 1999.
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The postretirement plan was amended on January 1, 1999, increasing the
retiree co-payment for prescription drugs. This decrease in benefit obligation
is reflected for December 31, 1998.
MidAmerican Funding also maintains noncontributory, nonqualified
supplemental executive retirement plans for active and retired participants.
Net periodic pension, supplemental retirement and postretirement benefit
costs included the following components for MidAmerican Funding and the
aforementioned affiliates for the years ended December 31 (in thousands).
MidAmerican Funding was allocated 100% of the total pension and postretirement
net periodic cost in 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Pension Cost
--------------------------------------------------------------
MidAmerican
Funding MHC (Predecessor)
---------------- ------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost.............................. $ 9,854 $ 2,338 $ 11,284 $ 10,092
Interest cost............................. 25,505 6,052 29,941 29,623
Expected return on plan assets............ (37,392) (8,873) (42,578) (37,617)
Amortization of net transition obligation. - (497) (2,591) (2,591)
Amortization of prior service cost........ - 274 1,871 1,871
Amortization of prior year gain........... - (518) (2,802) (1,797)
Curtailment loss.......................... 4,270 1,013 - -
Regulatory deferral of incurred cost...... - - - 5,423
-------- ------- -------- --------
Net periodic (benefit) cost............... $ 2,237 $ (211) $ (4,875) $ 5,004
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Postretirement Cost
--------------------------------------------------------------
MidAmerican
Funding MHC (Predecessor)
---------------- ------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost................................ $ 2,478 $ 588 $ 3,558 $ 2,680
Interest cost............................... 6,423 1,524 9,344 8,822
Expected return on plan assets.............. (3,540) (840) (3,651) (2,573)
Amortization of net transition obligation... - 788 5,291 5,291
Amortization of prior service cost.......... - 42 650 650
Amortization of prior year gain............. - (35) - (298)
Regulatory deferral of incurred cost........ - - - 4,888
------- ------ ------- -------
Net periodic cost........................... $ 5,361 $2,067 $15,192 $19,460
======= ====== ======= =======
</TABLE>
-70-
<PAGE>
The pension plan assets are in external trusts and are comprised of
corporate equity securities, United States government debt, corporate bonds, and
insurance contracts. The postretirement benefit plans assets are in external
trusts and are comprised primarily of corporate equity securities, corporate
bonds, money market investment accounts and municipal bonds.
Although the supplemental executive retirement plans had no assets as of
December 31, 1999, MidAmerican Funding has Rabbi trusts which hold
corporate-owned life insurance to provide funding for the future cash
requirements. Because these plans are nonqualified, the fair value of these
assets is not included in the following table. The fair value of the life
insurance policies was $64.8 million and $43.9 million at December 31, 1999 and
1998, respectively.
During 1999 certain participants in the supplemental executive retirement
plan left MidAmerican Energy reducing the future service of active employees by
28%. As a result, a curtailment loss of $5.3 million was recognized in 1999.
Additionally, termination benefits provided to the participants, totaling $3.5
million, were expensed in 1999.
The projected benefit obligation and accumulated benefit obligation for the
supplemental executive retirement plans were $68.8 million and $65.5 million,
respectively, as of December 31, 1999, and $58.1 million and $49.9 million,
respectively, as of December 31, 1998.
-71-
<PAGE>
The following table presents a reconciliation of the beginning and
ending balances of the benefit obligation, fair value of plan assets and the
funded status of the aforementioned plans to the net amounts recognized in the
Consolidated Balance Sheets as of December 31 (dollars in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------- --------------------------
MidAmerican MHC MidAmerican MHC
Funding (Predecessor) Funding (Predecessor)
1999 1998 1999 1998
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Benefit obligation at beginning of year............ $456,475 $430,043 $120,188 $127,347
Service cost....................................... 12,192 11,285 3,066 3,558
Interest cost...................................... 31,556 29,941 7,947 9,344
Participant contributions.......................... 107 127 1,838 1,404
Plan amendments.................................... 14,823 - 2,775 (21,607)
Actuarial (gain) loss.............................. (41,567) 15,793 (18,248) 9,463
Curtailment........................................ (705) - - -
Termination benefits............................... 3,471 - - -
Benefits paid...................................... (29,182) (30,714) (9,822) (9,321)
-------- -------- -------- --------
Benefit obligation at end of year.................. 447,170 456,475 107,744 120,188
-------- -------- -------- --------
Reconciliation of the fair value of plan assets:
Fair value of plan assets at beginning of year .... 524,508 483,668 63,093 52,174
Employer contributions............................. 4,201 3,445 12,405 10,095
Participant contributions.......................... 107 127 1,838 1,404
Actual return on plan assets....................... 105,425 67,982 5,108 8,741
Benefits paid...................................... (29,182) (30,714) (9,822) (9,321)
-------- --------- -------- --------
Fair value of plan assets at end of year........... 605,059 524,508 72,622 63,093
-------- --------- -------- --------
Funded status...................................... 157,889 68,033 (35,122) (57,095)
Unrecognized net gain.............................. (101,434) (101,860) (18,943) (6,873)
Unrecognized prior service cost.................... 9,540 19,868 2,776 2,555
Unrecognized net transition obligation (asset) .... - (13,748) - 57,543
-------- --------- -------- --------
Net amount recognized in the
Consolidated Balance Sheets.................... $ 65,995 $(27,707) $(51,289) $ (3,870)
======== ======== ======== ========
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost............................... $108,907 $ 4,350 $ 1,042 $ -
Accrued benefit liability.......................... (65,533) (49,874) (52,331) (3,870)
Intangible assets.................................. 22,621 17,817 - -
-------- -------- -------- -----------
Net amount recognized.............................. $ 65,995 $(27,707) $(51,289) $(3,870)
======== ======== ======== =======
</TABLE>
-72-
<PAGE>
<TABLE>
<CAPTION>
Pension And Postretirement
Assumptions
-------------------------------------------
MidAmerican MHC MHC
Funding (Predecessor) (Predecessor)
1999 1998 1997
----------- ------------- -------------
<S> <C> <C> <C>
Assumptions used were:
Discount rate........................... 7.75% 6.75% 7.00%
Rate of increase in compensation levels. 5.00% 5.00% 5.00%
Weighted average expected long-term
rate of return on assets............ 9.00% 9.00% 9.00%
</TABLE>
For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals prior to age 65 will increase
by 7.5% in 2000 and that the rate of increase thereafter will decline by .75%
annually to an ultimate rate of 5.25% by the year 2003. For covered individuals
age 65 and older, it is assumed health care costs will increase by 5.5%
annually.
If the assumed health care trend rates used to measure the expected cost of
benefits covered by the plans were increased by 1.0%, the total service and
interest cost for 1999 would increase by $2.0 million, and the postretirement
benefit obligation at December 31, 1999, would increase by $15.2 million. If the
assumed health care trend rates were to decrease by 1.0%, the total service and
interest cost for 1999 would decrease by $1.6 million and the postretirement
benefit obligation at December 31, 1999, would decrease by $12.1 million.
