such date less the sum of (a) the consolidated current liabilities of MEHC determined in accordance with GAAP and (b) assets properly classified as Intangible Assets.
"Currency Protection Agreement" means, with respect to any person, any foreign exchange contract, currency swap agreement or other similar agreement or arrangement intended to protect such person against fluctuations in currency values to or under which such person is a party or a beneficiary on the date of the indenture or becomes a party or a beneficiary thereafter.
"Debt" means, with respect to any person, at any date of determination (without duplication):
For purposes of determining any particular amount of Debt that is or would be outstanding, Guarantees of, or obligations with respect to letters of credit or similar instruments supporting (to the extent the foregoing constitutes Debt), Debt otherwise included in the determination of such particular amount will not be included. For purposes of determining compliance with the indenture, in the event that an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, MEHC, in its sole discretion, will classify such item of Debt and only be required to include the amount and type of such Debt in one of such clauses.
"Guarantee" means any obligation, contingent or otherwise, of any person directly or indirectly guaranteeing any Debt of any other person and, without limiting the generality of the foregoing, any Debt obligation, direct or indirect, contingent or otherwise, of such person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other person (whether arising by virtue of partnership arrangements (other than solely by reason of being a general partner of a partnership), or by agreement to keep-well, to purchase assets, goods, securities or services or to take-or-pay, or to maintain financial statement conditions or otherwise) or (2) entered into for purposes of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term "Guarantee" will not include endorsements for collection or deposit in the ordinary course of business or the grant of a lien in connection with any Non-Recourse Debt. The term "Guarantee" used as a verb has a corresponding meaning.
"Independent Investment Banker" means an independent investment banking institution of international standing appointed by MEHC.
"Intangible Assets" means, as of the date of determination thereof, all assets of MEHC properly classified as intangible assets determined on a consolidated basis in accordance with GAAP. "Interest Rate Protection Agreement" means, with respect to any person, any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement intended to protect such person against fluctuations in interest rates to or under which such person or any of its Subsidiaries is a party or a beneficiary on the date of the indenture or becomes a party or a beneficiary thereafter.
"Investment Grade" means with respect to the notes, (1) in the case of S&P, a rating of at least BBB–, (2) in the case of Moody's, a rating of at least Baa3, and (3) in the case of a Rating Agency other than S&P or Moody's, the equivalent rating, or in each case, any successor, replacement or equivalent definition as promulgated by S&P, Moody's or other Rating Agency as the case may be.
"Joint Venture" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form.
"Lien" means, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property, but will not include any partnership, joint venture, shareholder, voting trust or similar governance agreement with respect to Capital Stock in a Subsidiary or Joint Venture. For purposes of the indenture, MEHC will be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such Property.
"Non-Recourse" means any Debt or other obligation (or that portion of such Debt or other obligation) that is without recourse to MEHC or any property or assets directly owned by MEHC (other than a pledge of the equity interests in any Subsidiary of MEHC, to the extent recourse to MEHC under such pledge is limited to such equity interests).
"Property" of any person means all types of real, personal, tangible or mixed property owned by such person whether or not included in the most recent consolidated balance sheet of such person under GAAP.
"Rating Agencies" means (1) S&P and (2) Moody's or (3) if S&P or Moody's or both do not make a rating of the notes publicly available, a nationally recognized securities rating agency or agencies, as the case may be, selected by MEHC, which will be substituted for S&P, Moody's or both, as the case may be.
"Rating Category" means (1) with respect to S&P, any of the following categories: BB, B, CCC, CC, C and D (or equivalent successor categories), (2) with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and D (or equivalent successor categories) and (3) the equivalent of any such category of S&P or Moody's used by another Rating Agency. In determining whether the rating of the notes has decreased by one or more gradations, gradations within Rating Categories (+ and – for S&P, 1, 2 and 3 for Moody's or the equivalent gradations for another Rating Agency) will be taken into account (e.g., with respect to S&P, a decline in a rating from BB+ to BB, as well as from BB– to B+, will constitute a decrease of one gradation).
"Rating Decline" means the occurrence of the following on, or within 90 days after, the earlier of (1) the occurrence of a Change of Control and (2) the date of public notice of the occurrence of a Change of Control or of the public notice of the intention of MEHC to effect a Change of Control (the "Rating Date"), which period will be extended so long as the rating of the notes is under publicly announced consideration for possible downgrading by any of the Rating Agencies: (a) in the event that any series of the notes are rated by either Rating Agency on the Rating Date as Investment Grade, the rating of such notes by both such Rating Agencies is reduced below Investment Grade, or (b) in the event the notes are rated below Investment Grade by both such Rating Agencies on the
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Rating Date, the rating of such notes by either Rating Agency is decreased by one or more gradations (including gradations within Rating Categories as well as between Rating Categories).
"Redeemable Stock" means any class or series of Capital Stock of any person that by its terms or otherwise is (1) required to be redeemed prior to the stated maturity of any series of the notes, (2) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the stated maturity of any series of the notes or (3) convertible into or exchangeable for Capital Stock referred to in clause (1) or (2) above or Debt having a scheduled maturity prior to the stated maturity of any series of the notes, provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require MEHC to purchase or redeem such Capital Stock upon the occurrence of a "change of control" occurring prior to the stated maturity of any series of the notes will not constitute Redeemable Stock if the "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the covenants described under "Purchase of Notes Upon a Change of Control" above.
"Redemption Date" means any date on which MEHC redeems all or any portion of the notes in accordance with the terms of the indenture.
"Reference Treasury Dealer" means a primary U.S. government securities dealer in New York City appointed by MEHC.
"Reference Treasury Dealer Quotation" means, with respect to the Reference Treasury Dealer and any Redemption Date, the average, as determined by MEHC, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount and quoted in writing to MEHC by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such Redemption Date).
"Significant Subsidiary" means a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act, substituting 20 percent for 10 percent each place it appears therein. Unless the context otherwise clearly requires, any reference to a "Significant Subsidiary" is a reference to a Significant Subsidiary of MEHC.
"Subsidiary" means, with respect to any person including, without limitation, MEHC and its Subsidiaries, any corporation or other entity of which such person owns, directly or indirectly, a majority of the Capital Stock or other ownership interests and has ordinary voting power to elect a majority of the board of directors or other persons performing similar functions.
"Trade Payables" means, with respect to any person, any accounts payable or any other indebtedness or monetary obligation to trade creditors incurred, created, assumed or Guaranteed by such person or any of its Subsidiaries or Joint Ventures arising in the ordinary course of business.
"Treasury Yield" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
"U.S. Government Obligations" means any securities that are (1) direct obligations of the United States for the payment of which its full faith and credit is pledged or (2) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, that, in either case are not callable or redeemable at the option of the issuer thereof, and will also include any depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligations or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.
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"Voting Stock" means, with respect to any person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors (or persons fulfilling similar responsibilities) of such person.
Global Notes; Book-Entry System
The original series C notes were, and the series C exchange notes will be, issued under a book-entry system in the form of one or more global notes (each, a "Global Note"). Each Global Note with respect to the original series C notes was, and each Global Note with respect to the series C exchange notes will be, deposited with, or on behalf of, a depositary, which is The Depository Trust Company, New York, New York (the "Depositary"). The Global Notes with respect to the original series C notes were, and the Global Notes with respect to the series C exchange notes will be, registered in the name of the Depositary or its nominee.
The original series C notes were not issued in certificated form and, except under the limited circumstances described below, owners of beneficial interests in the Global Notes are not entitled to physical delivery of the series C notes in certificated form. The Global Notes may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any nominee to a successor of the Depositary or a nominee of such successor.
The Depositary is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depositary holds securities that its participants ("Direct Participants") deposit with the Depositary. The Depositary also facilitates the post-trade settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, including Euroclear Bank S.A./N.V. as operator of the Euroclear System ("Euroclear") and Clearstream Banking, societe anonyme ("Clearstream"). The Depositary is a wholly owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation and Emerging Markets Clearing Corporation, also subsidiaries of DTCC, as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC and the National Association of Securities Dealers, Inc. Access to the Depositary system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to the Depositary and its Direct and Indirect Participants are on file with the SEC.
Purchases of the notes under the Depositary system must be made by or through Direct Participants, which will receive a credit for the notes on the Depositary's records. The ownership interest of each actual purchaser of each note ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from the Depositary of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in notes, except in the event that use of the book-entry system for the notes is discontinued.
To facilitate subsequent transfers, all series C notes deposited by Direct Participants with the Depositary are registered in the name of the Depositary's partnership nominee, Cede & Co., or such
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other name as may be requested by an authorized representative of the Depositary. The deposit of series C notes with the Depositary and their registration in the name of Cede & Co. or such other nominee effect no change in beneficial ownership. The Depositary has no knowledge of the actual Beneficial Owners of the series C notes; the Depositary's records reflect only the identity of the Direct Participants to whose accounts such series C notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners are governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Neither the Depositary nor Cede & Co. (nor any other nominee of the Depositary) will consent or vote with respect to the series C notes unless authorized by a Direct Participant in accordance with the Depositary's procedures. Under its usual procedures, the Depositary mails an Omnibus Proxy to MEHC as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the notes are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Principal (and premium, if any) and interest payments on the series C notes and any redemption payments are made to Cede & Co. (or such other nominee as may be requested by an authorized representative of the Depositary). The Depositary's practice is to credit Direct Participants' accounts upon the Depositary's receipt of funds and corresponding detail information from MEHC or the trustee on the payable date in accordance with their respective holdings shown on the Depositary's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of the Depositary, the trustee or MEHC, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal (and premium, if any), interest and any redemption proceeds to Cede & Co. (or such other nominee as may be requested by an authorized representative of the Depositary) is the responsibility of MEHC, disbursements of such payments to Direct Participants shall be the responsibility of the Depositary, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities depositary with respect to the series C notes at any time by giving reasonable notice to MEHC or the trustee. Under such circumstances, in the event that a successor securities depositary is not obtained, certificated series C notes are required to be printed and delivered. MEHC may decide to discontinue use of the system of book-entry transfers through the Depositary (or a successor securities depositary). In that event, certificated series C notes will be printed and delivered.
The information in this section concerning the Depositary and the Depositary's book-entry system has been obtained from sources that MEHC believes to be reliable, but MEHC, the initial purchasers and the trustee take no responsibility for the accuracy thereof.
A Global Note of any series may not be transferred except as a whole by the Depositary to a nominee or successor of the Depositary or by a nominee of the Depositary to another nominee of the Depositary. A Global Note representing series C notes is exchangeable, in whole but not in part, for series C notes in definitive form of like tenor and terms if (1) the Depositary notifies MEHC that it is unwilling or unable to continue as depositary for such Global Note or if at any time the Depositary is no longer eligible to be or in good standing as a "clearing agency" registered under the Exchange Act, and in either case, a successor depositary is not appointed by MEHC within 120 days of receipt by MEHC of such notice or of MEHC becoming aware of such ineligibility, (2) while such Global Note is subject to the transfer restrictions described under "Transfer Restrictions," the book-entry interests in such Global Note cease to be eligible for Depositary services because such series C notes are neither (a) rated in one of the top four categories by a nationally recognized statistical rating organization nor (b) included within a Self-Regulatory Organization system approved by the SEC for the reporting of
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quotation and trade information of securities eligible for transfer pursuant to Rule 144A under the Securities Act, or (3) MEHC in its sole discretion at any time determines not to have such series C notes represented by a Global Note and notifies the trustee thereof. A Global Note exchangeable pursuant to the preceding sentence shall be exchangeable for series C notes registered in such names and in such authorized denominations as the Depositary shall direct.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The exchange of original series C notes for series C exchange notes pursuant to the exchange offer will not constitute a taxable event for U.S. federal income tax purposes. The series C exchange notes received by a holder of original series C notes should be treated as a continuation of such holder's investment in the original series C notes; thus there should be no material U.S. federal income tax consequences to holders exchanging original series C notes for series C exchange notes. As a result:
| • | a holder of original series C notes will not recognize taxable gain or loss as a result of the exchange of original series C notes for series C exchange notes pursuant to the exchange offer; |
| • | the holding period of the series C exchange notes will include the holding period of the original series C notes surrendered in exchange therefor; and |
| • | a holder's adjusted tax basis in the series C exchange notes will be the same as such holder's adjusted tax basis in the original series C notes surrendered in exchange therefor. |
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PLAN OF DISTRIBUTION
Based on existing interpretations of the Securities Act by the staff of the SEC set forth in several no-action letters to third parties, and subject to the immediately following sentence, we believe that the series C exchange notes that will be issued pursuant to the exchange offer may be offered for resale, resold and otherwise transferred by the holders thereof without further compliance with the registration and prospectus delivery provisions of the Securities Act. However, any purchaser of series C notes who is an "affiliate" (within the meaning of the Securities Act) of ours or who intends to participate in the exchange offer for the purpose of distributing the series C exchange notes or a broker-dealer (within the meaning of the Securities Act) that acquired original series C notes in a transaction other than as part of its market-making or other trading activities and who has arranged or has an understanding with any person to participate in the distribution of the series C exchange notes: (1) will not be able to rely on the interpretations by the staff of the SEC set forth in the above-mentioned no-action letters; (2) will not be able to tender its original series C notes in the exchange offer; and (3) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the series C notes unless such sale or transfer is made pursuant to an exemption from such requirements.
Each broker-dealer that receives series C exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such series C exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of series C exchange notes received in exchange for original series C notes where such original series C notes were acquired as a result of market-marketing activities or other trading activities. We have agreed that, for a period of 120 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until July 22, 2003, all dealers effecting transactions in the series C exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any such sale of series C exchange notes by broker-dealers. Series C exchange notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the series C exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker/dealer and/or the purchasers of any such series C exchange notes. Any broker-dealer that resells series C exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such series C exchange notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of series C exchange notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letters of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 120 days after the expiration date we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer (including the expenses of one counsel for the holders of the series C notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the series C notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act.
NOTICE TO CANADIAN RESIDENTS
Any resale of the series C notes in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under
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available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Note holders resident in Canada are advised to seek legal advice prior to any resale of the series C notes.
LEGAL MATTERS
Certain legal matters with respect to the series C exchange notes will be passed upon for us by Willkie Farr & Gallagher, New York, New York.
EXPERTS
The consolidated balance sheets of MidAmerican Energy Holdings Company (successor to MidAmerican Energy Holdings Company (Predecessor), or MEHC (Predecessor)), and its subsidiaries, which are herein collectively referred to as MEHC, as of December 31, 2002 and 2001 for MEHC, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2002 and 2001 for MEHC, for the period January 1, 2000 to March 13, 2000 for MEHC (Predecessor) and for the period March 14, 2000 to December 31, 2000 for MEHC, included in this prospectus, and the related financial statement schedules included elsewhere in the registration statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to MEHC's change in its accounting policy for goodwill and other intangible assets in 2002 and for major maintenance, overhaul, and well workover costs in 2001), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
With respect to the unaudited interim financial information for the periods ended March 31, 2003 and 2002, which is included in this prospectus, Deloitte & Touche LLP have applied limited procedures in accordance with professional standards for a review of such information. However, as stated in their report included herein, they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. Deloitte & Touche LLP are not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited interim financial information because this report is not a "report" or a "part" of the registration statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.
WHERE YOU CAN FIND MORE INFORMATION
We file reports and information statements and other information with the SEC. Such reports, proxy and information statements and other information filed by us with the SEC can be inspected and copied at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at Woolworth Building, 233 Broadway, New York, New York 10279 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a Web site that contains reports, proxy and information statements and other materials that are filed through the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. This Web site can be accessed athttp://www.sec.gov.
We make available free of charge through our internet website athttp://www.midamerican.com our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file with, or furnish it to, the SEC. Any information available on or through our website is not part of this prospectus and our web address is included as an inactive textual reference only.
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FINANCIAL STATEMENTS
Index to Financial Statements
| | | | | | |
| | | Page |
| Independent Accountant's Report | | | F-2 | |
| Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002 | | | F-3 | |
| Consolidated Statements of Operations for the three-month periods ended March 31, 2003 and 2002 (unaudited) | | | F-4 | |
| Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2003 and 2002 (unaudited) | | | F-5 | |
| Notes to Consolidated Financial Statements (unaudited) | | | F-6 | |
| Independent Auditors' Report | | | F-16 | |
| Consolidated Balance Sheets as of December 31, 2002 and 2001 | | | F-17 | |
| Consolidated Statements of Operations for the years ended December 31, 2002 and 2001 and for the periods from March 14, 2000 through December 31, 2000 and January 1, 2000 through March 13, 2000 | | | F-18 | |
| Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2002, 2001 and 2000 | | | F-19 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001 and for the periods from March 14, 2000 through December 31, 2000 and January 1, 2000 through March 13, 2000 | | | F-20 | |
| Notes to Consolidated Financial Statements | | | F-21 | |
|
F-1
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Holdings Company and subsidiaries (the "Company") as of March 31, 2003, and the related consolidated statements of operations and cash flows for the three-month periods ended March 31, 2003 and 2002. 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 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 Holdings Company and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2003, 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, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
May 8, 2003
F-2
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | | | | | | | | |
| | | As of |
| | | March 31,
2003 | | December 31,
2002 |
| | | (Unaudited) | |
| ASSETS |
| Current assets: | |
| Cash and cash equivalents | | $ | 852,868 | | | $ | 844,430 | |
| Restricted cash and short-term investments | | | 72,695 | | | | 50,808 | |
| Accounts receivable, net | | | 734,901 | | | | 707,731 | |
| Inventories | | | 62,326 | | | | 126,938 | |
| Other current assets | | | 238,454 | | | | 212,888 | |
| Total current assets | | | 1,961,244 | | | | 1,942,795 | |
| Properties, plants and equipment, net | | | 10,135,056 | | | | 9,898,796 | |
| Excess of cost over fair value of net assets acquired | | | 4,259,574 | | | | 4,258,132 | |
| Regulatory assets, net | | | 568,882 | | | | 415,804 | |
| Other investments | | | 444,679 | | | | 446,732 | |
| Equity investments | | | 278,755 | | | | 273,707 | |
| Deferred charges and other assets | | | 760,770 | | | | 780,489 | |
| Total assets | | $ | 18,408,960 | | | $ | 18,016,455 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| Current liabilities: | |
| Accounts payable | | $ | 418,367 | | | $ | 462,960 | |
| Accrued interest | | | 182,348 | | | | 192,015 | |
| Accrued taxes | | | 93,622 | | | | 75,097 | |
| Other accrued liabilities | | | 518,838 | | | | 457,058 | |
| Short-term debt | | | 70,932 | | | | 79,782 | |
| Current portion of long-term debt | | | 364,358 | | | | 470,213 | |
| Total current liabilities | | | 1,648,465 | | | | 1,737,125 | |
| Other long-term accrued liabilities | | | 1,275,554 | | | | 1,100,917 | |
| Parent company debt | | | 2,325,756 | | | | 2,324,456 | |
| Subsidiary and project debt | | | 7,231,794 | | | | 7,077,087 | |
| Deferred income taxes | | | 1,284,195 | | | | 1,238,421 | |
| Total liabilities | | | 13,765,764 | | | | 13,478,006 | |
| Deferred income | | | 77,695 | | | | 80,078 | |
| Minority interest | | | 6,533 | | | | 7,351 | |
| Company-obligated mandatorily redeemable preferred securities of subsidiary trusts | | | 2,063,935 | | | | 2,063,412 | |
| Preferred securities of subsidiaries | | | 93,028 | | | | 93,325 | |
| Commitments and contingencies (Note 6) | |
| Stockholders' equity: | |
| Zero-coupon convertible preferred stock — authorized 50,000 shares, no par value, 41,263 shares outstanding | | | — | | | | — | |
| Common stock — authorized 60,000 shares, no par value, 9,281 shares issued and outstanding | | | — | | | | — | |
| Additional paid-in capital | | | 1,956,509 | | | | 1,956,509 | |
| Retained earnings | | | 714,645 | | | | 584,009 | |
| Accumulated other comprehensive loss | | | (269,149 | ) | | | (246,235 | ) |
| Total stockholders' equity | | | 2,402,005 | | | | 2,294,283 | |
| Total liabilities and stockholders' equity | | $ | 18,408,960 | | | $ | 18,016,455 | |
|
The accompanying notes are an integral part of these financial statements.
