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, 1998
-----------------
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number No. Address and Telephone Number Identification
- - --------------- ---------------------------- --------------
1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(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:
Name of each Exchange
Title of Each Class On which Registered
------------------- ---------------------
7.98% MidAmerican Energy Company - Obligated
Preferred Securities of Subsidiary Trust New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $3.30 Series, no par value
Preferred Stock, $3.75 Series, no par value
Preferred Stock, $3.90 Series, no par value
Preferred Stock, $4.20 Series, no par value
Preferred Stock, $4.35 Series, no par value
Preferred Stock, $4.40 Series, no par value
Preferred Stock, $4.80 Series, no par value
Preferred Stock, $5.25 Series, no par value
Preferred Stock, $7.80 Series, no par value
_______________________________________________________________________________
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
--- ---
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].
The aggregate market value of voting stock held by non-affiliates of MidAmerican
Energy Company was zero as of February 26, 1999, when 70,980,203 shares of
common stock, without par value, were outstanding.
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MIDAMERICAN ENERGY COMPANY
1998 Annual Report on Form 10-K
TABLE OF CONTENTS
Part I Page
------ ----
Item 1 Business
General Development of Business.................................. 5
Financial Information About Industry Segments.................... 6
Narrative Description of Business................................ 7
Regulated Electric Operations ................................. 9
Regulated Natural Gas Operations............................... 12
Nonregulated Operations........................................ 13
Construction Program........................................... 14
Regulation..................................................... 14
Item 2 Properties........................................................ 19
Item 3 Legal Proceedings................................................. 21
Item 4 Submission of Matters to a Vote of Security Holders............... 22
Part II
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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........ 23
Item 8 Financial Statements and Supplementary Data....................... 25
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 25
Part III
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Item 10 Directors and Executive Officers of the Registrant................ 25
Item 11 Executive Compensation............................................ 28
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................................. 36
Item 13 Certain Relationships and Related Transactions.................... 37
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 38
Signatures ................................................................ 96
Exhibits Index............................................................. 97
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DEFINITIONS
The following terms are used in this document with the following meanings:
TERM MEANING
ANR ANR Pipeline Company
Btu British Thermal Unit, the quantity of heat required to
raise the temperature of one pound of water one
degree Fahrenheit
CAAA Clean Air Act Amendments of 1990
CalEnergy CalEnergy Company, Inc. (Refer to discussion of merger
in Part I, Item 1, of this Form 10-K)
ComEd Commonwealth Edison Company
Company MidAmerican Energy Company
Cooper Cooper Nuclear Station
DOE United States Department of Energy
EMFs Electric and magnetic fields
EAC Energy Adjustment Clause
EPA United States Environmental Protection Agency
Exchange Act Securities Exchange Act of 1934, as amended
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Holdings MidAmerican Energy Holdings Company, the new name of
CalEnergy Company, Inc. following its reincorporation
in conjunction with the merger of MHC (see below)
ICC Illinois Commerce Commission
IUB Iowa Utilities Board
Iowa-Illinois Iowa-Illinois Gas and Electric Company, a predecessor
company
KW Kilowatt, a thousand watts
KWh Kilowatt-hour, one thousand watts used for one hour
MAPP Mid-Continent Area Power Pool
MHC MHC Inc., an indirect wholly owned subsidiary of
Holdings.
Mcf One thousand cubic feet
MD&A Management's Discussion and Analysis of Financial
Condition and Results of Operations
MidAmerican MidAmerican Energy Company, a wholly owned subsidiary
of MHC
MidAmerican Capital MidAmerican Capital Company, a wholly owned subsidiary
of MHC
MidAmerican Realty MidAmerican Realty Services Company, a 95 percent-owned
subsidiary of MHC
Midwest Midwest Power Systems Inc., a predecessor company
Midwest Capital Midwest Capital Group, Inc., a wholly owned subsidiary
of MHC
MGP Manufactured gas plant
MW Megawatts, one million watts
NBPL Northern Border Pipeline Company
NGPL Natural Gas Pipeline Company of America
NNG Northern Natural Gas
NPDES National Pollutant Discharge Elimination System
NPPD Nebraska Public Power District
NRC Nuclear Regulatory Commission
NWPA Nuclear Waste Policy Act of 1982
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OCA Iowa Office of Consumer Advocate
Order 636 or Orders FERC Order 636 and related orders
PCBs Polychlorinated biphenyls
PGA Purchase gas adjustment clause
PRPs Potentially responsible parties
SDPUC South Dakota Public Utilities Commission
SFAS Statement of Financial Accounting Standards
Quad Cities Station Quad Cites Nuclear Power Station
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PART I
ITEM 1. BUSINESS
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(A) GENERAL DEVELOPMENT OF BUSINESS
MidAmerican Energy Company (MidAmerican) is a public utility company
headquartered in Des Moines, Iowa, and incorporated in the state of Iowa. On
March 12, 1999, MidAmerican became a wholly owned subsidiary of MidAmerican
Energy Holdings Company (Holdings), the successor by a reincorporation merger
dated March 12, 1999, to CalEnergy Company, Inc. (CalEnergy).
MidAmerican 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 became, through a corporate
reorganization involving the exchange of stock, a wholly owned subsidary of MHC
Inc., which, until March 12, 1999, was known as MidAmerican Energy Holdings
Company (MHC). Certain subsidiaries of MidAmerican then became subsidiaries of
MHC.
MHC is a wholly owned subsidiary of MidAmerican Funding, LLC (MidAmerican
Funding), a wholly owned subsidiary of Holdings. Holdings is a global energy
company that, in addition to MidAmerican Funding, manages and owns interests in
power generation facilities in operation, construction and development
worldwide. Through its Northern Electric operations in the United Kingdom
(U.K.), Holdings supplies and distributes electricity and gas to approximately
2.0 million customers in the U.K. It also develops and produces energy from
diversified fuel sources. Holdings conducts business in the U.S., U.K.,
Philippines, Indonesia, Poland and Australia.
CALENERGY MERGER
On March 12, 1999, the parties to an Agreement and Plan of Merger dated
August 11, 1998 completed a transaction whereby MidAmerican became a wholly
owned indirect subsidiary of Holdings. As a part of this transaction, CalEnergy,
a Delaware corporation, merged with and into a wholly owned subsidiary which was
an Iowa corporation (Reincorporation Sub), thereby effecting a reincorporation
(Reincorporation Merger). Immediately following the Reincorporation Merger, a
second wholly owned subsidiary of CalEnergy merged with and into MHC (MHC
Merger). As a part of the MHC Merger, MHC (formerly MidAmerican Energy Holdings
Company) changed its name to MHC Inc. Subsequent to the MHC Merger,
Reincorporation Sub changed its name to MidAmerican Energy Holdings Company. As
a result of the Reincorporation Merger and the MHC Merger, MidAmerican became an
indirect subsidiary of Holdings, all direct and indirect subsidiaries of MHC
each became an indirect subsidiary of Holdings and each outstanding share of
common stock of MHC was converted into the right to receive $27.15 in cash.
CHANGES IN THE UTILITY INDUSTRY AND MIDAMERICAN
The electric utility industry is in the midst of significant 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 occurred, and are expected to continue to
occur, 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 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'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. However, beginning January 1, 1998, MidAmerican also manages its
operations as four distinct business units: generation, transmission, energy
distribution and retail. It is under this framework that MidAmerican believes it
can best prepare for, and succeed in, the energy business of the future. With
these four business units, MidAmerican 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'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.
The Company 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.
YEAR 2000 COMPUTER ISSUES
MidAmerican's businesses and operations, as well as those of third parties
with whom MidAmerican transacts business, utilize computers and
computer-controlled systems, applications and processes (herein after referred
to as "Systems"). Because of the program structures within some of these
Systems, they could fail or create erroneous results when required to recognize
the year 2000. The effect of such failures or errors could result in significant
operational problems and/or costs material to MidAmerican. MidAmerican is
addressing the year 2000 issue and taking steps, including remediation and
contingency planning, to assure that any processes that may be date-sensitive
are ready for the year 2000. Refer to the ACTIVITIES REGARDING YEAR 2000 DATE
ISSUES section of MD&A included in Part IV, Item 14 of this Form 10-K for a
discussion of this topic.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information on MidAmerican's 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.
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(C) NARRATIVE DESCRIPTION OF BUSINESS
MidAmerican is the largest energy company headquartered in Iowa, with
assets and 1998 revenues totaling $3.6 billion and $1.7 billion, respectively.
Its strategy is to become the leading regional provider of energy and
complementary services. MidAmerican is primarily engaged in the business of
generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican distributes
electric energy 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, 1998, MidAmerican had 652,900 retail electric
customers and 621,500 retail natural gas customers.
In addition to retail sales, MidAmerican delivers electric energy to other
utilities and municipalities who distribute it to end-use customers (sales for
resale) and transports natural gas through its distribution system for a number
of end-use customers who have independently secured their supply of natural gas.
MidAmerican'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 has a residential, agricultural, commercial and diversified
industrial customer group, in which no single industry or customer accounted for
more than 3% (food and kindred products industry) of its total 1998 electric
operating revenues or 3% (food and kindred products industry) of its total 1998
gas operating margin. Among the primary industries served by MidAmerican 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.
During 1998, MidAmerican increased its emphasis on wholesale gas marketing
activities, some of which was previously managed by one of MHC's nonregulated
subsidiaries. (Refer to the NONREGULATED OPERATIONS section later in Part I for
further discussion).
For the year ended December 31, 1998, MidAmerican derived approximately 69%
of its gross operating revenues from its regulated electric business, and 25%
from its regulated gas business and 6% from its nonregulated business
activities. For 1997 and 1996, the corresponding percentages were 65% electric,
31% gas and 4% nonregulated; and 66% electric, 32% gas and 2% 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
1998 1997 1996
---- ---- ----
Residential 22.2% 20.9% 21.1%
Small General Service 17.5 16.5 16.2
Large General Service 28.1 27.4 27.6
Other 4.4 4.4 4.5
Sales for Resale 27.8 30.8 30.6
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Retail Electric Sales
By State
1998 1997 1996
---- ---- ----
Iowa 88.4% 88.6% 88.7%
Illinois 10.9 10.7 10.6
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 will be 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
1998 1997 1996
---- ---- ----
Residential 59.9% 60.8% 61.1%
Small General Service 32.1 33.1 33.3
Large General Service 3.7 4.2 4.6
Other 4.3 1.9 1.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
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Retail Gas Sales
By State
1998 1997 1996
---- ---- ----
Iowa 79.0% 79.1% 78.0%
Illinois 10.2 10.4 11.0
South Dakota 10.1 9.8 10.3
Nebraska 0.7 0.7 0.7
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
There are seasonal variations in MidAmerican's electric and gas businesses
which are principally related to the use of energy for air conditioning and
heating. In 1998, 40% of MidAmerican's electric revenues were reported in the
months of June, July, August and September, and 54% of MidAmerican's gas
revenues were reported in the months of January, February, March and December.
At December 31, 1998, MidAmerican had 3,703 full-time employees of which
1,698 were covered by union contracts. MidAmerican 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 109 441 7/31/99
IBEW 499 1,107 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.
REGULATED ELECTRIC OPERATIONS
The annual hourly peak demand on MidAmerican's electric system occurs
principally as a result of air conditioning use during the cooling season. In
July 1998, MidAmerican recorded an hourly peak demand of 3,643 MW, which was 90
MW more than MidAmerican's previous record hourly peak of 3,553 MW set in 1995.
MidAmerican's accredited net generating capability in the summer of 1998
was 4,425 MW. Accredited net generating capability represents the amount of
generation available to meet the requirements on MidAmerican's energy system,
net of the effect of participation purchases and sales, and consists of
Company-owned generation and power purchased under a long-term power purchase
contract. The net generating capability at any time may be less 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 1998.
MidAmerican is interconnected with certain Iowa and neighboring utilities
and is involved in an electric power pooling agreement known as MAPP. MAPP is a
voluntary association of electric utilities doing business in Iowa, Minnesota,
Nebraska and North Dakota and portions of Illinois, Missouri, Montana, South
Dakota and Wisconsin and the Canadian provinces of Saskatchewan and Manitoba.
Its membership also
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includes power marketers, regulatory agencies and independent power producers.
MAPP 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 MAPP 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 would be contractually imposed by MAPP. MidAmerican's reserve margin
for 1998 was approximately 20%.
MidAmerican'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's transmission system is unconstrained and has adequate capacity to
deliver energy to MidAmerican's distribution system and to export and import
energy with other interconnected systems. As energy markets open to competition,
MidAmerican 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
- - -----------------------------------
MidAmerican's sources of fuel for electric generation were as follows for
the periods shown:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Coal 79.2% 76.3% 75.6%
Nuclear* 19.5 23.0 23.9
Gas 1.1 0.6 0.4
Oil 0.2 0.1 0.1
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
*Nuclear includes generation purchased through a long-term power purchase
agreement with NPPD. Refer to Item 2, Properties, for detail of generating
facilities.
Prior to July 1997, MidAmerican was allowed to recover its energy costs
from most of its electric utility customers through EACs. Beginning in July
1997, the Iowa EAC was eliminated as part of the Iowa pricing plan approved by
the IUB. Accordingly, fluctuations in energy costs now may affect MidAmerican's
earnings.
All of the coal-fired generating stations operated by MidAmerican are
fueled primarily by low-sulfur, western coal from the Powder River Basin. The
use of low-sulfur western coal enables MidAmerican to comply with the acid rain
provisions of the CAAA without having to install additional costly emissions
control equipment at its generating stations. MidAmerican's coal supply
portfolio includes multiple suppliers and mines under agreements of varying term
and quantity flexibility. During 1998 approximately 65% of MidAmerican's coal
purchases were made under spot coal purchase agreements. MidAmerican regularly
monitors the western coal market, looking for opportunities to improve its coal
supply portfolio. MidAmerican believes its sources of coal supply are and will
continue to be satisfactory. Additional information regarding MidAmerican'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.
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MidAmerican uses both the Union Pacific Railroad (UP) and the Burlington
Northern and Santa Fe Railway (BNSF) as originating carriers of its coal supply
in order to achieve transportation diversity and competitive rates. Coal is
delivered directly to MidAmerican's Neal Energy Center and Council Bluffs Energy
Center (CBEC) by the UP and the BNSF, respectively. Coal for MidAmerican's
Louisa and Riverside Energy Centers is delivered to an interchange point by the
BNSF for transportation to its destination by the I&M Rail Link. Competitive
rail access is available to CBEC and to the interchange point for deliveries to
Louisa and Riverside Energy Centers. MidAmerican believes its coal
transportation arrangements are adequate to meet its coal delivery needs.
While coal deliveries to certain of MidAmerican's generating stations were
adversely affected by the UP's nationwide operational problems in 1997 and early
1998, MidAmerican believes its coal inventories are adequate to meet its needs
at expected generation levels.
MidAmerican 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's needs.
MidAmerican is a 25% joint owner of Quad Cities Station. MidAmerican has
been advised by ComEd, the joint owner and operator of Quad Cities Station, that
the majority of its uranium concentrate and uranium conversion requirements for
Quad Cities Station for 1999 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 2004. Commitments for fuel fabrication
have been obtained at least through 2001. 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 purchases one-half of the power and energy of Cooper through a
long-term power purchase contract with NPPD. Approximately 30% of the fuel in
the core at Cooper must be replaced every 18 months. The next refueling cycle is
currently scheduled to begin in March 2000. NPPD has informed MidAmerican 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 NWPA, the DOE 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 NPPD, as required by the NWPA, each
signed a contract with the DOE to provide for the disposal of spent nuclear fuel
and high-level radioactive waste beginning not later than January 1998. The DOE
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 DOE for disposal activities are being financed by fees charged to owners and
generators of the waste. ComEd has informed MidAmerican that there is on-site
storage capability at the Quad Cities Station sufficient to permit such interim
storage at least through 2006. NPPD has informed MidAmerican 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. Meeting spent nuclear fuel storage requirements beyond such time could
require modifications to the spent fuel storage pools or new and separate
storage facilities. Industry activities are underway to utilize dry casks for
the interim storage of high-level radioactive waste. This may provide an
alternative for interim on-site storage of such waste.
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REGULATED NATURAL GAS OPERATIONS
MidAmerican is engaged in the procurement, transportation, storage and
distribution of natural gas for utility and end-use customers in the Midwest.
MidAmerican purchases natural gas from various suppliers, transports it from the
production area to MidAmerican'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's distribution system.
MidAmerican also transports through its distribution system natural gas
purchased independently by a number of end-use customers. During 1998,
approximately 42% of total gas delivered on MidAmerican's system was under gas
transportation service.
On October 30, 1998, MidAmerican filed a Small Volume Transportation Plan
with the IUB to unbundle service for its small volume customers. Under the plan,
which is subject to IUB approval, all of MidAmerican's small volume natural gas
customers in Iowa, including residential customers, would be allowed to choose
their own natural gas supplier/marketer beginning May 1, 2000. Refer to the
OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A in Part VI, Item 14 of
this Form 10-K for more information.
Fuel Supply and Capacity
- - ------------------------
MidAmerican 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 has rights to firm pipeline capacity to transport gas to its
service territory through direct interconnects to the NNG, NGPL, NBPL and ANR
pipeline systems. Firm capacity in excess of MidAmerican'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 IUB rulings have allowed MidAmerican 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's cost of gas is recovered from customers through purchased gas
adjustment clauses. In 1995, the IUB approved MidAmerican's Incentive Gas Supply
Procurement Program for a three-year test period which expired in November 1998.
MidAmerican has filed with the IUB to continue this program. Under the program,
MidAmerican is required to file with the IUB every six months a comparison of
its gas procurement costs to an index-based reference price. If MidAmerican's
cost of gas for the period is lessor greater than an established tolerance band
around the reference price, then MidAmerican shares a portion of the savings or
cost with customers. Since the implementation of the program, MidAmerican has
successfully achieved and shared in savings for its natural gas customers.
MidAmerican 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 also
utilizes three liquefied natural gas plants and two propane-air plants to meet
peak day demands.
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On February 2, 1996, MidAmerican had its highest peak-day delivery of
1,143,026 MMBtus. This peak-day delivery consisted of approximately 88%
traditional sales service and 12% transportation service of customer-owned gas.
MidAmerican's 1998/99 winter heating season peak-day delivery of 1,119,838
MMBtus was reached on January 4, 1999. This peak-day delivery included
approximately 78% traditional sales service and 22% transportation service.
The supply sources utilized by MidAmerican to meet its 1998/99 peak-day
deliveries to its sales service customers were:
Thousands Percent
of of
MMBtus Total
------ -------
Leased Storage and Peak Shaving Plants 420.1 48.3%
Firm Supply 449.2 51.7
----- -----
Total 869.3 100.0%
===== =====
MidAmerican has strategically built multiple pipeline interconnections into
several of its larger communities. MidAmerican operates interconnects with NNG,
NGPL, NBPL, and ANR into the Quad Cities; with NNG, NGPL and NBPL into Cedar
Rapids/Iowa City; and with NNG and NGPL 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 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's system
customers are shared with all jurisdictions through a consolidated PGA.
MidAmerican 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's nonregulated operations include a variety of activities
outside of the traditional regulated electric and gas services. Some of the
activities included in nonregulated operations have previously been reflected in
Non-Operating Income on the Company's Consolidated Statements of Income. Refer
to Note 1(b) of Notes to Consolidated Financial Statements in Part IV, Item 14
of this Form 10-K. Additionally, MidAmerican has initiated new activities in
preparation for a competitive electric utility industry.
A majority of MidAmerican's nonregulated revenue is generated by its
nonregulated natural gas marketing services. MidAmerican purchases gas from
producers and third party marketers and sells it to wholesalers and large
end-users. Beginning in May 1998, contracts previously serviced by a
nonregulated subsidiary of MHC were renewed as MidAmerican contracts, creating a
significant increase in these operations at MidAmerican. In addition,
MidAmerican 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 39 million MMBtu's, 21 million
MMBtu's and 14 million MMBtu's for 1998, 1997 and 1996, respectively.
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Nonregulated revenues of MidAmerican also include awards received for
successful performance under its Incentive Gas Supply Procurement Plan discussed
in the REGULATED NATURAL GAS OPERATIONS section.
As the utility industry progresses toward a competitive marketplace,
MidAmerican is researching and developing additional services and products to
offer customers. Although many of the products and services are not ready to be
marketed, MidAmerican is now offering several. For example, MidAmerican offers
an Extended Service Protection Program that provides coordination and coverage
of maintenance services for home appliances. It is anticipated that customers in
the competitive environment will want more than the traditional services from
their energy provider, and MidAmerican expects to seek ways to satisfy these
customer desires.
CONSTRUCTION PROGRAM
The table below shows actual utility capital expenditures for 1998 and
budgeted utility expenditures for 1999.
1998 1999
Actual Budgeted
--------- ---------
(In thousands)
Electric Property
Production $ 15,968 $ 30,996
Transmission 23,396 30,180
Distribution 50,281 47,149
Gas 29,618 29,686
Information Technology
and Other 66,552 47,185
--------- ---------
Subtotal 185,815 185,196
Quad Cities Fuel 7,539 9,100
-------- --------
Total $193,354 $194,296
======== ========
The amounts shown above include allowance for funds used during
construction. Of the $31.0 million of budgeted electric production expenditures
for 1999, $6.5 million is for expenditures at the Quad Cities Station. In
addition to the expenditures shown above, MidAmerican contributes to external
trusts for Quad Cities Station nuclear decommissioning. Refer to the INVESTING
ACTIVITIES AND PLANS section of MD&A, under "Nuclear Decommissioning" for
further discussion.
REGULATION
General Utility Regulation
- - --------------------------
MidAmerican 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 FERC 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 is regulated by the ICC as to retail rates, services, 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 is regulated by the
IUB as to retail rates, services, accounts, construction of utility property and
in other respects as provided by the laws of Iowa.
-14-
<PAGE>
MidAmerican is also subject to regulation by the SDPUC as to electric and gas
retail rates and service as provided by the laws of South Dakota.
Rate Regulation
- - ---------------
Under Iowa law, temporary collection of higher rates can begin (subject to
refund) 90 days after filing with the IUB for that portion of such higher rates
approved by the IUB based on prior ratemaking principles and a rate of return on
common equity previously approved. If the IUB 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.
Information regarding MidAmerican's 1997 rate settlement for its Iowa electric
rates is included under the caption "Rate Matters" in the OPERATING ACTIVITIES
AND OTHER MATTERS section of MD&A in Part IV, Item 14 of this Form 10-K.
MidAmerican's cost of gas is reflected in its Iowa gas rates through the Iowa
Uniform Purchased Gas Adjustment Clause.
South Dakota law authorizes the SDPUC 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 be put into effect by MidAmerican 45 days
after filing with the ICC, or on such earlier date as the ICC may approve,
subject to the power of the ICC to suspend the proposed new rates for a period
not to exceed eleven months after filing, pending a hearing. Under Illinois
electric tariffs, MidAmerican'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'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 ICC and transitions portions of the traditional electric
services to a competitive environment. In general, the new law limits the ICC'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 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 depreciation cost recovery.
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. Rules no
longer specify mandatory spending levels; however, electric and gas utilities
previously were required to spend approximately 2.0% and 1.5%, respectively, of
their annual Iowa jurisdictional revenues. Utilities are allowed to recover the
cost of energy efficiency programs from their customers, subject to IUB review.
MidAmerican is recovering its historical energy efficiency program costs, which
were deferred until recovery in accordance with prior energy efficiency
regulations. MidAmerican is also recovering the current costs of its ongoing
energy efficiency programs. Refer to the
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<PAGE>
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 is subject to the jurisdiction of the NRC with respect to its
license and 25% ownership interest in Quad Cities Station Units 1 and 2. ComEd
is the operator of the Quad Cities Station and is under contract with
MidAmerican to secure and keep in effect all necessary NRC licenses and
authorizations.
Under the terms of a long-term power purchase contract with NPPD,
MidAmerican has contracted to purchase through September 21, 2004, one-half of
the power and energy from Cooper, which is located near Brownville, Nebraska.
MidAmerican pays for one-half of the fixed and operating costs of Cooper
(excluding depreciation but including debt service) and MidAmerican's share of
fuel costs (including disposal costs) based upon energy delivered. MidAmerican
is not subject to the jurisdiction of the NRC with respect to Cooper and the
long-term power purchase contract with NPPD. NPPD, as the sole owner, licensee
and operator of Cooper, is thereby the only entity subject to the jurisdiction
of the NRC with respect to Cooper. Under the terms of the long-term power
purchase contract, NPPD is required to assure that Cooper is in compliance with
all of the NRC regulations.
