UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
-------------
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
----------- ------------------------------------------ ------------------
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
--- ---
As of July 31, 2000, all 70,980,203 outstanding shares of MidAmerican Energy
Company's voting stock were held by its parent company, MHC Inc.
<PAGE>
MIDAMERICAN ENERGY COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Independent Accountants' Report.............................. 3
Consolidated Statements of Income............................ 4
Consolidated Balance Sheets.................................. 5
Consolidated Statements of Cash Flows........................ 6
Notes to Consolidated Financial Statements................... 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 23
ITEM 6. Exhibits and Reports on Form 8-K............................. 24
Signatures............................................................. 25
Exhibit Index.......................................................... 26
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<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Company and subsidiaries (the Company) as of June 30, 2000, and the
related consolidated statements of income for the three-month and six-month
periods ended June 30, 2000 and 1999 and the related consolidated statements of
cash flows for the six-month periods ended June 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
MidAmerican Energy Company and subsidiaries as of December 31, 1999, and the
related consolidated statements of income, retained earnings and cash flows for
the year then ended (not presented herein); and in our report dated January 25,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
July 21, 2000
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<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated electric ...................... $ 281,973 $ 279,350 $ 560,436 $ 541,478
Regulated gas ........................... 98,153 71,282 278,055 242,060
Nonregulated ............................ 88,936 27,709 145,423 63,051
--------- --------- --------- ---------
469,062 378,341 983,914 846,589
--------- --------- --------- ---------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ..... 57,172 50,681 115,489 101,667
Cost of gas sold ...................... 61,054 38,596 172,552 135,454
Other operating expenses .............. 102,863 104,387 204,754 221,026
Maintenance ........................... 29,938 31,934 54,677 58,471
Depreciation and amortization ......... 49,140 47,687 97,534 97,378
Property and other taxes .............. 19,110 20,662 38,409 40,813
--------- --------- --------- ---------
319,277 293,947 683,415 654,809
--------- --------- --------- ---------
Nonregulated:
Cost of sales ......................... 83,447 24,305 134,585 58,404
Other ................................. 5,271 4,185 8,870 8,122
--------- --------- --------- ---------
88,718 28,490 143,455 66,526
--------- --------- --------- ---------
Total operating expenses ................ 407,995 322,437 826,870 721,335
--------- --------- --------- ---------
OPERATING INCOME ........................ 61,067 55,904 157,044 125,254
--------- --------- --------- ---------
NON-OPERATING INCOME
Interest and dividend income ............ 1,212 588 2,585 1,687
Other, net .............................. (1,941) (3,338) (4,060) (5,379)
--------- --------- --------- ---------
(729) (2,750) (1,475) (3,692)
--------- --------- --------- ---------
FIXED CHARGES
Interest on long-term debt .............. 13,804 16,618 28,387 33,107
Other interest expense .................. 4,101 2,674 7,001 8,086
Preferred dividends of subsidiary trust . 2,057 1,995 4,052 3,990
Allowance for borrowed funds ............ (374) (300) (753) (606)
--------- --------- --------- ---------
19,588 20,987 38,687 44,577
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES .............. 40,750 32,167 116,882 76,985
INCOME TAXES ............................ 16,875 11,815 48,208 30,449
--------- --------- --------- ---------
NET INCOME .............................. 23,875 20,352 68,674 46,536
PREFERRED DIVIDENDS ..................... 1,238 1,238 2,477 2,477
--------- --------- --------- ---------
EARNINGS ON COMMON STOCK ................ $ 22,637 $ 19,114 $ 66,197 $ 44,059
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
-------------------------
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric ............................................. $4,404,772 $4,348,740
Gas .................................................. 819,600 809,112
---------- ----------
5,224,372 5,157,852
Less accumulated depreciation and amortization ....... 2,627,548 2,548,160
---------- ----------
2,596,824 2,609,692
Construction work in progress ........................ 29,197 33,739
---------- ----------
2,626,021 2,643,431
---------- ----------
POWER PURCHASE CONTRACT .............................. 102,164 106,481
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................ 4,474 5,167
Receivables .......................................... 185,416 190,986
Inventories .......................................... 39,138 80,649
Prepaid taxes ........................................ 22,889 22,889
Other ................................................ 8,981 10,355
---------- ----------
260,898 310,046
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ........... 253,170 228,105
REGULATORY ASSETS .................................... 255,320 278,757
OTHER ASSETS ......................................... 57,110 25,737
---------- ----------
TOTAL ASSETS ......................................... $3,554,683 $3,592,557
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .......................... $1,124,052 $1,057,855
MidAmerican preferred securities, not subject to
mandatory redemption ............................... 31,759 31,759
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) ........... 758,368 759,638
---------- ----------
2,064,179 1,999,252
---------- ----------
CURRENT LIABILITIES
Notes payable ........................................ 214,711 204,000
Current portion of long-term debt .................... 1,517 110,861
Current portion of power purchase contract ........... 15,767 15,767
Accounts payable ..................................... 125,288 131,186
Taxes accrued ........................................ 88,521 112,663
Interest accrued ..................................... 10,045 12,925
Other ................................................ 31,206 30,226
---------- ----------
487,055 617,628
---------- ----------
OTHER LIABILITIES
Power purchase contract .............................. 52,281 52,281
Deferred income taxes ................................ 558,244 561,000
Investment tax credit ................................ 68,827 71,757
Other ................................................ 324,097 290,639
---------- ----------
1,003,449 975,677
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ................. $3,554,683 $3,592,557
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................... $ 68,674 $ 46,536
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ............................... 97,681 97,525
Deferred income taxes and investment tax credit, net ........ (5,687) (4,075)
Amortization of other assets ................................ 24,490 30,063
Cash inflows (outflows) of accounts receivable securitization 12,877 (4,025)
Impact of changes in working capital ........................ 3,638 32,879
Other ....................................................... (12,082) (3,260)
--------- ---------
Net cash provided ......................................... 189,591 195,643
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................. (80,780) (77,865)
Quad Cities Nuclear Power Station decommissioning trust fund .. (4,152) (5,658)
Other investing activities, net ............................... (2,802) (11,630)
--------- ---------
Net cash used ............................................... (87,734) (95,153)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ................................................ (2,477) (39,183)
Retirement of long-term debt, including reacquisition cost .... (110,784) (629)
Net change in notes payable ................................... 10,711 (56,321)
--------- ---------
Net cash used ............................................... (102,550) (96,133)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... (693) 4,357
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 5,167 5,370
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 4,474 $ 9,727
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ..................... $ 34,395 $ 37,213
========= =========
Income taxes paid ............................................. $ 89,477 $ 24,843
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:
The consolidated financial statements included herein have been prepared by
MidAmerican Energy Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of MidAmerican Energy, all adjustments,
consisting of normal recurring adjustments, have been made to present fairly the
financial position, the results of operations and the changes in cash flows for
the periods presented. Prior year amounts have been reclassified to a basis
consistent with the current year presentation. All significant intercompany
transactions have been eliminated. Although MidAmerican Energy believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Energy's latest Annual Report on Form 10-K.