F-3
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
| | | | | | | | | | |
| | | Three Months
Ended March 31, |
| | | 2003 | | 2002 |
| | | (Unaudited) |
| Revenue: | |
| Operating revenue | | $ | 1,562,834 | | | $ | 1,041,752 | |
| Income on equity investments | | | 7,455 | | | | 14,120 | |
| Interest and dividend income | | | 13,871 | | | | 8,355 | |
| Other income | | | 19,794 | | | | 5,350 | |
| Total revenue | | | 1,603,954 | | | | 1,069,577 | |
| Costs and expenses: | |
| Cost of sales | | | 672,750 | | | | 409,283 | |
| Operating expense | | | 356,493 | | | | 279,667 | |
| Depreciation and amortization | | | 141,849 | | | | 126,244 | |
| Interest expense | | | 186,845 | | | | 141,300 | |
| Capitalized interest | | | (15,532 | ) | | | (6,647 | ) |
| Total costs and expenses | | | 1,342,405 | | | | 949,847 | |
| Income before provision for income taxes | | | 261,549 | | | | 119,730 | |
| Provision for income taxes | | | 73,000 | | | | 29,130 | |
| Income before minority interest and preferred dividends | | | 188,549 | | | | 90,600 | |
| Minority interest and preferred dividends | | | 57,913 | | | | 25,851 | |
| Net income available to common and preferred stockholders | | $ | 130,636 | | | $ | 64,749 | |
|
The accompanying notes are an integral part of these financial statements.
F-4
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | |
| | | Three Months
Ended March 31, |
| | | 2003 | | 2002 |
| | | (Unaudited) |
| Cash flows from operating activities: | |
| Net income | | $ | 130,636 | | | $ | 64,749 | |
| Adjustments to reconcile net cash flows from operating activities: | |
| Income in excess of distributions on equity investments | | | (3,541 | ) | | | (11,745 | ) |
| Depreciation and amortization | | | 141,849 | | | | 126,244 | |
| Amortization of deferred financing costs | | | 9,555 | | | | 9,005 | |
| Amortization of regulatory assets and liabilities and other | | | (9,709 | ) | | | (1,656 | ) |
| Provision for deferred income taxes | | | 58,923 | | | | 4,797 | |
| Changes in other items: | |
| Accounts receivable, net | | | (20,651 | ) | | | (137,731 | ) |
| Other current assets | | | 53,018 | | | | 54,595 | |
| Accounts payable and other accrued liabilities | | | 14,896 | | | | 44,164 | |
| Accrued interest | | | (9,357 | ) | | | 28,551 | |
| Accrued taxes | | | 15,291 | | | | (15,560 | ) |
| Deferred income | | | (2,214 | ) | | | (492 | ) |
| Other | | | 7,097 | | | | 17,701 | |
| Net cash flows from operating activities | | | 385,793 | | | | 182,622 | |
| Cash flows from investing activities: | |
| Acquisitions, net of cash acquired | | | (36,575 | ) | | | (493,696 | ) |
| Purchase of convertible preferred securities | | | — | | | | (275,000 | ) |
| Capital expenditures relating to operating projects | | | (133,845 | ) | | | (95,673 | ) |
| Construction and other development costs | | | (244,033 | ) | | | (22,372 | ) |
| (Increase) decrease in restricted cash and investments | | | (603 | ) | | | 5,423 | |
| Other | | | (28,944 | ) | | | (5,372 | ) |
| Net cash flows from investing activities | | | (444,000 | ) | | | (886,690 | ) |
| Cash flows from financing activities: | |
| Proceeds from subsidiary and project debt | | | 287,572 | | | | 395,428 | |
| Proceeds from parent company debt | | | — | | | | 120,500 | |
| Repayments of subsidiary and project debt | | | (211,268 | ) | | | (11,092 | ) |
| Net repayment of subsidiary short-term debt | | | (8,850 | ) | | | (46,195 | ) |
| Proceeds from issuance of trust preferred securities | | | — | | | | 323,000 | |
| Proceeds from issuance of common and preferred stock | | | — | | | | 402,000 | |
| Redemption of preferred securities of subsidiaries | | | (294 | ) | | | (100,320 | ) |
| Increase in restricted cash | | | (21,887 | ) | | | (23,012 | ) |
| Other | | | 28,276 | | | | (31,113 | ) |
| Net cash flows from financing activities | | | 73,549 | | | | 1,029,196 | |
| Effect of exchange rate changes | | | (6,904 | ) | | | (6,394 | ) |
| Net increase in cash and cash equivalents | | | 8,438 | | | | 318,734 | |
| Cash and cash equivalents at beginning of period | | | 844,430 | | | | 386,745 | |
| Cash and cash equivalents at end of period | | $ | 852,868 | | | $ | 705,479 | |
| Supplemental Disclosure: | |
| Interest paid, net of interest capitalized | | $ | 172,181 | | | $ | 146,222 | |
| Income taxes paid | | $ | 280 | | | $ | 20,167 | |
|
The accompanying notes are an integral part of these financial statements.
F-5
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
In the opinion of management of MidAmerican Energy Holdings Company and subsidiaries ("MEHC" or the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of March 31, 2003, and the results of operations and cash flows for the three-month periods ended March 31, 2003 and 2002. The results of operations for the three-month period ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.
The unaudited consolidated financial statements include the accounts of MidAmerican Energy Holdings Company and its wholly and majority owned subsidiaries. Other investments and corporate joint ventures, where the Company has the ability to exercise significant influence, are accounted for under the equity method. Investments where the Company's ability to influence is limited are accounted for under the cost method of accounting.
Certain amounts in the prior year financial statements and supporting note disclosures have been reclassified to conform to the current year presentation. Such reclassification did not impact previously reported net income or retained earnings.
The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
2. New Accounting Pronouncements
Effective January 1, 2003 the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets. The cumulative effect of initially applying this statement was immaterial.
The Company's review of its regulated entities identified legal retirement obligations for nuclear decommissioning, wet and dry ash landfills and offshore and minor lateral pipeline facilities. On January 1, 2003, the Company recorded $289.3 million of asset retirement obligation ("ARO") liabilities; $13.9 million of ARO assets, net of accumulated depreciation; $114.6 million of regulatory assets; and reclassified $1.0 million of accumulated depreciation to the ARO liability. The initial ARO liability recognized includes $266.5 million that pertains to obligations associated with the decommissioning of the Quad Cities nuclear station. The $266.5 million includes a $159.8 million nuclear decommissioning liability that had been recorded at December 31, 2002. The adoption of this statement did not have a material impact on the operations of the regulated entities, as the effects were offset by the establishment of regulatory assets, totaling $114.6 million, pursuant to SFAS No. 71.
During the three-month period ended March 31, 2003, the Company recorded, as a regulatory asset, accretion related to the ARO liability of $4.2 million resulting in an ARO liability balance of $293.5 million at March 31, 2003.
On April 30, 2003, the Financial Accounting Standards Board issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends SFAS No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS 149 also amends certain other existing pronouncements. It will require contracts with comparable characteristics to be accounted for similarly. In particular, SFAS 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS 149 is effective for the Company for contracts entered into or modified after June 30, 2003. The Company and its subsidiaries are evaluating the impact of adopting the requirements of SFAS 149.
F-6
3. Properties, Plants and Equipment, Net
Properties, plants and equipment, net comprise the following (in thousands):
| | | | | | | | | | |
| | | March 31,
2003 | | December 31,
2002 |
| Properties, plants and equipment, net: | |
| Utility generation and distribution system | | $ | 8,226,590 | | | $ | 8,165,140 | |
| Interstate pipelines' assets | | | 2,291,482 | | | | 2,260,145 | |
| Independent power plants | | | 1,415,538 | | | | 1,410,170 | |
| Mineral and gas reserves and exploration assets | | | 508,062 | | | | 500,422 | |
| Utility non-operational assets | | | 381,269 | | | | 370,811 | |
| Other assets | | | 136,343 | | | | 131,577 | |
| Total operating assets | | | 12,959,284 | | | | 12,838,265 | |
| Accumulated depreciation and amortization | | | (4,261,446 | ) | | | (4,109,954 | ) |
| Net operating assets | | | 8,697,838 | | | | 8,728,311 | |
| Construction in progress | | | 1,437,218 | | | | 1,170,485 | |
| Properties, plants and equipment, net | | $ | 10,135,056 | | | $ | 9,898,796 | |
|
Construction in Progress
Kern River Gas Transmission Company ("Kern River") completed the construction of its 2003 Expansion Project at a total cost of approximately $1.2 billion. The expansion, which was placed into operation on May 1, 2003, increased the design capacity of the existing Kern River pipeline by 885,626 decatherms per day to 1,755,626 decatherms per day.
4. Investment in CE Generation
The equity investment in CE Generation LLC ("CE Generation") at March 31, 2003 and December 31, 2002 was approximately $247.4 million and $244.9 million, respectively. During the three-month period ended March 31, 2003 and 2002, the Company recorded income from its investment in CE Generation of $2.3 million and $7.2 million, respectively.
5. Debt Issuances and Redemptions
On January 14, 2003, MidAmerican Energy Company ("MidAmerican Energy") issued $275.0 million of 5.125% medium-term notes due in 2013. The proceeds were used to refinance existing debt and for other corporate purposes.
On May 1, 2003, Kern River Funding Corporation, a wholly owned subsidiary of Kern River, issued $836 million of its 4.893% Senior Notes with a final maturity on April 30, 2018. The proceeds were used to repay all of the approximately $815 million of outstanding borrowings under Kern River's $875 million credit facility. Kern River entered into this credit facility in 2002 to finance the construction of the 2003 Expansion Project. The credit facility was canceled and a completion guarantee issued by the Company in favor of the lenders as part of the credit facility terminated upon completion of the 2003 Expansion Project.
On April 23, 2003, Yorkshire Power Group Limited, a wholly owned subsidiary of MEHC, reported that it had authorized the redemption in full of the outstanding shares of the Yorkshire Capital Trust I, 8.08% Trust Securities, due June 30, 2038. The Trust Securities will be redeemed on June 9, 2003, at a redemption price of 100% of the principal amount ($25 liquidation amount per each Trust Security) plus accrued distributions of $0.381555555 per Trust Security to the redemption date. The redemption price will be paid to holders of the Trust Security on the redemption date. At March 31, 2003 and December 31, 2002, $250.5 million and $249.7 million, respectively, of the Trust Securities are included in subsidiary and project debt.
F-7
6. Commitments and Contingencies
Manufactured Gas Plants
The United States Environmental Protection Agency ("EPA") 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 that 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 21 sites, has conducted interim removal actions at 14 sites and has received regulatory closure on two 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 $16 million to $54 million. As of March 31, 2003, MidAmerican Energy has recorded a $21 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process. MidAmerican Energy projects that these amounts will be paid or incurred over the next four years.
The estimate of probable remediation costs is established on a site-specific basis. The costs are accumulated in a three-step process. First, a determination is made as to whether MidAmerican Energy has potential legal liability for the site and whether information exists to indicate that contaminated wastes remain at 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. 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. Insurance recoveries have been received for some of the sites under investigation. Those recoveries are intended to be used principally for accelerated remediation, as specified by the Iowa Utilities Board ("IUB"), and are recorded as a regulatory liability.
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.
Air Quality
In July 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout 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). The standards were subjected to legal proceedings, and in February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the EPA. As a result of a decision rendered by the United States Circuit Court of Appeals for the District of Columbia, the EPA is moving forward in implementation of the ozone and fine particulate standards and is analyzing existing monitored data to determine attainment status.
The impact of the new standards on MidAmerican Energy is currently unknown. MidAmerican Energy's generating stations may be subject to emission reductions if the stations are located in
F-8
nonattainment areas or contribute to nonattainment areas in other states. As part of state implementation plans to achieve attainment of the standards, MidAmerican Energy could be required to install control equipment on its generating stations or decrease the number of hours during which these stations operate.
The ozone and fine particulate matter standards could, in whole or in part, be superceded by one of a number of multi-pollutant emission reduction proposals currently under consideration at the federal level. In July 2002, legislation was introduced in Congress to implement the Administration's "Clear Skies Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen oxides and mercury through a cap-and-trade system. Reductions would begin in 2008 with additional emission reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or other multi-pollutant emission reduction initiatives to become effective, MidAmerican Energy has implemented a planning process that forecasts the site-specific controls and actions required to meet emissions reductions of this nature. On April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy filed with the IUB its first multi-year plan and budget for managing regulated emissions from its generating facilities in a cost-effective manner. MidAmerican Energy expects the IUB to rule on the prudence of the multi-year plan and budget in 2003.
In recent years, the EPA has requested from several utilities information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the New Source Review and the New Source Performance Standards of the Clean Air Act. In December 2002, MidAmerican Energy received a request from the EPA to provide documentation related to its capital projects from January 1, 1980, to the present for its Neal, Council Bluffs, Louisa and Riverside Energy Centers. MidAmerican Energy has responded to this request and at this time cannot predict the outcome of this request.
Nuclear Decommissioning Costs
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 $41 million during the period 2003 through 2007 to external trusts established for the investment of funds for decommissioning Quad Cities Station. Approximately 60% of the fair value of the trusts' funds is now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. Funding for Quad Cities Station nuclear decommissioning is reflected as depreciation expense in the Consolidated Statements of Income. 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.
Pipeline Litigation
In 1998, the United States Department of Justice informed the then current owners of Kern River and Northern Natural Gas Company ("Northern Natural Gas") that Jack Grynberg, an individual, had filed claims in the United States District Court for the District of Colorado under the False Claims Act against such entities and certain of their subsidiaries including Kern River and Northern Natural Gas. Mr. Grynberg has also filed claims against numerous other energy companies and alleges that the defendants violated the False Claims Act in connection with the measurement and purchase of hydrocarbons. The relief sought is an unspecified amount of royalties allegedly not paid to the federal government, treble damages, civil penalties, attorneys' fees and costs. On April 9, 1999, the United States Department of Justice announced that it declined to intervene in any of the Grynberg qui tam cases, including the actions filed against Kern River and Northern Natural Gas in the United States District Court for the District of Colorado. On October 21, 1999, the Panel on Multi-District
F-9
Litigation transferred the Grynberg qui tam cases, including the ones filed against Kern River and Northern Natural Gas, to the United States District Court for the District of Wyoming for pre-trial purposes. Motions to dismiss the complaint, filed by various defendants including Northern Natural Gas and The Williams Companies, Inc. ("Williams") which was the former owner of Kern River, were denied on May 18, 2001. On October 9, 2002, the United States District Court for the District of Wyoming dismissed Grynberg's Royalty Valuation Claims. On November 19, 2002, the Court denied Grynberg's motion for clarification dismissing royalty valuation claims. Grynberg has appealed this dismissal to the United States Court of Appeals for the Tenth Circuit. In connection with the purchase of Kern River from Williams in March 2002, Williams agreed to indemnify the Company against any liability for this claim; however, no assurance can be given as to the ability of Williams to perform on this indemnity should it become necessary. No such indemnification was obtained in connection with the purchase of Northern Natural Gas in August 2002. The Company believes that the Grynberg cases filed against Kern River and Northern Natural Gas are without merit and Williams, on behalf of Kern River pursuant to its indemnification, and Northern Natural Gas, intend to defend these actions vigorously.
On June 8, 2001, a number of interstate pipeline companies, including Kern River and Northern Natural Gas, were named as defendants in a nationwide class action lawsuit which had been pending in the 26th Judicial District, District Court, Stevens County Kansas, Civil Department against other defendants, generally pipeline and gathering companies, since May 20, 1999. The plaintiffs allege that the defendants have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs. In November 2001, Kern River and Northern Natural Gas, along with the coordinating defendants, filed a motion to dismiss under Rules 9B and 12B of the Kansas Rules of Civil Procedure. In January 2002, Kern River and most of the coordinating defendants filed a motion to dismiss for lack of personal jurisdiction. The court has yet to rule on these motions. The plaintiffs filed for certification of the plaintiff class on September 16, 2002. On January 13, 2003, oral arguments were heard on coordinating defendants' opposition to class certification. On April 10, 2003, the court entered an order denying the plaintiffs' motion for class certification. It is anticipated that the plaintiffs will appeal this decision. On April 10, 2003, the court entered an order denying the plaintiffs' motion for class certification. It is anticipated that the plaintiffs will appeal this decision. Williams has agreed to indemnify the Company against any liability associated with Kern River for this claim; however, no assurance can be given as to the ability of Williams to perform on this indemnity should it become necessary. Williams, on behalf of Kern River and other entities, anticipates joining with Northern Natural Gas and other defendants in contesting certification of the plaintiff class. Kern River and Northern Natural Gas believe that this claim is without merit and that Kern River's and Northern Natural Gas' gas measurement techniques have been in accordance with industry standards and its tariff.