The NRC 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 NRC review and regulatory
process covers, among other things, operations, maintenance, and environmental
and radiological aspects of such stations. The NRC 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 NRC determines there are deficiencies in
state, local or utility emergency preparedness plans relating to such facility,
and the deficiencies are not corrected. ComEd and NPPD have advised MidAmerican
that emergency preparedness plans for the Quad Cities Station and Cooper,
respectively, have been approved by the NRC. ComEd and NPPD have also advised
MidAmerican that state and local plans relating to the Quad Cities Station and
Cooper, respectively, have been approved by the Federal Emergency Management
Agency.
In January 1998, ComEd was informed by the NRC that the performance of Quad
Cities Station was trending adversely. During outages to address certain safety
issues at Units 1 and 2 in the first five months of 1998, ComEd worked
extensively with the NRC regarding its concerns. In a July 1998 meeting ComEd
was informed by the NRC that while the adverse trend at Quad Cities Station
appears to have been stopped, the operating time of the units since their
restarts in May and June 1998 was not yet sufficient for the NRC to make a
final determination of the trend status of Quad Cities Station. The NRC senior
managers are scheduled to meet again in April 1999 and are scheduled to consider
the performance of nuclear power plants, including Quad Cities Station.
In June 1988, the NRC adopted regulations with respect to the
decommissioning of nuclear power plants. In 1996, the NRC enacted revisions to
provide clarification of these regulations. Among other things, the regulations
and amendments address the planning and funding for the eventual decommissioning
of nuclear power plants. In response to these regulations, MidAmerican submitted
a report to the NRC in July 1990 indicating that it will provide "reasonable
assurance" that funds will be available to pay the costs of decommissioning its
share of the Quad Cities Station. NPPD has advised MidAmerican that a report
addressing decommissioning funding for Cooper has been submitted and approved by
the NRC.
-16-
<PAGE>
MidAmerican has established external trusts for the investment of funds
collected for nuclear decommissioning associated with Quad Cities Station. NPPD
maintains an internal account and an external trust for decommissioning funds
associated with Cooper. MidAmerican makes contributions to NPPD related to
decommissioning and reflects those contributions in MidAmerican's power purchase
costs. Electric tariffs currently in effect include provisions for annual
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's cost related to decommissioning funding in 1998 was $19.3 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 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 certain of MidAmerican's
existing facilities, (iv) increasing the risk of delay on construction projects,
(v) increasing MidAmerican's cost of waste disposal and (vi) possibly reducing
the reliability of service provided by MidAmerican and the amount of energy
available from MidAmerican's facilities. Any of such items could have a
substantial impact on amounts required to be expended by MidAmerican in the
future.
Air Quality -
The CAAA was signed into law in November 1990. MidAmerican has five
jointly owned and six wholly owned coal-fired generating units, which represent
approximately 65% of MidAmerican's electric generating capability. Essentially
all utility generating units are subject to the provisions of the CAAA which
address continuous emissions monitoring, permit requirements and fees and
emissions of certain substances. Under current regulations, MidAmerican does not
anticipate its construction costs for the installation of emissions monitoring
system upgrades through 2000 to be material. MidAmerican's generating units meet
all Title IV CAAA requirements through 2007. Title IV of the CAAA, 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 is required to obtain NPDES permits to discharge effluents
(including thermal discharges) from its properties into various waterways. All
NPDES permits are subject to renewal after specified time periods not to exceed
five years. MidAmerican has obtained all necessary NPDES permits for its
generating stations, and when such permits are expected to expire, MidAmerican
will file applications for renewal.
-17-
<PAGE>
Hazardous Materials and Waste Management -
The EPA and state environmental agencies have determined that contaminated
wastes remaining at certain decommissioned MGP 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 is evaluating 27 properties which were, at one time, sites of
MGP facilities in which it may be a potentially responsible party. MidAmerican's
present estimate of probable remediation costs of these sites is $24 million.
The ICC has approved the use of a tariff rider which permits recovery of the
actual costs of litigation, investigation and remediation relating to former MGP
sites. MidAmerican's present rates in Iowa provide for a fixed annual recovery
of MGP costs.
Additional information relating to the Company's MGP 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 developed a comprehensive program for the use, handling,
control and disposal of all 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'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 EMFs without conclusive results. EMFs are produced by all devices carrying
or using electricity, including transmission and distribution lines and home
appliances. MidAmerican cannot predict the effect on construction costs of
electric utility facilities or operating costs if EMF regulations were to be
adopted. Although MidAmerican is not the subject of any suit involving EMFs,
litigation has been filed in a number of jurisdictions against a variety of
defendants alleging that EMFs had an adverse effect on health. If such
litigation were successful, the impact on MidAmerican and on the electric
utility industry in general could be material.
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 (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 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 CAAA, 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 (HAPs) by electric
utility steam generating units. In February 1998, EPA issued its Final Report to
Congress, indicating that mercury is the HAP 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 CAAA
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
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<PAGE>
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 of reducing its mercury emissions would depend on available
technology at the time, but could be material.
ITEM 2. PROPERTIES
- - -------------------
MidAmerican'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 are in good operating condition and well
maintained.
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<PAGE>
The net accredited generating capacity of MidAmerican, along with the
participation purchases and sales, net, and firm purchases and sales, net, are
shown for summer 1998 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 191
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 148
River Hills Energy Center - 8 units 100.0 Gas/Oil 116
Sycamore Energy Center - 2 units 100.0 Gas/Oil 149
-----
764
-----
Nuclear:
Cooper (1) (1) Nuclear 385
Quad-Cities Station
Unit No. 1 25.0 Nuclear 192
Unit No. 2 25.0 Nuclear 190
-----
767
-----
Hydro:
Moline - 4 units 100.0 Water 3
-----
Net Accredited Generating Capacity 4,381
Participation Purchases and Sales, Net 44
-----
Total Net Accredited Generating Capability 4,425
Firm Purchases and Sales, Net (50)
-----
Adjusted Net Accredited Generating Capability 4,375
=====
(1) Cooper is owned by NPPD and the amount shown is MidAmerican's
entitlement (50%) of Cooper's accredited capacity under a power
purchase agreement extending to the year 2004.
-20-
<PAGE>
The electric transmission system of MidAmerican at December 31, 1998,
included 896 miles of 345-kV lines, 1,294 miles of 161-kV lines, 1,796 miles of
69-kV lines and 219 miles of 34.5-kV lines.
The gas distribution facilities of MidAmerican at December 31, 1998,
included 19,428 miles of gas mains and services.
Substantially all the former Iowa-Illinois utility property and franchises,
and substantially all of the former Midwest electric utility property located in
Iowa, or approximately 80% of gross utility plant, is pledged to secure mortgage
bonds.
ITEM 3. LEGAL PROCEEDINGS
- - --------------------------
The Company and its subsidiaries have no material legal proceedings except
for the following:
Environmental Matters
- - ---------------------
Information on the Company's environmental matters is included in Item 1 -
Business and under the Note "Environmental Matters" in Notes to Consolidated
Financial Statements in Part IV, Item 14 of this Form 10-K.
Cooper Litigation
- - -----------------
On July 23, 1997, NPPD filed a Complaint, in the United States District
Court for the District of Nebraska, naming MidAmerican 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, NPPD
seeks a declaratory judgment in the following respects: (1) that MidAmerican is
obligated to pay 50% of all costs and expenses associated with decommissioning
Cooper, and that in the event NPPD continues to operate Cooper after expiration
of the power purchase agreement (September 2004), MidAmerican is not entitled to
reimbursement of any decommissioning funds it has paid to date or will pay in
the future; (2) that the current method of allocating transition costs as a part
of the decommissioning cost is proper under the power purchase agreement; and
(3) that the current method of investing decommissioning funds is proper under
the power purchase agreement.
MidAmerican filed its answer and contingent counterclaims. The contingent
counterclaims filed by MidAmerican are generally as follows: (1) that
MidAmerican has no duty under the power purchase agreement to reimburse or pay
50% of the decommissioning costs unless certain conditions occur; (2) that NPPD
has the duty to repay all amounts that MidAmerican has prefunded for
decommissioning in the event NPPD operates the plant after the term of the power
purchase agreement; (3) that NPPD is equitably estopped from continuing to
operate the plant after the term of the power purchase agreement; (4) that NPPD
has granted MidAmerican 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 has no duty to pay for nuclear fuel, O&M
projects or capital improvements that have useful lives after the term of the
power purchase agreement; (7) that transition costs are not included in any
decommissioning costs and expenses; (8) that NPPD has breached its duty to
MidAmerican in making investments of certain funds; (9) that reserves in certain
accounts are excessive and should be refunded to MidAmerican; and (10) that NPPD
must credit MidAmerican for certain payments by MidAmerican for low-level
radioactive waste disposal.
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MidAmerican and NPPD are currently involved in discovery. The trial in this
case is presently scheduled for November 1999. MidAmerican is vigorously
defending and pursuing its interest in this proceeding.
North Star Steel Company
- - ------------------------
On December 8, 1997, North Star Steel Company (NSS), a retail MidAmerican
electric customer, filed a Complaint in the United States District Court for the
Southern District of Iowa naming MHC and MidAmerican as defendants. The
Complaint alleges that MidAmerican's refusal to allow NSS to obtain retail
electric service from an unspecified alternative energy company amounts to a
violation of federal antitrust laws. NSS sought to recover an unspecified level
of damages, and to require MidAmerican to provide retail wheeling service so
that NSS could obtain electricity from an unnamed supplier. On June 23, 1998,
the District Court issued an Order Granting Summary Judgment in favor of
MidAmerican. On July 20, 1998, NSS appealed that decision to the United States
Court of Appeals for the Eighth Circuit. That appeal is currently pending.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- - ----------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- - --------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
MidAmerican's outstanding common stock is held entirely by MHC and is not
publicly traded. Cash dividends declared on common stock of MidAmerican are
shown in the table below (in thousands).
1998 1997
-------- --------
4th Quarter $33,500 $29,000
3rd Quarter 33,500 20,000
2nd Quarter 28,600 40,000
1st Quarter 28,600 31,500
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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - ------------------------------------------------------------------
MidAmerican is exposed to market risk, including changes in the market
price of certain commodities. To manage the price volatility relating to these
exposures, MidAmerican enters into various financial derivative instruments. A
Risk Management Committee of senior officers governs the overall direction,
structure, conduct and control of the Company's risk management activities,
including the use of financial derivative instruments. Responsibilities of the
Risk Management Committee include 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 uses hedge accounting for commodity-related instruments
pertaining to its natural gas purchasing operations. MidAmerican changed the
method of reporting market risk from the tabular presentation in the previous
year to the sensitivity analysis method in the current period to provide readers
with an estimate of impacts on net income or fair value where appropriate.
COMMODITY PRICE RISK
Regulated Natural Gas Operations-
Under the current regulatory framework, MidAmerican is allowed to recover
in revenues the cost of gas sold from most of its regulated gas customers
through a purchased gas adjustment clause (PGA). MidAmerican derived
approximately 94% of its regulated gas revenues from such customers in 1998.
Since the majority of MidAmerican's firm natural gas supply contracts contain
pricing provisions based on a daily or monthly market index, MidAmerican's
regulated gas customers, although ensured of the availability of gas supplies,
retain the risk associated with market price volatility.
MidAmerican enters into natural gas futures and swap agreements to mitigate
a portion of the market risk retained by its regulated gas customers through the
PGA. These financial derivative activities are recorded as hedge accounting
transactions, with net amounts 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. At December 31, 1998,
MidAmerican had entered into the following financial derivative instruments for
regulated operations:
Futures Contracts:
Net Contract Volumes- Long (Short) (240,000) MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) ($1,843)
Swap Contracts:
Contract Volumes 7,200,000 MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) $225
A $0.05 increase in underlying natural gas prices would increase unrealized
losses on the above futures contracts by approximately $12,000 and would
increase unrealized gains on the above swap contracts by approximately $360,000.
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<PAGE>
Nonregulated Natural Gas Operations-
MidAmerican 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 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
recorded as hedge accounting transactions, with net amounts exchanged or accrued
under swap agreements and realized gains or losses on futures contracts included
in the cost of gas sold. At December 31, 1998, MidAmerican had entered into the
following financial derivative instruments for nonregulated operations:
Futures Contracts:
Net Contract Volumes- Long (Short) (110,000) MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) $28
Swap Contracts:
Contract Volumes 9,122,181 MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) $(3,121)
A $0.05 increase in underlying natural gas prices would decrease unrealized
gains on the above futures contracts by approximately $6,000 and would decrease
unrealized losses on the above swap contracts by approximately $456,000.
Unrealized gains and losses on financial derivatives entered into for
nonregulated operations have little ultimate impact on MidAmerican's earnings
and cash flow as these amounts are offset by corresponding changes in the
theoretical value of underlying contracts for physical delivery of natural gas
to nonregulated customers.
1997 Total Natural Gas Operations-
At December 31, 1997, MidAmerican had entered into the following financial
derivative instruments for natural gas operations:
Futures Contracts:
Net Contract Volumes- Long(Short) 2,000,000 MMBtu
Unrealized Gain (Loss) at 12/31/97 (in thousands) $(386)
Swap Contracts:
Contract Volumes 6,968,807 MMBtu
Unrealized Gain (Loss) at 12/31/97 (in thousands) $(885)
-24-
<PAGE>
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 will be MidAmerican's new independent accountants for
accounting periods subsequent to the fiscal year ended December 31, 1998. For
further details, refer to MidAmerican's Form 8-K filed on March 12, 1999.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- - --------------------------------------------------
Information concerning the current directors and executive officers of
MidAmerican is as follows:
(A) IDENTIFICATION
Served in Served as
Present Present Director
Name Age Position Position Since Since
- - ---- --- -------- -------------- ---------
David L. Sokol 42 Chairman and Director 1999 1999
Gregory E. Abel 36 Chief Executive Officer
and Director 1999 1999
Ronald W. Stepien 52 President and Director 1999 1996
Wayne O. Smith 55 Executive Vice President
and Director 1997 1997
Jack L. Alexander 51 Senior Vice President 1998
David J. Levy 44 Senior Vice President 1996
John A. Rasmussen, Jr. 53 Senior Vice President
and General Counsel 1996
Alan L. Wells 39 Senior Vice President and
Chief Financial Officer 1997
Beverly A. Wharton 45 Senior Vice President 1996
Officers are elected annually by the Board of Directors. 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.
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<PAGE>
(B) BUSINESS EXPERIENCE
DAVID L. SOKOL
Chairman of MidAmerican since March 1999. Mr. Sokol was Chairman of
CalEnergy from May 1994 to March 1999 and Chief Executive Officer of CalEnergy
from April 1993 to March 1999.
GREGORY E. ABEL
Chief Executive Officer of MidAmerican since March 1999. Mr. Abel joined
CalEnergy in 1992. At CalEnergy he held various executive positions including
responsibility for engineering, construction, accounting and various
administrative functions.
RONALD W. STEPIEN
President of MidAmerican since November 1, 1998. Executive Vice President
of MidAmerican from November 1, 1996, to October 31, 1998, and Group Vice
President from 1995 to November 1, 1996. Vice President of Iowa-Illinois from
1990 to 1995.
WAYNE O. SMITH
Executive Vice President of MidAmerican since September 1, 1997. Executive
Vice President and President and Chief Operating Officer - Specialty Chemicals
at B. F. Goodrich Company from 1994 to 1997.
JACK L. ALEXANDER
Senior Vice President of MidAmerican since November 1, 1998. Vice President
of MidAmerican from November 1, 1996, to October 31, 1998, and various executive
and management positions with MidAmerican and Midwest for more than five years
prior thereto.
DAVID J. LEVY
Senior Vice President of MidAmerican since November 1, 1996, and Vice
President from 1995 to November 1, 1996. Vice President of Iowa-Illinois from
1993 to 1995.
-26-
<PAGE>
JOHN A. RASMUSSEN, JR.
Senior Vice President and General Counsel of MidAmerican since November 1,
1996, and Group Vice President and General Counsel from July 1, 1995, to
November 1, 1996. Vice President and General Counsel of Midwest from 1993 to
1995.
ALAN L. WELLS
Senior Vice President and Chief Financial Officer of MidAmerican since
November 1, 1997, Vice President of MidAmerican from November 1, 1996, to
November 1, 1997, and various executive and management positions with
MidAmerican from July 1, 1995 to November 1, 1996. Various executive and
management positions with Iowa-Illinois from 1993 to 1995.
BEVERLY A. WHARTON
Senior Vice President of MidAmerican since November 1, 1996, and President,
Gas Division from 1995 to October 31, 1996. Group Vice President of Midwest from
1992 to 1995. Director of The Security National Bank of Sioux City.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for services in all
capacities to MidAmerican and its parent and other subsidiaries for the fiscal
years ended December 31, 1998, 1997 and 1996 of those persons who were (i)
during the year ended December 31, 1998, the chief executive officer and (ii)
at December 31, 1998, the other four most highly compensated executive officers
of MidAmerican ("named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation (4)
------------------- --------------------------
Awards:
Other Securities Payouts: All
Annual Underlying LTIP Other
Name and Salary Bonus Compensation Options Payouts Compensation
Principal Position Year ($) ($)(1) ($) (#)(2) ($) ($)(3)
- - -------------------- ---- -------- -------- ------------ --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Stanley J. Bright 1998 562,000 396,875 - 87,500 - 44,622
Chairman and 1997 487,000 399,000 - - - 35,690
Chief Executive Officer 1996 443,750 - - - - 28,845
Ronald W. Stepien 1998 318,416 240,233 - 37,700 - 17,240
President 1997 260,417 158,859 - - - 14,240
1996 198,333 - - 20,000 - 11,136
Wayne O. Smith (5) 1998 270,000 135,093 - 37,700 - 20,191
Executive Vice 1997 250,000 50,783 - 20,000 - -
President
David J. Levy 1998 220,000 178,685 - 15,000 - 10,127
Senior Vice President 1997 185,000 88,800 - - - 9,305
1996 161,667 - - 40,000 - 8,048
Beverly A. Wharton 1998 262,000 227,154 - 15,000 - 9,405
Senior Vice President 1997 240,000 129,600 - - - 8,990
1996 218,333 - - - - 8,050
</TABLE>
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<PAGE>
(1) Includes retention bonus paid to Messrs. Stepien and Levy and Mrs. Wharton
as discussed under the caption "Employment Agreements."
(2) Consists of options granted pursuant to the 1995 Long-Term Incentive Plan.
(3) Amounts for 1998 consist of (i) contributions by MidAmerican to defined
contribution plans of $6,240 for each of Messrs. Bright, Stepien and Levy
and Mrs. Wharton, and $6,143 for Mr. Smith, and (ii) $38,382, $11,000,
$14,048, $3,887, and $3,165 for Messrs. Bright, Stepien, Smith and Levy,
and Mrs. Wharton, respectively, for supplemental life insurance.
(4) As of December 31, 1998, Messrs. Bright, Stepien, Smith and Levy and Mrs.
Wharton held 48,634, 18,210, 13,841, 11,119 and 16,637 restricted shares of
the pre-merger MHC Common Stock (Pre-merger Common Stock), respectively,
having a value of $1,307,039, $489,394, $371,977, $298,823, and $447,119,
respectively, based on the closing price of Pre-merger Common Stock at
December 31, 1998. The restricted stock was granted as performance shares
pursuant to the 1995 Long-Term Incentive Plan. At the effective time of the
merger transaction between MHC and CalEnergy, each outstanding grant of
performance shares whether or not vested was converted into the right to
receive $27.15 in cash, payable to the grantee without interest. Restricted
stock grantees have the right to vote such shares and receive the dividends
thereon. See the table of "Long-Term Incentive Plans-Awards in Last Fiscal
Year."
(5) Mr. Smith joined MidAmerican on September 1, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants(1)
--------------------
Number of Percent of
Securities Total Options Exercise Grant Date
Underlying Granted to Price Present
Options Employees ($/Share) Expiration Value
Name Granted(#)(2) in Fiscal Year (2)(3) Date ($)(4)
- - ---- ------------- -------------- --------- ---------- ----------
Stanley J. Bright 87,500 31% 25.25 8/13/08 280,875
Ronald W. Stepien 37,700 13% 25.25 8/13/08 121,017
Wayne O. Smith 37,700 13% 25.25 8/13/08 121,017
David J. Levy 15,000 5% 25.25 8/13/08 48,150
Beverly A. Wharton 15,000 5% 25.25 8/13/08 48,150
(1) The options shown in the foregoing table were granted pursuant to the 1995
Long-Term Incentive Plan. The aggregate number of shares attributable to
the 1998 grants is 289,000.
(2) On the effective date of the merger transaction between MHC and CalEnergy,
each outstanding option ("Original Option") to purchase shares of
Pre-merger Common Stock, whether or not exercisable or vested, was assumed
by Holdings and became an option to purchase the number of shares of
Holdings Common Stock (a"Substitute Option") equal to the number of shares
of Pre-merger Common Stock
-29-
<PAGE>
subject to such Original Option multiplied by a conversion factor of
0.9603. Accordingly, Messrs. Bright, Stepien, Smith and Levy and Mrs.
Wharton hold 84,026, 36,203, 36,203, 14,405, and 14,405 Substitute Options,
respectively, granted in 1998. The per share exercise price for each
Substitute Option granted in 1998 is $26.29. Each Substitute Option is
subject, in all material respects, to the other terms and conditions of the
Original Option to which it related.
(3) The exercise price (the price the recipient must pay to purchase each share
of common stock that is the subject of the option) is equal to the fair
market value of the Pre-merger Common Stock on the date of grant of the
option. All options shown were granted on August 13, 1998 and reflect the
closing price of Pre-merger Common Stock on that date. The exercise price
to purchase each share of Holdings Common Stock that is the subject of each
Substitute Option is equal to what was the fair market value of the
Pre-merger Common Stock on the date of grant of the option divided by a
conversion factor of 0.9603. Options may be exercised during a period that
begins one year after the date of grant and ends ten years after the date
of the grant. During the exercise period the recipient of the option may
exercise 33% of the total options granted after one year from the date of
the grant, 67% after two years from the date of the grant and all of the
options after three years from the date of the grant. Options become fully
exercisable in the event of termination of employment with the Company by
reason of disability, retirement at age 55 and after five years of service
with the Company or death.
(4) The Black-Scholes Option Pricing Model was used to determine the grant date
present value of the stock options granted in 1998 by MHC to the named
executive officers. Under the Black-Scholes Option Pricing Model, the grant
date present value of the stock options referred to in the table was $3.21
per share.
The ultimate values of the options will depend on the future market price
of Holdings Common Stock, which cannot be forecast with reasonable
accuracy. The actual value, if any, an option holder will realize upon
exercise of an option will depend on the excess of the market price of
Holdings Common Stock over the exercise price on the date the option is
exercised.
The material assumptions and adjustments incorporated in the model in
estimating the value of the options include the following:
o An exercise price of the option of $25.25, equal to the fair market
value of the underlying Pre-merger Common Stock on the date of the
grant.
o An option term of ten years.
o An interest rate of 5.27% that represents the interest rate on a U.S.
Treasury security on the date of the grant with a maturity date
corresponding to that of the option term.
o Volatility of 17.52% which represents the historical volatility of
Pre-merger Common Stock over a period commensurate with the option's
expected life.
o Dividends at the rate of $1.20 per share representing the annualized
quarterly dividends paid with respect to a share of Pre-merger Common
Stock at the date of the grant.
-30-
<PAGE>
FISCAL YEAR END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options at Options at
Fiscal Year End Fiscal Year End
(#)(1)(2) ($)(3)(4)
--------------- ---------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- - ------------------ ---------------- ---------------------
Stanley J. Bright 87,500 / 125,000 2,351,563 / 3,359,375
Ronald W. Stepien 15,000 / 62,700 403,125 / 1,685,063
Wayne O. Smith 6,667 / 51,033 179,176 / 1,371,512
David J. Levy 10,000 / 35,000 268,750 / 940,625
Beverly A. Wharton 30,000 / 30,000 806,250 / 806,250
(1) The options shown in the foregoing table were granted pursuant to the 1995
Long-Term Incentive Plan. Under the provisions of such plan, unless
provided otherwise in an individual's award agreement, in the event of a
change of control (which included the merger transaction between MHC and
CalEnergy), all outstanding stock options became immediately exercisable in
full. Stock options awarded in 1998 as disclosed under the table entitled
"Option Grants in Last Fiscal Year" did not vest or become exercisable as a
result of the merger, however.
(2) On March 12, 1999, Original Options were converted into Substitute Options
as disclosed in footnote (2) to the table entitled "Option Grants in Last
Fiscal Year."
(3) Represents the difference between the option exercise price and the closing
market price for Pre-merger Common Stock on December 31, 1998. The
in-the-money options at December 31, 1998, pertain to the market-priced
option grants in July of 1995 with an exercise price of $14.50, the
market-priced option grant in October of 1996 with an exercise price of
$15.75 and the market-priced option grant in September of 1997 with an
exercise price of $17.0625. The closing market price for Pre-merger Common
Stock at the end of the 1998 fiscal year was $26.875. Options shown as
unexercisable were conditionally granted.