MidAmerican Funding sponsors defined contribution pension plans (401(k)
plans) covering substantially all employees. MidAmerican Funding's contributions
vary depending on the plan, but are based primarily on each participant's level
of contribution and cannot exceed the maximum allowable for tax purposes. Total
contributions were $6.2 million, $5.6 million and $4.6 million for 1999, 1998
and 1997, respectively.
-73-
<PAGE>
(6) SHORT-TERM BORROWING:
Interim financing of working capital needs and the construction program may
be obtained from the sale of commercial paper or short-term borrowing from
banks. Information regarding short-term debt follows (dollars in thousands):
<TABLE>
<CAPTION>
MidAmerican MHC (Predecessor)
Funding --------------------
1999 1998 1997
----------- ---------- --------
<S> <C> <C> <C>
Balance at year-end................................ $204,000 $339,826 $138,054
Weighted average interest rate on year-end balance. 6.3% 6.0% 5.9%
Average daily amount outstanding during the year... $133,792 $187,466 $117,482
Weighted average interest rate on average daily
amount outstanding during the year............... 5.2% 5.6% 5.7%
</TABLE>
MidAmerican Energy 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 December 31, 1999, MidAmerican Energy had
in place a $250 million commercial paper program which is supported by a $250
million revolving credit facility. In addition, MidAmerican Energy has a $5
million line of credit. As of December 31, 1999, commercial paper and bank notes
totaled $204.0 million for MidAmerican Energy. MHC had lines of credit totaling
$24 million.
All subsidiary long-term borrowings outstanding at December 31, 1999, are
without recourse to MidAmerican Funding.
(7) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican Energy
reduced its Illinois electric service rates by annual amounts of $13.1 million
and $2.4 million, effective November 3, 1996, and June 1, 1997, respectively.
MidAmerican Energy implemented an additional $0.9 million annual rate reduction
for its Illinois residential customers, effective August 1, 1998, in connection
with Illinois' electric utility restructuring law.
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican Energy, the Iowa Office of Consumer Advocate (OCA) and other
parties. Four major components of the settlement and their status are as
follows:
1) On an annualized basis, prices for residential customers were reduced
$8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July
11, 1997, and June 1, 1998, respectively, for a total annual decrease of $23.5
million.
2) Prices for industrial customers were reduced by $6 million annually and
prices for commercial customers were reduced by $4 million annually. MidAmerican
Energy was given permission to implement these reductions through a retail
access pilot project, negotiated individual contracts and tariffed rate
reductions. On January 1, 1999, MidAmerican Energy reduced base rates for
selected non-contract commercial customers by approximately $1.5 million
annually, subject to Iowa Utilities Board approval. The remainder of the
commercial and industrial price reductions were achieved through negotiated
contracts and a retail access pilot project.
The negotiated 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
-74-
<PAGE>
customers have agreed to 10-year contracts. Prices are set as fixed prices;
however, many contracts allow for potential price adjustments with respect to
environmental costs, government imposed public purpose programs, tax changes,
and transition costs. While the contract prices are fixed (except for the
potential adjustment elements), the costs MidAmerican Energy incurs to fulfill
these contracts will vary. On an aggregate basis the annual revenues under
contract are approximately $180 million.
3) The Iowa energy adjustment clause was eliminated. Prior to July 11,
1997, MidAmerican collected fuel costs from Iowa customers on a current basis
through the energy adjustment clause, and thus, fuel costs had little impact on
net income. Since then, base rates for Iowa customers include a factor for
recovery of a representative level of fuel costs. If the actual per-unit fuel
cost varies from that factor, pre-tax earnings are affected. The fuel cost
factor was to be reviewed in February 1999 and adjusted prospectively if the
actual 1998 fuel cost per unit varied by more than 15% above or below the factor
included in base rates. Based on 1998 actual fuel costs, MidAmerican Energy
reduced the fuel cost recovery factor in 1999 base rates effective March 1,
1999. The estimated annual reduction in revenues associated with this adjustment
is $1.1 million.
4) If MidAmerican Energy's annual Iowa electric jurisdictional return on
common equity exceeds 12%, an equal sharing between customers and shareholders
of earnings above the 12% level begins; if it exceeds 14%, two-thirds of
MidAmerican Energy's share of those earnings will be used for accelerated
recovery of regulatory assets. The agreement precludes MidAmerican Energy from
filing for increased rates prior to 2001 unless the return on common equity
falls below 9%. Other parties signing the agreement are prohibited from filing
for reduced rates prior to 2001 unless the return on common equity, after
reflecting credits to customers, exceeds 14%.
Under a restructuring law enacted in 1997, a similar sharing mechanism is
in place for Illinois operations. Two-year average returns 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, due March 31, 2000, will be based on 1998 and 1999
results.
(8) DISCONTINUED OPERATIONS:
In October 1997, MHC sold its subsidiary that developed and operated a
computerized information system facilitating the real-time exchange of power in
the electric industry. MHC recorded a $4.0 million estimated after-tax loss on
disposal in the third quarter of 1996 and an additional $3.2 million in
September 1997.
On October 6, 1999, MHC distributed its holding in the capital stock of
MidAmerican Realty to MidAmerican Energy Holdings. The operations are the result
of several acquisitions beginning in May 1998. Refer to Note (21), "Acquisitions
and Dispositions."
-75-
<PAGE>
Revenues from discontinued activities, as well as the results of
operations and the estimated loss on the disposal of discontinued operations for
the years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- ------------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues................... $ 254,901 $58,047 $164,226 $ -
========= ======= ======== ========
Income from Operations:
Income (loss) before income taxes.. $ 19,025 $ 648 $ 7,251 $ (200)
Income tax benefit (expense)....... (7,767) (227) (3,087) 82
--------- ------- -------- --------
Income (loss) from operations...... $ 11,258 $ 421 $ 4,164 $ (118)
========= ======= ======== ========
Loss on Disposal:
Loss before income taxes........... $ - $ - $ - $(10,106)
Income tax benefit ................ - - - 5,996
--------- ------- -------- --------
Loss on disposal................... $ - $ - $ - $ (4,110)
========= ======= ======== ========
</TABLE>
(9) CONCENTRATION OF CREDIT RISK:
MidAmerican Energy's electric utility operations serve 577,000 customers in
Iowa, 83,000 customers in western Illinois and 4,000 customers in southeastern
South Dakota. MidAmerican Energy's gas utility operations serve 502,000
customers in Iowa, 65,000 customers in western Illinois, 67,000 customers in
southeastern South Dakota and 5,000 customers in northeastern Nebraska. The
largest communities served by MidAmerican Energy are the Iowa and Illinois
Quad-Cities; Des Moines, Sioux City, Cedar Rapids, Waterloo, Iowa City and
Council Bluffs, Iowa; and Sioux Falls, South Dakota. MidAmerican Energy's
utility operations grant unsecured credit to customers, substantially all of
whom are local businesses and residents. As of December 31, 1999, billed
receivables from MidAmerican Energy's utility customers totaled $20.6 million.
As described in Note 18, billed receivables related to utility services have
been sold to a wholly owned unconsolidated subsidiary.