Philippines
Casecnan Construction Contract
The CE Casecnan Water and Energy Company, Inc. ("CE Casecnan") Project (the "Casecnan Project") was initially constructed pursuant to a fixed-price, date-certain, turnkey construction contract (the "Hanbo Contract") on a joint and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. On May 7, 1997, CE Casecnan terminated the Hanbo Contract due to defaults by Hanbo and HECC including the insolvency of both companies. On the same date, CE Casecnan entered into a new fixed-price, date certain, turnkey engineering, procurement and construction contract to complete the construction of the Casecnan Project (the "Replacement Contract"). The work under the Replacement Contract was conducted by a consortium consisting of Cooperativa Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., (collectively, the "Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement Contract was amended to extend the Guaranteed Substantial Completion Date for the Casecnan Project to March 31, 2001. This amendment was approved by the lenders' independent engineer under the Trust Indenture.
F-10
On February 12, 2001, the Contractor filed a Request for Arbitration with the International Chamber of Commerce ("ICC") seeking schedule relief of up to 153 days through August 31, 2001 resulting from various alleged force majeure events. In its March 20, 2001 Supplement to Request for Arbitration, the Contractor also seeks compensation for alleged additional costs of approximately $4 million it incurred from the claimed force majeure events to the extent it is unable to recover from its insurer. On April 20, 2001, the Contractor filed a further supplement seeking an additional compensation for damages of approximately $62 million for the alleged force majeure event (and geologic conditions) related to the collapse of the surge shaft. The Contractor has alleged that the circumstances surrounding the placing of the Casecnan Project into commercial operation in December 2001 amounted to a repudiation of the Replacement Contract and has filed a claim for unspecified quantum meruit damages, and has further alleged that the delay liquidated damages clause which provides for payments of $125,000 per day for each day of delay in completion of the Casecnan Project for which the Contractor is responsible is unenforceable. The arbitration is being conducted applying New York law and pursuant to the rules of the ICC.
Hearings have been held in connection with this arbitration in July 2001, September 2001, January 2002, March 2002, November 2002 and January 2003. As part of those hearings, on June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from making calls on the demand guaranty posted by Banca di Roma in support of the Contractor's obligations to CE Casecnan for delay liquidated damages. As a result of the continuing nature of that injunction, on April 26, 2002, CE Casecnan and the Contractor mutually agreed that no demands would be made on the Banca di Roma demand guaranty except pursuant to an arbitration award. As of March 31, 2003, however, CE Casecnan has received approximately $6.0 million of liquidated damages from demands made on the demand guarantees posted by Commerzbank on behalf of the Contractor. On November 7, 2002, the ICC issued the arbitration tribunal's partial award with respect to the Contractor's force majeure and geologic conditions claims. The arbitration panel awarded the Contractor 18 days of schedule relief in the aggregate for all of the force majeure events and awarded the Contractor $3.8 million with respect to the cost of the collapsed surge shaft. The $3.8 million is shown as part of the accounts payable and accrued expenses balance at March 31, 2003 and December 31, 2002. All of the Contractor's other claims with respect to force majeure and geologic conditions were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the alleged unenforceability of the delay liquidated damages clause and certain other matters had been scheduled for March 24 through March 28, 2003, but were postponed as a result of the commencement of military action in Iraq. The hearings have been rescheduled for June 30 through July 11, 2003.
If the Contractor were to prevail on its claim that the delay liquidated damages clause is unenforceable, CE Casecnan would not be entitled to collect such delay damages for the period from March 31, 2001 through December 11, 2001. If the Contractor were to prevail in its repudiation claim and prove quantum meruit damages in excess of amounts paid to the Contractor, CE Casecnan could be liable to make additional payments to the Contractor. CE Casecnan believes all of such allegations and claims are without merit and is vigorously contesting the Contractor's claims.
Casecnan NIA Arbitration
Under the terms of the Project Agreement, the Philippines National Irrigation Administration ("NIA") has the option of timely reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an increase in the Water Delivery Fee. The payment of certain other taxes by CE Casecnan results automatically in an increase in the Water Delivery Fee. As of March 31, 2003, CE Casecnan has paid approximately $58.1 million in taxes, which as a result of the foregoing provisions results in an increase in the Water Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee each month, related to the payment of these taxes by CE Casecnan. As a result of this non-payment, on August 19, 2002, CE Casecnan filed a Request for Arbitration against NIA, seeking payment of such portion of the Water Delivery Fee and enforcement of the relevant provision of the Project Agreement going forward. The arbitration will be conducted in accordance with the rules of the ICC.
F-11
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA asserts, among other things, that most of the taxes which CE Casecnan has factored into the Water Delivery Fee compensation formula do not fall within the scope of the relevant section of the Project Agreement, that the compensation mechanism itself is invalid and unenforceable under Philippine law and that the Project Agreement is inconsistent with the Philippine build-operate-transfer ("BOT") law. As such, NIA seeks dismissal of CE Casecnan's claims and a declaration from the arbitral tribunal that the taxes which have been taken into account in the Water Delivery Fee compensation mechanism are not recoverable thereunder and that, at most, certain taxes may be directly reimbursed (rather than compensated for through the Water Delivery Fee) by NIA. NIA also counterclaims for approximately $7 million which it alleges is due to it as a result of the delayed completion of the Casecnan Project. On April 23, 2003, NIA filed a Supplemental Counterclaim in which it asserts that the Project Agreement is contrary to Philippine law and public policy and by way of relief seeks a declaration that the Project Agreement is void from the beginning or should be cancelled, or alternatively, an order for reformation of the Project Agreement or any portions or sections thereof which may be determined to be contrary to such law and or public policy. CE Casecnan intends to vigorously contest all of NIA's assertions and counterclaims.
The three member arbitration panel has been confirmed by the ICC and an initial organizational hearing was held on April 28, 2003. Hearings on this matter are scheduled for July 2004.
Included in revenue, for the three months ended March 31, 2003 and 2002, were $5.5 million and $5.8 million, respectively, of tax compensation for Water Delivery Fees under the Project Agreement, none of which has been paid. As of March 31, 2003 and December 31, 2002, the net receivable for the tax compensation piece of the Water Delivery Fees invoiced since the start of commercial operations totaled $29.8 million and $24.3 million, respectively.
Casecnan Stockholder Litigation
Pursuant to the share ownership adjustment mechanism in the CE Casecnan stockholder agreement, which is based upon pro forma financial projections of the Casecnan Project prepared following commencement of commercial operations, in February 2002, MEHC, through its indirect wholly owned subsidiary CE Casecnan Ltd., advised the minority stockholder LaPrairie Group Contractors (International) Ltd., ("LPG"), that MEHC's indirect ownership interest in CE Casecnan had increased to 100% effective from commencement of commercial operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the State of California, City and County of San Francisco against, inter alia, CE Casecnan Ltd. and MEHC. In the complaint, LPG seeks compensatory and punitive damages for alleged breaches of the stockholder agreement and alleged breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and MEHC to LPG. The complaint also seeks injunctive relief against all defendants and a declaratory judgment that LPG is entitled to maintain its 15% interest in CE Casecnan. The impact, if any, of this litigation on CE Casecnan cannot be determined at this time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San Lorenzo"), an original shareholder substantially all of whose shares in CE Casecnan MEHC purchased in 1998, threatened to initiate legal action in the Philippines in connection with certain aspects of its option to repurchase such shares on or prior to commercial operation of the Casecnan Project. CE Casecnan believes that San Lorenzo has no valid basis for any claim and, if named as a defendant in any action that may be commenced by San Lorenzo, will vigorously defend any such action.
Philippine Political Risks
In connection with an interagency review of approximately 40 independent power project contracts in the Philippines, the Casecnan Project (together with four other unrelated projects) has reportedly been identified as raising legal and financial questions and, with those projects, has been prioritized for renegotiation. The Company's subsidiaries' Upper Mahiao, Malitbog, and Mahanagdong projects have also reportedly been identified as raising financial questions. No written report has yet been issued with respect to the interagency review, and the timing and nature of steps, if any that the
F-12
Philippine Government may take in this regard are not known. Accordingly, it is not known what, if any, impact the government's review will have on the operations of the Company's Philippine Projects. CE Casecnan representatives, together with certain current and former government officials, also have been requested to appear, and have appeared during 2002, before a Philippine Senate committee which has raised questions and made allegations with respect to the Casecnan Project's tariff structure and implementation.
On May 5, 2003, the Philippine Supreme Court issued its ruling in a case involving an unsolicited BOT project for the development, construction and operation of the new Manila International Airport. Various members of Congress and labor unions initiated the action in the Philippine Supreme Court on September 17, 2002 seeking to enjoin the enforcement of the BOT agreement with an international consortium known as PIATCO (the "PIATCO Agreement"). The PIATCO Consortium is unrelated to CE Casecnan or the Company. On March 4, 2003, PIATCO separately initiated an ICC arbitration pursuant to the terms of the PIATCO Agreement. The Supreme Court, in its ruling, stated that there were no unresolved factual issues and therefore it had original jurisdiction and concluded that the pendency of the arbitration did not preclude the court from ruling on a case brought by non-parties to the PIATCO Agreement, such as members of the Philippine Congress or non-governmental organizations. In a public speech on November 29, 2002 prior to the December 10, 2002 oral arguments before the Philippine Supreme Court, Philippine President Arroyo stated that she would not honor the PIATCO Agreement because the executive branch's legal department had concluded it was "null and void". In light of that announcement, the project owners stopped work on the project, which is approximately 90% complete and accordingly has not been placed into commercial operation. In its 10 to 3 ruling (with one abstention) issued on May 5, 2003, the Philippine Supreme Court ruled that the PIATCO Agreement was contrary to Philippine law and public policy and was "null and void". CE Casecnan is assessing the impact of the PIATCO ruling on the Casecnan Project.
On April 24, 2003 Standard & Poor's Ratings Services ("S&P") lowered its rating of CE Casecnan to 'BB' from 'BB+' as a result of S&P's downgrade of the Republic of the Philippines. The downgrade of the Philippines by S&P reflected the Country's growing debt burden and fiscal rigidity.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior secured notes rating of CE Casecnan on review for possible downgrade, noting NIA's supplemental counterclaim seeking to have the Project Agreement declared void. Moody's noted that actions by government related agencies and the resulting instability of contractual arrangements was becoming inconsistent with their rating approach that attaches significant benefit to offtake arrangements with those government supported entities.
F-13
7. Comprehensive Income
The differences from net income to total comprehensive income for the Company are due to minimum pension liability adjustments, foreign currency translation adjustments, unrealized holding gains and losses of marketable securities during the periods, and the effective portion of net gains and losses of derivative instruments classified as cash flow hedges. Total comprehensive income for the Company is shown in the table below (in thousands).
| | | | | | | | | | |
| | | Three Months
Ended March 31, |
| | | 2003 | | 2002 |
| Net income | | $ | 130,636 | | | $ | 64,749 | |
| Other comprehensive income: | |
| Minimum pension liability adjustment, net of tax of $927 | | | 2,164 | | | | — | |
| Foreign currency translation | | | (30,171 | ) | | | (28,515 | ) |
| Marketable securities, net of tax of $(83) and $(1,116), respectively | | | (133 | ) | | | (2,158 | ) |
| Cash flow hedges, net of tax of $2,442 and $3,803, respectively | | | 5,226 | | | | 9,819 | |
| Total comprehensive income | | $ | 107,722 | | | $ | 43,895 | |
|
8. Segment Information
The Company has identified seven reportable operating segments based on management structure: MidAmerican Energy, Kern River, Northern Natural Gas, CE Electric UK Funding, Inc. ("CE Electric UK"), CalEnergy Generation-Domestic, CalEnergy Generation-Foreign, and HomeServices of America, Inc. ("HomeServices"). Information related to the Company's reportable operating segments is shown below (in thousands).
| | | | | | | | | | |
| | | Three Months
Ended March 31, |
| | | 2003 | | 2002 |
| Operating revenue: | |
| MidAmerican Energy | | $ | 815,916 | | | $ | 575,035 | |
| Kern River | | | 39,030 | | | | 2,198 | |
| Northern Natural Gas | | | 170,002 | | | | — | |
| CE Electric UK | | | 225,532 | | | | 213,957 | |
| CalEnergy Generation – Domestic | | | 11,233 | | | | 5,105 | |
| CalEnergy Generation – Foreign | | | 76,729 | | | | 74,085 | |
| HomeServices | | | 257,988 | | | | 174,566 | |
| Segment operating revenue | | | 1,596,430 | | | | 1,044,946 | |
| Corporate/other | | | (33,596 | ) | | | (3,194 | ) |
| Total operating revenue | | $ | 1,562,834 | | | $ | 1,041,752 | |
| Income (loss) before provision for income taxes: | |
| MidAmerican Energy | | $ | 89,892 | | | $ | 70,288 | |
| Kern River | | | 26,376 | | | | 971 | |
| Northern Natural Gas | | | 83,639 | | | | — | |
| CE Electric UK | | | 84,773 | | | | 60,967 | |
| CalEnergy Generation – Domestic | | | (5,858 | ) | | | (2,289 | ) |
| CalEnergy Generation – Foreign | | | 34,532 | | | | 30,693 | |
| HomeServices | | | 7,005 | | | | (129 | ) |
| Segment income before provision for income taxes | | | 320,359 | | | | 160,501 | |
| Corporate/other | | | (58,810 | ) | | | (40,771 | ) |
| Total income before provision for income taxes | | $ | 261,549 | | | $ | 119,730 | |
|
F-14
| | | | | | | | | | |
| | | March 31,
2003 | | December 31,
2002 |
| Total Assets: | |
| MidAmerican Energy | | $ | 6,327,397 | | | $ | 6,025,452 | |
| Kern River | | | 2,006,722 | | | | 1,797,850 | |
| Northern Natural Gas | | | 2,307,055 | | | | 2,162,367 | |
| CE Electric UK | | | 4,649,245 | | | | 4,714,459 | |
| CalEnergy Generation – Domestic | | | 892,019 | | | | 881,633 | |
| CalEnergy Generation – Foreign | | | 994,617 | | | | 974,852 | |
| HomeServices | | | 543,701 | | | | 488,324 | |
| Segment total assets | | | 17,720,756 | | | | 17,044,937 | |
| Corporate/other | | | 688,204 | | | | 971,518 | |
| Total assets | | $ | 18,408,960 | | | $ | 18,016,455 | |
|
The remaining differences from the segment amounts to the consolidated amounts described as "Corporate/other" relate principally to the corporate functions including administrative costs, corporate cash and related interest income, intersegment eliminations, and fair value adjustments relating to acquisitions. Total assets by segment includes the allocation of goodwill.
Excess of cost over fair value as of December 31, 2002 and changes for the period from January 1, 2003 through March 31, 2003 by segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | MidAmerican
Energy | | Kern
River | | Northern
Natural
Gas | | CE Electric
UK | | CalEnergy
Generation-
Domestic | | Home-
Services | | Total |
| Goodwill at December 31, 2002 | | $ | 2,149,282 | | | $ | 32,547 | | | $ | 414,721 | | | $ | 1,195,321 | | | $ | 126,440 | | | $ | 339,821 | | | $ | 4,258,132 | |
| Acquisitions/purchase price accounting adjustments | | | — | | | | 1,353 | | | | (619 | ) | | | — | | | | — | | | | 15,747 | | | | 16,481 | |
| Translation adjustment | | | — | | | | — | | | | — | | | | (15,039 | ) | | | — | | | | — | | | | (15,039 | ) |
| Goodwill at March 31, 2003 | | $ | 2,149,282 | | | $ | 33,900 | | | $ | 414,102 | | | $ | 1,180,282 | | | $ | 126,440 | | | $ | 355,568 | | | $ | 4,259,574 | |
|
F-15
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have audited the accompanying consolidated balance sheets of MidAmerican Energy Holdings Company (successor to MidAmerican Energy Holdings Company (Predecessor), referred to as "MEHC (Predecessor)") and subsidiaries (the "Company") as of December 31, 2002 and 2001 for the Company, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2002 and 2001 for the Company, for the period January 1, 2000 to March 13, 2000 for MEHC (Predecessor), and for the period March 14, 2000 to December 31, 2000 for the Company. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the above stated periods in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its accounting policy for goodwill and other intangible assets and in 2001 the Company changed is accounting policy for major maintenance, overhaul and well workover costs.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
January 24, 2003
F-16
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
| | | | | | | | | | |
| | | As of December 31, |
| | | 2002 | | 2001 |
| ASSETS |
| Current assets: | |
| Cash and cash equivalents | | $ | 844,430 | | | $ | 386,745 | |
| Restricted cash and short-term investments | | | 50,808 | | | | 30,565 | |
Accounts receivable, net of allowance for doubtful accounts of
$39,742 and $7,319 | | | 707,731 | | | | 310,030 | |
| Inventories | | | 126,938 | | | | 135,822 | |
| Other current assets | | | 212,888 | | | | 106,124 | |
| Total current assets | | | 1,942,795 | | | | 969,286 | |
| Properties, plants and equipment, net | | | 9,810,087 | | | | 6,537,371 | |
| Excess of cost over fair value of net assets acquired | | | 4,258,132 | | | | 3,638,546 | |
| Regulatory assets | | | 504,513 | | | | 221,120 | |
| Other investments | | | 446,732 | | | | 174,185 | |
| Equity investments | | | 273,707 | | | | 261,432 | |
| Deferred charges and other assets | | | 780,489 | | | | 824,712 | |
| Total assets | | $ | 18,016,455 | | | $ | 12,626,652 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| Current liabilities: | |
| Accounts payable | | $ | 462,960 | | | $ | 266,027 | |
| Accrued interest | | | 192,015 | | | | 130,569 | |
| Accrued taxes | | | 75,097 | | | | 88,973 | |
| Other accrued liabilities | | | 457,058 | | | | 308,924 | |
| Short-term debt | | | 79,782 | | | | 256,012 | |
| Current portion of long-term debt | | | 470,213 | | | | 317,180 | |
| Total current liabilities | | | 1,737,125 | | | | 1,367,685 | |
| Other long-term accrued liabilities | | | 1,100,917 | | | | 537,495 | |
| Parent company debt | | | 2,324,456 | | | | 1,834,498 | |
| Subsidiary and project debt | | | 7,077,087 | | | | 4,754,811 | |
| Deferred income taxes | | | 1,238,421 | | | | 1,284,268 | |
| Total liabilities | | | 13,478,006 | | | | 9,778,757 | |
| Deferred income | | | 80,078 | | | | 85,917 | |
| Minority interest | | | 7,351 | | | | 44,477 | |
| Company-obligated mandatorily redeemable preferred securities of subsidiary trusts | | | 2,063,412 | | | | 788,151 | |
| Subsidiary-obligated mandatorily redeemable preferred securities of subsidiary trusts | | | — | | | | 100,000 | |
| Preferred securities of subsidiaries | | | 93,325 | | | | 121,183 | |
| Commitments and contingencies (Note 20) | |
| Stockholders' equity: | |
| Zero coupon convertible preferred stock – authorized 50,000 shares, no par value, 41,263 and 34,563 shares outstanding at December 31, 2002 and 2001, respectively | | | — | | | | — | |
| Common stock — authorized 60,000 no par value; 9,281 shares issued and outstanding at December 31, 2002 and 2001 | | | — | | | | — | |
| Additional paid-in capital | | | 1,956,509 | | | | 1,553,073 | |
| Retained earnings | | | 584,009 | | | | 223,926 | |
| Accumulated other comprehensive loss, net | | | (246,235 | ) | | | (68,832 | ) |
| Total stockholders' equity | | | 2,294,283 | | | | 1,708,167 | |
| Total liabilities and stockholders' equity | | $ | 18,016,455 | | | $ | 12,626,652 | |
|
The accompanying notes are an integral part of these financial statements.