(4) As disclosed in footnote (3) to the table entitled "Option Grants in Last
Fiscal Year," the exercise price to purchase each share of Holdings Common
Stock that is the subject of each Substitute Option is equal to what was
the fair market value of the Pre-merger Common Stock on the date of grant
of the Original Option divided by a conversion factor of 0.9603.
Accordingly, the in-the-money options at December 31, 1998, pertain to the
market-priced option grants in July of 1995 with an exercise price of
$15.10, the market-priced option grants in October 1996 with an exercise
price of $16.40 and the market-priced option grant in September of 1997
with an exercise price of $17.77.
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<PAGE>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
Number of Shares, Performance or
Units or Other Other Period until
Name Rights(#)(1) Maturation or Payout(2)
- - ------------------ ----------------- -----------------------
Stanley J. Bright 18,697 6/30/01
Ronald W. Stepien 8,512 6/30/01
Wayne O. Smith 7,343 6/30/01
David J. Levy 5,152 6/30/01
Beverly A. Wharton 6,235 6/30/01
(1) The restricted stock awards shown in the foregoing table were made pursuant
to the 1995 Long-Term Incentive Plan and are subject to achievement of
specific performance measures during a three-year performance period ending
June 30, 2001. During this performance period, the holders of the
restricted stock were entitled to receive the dividends on the restricted
stock and vote the stock; however, the stock was not vested until the
achievement of the performance measures. The restricted stock shown in the
foregoing table would be granted if total shareholder return (as measured
by growth in stock price and dividends) by the Company for this performance
period is in the 68th to 74th percentiles of electric and combination gas
and electric utilities included in the Value Line Investment Survey. The
awards shown in the table represent grants at target, which is 75% of the
maximum 100% award that would be paid if performance achieved the 75th
percentile or higher. Minimum awards of 50% would be made if performance
achieved was in the 60th to 67th percentiles. A participant whose
employment was terminated due to retirement would receive a pro rata
portion of such participant's total award based on the participant's
service as an employee during the performance period or as otherwise
determined by the Board of Directors in its sole discretion. The
performance shares vest, however, in the event of termination of employment
with MHC by reason of disability, death or a change in control as defined
in the plan.
(2) Pursuant to the terms of the 1995 Long-Term Incentive Plan, in the event of
a change of control (which included the merger transaction between MHC and
CalEnergy), the restriction periods applicable to restricted stock awards
under the plan lapsed, and the performance measures applicable to
outstanding restricted stock awards and to any outstanding performance
share awards were deemed to have been satisfied at the target level.
Accordingly, at the effective time of the merger transaction between MHC
and CalEnergy, each outstanding grant of performance shares whether or not
vested was converted into the right to receive $27.15 in cash, payable to
the grantee without interest.
RETIREMENT PLANS
MidAmerican maintains a Supplemental Retirement Plan for Designated
Officers ("Supplemental Plan") to provide additional retirement benefits to
designated participants, as determined by the Board of Directors. Messrs.
Bright, Stepien, Smith and Levy and Mrs. Wharton are participants in the
Supplemental Plan. The Supplemental Plan provides retirement benefits up to 65%
of a participant's Total Cash Compensation in effect immediately prior to
retirement. "Total Cash Compensation" means the highest amount payable to a
participant as annual base salary during the five years immediately prior to
retirement plus the average of the participant's last three years' awards under
an annual incentive bonus program. Participants must be credited with five years
service in order to be eligible to receive benefits under the Supplemental Plan.
Each of the named executive officers has or will have five years of credited
service with MidAmerican as of
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<PAGE>
their respective normal retirement age and will be eligible to receive benefits
under the Supplemental Plan. A participant who elects early retirement is
entitled to reduced benefits under the Supplemental Plan. A survivor benefit is
payable to a surviving spouse under the Supplemental Plan. Benefits from the
Supplemental Plan will be paid out of general corporate funds; however,
MidAmerican, through a rabbi trust, maintains life insurance on the participants
in amounts expected to be sufficient to fund the after-tax cost of the projected
benefits. The Supplemental Plan provides that in the event of a change of
control (which, as defined therein, includes the merger transaction between MHC
and CalEnergy), the rabbi trust shall become irrevocable and all participants
were deemed to have at least five years of service. Deferred compensation is
considered part of the salary covered by the Supplemental Plan.
The supplemental retirement benefit will be reduced by the amount of the
participant's regular retirement benefit under the MidAmerican Energy Company
Cash Balance Retirement Plan ("MidAmerican Retirement Plan") which became
effective January 1, 1997, and by benefits under the Iowa-Illinois Gas and
Electric Company Supplemental Retirement Plan ("Iowa-Illinois Supplemental
Plan") or the Midwest Resources Inc. Supplemental Executive Retirement Plan
("MWR Supplemental Plan"), as applicable.
The MidAmerican Retirement Plan replaced retirement plans of predecessor
companies, which were structured as traditional, defined benefit plans. Under
the MidAmerican Retirement Plan, each participant has an account, for record
keeping purposes only, to which credits are allocated each payroll period based
upon a percentage of the participant's salary paid in the current pay period. In
addition, all balances in the accounts of participants earn a fixed rate of
interest which is credited annually. The interest rate for a particular year is
based on the one-year U. S. Treasury Bill plus one percentage point. At
retirement or other termination of employment, an amount equal to the vested
balance then credited to the account is payable to the participant in the form
of a lump sum or a form of annuity for the entire benefit under the MidAmerican
Retirement Plan.
The Iowa-Illinois Supplemental Plan provides for retirement benefits equal
to 65% of a participant's highest annual total cash compensation during the
three years prior to retirement reduced by the participant's MidAmerican
Retirement Plan benefit. A participant who elects early retirement is entitled
to reduced benefits under the plan. A survivor benefit is payable to a surviving
spouse. Deferred compensation is considered a part of salary covered by the
Iowa-Illinois Supplemental Plan.
The MWR Supplemental Plan provides a participant, upon retirement at age 65
with thirty or more years of service, an annual retirement benefit equal to 60%
of final average annual earnings which is defined as the average of salary plus
bonus for the five highest consecutive years during the participant's employment
with the Company. A participant who elects early retirement is entitled to
reduced benefits under the plan. A survivor benefit is payable to a surviving
spouse. Deferred compensation is considered a part of salary covered by the MWR
Supplemental Plan.
The table below shows the estimated aggregate annual benefits payable under
the Supplemental Plan and the MidAmerican Retirement Plan. The amounts exclude
Social Security and are based on a straight life annuity and retirement at ages
55, 60 and 65. Federal law limits the amount of benefits payable to an
individual through the tax qualified defined benefit and contribution plans, and
benefits exceeding such limitation are payable under the Supplemental Plan.
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<PAGE>
PENSION PLAN TABLE
Estimated Annual Benefit
Total Cash
Compensation Age at Retirement
----------------------------------------------
at Retirement 55 60 65
- - ------------- -------- -------- --------
$350,000 $192,500 $210,000 $227,500
400,000 220,000 240,000 260,000
450,000 247,500 270,000 292,500
500,000 275,000 300,000 325,000
550,000 302,500 330,000 357,500
600,000 330,000 360,000 390,000
650,000 357,500 390,000 422,500
700,000 385,000 420,000 455,000
750,000 412,500 450,000 487,500
800,000 440,000 480,000 520,000
850,000 467,500 510,000 552,500
900,000 495,000 540,000 585,000
950,000 522,500 570,000 617,500
1,000,000 550,000 600,000 650,000
EMPLOYMENT AGREEMENTS
Mr. Bright's employment agreement terminated on the effective date of the
merger transaction between MHC and CalEnergy.
The MidAmerican Energy Company Severance Plan for Specified Officers (the
"Severance Plan") became effective on November 1, 1996, and was amended on
August 11, 1998. The Severance Plan provides for Severance Benefits (as defined
hereinafter) to eligible participants in the event of a Qualifying Termination.
Under the Severance Plan, a Qualifying Termination means a termination of
employment of a Specified Officer either (i) involuntarily for any reason
(except in the instance of a felony) (ii) voluntarily within 24 months after a
Change in Control (defined hereinafter), should a Specified Officer's (a) job
reporting location be changed by more than 30 miles, (b) total cash compensation
opportunity be reduced or (c) duties and responsibilities be substantially
reduced; or (iii) if a Change in Control occurs on or before December 31, 1999,
voluntarily for any reason (other than to avoid an involuntary termination due
to the commission of a felony) in the thirteenth calendar month following the
date of a Change in Control.
Termination of employment due, in whole or in part, to the commission of a
felony by a Specified Officer will not constitute a Qualifying Termination under
the Severance Plan. All Severance Benefits for a Specified Officer charged with
a felony will be suspended until such time as a felony charge is finally
disposed. Conviction of a felony will be sufficient to disqualify the Specified
Officer for Severance Benefits. A plea of no contest to a felony will not be
sufficient to disqualify the Specified Officer for Severance Benefits.
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<PAGE>
A "Change in Control" means either (i) the closing date of the
restructuring of MHC as a result of a merger, consolidation, takeover or
reorganization unless at least 60% of the members of the board of directors of
the company resulting from such merger, consolidation, takeover or
reorganization were members of the incumbent Board of Directors of MHC; or (ii)
any occurrence or any other event that is designated as being a "Change in
Control" by a majority vote of the incumbent Board of Directors of MHC who are
not also employees of MHC. The merger transaction between MHC and CalEnergy
constituted a Change in Control for purposes of the Severance Plan.
"Severance Benefits" under the Severance Plan include: (i) an amount equal
to two times the Specified Officer's highest Total Cash Compensation (defined as
annual salary plus bonus) payable in a lump sum on the effective date of the
Qualifying Termination; (ii) with the exception of MHC Pre-merger stock options
granted in 1998, accelerated vesting of the Specified Officer's MHC Pre-merger
stock options; (iii) payment of the Specified Officer's accrued vacation pay
through the effective date of the Qualifying Termination, payable in a lump sum
on such date; (iv) for certain Specified Officers, an additional 24 months of
age or service credit under the Supplemental Plan; (v) continuation of the
welfare benefits of health insurance, disability insurance and group term life
insurance for a period of 24 full calendar months after the effective date of
the Qualifying Termination; and (vi) standard outplacement services for a period
of 24 full calendar months after the effective date of the Qualifying
Termination (the cost of such services not to exceed 20% of the Specified
Officer's Total Cash Compensation).
The Severance Plan also contains a restrictive covenant which prevents the
Specified Officers from disclosing confidential information through the term of
the Plan or for a period of one year following termination of employment, which
ever occurs first. In addition, Specified Officers are eligible to receive a
cash "gross-up" payment equal to the federal excise tax, if any, due on the
total severance package.
In consideration of the waiver and release of the right to receive any
prior severance benefits under any prior severance plans, MidAmerican agreed to
an irrevocable grant of three years additional service or age for the purpose of
determining benefits under the Supplemental Plan and a phantom stock retention
bonus equal to one year's annual base salary in effect on November 1, 1996 to
vest in three equal installments on each January 1 commencing in 1998 and
conditioned upon the continued employment of the eligible participant on such
dates. Of the eligible participants who are named executive officers, Messrs.
Stepien and Levy and Mrs. Wharton have agreed to the waiver and release.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
MHC owns 100 percent of the outstanding common stock of MidAmerican.
(B) SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the beneficial ownership, reported to MidAmerican
as of February 24, 1999, of MHC Common Stock (Pre-merger Common Stock) of each
director, the chief executive officer and the four other most highly compensated
executive officers and, as a group, directors and executive officers. No member
of the group owned any of the preferred stock of MidAmerican. To MidAmerican's
knowledge, at such date no single entity owned of record or beneficially more
than five percent of any class of the outstanding voting securities of MHC.
Amount and
Nature of Precent
Beneficial of
Name of Beneficial Owner Ownership (1)(8) Class
------------------------ ---------------- -------
Stanley J. Bright...................... 145,077(2) *
Ronald W. Stepien...................... 30,453(3) *
Wayne O. Smith......................... 21,276(4) *
David J. Levy.......................... 22,528(5) *
Beverly A. Wharton..................... 54,228(6) *
Directors and executive officers as a
group (8) persons.................... 329,935(7) *
* Less than one percent of the shares of Pre-merger Common Stock outstanding
on February 24, 1999.
(1) Beneficial ownership of each of the shares of Pre-merger Common Stock
listed in the foregoing table is comprised of sole voting power and sole
investment power, unless otherwise noted.
(2) Includes 87,500 shares which Mr. Bright has the right to acquire within 60
days upon the exercise of stock options, 7,246 shares held in a Section
401(k) defined contribution plan as of December 31, 1998, and 1,697 shares
beneficially owned by Mr. Bright and his spouse.
(3) Includes 15,000 shares which Mr. Stepien has the right to acquire within 60
days upon the exercise of stock options and 2,243 shares held in a Section
401(k) defined contribution plan as of December 31, 1998.
(4) Includes 6,667 shares which Mr. Smith has the right to acquire within 60
days upon the exercise of stock options and 768 shares held in a Section
401(k) defined contribution plan as of December 31, 1998.
(5) Includes 10,000 shares which Mr. Levy has the right to acquire within 60
days upon the exercise of stock options and 50 shares held in a Section
401(k) defined contribution plan as of December 31, 1998.
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<PAGE>
(6) Includes 30,000 shares which Mrs. Wharton has the right to acquire within
60 days upon the exercise of stock options, 1,496 shares held in a Section
401(k) defined contribution plan as of December 31, 1998, 767 shares
beneficially owned by Mrs. Wharton and her spouse and 1,027 shares
beneficially owned in a custodial account for a minor child.
(7) Includes shares which the executive officers have the right to acquire
within 60 days upon the exercise of stock options, shares held in defined
contribution plans as of December 31, 1998, and shares beneficially owned
jointly with and individually by family members of directors and executive
officers.
(8) At the effective time of the merger transaction between MHC and CalEnergy,
each outstanding share of Pre-merger Common Stock was converted into the
right to receive $27.15 in cash, payable without interest. In addition, at
such time each unexercised option ("Original Option") to purchase shares of
Pre-merger Common Stock became an option to purchase the number of shares
of Holdings Common Stock equal to the number of shares of Pre-merger Common
Stock subject to such Original Option multiplied by a conversion factor of
0.9603, and became immediately exercisable in full.
(C) CHANGES IN CONTROL
Refer to the discussion under the caption CALENERGY MERGER in Part I, Item
1(a).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------
None.
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<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................................. 39
Management's Discussion and Analysis of Financial Condition
And Results of Operations.......................................... 40
Consolidated Statements of Income
For the Year Ended December 31, 1998, 1997 and 1996................ 62
Consolidated Balance Sheets
As of December 31, 1998 and 1997 .................................. 63
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1998, 1997 and 1996................ 64
Consolidated Statements of Capitalization
As of December 31, 1998 and 1997 .................................. 65
Consolidated Statements of Retained Earnings
For the Year Ended December 31, 1998, 1997 and 1996................ 66
Notes to Consolidated Financial Statements........................... 67
Report of Independent Accountants.................................... 92
Supplemental Information
------------------------
Unaudited Regulated Electric Statistics........................... 93
Unaudited Regulated Gas Statistics................................ 94
(A)2. FINANCIAL STATEMENT SCHEDULES (INCLUDED HEREIN)
The following schedules should be read in conjunction with the
aforementioned financial statements.
Page No.
--------
MidAmerican Energy Company Consolidated Valuation
and Qualifying Accounts (Schedule II) ............................. 95
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 97.
(B) REPORTS ON FORM 8-K
None.
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<PAGE>
SELECTED FINANCIAL DATA
- - -----------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (e)
Revenues................................. $1,707,189 $1,727,855 $1,674,353 $1,554,235 $1,513,675
Operating income (a)..................... 280,920 287,309 366,174 304,638 268,222
Net income from continuing operations.... 115,593 125,941 165,132 132,489 121,145
Earnings on common from
continuing operations................ 110,641 119,453 154,731 124,430 110,594
BALANCE SHEET DATA:
Total assets............................. $3,585,530 $3,542,307 $3,774,653 $3,976,201 $3,879,847
Long-term debt (b)....................... 930,966 1,044,663 1,136,515 1,110,525 1,109,617
Power purchase obligation (b)............ 83,127 97,504 111,222 125,729 137,809
Short-term borrowings.................... 206,221 122,500 161,700 184,800 124,500
Preferred stock:
Not subject to mandatory redemption.. 31,759 31,763 31,769 89,945 89,955
Subject to mandatory redemption (c).. 150,000 150,000 150,000 50,000 50,000
Common stock equity (d).................. 972,278 985,744 986,825 1,225,715 1,204,112
</TABLE>
(a) MidAmerican's 1995 operating income includes $31.9 million of costs
related to a restructuring and work force reduction plan implemented and
completed in 1995.
(b) Includes amounts due within one year.
(c) Post-1995 years include MidAmerican-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely MidAmerican
junior subordinated debentures.
(d) 1996 reflects distribution of the capital stock of MidAmerican Capital
Company and Midwest Capital Group, Inc. to Holdings.
(e) Refer to Operating Activities and Other Matters in MD&A for discussion
of industry restructuring and rate matters.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
------------
MidAmerican Energy Company (MidAmerican) is a public utility with electric
and natural gas operations and is the principal subsidiary of MHC Inc. (MHC).
MHC is headquartered in Des Moines, Iowa, and has the following nonregulated
subsidiaries: MidAmerican Capital Company, MidAmerican Realty Services Company
and Midwest Capital Group, Inc. MHC is a wholly owned subsidiary of MidAmerican
Funding, LLC, which is wholly owned subsidiary of MidAmerican Energy Holdings
Company.
The current corporate structure is the result of the merger transaction
completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings
Company) and CalEnergy Company, Inc.(CalEnergy). CalEnergy, through a
reincorporation transaction, was renamed MidAmerican Energy Holdings Company
(Holdings). Holdings is an exempt public utility holding company headquartered
in Des Moines. References to MHC regarding information, events or transactions
prior to the merger relate to the former MidAmerican Energy Holdings Company.
MidAmerican was formed on July 1, 1995, as a result of the merger of
Iowa-Illinois Gas and Electric Company, Midwest Resources Inc. (Resources) and
Midwest Power Systems Inc., the utility subsidiary of Resources. Effective
December 1, 1996, MHC became the parent company of MidAmerican, MidAmerican
Capital and Midwest Capital. Prior to December 1, 1996, MidAmerican Capital and
Midwest Capital were subsidiaries of MidAmerican. Accordingly, the consolidated
financial statements of MidAmerican present amounts related to MidAmerican
Capital and Midwest Capital as discontinued operations in 1996 to reflect their
transfer to MHC.
FORWARD-LOOKING STATEMENTS
From time to time, MidAmerican may make forward-looking statements within
the meaning of the federal securities laws that involve judgments, assumptions
and other uncertainties beyond its control. 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's expectations,
beliefs, future plans and strategies, anticipated events or trends and similar
comments concerning matters that are not historical facts. Investors and other
users of the forward-looking statements are cautioned that such statements are
not a guarantee of future performance of MidAmerican and that such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in, or implied
by, such statements. Some, but not all, of the risks and uncertainties include
weather effects on sales and revenues, fuel prices, fuel transportation,
competitive factors, general economic conditions in MidAmerican's service
territory, interest rates, inflation and federal and state regulatory actions.
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RESULTS OF OPERATIONS
---------------------
The following table provides a summary of the earnings contributions of
MidAmerican's operations for each of the periods presented:
1998 1997 1996
------ ------ ------
(In millions)
Earnings on Common Stock
Continuing operations $110.6 $119.5 $154.7
Discontinued operations * - - (10.1)
------ ------ ------
Consolidated earnings $110.6 $119.5 $144.6
====== ====== ======
* 1996 includes the net losses of MidAmerican Capital and Midwest Capital
prior to their transfer to MHC on December 1, 1996.
EARNINGS DISCUSSION
Below is a list of some of the significant factors resulting in the
variances in earnings. The amounts represent the variance between the respective
years. Therefore, a factor that had a negative impact on earnings in both years,
but which had less of a negative impact in 1998 than in 1997, would be displayed
as a positive factor for comparison purposes.
In the second half of 1997, MidAmerican began charging 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 began recovery
of these costs from its customers, which resulted in additional revenues. For
purposes of the following table, the expenses are netted against the related
revenues. As a result, the "Other O&M expenses" line below does not reflect the
impact of these expenses, and the net effect of the additional revenues and
expenses is included in the amounts on the "Other factors" line under gross
margin.
Approximate Net Income Variances
--------------------------------
For Years Ended December 31
---------------------------
1998 vs 1997 1997 vs 1996
------------ ------------
(In millions)
Variation in gross margin due to -
Weather effect $ (8.2) $ (2.9)
Customer growth & other sales growth 15.2 17.3
Off-system sales 8.4 1.9
Electric retail prices (10.0) (12.6)
Other factors 5.5 1.9
Nuclear O&M expenses 0.3 (4.7)
1996 inventory adjustment - (3.7)
Storm repair expense (1.1) (1.2)
Other O&M expenses (6.3) (34.0)
Depreciation & amortization (6.9) (3.5)
Utility nonregulated activities (2.0) 0.3
Recognition of deferred
energy efficiency income (2.8) 1.0
1996 merger proposal costs - 5.1
Discontinued operations - 10.1
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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'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 continued strengthening its customer service and marketing
capabilities and adding to its information technology resources.
Discontinued Operations -
MidAmerican received $15.3 million in cash in 1996 as final settlement for
the sale of a former coal mining subsidiary which was reflected as discontinued
operations in 1982 by one of MidAmerican's predecessors. The final settlement
included reacquisition by the buyer of preferred equity issued to MidAmerican
and the settlement of reclamation reserves. MidAmerican recorded an after-tax
loss on disposal of $3.3 million for the transaction in September 1996. This
transaction is included in discontinued operations in the consolidated financial
statements of MidAmerican. Discontinued operations of MidAmerican includes the
net earnings/loss of MidAmerican Capital and Midwest Capital for periods prior
to their December 1, 1996, transfer to MHC.
REGULATED GROSS MARGIN
Regulated Electric Gross Margin:
- - --------------------------------
1998 1997 1996
------ ------ ------
(In millions)
Operating revenues $1,170 $1,126 $1,099
Cost of fuel, energy and capacity 228 236 234
------ ------ ------
Electric gross margin $ 942 $ 890 $ 865
====== ====== ======
1998 vs 1997 -
Electric gross margin improved $52 million in 1998 compared to 1997. An
increase in revenues from energy efficiency cost recovery and the Cooper Tracker
(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 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 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'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.
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The Cooper Tracker allows MidAmerican to collect on a current basis the
Iowa portion of expenses for Cooper Nuclear Station (Cooper) 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. In addition, an increase in sales that are not
dependent on weather contributed $15.5 million to the increase. When compared to
normal, the impact of temperatures resulted in an estimated $2 million reduction
of electric gross margin for 1998 compared to a $4 million reduction in 1997 -
or, a $2 million increase in margin for 1998 compared to 1997. 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. Revenues in 1998 reflect the
full-year effect of a June 1997 price reduction for Illinois customers and a
small price reduction in August 1998 related to Illinois utility industry
restructuring. Prices for Iowa residential customers were reduced $10 million
annually in July 1997 and $5 million annually in June 1998. Since July 1997,
MidAmerican has reduced prices a total of approximately $10 million annually for
its Iowa commercial and industrial customers. The commercial and industrial
price reductions were achieved through negotiated contracts, a pilot project and
tariffed rate reductions. 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 was allowed to recover its energy costs
from most of its electric utility customers through energy adjustment clauses
(EACs) included in revenues. Effective July 11, 1997, the EAC was eliminated for
Iowa customers as part of MidAmerican'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 EACs. With the
elimination of the Iowa EAC, fluctuations in energy costs now may have an impact
on gross margin and net income.
Under the Iowa pricing settlement, revenues from off-system sales are
considered a component of total energy costs. Accordingly, electric margin in
1998 reflects MidAmerican's strong performance in the off-system market relative
to 1997. Margins on off-system sales, which account for most of MidAmerican's
sales for resale, 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 obtained improved margins per unit for the 1998 sales. Refer to
comments on the energy market under "Industry Evolution" in the OPERATING
ACTIVITIES AND OTHER MATTERS section of MD&A.
1997 vs. 1996 -
Electric margin for 1997 increased $25 million compared to 1996. An
increase in revenues from energy efficiency cost recovery accounted for $9.0
million of the increase in margin while revenues from the Cooper Tracker totaled
$3.9 million in 1997, the first year for that collection mechanism.