MidAmerican Energy is a public utility with electric and natural gas
operations and is the principal subsidiary of MHC Inc. MHC is a wholly owned
indirect subsidiary of MidAmerican Energy Holdings Company. MidAmerican Energy
Holdings is an exempt public utility holding company headquartered in Des
Moines, Iowa.
B. ENVIRONMENTAL MATTERS:
(1) MANUFACTURED GAS PLANT FACILITIES -
The United States Environmental Protection Agency and the state
environmental agencies have determined that contaminated wastes remaining at
decommissioned manufactured gas plant facilities may pose a threat to the public
health or the environment if such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties which were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is currently conducting field investigations
at eighteen sites and has conducted interim removal actions at six of the
eighteen sites. In addition, MidAmerican Energy has completed investigations and
removals at four sites. MidAmerican Energy is continuing to evaluate several of
the sites to determine the future liability, if any, for conducting site
investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $22 million to
$68 million. MidAmerican Energy's estimate of the probable cost for these sites
as of June 30, 2000 was $27 million. The estimate consists of $3 million for
investigation costs, $9 million for remediation costs, $13 million for
groundwater treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 10 years.
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<PAGE>
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican Energy has potential legal
liability for the site and whether information exists to indicate that
contaminated wastes remain at the site. If so, the costs of performing a
preliminary investigation and the costs of removing known contaminated soil are
accrued. As the investigation is performed and if it is determined remedial
action is required, the best estimate of remedial costs is accrued. If
necessary, the estimate is revised when a consent order is issued. The estimated
recorded liabilities for these properties include incremental direct costs of
the remediation effort, costs for future monitoring at sites and costs of
compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liabilities for these properties are
based upon preliminary data. Thus, actual costs could vary significantly from
the estimates. The estimate could change materially based on facts and
circumstances derived from site investigations, changes in required remedial
action and changes in technology relating to remedial alternatives. In addition,
insurance recoveries for some or all of the costs may be possible, but the
liabilities recorded have not been reduced by any estimate of such recoveries.
The Illinois Commerce Commission has approved the use of a tariff rider
which permits recovery of the actual costs of litigation, investigation and
remediation relating to former manufactured gas plant sites. MidAmerican
Energy's present rates in Iowa provide for a fixed annual recovery of
manufactured gas plant costs. MidAmerican Energy intends to pursue recovery of
the remediation costs from other potentially responsible parties and its
insurance carriers.
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position or results of operations.
(2) CLEAN AIR ACT -
On July 18, 1997, the Environmental Protection Agency adopted revisions to
the National Ambient Air Quality Standards for ozone and a new standard for fine
particulate matter. Based on data to be obtained from monitors located
throughout each state, the Environmental Protection Agency will determine which
states have areas that do not meet the air quality standards (i.e., areas that
are classified as nonattainment). If a state has area(s) classified as
nonattainment area(s), the state is required to submit a State Implementation
Plan specifying how it will reach attainment of the standards through emission
reductions or other means. In August 1998, the Iowa Environmental Protection
Commission adopted by reference the National Ambient Air Quality Standards for
ozone and fine particulate matter.
In May 1999, the United States Court of Appeals for the District of
Columbia Circuit remanded the standards adopted in July 1997 back to the
Environmental Protection Agency indicating the Environmental Protection Agency
had not expressed sufficient justification for the basis of establishing the
standards and ruling that the Environmental Protection Agency has exceeded its
constitutionally-delegated authority in setting the standards. The Environmental
Protection Agency's appeal of the court's ruling to the full panel of the United
States District Court of Appeals for the District of Columbia was denied. In May
2000 the United States Supreme Court granted certiorari to review the appeals
court decision. Oral arguments are expected in the fall of 2000.
As a result of the court's initial decision and the current status of the
standards, the impact of any new standards on MidAmerican Energy is currently
unknown. If the Environmental Protection Agency successfully appeals the court's
decision, however, and the new standards are implemented, then MidAmerican
Energy's fossil fuel generating stations may be subject to emission reductions
if the stations are located in nonattainment areas. As part of an overall state
plan to achieve attainment of the standards,
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<PAGE>
MidAmerican Energy could be required to install control equipment on its fossil
fuel generating stations or decrease the number of hours during which these
stations operate. The degree to which MidAmerican Energy may be required to
install control equipment or decrease operating hours under a nonattainment
scenario would be determined by the state's assessment of MidAmerican Energy's
relative contribution, along with other emission sources, to the nonattainment
status. The installation of control equipment would result in increased costs to
MidAmerican Energy. A decrease in the number of hours during which the affected
stations operate would decrease the revenues of MidAmerican Energy.