F-17
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Revenue: | |
| Operating revenue | | $ | 4,794,010 | | | $ | 4,696,781 | | | $ | 3,918,100 | | | $ | 1,056,365 | |
| Income on equity investments | | | 40,520 | | | | 39,565 | | | | 40,019 | | | | 3,497 | |
| Interest and dividend income | | | 56,250 | | | | 24,552 | | | | 25,320 | | | | 8,080 | |
| Other income | | | 77,359 | | | | 212,082 | | | | 29,543 | | | | 7,907 | |
| Total revenue | | | 4,968,139 | | | | 4,972,980 | | | | 4,012,982 | | | | 1,075,849 | |
| Costs and expenses: | |
| Cost of sales | | | 1,844,024 | | | | 2,341,178 | | | | 2,194,512 | | | | 574,679 | |
| Operating expense | | | 1,345,205 | | | | 1,176,422 | | | | 904,511 | | | | 226,908 | |
| Depreciation and amortization | | | 525,902 | | | | 538,702 | | | | 383,351 | | | | 97,278 | |
| Interest expense | | | 647,379 | | | | 499,263 | | | | 396,773 | | | | 101,330 | |
| Less interest capitalized | | | (37,469 | ) | | | (86,469 | ) | | | (85,369 | ) | | | (15,516 | ) |
| Total costs and expenses | | | 4,325,041 | | | | 4,469,096 | | | | 3,793,778 | | | | 984,679 | |
| Income before provision for income taxes | | | 643,098 | | | | 503,884 | | | | 219,204 | | | | 91,170 | |
| Provision for income taxes | | | 99,588 | | | | 250,064 | | | | 53,277 | | | | 31,008 | |
| Income before minority interest and preferred dividends | | | 543,510 | | | | 253,820 | | | | 165,927 | | | | 60,162 | |
| Minority interest and preferred dividends | | | 163,467 | | | | 106,547 | | | | 84,670 | | | | 8,850 | |
| Income before cumulative effect of change in accounting principle | | | 380,043 | | | | 147,273 | | | | 81,257 | | | | 51,312 | |
| Cumulative effect of change in accounting principle, net of tax (Note 2) | | | — | | | | (4,604 | ) | | | — | | | | — | |
| Net income available to common and preferred stockholders | | $ | 380,043 | | | $ | 142,669 | | | $ | 81,257 | | | $ | 51,312 | |
|
The accompanying notes are an integral part of these financial statements.
F-18
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding
Common
Shares | | Common
Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury
Stock | | Total |
| Balance, January 1, 2000 | | | 59,944 | | | $ | — | | | $ | 1,249,079 | | | $ | 507,726 | | | $ | (12,029 | ) | | $ | (750,188 | ) | | $ | 994,588 | |
| Net income January 1, 2000 through March 13, 2000 | | | — | | | | — | | | | — | | | | 51,312 | | | | — | | | | — | | | | 51,312 | |
| Net income March 14, 2000 through December 31, 2000 | | | — | | | | — | | | | — | | | | 81,257 | | | | — | | | | — | | | | 81,257 | |
| Other comprehensive income: | |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (82,996 | ) | | | — | | | | (82,996 | ) |
| Minimum pension liability adjustment, net of tax of $1,699 | | | — | | | | — | | | | — | | | | — | | | | (2,388 | ) | | | — | | | | (2,388 | ) |
| Unrealized gains on securities, net of tax of $1,164 | | | — | | | | — | | | | — | | | | — | | | | 2,160 | | | | — | | | | 2,160 | |
| Total other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 49,345 | |
| Exercise of stock options and other equity transactions | | | 13 | | | | — | | | | (138 | ) | | | — | | | | — | | | | 418 | | | | 280 | |
| Teton Transaction | | | (50,676 | ) | | | — | | | | 304,132 | | | | (559,038 | ) | | | 37,324 | | | | 749,770 | | | | 532,188 | |
| Balance, December 31, 2000 | | | 9,281 | | | | — | | | | 1,553,073 | | | | 81,257 | | | | (57,929 | ) | | | — | | | | 1,576,401 | |
| Net income | | | — | | | | — | | | | — | | | | 142,669 | | | | — | | | | — | | | | 142,669 | |
| Other comprehensive income: | |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (22,103 | ) | | | — | | | | (22,103 | ) |
| Fair value adjustment on cash flow hedges, net of tax of $8,143 | | | — | | | | — | | | | — | | | | — | | | | 18,490 | | | | — | | | | 18,490 | |
| Minimum pension liability adjustment, net of tax of $3,448 | | | — | | | | — | | | | — | | | | — | | | | (4,847 | ) | | | — | | | | (4,847 | ) |
| Unrealized losses on securities, net of tax of $1,315 | | | — | | | | — | | | | — | | | | — | | | | (2,443 | ) | | | — | | | | (2,443 | ) |
| Total other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 131,766 | |
| Balance, December 31, 2001 | | | 9,281 | | | | — | | | | 1,553,073 | | | | 223,926 | | | | (68,832 | ) | | | — | | | | 1,708,167 | |
| Net income | | | — | | | | — | | | | — | | | | 380,043 | | | | — | | | | — | | | | 380,043 | |
| Other comprehensive income: | |
| Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 166,880 | | | | — | | | | 166,880 | |
| Fair value adjustment on cash flow hedges, net of tax of $10,106 | | | — | | | | — | | | | — | | | | — | | | | (27,623 | ) | | | — | | | | (27,623 | ) |
| Minimum pension liability adjustment, net of tax of $135,707 | | | — | | | | — | | | | — | | | | — | | | | (313,456 | ) | | | — | | | | (313,456 | ) |
| Unrealized losses on securities, net of tax of $1,813 | | | — | | | | — | | | | — | | | | — | | | | (3,204 | ) | | | — | | | | (3,204 | ) |
| Total other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 202,640 | |
| Issuance of zero-coupon convertible preferred stock | | | — | | | | — | | | | 402,000 | | | | — | | | | — | | | | — | | | | 402,000 | |
| Retirement of stock options | | | — | | | | — | | | | 815 | | | | (19,960 | ) | | | — | | | | — | | | | (19,145 | ) |
| Other equity transactions | | | — | | | | — | | | | 621 | | | | — | | | | — | | | | — | | | | 621 | |
| Balance, December 31, 2002 | | | 9,281 | | | $ | — | | | $ | 1,956,509 | | | $ | 584,009 | | | $ | (246,235 | ) | | $ | — | | | $ | 2,294,283 | |
|
The accompanying notes are an integral part of these financial statements.
F-19
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Cash flows from operating activities: | |
| Net income | | $ | 380,043 | | | $ | 142,669 | | | $ | 81,257 | | | $ | 51,312 | |
| Adjustments to reconcile net cash flows from operating activities: | |
| Income in excess of distributions on equity investments | | | (11,383 | ) | | | (28,515 | ) | | | (26,607 | ) | | | (3,459 | ) |
| Gains on non-recurring items | | | (25,329 | ) | | | (179,493 | ) | | | — | | | | — | |
| Depreciation and amortization | | | 525,902 | | | | 442,284 | | | | 303,354 | | | | 83,097 | |
Amortization of excess of cost over fair value
of net assets acquired | | | — | | | | 96,418 | | | | 79,997 | | | | 14,181 | |
Amortization of deferred financing and
other costs | | | 46,132 | | | | 20,529 | | | | 18,310 | | | | 4,075 | |
| Provision for deferred income taxes | | | (16,228 | ) | | | 152,920 | | | | (15,460 | ) | | | 7,735 | |
| Cumulative effect of change in accounting principle, net of tax | | | — | | | | 4,604 | | | | — | | | | — | |
| Changes in other items: | |
| Accounts receivable, net | | | (244,829 | ) | | | 639,868 | | | | (333,277 | ) | | | (11,769 | ) |
| Other current assets | | | 42,552 | | | | (20,041 | ) | | | 16,990 | | | | 12,209 | |
| Accounts payable and other accrued liabilities | | | 36,083 | | | | (424,374 | ) | | | 124,030 | | | | (21,242 | ) |
| Accrued interest | | | 68,924 | | | | (1,683 | ) | | | (19,892 | ) | | | 35,701 | |
| Accrued taxes | | | (39,302 | ) | | | (4,616 | ) | | | 7,238 | | | | (4,270 | ) |
| Deferred income | | | (4,839 | ) | | | 6,428 | | | | 10,467 | | | | 3,513 | |
| Net cash flows from operating activities | | | 757,726 | | | | 846,998 | | | | 246,407 | | | | 171,083 | |
| Cash flows from investing activities: | |
| Acquisitions, net of cash acquired | | | (1,416,937 | ) | | | (81,934 | ) | | | (2,048,266 | ) | | | — | |
| Purchase of convertible preferred securities | | | (275,000 | ) | | | — | | | | — | | | | — | |
| Capital expenditures relating to operating projects | | | (542,615 | ) | | | (398,165 | ) | | | (301,948 | ) | | | (44,355 | ) |
| Construction and other development costs | | | (965,470 | ) | | | (178,587 | ) | | | (236,781 | ) | | | (79,186 | ) |
| Proceeds from sale of assets | | | 214,070 | | | | 377,396 | | | | — | | | | — | |
| Decrease in restricted cash and investments | | | 16,351 | | | | 24,540 | | | | 157,905 | | | | 48,788 | |
| Other | | | 61,790 | | | | 18,206 | | | | 39,930 | | | | 19,879 | |
| Net cash flows from investing activities | | | (2,907,811 | ) | | | (238,544 | ) | | | (2,389,160 | ) | | | (54,874 | ) |
| Cash flows from financing activities: | |
| Proceeds from subsidiary and project debt | | | 1,485,349 | | | | 200,000 | | | | 262,176 | | | | 6,043 | |
| Proceeds from parent company debt | | | 700,000 | | | | — | | | | — | | | | — | |
| Repayments of subsidiary and project debt | | | (395,370 | ) | | | (437,372 | ) | | | (234,776 | ) | | | (3,135 | ) |
| Net proceeds from (repayment of) corporate revolver | | | (153,500 | ) | | | 68,500 | | | | 85,000 | | | | — | |
| Repayment of other obligations | | | (94,297 | ) | | | — | | | | (4,225 | ) | | | — | |
| Net repayment of subsidiary short-term debt | | | (472,835 | ) | | | (74,144 | ) | | | (88,106 | ) | | | (124,761 | ) |
| Proceeds from issuance of trust preferred securities | | | 1,273,000 | | | | — | | | | 454,772 | | | | — | |
Proceeds from issuance of common and
preferred stock | | | 402,000 | | | | — | | | | 1,428,024 | | | | — | |
| Redemption of preferred securities of subsidiaries | | | (127,908 | ) | | | (24,910 | ) | | | (20,409 | ) | | | — | |
| Other | | | (61,205 | ) | | | 9,459 | | | | (3,607 | ) | | | (6,648 | ) |
| Net cash flows from financing activities | | | 2,555,234 | | | | (258,467 | ) | | | 1,878,849 | | | | (128,501 | ) |
| Effect of exchange rate changes | | | 52,536 | | | | (1,394 | ) | | | (1,555 | ) | | | (424 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 457,685 | | | | 348,593 | | | | (265,459 | ) | | | (12,716 | ) |
| Cash and cash equivalents at beginning of period | | | 386,745 | | | | 38,152 | | | | 303,611 | | | | 316,327 | |
| Cash and cash equivalents at end of period | | $ | 844,430 | | | $ | 386,745 | | | $ | 38,152 | | | $ | 303,611 | |
| Supplemental Disclosure: | |
| Interest paid, net of interest capitalized | | $ | 588,972 | | | $ | 389,953 | | | $ | 351,532 | | | $ | 35,057 | |
| Income taxes paid | | $ | 101,225 | | | $ | 133,139 | | | $ | 94,405 | | | $ | — | |
|
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations
MidAmerican Energy Holdings Company and its subsidiaries (the "Company" or "MEHC") is a United States-based privately owned global energy company. The Company's subsidiaries' principal businesses are regulated electric and natural gas utilities, regulated interstate natural gas transmission and electric power generation. Its operations are organized and managed on seven distinct platforms: MidAmerican Energy Company ("MidAmerican Energy"), Kern River Gas Transmission Company ("Kern River"), Northern Natural Gas Company ("Northern Natural Gas"), CE Electric UK Funding ("CE Electric UK") (which includes Northern Electric plc ("Northern Electric") and Yorkshire Power Group Ltd. ("Yorkshire")), CalEnergy Generation – Domestic, CalEnergy Generation-Foreign (the Upper Mahiao, Malitbog and Mahanagdong Projects (collectively the "Leyte Projects") and the Casecnan Project) and HomeServices of America, Inc. ("HomeServices"). Through six of these platforms, the Company owns and operates a combined electric and natural gas utility company in the United States, two natural gas pipeline companies in the United States, two electricity distribution companies in the United Kingdom, and a diversified portfolio of domestic and international independent power projects. The Company also owns the second largest residential real estate brokerage firm in the United States.
On March 14, 2000, the Company and an investor group comprised of Berkshire Hathaway Inc., Walter Scott, Jr., a director of the Company, David L. Sokol, Chairman and Chief Executive Officer of the Company, and Gregory E. Abel, President and Chief Operating Officer of the Company, closed on a definitive agreement and plan of merger whereby the investor group acquired all of the outstanding common stock of the Company (the "Teton Transaction"). As a result of the Teton Transaction, Berkshire Hathaway, Mr. Scott, Mr. Sokol and Mr. Abel own approximately 9.7%, 86%, 3% and 1% of the voting stock respectively.
The Company initially incorporated in 1971 under the laws of the State of Delaware and was reincorporated in 1999 in Iowa, at which time it changed its name from CalEnergy Company, Inc. to MidAmerican Energy Holdings Company.
In these notes to consolidated financial statements, references to "U.S. dollars," "dollars," "US $," "$" or "cents" are to the currency of the United States and references to "pounds sterling," "pounds," "sterling," "pence" or "p" are to the currency of the United Kingdom. References to MW means megawatts, MWh means megawatt hours, Bcf means billion cubic feet, mmcf means million cubic feet, GWh means gigawatts per hour, kV means 1000 volts, Tcf means trillion cubic feet, kWh means kilowatt hours and MMBtus means million British thermal units.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Subsidiaries which are less than 100% owned but greater than 50% owned are consolidated with a minority interest. Subsidiaries that are 50% owned or less, but where the Company has the ability to exercise significant influence, are accounted for under the equity method of accounting. Investments where the Company's ability to influence is limited are accounted for under the cost method of accounting. All significant inter-enterprise transactions and accounts have been eliminated. The results of operations of the Company include the Company's proportionate share of results of operations of entities acquired from the date of each acquisition for purchase business combinations.
For the Company's foreign operations whose functional currency is not the U.S. dollar, the assets and liabilities are translated into U.S. dollars at current exchange rates. Resulting translation adjustments are reflected as accumulated other comprehensive income (loss) in stockholders' equity. Revenue and expenses are translated at average exchange rates for the period. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment position, are included in the results of operations as incurred.
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Reclassifications
Certain amounts in the fiscal 2001 and 2000 consolidated financial statements and supporting note disclosures have been reclassified to conform to the fiscal 2002 presentation. Such reclassification did not impact previously reported net income or retained earnings.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Accounting for the Effects of Certain Types of Regulation
MidAmerican Energy, Kern River and Northern Natural Gas prepare their financial statements in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71 ("SFAS 71"), which differs in certain respects from the application of generally accepted accounting principles by non-regulated businesses. In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated utility is required to defer the recognition of costs (a regulatory asset) or the recognition of obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, MidAmerican Energy, Kern River and Northern Natural Gas have deferred certain costs, which will be amortized over various future periods. To the extent that collection of such costs or payment of such obligations is no longer probable as a result of changes in regulation, the associated regulatory asset or liability is charged or credited to income.
A possible consequence of deregulation of the regulated energy industry is that SFAS 71 may no longer apply. If portions of the Company's subsidiaries' regulated energy operations no longer meet the criteria of SFAS 71, the Company 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 or liabilities are not recovered in transition provisions of any deregulation legislation.
The Company continues to evaluate the applicability of SFAS 71 to its regulated energy operations and the recoverability of these assets and liabilities through rates as there are on-going changes in the regulatory and economic environment.
Cash and Cash Equivalents
The Company considers all investment instruments purchased with an original maturity of three months or less to be cash equivalents. Investments other than restricted cash are primarily commercial paper and money market securities. Restricted cash is not considered a cash equivalent.
Restricted Cash and Investments
The current restricted cash and short-term investments balance includes commercial paper and money market securities, and is mainly composed of amounts deposited in restricted accounts from which the Company will source its debt service reserve requirements relating to the projects. These funds are restricted by their respective project debt agreements to be used only for the related project.