Retail sales of electricity increased 2.6% compared to 1996 sales. A
moderate but steady growth in the number of customers contributed $11.1 million
to the increase in electric gross margin. Compared to 1996, sales and gross
margin improved due to the impact of temperatures in the Company's service
territory. Although temperatures overall were milder than normal in both years,
comparatively, margin for 1997 increased $5 million over 1996 margin due to the
effect of weather. When compared to normal, the impact of temperatures resulted
in a $4 million reduction of electric gross margin in 1997 compared to a $9
million
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reduction in the 1996 margin. Additionally, revenues and margin increased due to
an improvement in sales not dependent on weather.
As discussed above, the Iowa EAC was eliminated in July 1997. Energy costs
per unit for the remainder of 1997 were below the amount recovered in rates
under the Iowa pricing plan and resulted in an increase to gross margin. Margins
on off-system sales contributed $3.2 million more to electric margin in 1997
than in 1996. Additionally, the 1997 electric margin benefited from a $6.2
million increase in transmission revenues.
In total, price reductions decreased electric gross margin by $21.4 million
in 1997 compared to 1996. In addition to the price reductions discussed above,
MidAmerican reduced prices for its Illinois customers by $13.1 million annually
on November 3, 1996, in conjunction with a rate reduction proceeding. In Iowa,
MidAmerican reduced its electric retail prices by $8.7 million effective
November 1, 1996. This was the first reduction related to MidAmerican's pricing
plan filed in June 1996. Refer to "Rate Matters" in LIQUIDITY AND CAPITAL
RESOURCES later in MD&A for further information regarding prices in Iowa.
Regulated Gas Gross Margin:
- - ---------------------------
1998 1997 1996
----- ----- -----
(In millions)
Operating revenues $ 430 $ 536 $ 537
Cost of gas sold 243 346 345
----- ----- -----
Gas gross margin $ 187 $ 190 $ 192
===== ===== =====
1998 vs. 1997 -
MidAmerican's regulated gas revenues include purchase gas adjustment
clauses (PGAs) through which MidAmerican 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 PGAs. A decrease in the 1998
per-unit cost of gas compared to 1997 reduced revenues and cost of gas sold by
approximately $59 million. MidAmerican recently made a filing with the IUB that
would modify the use of the PGA beginning May 1, 2000. Refer to Small Volume Gas
Transportation under the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A
for further discussion.
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
Electric Gross Margin section, on September 29, 1997, MidAmerican began recovery
of its deferred energy efficiency costs that had not previously been approved
for recovery. Approximately $17.5 million of MidAmerican'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. In 1997, temperatures were closer to normal, resulting in a reduction
of the 1997 margin of only $2 million. Comparing the two years then, 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.
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1997 vs. 1996 -
Gas gross margin for 1997 decreased $2 million compared to 1996. On a
comparative basis, the 1997 gas margin decreased an estimated $10 million due to
the effect of weather. Temperatures in 1997 were close to normal, resulting in a
$2 million reduction in margin, while temperatures in 1996 were 10.1% colder
than normal, contributing $8 million to the 1996 gas gross margin. The decrease
in gross margin due to weather was partially offset by a $2.3 million increase
from growth in the number of retail customers. In total, retail sales of natural
gas in 1997 decreased 7.1% compared to 1996 sales.
Revenues from energy efficiency cost recovery contributed $3.4 million more
to gas margin in 1997 than in 1996. Revenues and cost of gas sold increased
approximately $25 million in 1997 due to an increase in the average cost of gas
per unit compared to 1996.
REGULATED OPERATING EXPENSES
Other Operating Expenses -
Regulated other operating expenses increased $31.1 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 Electric Gross Margin section for further comments on energy efficiency
costs.
Operating expenses related to Cooper increased due in part to the
ratemaking treatment for Cooper capital improvements, as discussed in the
Electric Gross Margin section. Cooper capital improvement advances are now
expensed when incurred. MidAmerican 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
the Quad Cities Station.
MidAmerican 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.
Regulated other operating expenses increased $79.6 million in 1997 compared
to 1996. Nuclear operating costs increased $14.0 million compared to 1996. Of
that increase, $4.5 million related to the change in rate treatment of Cooper
capital improvement advances. An increase in energy efficiency costs, including
amortization of historical costs and charging expense for current costs,
accounted for $13.1 million of the increase in other operating expenses.
MidAmerican's efforts to improve its customer service and reliability
resulted in increases in consulting costs, advertising and other related
expenses. In addition, 1997 reflects increases in uncollectible accounts
expense, employee incentive compensation and certain employee benefits expenses.
Other operating expenses for 1997 also reflect an increase in transmission
wheeling expense due in part to changes required by FERC Order Nos. 888 and 889.
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Maintenance -
Maintenance expenses increased $9.8 million in 1998 compared to 1997. An
increase in maintenance costs at the Quad Cities Station accounted for $8.0
million of the total. Additionally, MidAmerican 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.
Maintenance expenses increased $9.5 million for 1997 compared to 1996. The
main cause of the increase was an adjustment in 1996 to align power plant
inventory accounting of predecessor companies which reduced 1996 expense by $6.2
million. Restoration costs for the October 1997 snowstorm also contributed to
the increase, while maintenance expenses at the Quad Cities Station decreased
$2.5 million in 1997 compared to 1996.
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 regulatory accruals.
Property and Other Taxes -
Deregulation of the Illinois electric utility industry resulted in changes
in the way certain taxes are assessed in Illinois. The changes resulted in a
decrease in MidAmerican'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's electric revenues reflect an equal reduction
in 1998. Property taxes increased $8.8 million in 1997 compared to 1996 due
primarily to an increase in the assessed value for Iowa property tax purposes.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
MidAmerican's income statements now reflect its nonregulated operations in
the determination of Operating Income. Previously, these activities were
reflected in Other, Net on the Consolidated Statements Income. All prior year
amounts are reclassified to be consistent with the current year's presentation.
MidAmerican has increased its efforts in nonregulated operations in preparation
for a competitive utility industry. Additionally, beginning in May 1998, gas
marketing contracts previously serviced by a nonregulated affiliate of
MidAmerican were renewed as MidAmerican contracts.
Revenues and Cost of Sales -
Revenues from wholesale natural gas marketing operations increased $32.5
million in 1998 compared to 1997 due to an increase of 18 million MMBtus (88%)
in related sales volumes. A decrease in the average price per unit, reflective
of a lower cost of gas per unit, partially offset the effect of increased sales.
Cost of sales related to natural gas marketing for 1998 reflects the increase in
sales and the decrease in 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 of CBEC Railway, a
subsidiary of MidAmerican that operates rail services on a section of railroad
track it owns. MidAmerican'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's cost of gas
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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.
For the comparison of 1997 with 1996, revenues from wholesale natural gas
marketing operations increased $23.1 million due to an increase in sales volumes
of 7 million MMBtus (51%). In addition, the average price per unit increased,
reflecting an increase in the average cost of gas per unit. Cost of sales
related to natural gas marketing for 1997 reflects the increases in sales and
the average cost of gas per unit. Total gross margin on nonregulated natural gas
sales decreased $0.3 million compared to 1996.
Nonregulated revenues for 1997 also reflect a $2.2 million increase
compared to 1996 in MidAmerican's award for performance under its incentive gas
procurement program.
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 customers, costs of appliance services and costs of initiatives for
new products and services in preparation for deregulation.
The increase in 1997 costs compared to 1996 relates to appliance services
and initiatives for new products and services.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and Dividend Income-
In December 1997, MidAmerican 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.
Other, Net -
Other, Net, for 1998 and 1997 reflects the discount on sold accounts
receivable, net of a fee for servicing the accounts. The net discount reduced
Other, Net by $7.0 million and $0.3 million in 1998 and 1997, respectively.
In September 1997, MidAmerican received a $15 million cash payment from
Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by
MidAmerican against NPPD. Approximately $12 million was refunded to
MidAmerican's customers. The remaining amount was retained by MidAmerican 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.
In addition, Other, Net includes the recognition of deferred income from
energy efficiency programs totaling $0.2 million, $5.0 million and $3.3 million
for 1998, 1997 and 1996, respectively. As discussed in the gross margin
sections, MidAmerican 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.
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In 1996, MidAmerican recorded an initial pre-tax gain of $3.2 million on
its sale of the certain storage gas supplies. MidAmerican recorded an additional
$0.8 million gain in the second quarter of 1997 after receiving favorable
treatment on the transaction from the Iowa Utilities Board (IUB).
Other, Net for 1997 reflects a net loss on reacquired long-term debt of
$0.9 million compared to a $1.1 million net gain in 1996.
Other, Net for 1996 includes approximately $8.7 million of expenses for
costs incurred by MidAmerican for its merger proposal to IES Industries Inc. in
1996.
Fixed Charges -
During 1998, MidAmerican reduced its long-term debt through maturities and
refinancing. Refer to FINANCING ACTIVITIES, PLANS AND AVAILABILITY later in MD&A
for more details.
A decrease in the average amount of commercial paper outstanding in 1997
compared to 1996 resulted in a decrease in other interest expense for 1997. The
decrease was partially offset by interest expense related to IRS settlements in
1997.
Preferred securities of MidAmerican's subsidiary trust were issued in
December 1996. MidAmerican preferred shares were reacquired at that time,
resulting in the decrease in preferred dividends. Preferred dividends include
net gains or losses on the reacquisition of MidAmerican preferred shares. Net
losses on reacquisitions totaled $1.4 million and $1.6 million for 1997 and
1996, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
MidAmerican 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's
net cash provided from operating activities was $381 million, $310 million and
$327 million in 1998, 1997 and 1996, respectively.
INVESTING ACTIVITIES AND PLANS
Utility Construction Expenditures -
MidAmerican's primary need for capital is utility construction
expenditures. For 1998, utility construction expenditures totaled $193 million,
including allowance for funds used during construction (AFUDC) and Quad Cities
Station nuclear fuel purchases. All such expenditures were met with cash
generated from utility operations, net of dividends.
Beginning with July 1997 expenditures, advances for Cooper capital
improvements are no longer included in utility construction expenditures but are
expensed when incurred and reflected in other operating expenses. Previously,
MidAmerican capitalized these expenses in accordance with then applicable rate
regulation. As part of the 1997 settlement of MidAmerican's electric pricing
proposal, MidAmerican is recovering on a current basis the Iowa portion of
expenses for Cooper capital improvements advances from its Iowa electric
customers through a tracking mechanism.
Forecasted utility construction expenditures, including AFUDC, for 1999 are
$194 million and $698 million for 2000 through 2003. Capital expenditure needs
are reviewed regularly by MidAmerican's management and may change significantly
as a result of such reviews. MidAmerican 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.
Deferred Energy Efficiency Expenditures -
MidAmerican stopped reflecting costs of its energy efficiency programs as
an investing activity on its Consolidated Statement of Cash Flows following the
IUB's approval in September 1997 of the current recovery of ongoing energy
efficiency program costs. Under prior energy efficiency regulations, program
costs were deferred for several years prior to beginning their recovery over a
four-year period, and accordingly, MidAmerican reflected them as an investing
activity.
Nuclear Decommissioning -
Each owner of a nuclear facility is required to set aside funds to provide
for the cost of decommissioning its nuclear facility. In general,
decommissioning of a nuclear facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator. Based on information presently available, MidAmerican expects to
contribute approximately $50 million during the period 1999 through 2003 to an
external trust established for the investment of funds for decommissioning the
Quad Cities Station. Approximately 60% of the trust's funds are now invested in
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domestic corporate debt and common equity securities. The remainder is invested
in investment grade municipal and U.S. Treasury bonds.
In addition, MidAmerican makes payments to NPPD related to decommissioning
Cooper. These payments are reflected in other operating expenses in the
Consolidated Statements of Income. NPPD estimates call for MidAmerican to pay
approximately $57 million to NPPD for Cooper decommissioning during the period
1999 through 2003. NPPD invests the funds predominately in U.S. Treasury Bonds.
MidAmerican's obligation for Cooper decommissioning may be affected by the
actual plant shutdown date and the status of the power purchase contract at that
time. In July 1997, NPPD filed a lawsuit in United States District Court for the
District of Nebraska naming MidAmerican as the defendant and seeking a
declaration of MidAmerican's rights and obligations in connection with Cooper
nuclear decommissioning funding.
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. MidAmerican currently
recovers Quad Cities Station decommissioning costs charged to Illinois customers
through a rate rider on customer billings.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
MidAmerican currently has authority from the FERC to issue short-term
debt in the form of commercial paper and bank notes aggregating $400 million. As
of March 15, 1999, MidAmerican had a $250 million revolving credit facility
agreement and a $5 million bank line of credit. MidAmerican's commercial paper
borrowings are supported by the revolving credit facility and the line of
credit. MidAmerican also has a revolving credit facility which is dedicated to
provide liquidity for its obligations under outstanding pollution control
revenue bonds that are periodically remarketed.
In 1997, MidAmerican entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the majority of its billed
accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a
special purpose entity established to purchase accounts receivable from
MidAmerican. Funding Corp. in turn sold receivable interests to outside
investors. In consideration for the sale, MidAmerican received $70 million in
cash and the remaining balance in the form of a subordinated note from Funding
Corp. In 1998, the revolving balance was reduced to $60 million due to a decline
in accounts receivable available for sale. The agreement is structured as a true
sale, as determined by Statement of Financial Accounting Standards (SFAS) No.
125, under which the creditors of Funding Corp. will be entitled to be satisfied
out of the assets of Funding Corp. prior to any value being returned to
MidAmerican or its creditors. Therefore, the accounts receivable sold are not
reflected on MidAmerican's Consolidated Balance Sheets. As of December 31, 1998,
$97.4 million of accounts receivable, net of reserves, was sold under the
agreement.
The following table displays the 1998 long-term debt retirements and
issuances of MidAmerican. Repayment of the February and October maturities was
funded with short-term debt and cash from operations.
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<TABLE>
<CAPTION>
Date Issue Principal Transaction
-------- ---------------------------------------- ------------- ----------------
<S> <C> <C> <C>
2-1-98 6.25% First Mortgage Bonds, due 2-1-98 $ 75,000,000 Matured
6-19-98 6.375% Medium Term Notes due 6-15-06 160,000,000 Issued
7-15-98 8.125% General Mortgage Bonds due 2-1-03 100,000,000 Called at 105.23
7-15-98 8% General Mortgage Bonds due 2-15-22 50,000,000 Called at 105.13
10-15-98 5.05% First Mortgage Bonds due 10-15-98 49,100,000 Matured
</TABLE>
As of December 31, 1998, MidAmerican had $381 million of long-term debt
maturities and sinking fund requirements for 1999 through 2003.
MidAmerican has authorization from the FERC to issue up to $500 million in
various forms of debt. MidAmerican will also need authorization from the
Illinois Commerce Commission (ICC) prior to issuing any securities. If 90% or
more of the proceeds from a securities issuance are used for refinancing
purposes, MidAmerican need only provide the ICC 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 ICC is required to hold a hearing
before issuing its authorization.
Credit Ratings -
MidAmerican's access to external capital and its cost of capital are
influenced by the credit ratings of its securities. MidAmerican's credit ratings
as of March 12, 1999, are shown in the table below. The ratings reflect only the
views of such rating agencies, and each rating should be evaluated independently
of any other rating. Generally, rating agencies base their ratings on
information furnished to them by the issuing company and on investigation,
studies and assumptions by the rating agencies. There is no assurance that any
particular rating will continue for any given period of time or that it will not
be changed or withdrawn entirely if in the judgment of the rating agency
circumstances so warrant. Such ratings are not a recommendation to buy, sell or
hold securities.
Moody's
Duff & Investors Standard
Phelps Service & Poor's
------ --------- --------
Mortgage Bonds AA- A2 A+
Unsecured Medium-Term Notes A+ A3 A-
Preferred Stocks A a3 BBB+
Commercial Paper N/A P-1 A-1
The following is a summary of the meanings of the ratings shown above and
the relative rank of MidAmerican's rating within each agency's classification
system.
Duff & Phelps top four bond/note ratings (AAA, AA, A, BBB) are generally
considered "investment grade." Bonds rated "AA" possess a high credit quality,
and protection factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions. Duff & Phelps may use a plus (+) or
minus (-) sign after ratings to designate the relative position of security
within the rating category. Moody's top four bond/note ratings (Aaa, Aa, A and
Baa) are generally considered "investment grade." Obligations which are rated
"A" possess many favorable investment attributes and are considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future. A numerical modifier ranks
the security within the category with a "1" indicating the high end, a "2"
indicating the mid-range and a "3" indicating the low end of the category.
Standard & Poor's top four bond/note ratings (AAA, AA, A and BBB) are considered
"investment grade". Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than higher-rated debt.
Standard & Poor's may use a plus (+) or minus (-) sign after ratings to
designate the relative position of a security within the rating category.
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Ratings of preferred stocks are an indication of a company's ability to pay
the preferred dividend and any sinking fund obligations on a timely basis. Duff
& Phelps top four preferred stock ratings categories are the same as for bonds
and notes. A rating of "A" indicates protection factors are average but
adequate. Risk factors are more variable and greater in periods of economic
stress. Moody's top four preferred stock ratings (aaa, aa, a and baa) are
generally considered "investment grade". Moody's "a" rating is considered to be
an upper medium grade preferred stock. Earnings and asset protection are
expected to be maintained at adequate levels in the foreseeable future. Standard
& Poor's top four preferred stock ratings (AAA, AA, A and BBB) are considered
"investment grade". Standard & Poor's "BBB" rating indicates adequate capacity
to meet payment obligations. Whereas it normally exhibits adequate asset
protection, it is susceptible to weakened payment capacities during adverse
economic conditions than higher rated categories.
Moody's top three commercial paper ratings (P-1, P-2 and P-3) are generally
considered "investment grade". Issuers rated "P-1" have a superior ability for
repayment of senior short-term debt obligations and repayment ability is often
evidenced by a conservative structure, broad margins in earnings coverage of
fixed financial charges and well established access to a range of financial
markets and assured sources of alternate liquidity. Standard & Poor's commercial
paper ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity less than 365 days. The top three Standard &
Poor's commercial paper ratings (A-1, A-2 and A-3) are considered "investment
grade". Issues rated "A-1" indicate that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety are denoted with a plus (+) sign designation.
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 being deregulated. For local gas distribution businesses,
the supply, local delivery and marketing functions are similarly being separated
and opened to competitors for all classes of customers. While retail electric
competition is presently not permitted in Iowa, MidAmerican's primary market,
legislation is being considered in the current legislative session to do so.
Deregulation of the gas supply function related to small volume customers is
currently being considered by the IUB. MidAmerican is actively participating in
the legislative and regulatory processes shaping the new environment in which
its businesses will operate.
The generation and retail portions of MidAmerican'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 self-generation could put
pressure on utility margins.
During the transition to full competition, increased volatility in the
marketplace can be expected, as evidenced by the extreme price spikes for bulk
power encountered in the Midwest in June 1998. Although
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the extreme prices did not have a material impact on MidAmerican's results, such
volatility underscores the increased risk and opportunity associated with the
energy business as it transitions to competition.
MidAmerican is positioning itself to succeed in a competitive environment
in a number of ways including working to reduce energy costs, developing new
energy-related products and services, and entering into ventures with others to
strengthen its relationship with existing and prospective customers.
MidAmerican's association with its real estate brokerage affiliate is an example
how it is positioning to expand market share when retail competition is allowed.
Legislative and Regulatory Evolution -
In December 1997, the Governor of Illinois signed into law a bill to
restructure Illinois' electric utility industry and transition it to a
competitive market. Under the law, larger non-residential customers in Illinois
and 33% of the remaining non-residential Illinois customers will be allowed to
select their provider of electric supply services, beginning October 1, 1999.
All other non-residential customers will have supplier choice starting December
31, 2000. Residential customers all receive the opportunity to select their
electric supplier on May 1, 2002.
The law required a 15% electric rate reduction for all Illinois residential
customers in 1998. To satisfy its obligation, MidAmerican received credit for
its 1996 and 1997 Illinois rate reductions, totaling $15.5 million, and reduced
rates an additional $0.9 million annually, effective August 1, 1998. MidAmerican
is exempted from the requirement to join an independent system operator (ISO) or
to form an in-state ISO.
In addition, the law provides for Illinois earnings above a certain level
of return on equity (ROE) to be shared equally between customers and MidAmerican
beginning in April 2000. MidAmerican's ROE level will be based on a rolling
two-year average, with the first determination being based on an average of 1998
and 1999. The ROE level at which MidAmerican 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 and 6.50% for 2000 through 2004. If the resulting average
Treasury Bond rate were equal to the December 1998 30-year Treasury Bond rate,
the ROE level above which sharing must occur would be approximately 10.6%. The
law allows MidAmerican to mitigate the sharing of earnings above the threshold
ROE through non-cash methods that would reduce MidAmerican's earnings.
MidAmerican continues to evaluate its strategy regarding the sharing mechanism.
The law also addresses charges to customers for transition costs based on a
lost-revenue approach. These transition fees, designed to help utilities recover
stranded costs, will end December 31, 2006, subject to possible extension.
MidAmerican continues its involvement in proceedings which detail the new
competitive environment and to evaluate the impact of the law on its operations.
In Iowa, a replacement of the prior utility property tax system, which was
supported by MidAmerican, went into effect on January 1, 1999. The replacement
tax is primarily a consumption-based tax on the user of energy and assures
stability in tax collections as the industry is deregulated in Iowa. With
resolution of the utility property tax issue, MidAmerican is pursuing the
adoption of restructuring legislation in the 1999 Iowa legislative session.
Small Volume Gas Transportation -
In October 1997, the IUB adopted rules to encourage gas transportation
service for small volume customers starting in 1999. MidAmerican filed its plan
to unbundle service for its small volume customers on October 30, 1998. Under
the plan, all of MidAmerican's small volume natural gas customers in Iowa,
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including residential customers, would be allowed to choose their own natural
gas supplier/marketer, which may be the retail portion of MidAmerican's
business, beginning May 1, 2000. If a customer does not expressly choose a
supplier/marketer, then MidAmerican will provide the customer with market-priced
service. With implementation of customer choice, the PGA (refer to the Gas
Margin discussion of Results of Operations) would be modified to recover only
the costs incurred by MidAmerican, as the distribution system operator, to
balance the system and maintain system integrity.
Residential and Commercial Pilot Project -
On August 21, 1998, the IUB issued an Order approving MidAmerican's
proposal to allow at least 15,000 Iowa families and 2,000 small businesses to
have the opportunity to select among competing electricity providers. The
two-year program will allow participating retail customers in the selected test
area to choose among several electricity providers, including MidAmerican, and
to have that energy delivered by MidAmerican. Customer enrollment will begin on
April 1, 1999, with the pilot starting in May 1999. Businesses in the test
area will be eligible for the program if their annual peak demand is less than
four megawatts. New suppliers participating in the program will have to be
certified by the IUB and meet specified requirements.
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'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'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 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 could be required to write off the related regulatory assets and
liabilities from its balance sheet, and thus, a material adjustment to earnings
in that period could result. As of December 31, 1998, MidAmerican had $305
million of regulatory assets on its Consolidated Balance Sheet.
Energy Efficiency -
MidAmerican's regulatory assets as of December 31, 1998, included $74.5
million of deferred energy efficiency costs. Based on the current level of
recovery, MidAmerican expects to recover these costs by the end of 2001.
MidAmerican 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 $16.8 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 1999,
2000 and 2001 is estimated to be $43 million, $40 million and $35 million,
respectively.
Rate Matters: Electric -
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other
parties. Four major components of the settlement and their status are as
follows:
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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
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 reduced base rates for certain non-contract
commercial customers by approximately $1.5 million annually, subject to IUB
approval. Additionally, MidAmerican will make a one-time refund for reductions
that were not in place by the June 1, 1998, deadline. 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 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 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 (EAC) was eliminated. Prior to July
11, 1997, MidAmerican collected fuel costs from Iowa customers on a current
basis through the EAC, 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 will reduce the fuel cost
recovery factor in 1999 base rates. The estimated annual reduction in revenues
associated with this adjustment is $1.1 million.
4) If MidAmerican's annual Iowa electric jurisdictional return on common
equity exceeds 12%, then an equal sharing between customers and shareholders of
earnings above the 12% level begins; if it exceeds 14%, then two-thirds of
MidAmerican's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The agreement precludes MidAmerican 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%.
Rate Matters: Gas -
On October 27, 1998, MidAmerican made a filing with the IUB requesting a
rate increase for its Iowa retail gas customers. The 4.5% increase represents
approximately an $18.5 million increase in annual gas revenues. On January 22,
1999, the IUB approved an interim rate increase of approximately $6.7 million
annually, effective immediately. MidAmerican and the OCA have signed a
settlement agreeing to a final rate increase of $13.9 million annually. The
settlement is subject to the IUB's approval which MidAmerican expects to occur
in the second quarter of 1999.
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On November 20, 1998, MidAmerican filed with the South Dakota Public
Service Commission requesting a rate increase for its South Dakota retail gas
customers. The requested 6.5% increase represents approximately a $3.2 million
increase in annual revenues. MidAmerican expects the final rates, which may
differ from the requested amount, to be implemented in the summer of 1999.