C. RATE MATTERS:
Under a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, electric prices for Iowa industrial and
commercial customers were reduced through a retail access pilot project,
negotiated individual electric contracts and a tariffed rate reduction for some
non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as
well as prices. The contracts range in length from five to ten years, and some
have price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to ten-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes, and transition costs. While the contract prices are fixed (except
for the potential adjustment elements), the costs MidAmerican Energy incurs to
fulfill these contracts will vary. On an aggregate basis the annual revenues
under contract are approximately $180 million.
If MidAmerican Energy's annual Iowa electric jurisdictional return on
common equity exceeds 12%, then earnings above the 12% level will be shared
equally between customers and MidAmerican Energy; if the return exceeds 14%,
then two-thirds of MidAmerican Energy's share of those earnings above the 14%
level will be used for accelerated recovery of regulatory assets. The 1997
pricing plan settlement agreement precludes MidAmerican Energy from filing for
increased rates prior to 2001 unless the return falls below 9%. Other parties
signing the agreement are prohibited from filing for reduced rates prior to 2001
unless the return after reflecting credits to customers, exceeds 14%.
Under an Illinois restructuring law enacted in 1997, a similar sharing
mechanism is in place for MidAmerican Energy's Illinois electric operations. A
two-year average return on common equity greater than a two-year average
benchmark will trigger an equal sharing of earnings on the excess. The benchmark
is a calculation of average 30-year Treasury Bond rates plus 5.5% for 1998 and
1999 and 8.5% for 2000 through 2004. The initial calculation, which was due
March 31, 2000, was based on 1998 and 1999 results. The two-year average above
which sharing must occur for 1999 was 11.21%. Using the same 30-year Treasury
bond average, the computed level of return would be 12.71% for 2000 and 14.21%
for 2001 through 2004. The law allows MidAmerican Energy to mitigate the sharing
of earnings above the threshold return on common equity through accelerated
recovery of regulatory assets.
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<PAGE>
D. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
MidAmerican Energy's utility operations are subject to the regulation of
the Iowa Utilities Board, the Illinois Commerce Commission, the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission.
MidAmerican Energy's accounting policies and the accompanying consolidated
financial statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
A possible consequence of deregulation in the utility industry is that
Statement of Financial Accounting Standards No. 71 may no longer apply. 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. With the exception of the generation operations serving the Illinois
jurisdiction, MidAmerican Energy's electric and gas utility operations currently
meet the criteria of SFAS 71, but its applicability is periodically reexamined.
If portions of its utility operations no longer meet the criteria of SFAS 71,
MidAmerican Energy could be required to write off the related regulatory assets
and liabilities from its balance sheet and thus, a material adjustment to
earnings in that period could result if regulatory assets are not recovered in
transition provisions of any resulting legislation. As of June 30, 2000,
MidAmerican Energy had $255 million of regulatory assets on its Consolidated
Balance Sheet.
E. SEGMENT INFORMATION:
MidAmerican Energy has two reportable operating segments: electric and gas.
The electric segment derives most of its revenue from retail sales of regulated
electricity to residential, commercial, and industrial customers and sales to
other utilities. The gas segment derives most of its revenue from retail sales
of regulated natural gas to residential, commercial, and industrial customers
and also earns significant revenues by transporting gas owned by others through
its distribution systems. Pricing for electric and gas sales are established
separately by regulatory agencies; therefore, management also reviews each
segment separately to make decisions regarding allocation of resources and in
evaluating performance. Common operating costs such as interest income, interest
expense, income tax expense and equity in the net loss of investees are
allocated to each segment.
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<PAGE>
The following table provides MidAmerican Energy information on an
operating segment basis (in thousands):
Three Months Six Months
Ended June 30 Ended June 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues:
Electric ................. $ 281,973 $ 279,350 $ 560,436 $ 541,478
Gas ...................... 98,153 71,282 278,055 242,060
Nonregulated and other (a) 88,936 27,709 145,423 63,051
--------- --------- --------- ---------
$ 469,062 $ 378,341 $ 983,914 $ 846,589
========= ========= ========= =========
Earnings on common stock:
Electric ................. $ 26,163 $ 25,284 $ 53,934 $ 37,959
Gas ...................... 550 (5,991) 15,388 8,330
Nonregulated and other (a) (4,076) (179) (3,125) (2,230)
--------- --------- --------- ---------
$ 22,637 $ 19,114 $ 66,197 $ 44,059
========= ========= ========= =========
(a) "Nonregulated and other" consists of nonregulated gas operations, CBEC
Railway and other nonregulated activities.
F. OTHER COMPREHENSIVE INCOME:
For the three months and six months ended June 30, 2000 and 1999, there
were no differences between MidAmerican Energy's comprehensive income and
earnings on common stock.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
INTRODUCTION
------------
MidAmerican Energy Company is a public utility with electric and natural
gas operations and is the principal subsidiary of MHC Inc. MHC is headquartered
in Des Moines, Iowa, and has the following nonregulated subsidiaries:
MidAmerican Capital Company, MidAmerican Services Company and Midwest Capital
Group, Inc. MHC is a wholly owned subsidiary of MidAmerican Funding, LLC, which
is a wholly owned subsidiary of MidAmerican Energy Holdings Company.
MHC, MidAmerican Funding and MidAmerican Energy Holdings are exempt public
utility holding companies headquartered in Des Moines.
FORWARD-LOOKING STATEMENTS
From time to time, MidAmerican Energy 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
Energy's expectations, beliefs, future plans and strategies, anticipated events
or trends and similar comments concerning matters that are not historical facts.
These type of forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results and performance of MidAmerican Energy to differ materially
from any expected future results or performance, expressed or implied, by the
forward-looking statements. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, MidAmerican Energy has
identified important factors that could cause actual results to differ
materially from those expectations, including weather effects on sales and
revenues, fuel prices, fuel transportation and other operating uncertainties,
acquisition uncertainty, uncertainties relating to economic and political
conditions and uncertainties regarding the impact of regulations, changes in
government policy, utility industry deregulation and competition. MidAmerican
Energy assumes no responsibility to update forward-looking information contained
herein.