The Company's nuclear decommissioning trust funds and other marketable securities are classified as available for sale and are accounted for at fair value.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company's assessment of the collectibility of payments from its customers. This assessment requires judgment regarding the outcome of pending disputes, arbitrations and the ability of customers to pay the amounts owed to the Company. Any change in the Company's assessment of the collectibility of accounts receivable that was not previously provided is recorded in the current period.
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Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. Therefore, the fair value estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Short-term debt – Due to the short-term nature of the short-term debt, the fair value approximates the carrying value.
Debt instruments – The fair value of all debt issues listed on exchanges has been estimated based on the quoted market prices. The Company is unable to estimate a fair value for the Philippine term loans as there are no quoted market prices available.
Other financial instruments – All other financial instruments of a material nature are short-term and the fair value approximates the carrying amount.
Properties, Plants and Equipment, Net
Properties, plants and equipment are recorded at historical cost. The cost of major additions and betterments are capitalized, while replacements, maintenance, and repairs that do not improve or extend the lives of the respective assets are expensed.
Capitalized costs for gas reserves, other than costs of unevaluated exploration projects and projects awaiting development consent, are depleted using the units of production method. Depletion is calculated based on hydrocarbon reserves of properties in the evaluated pool estimated to be commercially recoverable and include anticipated future development costs in respect of those reserves.
Impairment of Long-Lived Assets
The Company's long-lived assets consist primarily of properties, plants and equipment. Depreciation is computed using the straight-line method based on economic lives or regulatory mandated recovery periods. The Company believes the useful lives assigned to the depreciable assets, which generally range from 3 to 87 years, are reasonable.
The Company periodically evaluates long-lived assets, including properties, plants and equipment, when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Upon the occurrence of a triggering event, the carrying amount of a long-lived asset is reviewed to assess whether the recoverable amount has declined below its carrying amount. The recoverable amount is the estimated net future cash flows that the Company expects to recover from the future use of the asset, undiscounted and without interest, plus the asset's residual value on disposal. Where the recoverable amount of the long-lived asset is less than the carrying value, an impairment loss would be recognized to write down the asset to its fair value that is based on discounted estimated cash flows from the future use of the asset.
The estimate of cash flows arising from future use of the asset that are used in the impairment analysis requires judgment regarding what the Company would expect to recover from future use of the asset. Any changes in the estimates of cash flows arising from future use of the asset or the residual value of the asset on disposal based on changes in the market conditions, changes in the use of the asset, management's plans, the determination of the useful life of the asset and technology changes in the industry could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss, which could significantly affect the results of operations. The determination of whether impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets. An impairment analysis of generating facilities requires estimates of possible future market prices, load growth, competition and many other factors over the lives of the facilities. A resulting impairment loss is highly dependent on these underlying assumptions.
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Excess of Cost over Fair Value of Net Assets Acquired
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes the accounting for acquired goodwill and other intangible assets, and provides that goodwill and indefinite-lived intangible assets will not be amortized, but will be tested for impairment on an annual basis. The Company's related amortization consisted primarily of goodwill amortization. Following is a reconciliation of net income available to common and preferred stockholders as originally reported for the years ended December 31, 2002 and 2001 and for the periods from March 14, 2000 through December 31, 2000 and January 1, 2000 through March 13, 2000, to adjusted net income available to common and preferred stockholders (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Reported net income available to common and preferred stockholders | | $ | 380,043 | | | $ | 142,669 | | | $ | 81,257 | | | $ | 51,312 | |
| Amortization of excess of cost over fair value of net assets acquired | | | — | | | | 96,418 | | | | 79,997 | | | | 14,181 | |
| Tax effect of amortization | | | — | | | | (2,018 | ) | | | (1,413 | ) | | | (372 | ) |
| Adjusted net income available to common and preferred stockholders | | $ | 380,043 | | | $ | 237,069 | | | $ | 159,841 | | | $ | 65,121 | |
|
The Company completed its initial review pursuant to SFAS No. 142 for its reporting units during the second quarter of 2002 and its annual review during the fourth quarter of 2002. No impairment was indicated as a result of these assessments.
Capitalization of Interest and Allowance for Funds Used During Construction
Allowance for funds used during construction ("AFUDC") represents the approximate net composite interest cost of borrowed funds and a reasonable return on the equity funds used for construction. Although AFUDC increases both utility plant and earnings, it is realized in cash through depreciation provisions included in rates for subsidiaries that apply SFAS 71. Interest and AFUDC for subsidiaries that apply SFAS 71 are capitalized as a component of projects under construction and will be amortized over the assets' estimated useful lives.
Deferred Financing Costs
The Company capitalizes costs associated with financings, as deferred financing costs, and amortizes the amounts over the term of the related financing using the effective interest method.
Contingent Liabilities
The Company establishes reserves for estimated loss contingencies when it is management's assessment that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in operations in the period in which different facts or information become known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon management's assumptions and estimates, and advice of legal counsel or other third parties regarding the probable outcomes of any matters. Should the outcomes differ from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required.
Deferred Income Taxes
The Company recognizes deferred tax assets and liabilities based on the difference between the financial statement and tax basis of assets and liabilities using estimated tax rates in effect for the year in which the differences are expected to reverse. The Company does not intend to repatriate earnings of foreign subsidiaries in the foreseeable future. As a result, deferred United States income taxes are not provided for retained earnings of international subsidiaries and corporate joint ventures unless the earnings are intended to be remitted.
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Revenue Recognition
Revenue is recorded based upon services rendered and electricity, gas and steam delivered, distributed or supplied to the end of the period. The Company records unbilled revenue representing the estimated amounts customers will be billed for services rendered between the meter reading dates in a particular month and the end of that month. The unbilled revenue estimate is reversed in the following month. To the extent the estimated amount differs from the actual amount subsequently billed, revenue will be affected.
Where there is an over recovery of United Kingdom distribution business revenue against the maximum regulated amount, revenue is deferred in an amount equivalent to the over recovered amount. The deferred amount is deducted from revenue and included in other liabilities. Where there is an under recovery, no anticipation of any potential future recovery is made.
Revenue from the transportation and storage of gas are recognized based on contractual terms and the related volumes. Kern River and Northern Natural Gas are subject to the FERC's regulations and, accordingly, certain revenue collected may be subject to possible refunds upon final orders in pending rate cases. Kern River and Northern Natural Gas record rate refund liabilities considering their regulatory proceedings and other third party regulatory proceedings, advice of counsel and estimated total exposure, as discounted and risk weighted, as well as collection and other risks.
Commission revenue from real estate brokerage transactions and related amounts due to agents are recognized when title has transferred from seller to buyer. Title fee revenue from real estate transactions and related amounts due to the title insurer are recognized at the closing, which is when consideration is received. Fees related to loan originations are recognized at the closing, which is when services have been provided and consideration is received.
Financial Instruments
The Company currently utilizes swap agreements and forward purchase agreements to manage market risks and reduce its exposure resulting from fluctuation in interest rates, foreign currency exchange rates and electric and gas prices. For interest rate swap agreements, the net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. Gains and losses related to gas forward contracts are deferred and included in the measurement of the related gas purchases. These instruments are either exchange traded or with counterparties of high credit quality; therefore, the risk of nonperformance by the counterparties is considered to be negligible.
Accounting Principle Change
Effective January 1, 2001, the Company has changed its accounting policy regarding major maintenance and repairs for non-regulated gas projects, non-regulated plant overhaul costs and geothermal well rework costs to the direct expense method from the former policy of monthly accruals based on long-term scheduled maintenance plans for the gas projects and deferral and amortization of plant overhaul costs and geothermal well rework costs over the estimated useful lives. The cumulative effect of the change in accounting principle was $4.6 million, net of taxes of $0.7 million. If the Company had adopted the policy as of January 1, 2000, income before extraordinary item and cumulative effect of change in accounting principle would have been $6.3 million lower in 2000 on a pro forma basis.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Company has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the liability. Cumulative accretion and accumulated depreciation will be recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. The cumulative effect of initially applying this statement is recognized as a change in
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accounting principle. The Company and its unconsolidated subsidiary used an expected cash flow approach to measure the obligations and adopted the statement as of January 1, 2003.
The Company's initial review of its regulated entities identified legal retirement obligations for nuclear decommissioning, wet and dry ash landfills and offshore and minor lateral pipeline facilities. The Company expects to record approximately $290.0 million of asset retirement obligation liabilities, approximately $265.0 million of which pertains to obligations associated with the decommissioning of the Quad Cities nuclear station. The adoption of this statement is not expected to have a material impact on the operations of the regulated entities, as the effects are expected to be offset by the establishment of regulatory assets, totaling approximately $115.0 million, pursuant to SFAS 71.
In addition, one of the Company's unconsolidated subsidiaries has identified legal retirement obligations for landfill and plant abandonment costs. The Company's share of this adoption is expected to total $1.1 million, net of tax.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS 144 supercedes SFAS No. 121 and APB Opinion No. 30, while retaining many of the requirements of these two statements. Under SFAS 144, assets held for sale that are a component of an entity will be included in discontinued operations if the operations and cash flows will be or have been eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations prospectively. SFAS 144 did not materially change the methods used by the Company to measure impairment losses on long-lived assets but may result in more future dispositions being reported as discontinued operations than would previously have been permitted. The Company adopted SFAS 144 on January 1, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 eliminates extraordinary accounting treatment for reporting gains or losses on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4 are applicable in fiscal years beginning after May 15, 2002, the provisions related to FASB Statement No. 13 are effective for transactions occurring after May 15, 2002, and all other provisions are effective for financial statements issued on or after May 15, 2002; however, early application is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of SFAS 145 would be reclassified in most cases following adoption. The Company does not expect the adoption of SFAS 145 to have a material effect on its financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The principal difference between SFAS 146 and EITF 94-3 relates to the requirements for recognition of a liability for costs associated with an exit or disposal activity. SFAS 146 requires that a liability be recognized for a cost associated with an exit or disposal activity when it is incurred. A liability is incurred when a transaction or event occurs that leaves an entity little or no discretion to avoid the future transfer or use of assets to settle the liability. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. In addition, SFAS 146 also requires that a liability for a cost associated with an exit or disposal activity be recognized at its fair value when it is incurred. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The Company will apply the provisions of SFAS 146 to all exit or disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of
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certain guarantees. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company does not expect the adoption of FIN 45 to have a material effect on its financial position, results of operations, or cash flows.
3. Acquisitions
Kern River
On March 27, 2002, the Company acquired Kern River, a 926-mile interstate pipeline transporting Rocky Mountain and Canadian natural gas to markets in California, Nevada and Utah.
The Company paid $419.7 million, net of cash acquired of $7.7 million and a working capital adjustment, for Kern River's gas pipeline business. The acquisition has been accounted for as a purchase business combination. The Company is in the process of completing the allocation of the purchase price to the assets and liabilities acquired. The results of operations for Kern River are included in the Company's results beginning March 27, 2002.
The recognition of excess of cost over fair value of net assets acquired resulted from various attributes of Kern River's operations and business in general. These attributes include, but are not limited to:
| • | Opportunities for expansion; |
| • | High credit quality shippers contracting with Kern River; |
| • | Kern River's strong competitive position; |
| • | Exceptional operating track record and state-of-the-art technology; |
| • | Strong demand for gas in the Western markets; and |
| • | An ample supply of low-cost gas. |
In connection with the acquisition of Kern River, the Company issued $323.0 million of 11% Company-obligated mandatorily redeemable preferred securities of subsidiary trust due March 12, 2012 with scheduled principal payments beginning in 2005 and $127.0 million of no par, zero coupon convertible preferred stock to Berkshire Hathaway. Each share of preferred stock is convertible at the option of the holder into one share of the Company's common stock subject to certain adjustments as described in the Company's Amended and Restated Articles of Incorporation.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
| | | | | | |
| Cash | | $ | 7.7 | |
| Properties, plants and equipment | | | 797.2 | |
| Excess of cost over fair value of net assets acquired | | | 32.5 | |
| Other assets | | | 173.2 | |
| Total assets acquired | | | 1,010.6 | |
| Current liabilities | | | (105.4 | ) |
| Long-term debt | | | (482.0 | ) |
| Other liabilities | | | (0.9 | ) |
| Total liabilities assumed | | | (588.3 | ) |
| Net assets acquired | | $ | 422.3 | |
|
F-27
Northern Natural Gas Company
On August 16, 2002, the Company acquired Northern Natural Gas from Dynegy Inc. ("Dynegy"). Northern Natural Gas is a 16,600-mile interstate pipeline extending from southwest Texas to the upper Midwest region of the United States.
The Company paid $882.7 million for Northern Natural Gas, net of cash acquired of $1.4 million and net of a working capital adjustment. The acquisition has been accounted for as a purchase business combination. The Company is in the process of completing the allocation of the purchase price to the assets and liabilities acquired. The results of operations for Northern Natural Gas are included in the Company's results beginning August 16, 2002.
The recognition of excess of cost over fair value of net assets acquired resulted from various attributes of Northern Natural Gas' operations and business in general. These attributes include, but are not limited to:
| • | High credit quality shippers contracting with Northern Natural Gas; |
| • | Northern Natural Gas' strong competitive position; |
| • | Strategic location in the high demand Upper Midwest markets; |
| • | Flexible access to an ample supply of low-cost gas; |
| • | Exceptional operating track record; and |
| • | Opportunities for expansion. |
In connection with the acquisition of Northern Natural Gas, the Company issued $950.0 million of 11% Company-obligated mandatorily redeemable preferred securities of subsidiary trust due August 31, 2011, with scheduled principal payments beginning in 2003, to Berkshire Hathaway.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in millions):
| | | | | | |
| Cash | | $ | 1.4 | |
| Properties, plants and equipment | | | 1,346.7 | |
| Excess of cost over fair value of net assets acquired | | | 414.7 | |
| Other assets | | | 309.9 | |
| Total assets acquired | | | 2,072.7 | |
| Current portion of long-term debt | | | (450.0 | ) |
| Other current liabilities | | | (216.1 | ) |
| Long-term debt | | | (499.8 | ) |
| Other liabilities | | | (27.7 | ) |
| Total liabilities assumed | | | (1,193.6 | ) |
| Net assets acquired | | $ | 879.1 | |
|
The following pro forma financial information of the Company represents the unaudited pro forma results of operations as if the Kern River and Northern Natural Gas acquisitions, and the related financings, had occurred at the beginning of each period. These pro forma results have been prepared for comparative purposes only and do not profess to be indicative of the results of operations which would have been achieved had these transactions been completed at the beginning of each year, nor are the results indicative of the Company's future results of operations (in millions).
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| | | | | | | | | | |
| | | Year Ended
December 31, |
| | | 2002 | | 2001 |
| Revenue | | $ | 5,299.4 | | | $ | 5,688.5 | |
| Income before cumulative effect of change in accounting principle | | | 285.5 | | | | 36.9 | |
| Net income available to common and preferred shareholders | | | 285.5 | | | | 32.3 | |
|
HomeServices' 2002 Acquisitions
In 2002, HomeServices separately acquired three real estate companies for an aggregate purchase price of approximately $106.1 million, net of cash acquired, plus working capital and certain other adjustments. For the year ended December 31, 2001, these real estate companies had combined revenue of approximately $356.0 million on 42,000 closed sides representing $13.7 billion of sales volume. Additionally, HomeServices is obligated to pay a maximum earnout of $18.5 million based on 2002 financial performance measures. These purchases were financed using HomeServices' internally generated cash flows, revolving credit facility and $40.0 million from the Company, which was contributed to HomeServices as equity.
The acquisitions have been accounted for as a purchase business combination. The purchase price has been allocated to assets acquired and liabilities assumed. The Company recorded goodwill of approximately $108.9 million.
Yorkshire Swap
On September 21, 2001, CE Electric UK Ltd, an indirect wholly owned subsidiary of the Company, and Innogy Holdings, plc ("Innogy") executed an agreement to exchange Northern' Electrics electricity and gas supply and metering assets for Innogy's 94.75% interest in Yorkshire's electricity distribution business. Northern Electric's supply business was valued at approximately $391.0 million (£268.0 million), including working capital of approximately $14.0 million (£10.0 million). 94.75% of Yorkshire's distribution business was valued at approximately $405.0 million (£278.0 million), including working capital of approximately $58.0 million (£40.0 million). The net cash paid by Northern Electric for the exchange was approximately $14.0 million (£10.0 million).
The disposition of Northern Electric's supply business created a pre-tax non-recurring gain of $196.7 million and an after-tax gain of $10.8 million. Included in the carrying value of the Northern Electric supply business was $504.4 million of goodwill allocated based on the relative fair values of the Northern Electric supply business.
The Company paid $57.4 million, net of cash acquired of $353.8 million and transaction costs, for 94.75% of the Yorkshire electricity distribution business and related indebtedness. The acquisition has been accounted for as a purchase business combination. The results of operations for Yorkshire are included in the Company's results beginning September 21, 2001.
Teton Transaction
On October 24, 1999, the Company and an investor group comprised of Berkshire Hathaway, Walter Scott, Jr., and David L. Sokol, executed a definitive agreement and plan of merger whereby the investor group would acquire all of the outstanding common stock of the Company for $35.05 per share in cash, representing a total purchase price of approximately $2.2 billion, including transaction costs. The Teton Transaction closed on March 14, 2000 and Berkshire Hathaway invested approximately $1.24 billion in common stock and convertible preferred stock and approximately $455 million in 11% nontransferable trust preferred securities due March 14, 2010. Mr. Scott, Mr. Sokol and Gregory E. Abel contributed cash and current securities of the Company having a value of approximately $310 million. The remaining purchase price was funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr. Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately 1% of the voting stock.
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The merger has been accounted for as a purchase business combination. The purchase price has been allocated to assets acquired and liabilities assumed. The Company recorded goodwill of approximately $1.2 billion.
4. Dispositions and Other Non-recurring Items
CE Gas Asset Sale
In May 2002, CE Gas, an indirect wholly owned subsidiary of the Company, executed the sale of several of its U.K. natural gas assets to Gaz de France for £137.0 million (approximately $200.0 million). CE Gas sold four natural gas-producing fields located in the southern basin of the U.K. North Sea, including Anglia, Johnston, Schooner and Windermere. The transaction also included the sale of rights in four gas fields (in development/construction) and three exploration blocks owned by CE Gas. The Company recorded pre-tax and after-tax income of $54.3 million and $41.3 million, respectively, which includes a write off of non-deductible goodwill of $49.6 million.