MidAmerican Capital has investments in preferred stocks of companies in the
utility industry. As of December 31, 1999, the total cost of these investments
was $29.2 million. MidAmerican Capital has entered into leveraged lease
agreements with companies in the airline industry. As of December 31, 1999, the
receivables under these agreements totaled $28.2 million.
(10) PREFERRED SHARES:
The $5.25 Series Preferred Shares are subject to mandatory redemption on
November 1, 2003 at $100 per share. The $7.80 Series Preferred Shares have
sinking fund requirements under which 66,600 shares will be redeemed at $100 per
share each May 1, beginning in 2001 through May 1, 2006.
The 7.98% Series shares were issued by a wholly owned statutory business
trust of MidAmerican Energy whose sole assets are $103.1 million of MidAmerican
Energy 7.98% Series A Debentures due 2045. The preferred shares are mandatorily
redeemable. Refer to Note (15) for additional information.
-76-
<PAGE>
The total outstanding cumulative preferred securities of MidAmerican Energy
not subject to mandatory redemption requirements may be redeemed at the option
of MidAmerican Energy at prices which, in the aggregate, total $32.6 million.
The aggregate total the holders of all preferred securities outstanding at
December 31, 1999, are entitled to upon involuntary bankruptcy is $181.8 million
plus accrued dividends. Annual dividend requirements for all preferred
securities outstanding at December 31, 1999, total $12.9 million.
(11) 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 regulated 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.
-77-
<PAGE>
The following tables provide information on an operating segment basis as
of and for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- ----------------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
-------------- ------------- ------------ ------------
SEGMENT PROFIT INFORMATION
- --------------------------
<S> <C> <C> <C> <C>
Revenues:
Electric ........................... $ 969,739 $ 208,963 $ 1,169,810 $ 1,126,300
Gas ................................ 315,238 139,564 429,870 536,306
Nonregulated and Other ............. 148,069 34,539 176,244 306,931
----------- ----------- ----------- -----------
Total ............................ 1,433,046 383,066 1,775,924 1,969,537
----------- ----------- ----------- -----------
Depreciation and amortization expense:
Electric ........................... 128,993 34,277 156,546 145,931
Gas ................................ 22,137 5,140 25,665 24,609
Nonregulated and Other (a) ......... 31,016 454 3,086 3,436
----------- ----------- ----------- -----------
Total ............................ 182,146 39,871 185,297 173,976
----------- ----------- ----------- -----------
Interest income:
Electric ........................... 2,069 847 4,945 1,820
Gas ................................ 466 138 1,169 501
Nonregulated and Other ............. 15,879 526 3,148 2,997
Intersegment Eliminations .......... (380) (100) -- --
----------- ----------- ----------- -----------
Total ............................ 18,034 1,411 9,262 5,318
----------- ----------- ----------- -----------
Interest expense:
Electric ........................... 48,476 13,918 66,784 71,138
Gas ................................ 10,247 3,000 14,011 14,412
Nonregulated and Other ............. 41,704 906 9,418 11,785
Intersegment Eliminations .......... (380) (100) -- --
----------- ----------- ----------- -----------
Total ............................ 100,047 17,724 90,213 97,335
----------- ----------- ----------- -----------
Income tax expense (benefit):
Electric ........................... 76,933 9,382 75,831 64,017
Gas ................................ (3,230) 8,435 (800) 9,698
Nonregulated and Other ............. 22,342 3,560 1,895 (5,325)
----------- ----------- ----------- -----------
Total ............................ 96,045 21,377 76,926 68,390
----------- ----------- ----------- -----------
Net income (loss):
Electric ........................... 108,206 11,878 109,539 101,534
Gas ................................ (6,488) 13,010 (435) 14,177
Nonregulated and Other ............. 33,617 (7,678) 22,760 19,784
Intersegment Eliminations .......... -- -- (546) (391)
----------- ----------- ----------- -----------
Total ............................ 135,335 17,210 131,318 135,104
----------- ----------- ----------- -----------
</TABLE>
-78-
<PAGE>
MidAmerican
Funding MHC (Predecessor)
----------- ----------------------------
1999 1998 1997
---------- ----------- ----------
SEGMENT ASSET INFORMATION
Total Assets:
Electric .............. $2,632,660 $2,891,646 $2,833,256
Gas ................... 680,564 670,862 681,649
Nonregulated and Other 1,882,129 681,828 763,186
---------- ---------- ----------
Total ............... 5,195,353 4,244,336 4,278,091
---------- ---------- ----------
Capital expenditures:
Electric .............. 169,261 158,596 128,544
Gas ................... 34,314 34,758 38,388
Nonregulated and Other 22,353 45,466 14,066
---------- ---------- ----------
Total ............... 225,928 238,820 180,998
---------- ---------- ----------
(a) Depreciation and amortization expense related to Nonregulated and Other
is included in Nonregulated, Other operating expenses on the Consolidated
Statements of Income.
Nonregulated and Other consists of MidAmerican Capital, Midwest Capital,
CBEC Railway and other nonregulated operations and MHC and corporate
assets.
Dividend income related to MHC common stock held by MidAmerican Capital of
$0.5 and $0.4 million for 1998 and 1997, respectively, is included in
Nonregulated and Other Net Income above but has been eliminated in Net Income in
the Consolidated Statements of Income. In addition, a realized gain of $4.2
million from MidAmerican Capital's sale of the common stock to MHC in 1998 has
also been eliminated in Net Income in the Consolidated Statements of Income.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. Tariffs for MidAmerican Energy's utility
services are established based on historical cost ratemaking. Therefore, the
impact of any realized gains or losses related to financial instruments
applicable to MidAmerican Energy's utility operations is dependent on the
treatment authorized under future ratemaking proceedings.
Cash and cash equivalents--The carrying amount approximates fair value due
to the short maturity of these instruments.
Quad Cities Station nuclear decommissioning trust fund--Fair value is based
on quoted market prices of the investments held by the fund.
Marketable securities--Fair value is based on quoted market prices.
Debt securities--Fair value is based on the discounted value of the future
cash flows expected to be received from these investments.
Equity securities carried at cost--Fair value is based on an estimate of
MidAmerican Energy's share of partnership equity, offers from unrelated third
parties or the discounted value of the future cash flows expected to be received
from these investments.
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<PAGE>
Notes payable--Fair value is estimated to be the carrying amount due to the
short maturity of these issues.
Preferred shares--Fair value of preferred shares with mandatory redemption
provisions is estimated based on the quoted market prices for similar issues.
Long-term debt--Fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to MidAmerican Funding for debt of the same remaining maturities.
Preferred Stock Hedge Instruments--Fair value is determined using quoted
market prices. See Note 1(i) for additional discussion of fair value.
Gas Futures Contracts and Swaps--Fair value of the futures contracts are
based on quoted market prices and generally have maturities of one year or less.
The fair value of the swaps is estimated based on quotes from the market makers
of these instruments and represents the estimated amounts that would expect to
be received or paid to terminate the agreements. See Note 1(i) for additional
discussion of fair value.