RESULTS OF OPERATIONS
---------------------
EARNINGS DISCUSSION
MidAmerican Energy's earnings on common stock for the second quarter of
2000 were $22.6 million compared to $19.1 million for the second quarter of
1999. Decreases in regulated operating and maintenance costs and interest
expense contributed to the improvement in earnings.
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<PAGE>
REGULATED GROSS MARGIN
Regulated Electric Gross Margin:
--------------------------------
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2000 1999 2000 1999
---- ----- ---- ----
(In millions)
Operating revenues................ $282 $279 $560 $541
Cost of fuel, energy and capacity. 57 51 115 102
---- ----- ---- ----
Electric gross margin............. $225 $228 $445 $439
==== ==== ==== ====
MidAmerican Energy's electric gross margin for the second quarter of 2000
decreased $3 million compared to the second quarter of 1999.
Temperatures during the three months ended June 30, 2000, were more
moderate than temperatures in the second quarter of 1999, resulting in a $3
million decrease in electric margin. Growth in the number of customers and other
usage factors not dependent on weather increased electric margin by $2.8 million
compared to the second quarter of 1999. In total, retail sales of electricity
increased 1.8% for the three months ended June 30, 2000, compared to the same
period in 1999.
Electric revenues from the recovery of energy efficiency program costs and
a tracking mechanism related to Cooper Nuclear Station costs, referred to as the
Cooper Tracker, decreased $2.2 million compared to the second quarter of 1999.
Changes in revenues from these recovery items are substantially matched with
corresponding changes in other operating expenses. The decrease in energy
efficiency program costs is due to the completion in 1999 of two of the
four-year recovery phases. One phase remains and will be completed in 2001.
Refer to the discussion under "Energy Efficiency" in the OPERATING ACTIVITIES
AND OTHER MATTERS section of MD&A for further discussion of energy efficiency
cost recovery.
A refund accrual for a revenue sharing arrangement in Iowa was $1.1 million
less in the second quarter of 2000 than in the 1999 quarter, resulting in an
increase in electric margin. Conversely, electric margin decreased $0.8 million
due to a decrease in margins on off-system sales compared to the quarter ended
June 30, 1999. Related sales volumes decreased 13.4%. Off-system sales are the
supply of energy to other utilities, municipalities and marketers which in turn
distribute it to end-use customers.
Revenues from electric transmission services decreased $0.7 million
compared to the 1999 quarter due principally to a reduction in transactions
under MidAmerican Energy's transmission tariff. Under an order by the Federal
Energy Regulatory Commission, beginning in the fourth quarter of 1999, the
Mid-Continent Area Power Pool tariff was opened to transactions which previously
would have been under the MidAmerican Energy tariff.
Electric gross margin for the six months ended June 30, 2000, increased $6
million compared to the same period in 1999.
Growth in the number of customers and other usage factors not dependent on
weather increased electric margin by $10.6 million compared to the six-month
period ended June 30, 1999. Temperatures during the six months ended June 30,
2000, were warmer than temperatures in the first six months of 1999, resulting
in a $7 million decrease in electric margin. In total, retail sales of
electricity increased 2.3% for the first six months of 2000 compared to the same
period in 1999.
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MidAmerican Energy's margins on off-system sales increased $2.5 million for
the six months ended June 30, 2000, compared to the six months ended June 30,
1999. Related off-system sales volumes increased 2.2% compared to the 1999
period.
Electric revenues from the recovery of energy efficiency program costs and
the Cooper Tracker decreased $2.9 million compared to the first six months of
1999. Changes in revenues from these recovery items are substantially offset by
corresponding changes in other operating expenses.
A refund accrual for a revenue sharing arrangement in Iowa was $1.6 million
less in the six months ended June 30, 2000, than in the 1999 six-month period,
resulting in an increase in electric margin. A decrease in fuel costs compared
to the second quarter of 1999 improved electric margin by $2.0 million.
Revenues from electric transmission services decreased $1.0 million
compared to the six months ended June 30, 1999, for the same reasons discussed
above in the comparison of the three-month periods.
Regulated Gas Gross Margin:
---------------------------
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
Operating revenues.... $ 98 $ 71 $278 $242
Cost of gas sold...... 61 39 173 135
---- ---- ---- ----
Gas gross margin.... $ 37 $ 32 $105 $107
==== ==== ==== ====
MidAmerican Energy's regulated gas revenues include purchase gas adjustment
clauses through which MidAmerican Energy 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 the purchase gas adjustment
clauses. An increase in the per-unit cost of gas for the three- and six-month
periods ended June 30, 2000 compared to the same periods in 1999 increased
revenues and cost of gas sold by approximately $24 million and $50 million,
respectively.
Compared to the second quarter of 1999, gas gross margin increased
approximately $5 million due primarily to a $3.6 million adjustment to gas
margin in the second quarter of 1999 for sales to the electric generation unit.
Changes in retail gas rates increased gas margin by approximately $1.1
million compared to the second quarter of 1999. On January 22, 1999, the IUB
approved a $6.7 million annual interim increase in gas rates for Iowa retail
customers. An additional increase was implemented on May 27, 1999, as a result
of the Iowa Utilities Board's approval of a final rate increase of $13.9 million
annually. Rates for South Dakota customers increased $2.4 million annually
effective May 1, 1999.
Recovery of gas energy efficiency costs decreased $1.0 million compared to
the second quarter of 1999. Again, changes in revenues from energy efficiency
cost recovery are substantially offset by corresponding changes in other
operating expenses.
A $1 million decrease in gas margin due to more moderate temperatures was
offset by a similar increase from customer growth and other sales factors
compared to the second quarter of 1999. Margin for
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gas transported increased $0.9 million due to a 4.9% increase in volumes
transported compared to the quarter ended June 30, 1999.
Compared to the first six months of 1999, gas gross margin decreased
approximately $2 million. Warmer temperatures in the six months ended June 30,
2000, resulted in a $6 million decrease in gas margin compared to the same
period in 1999. In total, retail sales of natural gas decreased 9.8% compared to
the 1999 period.