Telephone Flat Sale
On October 16, 2001, the Company closed on a transaction that transferred all properties and rights of the Telephone Flat Project, a geothermal development project in northern California to Calpine Corp. The Company recorded a pre-tax gain of $20.7 million and an after-tax gain of $12.2 million on the sale of the Telephone Flat Project.
Western States Sale
On June 30, 2001, the Company closed on a transaction in which the Company sold Western States Geothermal, an indirect wholly owned subsidiary of the Company, to Ormat. The Company recorded a pre-tax gain of $9.8 million and an after-tax gain of $6.4 million on the sale of Western States Geothermal.
Tesside Power Limited ("TPL")
In December 2001, the Company recorded a non-recurring charge of $20.7 million, net of tax, representing an asset valuation impairment charge under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 121") relating to the Company's 15.4% interest in TPL. TPL owns and operates a 1,875 MW combined cycle gas-fired power plant. Enron Corp. ("Enron"), through its subsidiaries, owned a 42.5% interest, operated the plant, and purchased 668 MW of capacity. Enron's subsidiary, which owns and operates TPL, is now in administration and administrators have been appointed to run its business and are attempting to find a buyer.
Shareholders in TPL had previously utilized TPL's taxable losses with an obligation to reimburse TPL later in the project's life. In May 2002, TPL executed a restructuring and stabilization agreement with its lenders. The contract included an agreement between TPL and its shareholders with respect to the waiver of these repayment obligations. In May 2002, TPL released $35.7 million due to the repayment obligation being waived which is reflected as a tax benefit in the provision for income taxes.
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5. Properties, Plants and Equipment, Net
Properties, plants and equipment, net comprise the following at December 31 (in thousands):
| | | | | | | | | | | | | | |
| | | Estimated
Useful Lives
(Years) | | December 31, |
| | | 2002 | | 2001 | |
| Properties, plants and equipment, net: | |
| Utility generation and distribution system | | | 10-50 | | | $ | 8,165,140 | | | $ | 7,574,339 | |
| Interstate pipelines' assets | | | 3-87 | | | | 2,171,436 | | | | — | |
| Independent power plants | | | 10-30 | | | | 1,410,170 | | | | 1,402,102 | |
| Mineral and gas reserves and exploration assets | | | 5-30 | | | | 495,423 | | | | 387,697 | |
| Utility non-operational assets | | | 3-30 | | | | 370,811 | | | | 354,366 | |
| Other assets | | | 3-10 | | | | 130,755 | | | | 153,211 | |
| Total operating assets | | | | | | | 12,743,735 | | | | 9,871,715 | |
| Accumulated depreciation and amortization | | | | | | | (4,104,133 | ) | | | (3,650,875 | ) |
| Net operating assets | | | | | | | 8,639,602 | | | | 6,220,840 | |
| Construction in progress | | | | | | | 1,170,485 | | | | 316,531 | |
| Properties, plants and equipment, net | | | | | | $ | 9,810,087 | | | $ | 6,537,371 | |
|
Construction in Progress
MidAmerican Energy is constructing a 500-MW (based on expected accreditation) natural gas-fired, combined cycle plant with an estimated cost of $415 million. MidAmerican Energy will own 100% of the plant and operate it. The plant will be operated in simple cycle mode during 2003 and 2004, resulting in 310 MW of accredited capacity. The combined cycle operation will commence in 2005. MidAmerican Energy has received a certificate from the Iowa Utilities Board, "(IUB"), allowing it to construct the plant. In May 2002, the IUB issued an order that specified the Iowa ratemaking principles that will apply to the plant over its life. As a result of that order, MidAmerican Energy is proceeding with the construction of the plant.
The 2003 Expansion Project is a new parallel 717-mile loop pipeline that will begin in Lincoln County, Wyoming and terminate in Kern County, California. The 2003 Expansion Project began construction on August 6, 2002 and is expected to be completed and operational by May 1, 2003 at a total cost of approximately $1.2 billion. The pipeline will include 36- and 42-inch diameter pipe, most of which will be laid in the existing Kern River rights-of-way at a 25-foot offset from the existing pipeline, and new above ground facilities. Three segments along the rights-of-way, approximately 205 miles in Utah, Nevada and California, will not require additional pipeline but will instead be areas where the gas will be compressed and transported through the existing pipeline. The existing pipeline rights-of-way, compressor facilities and receipt/delivery facilities will all be utilized by the 2003 Expansion Project, streamlining the permitting, acquisition of rights-of-way and ultimately the construction and operations of the 2003 Expansion Project.
The 2003 Expansion Project includes the construction of three new compressor stations and the installation of additional compression and other modifications at six existing facilities. When completed, the Kern River system will have a summer day design capacity of approximately 1.73 Bcf per day, an increase of approximately 886 mmcf per day.
6. Investment in CE Generation
Since the sale of 50% of its interests in CE Generation on March 3, 1999, the Company has accounted for CE Generation as an equity investment. The equity investment in CE Generation at December 31, 2002 and 2001 was approximately $244.9 million and $233.6 million, respectively. The following is summarized financial information for CE Generation as of and for the years ended December 31 (in thousands):
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| | | | | | | | | | | | | | |
| | | 2002 | | 2001 | | 2000 |
| Revenue | | $ | 510,082 | | | $ | 565,838 | | | $ | 510,796 | |
| Income before cumulative effect of change in accounting principle | | | 58,314 | | | | 74,194 | | | | 73,535 | |
| Net income | | | 58,314 | | | | 58,808 | | | | 73,535 | |
| Current assets | | | 202,490 | | | | 211,635 | | | | | |
| Total assets | | | 1,865,036 | | | | 1,932,119 | | | | | |
| Current liabilities | | | 150,165 | | | | 155,808 | | | | | |
| Long-term debt, including current portion | | | 1,011,220 | | | | 1,096,256 | | | | | |
|
7. Other Investments
Williams' Company Preferred Stock
On March 27, 2002, a newly formed subsidiary of the Company, MEHC Investments Inc., invested $275.0 million in Williams in exchange for shares of 9 7/8% cumulative convertible preferred stock of Williams. Dividends on the Williams' preferred stock are scheduled to be received quarterly, which commenced July 1, 2002. This investment is accounted for under the cost method. Since the date of this investment, there have been public announcements that Williams' financial condition has deteriorated as a result of, among other factors, reduced liquidity. The Company has not recorded an impairment on this investment as of December 31, 2002, and is monitoring the situation.
Investments in Debt and Equity Securities
Substantially all of the Company's investments in debt and equity securities relate to its Quad Cities Station decommissioning trust. The amortized cost, gross unrealized gain and losses and estimated fair value of investments in debt and equity securities comprise the following at December 31 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | 2002 |
| | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair
Value |
| Available-for-sale: | |
| Equity securities | | $ | 56,265 | | | $ | 16,373 | | | $ | (1,313 | ) | | $ | 71,325 | |
| Municipal bonds | | | 30,915 | | | | 918 | | | | (263 | ) | | | 31,570 | |
| U. S. Government securities | | | 18,511 | | | | 183 | | | | (119 | ) | | | 18,575 | |
| Corporate securities | | | 25,258 | | | | 1,152 | | | | (80 | ) | | | 26,330 | |
| Cash equivalents | | | 12,718 | | | | — | | | | — | | | | 12,718 | |
| Total available-for-sale | | $ | 143,667 | | | $ | 18,626 | | | $ | (1,775 | ) | | $ | 160,518 | |
| Held-to-Maturity: | |
| Debt securities | | $ | 2,070 | | | $ | — | | | $ | — | | | $ | 2,070 | |
| U.S. Treasury Strips | | | 1,485 | | | | 208 | | | | — | | | | 1,693 | |
| Agency obligations | | | 216 | | | | 111 | | | | — | | | | 327 | |
| Total held-to-maturity | | $ | 3,771 | | | $ | 319 | | | $ | — | | | $ | 4,090 | |
|
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| | | | | | | | | | | | | | | | | | |
| | | 2001 |
| | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair
Value |
| Available-for-sale: | |
| Equity securities | | $ | 53,663 | | | $ | 24,444 | | | $ | (3,144 | ) | | $ | 74,963 | |
| Municipal bonds | | | 27,842 | | | | 1,315 | | | | (92 | ) | | | 29,065 | |
| U. S. Government securities | | | 26,725 | | | | 1,910 | | | | (19 | ) | | | 28,616 | |
| Corporate securities | | | 18,682 | | | | 812 | | | | (23 | ) | | | 19,471 | |
| Cash equivalents | | | 7,120 | | | | — | | | | — | | | | 7,120 | |
| Total available-for-sale | | $ | 134,032 | | | $ | 28,481 | | | $ | (3,278 | ) | | $ | 159,235 | |
| Held-to-Maturity: | |
| Debt securities | | $ | 2,074 | | | $ | — | | | $ | — | | | $ | 2,074 | |
| U.S. Treasury Strips | | | 1,090 | | | | 85 | | | | — | | | | 1,175 | |
| Agency obligations | | | 611 | | | | — | | | | (22 | ) | | | 589 | |
| Total held-to-maturity | | $ | 3,775 | | | $ | 85 | | | $ | (22 | ) | | $ | 3,838 | |
|
At December 31, 2002, the debt securities held by the Company had the following maturities (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Available For Sale | | Held To Maturity |
| | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Within 1 year | | $ | 7,224 | | | $ | 7,384 | | | $ | 2,070 | | | $ | 2,070 | |
| 1 through 5 years | | | 25,143 | | | | 25,994 | | | | 479 | | | | 664 | |
| 5 through 10 years | | | 14,190 | | | | 14,574 | | | | 1,222 | | | | 1,356 | |
| Over 10 years | | | 27,621 | | | | 28,020 | | | | — | | | | — | |
|
The proceeds and gross realized gains and losses on the disposition of available-for-sale and held-to-maturity investments are shown in the following table (in thousands). Realized gains and losses are determined by specific identification.
| | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC (Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Proceeds from sales | | $ | 151,394 | | | $ | 68,333 | | | $ | 93,531 | | | $ | 22,588 | |
| Gross realized gains | | | 7,099 | | | | 2,676 | | | | 6,464 | | | | 1,560 | |
| Gross realized losses | | | (7,792 | ) | | | (7,314 | ) | | | (10,585 | ) | | | (2,556 | ) |
|
8. Short-Term Debt
Short-term debt comprises the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Short-term debt: | |
| Corporate revolving credit facility | | $ | — | | | $ | 153,500 | |
| MidAmerican Energy short-term debt | | | 55,000 | | | | 91,780 | |
| HomeServices revolving credit facilities | | | 24,750 | | | | 9,000 | |
| Other | | | 32 | | | | 1,732 | |
| Total short-term debt | | $ | 79,782 | | | $ | 256,012 | |
|
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Corporate Revolving Credit Facilities
The Company has a $400.0 million revolving credit facility which expires in June 2003. The facility is unsecured and available to fund working capital requirements and other corporate requirements. The facility carries a variable interest rate based on LIBOR and ranged from 2.625% to 2.8625% in 2002. No borrowings were outstanding at December 31, 2002. The Company plans to renew the facility in June 2003.
MidAmerican Energy Short-Term Debt
As of December 31, 2002, MidAmerican Energy had in place a $370.4 million revolving credit facility that supports its $250.0 million commercial paper program and its variable rate pollution control revenue obligations. In addition, MidAmerican Energy has a $5.0 million line of credit. As of December 31, 2002, commercial paper and bank notes totaled $55.0 million for MidAmerican Energy. MHC Inc., an indirect wholly owned subsidiary of the Company, has a $4.0 million line of credit under which no borrowings were outstanding at December 31, 2002. The commercial paper, bank notes and outstanding line of credit have a weighted average interest rate of 1.29% at December 31, 2002.
HomeServices Revolving Credit Facilities
Upon the expiration of its $65.0 million senior secured revolving credit facility in November 2002, HomeServices entered into a new $125.0 million senior secured revolving credit agreement. The new revolving credit agreement has a term of three years and is secured by a pledge of the capital stock of all of the existing and future subsidiaries of HomeServices. Amounts outstanding under this revolving credit facility bear interest, at HomeServices' option, at either the prime lending rate or LIBOR plus a fixed spread of 1.25% to 2.25%, which varies based on HomeServices' cash flow leverage ratio (1.25% at December 31, 2002). As of December 31, 2002, the outstanding balance of $24.8 million had a weighted average interest rate of 2.6661%.
9. Parent Company Debt
Parent company debt is unsecured senior obligations of the Company and comprises the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Parent company debt: | |
| 6.96% Senior Notes, due 2003 | | $ | 215,000 | | | $ | 215,000 | |
| 7.23% Senior Notes, due 2005 | | | 260,000 | | | | 260,000 | |
| 4.625% Senior Notes, due 2007 | | | 200,000 | | | | — | |
| 7.63% Senior Notes, due 2007 | | | 350,000 | | | | 350,000 | |
| 7.52% Senior Notes, due 2008 | | | 450,000 | | | | 450,000 | |
| 7.52% Senior Notes, due 2008 (Series B) | | | 101,481 | | | | 101,680 | |
| 5.875% Senior Notes, due 2012 | | | 500,000 | | | | — | |
| 8.48% Senior Notes, due 2028 | | | 475,000 | | | | 475,000 | |
| Fair value adjustments and other | | | (12,025 | ) | | | (17,182 | ) |
| Total parent company debt | | | 2,539,456 | | | | 1,834,498 | |
| Less current portion | | | (215,000 | ) | | | — | |
| Total long-term parent company debt | | $ | 2,324,456 | | | $ | 1,834,498 | |
|
Interest on the 7.63% Senior Notes is payable semiannually on April 15 and October 15 of each year. Interest on the 3.5% Senior Notes and the 5.875% Senior Notes is payable semiannually on January 31 and July 31 of each year. Interest on the remaining parent company debt is payable semiannually on March 15 and September 15 of each year.
10. Subsidiary and Project Loans
Each of the Company's direct and indirect subsidiaries is organized as a legal entity separate and apart from the Company and its other subsidiaries. Pursuant to separate project financing agreements, the
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assets of each subsidiary are pledged or encumbered to support or otherwise provide the security for their own project or subsidiary debt. It should not be assumed that any asset of any such subsidiary will be available to satisfy the obligations of the Company or any of its other such subsidiaries; provided, however, that unrestricted cash or other assets which are available for distribution may, subject to applicable law and the terms of financing arrangements of such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to the Company or affiliates thereof.
Project loans held by subsidiaries and projects comprise the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Subsidiary and project loans: | |
| MidAmerican Funding Senior Notes and Bonds | | $ | 700,000 | | | $ | 700,000 | |
| MidAmerican Energy Mortgage Bonds | | | 340,570 | | | | 340,570 | |
| MidAmerican Energy Pollution Control Bonds | | | 155,745 | | | | 157,185 | |
| MidAmerican Energy Notes | | | 560,000 | | | | 322,240 | |
| MidAmerican Capital Notes | | | — | | | | 23,333 | |
| Northern Electric Eurobonds | | | 322,811 | | | | 291,643 | |
| CE Electric UK Senior Notes and Sterling Bonds | | | 677,642 | | | | 646,500 | |
| Yorkshire | | | 1,573,136 | | | | 1,491,597 | |
| CE Gas Loan | | | — | | | | 70,180 | |
| Kern River Senior Notes | | | 488,000 | | | | — | |
| Kern River Construction Financing Facility | | | 789,916 | | | | — | |
| Northern Natural Gas Senior Notes | | | 799,406 | | | | — | |
| Cordova Funding Senior Secured Bonds | | | 223,763 | | | | 225,000 | |
| Salton Sea Funding Corporation Series F Bonds | | | 137,789 | | | | 139,896 | |
| Casecnan Notes and Bonds | | | 287,925 | | | | 320,138 | |
| Philippine Term Loans | | | 244,961 | | | | 313,221 | |
| HomeServices Senior Notes and Other | | | 39,031 | | | | 36,780 | |
| Other, including fair value adjustments | | | (8,395 | ) | | | (6,292 | ) |
| Total subsidiary and project loans . | | | 7,332,300 | | | | 5,071,991 | |
| Less current portion | | | (255,213 | ) | | | (317,180 | ) |
| Total long-term subsidiary and project loans. | | $ | 7,077,087 | | | $ | 4,754,811 | |
|
MidAmerican Funding Senior Notes and Bonds
On March 11, 1999, MidAmerican Funding, a wholly owned subsidiary of the Company, issued $200.0 million of 5.85% Senior Secured Notes due in 2001, $175.0 million of 6.339% Senior Secured Notes due in 2009, and $325.0 million of 6.927% Senior Secured Bonds due in 2029. The proceeds from the offering were used to complete the MidAmerican acquisition in 1999.
On March 1, 2001 MidAmerican Funding retired $200.0 million of 5.85% Senior Secured Notes due 2001. On March 19, 2001 MidAmerican Funding issued $200 million of 6.75% Senior Secured Notes due March 1, 2011.
MidAmerican Funding uses distributions that it receives from its subsidiaries to make payments on the Senior Notes and Bonds. These subsidiaries must make payments on their own indebtedness before making distributions to MidAmerican Funding. The distributions are also subject to utility regulatory restrictions agreed to by MidAmerican Energy in March 1999 whereby it committed to the IUB to use commercially reasonable efforts to maintain an investment grade rating on its long-term debt and to maintain its common equity level above 42% of total capitalization unless circumstances beyond its control result in the common equity level decreasing to below 39% of total capitalization. MidAmerican Funding must seek the approval of the IUB of a reasonable utility capital structure if MidAmerican Energy's common equity level decreases below 42% of total capitalization, unless the decrease is beyond the control of MidAmerican Funding. MidAmerican Funding is also required to seek the approval of the
F-35
IUB if MidAmerican Energy's equity level decreases to below 39%, even if the decrease is due to circumstances beyond the control of MidAmerican Funding.