The following table presents the carrying amount and estimated fair value
of the named financial instruments as of December 31 (in thousands):
<TABLE>
<CAPTION>
MHC (Predecessor)
MidAmerican Funding ------------------------
1999 1998
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Instruments Owned:
Equity securities carried at cost............... $ 13,207 $ 14,234 $ 27,464 $ 27,372
Financial Instruments Issued:
MidAmerican Energy preferred securities;
subject to mandatory redemption............. 50,000 52,025 50,000 53,317
MidAmerican Energy-obligated preferred
securities; subject to mandatory redemption. 101,598 87,240 100,000 102,500
Long-term debt, including current portion....... 1,642,476 1,564,554 1,045,548 1,088,650
</TABLE>
-80-
<PAGE>
The amortized cost, gross unrealized gain and losses and estimated fair
value of investments in debt and equity securities at December 31 are as follows
(in thousands):
1999
---------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale:
Equity securities ........... $122,327 $ 37,941 $ (13,530) $146,738
Municipal bonds ............. 30,913 868 (355) 31,426
U. S. Government securities . 14,159 78 (123) 14,114
Corporate securities ........ 26,935 5 (1,511) 25,429
Cash equivalents ............ 8,591 -- -- 8,591
-------- -------- --------- --------
$202,925 $ 38,892 $ (15,519) $226,298
======== ======== ========= ========
Held-to-maturity:
Debt securities ............. $ 2,080 $ -- $ -- $ 2,080
======== ======== ========= ========
1998
----------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Available for sale:
Equity securities .......... $225,836 $ 214,927 $ (15,789) $424,974
Municipal bonds ............ 28,645 2,037 (8) 30,674
U.S. Government securities . 15,411 1,410 -- 16,821
Corporate securities ....... 28,051 698 (4) 28,745
Cash equivalents ........... 6,470 -- -- 6,470
-------- --------- --------- --------
$304,413 $ 219,072 $ (15,801) $507,684
======== ========= ========= ========
Held-to-maturity:
Mandatorily redeemable
preferred securities ..... $ 2,843 $ -- $ -- $ 2,843
Debt securities ............ 11,837 -- -- 11,837
-------- --------- --------- --------
$ 14,680 $ -- $ -- $ 14,680
======== ========= ========= ========
At December 31, 1999, the debt securities held by MidAmerican Funding had
the following maturities (in thousands):
Available For Sale Held To Maturity
-------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ------
Within 1 year....... $ 4,499 $ 4,507 $ 4 $ 4
1 through 5 years... 31,222 31,580 7 7
5 through 10 years.. 6,754 6,907 2,069 2,069
Over 10 years....... 29,532 27,975 - -
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<PAGE>
The proceeds and the gross realized gains and losses on the disposition
of investments, determined by specific identification, held by MidAmerican
Funding for the years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- -------------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Proceeds from sales... $471,158 $64,973 $246,838 211,691
Gross realized gains.. 80,635 16,910 27,973 14,320
Gross realized losses. (4,251) (2,186) (14,199) (6,480)
</TABLE>
(13) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for
the following periods (in thousands):
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- --------------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current
Federal................... $193,570 $20,630 $80,837 $91,627
State..................... 23,877 3,016 20,736 21,619
-------- ------- ------- -------
217,447 23,646 101,573 113,246
-------- ------- ------- -------
Deferred
Federal................... (116,190) (1,918) (11,861) (29,257)
State..................... (2) 103 (5,633) (8,242)
-------- ------- ------- -------
(116,192) (1,815) (17,494) (37,499)
-------- ------- ------- -------
Investment tax credit, net.. (5,210) (454) (7,153) (7,357)
-------- ------- ------- -------
Total income tax expense.. $ 96,045 $21,377 $76,926 $68,390
======== ======= ======= =======
</TABLE>
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<PAGE>
Included in Deferred Income Taxes in the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
MidAmerican MHC (Predecessor)
Funding -----------------
1999 1998
----------- -----------------
Deferred tax assets related to:
Investment tax credits................. $ 48,427 $52,139
Cooper contract........................ 51,838 -
Unrealized losses...................... 4,684 7,391
Pensions............................... 14,576 15,677
Nuclear reserves and decommissioning... 20,280 17,715
Other.................................. 4,711 5,360
-------- --------
Total.............................. $144,516 $98,282
======== =======
Deferred tax liabilities related to:
Depreciable property................... $431,874 $496,295
Income taxes recoverable through
future rates......................... 187,379 198,364
Unrealized gains....................... - 75,070
Energy efficiency...................... 14,806 27,186
Reacquired debt........................ 12,476 16,385
Other.................................. 18,069 18,430
-------- --------
Total.............................. $664,604 $831,730
======== ========
The following table is a reconciliation between the effective income tax
rate, before preferred stock dividends of a subsidiary trust, indicated by the
Consolidated Statements of Income and the statutory federal income tax rate for
the following periods:
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- ------------------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Effective federal and state income tax rate........ 42% 52% 36% 31%
Amortization of investment tax credit.............. 2 1 3 3
State income tax, net of federal income tax benefit (7) (5) (5) (4)
Dividends received deduction....................... 1 1 2 2
Merger costs....................................... - (13) - -
Goodwill amortization.............................. (5) - - -
Other.............................................. 2 (1) (1) 3
-- --- -- --
Statutory federal income tax rate.................. 35% 35% 35% 35%
== == == ==
</TABLE>
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<PAGE>
(14) INVENTORIES:
Inventories include the following amounts as of December 31 (in thousands):
MidAmerican MHC (Predecessor)
Funding -----------------
1999 1998
----------- -----------------
Materials and supplies, at average cost. $30,195 $30,914
Coal stocks, at average cost............ 26,712 22,266
Gas in storage, at LIFO cost............ 21,449 37,306
Fuel oil, at average cost............... 1,156 1,294
Other................................... 3,311 2,991
------- -------
Total................................. $82,823 $94,771
======= =======
At December 31, 1999 prices, the current cost of gas in storage was $33.8
million.
(15) MIDAMERICAN ENERGY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
MIDAMERICAN ENERGY FINANCING I:
In December 1996, MidAmerican Energy Financing I (the Trust), a wholly
owned statutory business trust of MidAmerican Energy, issued 4,000,000 shares of
7.98% Series MidAmerican Energy-obligated mandatorily redeemable preferred
securities (the Preferred securities). The sole assets of the Trust are $103.1
million of MidAmerican Energy 7.98% Series A Debentures due 2045 (the
Debentures). There is a full and unconditional guarantee by MidAmerican Energy
of the Trust's obligations under the Preferred securities. MidAmerican Energy
has the right to defer payments of interest on the Debentures by extending the
interest payment period for up to 20 consecutive quarters. If interest payments
on the Debentures are deferred, distributions on the Preferred securities will
also be deferred. During any deferral, distributions will continue to accrue
with interest thereon, and MidAmerican Energy may not declare or pay any
dividend or other distribution on, or redeem or purchase, any of its capital
stock.