Rate changes increased gas margin by approximately $5.4 million compared to
the first six months of 1999 due to the rate increases discussed above. Recovery
of gas energy efficiency costs decreased $2.2 million for the first six months
of 2000 compared to the first six months of 2000.
REGULATED OPERATING EXPENSES
Regulated other operating expenses decreased $1.5 million for the second
quarter of 2000 compared to the second quarter of 1999. Information technology
expenses were $1.0 million lower in the 2000 quarter due principally to
consulting and other costs in the 1999 quarter to support newly implemented
systems and for Y2K preparation. As mentioned in the gross margin sections
above, energy efficiency costs and Cooper Tracker costs decreased compared to
the three months ended June 30, 1999, which reduced other operating expenses by
$2.9 million. Pension expense increased $2.4 million for the second quarter of
2000 compared to the same period in 1999.
For the six months ended June 30, 2000, other operating expenses decreased
$16.3 million compared to the same period in 1999. Information technology
expenses for system maintenance and implementation were $6.9 million lower for
the six months ended June 30, 2000, due principally to consulting and other
costs in the 1999 period to support newly implemented systems and for Y2K
preparation. Energy efficiency costs and Cooper Tracker costs decreased $4.4
million compared to the six months ended June 30, 1999. Costs related to
manufactured gas plant clean up decreased $2.3 million due primarily to the
timing of expenditures. Other factors contributing to the decrease were a
reduction in employee incentive plan costs and an increase in 2000 of a reserve
distribution from a nuclear insurance fund compared to the distribution in 1999.
Maintenance expenses decreased $2.0 million and $3.8 million for the three
months and six months ended June 30, 2000, respectively, compared to the same
periods in 1999 due to the timing of coal-fired and nuclear generating plant
maintenance. In addition, the six-month period ended June 30, 2000, includes
recovery from insurance of transformer failure costs incurred in prior periods.
Depreciation and amortization expense increased for the quarterly
comparison due to an increase in utility plant. For the six-month comparison,
the increase in utility plant depreciation was offset by decreases in nuclear
decommissioning expense and amortization of regulatory assets for MidAmerican
Energy's Illinois operations.
Property and other taxes decreased for the three and six months ended June
30, 2000, compared to the 1999 periods due to a reduction in MidAmerican
Energy's Iowa property tax assessed values.
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NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Revenues and Cost of Sales -
Revenues from nonregulated natural gas marketing operations increased $55.6
million to $80.0 million for the second quarter of 2000 compared to the same
period in 1999. An increase in the average price per unit sold, reflective of a
65% increase in the average cost of gas, accounted for $30.7 million of the
increase in revenues. Sales volumes increased 11 million MMBtus (102%) resulting
in a $24.9 million increase in revenues. Related cost of sales increased $55.7
million and reflects the increase in cost per unit and sales volumes.
Nonregulated revenues for the second quarter of 2000 include $4.5 million
from MidAmerican Energy's market access service project, which began in the
third quarter of 1999. The pilot project allows participating Iowa customers
with at least 4 megawatts of load to choose their electric power supplier.
MidAmerican Energy's revenues from project participants related to non-supply
services, such as distribution and transmission, are reflected in regulated
electric revenues. Cost of sales for the second quarter of 2000 includes $4.1
million related to the market access service project.
Revenues from nonregulated natural gas marketing operations increased $68.2
million to $126.1 million for the six months ended June 30, 2000, compared to
the same period in 1999. An increase in the average price per unit sold,
reflective of a 60% increase in the average cost of gas, accounted for $48.1
million of the increase in revenues. Sales volumes increased 10 million MMBtus
(35%) resulting in a $20.1 million increase in revenues. Related cost of sales
increased $66.7 million and reflects the increase in cost per unit and sales
volumes.
Revenues and cost of sales for the market access service project totaled
$8.6 million and $8.7 million, respectively, for the six months ended June 30,
2000.
Beginning October 1, 1999, some non-residential customers in Illinois are
allowed to select their electric power supplier. MidAmerican Energy's
nonregulated revenues include $1.5 million in agency fees related to these
supply services.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and dividend income -
The increase in interest income is due to an increase in a note receivable
related to accounts receivable sold.
Other, Net -
Other, Net reflects the discount on sold accounts receivable, net of a
subservicer fee charged to MidAmerican Energy Funding Corporation for servicing
the accounts. The discount is designed to cover the expenses of MidAmerican
Energy Funding Corporation, including bad debt expense, subservicer fees,
monthly administrative costs and interest. The discount is recorded in Other,
Net because it is not reflected in utility cost of service for regulatory
purposes. The discount, net of the subservicer fee, reduced Other, Net by $2.3
million and $1.7 million in the second quarter of 2000 and 1999, respectively,
and $4.4 million and $4.6 million in the six months ended June 30, 2000 and
1999, respectively.
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Fixed Charges -
The decrease in interest on long-term debt is due to long-term debt
maturities in 1999 and 2000. Other interest expense decreased in the six months
ended June 30, 2000, compared to the six months ended June 30, 1999, due to a
decrease in short-term debt outstanding. For the quarter, average short-term
debt outstanding was greater in 2000 than in 1999, resulting in an increase in
interest expense. In addition, the 2000 quarter includes $0.6 million on
interest related to a gas supplier tax refund that is refundable to customers.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
MidAmerican Energy 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
Energy's net cash provided from operating activities was $190 million and $196
million the first six months of 2000 and 1999, respectively.
INVESTING ACTIVITIES AND PLANS
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first six months of 2000, utility construction
expenditures totaled $81 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases. All such expenditures were met with cash generated from utility
operations.
Forecasted utility construction expenditures, including allowance for funds
used during construction for 2000 are $211 million and $732 million for 2001
through 2004. Capital expenditure needs are reviewed regularly by management and
may change significantly as a result of such reviews. MidAmerican Energy
presently expects that all utility construction expenditures for the next five
years will be met with cash generated from utility operations, net of dividends.