Environmental Matters -
The United States Environmental Protection Agency (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 is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste materials
are present, whether such materials constitute an environmental or health risk,
and whether MidAmerican has any responsibility for remedial action.
MidAmerican's estimate of probable remediation costs for these sites as of
December 31, 1998, was $24 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 for further discussion of MidAmerican's
environmental activities related to manufactured gas plant sites and cost
recovery.
Although the timing of potential incurred costs and recovery of such cost
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's financial position or results of operations.
Following recommendations provided by the Ozone Transport Assessment Group,
the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of the ozone standard in downwind states in the
eastern half of the United States. In September 1998, the EPA issued its final
rules in this proceeding. Iowa is not subject to the emissions reduction
requirements in the final rules, and, as such, MidAmerican's facilities are not
currently subject to additional emissions reductions as a result of this
initiative.
On July 18, 1997, the EPA adopted revisions to the NAAQS 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 August 1998, the Iowa
Environmental Protection Commission adopted by reference the NAAQS for ozone and
fine particulate matter.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. The attainment
status of areas in the state of Iowa will not be known for two to three years.
However, if MidAmerican's operations are determined to contribute to
nonattainment, the installation of additional control equipment, such as
scrubbers and/or selective catalytic reduction, on MidAmerican's units could be
required. The cost to install such equipment could be significant. MidAmerican
will continue to follow the attainment status of the areas in which it operates
and evaluate the potential impact of the status of these areas on MidAmerican
under the new regulations.
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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 (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 the
utility industry in general, and to MidAmerican, of reducing its CO2 emissions
levels by 7 percent 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 (ComEd). In January 1998, ComEd was informed by the Nuclear Regulatory
Commission (NRC) that the performance of Quad Cities Station was trending
adversely. During outages at Units 1 and 2 in the first five months of 1998,
ComEd worked extensively with the NRC regarding its concerns. In a July 1998
meeting, ComEd was informed by the NRC that while the adverse trend at Quad
Cities Station appears to have been stopped, the operating time of the units
since their restarts in May and June 1998 was not sufficient for the NRC to make
a final determination of the trend status of Quad Cities Station. The NRC senior
managers are scheduled to meet again in April 1999 on one unit and are expected
to consider the performance of nuclear power plants, including Quad Cities
Station. Other than a refueling outage on one unit and a scheduled surveillance
outage required by technical specifications, the Quad Cities Station units have
remained in full operation.
Coal Inventories -
In 1997 and 1998, nationwide operational problems of the Union Pacific
Railroad resulted in reduced coal inventories at certain MidAmerican generating
facilities. Management believes MidAmerican coal inventories have been restored
to levels adequate to meet expected customer demands.
Generating Capability -
In July 1998, customer usage of electricity caused an hourly peak demand of
3,643 MW on MidAmerican's energy system. MidAmerican's previous record peak
demand was 3,553 MW set in 1995. MidAmerican is interconnected with certain Iowa
and neighboring utilities and is involved in an electric power pooling agreement
known as Mid-Continent Area Power Pool (MAPP). Each MAPP participant is required
to maintain for emergency purposes a net generating capability reserve of at
least 15% above its system peak demand. MidAmerican's reserve margin for 1998
was approximately 20%.
MidAmerican 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's reserve to fall below the 15% minimum.
If MidAmerican fails to maintain the appropriate reserve, significant penalties
would be contractually imposed by MAPP.
ACTIVITIES REGARDING YEAR 2000 DATE ISSUES
The following discussion of year 2000 issues describes MidAmerican's plans
to address technical problems relating to calculations, manipulations, storage
and other uses of date data which could cause some computer-controlled systems,
applications and processes (hereinafter referred to as "Systems") to incorrectly
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process critical financial and operational information, or stop processing
altogether. The discussion contains by necessity many forward-looking
statements. The Company wishes to avail itself of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and in order to do so
includes the following meaningful cautionary statements with regard to the
forward looking statements of its year 2000 plans. The Company's intentions,
expectations, and predictions relating to its year 2000 efforts are subject to
risks and uncertainties that could cause actual results to differ materially
from those expressed in, or implied by such statements. Such risks and
uncertainties include, among others, the effects of weather, competitive
factors, federal and state regulatory actions, and other matters, many of which
are beyond the Company's control. In addition, the Company claims the full
protections established by the Year 2000 Information and Readiness Disclosure
Act for Year 2000 Statements and Year 2000 Readiness Disclosure.
Project Description -
The Company has undertaken an extensive ongoing project to address its
information technology (IT) and non-IT (including embedded technology) Systems
potentially affected by the year 2000 date change. The Company's approach is
based on a five-phase project methodology - inventory, assessment, planning,
resolution and implementation - designed to result in the identification and
evaluation of potential problems, and remediation of the Company's Systems. The
Company generally defines the five phases as follows:
1. Inventory Phase - The purpose of the inventory phase is to identify and
document Systems used by the Company that may have a date function.
2. Assessment Phase - The purpose of the assessment phase is to collect
information about inventoried Systems, including the business and technical
context in which individual Systems operate, to make an informed judgment
concerning an appropriate plan to mitigate year 2000 related risks.
3. Planning Phase - The purpose of the planning phase is to develop
strategic and tactical plans for Systems that require replacement, repairs,
upgrades or other appropriate actions (collectively referred to as "remedial
actions").
4. Resolution Phase - The purpose of the resolution phase is to execute the
plan developed during the preceding phases. Testing of Systems and/or components
of Systems is commenced during this phase.
5. Implementation Phase - The purpose of the implementation phase is
to examine the Systems to determine whether they will function adequately in a
production environment and to perform follow-up administrative tasks as required
to develop appropriate documentation in support of year 2000 readiness.
The Company's preparedness goal is to ensure high- and medium-priority
Systems are suitable for continued use into the year 2000 and will correctly
perform all critical functions that require accurate processing of date data
("year 2000 ready" or "year 2000 readiness") by June 30, 1999. The Company
classifies all Systems ranging from low- to high-priority based on their
importance to carrying out the Company's business mission. System priority is
based on potential impacts resulting from year 2000 problems on public and
employee safety, prolonged and widespread service outages, long-term shareholder
value, and ability to comply with regulatory requirements. In the case of
low-priority Systems, year 2000 readiness may be delayed beyond January 1, 2000,
or perhaps indefinitely. The Company plans to use the last six months of 1999 to
perform post-implementation testing, address selected lower priority Systems and
conduct preparedness exercises.
Vendors, customers and other third parties may affect the Company's ability
to achieve year 2000 readiness. Because service reliability and financial
stability are dependent on the Company's supply chain, a
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concerted effort is being made to investigate important third parties to assess
their ability to continue to supply products or services to, or purchase
products or services from, the Company. To date, the Company's investigation of
third parties has focused substantial efforts on vendors of Systems and System
components, fuel suppliers, joint owners of service providers, wholesale (bulk
power) customers, major retail customers, and companies that exchange electronic
data with the Company. However, information made available to the Company has
not been uniform in terms of quality and quantity; e.g., information about
products in which the Company has a specific interest has been definitive in
some cases, while in other cases such information has been inconclusive.
State of Readiness -
Due to factors such as the overlapping nature of the project phases and the
varying degree of complexity of the Systems being addressed, it is difficult to
accurately determine the status of completion of a particular phase of the
project at any given point in time. The Company uses three methods to measure
the status of project completion:
1. As an entity with public utility operations, the Company must comply
with certain year 2000 regulatory requirements imposed by the North
American Electric Reliability Council ("NERC"). NERC reporting data is
limited primarily to Systems that are directly associated with
transmission grid stability. The transmission grid consists of the
interconnected transmission systems of North American utilities.
Reporting categories include nuclear generation, non-nuclear
generation, Energy Management Systems and Supervisory Control and Data
Acquisition ("SCADA") system, telecommunications systems, substation
controls and system protection, and IT business information systems.
Pursuant to NERC requirements, the Company's January compliance filing
shows the Company has completed 100% of inventory provisions, 94% of
assessment conditions (the remaining 6% relates to finalizing
phase-end sign-off documentation and completion of assessment on some
products that had not been implemented to production as of the
reporting date), and 50% of remediation/testing requirements.
2. The "checklist" approach counts as one each System that is unique to a
given organizational group. For example, identical substation meters
may be located in several individual substations, but the meter is
counted as only one System. All Systems are viewed as equivalent,
regardless of priority, in the checklist approach. Systems are
categorized as complete or not complete, without regard to percentage
of completion of the System in total or percentage of completion of
any particular phase of the project. As of January 31, 1999, there
were 5,469 separate Systems in the Company's inventory. Of these,
3,637, or 66.5%, had been completed.
3. The Company's internally developed measure is more sensitive and is
based on business risk/priority, weighted tasks and weighted phases.
Only high- and medium-risk/priority Systems are included in the status
of completion calculation. The data related to Systems that could
impact grid stability pertains only to those Systems that directly
affect the Company's customers. Also, progress toward completion is
measured. As of January 31,1999, the Company as a whole is generally
in the resolution phase. Percentage of completion for six areas of
business operations is a follows:
A. IT - Applications: 65% complete
B. IT - Operations & Infrastructure: 73% complete
C. Generation: 70% complete
D. Energy Delivery: 71% complete
E. Retail: 47% complete
F. Corporate Services (excluding IT): 43% complete
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The investigation of supply chain issues consists of documenting the nature
of business relationships in correspondence, surveys and meetings with third
parties and making determinations regarding their year 2000 readiness status
based on the responses received. Ongoing communications with some third parties
will be required for the Company to make such a determination. Due to the nature
of third parties' continued updates of year 2000 readiness disclosures, it is
expected that these communications will continue through the last half of 1999,
as will continued monitoring of information about specific products in the
Company's inventory.
Costs -
As of December 31, 1998, approximately $5.5 million in operating expenses
have been incurred to carry out year 2000 activities. It is anticipated that an
additional $8.2 million in operating expenses and $1.4 million in capital costs
will need to be incurred to complete the project. Although additional unforeseen
costs may be incurred, at this time the Company has not become aware of any
material costs which may arise in order to achieve year 2000 readiness. Future
progress toward achievement of year 2000 readiness could change this outlook.
The Company has renovated several high-priority Systems (management
information, materials management information, work management information, and
others). Certain other Systems (customer service, electric outage management,
meter control and inventory, and others) will be replaced to gain enhanced
functionalities prior to the end of the first quarter of 1999. The requirement
to develop and install a new customer service system ("CSS") and related
applications was an outcome of the merger which created MidAmerican in July of
1995. Although potential year 2000 problems existing in the predecessor
companies' CSS products were recognized, the decision to implement the new CSS
was primarily in response to technical difficulties associated with application
integration and the need for additional application functionalities. The costs
of the new CSS and related applications are not reported herein as their
development and installation was not driven by year 2000 concerns.
Contingency Plans -
A contingency plan identifying credible worst-case scenarios is being
developed. Although a number of factors come into play in defining reasonably
likely worst case scenarios, the loss of voice and data ("V/D") communications
in combination with volatile load patterns is viewed as the most serious threat.
Such communications are crucial to enable the Company to monitor the
relationship between the supply and demand for electricity. Loss of V/D
communications would have a severe impact in the event load patterns become
uncommonly unstable as a result of other utilities and/or large numbers of major
customers on the Company's transmission grid system experience problems due to
year 2000 issues.
The first draft of the Company's contingency plan was completed before
December 31, 1998, and the schedule for finalizing the plan calls for the second
draft to be completed on or before June 30, 1999, and to have an operational
plan in place no later than September 1, 1999. The Company plans to participate
in two contingency planning drills coordinated by NERC on April 9 and September
9 of 1999.
The contingency plan comprises both mitigation and recovery aspects.
Mitigation entails planning to reduce the impact of unresolved year 2000
problems and recovery entails planning to recover from year 2000 problems that
may occur. The Company's approach to contingency planning includes the following
steps: identify year 2000 operating risks; perform scenario risk analysis;
develop risk management strategies; begin general preparations; implement power
system operation planning; and implementation of year 2000 system operating
plan.
-60-
<PAGE>
Risks -
Despite the comprehensive nature of the Company's year 2000 project and the
results the project is designed to produce, the Company may experience random,
widespread and simultaneous failures in its generation, distribution and Systems
during January 2000. Contingency plans for any known or reasonably anticipated
risk of interruption to the generation or distribution of energy are being
developed to plan for resources needed to be put in place to reduce the
potential outage period to a minimum. Although the impact on future operations
and revenues is unknown, failure of the Company's Systems to perform because of
year 2000 implications could result in operating problems and costs material to
the Company.
Although management believes the project will be completed sufficiently in
advance of January 1, 2000, unforeseen and other factors could cause delays in
the project, the results of which may have a material effect on the Company's
results of operations. In addition, there is no assurance that the Company will
not be affected by year 2000 problems experienced by third parties.
ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" effective
for fiscal years beginning after June 15, 1999. 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
certain conditions are met, such 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. An entity
that elects to apply hedge accounting is required to establish at the inception
of the hedge the method it will use in assessing the effectiveness of the
derivative. If the pronouncement was currently in effect, MidAmerican believes
it would not have a material impact on its results of operations or financial
condition.
In November 1998, the Emerging Issues Task Force (EITF) of the FASB
released EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities," effective for fiscal years beginning
after December 15, 1998. In this issue, the EITF provides guidance on how energy
trading activities are to be accounted for on a company's income statement.
Current accounting practice varies throughout the energy industry. Historically,
a "settlement" basis of accounting has been used, meaning the earnings impact of
energy contracts was recognized when such contracts were physically settled. As
these type of contracts become more complicated or as the operation of the group
conducting these activities takes on more characteristics of a trading function,
the EITF has concluded that such contracts must be recorded at fair value, and
the net change in value recorded in income. The EITF outlines a number of
indicators to consider in determining whether an operation is engaged in
"trading activities." Presently, MidAmerican's operation does not meet the
definition of "trading", and hence it continues to use settlement accounting.
However, if the nature of MidAmerican's trading activity changes, there will
need to be a transition to fair value accounting.
-61-
<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES
Regulated electric .................................. $ 1,169,810 $ 1,126,300 $ 1,099,008
Regulated gas ....................................... 429,870 536,306 536,753
Nonregulated ........................................ 107,509 65,249 38,592
----------- ----------- -----------
1,707,189 1,727,855 1,674,353
----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ................. 227,870 235,760 234,317
Cost of gas sold .................................. 243,451 346,016 345,014
Other operating expenses .......................... 460,937 429,794 350,174
Maintenance ....................................... 107,891 98,090 88,621
Depreciation and amortization ..................... 182,211 170,540 164,592
Property and other taxes .......................... 99,163 101,317 92,630
----------- ----------- -----------
1,321,523 1,381,517 1,275,348
----------- ----------- -----------
Nonregulated:
Cost of sales ..................................... 88,390 54,522 31,197
Other ............................................. 16,356 4,507 1,634
----------- ----------- -----------
104,746 59,029 32,831
----------- ----------- -----------
Total operating expenses ............................ 1,426,269 1,440,546 1,308,179
----------- ----------- -----------
OPERATING INCOME .................................... 280,920 287,309 366,174
----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income ........................ 6,116 2,332 1,598
Other, net .......................................... (6,477) 6,147 (3,361)
----------- ----------- -----------
(361) 8,479 (1,763)
----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt .......................... 70,193 78,120 79,434
Other interest expense .............................. 14,128 10,027 10,842
Preferred dividends of subsidiary trust ............. 7,980 7,980 288
Allowance for borrowed funds ........................ (3,377) (2,597) (4,212)
----------- ----------- -----------
88,924 93,530 86,352
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 191,635 202,258 278,059
INCOME TAXES ........................................ 76,042 76,317 112,927
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ................... 115,593 125,941 165,132
LOSS FROM DISCONTINUED OPERATIONS ................... - - (10,161)
----------- ----------- -----------
NET INCOME .......................................... 115,593 125,941 154,971
PREFERRED DIVIDENDS ................................. 4,952 6,488 10,401
----------- ----------- -----------
EARNINGS ON COMMON STOCK ............................ $ 110,641 $ 119,453 $ 144,570
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-62-
<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric ......................................................... $4,258,061 $4,087,924
Gas .............................................................. 786,169 756,874
---------- ----------
5,044,230 4,844,798
Less accumulated depreciation and amortization ................... 2,428,954 2,277,110
---------- ----------
2,615,276 2,567,688
Construction work in progress .................................... 26,369 55,418
---------- ----------
2,641,645 2,623,106
---------- ----------
POWER PURCHASE CONTRACT .......................................... 150,401 173,107
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ........................................ 5,370 9,318
Receivables ...................................................... 168,764 184,153
Inventories ...................................................... 92,745 84,298
Other ............................................................ 32,126 6,174
---------- ----------
299,005 283,943
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ....................... 183,279 115,029
---------- ----------
OTHER ASSETS ..................................................... 311,200 347,122
---------- ----------
TOTAL ASSETS ..................................................... $3,585,530 $3,542,307
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity ...................................... $ 972,278 $ 985,744
MidAmerican preferred securities, not subject to mandatory
redemption ................................................... 31,759 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ............................... 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary trust
holding solely MidAmerican junior subordinated debentures..... 100,000 100,000
Long-term debt (excluding current portion) ....................... 870,069 920,203
---------- ----------
2,024,106 2,087,710
---------- ----------
CURRENT LIABILITIES
Notes payable .................................................... 206,221 122,500
Current portion of long-term debt ................................ 60,897 124,460
Current portion of power purchase contract ....................... 15,034 14,361
Accounts payable ................................................. 159,420 128,390
Taxes accrued .................................................... 106,132 91,449
Interest accrued ................................................. 13,473 20,616
Other ............................................................ 35,405 22,598
---------- ----------
596,582 524,374
---------- ----------
OTHER LIABILITIES
Power purchase contract .......................................... 68,093 83,143
Deferred income taxes ............................................ 584,675 592,840
Investment tax credit ............................................ 77,421 83,127
Other ............................................................ 234,653 171,113
---------- ----------
964,842 930,223
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ............................. $3,585,530 $3,542,307
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-63-
<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................... $ 115,593 $ 125,941 $ 154,971
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .............................. 198,616 194,287 185,657
Net decrease in deferred income taxes and
investment tax credit, net ............................... (18,379) (32,645) (3,111)
Amortization of other assets ............................... 40,076 33,112 20,541
Loss from discontinued operations .......................... - - 10,161
Gain on sale of assets and long-term investments ........... - - (6,104)
Impact of changes in working capital ....................... 42,367 17,003 (58,371)
Other ...................................................... 2,734 (28,160) 23,689
--------- --------- ---------
Net cash provided ........................................ 381,007 309,538 327,433
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................. (193,354) (166,932) (154,198)
Quad Cities Nuclear Power Station decommissioning trust fund .. (11,409) (9,819) (8,607)
Deferred energy efficiency expenditures ....................... - (12,258) (20,390)
Nonregulated capital expenditures ............................. (21,065) (5,920) (2,970)
Proceeds from sale of assets and other investments ............ 19,854 - 11,620
Investment in discontinued operations ......................... - - 10,100
Other investing activities, net ............................... 799 (788) 734
--------- --------- ---------
Net cash used .............................................. (205,175) (195,717) (163,711)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ................................................ (129,152) (126,988) (131,171)
Issuance of long-term debt, net of issuance cost .............. 158,414 - 99,500
Retirement of long-term debt, including reacquisition cost .... (282,759) (92,524) (72,111)
Reacquisition of preferred shares ............................. (4) (6) (58,176)
Issuance of preferred securities, net of issuance cost ........ - - 96,850
Cash inflows (outflows) of accounts receivable securitization . (10,000) 70,000 -
Net increase (decrease) in notes payable ...................... 83,721 (39,200) (23,100)
--------- --------- ---------
Net cash used .............................................. (179,780) (188,718) (88,208)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... (3,948) (74,897) 75,514
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................ 9,318 84,215 8,701
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 5,370 $ 9,318 $ 84,215
========= ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ..................... $ 89,932 $ 90,718 $ 80,881
========= ========= =========
Income taxes paid ............................................. $ 89,130 $ 112,492 $ 103,627
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
-64-
<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------------------------------
1998 1997
------------------- --------------------
<S> <C> <C> <C> <C>
COMMON SHAREHOLDER'S EQUITY
Common shares, no par; 350,000,000 shares authorized;
70,980,203 shares outstanding.................................... $ 560,656 $ 560,563
Retained earnings.................................................... 411,622 425,181
----------- -----------
972,278 48.0% 985,744 47.2%
----------- ----- ----------- -----
PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding not subject to mandatory redemption:
$3.30 Series, 49,451 and 49,481 shares, respectively............... 4,945 4,948
$3.75 Series, 38,305 and 38,310 shares, respectively............... 3,831 3,831
$3.90 Series, 32,630 shares ....................................... 3,263 3,263
$4.20 Series, 47,362 and 47,369 shares, respectively............... 4,736 4,737
$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 1.6% 31,763 1.5%
----------- ----- ----------- -----
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 2.5% 50,000 2.4%
----------- ------ ----------- ------
MIDAMERICAN-OBLIGATED PREFERRED SECURITIES
MidAmerican-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely
MidAmerican junior subordinated debentures:
7.98% series, 4,000,000 shares outstanding......................... 100,000 4.9% 100,000 4.8%
----------- ------ ----------- ------
LONG-TERM DEBT
Mortgage bonds:
7.875% Series, due 1999............................................ - 60,000
6% Series, due 2000................................................ 35,000 35,000
6.75% Series, due 2000............................................. 75,000 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
8% Series, due 2022................................................ - 50,000
7.45% Series, due 2023............................................. 6,940 6,940
8.125% Series, due 2023............................................ - 100,000
6.95% Series, due 2025............................................. 12,500 12,500
Pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003............... 7,704 8,064
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.
-65-
<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017, 3.7% ....................................... $ 37,600 $ 37,600
Due 2023 (secured by general mortgage bond, 3.7%).............. 28,295 28,295
Due 2023, 3.7%................................................. 6,850 6,850
Due 2024, 3.7%................................................. 34,900 34,900
Due 2025, 3.7%................................................. 12,750 12,750
Notes:
8.75% Series, due 2002........................................... 240 240
6.5% Series, due 2001............................................ 100,000 100,000
6.375% Series, due 2006.......................................... 160,000 -
6.4% Series, due 2003 through 2007............................... 2,000 2,000
Obligation under capital lease....................................... 2,055 3,096
Unamortized debt premium and discount, net........................... (1,925) (3,192)
---------- ----------
870,069 43.0% 920,203 44.1%
---------- ------ ---------- ------
TOTAL CAPITALIZATION................................................. $2,024,106 100.0% $2,087,710 100.0%
========== ====== ========== ======
</TABLE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
BEGINNING OF YEAR................................................. $ 425,181 $ 426,228 $ 430,589
--------- --------- ---------
NET INCOME........................................................ 115,593 125,941 154,971
--------- --------- ---------
DEDUCT (ADD):
(Gain) loss on reacquisition of preferred shares.................. (3) 1,433 1,572
Dividends declared on preferred shares............................ 4,955 5,055 8,829
Dividends declared on common shares............................... 124,200 120,500 120,770
Dividend of investment in subsidiaries............................ - - 28,161
--------- ---------- ----------
129,152 126,988 159,332
--------- ---------- ----------
END OF YEAR....................................................... $ 411,622 $ 425,181 $ 426,228
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
-66-
<PAGE>
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) COMPANY STRUCTURE AND MERGER:
MidAmerican Energy Company (MidAmerican) is a public utility with electric
and natural gas operations and is the principal subsidiary of MHC Inc. (MHC).
MHC is headquartered in Des Moines, Iowa, and has the following nonregulated
subsidiaries: MidAmerican Capital Company, MidAmerican Realty Services Company
and Midwest Capital Group, Inc. MHC is a wholly owned subsidiary of MidAmerican
Funding, LLC, which is wholly owned subsidiary of MidAmerican Energy Holdings
Company.
The current corporate structure is the result of the merger transaction
completed on March 12, 1999, (the Merger) involving MHC (formerly MidAmerican
Energy Holdings Company), and CalEnergy Company, Inc. (CalEnergy). CalEnergy,
through a reincorporation transaction, was renamed MidAmerican Energy Holdings
Company (Holdings). Holdings is an exempt public utility holding company
headquartered in Des Moines. References to MHC regarding information, events or
transactions prior to the merger relate to the former MidAmerican Energy
Holdings Company.