The Debentures may be redeemed by MidAmerican Energy on or after December
18, 2001, or at an earlier time if there is more than an insubstantial risk that
interest paid on the Debentures will not be deductible for federal income tax
purposes. If the Debentures, or a portion of the Debentures, are redeemed, the
Trust must redeem a like amount of the Preferred securities. If a termination of
the Trust occurs, the Trust will distribute to the holders of the Preferred
securities a like amount of the Debentures unless the distribution is determined
not to be practicable. If a determination is made, the holders of the Preferred
securities will be entitled to receive, out of the assets of the trust after
satisfaction of its liabilities, a liquidation amount of $25 for each Preferred
Security held plus accrued and unpaid distributions.
(16) MIDAMERICAN FUNDING DEBT:
On March 11, 1999, MidAmerican Funding issued $200 million of 5.85% Senior
Secured Notes due 2001, $175 million of 6.339% Senior Secured Notes due 2009,
and $325 million of 6.927% Senior Secured Bonds due 2029. The proceeds from the
offering were used to complete the acquisition of MHC. MidAmerican Funding
incurred $7.0 million of underwriter discounts and other offering costs.
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<PAGE>
Prior to the offering, MidAmerican Funding entered into three separate
interest rate swap arrangements of $125 million each as follows:
Reference Settlement
Transaction Date Reference Security Price Price
- ---------------- --------------------------------------- ------- ---------
January 25, 1999 US Treasury 5.5% due August 15, 2028 103.75% 96.84%
January 25, 1999 US Treasury 4.75% due November 15, 2008 100.01% 96.61%
February 24, 1999 US Treasury 4.75% due November 15, 2008 97.15% 96.61%
From the transaction dates until the date of closing, interest rates on
these securities rose so that the reference prices decreased, therefore creating
a net gain of $13.6 million on the unwinding of these arrangements.
The offering costs and the net gain from the interest rate swaps
essentially lowered the weighted average stated interest rate of approximately
6.47% to a weighted average effective rate of approximately 6.22%.
The net amount of the rate swap arrangements and the offering costs are
being amortized using the effective interest method over the life of each of the
three traunches.
The Notes due 2001 mature on March 1, 2001, the Notes due 2009 mature on
March 1, 2009 and the Bonds due 2029 mature on March 1, 2029. All of the Notes
and Bonds are secured by a pledge of the common stock of MHC. The Notes and
Bonds:
o are the direct senior secured obligations of MidAmerican Funding;
o rank on an equal basis with all of MidAmerican Funding's other
existing and future senior obligations;
o rank senior to all of MidAmerican Funding's existing and future
subordinated indebtedness; and
o effectively rank junior to all indebtedness and other liabilities,
including preferred stock, of the direct and indirect subsidiaries of
MidAmerican Funding, to the extent of the assets of these
subsidiaries.
MidAmerican Funding may redeem any series of the Notes and Bonds in whole
or in part at any time at a redemption price equal to the sum of:
o the greater of the following:
(1) 100% of the principal amount of the series of the Notes or Bonds
being redeemed, and
(2) the sum of the present values of the remaining scheduled payments
of principal of and interest on the series of Notes or Bonds
being redeemed, discounted to the date of redemption on a
semiannual basis at the treasury yield plus (x) 15 basis points
in the case of the Notes due 2009, or (y) 25 basis points in the
case of the Bonds due 2029, plus
o accrued and unpaid interest on the Notes or Bonds being redeemed
to the date of redemption.
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 Funding 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
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<PAGE>
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.
(17) SALE OF ACCOUNTS RECEIVABLE:
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 Corp., a special
purpose entity established to purchase accounts receivable from MidAmerican
Energy. MidAmerican Energy Funding Corp. in turn sells receivable interests to
outside investors. In consideration of the sale, MidAmerican Energy received $70
million in cash and the remaining balance in the form of a subordinated note
from MidAmerican Energy Funding Corp. In 1999, the revolving balance was reduced
to $57 million due to a decline in accounts receivable available for sale. The
agreement is structured as a true sale under which the creditors of MidAmerican
Energy Funding Corp. will be entitled to be satisfied out of the assets of
MidAmerican Energy Funding Corp. prior to any value being returned to
MidAmerican Energy or its creditors and, as such, the accounts receivable sold
are not reflected on the Consolidated Balance Sheets. At December 31, 1999,
$107.5 million of accounts receivable, net of reserves, was sold under the
agreement.
(18) UNAUDITED QUARTERLY OPERATING RESULTS:
<TABLE>
<CAPTION>
1999 MHC
(Predecessor) MidAmerican Funding
------------- -------------------------------------------------
Jan. 1, 1999 March 12, 1999
through through
March 11, March 31, 2nd 3rd 4th
1999 1999 Quarter Quarter Quarter
------------- ---------------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues................. $383,066 $93,586 $386,103 $463,885 $489,472
Operating income................... 58,898 8,369 47,732 110,762 60,270
Income from continuing operations.. 16,789 905 60,987 46,737 15,448
Income from discontinued operations 421 1,199 5,054 5,005 -
Net income......................... 17,210 2,104 66,040 51,743 15,448
</TABLE>
<TABLE>
<CAPTION>
1998 MHC (Predecessor)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenues........................ $488,148 $389,352 $455,964 $442,460
Operating income.......................... 77,285 52,210 105,877 36,040
Income from continuing operations......... 38,733 19,326 49,046 20,049
Income (loss) from discontinued operations - 1,674 4,576 (2,086)
Net income................................ 38,733 21,000 53,622 17,963
</TABLE>
The quarterly data reflect seasonal variations common in the utility
industry.
-86-
<PAGE>
(19) OTHER INFORMATION:
Non-Operating-Other, Net, as shown on the Consolidated Statements of Income
includes the following (in thousands):
<TABLE>
<CAPTION>
MidAmerican
Funding MHC (Predecessor)
-------------- ---------------------------------
March 12, 1999 Jan. 1, 1999 Year Year
through through Ended Ended
December 31, March 11, December 31, December 31,
1999 1999 1998 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gain on sale of assets, net............ $4,687 $ - $7,409 $10,213
Discount on sold receivables........... (6,828) (2,629) (8,716) (439)
Subservicer fee from Funding Corp...... 1,167 348 1,714 153
Merger costs........................... (535) (18,585) (4,243) -
Income from equity method investments.. 1,882 1,505 3,765 1,273
Special purpose fund income............ 437 128 2,088 1,989
Other-than-temporary declines in value
of investments and other assets.... (41) - - (3,443)
Energy efficiency carrying charges..... - - 197 4,993
Litigation recoveries.................. - 1,500 - 2,248
Other.................................. 1,556 (400) 2,882 (1,096)
------ -------- ------ -------
Total......................... $2,325 $(18,133) $5,096 $15,891
====== ======== ====== =======
</TABLE>
(20) AFFILIATE TRANSACTIONS:
The companies identified as affiliates are MidAmerican Energy Holdings and
its subsidiaries. The basis for these charges is provided for in service
agreements between MidAmerican Funding and its affiliates. MidAmerican Energy
purchased a corporate jet from MidAmerican Energy Holdings for $14.5 million in
1999. MidAmerican Funding reimbursed MidAmerican Energy Holdings in the amount
of $5.0 million for its allocated share of insurance premiums.