The actual level of cash generated from utility operations is affected by, among
other things, economic conditions in the utility service territory, weather and
federal and state regulatory actions.
Nuclear Decommissioning -
Each licensee of a nuclear facility is required to provide financial
assurance for the cost of decommissioning its licensed nuclear facility. In
general, decommissioning of a nuclear facility means to safely remove the
facility from service and restore the property to a condition allowing
unrestricted use by the operator. Based on information presently available,
MidAmerican Energy expects to contribute approximately $42 million during the
period 2000 through 2004 to external trusts established for the investment of
funds for decommissioning Quad Cities Station. Approximately 65% of the trust's
funds are invested in domestic corporate debt and common equity securities.
The remainder is invested in investment grade municipal and U.S. Treasury bonds.
In addition, MidAmerican Energy makes payments to the Nebraska Public Power
District related to decommissioning Cooper. These payments are reflected in
other operating expenses in the Consolidated Statements of Income. Nebraska
Public Power District estimates call for MidAmerican Energy to pay
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approximately $57 million to Nebraska Public Power District for Cooper
decommissioning during the period 2000 through 2004. Nebraska Public Power
District invests the funds predominantly in U.S. Treasury Bonds and other U.S.
Government securities. Approximately 20% was invested in domestic corporate
debt. MidAmerican Energy's obligation for Cooper decommissioning may be affected
by the actual plant shutdown date and the status of the power purchase contract
at that time. In July 1997, Nebraska Public Power District filed a lawsuit in
United States District Court for the District of Nebraska naming MidAmerican
Energy as the defendant and seeking a declaration of MidAmerican Energy's rights
and obligations in connection with Cooper nuclear decommissioning funding. Refer
to Part II, Item 1. Legal Proceedings, for further discussion of the litigation.
Cooper and Quad Cities Station decommissioning costs charged to Iowa
customers are to a large extent included in base rates, and recovery of
increases in those amounts must be sought through the normal ratemaking process.
Cooper decommissioning costs charged to Illinois customers are recovered through
a rate rider on customer billings that is reviewed annually.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
Debt Authorization and Credit Facilities -
MidAmerican Energy currently has authority from the Federal Energy
Regulatory Commission to issue short-term debt in the form of commercial paper
and bank notes aggregating $400 million. As of June 30, 2000, MidAmerican Energy
had in place a $325 million commercial paper program which is supported by $325
million of revolving credit facilities. In addition, MidAmerican Energy has a $5
million bank line of credit. MidAmerican Energy also has a revolving credit
facility which is dedicated to providing liquidity for its obligations under
outstanding pollution control revenue bonds that are periodically remarketed.
MidAmerican Energy has authorization from the Federal Energy Regulatory
Commission to issue up to an additional $338 million in various forms of
long-term debt. MidAmerican Energy will also need authorization from the
Illinois Commerce Commission prior to issuing any securities. If 90% or more of
the proceeds from a securities issuance are used for refinancing purposes,
MidAmerican Energy need only provide the commission with an "informational
statement" prior to the issuance which sets forth the type, amount and use of
the proceeds of the securities to be issued. If less than 90% of the proceeds
are used for refinancing, MidAmerican Energy must file a comprehensive
application seeking authorization prior to issuance. The Illinois Commerce
Commission is required to hold a hearing before issuing its authorization.
On July 24, 2000, MidAmerican Energy issued $162 million of 7.375%
medium-term notes due August 1, 2002. Additionally, MidAmerican Energy entered
into a two-year fixed-to-floating interest rate swap. The floating rate is based
on a three-month LIBOR rate.
Accounts Receivable Sold -
In 1997, MidAmerican Energy entered into a revolving agreement, which
expires in 2002, to sell all of its right, title and interest in the majority of
its billed accounts receivable to MidAmerican Energy Funding Corporation, a
special purpose entity established to purchase accounts receivable from
MidAmerican Energy. Funding Corp. in turn sells receivable interests to outside
investors. In consideration for the sale, MidAmerican Energy received $70
million in cash and the remaining balance in the form of a subordinated note,
bearing interest at 8%, from Funding Corp. As of June 30, 2000, the revolving
cash balance was $70 million, and the amount outstanding under the subordinated
note was $45
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million. As part of the agreement, the creditors of Funding Corp. will be
entitled to be satisfied out of the assets of Funding Corp. prior to any value
being returned to MidAmerican Energy or its creditors. Therefore, the accounts
receivable sold are not reflected on MidAmerican Energy's Consolidated Balance
Sheets. As of June 30, 2000, $118.1 million of accounts receivable, net of
reserves, were sold under the agreement.
OPERATING ACTIVITIES AND OTHER MATTERS
Industry Evolution -
Retail electric competition is presently not permitted in Iowa, MidAmerican
Energy's primary market. Legislation to initiate competition was introduced in
the Iowa legislature in the 2000 session, but it did not pass. MidAmerican
Energy cannot predict the timing or ultimate outcome of any potential electric
restructuring legislation in Iowa. Deregulation of the gas supply function
related to small volume customers is also being considered by the Iowa Utilities
Board. MidAmerican Energy has actively participated in the legislative and
regulatory processes.
As retail choice becomes more prevalent, the generation and retail portions
of MidAmerican Energy's electric business will be most affected by competition.
The introduction of competition in the wholesale market has resulted in a
proliferation of power marketers and a substantial increase in market activity.
As retail choice evolves, competition from other traditional utilities, power
marketers and customer-owned generation could put pressure on utility margins.
During the transition to full competition, increased volatility in the
marketplace can be expected. With the elimination of the energy adjustment
clause in Iowa, MidAmerican Energy is financially exposed to movements in energy
prices. Although MidAmerican Energy has sufficient low cost generation under
typical operating conditions for its retail electric needs, a loss of adequate
generation by MidAmerican Energy at a time of high market prices could subject
MidAmerican Energy to losses on its energy sales.