MidAmerican was formed on July 1, 1995, as a result of the merger of
Iowa-Illinois Gas and Electric Company, Midwest Resources Inc. (Resources) and
Midwest Power Systems Inc., the utility subsidiary of Resources. Effective
December 1, 1996, MHC became the parent company of MidAmerican, MidAmerican
Capital and Midwest Capital. Prior to December 1, 1996, MidAmerican Capital and
Midwest Capital were subsidiaries of MidAmerican. Accordingly, the consolidated
financial statements of MidAmerican present amounts related to MidAmerican
Capital and Midwest Capital as discontinued operations in 1996 to reflect their
transfer to MHC. See Note (10) for additional information regarding the
formation of the holding company in 1996.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include MidAmerican and
its wholly owned subsidiaries. In 1998, MidAmerican reformatted its income
statement to reflect certain nonregulated operations differently. Prior year
amounts have been reclassified accordingly. All significant intercompany
transactions have been eliminated.
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.
(C) REGULATION:
MidAmerican's utility operations are subject to the regulation of the Iowa
Utilities Board (IUB), the Illinois Commerce Commission (ICC), the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission
(FERC). MidAmerican'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.
-67-
<PAGE>
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71 allows, among other
things, the deferral of costs that would otherwise be expensed when incurred. A
possible consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71. The majority of MidAmerican's electric and gas utility
operations currently meet the criteria of SFAS 71, but its applicability is
periodically reexamined. On December 16, 1997, MidAmerican'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 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 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. The
following regulatory assets, primarily included in Other Assets in the
Consolidated Balance Sheets, represent probable future revenue to MidAmerican
because these costs are expected to be recovered in charges to utility customers
(in thousands):
1998 1997
-------- --------
Deferred income taxes................... $148,036 $143,851
Energy efficiency costs................. 74,509 111,471
Debt refinancing costs.................. 40,233 34,923
FERC Order 636 transition costs......... - 9,279
Environmental costs..................... 23,427 20,417
Enrichment facilities decommissioning... 8,659 8,781
Unamortized costs of retired plant ..... 3,537 5,771
Other................................... 7,088 4,796
-------- --------
Total................................. $305,489 $339,289
======== ========
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
records unbilled revenues, and related energy costs, representing the estimated
amount customers will be billed for services rendered between the meter-reading
dates in a particular month and the end of such month. Accrued unbilled revenues
were $79.8 million and $80.2 million at December 31, 1998 and 1997,
respectively, and are included in Receivables on the Consolidated Balance
Sheets.
MidAmerican's Illinois and South Dakota jurisdictional sales, or
approximately 12% of total retail electric sales, and the majority of its total
retail gas sales are subject to adjustment clauses. These clauses allow
MidAmerican 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.
-68-
<PAGE>
(E) DEPRECIATION AND AMORTIZATION:
MidAmerican'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:
1998 1997 1996
---- ---- ----
Electric.......................... 3.9% 3.8% 3.8%
Gas............................... 3.4% 3.4% 3.7%
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 are 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 (Quad Cities 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 and Nonregulated Property, Net includes the following amounts
as of December 31 (in thousands):
1998 1997
-------- --------
Nuclear decommissioning trust fund.... $116,973 $ 93,251
Corporate owned life insurance........ 43,945 -
Coal transportation property.......... 11,562 11,626
Other................................. 10,799 10,152
-------- --------
Total............................... $183,279 $115,029
======== ========
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.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
MidAmerican 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.
-69-
<PAGE>
Net cash provided (used) from changes in working capital, net of effects
from discontinued operations was as follows (in thousands):
1998 1997 1996
------- ------- --------
Receivables................... $25,389 $ (209) $(55,014)
Inventories................... (8,447) 6,566 (7,311)
Other current assets ......... (25,952) 1,602 9,118
Accounts payable.............. 31,030 5,416 6,543
Taxes accrued................. 14,683 9,111 3,345
Interest accrued.............. (7,143) (3,629) 603
Other current liabilities..... 12,807 (1,854) (15,655)
------- ------- --------
Total....................... $42,367 $17,003 $(58,371)
======= ======= ========
MidAmerican distributed the capital stock of MidAmerican Capital and
Midwest Capital to MHC. See Note (10) for additional information.
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Under a long-term power purchase contract with Nebraska Public Power
District (NPPD), expiring in 2004, MidAmerican purchases one-half of the output
of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated Balance
Sheets include a liability for MidAmerican's fixed obligation to pay 50% of
NPPD's Nuclear Facility Revenue Bonds and other fixed liabilities. A like amount
representing MidAmerican's right to purchase power is shown as an asset.
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 NPPD contract. Beginning July 11, 1997, the Iowa portion of capital
improvement costs is recovered currently from customers and is expensed as
incurred. MidAmerican began charging the remaining Cooper capital improvement
costs to expense 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 incurs in relation to its long-term power purchase contract
with NPPD 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:
MidAmerican 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 $0.3
million and $1.5 million as of December 31, 1998 and 1997, 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 Cost of Sales consistent
-70-
<PAGE>
with the expense for the physical commodity. Deferred net gains (losses) related
to the Company's gas futures contracts are $(1.9) million and $(0.4) million as
of December 31, 1998 and 1997, respectively.
MidAmerican 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. At December 31, 1998, MidAmerican held the following
hedging instruments:
Weighted Average
Notional Volume Market Value
(MMBtu) (Per MMBtu)
--------------- ----------------
Natural Gas Futures (Long) 6,970,000 $1.857
Natural Gas Futures (Short) 7,320,000 $1.854
Natural Gas Swaps (Variable to Fixed) 16,322,181
Weighted average variable price $1.922
Weighted average fixed price $2.098
(2) LONG-TERM DEBT:
MidAmerican's sinking fund requirements and maturities of long-term debt
for 1999 through 2003 are $61 million, $111 million, $102 million, $2 million
and $105 million, respectively.
MidAmerican'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, 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, 1998 and 1997. MidAmerican 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 property, is pledged to
secure mortgage bonds.
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
had undivided interests at December 31, 1998, in jointly owned generating plants
as shown in the table below.
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<PAGE>
The dollar amounts below represent MidAmerican'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'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 Unit 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 $242 $127 $298 $161 $210 $530
Accumulated depreciation $ 98 $ 82 $175 $ 92 $109 $252
Unit capacity-MW 1,529 515 675 624 716 700
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 1999 are estimated to be $194
million, including $9 million for Quad Cities Station nuclear fuel.
(B) MANUFACTURED GAS PLANT FACILITIES:
The United States Environmental Protection Agency (EPA) and the 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 is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste materials
are present, whether such materials constitute an environmental or health risk,
and whether MidAmerican has any responsibility for remedial action. MidAmerican
is currently conducting field investigations at eighteen sites and has conducted
interim removal actions at five of the eighteen sites. In addition, MidAmerican
has completed investigations and removals at four sites. MidAmerican is
continuing to evaluate several of the sites to determine the future liability,
if any, for conducting site investigations or other site activity.
MidAmerican's estimate of probable remediation costs for the sites
discussed above as of December 31, 1998, was $24 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The ICC has
approved the use of a tariff rider which permits recovery of the actual costs of
litigation, investigation and remediation relating to former MGP sites.
MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP
costs. MidAmerican intends to pursue recovery of the remediation costs from
other PRPs and its insurance carriers.
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 has potential legal liability
for the site and whether information exists to indicate that contaminated wastes
remain at the site. If so, the costs of performing a preliminary investigation
and the costs of removing known contaminated soil
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are accrued. As the investigation is performed and if it is determined remedial
action is required, the best estimate of remediation 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.
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's financial position or results of operations.
(C) CLEAN AIR ACT:
Following recommendations provided by the Ozone Transport Assessment Group,
the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making a significant
contribution to nonattainment of the ozone standard in downwind states in the
eastern half of the United States. In September 1998, the EPA issued its final
rules in this proceeding. Iowa is not subject to the emissions reduction
requirements in the final rules, and, as such, MidAmerican's facilities are not
currently subject to additional emissions reductions as a result of this
initiative.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards (NAAQS) for ozone and a new standard for fine particulate
matter. Based on data to be obtained from monitors located throughout each
state, the EPA will determine which states have areas that do not meet the air
quality standards (i.e., areas that are classified as nonattainment). If a state
has area(s) classified as nonattainment area(s), the state is required to submit
a State Implementation Plan specifying how it will reach attainment of the
standards through emission reductions or other means. In August 1998, the Iowa
Environmental Protection Commission adopted by reference the NAAQS for ozone and
fine particulate matter.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. The attainment
status of areas in the state of Iowa will not be known for two to three years.
However, if MidAmerican's operations are determined to contribute to
nonattainment, the installation of additional control equipment, such as
scrubbers and/or selective catalytic reduction, on MidAmerican's units could be
required. The cost to install such equipment could be significant. MidAmerican
will continue to follow the attainment status of the areas in which it operates
and evaluate the potential impact of the status of these areas on MidAmerican
under the new regulations.
(D) LONG-TERM POWER PURCHASE CONTRACT:
Payments to NPPD cover one-half of the fixed and operating costs of Cooper
(excluding depreciation but including debt service) and MidAmerican'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 pays
one-half of NPPD's decommissioning funding related to Cooper.
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<PAGE>
The debt amortization and Department of Energy (DOE) enrichment plant
decontamination and decommissioning component of MidAmerican's payments to NPPD
were $14.4 million, $13.8 million and $14.5 million and the net interest
component was $2.9 million, $3.8 million and $3.6 million each for the years
1998, 1997 and 1996, respectively.
MidAmerican's payments for the debt principal portion of the power purchase
contract obligation and the DOE enrichment plant decontamination and
decommissioning payments are $15.0 million, $15.8 million, $16.6 million, $17.4
million and $18.3 million, for 1999 through 2003, respectively.
(E) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican's share of expected decommissioning costs for Cooper and Quad Cities
Station, in 1998 dollars, is $256 million and $242 million, respectively. In
Illinois, nuclear decommissioning costs are included in customer billings
through a mechanism that permits annual adjustments. Such costs are reflected as
base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, NPPD
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, 1998, MidAmerican's share of funds set aside by NPPD in
internal and external accounts for decommissioning was $97.5 million. In
addition, the funding plan also assumes various funds and reserves currently
held to satisfy NPPD 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. NPPD
is recognizing decommissioning costs over the life of the power sales contract.
MidAmerican makes payments to NPPD related to decommissioning Cooper. These
payments are included in MidAmerican's power purchase costs. The Cooper
decommissioning component of MidAmerican's payments to NPPD was $7.9 million,
$11.3 million and $9.9 million for the years 1998, 1997, and 1996, respectively,
and is included in Other Operating Expenses in the Consolidated Statements of
Income. Earnings from the internal and external trust funds, which are
recognized by NPPD as the owner of the plant, are tax exempt and serve to reduce
future funding requirements.
External trusts have been established for the investment of funds for
decommissioning the Quad Cities Station. The total accrued balance as of
December 31, 1998, was $117.0 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's provision for depreciation included costs for Quad Cities
Station nuclear decommissioning of $11.4 million, $9.8 million and $8.6 million
for 1998, 1997 and 1996, respectively. The provision charged to expense is equal
to the funding that is being collected in rates. The decommissioning funding
component of MidAmerican's Illinois and Iowa tariffs assumes decommissioning
costs, related to the Quad Cities Station, will escalate at an annual rate of
4.9% 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 $1.7 million, $4.5
million and $3.2 million for 1998, 1997 and 1996, respectively. See Note (14)
for information regarding unrealized gains and losses.
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<PAGE>
(F) NUCLEAR INSURANCE:
MidAmerican maintains financial protection against catastrophic loss
associated with its interest in Quad Cities Station and Cooper through a
combination of insurance purchased by NPPD (the owner and operator of Cooper)
and Commonwealth Edison (ComEd, the joint owner and operator of Quad Cities
Station), insurance purchased directly by MidAmerican, 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.
NPPD 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's
aggregate maximum potential share of such 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 totalling $2.1 billion. For Cooper, MidAmerican and NPPD
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 and NPPD are covered for their
respective 50% obligation in the event of a loss totalling up to $2.75 billion.
MidAmerican 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, and the property coverages purchased by
ComEd, which includes the interests of MidAmerican, 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 from industry mutual policies for its obligations associated
with Cooper and Quad Cities Station combined, total $11.2 million.
The master nuclear worker liability coverage, which is purchased by NPPD
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 as a result of radiation exposure.
(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican has entered into supply and related transportation contracts
for its fossil fueled generating stations. The contracts, with expiration dates
ranging from 1999 to 2003, require minimum payments of $110.2 million, $75.8
million, $28.0 million, $8.1 million and $2.6 million for the years 1999 through
2003, respectively. MidAmerican expects to supplement these coal contracts with
spot market purchases to fulfill its future fossil fuel needs.
MidAmerican has entered into various natural gas supply and transportation
contracts for its utility operations. The minimum commitments under these
contracts are $57.4 million, $40.1 million, $33.3 million, $18.7 million and
$13.7 million for the years 1999 through 2003, respectively, and $60.7 million
for the total of the years thereafter.
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<PAGE>
(H) OPERATING LEASE COMMITMENTS:
MidAmerican has entered into various operating lease agreements covering
facilities, computer and transportation equipment. Rental payments on operating
leases were $23.2 million for 1998, $20.4 million for 1997, and $21.1 million
for 1996. The approximate minimum annual commitments under all operating leases
are $13.3 million, $11.8 million, $7.1 million, $5.5 million and $3.8 million
for the years 1999 through 2003, respectively, and $3.6 million for the total of
the years thereafter.
(5) COMMON SHAREHOLDER'S EQUITY:
Common shares outstanding changed during the years ended December 31 as
shown in the table below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------- --------------------
Amount Shares Amount Shares Amount Shares
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year....... $560,563 70,980 $560,597 100,752 $801,227 100,752
Changes due to:
Cancellation of common shares.... - - - (29,772) - -
Stock options.................... - - - - 623 -
Capital stock expense .......... - - - - (391) -
Distribution of investment in
subsidiaries to Holdings..... - - - - (240,862) -
Other............................ 93 - (34) - - -
-------- ------- -------- ------- -------- -------
Balance, end of year............. $560,656 70,980 $560,563 70,980 $560,597 100,752
======== ======= ======== ======= ======== =======
</TABLE>
(6) RETIREMENT PLANS:
MidAmerican has primarily noncontributory defined benefit pension plans
covering substantially all employees of MidAmerican and its affiliates,
MidAmerican Capital and Midwest Capital. No detail segregation of the data is
available by company. Employees of MidAmerican represent approximately 95% of
the payroll covered under these plans. Benefits 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 has been allowed to recover funding contributions in rates.
MidAmerican currently provides certain health care and life insurance
(postretirement) benefits for retired employees of MidAmerican and its
affiliates, MidAmerican Capital and Midwest Capital. No detailed segregation of
the data is available by company. Employees of MidAmerican represent
approximately 99% of the participants covered under these plans. Under the
plans, substantially all of MidAmerican's employees may become eligible for
these benefits if they reach retirement age while working for MidAmerican.
However, MidAmerican retains the right to change these benefits anytime at its
discretion. MidAmerican expenses postretirement benefit costs on an accrual
basis and includes provisions for such costs in rates.
MidAmerican also maintains noncontributory, nonqualified supplemental
executive retirement plans for active and retired participants.
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<PAGE>
Net periodic pension, supplemental retirement and postretirement benefit
costs included the following components for MidAmerican and the aforementioned
affiliates for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
Pension Cost Postretirement Cost
--------------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost................................ $ 11,284 $ 10,092 $ 12,323 $ 3,558 $ 2,680 $ 2,118
Interest cost............................... 29,941 29,623 31,109 9,344 8,822 8,341
Expected return on plan assets.............. (42,578) (37,617) (33,635) (3,651) (2,573) (1,895)
Amortization of net transition obligation... (2,591) (2,591) (2,591) 5,291 5,291 5,291
Amortization of prior service cost.......... 1,871 1,871 3,183 650 650 -
Amortization of prior year (gain) loss...... (2,802) (1,797) 806 - (298) -
Regulatory deferral of incurred cost........ - 5,423 568 - 4,888 5,112
-------- -------- -------- ------- ------- -------
Net periodic (benefit) cost............. $ (4,875) $ 5,004 $ 11,763 $15,192 $19,460 $18,967
======== ======== ======== ======= ======= =======
</TABLE>
The pension plan assets are in external trusts and are comprised of
corporate equity securities, United States government debt, corporate bonds, and
insurance contracts. 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 plan assets as
of December 31, 1998, MidAmerican had Rabbi trusts which held 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 cash value of the life insurance policies was $27.2
million and $21.5 million as of December 31, 1998 and 1997, respectively.
The projected benefit obligation and accumulated benefit obligation for the
supplemental incentive retirement plans were $55.1 million and $49.9 million,
respectively, as of December 31, 1998, and $48.6 million and $40.3 million,
respectively, as of December 31, 1997.
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<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 MidAmerican and the aforementioned affiliate plans to the net amounts
recognized in MHC's Consolidated Balance Sheets as of December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Benefit obligation at beginning of year ........ $ 430,043 $ 428,713 $ 127,347 $ 116,505
Service cost ................................... 11,285 10,091 3,558 2,680
Interest cost .................................. 29,941 29,623 9,344 8,822
Participant contributions ...................... 127 125 1,404 1,704
Plan amendments ................................ - (16,211) (21,607) 8,927
Actuarial (gain) loss .......................... 15,793 8,088 9,463 (3,025)
Benefits paid .................................. (30,714) (30,386) (9,321) (8,266)
--------- --------- --------- ---------
Benefit obligation at end of year .......... 456,475 430,043 120,188 127,347
--------- --------- --------- ---------
Reconciliation of the fair value of plan assets:
Fair value of plan assets at beginning of year . 483,668 427,828 52,174 36,783
Employer contributions ......................... 3,445 6,362 10,095 19,668
Participant contributions ...................... 127 125 1,404 1,704
Actual return on plan assets ................... 67,982 79,739 8,741 2,285
Benefits paid .................................. (30,714) (30,386) (9,321) (8,266)
--------- --------- --------- ---------
Fair value of plan assets at end of year ... 524,508 483,668 63,093 52,174
--------- --------- --------- ---------
Funded status .................................. 68,033 53,625 (57,095) (75,173)
Unrecognized net loss (gain) ................... (101,860) (95,051) (6,873) (11,248)
Unrecognized prior service cost ................ 19,868 21,739 2,555 8,277
Unrecognized net transition obligation (asset) . (13,748) (16,339) 57,543 79,370
--------- --------- --------- ---------
Net amount recognized in MHC's
Consolidated Balance sheets ........... $ (27,707) $ (36,026) $ (3,870) $ 1,226
========= ========= ========= =========
Amounts recognized in the Consolidated Balance
Sheets of MHC consist of:
Prepaid benefit cost ........................... $ 4,350 $ - $ - $ 1,226
Accrued benefit liability ...................... (49,874) (47,591) (3,870) -
Intangible asset ............................... 17,817 11,565 - -
--------- --------- --------- ---------
Net amount recognized ...................... $ (27,707) $ (36,026) $ (3,870) $ 1,226
========= ========= ========= =========
</TABLE>
Pension and Postretirement
Assumptions
--------------------------
1998 1997
----- ----
Assumptions used were:
Discount rate................................... 6.75% 7.0%
Rate of increase in compensation levels......... 5.0% 5.0%
Weighted average expected long-term
rate of return on assets...................... 9.0% 9.0%
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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.
For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals prior to age 65 will increase
by 8.4% in 1999 and that the rate of increase thereafter will decline by 1.0%
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 6.0% in 1999
and 5.5% in 2000.
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 1998 would increase by $2.4 million, and the postretirement
benefit obligation at December 31, 1998, would increase by $18.3 million. If the
assumed health care trend rates were to decrease by 1.0%, the total service and
interest cost for 1998 would decrease by $1.9 million and the postretirement
benefit obligation at December 31, 1998, would decrease by $15.3 million.
MidAmerican sponsors defined contribution pension plans (401(k) plans)
covering substantially all employees of MidAmerican and its affiliates,
MidAmerican Capital and Midwest Capital. MidAmerican's contributions to the
plans for MidAmerican employees, which are based on each participant's level of
contribution and cannot exceed four percent of each participant's salary or
wages, were $5.6 million, $4.5 million and $4.0 million for 1998, 1997 and 1996,
respectively.
(7) STOCK-BASED COMPENSATION PLANS:
MidAmerican has stock-based compensation arrangements for employees and
directors of MidAmerican and affiliates MidAmerican Capital and Midwest Capital,
as described below. MidAmerican accounts for these plans under Accounting
Principles Board Opinion No. 25 and the related interpretations. MidAmerican's
allocated portion of total compensation cost recognized in income for
stock-based compensation awards was $0.2 million, $1.2 million, and $0.6 million
for 1998, 1997, and 1996, respectively. Had MidAmerican used Statement of
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), pro-forma net income for common stock would be $110.2 million, $119.6
million, and $144.4 million, respectively.
Stock options and performance share awards have been granted pursuant to
the MidAmerican Energy Company 1995 Long-Term Incentive Plan (the "Plan"). Up to
four million shares are authorized to be granted under the Plan.
STOCK OPTIONS - Under the Plan, the Board of Directors of MHC granted
options to purchase shares of common stock (the "Options") at the fair market
value of the shares on the date of the grant. The options granted in 1998 and
1997 vest over a 3-year period at a rate of 33.3% per year and options granted
in 1995 and 1996 vest over a 4-year period at a rate of 25% per year. Under the
plan, all options expire ten years after the date of grant. At the effective
time of the Merger, each outstanding option to purchase shares of common stock
whether or not exercisable or vested, was assumed by Holdings and became an
option to purchase shares of Holdings common stock based on a conversion factor
of 0.9603. Stock option activity for 1998, 1997 and 1996, based on
preconversion amounts, is summarized as follows:
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<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
-------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... 566,666 $15.12 800,000 $14.66 700,000 $14.50
Granted.......................... 289,000 $25.25 46,666 $17.36 100,000 $15.75
Exercised........................ (70,000) $14.50 (165,000) $14.58 - -
Forfeited........................ (10,000) $17.38 (115,000) $14.93 - -
------- -------- -------
Outstanding, end of year......... 775,666 $18.72 566,666 $15.12 800,000 $14.66
======= ======== =======
Exercisable, end of year......... 369,710 $14.70 315,000 $14.54 175,000 $14.50
======= ====== ========
Weighted average fair value of
options granted during year.... $3.21 $1.66 $1.48
</TABLE>
The fair value of the options granted were estimated as of the date of the
grant using the Black-Scholes option pricing model. The model assumed:
1998 1997 1996
-------- --------- --------
Dividend rate per share...... $1.20 $ 1.20 $ 1.20
Expected volatility.......... 17.52% 16.55% 17.62%
Expected life................ 10 Years 10 Years 10 Years
Risk free interest rate...... 5.27% 6.14% 6.53%
The options outstanding at December 31, 1998, have an exercise price range
of $14.50 to $25.25, with a weighted average contractual life of 8.27 years.
PERFORMANCE SHARES - Under the Plan, participants were granted contingent
shares of MHC common stock. The shares are contingent upon the attainment of
specified performance measures within a 3-year performance period. During the
performance period, the participant is entitled to receive dividends and vote
the stock. The stock is vested upon achievement of the performance measures. If
the specified criteria is not met within the 3-year performance period, the
shares are forfeited. At the effective date of the Merger, each outstanding
grant of performance shares whether or not vested was converted into the right
to receive $27.15 in cash, payable to the grantee without interest.
The following table provides certain information regarding contingent
performance incentive shares granted under the Plan:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Number of performance shares granted....... 77,441 77,105 68,189
Fair value at date of grant (in thousands). $ 1,645 $ 1,335 $ 1,176
Weighted average per share amount.......... $21.2372 $ 17.3125 $ 17.2500
End of performance period.................. 6/30/01 6/30/00 6/30/99
</TABLE>
In addition, MHC has granted 1,200 restricted shares to each non-employee
director in 1998 and 800 restricted shares to each non-employee director in 1997
and 1996, respectively. Non-employee directors are
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restricted from disposing of granted shares until such time as they cease to be
a director of the company. The following table provides certain information
regarding the directors restricted shares granted under the Plan.
1998 1997 1996
-------- -------- --------
Number of shares granted .................... 14,400 11,200 12,000
Fair value at date of grant (in thousands) .. $ 295 $ 194 $ 207
Weighted average price per share amounts .... $20.4658 $17.3125 $17.2500
EMPLOYEE STOCK PURCHASE PLAN - Employees of MidAmerican and its affiliates
were allowed to purchase MHC stock up to the lesser of 15% of their annual
compensation or $25,000 at a 15% discount. The number of shares acquired by
employees under the plan were 146,299, 140,943, and 150,899 in 1998, 1997 and
1996, respectively. MHC acquired shares in the open market for this plan.
Participants who purchase shares under the Plan are required to hold purchased
shares for 180 days.