MidAmerican Funding was also reimbursed for charges incurred on behalf of
its affiliates. The majority of these reimbursed expenses was for allocated
employee wages and benefits, insurance, computer costs, administrative services,
travel expenses and general and administrative expenses: including treasury,
legal, shareholder relations and accounting functions. The amount of such
expenses was $7.3 million for 1999.
As of December 31, 1999, MidAmerican Funding had notes receivable from an
affiliate of $122.6 million included in Investments and Nonregulated Property,
Net on the Consolidated Balance Sheet and accounts receivable from affiliates of
$19.5 million included in Receivable on the Consolidated Balance Sheet.
MidAmerican Funding also had accounts payable to affiliates of $7.4 million as
of December 31, 1999, which is included in Accounts Payable on the Consolidated
Balance Sheet.
(22) ACQUISITIONS AND DISPOSITIONS:
In 1998, MHC established MidAmerican Realty as a holding company for its
real estate brokerage operations. MHC, through MidAmerican Realty, then acquired
several real estate brokerage operations and related businesses.
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<PAGE>
MHC purchased all of the outstanding capital stock of the following
companies: Iowa Realty Co. Inc., Edina Financial Services, Inc., Home Real
Estate Company of Omaha and CBS Real Estate Company. Additionally, MHC purchased
all assets of J.C. Nichols Residential, Inc. Nebraska Land Title & Abstract
Company, Paul Semonin Realtors, Long Realty, and Champion Realty. The aggregate
cost of these acquisitions was $108 million.
Each acquisition was accounted for as a purchase business combination. All
identifiable assets acquired and liabilities assumed were assigned a portion of
the acquisition price equal to their fair value at the date of acquisition.
MHC's Consolidated Income Statements reflect the results of operations of the
acquired businesses from the date of their respective acquisition dates, which
range from May 27, 1998, through September 1, 1998, except for a minor
acquisition in December 1998.
In May 1999, a subsidiary of MHC sold approximately 6.74 million shares of
McLeodUSA common stock, through a secondary offering by McLeodUSA. Proceeds from
the sale exceeded $375 million, with a resulting pre-tax gain to MidAmerican
Funding of approximately $78.2 million, and an after-tax gain of approximately
$47.1 million.
As discussed in Note (8), MidAmerican Funding distributed its holding in
the capital stock of MidAmerican Realty to MidAmerican Energy Holdings in
October 1999 and has reflected these operations as discontinued operations.
In November 1998, a subsidiary of MHC sold 425,000 shares of its holdings
in McLeodUSA common stock. Proceeds from the sale totaled $14.0 million and a
$9.1 million gain was realized which is reflected in Realized gains and losses
on securities, net on the Consolidated Statements of Income. Other gains on the
sale of nonregulated investments during 1998 totaled $6.6 million and are
included in Other, net on the Consolidated Statements of Income. These gains
include the sale of MHC's interest in a small trust company, the sale of
railcars, and gains from the sale of a venture capital fund.
In 1997 MHC sold its interest in its railcar management and repair
businesses. Proceeds from these sales totaled $7.5 million, resulting in a $1.6
million gain which is reflected in Other, net on the Consolidated Statements of
Income.
-88-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of MidAmerican Funding, LLC (successor to MHC, Inc.)
and subsidiaries (Company) 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 for the period March 12,
1999 to December 31, 1999 for the Company. Our audit also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audit. The financial statements and financial statement schedule of MHC, Inc. as
of December 31, 1998 and for the two years then ended were audited by other
auditors whose report, dated January 22, 1999, except with respect to the third
paragraph in Note (10) and related information, as to which the date is October
6, 1999, expressed an unqualified opinion on those financial statements and
financial statement schedule.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MidAmerican Funding, LLC and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the above-stated periods in conformity with generally
accepted accounting principles. Also, in our opinion, such 1999 financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Des Moines, Iowa DELOITTE & TOUCHE LLP
January 25, 2000
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<PAGE>
SCHEDULE II
MIDAMERICAN FUNDING, LLC
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------------------- ---------- ----------
Additions
Balance at --------- Balance at
Beginning Charged Other End
Description of Year to Income Accounts Deductions of Year
- ----------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserves Deducted From Assets
To Which They Apply:
Reserve for uncollectible accounts receivable:
Year ended 1999 (1)......................... $ 503 $ 204 $ - $ (238) $ 469
====== ====== ======= ======= ======
MHC (Predecessor) -
Year ended 1998........................... $ 347 $7,075 $ - $(6,919) $ 503
====== ====== ======= ======= ======
Year ended 1997........................... $2,093 $7,683 $ - $(9,429) $ 347
====== ====== ======= ======= ======
Reserves Not Deducted From Assets (2):
Year ended 1999 (1)........................... $5,660 $2,758 $2,148 $(1,584) $8,982
====== ====== ====== ======= ======
MHC (Predecessor) -
Year ended 1998............................. $6,257 $1,148 $ - $(1,745) $5,660
====== ====== ====== ======= ======
Year ended 1997............................. $4,267 $3,971 $ - $(1,981) $6,257
====== ====== ====== ======= ======
</TABLE>
(1) The Balance at Beginning of Year is MHC's balance at December 31,
1998.
(2) Reserves not deducted from assets include estimated liabilities for
losses retained by MHC for workers compensation, public liability and
property damage claims.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 24, 2000 By *
--------------------------
David L. Sokol
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Signature Title Date
*
- --------------------------- Chairman and Chief Executive
(David L. Sokol) Officer March 24, 2000
/s/ Patrick J. Goodman
- --------------------------- Senior Vice President and
(Patrick J. Goodman) Chief Financial Officer March 24, 2000
/s/ Gregory E. Abel Director March 24, 2000
- ---------------------------
(Gregory E. Abel)
/s/ Steven A. McArthur Director March 24, 2000
- ----------------------------
(Steven A. McArthur)
/s/ John A. Rasmussen Director March 24, 2000
- ----------------------------
(John A. Rasmussen)
*By: /s/ Steven A. McArthur Attorney-in-Fact March 24, 2000
--------------------------
(Steven A. McArthur)
-91-
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED HEREWITH
- -----------------------
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
EXHIBITS INCORPORATED BY REFERENCE
- ----------------------------------
3.1 Articles of Organization of MidAmerican Funding, LLC
3.2 Operating Agreement of MidAmerican Funding, LLC
4.1 Indenture, dated as of March 11, 1999, by and between MidAmerican
Funding, LLC and IBJ Whitehall Bank & Trust Company, as Trustee
4.2 First Supplemental Indenture, dated as of March 11, 1999, by and
between MidAmerican Funding, LLC and IBJ Whitehall Bank & Trust
Company, as Trustee
4.3 Registration Rights Agreement, dated March 9, 1999, by and among
MidAmerican Funding, LLC, Credit Suisse First Boston Corporation,
Lehman Brothers, Inc., Goldman Sachs & Co. and Merrill Lynch & Co.