MidAmerican Energy Mortgage Bonds, Pollution Control Bonds and Notes
The components of MidAmerican Energy's Mortgage Bonds, Pollution Control Bonds and Notes comprise the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Mortgage bonds: | |
| 7.125% Series, due 2003 | | $ | 100,000 | | | $ | 100,000 | |
| 7.70% Series, due 2004 | | | 55,630 | | | | 55,630 | |
| 7% Series, due 2005 | | | 90,500 | | | | 90,500 | |
| 7.375% Series, due 2008 | | | 75,000 | | | | 75,000 | |
| 7.45% Series, due 2023 | | | 6,940 | | | | 6,940 | |
| 6.95% Series, due 2025 | | | 12,500 | | | | 12,500 | |
| Total mortgage bonds | | $ | 340,570 | | | $ | 340,570 | |
| Pollution control revenue obligations: | |
| 5.75% Series, due periodically through 2003 | | $ | 4,320 | | | $ | 5,760 | |
| 5.95% Series, due 2023 | | | 29,030 | | | | 29,030 | |
| 6.7% Series, due 2003 | | | 1,000 | | | | 1,000 | |
| 6.1% Series, due 2007 | | | 1,000 | | | | 1,000 | |
| Variable rate series: | |
| Due 2016 and 2017, 1.64% and 1.77% respectively | | | 37,600 | | | | 37,600 | |
| Due 2023 (secured by general mortgage bond, 1.64% and 1.77%, respectively | | | 28,295 | | | | 28,295 | |
| Due 2023, 1.64% and 1.77%, respectively | | | 6,850 | | | | 6,850 | |
| Due 2024, 1.64% and 1.77%, respectively | | | 34,900 | | | | 34,900 | |
| Due 2025, 1.64% and 1.77%, respectively | | | 12,750 | | | | 12,750 | |
| Total pollution control revenue obligations | | $ | 155,745 | | | $ | 157,185 | |
| Notes: | |
| 8.75% Series, due 2002 | | $ | — | | | $ | 240 | |
| 7.375% Series, due 2002 | | | — | | | | 162,000 | |
| 6.75% Series, due 2031 | | | 400,000 | | | | — | |
| 6.375% Series, due 2006 | | | 160,000 | | | | 160,000 | |
| Total notes | | $ | 560,000 | | | $ | 322,240 | |
|
On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% notes due in 2031. The proceeds were used to refinance existing debt and preferred securities and for other corporate purposes. On March 11, 2002, MidAmerican Energy redeemed its MidAmerican Energy-obligated mandatorily redeemable preferred securities of subsidiary trust at 100% of the principal amount plus accrued interest.
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CE Electric UK, Northern Electric and Yorkshire Electric Eurobonds, Senior Notes and Sterling Bonds
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Eurobonds: | |
| 8.625% Bearer bonds, due 2005 | | $ | 161,469 | | | $ | 145,879 | |
| 8.875% Bearer bonds, due 2020 | | | 161,342 | | | | 145,764 | |
| Total eurobonds | | $ | 322,811 | | | $ | 291,643 | |
| Senior Notes and Sterling Bonds: | |
| 6.853% Senior Notes, due 2004 | | $ | 124,590 | | | $ | 124,613 | |
| 6.995% Senior Notes, due 2007 | | | 236,223 | | | | 235,937 | |
| 7.25% Sterling Bonds, due 2022 | | | 316,829 | | | | 285,950 | |
| Total senior notes and sterling bonds | | $ | 677,642 | | | $ | 646,500 | |
| Yorkshire: | |
| 9.25% Eurobonds, due 2020 | | $ | 421,896 | | | $ | 383,576 | |
| 7.25% Eurobonds, due 2028 | | | 342,539 | | | | 311,427 | |
| Variable Rate Reset Trust Securities, due 2020 (5.04% at December 31, 2002) | | | 258,821 | | | | 235,313 | |
| 8.08% Trust Securities, due 2038 | | | 249,695 | | | | 261,082 | |
| 6.496% Yankee Bonds, due 2008 | | | 300,185 | | | | 300,199 | |
| Total Yorkshire Electric debt | | $ | 1,573,136 | | | $ | 1,491,597 | |
|
The CE Electric UK Senior Notes and Sterling Bonds prohibit distributions to any of its stockholders unless certain financial ratios are met by CE Electric UK or the long-term debt rating is above a prescribed level.
The Yorkshire Electric Debt prohibits distributions to any of its stockholders unless certain financial ratios are met by Yorkshire or the long-term debt rating is above a prescribed level.
On February 15, 2005, the Yorkshire Variable Rate Reset Trust Securities may be remarketed by the underwriter at a fixed rate of interest through the maturity date or, at a floating rate of interest for up to one year and then at fixed rate of interest through 2020, or redeemed by Yorkshire.
Kern River Senior Notes and Construction Financing Facility
On August 13, 2001, Kern River issued $510.0 million in debt securities. The offering was in the form of $510.0 million of 15-year amortizing Senior Notes bearing a fixed rate of interest of 6.676%. For the Senior Notes, $405.0 million will be amortized through June 2016, with a final payment of $105.0 million to be made on July 31, 2016. As of December 31, 2002, the balance of the Kern River Senior Notes was $488.0 million.
On July 17, 2002, Kern River received approval from the FERC to construct, own and operate the 2003 Expansion Project. The estimated cost of the expansion is approximately $1.2 billion and is being be financed with approximately 70% debt and 30% equity, consistent with Kern River's original capital structure, the application for the FERC approval described above and the limitations contained in the indenture for Kern River's existing senior notes.
Construction is being initially funded with the proceeds of the $875.0 million credit facility entered into by Kern River on June 21, 2002, for approximately 70% of the projected capitalized costs of the 2003 Expansion Project. The remaining approximately 30% of the capitalized costs of the 2003 Expansion Project is being funded with equity from the Company. As of December 31, 2002, the balance of the Kern River construction financing facility was $789.9 million.
Northern Natural Gas Senior Notes
The components of Northern Natural Gas' Senior Notes comprise the following at December 31 (in thousands):
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| | | | | | |
| | | 2002 |
| 6.875% Senior Notes, due 2005 | | $ | 100,000 | |
| 6.75% Senior Notes, due 2008 | | | 150,000 | |
| 7.00% Senior Notes, due 2011 | | | 250,000 | |
| 5.375% Senior Notes, due 2012 | | | 300,000 | |
| Unamortized debt discount | | | (594 | ) |
| Total Senior Notes | | $ | 799,406 | |
|
Cordova Funding Senior Secured Bonds
On September 10, 1999, Cordova Funding Corporation ("Cordova Funding"), a wholly owned subsidiary of the Company, closed the $225.0 million aggregate principal amount financing for the construction of the Cordova Project. The proceeds were loaned to Cordova Energy and comprise the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| 8.64% Senior Secured Bonds, due 2019 | | $ | 93,001 | | | $ | 93,515 | |
| 8.79% Senior Secured Bonds, due 2019 | | | 31,137 | | | | 31,309 | |
| 9.07% Senior Secured Bonds, due 2019 | | | 29,139 | | | | 29,300 | |
| 8.48% Senior Secured Bonds, due 2019 | | | 12,685 | | | | 12,755 | |
| 8.82% Senior Secured Bonds, due 2019 | | | 57,801 | | | | 58,121 | |
| Total Senior Secured Bonds | | $ | 223,763 | | | $ | 225,000 | |
|
MEHC has guaranteed a specified portion of the final scheduled principal payment on December 15, 2019 on the Cordova Funding Senior Secured Bonds in an amount up to a maximum of $37.0 million. MEHC also provides a debt service reserve guarantee in an amount equal to the principal, premium, if any, and interest payment due on the bonds on the next scheduled payment date which was equal to $14.3 million at December 31, 2002.
Salton Sea Funding Corporation Series F Bonds
Salton Sea Funding Corporation, an indirect wholly owned subsidiary of CE Generation, had a debt balance of $491.7 million at December 31, 2002. Minerals is one of several guarantors of the Salton Sea Funding Corporation's debt. As a result of a note allocation agreement, Minerals is primarily responsible for $137.8 million of the 7.475% Senior Secured Series F Bonds due November 30, 2018. MEHC has guaranteed a specified portion of the scheduled debt service on the Series F Bonds equal to this current principal amount of $137.8 million and associated interest.
Casecnan Notes and Bonds
On November 27, 1995, CE Casecnan Ltd. ("CE Casecnan") issued $371.5 million of notes and bonds to finance the construction of the Casecnan Project. The Casecnan notes and bonds comprise the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Casecnan notes and bonds: | |
| Senior Secured Floating Rate Notes (FRNs), due in 2002 | | $ | — | | | $ | 23,638 | |
| 11.45% Senior Secured Series A Notes, due in 2005 | | | 125,000 | | | | 125,000 | |
| 11.95% Senior Secured Series B Bonds, due in 2010 | | | 162,925 | | | | 171,500 | |
| Total Casecnan notes and bonds | | $ | 287,925 | | | $ | 320,138 | |
|
The Casecnan Notes and Bonds are subject to redemption at the Company's option as provided in the Trust Indenture. The Casecnan Notes and Bonds are also subject to mandatory redemption based on certain conditions.
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Philippine Term Loans
The Export-Import Bank of the United States ("Ex-Im Bank") provided term loan financing for the Company's Mahanagdong geothermal power project of $92.8 million at a fixed rate of 6.92%. The Overseas Private Investment Corporation ("OPIC") is providing term loan financing of $20.6 million at a fixed interest rate of 7.6%. The loans have scheduled repayments through June 2007.
OPIC provided term loan financing for the Company's Malitbog geothermal power project of $22.7 million that was fixed at an interest rate of 9.176%. A syndicate of international commercial banks is providing term loan financing of $40.9 million at a variable interest rate based on LIBOR (3.84% at December 31, 2002). The loans have scheduled repayments through June 2005.
Ex-Im provided term loan financing for the Company's Upper Mahiao geothermal power project of $63.1 million at a fixed interest rate of 5.95%. United Coconut Planters Bank of the Philippines is providing term loan financing of $5.0 million at a variable interest rate based on LIBOR (4.42% at December 31, 2002). The loans have scheduled repayments through June 2006.
The Philippine term loans comprise the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Philippine term loans: | |
| Mahanagdong Project 7.60% Term Loan, due 2007 | | $ | 20,571 | | | $ | 25,143 | |
| Mahanagdong Project 6.92% Term Loan, due 2007 | | | 92,766 | | | | 113,381 | |
| Malitbog Project Variable Rate Term Loan, due 2005 3.84% and 4.295%, respectively | | | 40,890 | | | | 55,402 | |
| Malitbog Project 9.176% Term Loan, due 2006 | | | 22,677 | | | | 30,725 | |
| Upper Mahiao Project Variable Rate Term Loan, due 2003 4.42% and 5.130%, respectively | | | 5,000 | | | | 6,111 | |
| Upper Mahiao Project 5.95% Term Loan, due 2006 | | | 63,057 | | | | 82,459 | |
| Total Philippine term loans | | $ | 244,961 | | | $ | 313,221 | |
|
HomeServices Senior Notes and Other
In November 1998, HomeServices issued $35.0 million of 7.12% fixed-rate private placement senior notes due in annual increments of $5.0 million beginning in 2004. As of December 31, 2002, the balance of the HomeServices Senior Notes was $35.0 million.
In addition to the senior notes, HomeServices' has outstanding notes, with varying interest rates, totaling $4.0 million at December 31, 2002.
Annual Repayments of Debt
The annual repayments of debt for the years beginning January 1, 2003 and thereafter are as follows (in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | Thereafter | | Total |
| Parent, Subsidiary and Project loans: | |
| Parent Company Debt | | $ | 215,000 | | | $ | — | | | $ | 260,000 | | | $ | — | | | $ | 550,000 | | | $ | 1,514,456 | | | $ | 2,539,456 | |
| MidAmerican Funding Senior Notes and Bonds | | | — | | | | — | | | | — | | | | — | | | | — | | | | 700,000 | | | | 700,000 | |
| MidAmerican Energy Mortgage Bonds | | | 100,000 | | | | 55,630 | | | | 90,500 | | | | — | | | | — | | | | 94,440 | | | | 340,570 | |
| MidAmerican Energy Pollution Control Bonds | | | 5,727 | | | | — | | | | — | | | | — | | | | 1,000 | | | | 149,018 | | | | 155,745 | |
| MidAmerican Energy Notes | | | — | | | | — | | | | — | | | | 160,000 | | | | — | | | | 400,000 | | | | 560,000 | |
| Northern Electric Eurobonds | | | — | | | | — | | | | 161,469 | | | | — | | | | — | | | | 161,342 | | | | 322,811 | |
| CE Electric UK Senior Notes and Sterling Bonds | | | — | | | | 124,590 | | | | — | | | | — | | | | 236,223 | | | | 316,829 | | | | 677,642 | |
| Yorkshire | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,573,136 | | | | 1,573,136 | |
| Kern River Senior Notes | | | 24,000 | | | | 25,000 | | | | 26,000 | | | | 26,000 | | | | 26,000 | | | | 361,000 | | | | 488,000 | |
| Kern River Construction Financing Facility | | | — | | | | — | | | | — | | | | — | | | | — | | | | 789,916 | | | | 789,916 | |
Northern Natural Gas Senior
Notes | | | — | | | | — | | | | 100,000 | | | | — | | | | — | | | | 699,406 | | | | 799,406 | |
| Cordova Funding Senior Secured Bonds | | | 9,000 | | | | 8,100 | | | | 7,875 | | | | 4,500 | | | | 4,162 | | | | 190,126 | | | | 223,763 | |
| Salton Sea Funding Corporation Series F Bonds | | | 1,405 | | | | 1,757 | | | | 1,756 | | | | 1,827 | | | | 1,055 | | | | 129,989 | | | | 137,789 | |
| Casecnan Notes and Bonds | | | 41,468 | | | | 49,360 | | | | 54,752 | | | | 36,015 | | | | 37,730 | | | | 68,600 | | | | 287,925 | |
| Philippine Term Loans | | | 72,148 | | | | 67,148 | | | | 63,034 | | | | 30,037 | | | | 12,594 | | | | — | | | | 244,961 | |
| HomeServices Senior Notes and Other | | | 1,465 | | | | 5,133 | | | | 5,048 | | | | 5,036 | | | | 5,024 | | | | 17,325 | | | | 39,031 | |
| Other, including fair value adjustments | | | | | | | — | | | | — | | | | — | | | | — | | | | (8,395 | ) | | | (8,395 | ) |
| Total parent, subsidiary and project loans | | $ | 470,213 | | | $ | 336,718 | | | $ | 770,434 | | | $ | 263,415 | | | $ | 873,788 | | | $ | 7,157,188 | | | $ | 9,871,756 | |
|
Fair Value
At December 31, 2002, the Company had fixed-rate long-term debt, Company-obligated mandatorily redeemable preferred securities of subsidiary trusts, and subsidiary-obligated mandatorily redeemable preferred securities of subsidiary trusts of $11,683.2 million in principal amount and having a fair value of $12,188.8 million. In addition, at December 31, 2002, the Company had floating-rate obligations of $425.1 million that expose the Company to the risk of increased interest expense in the event of increases in short-term interest rates.
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11. Income Taxes
Provision for income taxes was comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC (Predecessor)
January 1, 2000
through
March 13, 2000 | | |
| | | 2002 | | 2001 | |
| Current: | |
| Federal | | $ | 46,714 | | | $ | 51,025 | | | $ | 17,387 | | | $ | 9,147 | | |
| State | | | 14,516 | | | | 2,669 | | | | 10,527 | | | | (1,886 | ) | |
| Foreign | | | 54,586 | | | | 43,450 | | | | 40,823 | | | | 16,012 | | |
| | | | 115,816 | | | | 97,144 | | | | 68,737 | | | | 23,273 | | |
| Deferred: | |
| Federal | | $ | (7,073 | ) | | $ | (14,004 | ) | | $ | (32,469 | ) | | $ | 1,854 | | |
| State | | | (9,675 | ) | | | (342 | ) | | | (1,933 | ) | | | 834 | | |
| Foreign | | | 520 | | | | 167,266 | | | | 18,942 | | | | 5,047 | | |
| | | | (16,228 | ) | | | 152,920 | | | | (15,460 | ) | | | 7,735 | | |
| Total | | $ | 99,588 | | | $ | 250,064 | | | $ | 53,277 | | | $ | 31,008 | | |
|
A reconciliation of the federal statutory tax rate to the effective tax rate applicable to income before provision for income taxes follows:
| | | | | | | | | | | | | | | | | | |
| | |
Year Ended
December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 31, 2000 |
| | | 2002 | | 2001 | |
| Federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| Investment and energy tax credits | | | (0.7 | ) | | | (1.0 | ) | | | (2.3 | ) | | | (0.7 | ) |
| State taxes, net of federal tax effect | | | 1.2 | | | | 3.2 | | | | 2.6 | | | | (0.8 | ) |
| Goodwill amortization | | | — | | | | 5.9 | | | | 12.1 | | | | 5.9 | |
| Dividends on preferred securities of subsidiary trusts | | | (8.1 | ) | | | (6.1 | ) | | | (11.1 | ) | | | (2.8 | ) |
| Tax effect of foreign income | | | (4.8 | ) | | | (2.5 | ) | | | (5.8 | ) | | | (5.0 | ) |
| Non-recurring items on CE Electric UK, net of tax effect of foreign income | | | (8.1 | ) | | | 19.2 | | | | — | | | | — | |
| Dividends received deduction | | | (1.8 | ) | | | (2.6 | ) | | | (6.8 | ) | | | (1.0 | ) |
| Other items, net | | | 2.8 | | | | (1.5 | ) | | | 0.6 | | | | 3.4 | |
| Effective tax rate | | | 15.5 | % | | | 49.6 | % | | | 24.3 | % | | | 34.0 | % |
|
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Deferred tax liabilities (assets) comprise the following at December 31 (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Properties, plants and equipment, net | | $ | 1,325,228 | | | $ | 1,133,286 | |
| Income taxes recoverable through future rates | | | 159,411 | | | | 185,222 | |
| Employee benefits | | | 65,537 | | | | 68,514 | |
| Reacquired debt | | | 4,914 | | | | 7,544 | |
| Fuel cost recoveries | | | — | | | | 20,272 | |
| Other | | | 121 | | | | — | |
| | | | 1,555,211 | | | | 1,414,838 | |
| Minimum pension liability adjustment | | | (140,854 | ) | | | (5,147 | ) |
| Revenue sharing accruals | | | (48,861 | ) | | | (24,769 | ) |
| Accruals not currently deductible for tax purposes | | | (59,083 | ) | | | (47,287 | ) |
| Nuclear reserve and decommissioning | | | (28,411 | ) | | | (17,898 | ) |
| Deferred income | | | (21,733 | ) | | | (24,732 | ) |
| Fuel cost recoveries | | | (9,558 | ) | | | — | |
| NOL and credit carryforwards | | | (8,290 | ) | | | (5,567 | ) |
| Other | | | — | | | | (5,170 | ) |
| | | | (316,790 | ) | | | (130,570 | ) |
| Net deferred income taxes | | $ | 1,238,421 | | | $ | 1,284,268 | |
|
12. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
The Company has organized special purpose Delaware business trusts (collectively, the "Trusts") pursuant to their respective amended and restated declarations of trusts (collectively, the "Declarations"). The Company, through these Trusts, issued Company-obligated mandatorily redeemable preferred securities (collectively, the "Trust Securities") as follows (in thousands):
| | | | | | | | | | |
| | | 2002 | | 2001 |
| CalEnergy Capital Trust II – 6.25% preferred securities, due 2012 | | $ | 155,538 | | | $ | 155,584 | |
| CalEnergy Capital Trust III – 6.5% preferred securities, due 2027 | | | 269,980 | | | | 269,984 | |
| MidAmerican Capital Trust I – 11% preferred securities, due 2010 | | | 454,772 | | | | 454,772 | |
| MidAmerican Capital Trust II – 11% preferred securities, due 2012 | | | 323,000 | | | | — | |
| MidAmerican Capital Trust III – 11% preferred securities, due 2012 | | | 950,000 | | | | — | |
| Fair value adjustment | | | (89,878 | ) | | | (92,189 | ) |
| Total Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts | | $ | 2,063,412 | | | $ | 788,151 | |
|
The Company owns all of the common securities of the Trusts. The Trust Securities have a liquidation preference of $50 each and represent undivided beneficial ownership interests in each of the Trusts. The assets of the Trusts consist solely of the Company's Subordinated Debentures (collectively, the "Junior Debentures") issued pursuant to their respective indentures. The indentures include agreements by the Company to pay expenses and obligations incurred by the Trusts.