(8) 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>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at year-end ................................ $206,221 $122,500 $161,700
Weighted average interest rate
on year-end balance................................. 5.9% 5.9% 5.4%
Average daily amount outstanding
during the year..................................... $104,557 $110,472 $151,162
Weighted average interest rate
on average daily amount outstanding during the year. 5.6% 5.7% 5.5%
</TABLE>
MidAmerican has authority from FERC to issue short-term debt in the form of
commercial paper and bank notes aggregating $400 million. As of December 31,
1998, MidAmerican had a $250 million revolving credit facility and lines of
credit totaling $90 million. In March 1999, an $85 million line of credit was
terminated. MidAmerican's commercial paper borrowings are supported by the
revolving credit facility and the lines of credit.
(9) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican 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
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, the Iowa Office of Consumer Advocate (OCA) and other
parties. Four major components of the settlement and their status are as
follows:
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<PAGE>
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
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 reduced base rates for certain non-contract
commercial customers by approximately $1.5 million annually, subject to IUB
approval. Additionally, MidAmerican will make a one-time refund for reductions
that were not in place by the June 1, 1998, deadline. 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 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 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 (EAC) was eliminated. Prior to July
11, 1997, MidAmerican collected fuel costs from Iowa customers on a current
basis through the EAC, 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 will reduce the fuel cost
recovery factor in 1999 base rates. The estimated annual reduction in revenues
associated with this adjustment is $1.1 million.
4) If MidAmerican'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's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The agreement precludes MidAmerican 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 ROE's 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 6.5% for 2000 through 2004. The initial calculation, due March
31, 2000, will be based on 1998 and 1999 results.
(10) DISCONTINUED OPERATIONS:
On April 24, 1996, MidAmerican shareholders approved a proposal to form MHC
as a holding company for MidAmerican and its subsidiaries. Effective December 1,
1996, each share of MidAmerican common stock was exchanged for one share of MHC
common stock. As part of the transaction, MidAmerican
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<PAGE>
distributed the capital stock of MidAmerican Capital and Midwest Capital to
MHC. The subsidiaries that were distributed to MHC have been reflected as
discontinued operations for MidAmerican.
In the third quarter of 1996 MidAmerican received a final settlement
from the sale of a coal mining subsidiary which was reflected as a discontinued
operation by a predecessor company in 1982. The final settlement, which resulted
in an after-tax loss of $3.3 million, includes the reacquisition of preferred
equity by the buyer and the settlement of reclamation reserves. Proceeds
received from the settlement were $15 million.
Revenues from discontinued activities, as well as the results of
discontinued operations for the years ended December 31 are as follows (in
thousands):
1998 1997 1996
-------- -------- ---------
OPERATING REVENUES ...................... $ - $ - $ 215,631
======== ======= =========
INCOME (LOSS) FROM OPERATIONS
Income (loss) before income taxes .... $ - $ - $ 12,588
Income tax benefit (expense) ......... - - (19,457)
-------- ------- ---------
$ - $ $ (6,869)
======== ======= =========
LOSS ON DISPOSAL
Loss before income taxes ............. $ - $ - $ (5,579)
Income tax benefit ................... - - 2,287
-------- ------- ---------
Loss on Disposal ..................... $ - $ - $ (3,292)
======== ======= =========
(11) CONCENTRATION OF CREDIT RISK:
MidAmerican's electric utility operations serve 565,000 customers in Iowa,
85,000 customers in western Illinois and 3,000 customers in southeastern South
Dakota. MidAmerican's gas utility operations serve 489,000 customers in Iowa,
65,000 customers in western Illinois, 64,000 customers in southeastern South
Dakota and 4,000 customers in northeastern Nebraska. The largest communities
served by MidAmerican 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's utility operations grant unsecured credit to
customers, substantially all of whom are local businesses and residents. As of
December 31, 1998, billed receivables from MidAmerican's utility customers
totaled $20.1 million. As described in Note 18, billed receivables related to
utility services have been sold to a wholly owned unconsolidated subsidiary.
(12) PREFERRED SHARES:
The $5.25 Series Preferred Shares, which were not redeemable prior to
November 1, 1998 for any purpose, 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 total outstanding cumulative preferred stock of MidAmerican not subject
to mandatory redemption requirements may be redeemed at the option of the
Company at prices which, in the aggregate, total $32.2 million. The aggregate
total the holders of all preferred stock outstanding at December 31, 1998, are
entitled to upon involuntary bankruptcy is $181.8 million plus accrued
dividends. Annual dividend requirements for all preferred stock outstanding at
December 31, 1998, total $12.9 million.
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<PAGE>
During 1996, MidAmerican redeemed all shares of the $1.7375 Series of
preferred stock. The redemptions were made at a premium, which resulted in a
charge to net income of $1.6 million.
(13) SEGMENT INFORMATION:
In 1998, the Company adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information."
MidAmerican has two reportable operating segments: electric and gas. The
electric segment derives most of its revenue from retail sales of electricity to
residential, commercial, and industrial customers and sales to other utilities;
whereas the gas segment derives most of its revenue from retail sales of natural
gas to residential, commercial, and industrial customers. The gas segment also
earns significant revenues by transporting gas owned by others through its
distribution systems. Pricing for electric and gas sales are established
separately by regulatory agencies; therefore, management also reviews each
segment separately to make decisions regarding allocation of resources and in
evaluating performance. Common operating costs, interest income, interest
expense, income tax expense, and equity in the net loss of investees are
allocated to each segment.
The following tables provide certain Company information on an operating
segment basis as of and for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
SEGMENT PROFIT INFORMATION
ELECTRIC:
Revenues ............................. $ 1,169,810 $ 1,126,300 $ 1,099,008
Depreciation and amortization expense. 156,546 145,931 140,939
Interest income ...................... 4,945 1,820 1,360
Interest expense ..................... 66,784 71,138 72,484
Income tax expense ................... 75,831 64,017 90,544
Equity in the net loss of investees .. (219) (161) -
Earnings on Common ................... 109,539 101,534 119,583
GAS:
Revenues ............................. 429,870 536,306 536,753
Depreciation and amortization expense. 25,665 24,609 23,653
Interest income ...................... 1,169 501 237
Interest expense ..................... 14,011 14,412 13,580
Income tax expense (benefit).......... (800) 9,698 20,023
Equity in the net loss of investee ... (45) (32) -
Earnings on Common ................... (435) 14,177 28,460
NONREGULATED AND OTHER (a):
Revenues ............................. 107,509 65,249 38,592
Interest income ...................... 2 - -
Interest expense ..................... 149 - -
Income tax expense ................... 1,011 2,602 2,360
Earnings on Common ................... 1,537 3,742 (3,473)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SEGMENT ASSET INFORMATION
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Electric:
Total assets ........................... $2,897,657 $2,843,884 $3,036,211
Capital expenditures ................... 158,596 128,544 116,243
Investment in equity method investments. 1,388 1,292 -
GAS:
Total assets ........................... 672,072 686,238 732,220
Capital expenditures ................... 34,758 38,388 37,955
Investment in equity method investments. 256 615 -
NONREGULATED AND OTHER (a):
Total assets ........................... 15,801 12,185 6,222
Capital expenditures ................... 21,065 5,920 2,970
</TABLE>
(a) "Nonregulated and Other" consists of nonregulated gas, CBEC Railway and
other nonregulated operations.
(14) 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'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'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.
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
available to MidAmerican for debt of the same remaining maturities.
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<PAGE>
The following table presents the carrying amount and estimated fair value
of certain financial instruments as of December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Instruments Issued by MidAmerican:
MidAmerican preferred securities; subject
to mandatory redemption.................... $ 50,000 $ 53,317 $ 50,000 $ 53,650
MidAmerican-obligated preferred securities;
subject to mandatory redemption........... 100,000 102,500 100,000 104,250
Long-term debt, including current portion... 930,966 968,308 1,044,663 1,076,167
</TABLE>
The amortized cost, gross unrealized gain and losses and estimated fair
value of investments held in the Quad Cities Station nuclear decommissioning
trust fund at December 31 are as follows (in thousands):
1998
-------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale:
Equity Securities ......... $ 43,577 $ 13,250 $ (393) $ 56,434
Municipal Bonds ........... 28,645 2,037 (8) 30,674
U.S. Government Securities. 15,411 1,410 - 16,821
Corporate Debt Securities.. 8,620 345 (4) 8,961
Cash equivalents .......... 4,083 - - 4,083
-------- -------- -------- --------
$100,336 $ 17,042 $ (405) $116,973
======== ======== ======== ========
1997
--------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Available-for-sale:
Equity Securities ......... $24,336 $ 3,848 $ (122) $28,062
Municipal Bonds ........... 35,217 2,116 (1) 37,332
U.S. Government Securities. 18,753 800 (4) 19,549
Corporate Securities ...... 6,353 77 (3) 6,427
Cash equivalents .......... 1,881 - - 1,881
------- ------- -------- -------
$86,540 $ 6,841 $ (130) $93,251
======= ======= ======== =======
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<PAGE>
At December 31, 1998, the debt securities held in the Quad Cities Station
nuclear decommissioning trust fund had the following maturities (in thousands):
Available for Sale
------------------
Amortized Fair
Cost Value
--------- -------
Within 1 year............ $ 1,397 $ 1,397
1 through 5 years........ 21,793 22,852
5 through 10 years....... 14,595 15,820
Over 10 years............ 14,891 16,387
The proceeds and the gross realized gains and losses on the disposition of
investments held in the Quad Cities Station nuclear decommissioning trust fund
for the years ended December 31, are as follows (in thousands):
1998 1997 1996
-------- -------- -------
Proceeds from sales .......... $ 29,380 $ 30,801 $ 4,106
Gross realized gains ......... 1,073 713 92
Gross realized losses ........ (2,690) (659) (17)
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for
the years ended December 31 (in thousands):
1998 1997 1996
--------- --------- ---------
Current
Federal .............. $ 69,266 $ 83,466 $ 92,240
State ................ 25,154 25,495 23,798
--------- --------- ---------
94,420 108,961 116,038
--------- --------- ---------
Deferred
Federal .............. (8,666) (23,143) 2,504
State ................ (4,007) (3,786) 583
--------- --------- ---------
(12,673) (26,929) 3,087
Investment tax credit, net (5,705) (5,715) (6,198)
--------- --------- ---------
Total income tax expense . $ 76,042 $ 76,317 $ 112,927
========= ========= =========
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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):
1998 1997
--------- --------
Deferred tax assets
Related to:
Investment tax credits ...................... $ 52,139 $ 55,998
Pensions .................................... 15,677 17,339
Nuclear reserves and decommissioning ........ 17,715 15,287
Other ....................................... - 799
--------- --------
Total .................................... $ 85,531 $ 89,423
========= ========
Deferred tax liabilities
Related to:
Depreciable property ........................ $ 419,265 $417,333
Income taxes recoverable through future rates 198,364 197,877
Energy efficiency ........................... 27,186 40,902
Reacquired debt ............................. 16,385 15,346
FERC Order 636 .............................. (941) 2,858
Other ....................................... 9,947 7,947
--------- --------
Total .................................... $ 670,206 $682,263
========= ========
The following table is a reconciliation between the effective income tax
rate, before preferred stock dividends of subsidiary trust, indicated by the
Consolidated Statements of Income and the statutory federal income tax rate for
the years ended December 31:
1998 1997 1996
---- ---- ----
Effective federal and state income tax rate . 38% 36% 41%
Amortization of investment tax credit ....... 3 3 2
State income tax, net of federal income
tax benefit ............................. (7) (7) (6)
Other ....................................... 1 3 (2)
--- --- ---
Statutory federal income tax rate ........... 35% 35% 35%
=== === ===
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in thousands):
1998 1997
------- -------
Materials and supplies, at average cost $30,914 $31,425
Coal stocks, at average cost ........... 22,266 14,225
Gas in storage, at LIFO cost ........... 37,306 35,430
Fuel oil, at average cost .............. 1,294 2,344
Other .................................. 965 874
------- -------
Total ............................... $92,745 $84,298
======= =======
At December 31, 1998 prices, the current cost of gas in storage was $43.0
million.
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<PAGE>
(17) MIDAMERICAN-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, issued 4,000,000 shares of 7.98%
Series MidAmerican-obligated Mandatorily Redeemable Preferred Securities (the
Preferred Securities). The sole assets of the Trust are $103.1 million of
MidAmerican 7.98% Series A Debentures due 2045 (the Debentures). There is a full
and unconditional guarantee by MidAmerican of the Trust's obligations under the
Preferred Securities. MidAmerican 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 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 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 thereof, 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 such a distribution is determined not to be
practicable. If such 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.
(18) SALE OF ACCOUNTS RECEIVABLE:
In 1997 MidAmerican entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the majority of its billed
accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a
special purpose entity established to purchase accounts receivable from
MidAmerican. Funding Corp. in turn has sold receivable interests to outside
investors. In consideration of the sale, MidAmerican received $70 million in
cash and the remaining balance in the form of a subordinated note from Funding
Corp. In 1998 the revolving balance was reduced to $60 million due to a decline
in accounts receivable available for sale. The agreement is structured as a true
sale under which the creditors of Funding Corp. will be entitled to be satisfied
out of the assets of Funding Corp. prior to any value being returned to
MidAmerican or its creditors. At December 31, 1998, $97.4 million of accounts
receivable, net of reserves, was sold under the agreement.
(19) AFFILIATED COMPANY TRANSACTIONS:
The companies identified as affiliates are subsidiaries of MHC. The basis
for these charges is provided for in service agreements between MidAmerican and
its affiliates.
MHC incurred charges which are of general benefit to all of its
subsidiaries. These costs were for administrative and general salaries and
expenses, outside services, director fees, pension, deferred compensation, and
retirement costs, some of which originated at MidAmerican. MHC reimbursed
MidAmerican for charges originating at MidAmerican in the amount of $12.2
million and $4.1 million for 1998 and 1997, respectively. MidAmerican's
allocated share of such costs and those which originated at MHC was $15.3
million and $13.8 million for 1998 and 1997, respectively.
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<PAGE>
MidAmerican was also reimbursed for charges incurred on behalf of its
affiliates, MidAmerican Capital, Midwest Capital and MidAmerican Realty. The
majority of these reimbursed expenses was for employee wages and benefits,
insurance, building rent, computer costs, administrative services, travel
expense, and general and administrative expense; including treasury, legal,
shareholder relations and accounting functions. The amount of such expenses was
$3.2 million and $6.6 million for 1998 and 1997, respectively.
Prior to 1997, MidAmerican, as the parent company, incurred costs of
general benefit to itself and its subsidiaries. In addition, it incurred costs
for employee wages and benefits, insurance, building rent, computer costs,
administrative services, travel expense, and general and administrative expense;
including treasury, legal, shareholder relations and accounting functions, on
behalf of MidAmerican Capital and Midwest Capital. The total of such costs
charged to MidAmerican Capital and Midwest Capital was $9.3 million for 1996.
MidAmerican leases unit trains from an affiliate for the transportation
of coal to MidAmerican's generating stations. Unit train costs, including
maintenance, were approximately $2.1 million, $2.8 million and $3.0 million for
1998, 1997 and 1996, respectively.
MidAmerican purchased natural gas from AmGas, an affiliate. MidAmerican's
cost of gas related to these transactions was $2.2 million, $0.5 million and
$0.2 million for 1998, 1997 and 1996, respectively. During 1998 MidAmerican also
sold natural gas to AmGas in the amount of $24.8 million.
MidAmerican purchased natural gas from InterCoast Trade and Resources, an
affiliate, in the amount of $2.0 million and $11.4 million for 1998 and 1997,
respectively. MidAmerican also sold natural gas to InterCoast Trade and
Resources in the amount of $1.6 million and $6.1 million for 1998 and 1997,
respectively.
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
1998
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands)
Operating revenues................ $447,266 $375,506 $447,992 $436,425
Operating income.................. 80,098 54,350 106,722 39,750
Income from continuing operations. 33,179 18,380 49,544 14,490
Earnings on common stock.......... 31,942 17,142 48,305 13,252
1997
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands)
Operating revenues................ $486,640 $356,756 $406,531 $477,928
Operating income.................. 81,165 59,568 102,476 44,100
Income from continuing operations. 35,224 21,822 50,255 18,640
Earnings on common stock.......... 32,450 20,586 49,016 17,401
The quarterly data reflect seasonal variations common in the utility industry.
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<PAGE>
(21) OTHER INFORMATION:
Non-Operating - Other, Net, as shown on the Consolidated Statements of
Income includes the following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Discount on sold receivables ................. $(8,716) $ (439) $ -
Subservicer fee from Funding Corp. ........... 1,714 153 -
Loss from equity method investments .......... (264) (193) -
Energy efficiency carrying charges ........... 197 4,993 3,255
Gain on sale of cushion gas .................. - 855 3,182
Donations .................................... (228) (556) (1,271)
Gain (loss) on reacquisition of long-term debt - (923) 1,105
NPPD settlement .............................. - 2,248 -
IES merger proposal .......................... - - (8,689)
Other ........................................ 820 9 (943)
------- ------- -------
Total ...................................... $(6,477) $ 6,147 $(3,361)
======= ======= =======
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To MidAmerican Energy Company and Subsidiaries:
We have audited the accompanying consolidated financial statements and the
financial statement schedule of MidAmerican Energy Company and subsidiaries
listed in Item 14(a) of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MidAmerican Energy
Company and subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
January 22, 1999, except with respect to Note (1)(a),
as to which the date is March 12, 1999.
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<PAGE>
MIDAMERICAN ENERGY COMPANY
UNAUDITED REGULATED ELECTRIC STATISTICS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES (in thousands)
Residential ............................. $ 436,696 $ 417,845 $ 415,954
Small general service ................... 261,476 246,927 237,466
Large general service ................... 259,138 249,444 241,172
Other sales ............................. 63,509 62,261 60,476
Sales for resale ........................ 125,919 124,741 121,452
------------ ------------ ------------
Total from electric sales ........... 1,146,738 1,101,218 1,076,520
Other electric revenue .................. 23,072 25,082 22,488
------------ ------------ ------------
Total ............................... $ 1,169,810 $ 1,126,300 $ 1,099,008
============ ============ ============
KWH SALES (in thousands)
Residential ............................. 4,942,044 4,740,688 4,652,031
Small general service ................... 3,900,616 3,725,873 3,565,459
Large general service ................... 6,256,141 6,204,087 6,067,325
Other ................................... 989,756 995,295 988,022
Sales for resale ........................ 6,185,653 6,987,268 6,727,326
------------ ------------ ------------
Total ............................... 22,274,210 22,653,211 22,000,163
============ ============ ============
REVENUES FROM SALES AS A % OF TOTAL
Residential ............................. 38.1 37.9 38.6
Small general service ................... 22.8 22.4 22.1
Large general service ................... 22.6 22.7 22.4
Other ................................... 5.5 5.7 5.6
Sales for resale ........................ 11.0 11.3 11.3
------------ ------------ ------------
Total ................................ 100.0 100.0 100.0
============ ============ ============
SALES AS A % OF TOTAL
Residential ............................. 22.2 20.9 21.1
Small general service ................... 17.5 16.5 16.2
Large general service ................... 28.1 27.4 27.6
Other ................................... 4.4 4.4 4.5
Sales for resale ........................ 27.8 30.8 30.6
------------ ------------ ------------
Total ................................ 100.0 100.0 100.0
============ ============ ============
RETAIL ELECTRIC SALES BY JURISDICTION (%)
Iowa .................................... 88.4 88.6 88.7
Illinois ................................ 10.9 10.7 10.6
South Dakota ............................ 0.7 0.7 0.7
------------ ------------ ------------
Total ................................ 100.0 100.0 100.0
============ ============ ============
CUSTOMERS (end of year)
Residential ............................. 567,316 563,189 557,637
Small general service ................... 74,310 73,488 73,022
Large general service ................... 1,031 1,000 982
Other ................................... 10,216 10,047 9,937
Sales for resale ........................ 54 47 55
------------ ------------ ------------
Total ................................ 652,927 647,771 641,633
============ ============ ============
ANNUAL AVERAGE PER RESIDENTIAL CUSTOMER
Revenue per Kwh (cents) ................. 8.83 8.81 8.94
KWh sales ............................... 8,739 8,463 8,392
COOLING DEGREE DAYS
Actual .................................. 1,054 883 788
Percent warmer (colder) than normal ..... 10.4 (7.5) (17.5)
ELECTRIC PEAK DEMAND (net MW) ........... 3,643 3,548 3,537
SUMMER NET ACCREDITED CAPABILITY (MW) ... 4,425 4,293 4,301
</TABLE>
-93-
<PAGE>
MIDAMERICAN ENERGY COMPANY
UNAUDITED REGULATED GAS STATISTICS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
REVENUES (in thousands)
Residential........................................... $ 278,420 $ 339,924 $ 338,605
Small general service................................. 113,675 152,661 153,616
Large general service................................. 9,837 15,201 17,670
Sales for resale and other............................ 4,652 2,914 2,050
--------- ---------- ----------
Total revenue from gas sales ...................... 406,584 510,700 511,941
Gas transported....................................... 18,694 20,443 20,155
Other gas revenues.................................... 4,592 5,163 4,657
--------- ---------- ----------
Total.............................................. $ 429,870 $ 536,306 $ 536,753
========= ========== ==========
THROUGHPUT (MMBtu in thousands)
Sales
Residential........................................ 49,084 57,039 61,732
Small general service.............................. 26,250 31,066 33,642
Large general service.............................. 3,032 3,920 4,634
Sales for resale and other......................... 3,524 1,800 977
--------- ---------- ----------
Total sales...................................... 81,890 93,825 100,985
Gas transported....................................... 59,062 58,804 54,618
--------- ---------- ----------
Total.............................................. 140,952 152,629 155,603
========= ========== ==========
REVENUES FROM THROUGHPUT AS A % OF TOTAL
Residential........................................... 65.5 64.0 63.6
Small general service................................. 26.7 28.7 28.9
Large general service................................. 2.3 2.9 3.3
Sales for resale and other............................ 1.1 0.5 0.4
Gas transported....................................... 4.4 3.9 3.8
--------- ---------- ----------
Total.............................................. 100.0 100.0 100.0
========= ========== ==========
SALES AS A % OF TOTAL (excludes gas transported)
Residential........................................... 59.9 60.8 61.1
Small general service................................. 32.1 33.1 33.3
Large general service................................. 3.7 4.2 4.6
Sales for resale and other............................ 4.3 1.9 1.0
--------- ---------- ----------
Total.............................................. 100.0 100.0 100.0
========= ========== ==========
RETAIL GAS SALES BY JURISDICTION (%)
Iowa ................................................. 79.0 79.1 78.0
Illinois.............................................. 10.2 10.4 11.0
South Dakota.......................................... 10.1 9.8 10.3
Other................................................. 0.7 0.7 0.7
--------- ---------- ----------
Total ............................................. 100.0 100.0 100.0
========= ========== ==========
CUSTOMERS (end of year)
Residential........................................... 561,579 558,501 550,786
Small general service................................. 58,703 58,739 58,059
Large general service................................. 713 767 821
Gas transported and other............................. 566 569 504
--------- ---------- ----------
Total.............................................. 621,561 618,576 610,170
========= ========== ==========
ANNUAL AVERAGES PER RESIDENTIAL CUSTOMER
Revenue per MMBtu..................................... $ 5.67 $ 5.96 $ 5.49
MMBtu sales........................................... 88 103 113
HEATING DEGREE DAYS
Actual................................................ 5,705 6,872 7,445
Percent colder (warmer) than normal................... (15.6) 1.6 10.1
COST PER MMBTU........................................ $ 2.97 $ 3.69 $ 3.42
</TABLE>
-94-
<PAGE>
SCHEDULE II
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Additions Balance
Beginning Charged at End
Description of Year to Income Deductions of Year
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Reserves Deducted From Assets
To Which They Apply:
Reserve for uncollectible accounts:
Year ended 1998 ................. $ - $6,915 $ 6,915 $ -
========== ====== ======= ======
Year ended 1997 ................. $ 1,845 $7,386 $(9,231) $ -
========== ====== ======= ======
Year ended 1996 ................. $ 2,214 $5,854 $(6,223) $1,845
========== ====== ======= ======
Reserves Not Deducted From Assets:
Year ended 1998 ................. $ 5,257 $1,148 $(1,717) $4,688
========== ====== ======= ======
Year ended 1997 ................. $ 4,267 $2,971 $(1,981) $5,257
========== ====== ======= ======
Year ended 1996 ................. $ 3,177 $2,683 $(1,593) $4,267
========== ====== ======= ======
</TABLE>
-95-
<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 ENERGY COMPANY
----------------------------
Registrant
Date: March 30, 1999 By /s/ Gregory E. Abel
--------------------------
(Gregory E. Abel)
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
--------- ----- ----
/s/ David L. Sokol * Chairman March 30, 1999
--------------------------
(David L. Sokol)
/s/ Gregory E. Abel Chief Executive Officer March 30, 1999
--------------------------
(Gregory E. Abel) and Director
/s/ Alan L. Wells Senior Vice President and March 30, 1999
--------------------------
(Alan L. Wells) Chief Financial Officer
/s/ Wayne O. Smith Director March 30, 1999
--------------------------
(Wayne O. Smith)
/s/ Ronald W. Stepien Director March 30, 1999
--------------------------
(Ronald W. Stepien)
*By: /s/ Steven A. McArthur Attorney-in-Fact March 30, 1999
--------------------------
(Steven A. McArthur)
-96-
<PAGE>
EXHIBIT INDEX
Exhibits Filed Herewith
- - -----------------------
12 Computation of ratios of earnings to fixed charges and computation of
ratios of earnings to fixed charges plus preferred dividend
requirements
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedules (electronic filing only)
Exhibits Incorporated by Reference
3.3 Restated Articles of Incorporation of MidAmerican Energy Company, as
amended October 27, 1998. (Filed as Exhibit 3.3 to MidAmerican's
Quarterly Report on Form 10-Q for the period ended September 30, 1998,
Commission File No. 1-11505.)