10.1 Power Sales Contract between Iowa Power Inc. and Nebraska Public Power
District, dated September 22, 1967 (Filed as Exhibit 4-C-2 to Iowa
Power Inc.'s Registration Statement, Registration No. 2-27681)
10.2 Amendments No. 1 and 2 to Power Sales Contract between Iowa Power Inc.
and Nebraska Public Power District (Filed as Exhibit 4-C-2a to Iowa
Power Inc.'s Registration Statement, Registration No. 2-35624)
10.3 Amendment No. 3 dated August 31, 1970, to the Power Sales Contract
between Iowa Power Inc. and Nebraska Public Power District, dated
September 22, 1967 (Filed as Exhibit 5-C-2-b to Iowa Power Inc.'s
Registration Statement, Registration No. 2-42191)
10.4 Amendment No. 4 dated March 28, 1974 to the Power Sales Contract
between Iowa Power Inc. and Nebraska Public Power District, dated
September 22, 1967 (Filed as Exhibit 5-C-2-c to Iowa Power Inc.'s
Registration Statement, Registration No. 2-51540)
10.5 Amendment No. 5 dated September 2, 1997 to the Power Sales Contract
between Iowa Power Inc. and Nebraska Public Power District, dated
September 22, 1967 (Filed as Exhibit 10.2 to MidAmerican Holdings' and
MidAmerican Energy's respective Quarterly Reports on combined Form 10-Q
for the quarter ended September 30, 1997, Commission File Nos. 1-12459
and 1-11505, respectively)
-92-
<PAGE>
10.6 Iowa Utilities Board Settlement Agreement among MidAmerican Energy
Company, Office of Consumer Advocate, Iowa Energy Consumers, Aluminum
Company of America, Deere & Company, Cargill Inc., U.S. Gypsum Company,
Interstate Power Company and IES Utilities, Inc.
-93-
EXHIBIT 12
MIDAMERICAN FUNDING, LLC
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
MIDAMERICAN
FUNDING MHC INC. (PREDECESSOR)
-------------------------------- ------------------------------
MARCH 12, 1999 - JANUARY 1, 1999 -
DECEMBER 31, 1999 MARCH 11, 1999
-------------------------------- ------------------------------
Supplemental (a) Supplemental (a)
-------------------- ------------------
Adjust- As Adjust- As
ment Adjusted ment Adjusted
-------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $ 124,077 $ -- $ 124,077 $ 16,789 $ -- $ 16,789
Pre-tax (gain) loss of less than
50% owned persons (75) -- (75) (343) -- (343)
--------- -------- --------- -------- ------- --------
124,002 -- 124,002 16,446 -- 16,446
--------- -------- --------- -------- ------- --------
Add (Deduct):
Total income taxes 96,045 -- 96,045 21,377 -- 21,377
Interest on long-term debt 93,533 1,807 95,340 14,814 702 15,516
Other interest charges 7,536 -- 7,536 3,145 -- 3,145
Preferred stock dividends of subsidiary 3,576 -- 3,576 836 -- 836
Preferred stock dividends of subsidiary trust 5,985 -- 5,985 1,995 -- 1,995
Interest on leases 138 -- 138 38 -- 38
--------- -------- --------- -------- ------- --------
206,813 1,807 208,620 42,205 702 42,907
--------- -------- --------- -------- ------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES 330,815 1,807 332,622 58,651 702 59,353
--------- -------- --------- -------- ------- --------
Fixed Charges:
Interest on long-term debt 93,533 1,807 95,340 14,814 702 15,516
Other interest charges 7,536 -- 7,536 3,145 -- 3,145
Preferred stock dividends of subsidiary trust 5,985 -- 5,985 1,995 -- 1,995
Interest on leases 138 -- 138 38 -- 38
--------- -------- --------- -------- ------- --------
Subtotal 107,192 1,807 108,999 19,992 702 20,694
--------- -------- --------- -------- ------- --------
Preferred stock dividends of subsidiary 3,576 -- 3,576 836 -- 836
Ratio of net income before income taxes
to net income 1.7524 -- 1.7524 2.2129 -- 2.2129
--------- -------- --------- -------- ------- --------
Preferred stock dividend requirements
before income taxes 6,267 -- 6,267 1,850 -- 1,850
--------- -------- --------- -------- ------- --------
FIXED CHARGES $ 113,459 $ 1,807 $ 115,266 $ 21,842 $ 702 $ 22,544
--------- -------- --------- -------- ------- --------
RATIO OF EARNINGS TO FIXED CHARGES 2.9 -- 2.9 2.7 -- 2.6
========= ======== ========= ======== ======= ========
</TABLE>
Note: (a) Amounts in the supplemental columns are to reflect MidAmerican
Energy's portion of the net interest component of payments to Nebraska
Public Power District under a long-term purchase agreement for one-half
of the plant capacity from Cooper Nuclear Station.
-1-
<PAGE>
EXHIBIT 12
MIDAMERICAN FUNDING, LLC
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
MHC INC. (PREDECESSOR)
-------------------------------------------------------------------
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------- ------------------------------
Supplemental (a) Supplemental (a)
-------------------- ------------------
Adjust- As Adjust- As
ment Adjusted ment Adjusted
-------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $ 127,154 $ -- $ 127,154 $139,332 $ -- $139,332
Pre-tax (gain) loss of less than
50% owned persons (720) -- (720) 2,234 -- 2,234
--------- -------- --------- -------- ------- --------
126,434 -- 126,434 141,566 -- 141,566
--------- -------- --------- -------- ------- --------
Add (Deduct):
Total income taxes 76,926 -- 76,926 68,390 -- 68,390
Interest on long-term debt 80,908 2,931 83,839 89,898 3,760 93,658
Other interest charges 12,682 -- 12,682 10,034 -- 10,034
Preferred stock dividends of subsidiary 4,952 -- 4,952 6,488 -- 6,488
Preferred stock dividends of subsidiary trust 7,980 -- 7,980 7,980 -- 7,980
Interest on leases 212 -- 212 268 -- 268
--------- -------- --------- -------- ------- --------
183,660 2,931 186,591 183,058 3,760 186,818
--------- -------- --------- -------- ------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES 310,094 2,931 313,025 324,624 3,760 328,384
--------- -------- --------- -------- ------- --------
Fixed Charges:
Interest on long-term debt 80,908 2,931 83,839 89,898 3,760 93,658
Other interest charges 12,682 -- 12,682 10,034 -- 10,034
Preferred stock dividends of subsidiary trust 7,980 -- 7,980 7,980 -- 7,980
Interest on leases 212 -- 212 268 -- 268
--------- -------- --------- -------- ------- --------
Subtotal 101,782 2,931 104,713 108,180 3,760 111,940
--------- -------- --------- -------- ------- --------
Preferred stock dividends of subsidiary 4,952 -- 4,952 6,488 -- 6,488
Ratio of net income before income taxes
to net income 1.5823 -- 1.5823 1.4690 -- 1.4690
--------- -------- --------- -------- ------- --------
Preferred stock dividend requirements
before income taxes 7,836 -- 7,836 9,531 -- 9,531
--------- -------- --------- -------- ------- --------
FIXED CHARGES $ 109,618 $ 2,931 $ 112,549 $117,711 $ 3,760 $121,471
RATIO OF EARNINGS TO FIXED CHARGES 2.8 -- 2.8 2.8 -- 2.7
========= ======== ========= ======== ======= ========
</TABLE>
Note: (a) Amounts in the supplemental columns are to reflect MidAmerican
Energy's portion of the net interest component of payments to Nebraska
Public Power District under a long-term purchase agreement for one-half
of the plant capacity from Cooper Nuclear Station.