Legislative and Regulatory Evolution -
In December 1997, the Governor of Illinois signed into law a bill to
restructure Illinois' electric utility industry and transition it to a
competitive market. Under the law, beginning October 1, 1999, larger
non-residential customers in Illinois and 33% of the remaining non-residential
Illinois customers are allowed to select their provider of electric supply
services. All other non-residential customers will have supplier choice starting
December 31, 2000. Residential customers all receive the opportunity to select
their electric supplier on May 1, 2002.
In addition to rate reductions implemented in 1998, the law provides for
Illinois earnings above a certain level of return on common equity to be shared
equally between customers and MidAmerican Energy beginning in April 2000.
MidAmerican Energy's return on common equity level will be based on a rolling
two-year average, with the first determination being based on an average of 1998
and 1999. The level of return at which MidAmerican Energy will be required to
share earnings is a multi-step calculation of average 30-year Treasury Bond
rates plus 5.50% for 1998 and 1999. Legislation passed in July 1999 increased
the benchmark for 2000 through 2004 to 8.5% above the 30-year Treasury bond
rate. The two-year average above which sharing must occur for 1999 was 11.21%.
Using the same 30-year Treasury bond average, the computed level of return would
be 12.71% for 2000 and 14.21% for 2001 through 2004. The law allows MidAmerican
Energy to mitigate the sharing of earnings above the threshold return on common
equity through accelerated cost recognition.
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MidAmerican Energy continues its involvement in proceedings which detail
the new competitive environment and to evaluate the impact of the law on its
operations and the opportunities the law presents, including proceedings
involving the unbundling of customer billing and meter reading.
In December 1999, the Federal Energy Regulatory Commission issued Order No.
2000 establishing among other things minimum characteristics and functions for
regional transmission organizations. Public utilities that were not a member of
an independent system operator at the time of the order are required to submit a
plan by which its transmission facilities would be transferred to a regional
transmission organization on a schedule that would allow the regional
transmission organization to commence operating by December 15, 2001.
MidAmerican Energy, which was not a member of an independent system operator, is
presently analyzing the impact that the order may have on its operations.
Accounting Effects of Industry Restructuring -
A possible consequence of deregulation in the utility industry is that
Statement of Financial Accounting Standards No. 71 may no longer apply. SFAS 71
sets forth accounting principles for operations that are regulated and meet
certain criteria. For operations that meet the criteria, SFAS 71 allows, among
other things, the deferral of costs that would otherwise be expensed when
incurred. With the exception of the generation operations serving the Illinois
jurisdiction, MidAmerican Energy's electric and gas utility operations currently
meet the criteria required by SFAS 71, but its applicability is periodically
reexamined. If portions of its utility operations no longer meet the criteria of
SFAS 71, MidAmerican Energy could be required to write off the related
regulatory assets and liabilities from its balance sheet, and thus, a material
adjustment to earnings in that period could result if regulatory assets are not
recovered in transition provisions of any resulting legislation. As of June 30,
2000, MidAmerican Energy had $255 million of net regulatory assets on its
Consolidated Balance Sheet.
Energy Efficiency -
MidAmerican Energy's regulatory assets as of June 30, 2000, included $30.0
million of deferred energy efficiency costs. Based on the current level of
recovery, MidAmerican Energy expects to recover these costs by the end of 2001.
MidAmerican Energy is also allowed to recover its ongoing energy efficiency
costs on a current basis. Recovery of these costs is being collected from
customers based on projected annual costs of $16.4 million, which may be
adjusted annually. Amortization of the deferred energy efficiency costs and
current expenditures for energy efficiency costs will be reflected in other
operating expenses over the related periods of recovery. The total of such costs
for the years 2000 and 2001 is estimated to be $40 million and $34 million,
respectively.
Rate Matters: Electric -
Under a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, electric prices for MidAmerican Energy's Iowa
industrial and commercial customers were reduced through a retail access pilot
project, negotiated individual electric contracts and a tariffed rate reduction
for some non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as
well as prices. The contracts range in length from five to ten years, and some
have price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to ten-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes, and transition costs. While the contract prices
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are fixed (except for the potential adjustment elements), the costs MidAmerican
Energy incurs to fulfill these contracts will vary. MidAmerican Energy presently
intends to manage this risk through hedging and other similar arrangements. On
an aggregate basis the annual revenues under contract are approximately $180
million.
Under the 1997 pricing plan settlement agreement if MidAmerican Energy's
annual Iowa electric jurisdictional return on common equity exceeds 12%, then
earnings above the 12% level will be shared equally between customers and
MidAmerican Energy. If the return exceeds 14%, then two-thirds of MidAmerican
Energy's share of those earnings above the 14% level will be used for
accelerated recovery of certain regulatory assets. The pricing plan settlement
agreement precludes MidAmerican Energy from filing for increased rates prior to
2001 unless the return falls below 9%. Other parties signing the agreement are
prohibited from filing for reduced rates prior to 2001 unless the return, after
reflecting credits to customers, exceeds 14%. The agreement also eliminated
MidAmerican Energy's energy adjustment clause, and, as a result, the cost of
fuel is not directly passed on to customers.
Rate Matters: Gas -
On July 11, 2000, the Illinois Commerce Commission issued an order
approving a gas rate increase totaling $2.1 million, or 4.9%, annually effective
July 18, 2000.
Environmental Matters -
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties which were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy's estimate of the probable costs for these
sites as of June 30, 2000, was $27 million. This estimate has been recorded as a
liability and a regulatory asset for future recovery through the regulatory
process. Refer to Note B(1) of Notes to Consolidated Financial Statements for
further discussion of MidAmerican Energy's environmental activities related to
manufactured gas plant sites and cost recovery.
Although the timing of potential incurred costs and recovery of costs in
rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position or results of operations.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter. In
May 1999, the U.S. Court of Appeals for the District of Columbia Circuit
remanded the standards adopted in July 1997 back to the EPA indicating the EPA
had not expressed sufficient justification for the basis of establishing the
standards and ruling that the EPA has exceeded its constitutionally-delegated
authority in setting the standards. As a result of the court's initial decision
and the current status of the standards, the impact of any new standards on
MidAmerican Energy is currently unknown. If the EPA successfully appeals the
court's decision, however, and the new standards are implemented, then
MidAmerican Energy could incur increased costs
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and a decrease in revenues. Refer to Note B(2) of Notes to Consolidated
Financial Statements for further discussion of this issue.