3.4 Restated Bylaws of MidAmerican Energy Company, as amended July 24,
1996. (Filed as Exhibit 3.1 to MidAmerican's Quarterly Report on Form
10-Q for the period ended June 30, 1996, Commission File No.
1-11505.)
4.2 General Mortgage Indenture and Deed of Trust dated as of January 1,
1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust
Company of New York, Trustee. (Filed as Exhibit 4(b)-1 to Midwest
Resources Inc.'s Annual Report on Form 10-K for the year ended December
31, 1992, Commission File No.
1-10654.)
4.3 First Supplemental Indenture dated as of January 1, 1993, between
Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New
York, Trustee. (Filed as Exhibit 4(b)-2 to Midwest Resources' Annual
Report on Form 10-K for the year ended December 31, 1992, Commission
File No. 1-10654.)
4.4 Second Supplemental Indenture dated as of January 15, 1993, between
Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New
York, Trustee. (Filed as Exhibit 4(b)-3 to Midwest Resources' Annual
Report on Form 10-K for the year ended December 31, 1992, Commission
File No. 1-10654.)
4.5 Third Supplemental Indenture dated as of May 1, 1993, between Midwest
Power Systems Inc. and Morgan Guaranty Trust Company of New York,
Trustee. (Filed as Exhibit 4.4 to Midwest Resources' Annual Report on
Form 10-K for the year ended December 31, 1993, Commission File No.
1-10654.)
4.6 Fourth Supplemental Indenture dated as of October 1, 1994, between
Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee.
(Filed as Exhibit 4.5 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1994, Commission File No. 1-10654.)
4.7 Fifth Supplemental Indenture dated as of November 1, 1994, between
Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee.
(Filed as Exhibit 4.6 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1994, Commission File No. 1-10654.)
-97-
<PAGE>
4.8 Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947.
(Filed by Iowa-Illinois as Exhibit 7B to Commission File No. 2-6922.)
4.9 Sixth Supplemental Indenture dated as of July 1, 1967. (Filed by
Iowa-Illinois as Exhibit 2.08 to Commission File No. 2-28806.)
4.10 Twentieth Supplemental Indenture dated as of May 1, 1982. (Filed as
Exhibit 4.B.23 to Iowa-Illinois' Quarterly Report on Form 10-Q for the
period ended June 30, 1982, Commission File No.
1-3573.)
4.11 Resignation and Appointment of successor Individual Trustee. (Filed by
Iowa-Illinois as Exhibit 4.B.30 to Commission File No. 33-39211.)
4.13 Twenty-Eighth Supplemental Indenture dated as of May 15, 1992. (Filed
as Exhibit 4.31.B to Iowa-Illinois' Current Report on Form 8-K dated
May 21, 1992, Commission File No. 1-3573.)
4.14 Twenty-Ninth Supplemental Indenture dated as of March 15, 1993. (Filed
as Exhibit 4.32.A to Iowa-Illinois' Current Report on Form 8-K dated
March 24, 1993, Commission File No. 1-3573.)
4.15 Thirtieth Supplemental Indenture dated as of October 1, 1993. (Filed as
Exhibit 4.34.A to Iowa-Illinois' Current Report on Form 8-K dated
October 7, 1993, Commission File No. 1-3573.)
4.16 Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest
Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed
as Exhibit 4.15 to MidAmerican's Annual Report on Form 10-K dated
December 31, 1995, Commission File No. 1-11505.)
4.17 Thirty-First Supplemental Indenture dated as of July 1, 1995, between
Iowa-Illinois Gas and Electric Company and Harris Trust and Savings
Bank, Trustee. (Filed as Exhibit 4.16 to MidAmerican's Annual Report on
Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.1 MidAmerican Energy Company Severance Plan For Specified Officers dated
November 1, 1996. (Filed as Exhibit 10.1 to Holdings' and MidAmerican's
respective Annual Reports on the combined Form 10-K for the year ended
December 31, 1996, Commission File Nos. 1-12459 and 1-11505,
respectively.)
10.2 MidAmerican Energy Company Deferred Compensation Plan for Executives.
(Filed as Exhibit 10.2 to MidAmerican's Annual Report on Form 10-K
dated December 31, 1995, Commission File No. 1-11505.)
10.3 MidAmerican Energy Company Supplemental Retirement Plan for Designated
Officers. (Filed as Exhibit 10.3 to MidAmerican's Annual Report on
Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.4 MidAmerican Energy Company Key Employee Short-Term Incentive Plan.
(Filed as Exhibit 10.4 to MidAmerican's Annual Report on Form 10-K
dated December 31, 1995, Commission File No. 1- 11505.)
10.5 Deferred Compensation Plan for Executives of Midwest Resources Inc.
and Subsidiaries. (Filed as Exhibit 10.1 to Midwest Resources' Annual
Report on Form 10-K for the year ended December 31, 1990, Commission
File No. 1-10654).
-98-
<PAGE>
10.6 Deferred Compensation Plan for Board of Directors of Midwest Resources
Inc. and Subsidiaries. (Filed as Exhibit 10.2 to Midwest Resources'
Annual Report on Form 10-K for the year ended December 31, 1990,
Commission File No. 1-10654).
10.7 Midwest Resources Inc. revised and amended Executive Deferred
Compensation Plan for IOR and Subsidiaries, dated January 29, 1992.
(Filed as Exhibit 10.5 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1991, Commission File No. 1-10654.)
10.8 Midwest Resources Inc. revised and amended Board of Directors Deferred
Compensation Plan for IOR and Subsidiaries, dated January 29, 1992.
(Filed as Exhibit 10.6 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1991, Commission File No. 1-10654.)
10.9 Midwest Resources Inc. Supplemental Retirement Plan (formerly the
Midwest Energy Company Supplemental Retirement Plan). (Filed as Exhibit
10.10 to Midwest Resources' Annual Report on Form 10-K for the year
ended December 31, 1993, Commission File No. 1-10654.)
10.10 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 (IPR) Registration Statement, Registration No.
2-27681.)
10.11 Amendments Nos. 1 and 2 to Power Sales Contract between Iowa Power
Inc. and Nebraska Public Power District. (Filed as Exhibit 4-C-2a to
IPR's Registration Statement, Registration No. 2-35624.)
10.12 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 IPR's Registration
Statement, Registration No. 2-42191.)
10.13 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 IPR's Registration
Statement, Registration No. 2-51540.)
10.14 Revised and amended Executive Deferred Compensation Plan for IOR and
Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.22 to IOR's
Annual Report on Form 10-K for the year ended December 31, 1985,
Commission File No. 1-7830.)
10.15 Revised and amended Deferred Compensation Plan for Board of Directors
of IOR and Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.22
to IOR's Annual Report on Form 10-K for the year ended December 31,
1985, Commission File No. 1-7830.)
10.16 Revised and amended Executive Deferred Compensation Plan for IOR and
Subsidiaries, dated December 18, 1987. (Filed as Exhibit 10.15 to IOR's
Annual Report on Form 10-K for the year ended December 31, 1987,
Commission File No. 1-7830.)
10.17 Revised and amended Deferred Compensation Plan for Board of Directors
of IOR and Subsidiaries, dated December 18, 1987. (Filed as Exhibit
10.16 to IOR's Annual Report on Form 10-K for the year ended December
31, 1987, Commission File No. 1-7830.)
-99-
<PAGE>
10.18 Amendments to Midwest Resources Executive Deferred Compensation Plans,
dated October 30, 1992. (Filed as Exhibit 10(h) to Midwest Resource's
Annual Report on Form 10-K for the year ended December 31, 1992,
Commission File No. 1-10654.)
10.19 Supplemental Retirement Plan for Principal Officers, as amended as of
July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report
on Form 10-K for the year ended December 31, 1993, Commission File No.
1-3573.)
10.20 Compensation Deferral Plan for Principal Officers, as amended as of
July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report
on Form 10-K for the year ended December 31, 1993, Commission File No.
1-3573.)
10.21 Board of Directors' Compensation Deferral Plan. (Filed as Exhibit
10.K.4 to Iowa-Illinois' Annual Report on Form 10-K for the year ended
December 31, 1992, Commission File No. 1-3573.)
10.22 Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement
Plan. (Filed as Exhibit 10.24 to Midwest Resources' Annual Report on
Form 10-K for the year ended December 31, 1994, Commission File No.
1-10654.)
10.23 Deferred Compensation Plan of Midwest Energy Company and Subsidiary
Corporations. (Filed as Exhibit 10.25 to Midwest Resources' Annual
Report on Form 10-K for the year ended December 31, 1994, Commission
File No. 1-10654.)
10.24 Form of Indemnity Agreement between MidAmerican Energy Company and its
directors and officers. (Filed as Exhibit 10.37 to MidAmerican's Annual
Report on Form 10-K dated December 31, 1995, Commission File No.
1-11505.)
10.25 MidAmerican Energy Company 1995 Long-Term Incentive Plan. (Filed as
Exhibit 10(a) to Holdings' Registration Statement on Form S-4, File
No. 333-01645.)
10.26 Amendment No. 5 dated September 2, 1997, to the Power Sales contract
between MidAmerican Energy Company and Nebraska Public Power District,
dated September 22, 1967. (Filed as Exhibit 10.2 to Holdings' and
MidAmerican's respective Quarterly Reports on the combined Form 10-Q
for the quarter ended September 30, 1997, Commission File Nos. 1-12459
and 1-11505, respectively.)
10.27 Amendment No. 1 dated October 29, 1997, to the MidAmerican Energy
Company 1995 Long-Term Incentive Plan. (Filed as Exhibit 10.1 to
Holdings' and MidAmerican's respective Quarterly Reports on the
combined Form 10-Q for the quarter ended September 30, 1997, Commission
File Nos. 1-12459 and 1-11505, respectively.)
Note: Pursuant to (b) (4) (iii)(A) of Item 601 of Regulation S-K, the Company
has not filed as an exhibit to this Form 10-K certain instruments with
respect to long-term debt not registered in which the total amount of
securities authorized thereunder does not exceed 10% of total assets of
the Company, but hereby agrees to furnish to the Commission on request
any such instruments.
-100-
EXHIBIT 12
<TABLE>
<CAPTION>
MIDAMERICAN ENERGY COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
(IN THOUSANDS)
(UNAUDITED)
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31,1998 DECEMBER 31,1997
-------------------------------- --------------------------------
Supplemental (a) Supplemental (a)
--------------------- ---------------------
As As
Adjustment Adjusted Adjustment Adjusted
---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations ......................... $115,593 $ - $115,593 $125,941 $ - $125,941
-------- ------ -------- -------- ------ --------
Add (Deduct):
Total income taxes ........................................ 76,042 - 76,042 76,317 - 76,317
Interest on long-term debt ................................ 70,193 2,931 73,124 78,120 3,760 81,880
Other interest charges .................................... 14,128 - 14,128 10,027 - 10,027
Preferred stock dividends of subsidiary trust.............. 7,980 - 7,980 7,980 - 7,980
Interest on leases ........................................ 212 - 212 268 - 268
-------- ------ -------- -------- ------ --------
168,555 2,931 171,486 172,712 3,760 176,472
-------- ------ -------- -------- ------ --------
Earnings available for fixed charges .................... 284,148 2,931 287,079 298,653 3,760 302,413
-------- ------ -------- -------- ------ --------
Fixed Charges:
Interest on long-term debt ................................ 70,193 2,931 73,124 78,120 3,760 81,880
Other interest charges .................................... 14,128 - 14,128 10,027 - 10,027
Preferred stock dividends of subsidiary trust.............. 7,980 - 7,980 7,980 - 7,980
Interest on leases ........................................ 212 - 212 268 - 268
-------- ------ -------- -------- ------ --------
Total fixed charges...................................... 92,513 2,931 95,444 96,395 3,760 100,155
-------- ------ -------- -------- ------ --------
Ratio of earnings to fixed charges ........................ 3.07 - 3.01 3.10 - 3.02
======== ====== ======== ======== ====== ========
Preferred stock dividends ................................. $ 4,952 $ - $ 4,952 $ 6,488 $ - $ 6,488
Ratio of net income before income taxes to net income ..... 1.6578 - 1.6578 1.6060 - 1.6060
-------- ------ -------- -------- ------ --------
Preferred stock dividend requirements before income tax ... 8,209 - 8,209 10,420 - 10,420
-------- ------ -------- -------- ------ --------
Fixed charges plus preferred stock dividend requirements .. 100,722 2,931 103,653 106,815 3,760 110,575
-------- ------ -------- -------- ------ --------
Ratio of earnings to fixed charges plus preferred stock
dividend requirements (pre-income tax basis) ............ 2.82 - 2.77 2.80 - 2.73
======== ====== ======== ======== ====== ========
</TABLE>
Note: (a) Amounts in the supplemental columns are to reflect the Company'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
<TABLE>
<CAPTION>
MIDAMERICAN ENERGY COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
(In Thousands)
(Unaudited)
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31,1996 DECEMBER 31,1995
------------------------------ --------------------------------
Supplemental (a) Supplemental (a)
-------------------- ---------------------
As As
Adjustment Adjusted Adjustment Adjusted
---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations ........................... $165,132 $ - $165,132 $132,489 $ - $132,489
-------- ------ -------- -------- ------ --------
Add (Deduct):
Total income taxes .......................................... 112,927 - 112,927 84,098 - 84,098
Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728
Other interest charges ...................................... 10,842 - 10,842 9,396 - 9,396
Preferred stock dividends of subsidiary trust................ 288 - 288 - - -
Interest on leases .......................................... 375 - 375 1,088 - 1,088
-------- ------ -------- -------- ------ -------
203,866 3,615 207,481 174,715 4,595 179,310
-------- ------ -------- -------- ------ -------
Earnings available for fixed charges ...................... 368,998 3,615 372,613 307,204 4,595 311,799
-------- ------ -------- -------- ------ -------
Fixed Charges:
Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728
Other interest charges ...................................... 10,842 - 10,842 9,396 - 9,396
Preferred stock dividends of subsidiary trust................ 288 - 288 - - -
Interest on leases .......................................... 375 - 375 1,088 - 1,088
-------- ------ -------- -------- ------ -------
Total fixed charges 90,939 3,615 94,554 90,617 4,595 95,212
-------- ------ ------- -------- ------ --------
Ratio of earnings to fixed charges .......................... 4.06 - 3.94 3.39 - 3.27
======== ====== ======== ======== ====== =======
Preferred stock dividends ................................... $ 10,401 $ - $ 10,401 $ 8,059 $ - $ 8,059
Ratio of net income before income taxes to net income ....... 1.6839 - 1.6839 1.6348 - 1.6348
-------- ------ -------- -------- ------ -------
Preferred stock dividend requirements before income tax ..... 17,514 - 17,514 13,175 - 13,175
-------- ------ -------- -------- ------ -------
Fixed charges plus preferred stock dividend requirements .... 108,453 3,615 112,068 103,792 4,595 108,387
-------- ------ -------- -------- ------ -------
Ratio of earnings to fixed charges plus preferred stock
dividend requirements (pre-income tax basis) .............. 3.40 - 3.32 2.96 - 2.88
======== ====== ======== ======== ====== =======
</TABLE>
Note: (a) Amounts in the supplemental columns are to reflect the Company'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
<TABLE>
<CAPTION>
MIDAMERICAN ENERGY COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
(In Thousands)
(Unaudited)
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31,1994 DECEMBER 31,1993
------------------------------ --------------------------------
Supplemental (a) Supplemental (a)
-------------------- ---------------------
As As
Adjustment Adjusted Adjustment Adjusted
---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations .......................... $121,145 $ - $121,145 $133,888 $ - $133,888
-------- ------ -------- -------- ------ --------
Add (Deduct):
Total income taxes ......................................... 66,759 - 66,759 75,917 - 75,917
Interest on long-term debt ................................. 73,922 5,428 79,350 80,642 5,678 86,320
Other interest charges ..................................... 6,639 - 6,639 5,068 - 5,068
Preferred stock dividends of subsidiary trust............... - - - - - -
Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876
-------- ------ -------- -------- ------ -------
148,531 5,428 153,959 163,503 5,678 169,181
-------- ------ -------- -------- ------ -------
Earnings available for fixed charges ..................... 269,676 5,428 275,104 297,391 5,678 303,069
-------- ------ -------- -------- ------ -------
Fixed Charges:
Interest on long-term debt ................................. 73,922 5,428 79,350 80,642 5,678 86,320
Other interest charges ..................................... 6,639 - 6,639 5,068 - 5,068
Preferred stock dividends of subsidiary trust............... - - - - - -
Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876
-------- ------ -------- -------- ------ -------
Total fixed charges 81,772 5,428 87,200 87,586 5,678 93,264
-------- ------ -------- -------- ------ -------
Ratio of earnings to fixed charges ......................... 3.30 - 3.15 3.40 - 3.25
======== ====== ======== ======== ====== =======
Preferred stock dividends .................................. $ 10,551 $ - $ 10,551 $ 8,367 $ - $ 8,367
Ratio of net income before income taxes to net income ...... 1.5511 - 1.5511 1.5670 - 1.5670
-------- ------ -------- -------- ------ -------
Preferred stock dividend requirements before income tax .... 16,366 - 16,366 13,111 - 13,111
-------- ------ -------- -------- ------ -------
Fixed charges plus preferred stock dividend requirements ... 98,138 5,428 103,566 100,697 5,678 106,375
-------- ------ -------- -------- ------ -------
Ratio of earnings to fixed charges plus preferred stock
dividend requirements (pre-income tax basis) ............. 2.75 - 2.66 2.95 - 2.85
======== ====== ======== ======== ====== =======
</TABLE>
Note: (a) Amounts in the supplemental columns are to reflect the Company'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-
EXHIBIT 21
SUBSIDIARIES OF MIDAMERICAN ENERGY COMPANY
AS OF DECEMBER 31, 1998
Jurisdiction
Subsidiary of Incorporation
- - ---------- ----------------
CBEC Railway Inc. Iowa
MidAmerican Energy Financing I Delaware
As of the end of the year covered by this report, MidAmerican Energy Company's
remaining subsidiaries, considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary as defined in Rule 1-02(w) of
Regulation S-X.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of MidAmerican Energy Company on Form S-3 (File No. 333-15387) of our report
dated January 22, 1999, except with respect to Note (1)(a), as to which the date
is March 12, 1999, on our audits of consolidated financial statements of
MidAmerican Energy Company as of December 31, 1998 and 1997 and for the years
ended December 31, 1998, 1997 and 1996, which report is included in this Form
10-K.
/s/ PricewaterhouseCoopers LLP
--------------------------------
PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of MidAmerican Energy Company as of December 31,
1998, and the related consolidated statements of income and cash flows for the
twelve months ended December 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000928576
<NAME> MidAmerican Energy Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,641,645
<OTHER-PROPERTY-AND-INVEST> 183,279
<TOTAL-CURRENT-ASSETS> 299,005
<TOTAL-DEFERRED-CHARGES> 311,200
<OTHER-ASSETS> 150,401
<TOTAL-ASSETS> 3,585,530
<COMMON> 560,656
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 411,622
<TOTAL-COMMON-STOCKHOLDERS-EQ> 972,278
150,000
31,759
<LONG-TERM-DEBT-NET> 870,069
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 206,221
<LONG-TERM-DEBT-CURRENT-PORT> 60,897
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,294,306
<TOT-CAPITALIZATION-AND-LIAB> 3,585,530
<GROSS-OPERATING-REVENUE> 1,707,189
<INCOME-TAX-EXPENSE> 76,042 <F1>
<OTHER-OPERATING-EXPENSES> 1,426,269
<TOTAL-OPERATING-EXPENSES> 1,426,269
<OPERATING-INCOME-LOSS> 280,920
<OTHER-INCOME-NET> (361)
<INCOME-BEFORE-INTEREST-EXPEN> 280,559
<TOTAL-INTEREST-EXPENSE> 88,924
<NET-INCOME> 115,593
4,952
<EARNINGS-AVAILABLE-FOR-COMM> 110,641
<COMMON-STOCK-DIVIDENDS> 124,200
<TOTAL-INTEREST-ON-BONDS> 70,193
<CASH-FLOW-OPERATIONS> 381,007
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
INCOME-TAX-EXPENSE includes all income taxes and is excluded from Total
Operating Expenses above and on the Consolidated Statement of Income.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of MidAmerican Energy Company as of December 31,
1997, and the related consolidated statements of income and cash flows for the
twelve months ended December 31, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000928576
<RESTATED>
<NAME> MidAmerican Energy Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,623,106
<OTHER-PROPERTY-AND-INVEST> 115,029
<TOTAL-CURRENT-ASSETS> 283,943
<TOTAL-DEFERRED-CHARGES> 347,122
<OTHER-ASSETS> 173,107
<TOTAL-ASSETS> 3,542,307
<COMMON> 560,563
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 425,181
<TOTAL-COMMON-STOCKHOLDERS-EQ> 985,744
150,000
31,763
<LONG-TERM-DEBT-NET> 920,203
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 122,500
<LONG-TERM-DEBT-CURRENT-PORT> 124,460
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,207,637
<TOT-CAPITALIZATION-AND-LIAB> 3,542,307
<GROSS-OPERATING-REVENUE> 1,727,855
<INCOME-TAX-EXPENSE> 76,317 <F1>
<OTHER-OPERATING-EXPENSES> 1,440,546
<TOTAL-OPERATING-EXPENSES> 1,440,546
<OPERATING-INCOME-LOSS> 287,309
<OTHER-INCOME-NET> 8,479
<INCOME-BEFORE-INTEREST-EXPEN> 295,788
<TOTAL-INTEREST-EXPENSE> 93,530
<NET-INCOME> 125,941
6,488
<EARNINGS-AVAILABLE-FOR-COMM> 119,453
<COMMON-STOCK-DIVIDENDS> 120,500
<TOTAL-INTEREST-ON-BONDS> 78,120
<CASH-FLOW-OPERATIONS> 309,538
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
INCOME-TAX-EXPENSE includes all income taxes and is excluded from Total
Operating Expenses above and on the Consolidated Statement of Income.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of MidAmerican Energy Company as of December 31,
1996, and the related consolidated statements of income and cash flows for the
twelve months ended December 31, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000928576
<RESTATED>
<NAME> MidAmerican Energy Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,632,142
<OTHER-PROPERTY-AND-INVEST> 118,344
<TOTAL-CURRENT-ASSETS> 436,799
<TOTAL-DEFERRED-CHARGES> 396,471
<OTHER-ASSETS> 190,897
<TOTAL-ASSETS> 3,774,653
<COMMON> 560,597
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 426,228
<TOTAL-COMMON-STOCKHOLDERS-EQ> 986,825
150,000
31,769
<LONG-TERM-DEBT-NET> 1,086,955
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 161,700
<LONG-TERM-DEBT-CURRENT-PORT> 49,560
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,307,844
<TOT-CAPITALIZATION-AND-LIAB> 3,774,653
<GROSS-OPERATING-REVENUE> 1,674,353
<INCOME-TAX-EXPENSE> 112,927 <F1>
<OTHER-OPERATING-EXPENSES> 1,308,179
<TOTAL-OPERATING-EXPENSES> 1,308,179
<OPERATING-INCOME-LOSS> 366,174
<OTHER-INCOME-NET> (11,924)<F2>
<INCOME-BEFORE-INTEREST-EXPEN> 354,250
<TOTAL-INTEREST-EXPENSE> 86,352
<NET-INCOME> 154,971
10,401
<EARNINGS-AVAILABLE-FOR-COMM> 144,570
<COMMON-STOCK-DIVIDENDS> 120,770
<TOTAL-INTEREST-ON-BONDS> 79,434
<CASH-FLOW-OPERATIONS> 327,433
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCOME-TAX-EXPENSE includes all income taxes for continuing operations and
is excluded from Total Operating Expenses above and on the Consolidated
Statement of Income.
<F2> OTHER-INCOME-NET above includes a $(10,161,000) loss from Discontinued
Operations, net of income taxes.
</FN>
</TABLE>