-2-
<PAGE>
EXHIBIT 12
MIDAMERICAN FUNDING, LLC
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
MHC INC. (PREDECESSOR)
------------------------------------------------------------------
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------- ------------------------------
Supplemental (a) Supplemental (a)
------------------ -----------------
Adjust- As Adjust- As
ment Adjusted ment Adjusted
-------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $ 143,761 $ -- $ 143,761 $119,705 $ -- $119,705
Pre-tax (gain) loss of less than
50% owned persons (698) -- (698) 9,079 -- 9,079
--------- -------- --------- -------- ------- --------
143,063 -- 143,063 128,784 -- 128,784
--------- -------- --------- -------- ------- --------
Add (Deduct):
Total income taxes 98,422 -- 98,422 66,803 -- 66,803
Interest on long-term debt 102,909 3,615 106,524 105,550 4,595 110,145
Other interest charges 10,941 -- 10,941 9,449 -- 9,449
Preferred stock dividends of subsidiary 10,401 -- 10,401 8,059 -- 8,059
Preferred stock dividends of subsidiary trust 288 -- 288 -- -- --
Interest on leases 375 -- 375 1,088 -- 1,088
--------- -------- --------- -------- ------- --------
223,336 3,615 226,951 190,949 4,595 195,544
--------- -------- --------- -------- ------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES 366,399 3,615 370,014 319,733 4,595 324,328
--------- -------- --------- -------- ------- --------
Fixed Charges:
Interest on long-term debt 102,909 3,615 106,524 105,550 4,595 110,145
Other interest charges 10,941 -- 10,941 9,449 -- 9,449
Preferred stock dividends of subsidiary trust 288 -- 288 -- -- --
Interest on leases 375 -- 375 1,088 -- 1,088
--------- -------- --------- -------- ------- --------
Subtotal 114,513 3,615 118,128 116,087 4,595 120,682
--------- -------- --------- -------- ------- --------
Preferred stock dividends of subsidiary 10,401 -- 10,401 8,059 -- 8,059
Ratio of net income before income taxes
to net income 1.6384 -- 1.6384 1.5229 -- 1.5229
--------- -------- --------- -------- ------- --------
Preferred stock dividend requirements
before income taxes 17,041 -- 17,041 12,273 -- 12,273
--------- -------- --------- -------- ------- --------
FIXED CHARGES $ 131,554 $ 3,615 $ 135,169 $128,360 $ 4,595 $132,955
--------- -------- --------- -------- ------- --------
RATIO OF EARNINGS TO FIXED CHARGES 2.8 -- 2.7 2.5 -- 2.4
========= ======== ========= ======== ======= ========
</TABLE>
Note: (a) Amounts in the supplemental columns are to reflect MidAmerican
Energy's portion of the net interest component of payments to Nebraska
Public Power District under a long-term purchase agreement for one-half
of the plant capacity from Cooper Nuclear Station.
-3-
<PAGE>
EXHIBIT 12
MIDAMERICAN FUNDING, LLC
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MHC INC. (PREDECESSOR)
---------------------------
TWELVE MONTHS ENDED
DECEMBER 31, 1994
---------------------------
Supplemental (a)
-----------------
Adjust- As
ment Adjusted
-------- ----- --------
<S> <C> <C> <C>
Income from continuing operations $123,098 $ -- $123,098
Pre-tax (gain) loss of less than
50% owned persons (270) -- (270)
-------- ----- ---------
122,828 -- 122,828
-------- ----- ---------
Add (Deduct):
Total income taxes 60,457 -- 60,457
Interest on long-term debt 101,267 5,428 106,695
Other interest charges 6,446 -- 6,446
Preferred stock dividends of subsidiary 10,551 -- 10,551
Preferred stock dividends of subsidiary trust - -- -
Interest on leases 1,211 -- 1,211
-------- ----- --------
179,932 5,428 185,360
-------- ----- --------
EARNINGS AVAILABLE FOR FIXED CHARGES 302,760 5,428 308,188
-------- ----- --------
Fixed Charges:
Interest on long-term debt 101,267 5,428 106,695
Other interest charges 6,446 -- 6,446
Preferred stock dividends of subsidiary trust - -- -
Interest on leases 1,211 -- 1,211
-------- ------ --------
Subtotal 108,924 5,428 114,352
-------- ------ --------
Preferred stock dividends of subsidiary 10,551 -- 10,551
Ratio of net income before income taxes
to net income 1.4524 -- 1.4524
-------- ------ --------
Preferred stock dividend requirements
before income taxes 15,324 -- 15,324
-------- ------ --------
FIXED CHARGES $124,248 $5,428 $129,676
-------- ------ --------
RATIO OF EARNINGS TO FIXED CHARGES 2.4 -- 2.4
======== ====== ========
</TABLE>
Note: (a) Amounts in the supplemental columns are to reflect MidAmerican
Energy's portion of the net interest component of payments to Nebraska
Public Power District under a long-term purchase agreement for one-half
of the plant capacity from Cooper Nuclear Station.
-4-
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains Summary Financial Information extracted from the
consolidated balance sheet of Midamerican Funding, LLC as of December 31, 1999,
and the related consolidated statements of income and cash flows for the period
March 12, 1999 through December 31, 1999, 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> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-12-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,505,616
<OTHER-PROPERTY-AND-INVEST> 519,201
<TOTAL-CURRENT-ASSETS> 339,609
<TOTAL-DEFERRED-CHARGES> 347,935
<OTHER-ASSETS> 1,482,992
<TOTAL-ASSETS> 5,195,353
<COMMON> 1,670,866
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 129,577
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,800,416
151,598
31,759
<LONG-TERM-DEBT-NET> 1,508,394
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 204,000
<LONG-TERM-DEBT-CURRENT-PORT> 134,082
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,365,104
<TOT-CAPITALIZATION-AND-LIAB> 5,195,353
<GROSS-OPERATING-REVENUE> 1,433,046
<INCOME-TAX-EXPENSE> 96,045 <F1>
<OTHER-OPERATING-EXPENSES> 1,205,913
<TOTAL-OPERATING-EXPENSES> 1,205,913
<OPERATING-INCOME-LOSS> 227,133
<OTHER-INCOME-NET> 113,855 <F2>
<INCOME-BEFORE-INTEREST-EXPEN> 340,988
<TOTAL-INTEREST-EXPENSE> 109,608
<NET-INCOME> 135,335
0
<EARNINGS-AVAILABLE-FOR-COMM> 135,335
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 52,714
<CASH-FLOW-OPERATIONS> 149,962
<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.
<F2>
Other Income net includes a $11,258,000 income from Discontinued
Operations, net of income taxes.
</FN>
</TABLE>