Quad Cities Nuclear Power Station -
Quad Cities Station is operated by, and 75% owned by, Commonwealth Edison
Company. On May 3, 1999, the Nuclear Regulatory Commission advised ComEd that it
had classified Quad Cities Station in its Routine Oversight category for nuclear
power plants, which is the best of the commission's three new categories,
removing the station from the Trending (adversely) Letter status initiated in
January 1998. During 1999, Quad Cities Station's capacity factor based on
maximum dependable capacity was in excess of 96.0% compared to 51.7% for 1998.
The lower capacity factor in 1998 reflects the extended outages at both of the
Quad Cities Station units during the first five months of 1998.
Generating Capability -
In July 1999, retail customer usage of electricity caused an hourly peak
demand of 3,833 MW on MidAmerican Energy's energy system. MidAmerican Energy is
interconnected with Iowa and neighboring utilities and is involved in an
electric power pooling agreement known as Mid-Continent Area Power Pool. Each
MAPP participant is required to maintain for emergency purposes a net generating
capability reserve of at least 15% above its system peak demand. MidAmerican
Energy was able to maintain its capacity reserve requirement during the hot
weather in July 1999 and was not adversely affected by the resultant high prices
in the off-system market.
MidAmerican Energy believes it has adequate electric capacity reserve and
continues to manage its generating resources to ensure an adequate reserve in
the future. However, significantly higher-than-normal temperatures during the
cooling season could cause MidAmerican Energy's reserve to fall below the 15%
minimum. If MidAmerican Energy fails to maintain the appropriate reserve,
significant penalties could be contractually imposed by MAPP.
ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and amended by SFAS 138 and is effective for MidAmerican
Energy beginning January 1, 2001. SFAS 133 requires an entity to recognize all
of its derivatives as either assets or liabilities in its statement of financial
position and measure those instruments at fair value. MidAmerican Energy is in
the process of evaluating the impact of this accounting standard.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MidAmerican Energy is exposed to market risk, including changes in the
market price of certain commodities and interest rates. The exposure to changes
in market prices and interest rates at June 30, 2000 is not materially different
than at December 31, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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MidAmerican Energy and its subsidiaries have no material legal proceedings
except for the following:
Environmental Matters
---------------------
For information relating to MidAmerican Energy's environmental matters,
reference is made to Note B of Notes to Consolidated Financial Statements.
Cooper Litigation
-----------------
On July 23, 1997, Nebraska Public Power District filed a complaint, in the
United States District Court for the District of Nebraska, naming MidAmerican
Energy as the defendant and seeking declaratory judgment as to three issues
under the parties' long-term power purchase agreement for Cooper capacity and
energy. More specifically, Nebraska Public Power District sought a declaratory
judgment in the following respects:
(1) that MidAmerican Energy is obligated to pay 50% of all costs and
expenses associated with decommissioning Cooper, and that in the event
Nebraska Public Power District continues to operate Cooper after
expiration of the power purchase agreement (September 2004),
MidAmerican Energy is not entitled to reimbursement of any
decommissioning funds it has paid to date or will pay in the future;
(2) that the current method of allocating transition costs as a part of
the decommissioning cost is proper under the power purchase agreement;
and
(3) that the current method of investing decommissioning funds is proper
under the power purchase agreement.
MidAmerican Energy filed its answer and contingent counterclaims. The
contingent counterclaims filed by MidAmerican Energy are generally as follows:
(1) that MidAmerican Energy has no duty under the power purchase agreement
to reimburse or pay 50% of the decommissioning costs unless conditions
to reimbursement occur;
(2) that Nebraska Public Power District has the duty to repay all amounts
that MidAmerican Energy has prefunded for decommissioning in the event
the Nebraska Public Power District operates the plant after the term
of the power purchase agreement;
(3) that Nebraska Public Power District is equitably estopped from
continuing to operate the plant after the term of the power purchase
agreement;
(4) that Nebraska Public Power District has granted MidAmerican Energy an
option to continue taking 50% of the power from the plant;
(5) that the term "monthly power costs" as defined in the power purchase
agreement does not include costs and expenses associated with
decommissioning the plant;
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(6) that MidAmerican Energy has no duty to pay for nuclear fuel,
operations and maintenance projects or capital improvements that have
useful lives after the term of the power purchase agreement;
(7) that transition costs are not included in any decommissioning costs
and expenses;
(8) that Nebraska Public Power District has breached its duty to
MidAmerican Energy in making investments of decommissioning funds;
(9) that reserves in named accounts are excessive and should be refunded
to MidAmerican Energy; and
(10) that Nebraska Public Power District must credit MidAmerican Energy for
payments by MidAmerican Energy for low-level radioactive waste
disposal.
On October 6, 1999, the court rendered summary judgment for Nebraska Public
Power District on the above-mentioned issue concerning liability for
decommissioning (issue one in the first paragraph above) and the related
contingent counterclaims filed by MidAmerican Energy (issues one, two, three and
five in the second paragraph above). The court referred all remaining issues in
the case to mediation, and cancelled the November 1999 trial date. MidAmerican
Energy has appealed the court's summary judgment ruling and is participating in
ongoing mediation efforts.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
(A) EXHIBITS
Exhibits Filed Herewith
-----------------------
Exhibit 15 - Awareness Letter of Independent Accountants
Exhibit 27 - Financial Data Schedules (for electronic filing only).
(B) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY COMPANY
--------------------------
(Registrant)
Date August 10, 2000 /s/ Patrick J. Goodman
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Patrick J. Goodman
Senior Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
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15 Awareness Letter of Independent Accountants
27 Financial Data Schedules (for electronic filing only).
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