Prior to the Teton Transaction, each Trust Security issued by CalEnergy Capital Trust II and III with a par value of $50 was convertible at the option of the holder at any time into shares of the Company's common stock based on the conversion rate. As a result of the Teton Transaction, in lieu of shares of the Company's common stock, holders of Trust Securities will receive $35.05 for each share of common stock it would have been entitled to receive on conversion.
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Distributions on the Trust Securities (and Junior Debentures) are cumulative, accrue from the date of initial issuance and are payable quarterly in arrears. The Junior Debentures are subordinated in right of payment to all senior indebtedness of the Company and the Junior Debentures are subject to certain covenants, events of default and optional and mandatory redemption provisions, all as described in the Junior Debenture indentures.
Pursuant to Preferred Securities Guarantee Agreements (collectively, the "Guarantees"), between the Company and a preferred guarantee trustee, the Company has agreed irrevocably to pay to the holders of the Trust Securities, to the extent that the Trustee has funds available to make such payments, quarterly distributions, redemption payments and liquidation payments on the Trust Securities. Considered together, the undertakings contained in the Declarations, Junior Debentures, Indentures and Guarantees constitute full and unconditional guarantees by the Company of the Trusts' obligations under the Trust Securities.
13. Subsidiary-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust
On March 11, 2002, MidAmerican Energy redeemed all $100.0 million of its 7.98% MidAmerican-obligated preferred securities of subsidiary trust at 100% of the principal amount plus accrued interest.
14. Preferred Securities of Subsidiaries
During 2002, MidAmerican Energy redeemed all $26.7 million of its $7.80 Series Preferred Shares.
The total outstanding cumulative preferred securities of MidAmerican Energy not subject to mandatory redemption requirements may be redeemed at the option of MidAmerican Energy at prices which, in the aggregate, total $32.6 million. The aggregate total the holders of all preferred securities outstanding at December 31, 2002, are entitled to upon involuntary bankruptcy is $31.8 million plus accrued dividends. Annual dividend requirements for all preferred securities outstanding at December 31, 2002, total $1.3 million.
The total outstanding 8.061% cumulative preferred securities of CE Electric UK, which are redeemable in the event of the revocation by the Secretary of State of the Company's Public Electricity Supply License, was $56.0 million as of December 31, 2002 and 2001.
15. Convertible Preferred Stock
In connection with the Kern River acquisition and the purchase of $275.0 million of Williams' preferred stock, the Company issued 6.7 million shares of no par, zero-coupon convertible preferred stock valued at $402.0 million. In connection with the Teton Transaction, the Company issued 34.6 million shares of no par, zero coupon convertible preferred stock valued at $1,211.4 million. Each share of preferred stock is convertible at the option of the holder into one share of the Company's common stock subject to certain adjustments as described in the Company's Amended and Restated Articles of Incorporation.
16. Stock Options
The Company had various stock option plans under which shares were reserved for grant as incentive or non-qualified stock options, as determined by the Board of Directors. The plans allowed options to be granted at 85% of their fair market value of the common stock at the date of grant. Generally, options were issued at 100% of fair market value of the common stock at the date of grant. Options remaining subsequent to the Teton Transaction became exercisable over a period of two to five years and expired if not exercised within ten years from the date of grant or, in some instances, a lesser term.
As a result of the Teton Transaction, the majority of the options were cashed out at $35.05 per share. The remaining options of 2,145,000 were reissued under the new MEHC and an additional 703,329 options were issued. The old options are fully vested and the additional options vest monthly over three years. The options are exercisable until the end of the term on March 14, 2008 at exercise prices ranging from $15.94 to $35.05 per share.
On March 6, 2002, the Company purchased stock options from Mr. David L. Sokol, its Chairman and Chief Executive Officer. The options purchased had exercise prices ranging from $18.50 to $29.01. The
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Company paid Mr. Sokol an aggregate amount of $27.1 million, which is equal to the difference between the option exercise prices and an agreed upon per share value.
17. Accounting for Derivatives
MidAmerican Energy
Commodity Price Risk
Under the current regulatory framework, MidAmerican Energy is allowed to recover in revenue the cost of gas sold from all of its regulated gas customers through a purchased gas adjustment clause. Because the majority of MidAmerican Energy's firm natural gas supply contracts contain pricing provisions based on a daily or monthly market index, MidAmerican Energy's regulated gas customers, although ensured of the availability of gas supplies, retain the risk associated with market price volatility.
MidAmerican Energy uses natural gas futures, options and over-the-counter agreements to mitigate a portion of the market risk retained by its regulated gas customers through the purchased gas adjustment clause. These financial derivative instruments are identified and recorded as hedge transactions. The net amounts exchanged or accrued under swap agreements and the realized gains or losses on futures and options contracts are included in cost of sales and recovered in revenue from regulated gas customers.
MidAmerican Energy also derives revenue from nonregulated sales of natural gas. Pricing provisions are individually negotiated with these customers and may include fixed prices, prices based on a daily or monthly market index or prices based on MidAmerican Energy's actual costs. MidAmerican Energy enters into natural gas futures, options and swap agreements to offset the financial impact of variations in natural gas commodity prices for physical delivery to nonregulated customers. These financial derivative activities are also recorded as hedge accounting transactions.
MidAmerican Energy is exposed to variations in the price of fuel for generation and the price of purchased power in its Iowa jurisdiction, which comprises approximately 89% of 2002 electric operating revenues. Fuel price risk is mitigated through forward contracts. Under typical operating conditions, MidAmerican Energy has sufficient generation to supply its regulated retail electric needs. A loss of such generation at a time of high market prices could subject MidAmerican Energy to losses on its energy sales. MidAmerican Energy uses electricity forward contracts to hedge anticipated sales of excess wholesale electric power.
Derivative instruments are used for two types of hedges. Hedges that offset the variability in earnings and cash flows related to firm commitments are referred to as fair value hedges. Gains and losses on fair value hedges are recognized in income as either operating revenues or cost of sales, depending upon the nature of the item being hedged. Purchase and sales commitments hedged by fair value hedges are recorded at fair value, with changes in their fair values recognized in income and substantially offsetting the impact of the hedges on earnings. For 2002, net pre-tax unrealized gains (losses), representing the ineffectiveness of fair value hedges, were immaterial.
Hedges that offset the variability in earnings and cash flows related to forecasted transactions are referred to as cash flow hedges. The effective portion of unrealized gains and losses on cash flow hedges is recorded in other comprehensive income, net of associated deferred income taxes. Any ineffective portion of unrealized gains and losses on cash flow hedges is recognized in income as operating revenues or a cost of sales, depending upon the nature of the item being hedged. Only hedges that are highly effective in offsetting the risk of variability in future cash flows are accounted for in this manner. Forecasted transactions include purchases of gas for resale to regulated and nonregulated customers, purchases of gas for storage, and purchases and sales of wholesale electric energy. When the associated hedged forecasted transaction occurs or if a hedging relationship is no longer appropriate, the unrealized gains and losses are reversed from other comprehensive income and recognized in net income. Realized gains on cash flow hedges are recognized in income as either operating revenues or cost of sales, depending upon the nature of the physical transaction being hedged.
For 2002, net pre-tax unrealized gains (losses) of $13,000 and $502,000, representing the ineffectiveness of cash flow hedges, are reflected in operating revenues and cost of sales, respectively, on the consolidated
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statements of operations. During the twelve months beginning January 1, 2003, it is anticipated that all of the after-tax, net unrealized gains on cash flow hedges presently recorded as accumulated other comprehensive income will be realized and recorded in earnings. MidAmerican Energy has hedged a portion of its exposure to the variability of cash flows for forecasted transactions through December 2003.
At December 31, 2002, MidAmerican Energy held derivative instruments used for the following hedging purposes with the following fair values (in thousands):
| | | | | | | | | | | | | | |
| Type | | Maturity in
2003 | | Maturity in
2004-06 | | Total |
| Regulated electric | | $ | 1,018 | | | $ | 112 | | | $ | 1,130 | |
| Regulated gas | | | 1,150 | | | | — | | | | 1,150 | |
| Nonregulated gas | | | 2,027 | | | | (41 | ) | | | 1,986 | |
| Total | | $ | 4,195 | | | $ | 71 | | | $ | 4,266 | |
|
A $5.00 per MWh increase in the price of electricity would decrease the fair value of electric hedge instruments by $316,000. A $1.00 per MMBtus increase in the price of natural gas would increase the fair value of gas hedge instruments by $2.3 million.
Trading Risk
MidAmerican Energy uses natural gas and electricity derivative instruments and forward contracts for proprietary trading purposes under strict guidelines outlined by senior management. Derivative instruments held for trading purposes are recorded at fair value and any unrealized gains or losses are reported in earnings.
MidAmerican Energy uses value at risk, or VaR calculations to measure and control its exposure to market risk sensitive instruments. VaR is an estimate of the potential loss on a portfolio over a specified holding period, based on normal market conditions and within a given statistical confidence interval. MidAmerican Energy calculates VaR separately for its electric and gas proprietary trading activities based on a variance-covariance method using historical prices to estimate volatilities and correlations, a one-day holding period and a 95% level of confidence. MidAmerican Energy initiated its nonregulated proprietary electric trading activities in early 2002. Accordingly, the following summary of MidAmerican Energy's trading VaR profile for 2001 includes only gas trading data.
| | | | | | | | | | |
| | | VaR (in $millions) |
| | | 2002 | | 2001 |
| At December 31 | | $ | 0.3 | | | $ | 0.2 | |
| High during year | | | 0.5 | | | | 0.3 | |
| Low during year | | | 0.1 | | | | — | |
| Average during year | | | 0.2 | | | | 0.1 | |
|
The fair value of MidAmerican Energy's proprietary trading activities at December 31, 2002 and the periods in which unrealized gains and losses are expected to be realized are as follows (in thousands):
| | | | | | | | | | | | | | |
| Type | | Maturity in
2003 | | Maturity in
2004-06 | | Total |
| Exchange prices | | $ | 4,683 | | | $ | 71 | | | $ | 4,754 | |
| Prices actively quoted | | | (4,259 | ) | | | (159 | ) | | | (4,418 | ) |
| Prices based on models | | | 207 | | | | (14 | ) | | | 193 | |
| Total | | $ | 631 | | | $ | (102 | ) | | $ | 529 | |
|
CE Electric UK
Currency Exchange Rate Risk
CE Electric UK entered into certain currency rate swap agreements for the CE Electric UK Company Senior Notes with two large multi-national financial institutions. The swap agreements effectively convert
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the U.S. dollar fixed interest rate to a fixed rate in Sterling. For the $125.0 million of 6.853% Senior Notes, the agreements extend until maturity on December 30, 2004 and convert the U.S. dollar interest rate to a fixed Sterling rate of 7.744%. For the $237.0 million of 6.995% Senior Notes, the agreements extend until maturity on December 30, 2007 and convert the U.S. dollar interest rate to a fixed Sterling rate of 7.737%. The estimated fair value of these swap agreements at December 31, 2002 is approximately $24.5 million based on quotes from the counterparty to these instruments and represents the estimated amount that the Company would expect to receive if these agreements were terminated.
Yorkshire entered into certain currency rate swap agreements for the Trust Securities and the Yankee Bonds with five large multi-national financial institutions. The swap agreements effectively convert the U.S. dollar fixed interest rate to a fixed rate in Sterling. For the 8.08% Trust Securities, the agreements extend until June 30, 2008 and convert the U.S. dollar interest rate to a fixed Sterling rate ranging from 9.4758% to 9.715%. For the $300.0 million of 6.496% Yankee Bonds, the agreements extend until February 25, 2008 and convert the U.S. dollar interest rate to a fixed Sterling rate ranging from 7.3175% to 7.345%. The estimated fair value of these swap agreements at December 31, 2002 is approximately $(22.8) million based on quotes from the counterparty to these instruments and represents the estimated amount that the Company would expect to pay if these agreements were terminated.
A decrease of 10% in the December 31, 2002 rate of exchange of Sterling to dollars would increase the amount paid to the Company if these swap agreements were terminated by approximately $120.9 million.
Northern Natural Gas
Commodity Price Risk
As of December 31, 2002, Northern Natural Gas had $52.0 million of obligations to deliver 12.2 Bcf of natural gas in 2003. The obligations are revalued based on market prices for natural gas, with changes in value included in the statement of operations. In 2002, Northern Natural Gas entered into natural gas commodity price swaps and index basis swaps to effectively fix the deferred obligation balance. These swaps have a net receivable balance of $3.4 million at December 31, 2002. The swaps are revalued based on market prices for natural gas, with changes in value included in the statement of operations. Therefore, any further changes in the market value of the deferred obligations are expected to be offset by a corresponding change in the opposite direction in the market value of the swaps. However, at December 31, 2002, Northern Natural Gas had a $10.4 million receivable position with a third party energy marketer relating to these swaps. Since the date of entering into these swaps, there have been public announcements that this third party's financial condition has deteriorated as a result of, among other factors, reduced liquidity. This receivable would increase by approximately $12.2 million if the price curve of natural gas were to increase by $1.00 per MMBtu from levels at December 31, 2002. The Company has not recorded an allowance on this receivable as of December 31, 2002, and is monitoring the situation.
18. Regulatory Matters
MidAmerican Energy
Under a settlement agreement approved by the IUB on December 21, 2001, MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000, are effectively frozen through December 31, 2005. In approving that settlement, the IUB specifically allows the filing of electric rate design and/or cost of service rate changes that are intended to keep overall company revenues unchanged but could result in changes to individual tariffs. Under the 2001 settlement agreement, an amount equal to 50% of revenues associated with Iowa retail electric returns on equity between 12% and 14%, and 83.33% of revenues associated with Iowa retail electric returns on equity above 14%, in each year is recorded as a regulatory liability to be used to offset a portion of the cost to Iowa customers of future generating plant investments. An amount equal to the regulatory liability is recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Interest expense is accrued on the portion of the regulatory liability related to prior years. Beginning in 2002, the liability is being relieved as it is credited against allowance for funds used during construction, or capitalized financing costs, associated with generating plant additions. As of December 31, 2002, the related liability reflected on the consolidated balance sheet totaled $102.9 million.
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On March 20, 2003, MidAmerican Energy and the Iowa Office of Consumer Advocate agreed upon a settlement proposal in which the rate freeze described above would be extended through December 31, 2010. Under the settlement proposal, for calendar years 2006 through 2010, an amount equal to 40% of revenues associated with Iowa retail electric returns on equity between 11.75% and 13.0%; 50% of revenues associated with Iowa retail electric returns on equity between 13.0% and 14.0%; and 83.3% of revenues associated with Iowa retail electric returns on equity greater than 14.0% will be applied as a reduction to offset some of the capital costs on the Iowa portion of three generation projects. If Iowa retail electric returns on equity fall below 10% in any 12-month period after January 1, 2006, MidAmerican Energy has the ability to file for a general increase in rates under the proposed settlement. The proposed settlement requires enactment of Iowa legislation and is subject to approval by the IUB. The IUB is expected to rule on the proposal during the second half of 2003.
On March 15, 2002, MidAmerican Energy made a filing with the IUB requesting an increase in rates for its Iowa retail natural gas customers. On June 12, 2002, the IUB issued an order granting an interim rate increase of approximately $13.8 million annually, effective immediately and subject to refund with interest. On November 8, 2002, the IUB approved the proposed settlement agreement previously filed with it by MidAmerican Energy and the Iowa Office of Consumer Advocate. The settlement agreement provides for an increase in rates of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas customers and effectively freezes such rates through November 2004. MidAmerican Energy implemented the new rates for usage beginning November 25, 2002.
CE Electric UK
Most revenue of each Distribution License Holder ("DLH") is controlled by a distribution price control formula. The current formula requires that regulated distribution income per unit is increased or decreased each year by RPI-Xd where the Retail Price Index ("RPI") reflects the average of the 12-month inflation rates recorded for each month in the previous July to December period. The distribution price control formula also reflects an adjustment factor ("Xd") which was established by the regulatory body, the Office of Gas and Electricity Markets ("Ofgem"), at the last price control review (and continues to be set) at 3%. The formula also takes account of the changes in system electrical losses, the number of customers connected and the voltage at which customers receive the units of electricity distributed. This formula determines the maximum average price per unit of electricity distributed (in pence per kWh) which a DLH is entitled to charge. The distribution price control formula permits DLHs to receive additional revenue due to increased distribution of units and a predetermined increase in customer numbers. The price control does not seek to constrain the profits of a DLH from year to year. It is a control on revenue that operates independently of most of the DLH's costs. During the lifetime of the price control, cost savings or additional costs have a direct impact on profit.
19. Pension Commitments
Domestic Operations
The Company has primarily noncontributory defined benefit pension plans covering substantially all domestic employees. Benefit obligations under the plans are based on participants' compensation, years of service and age at retirement. Funding is based upon the actuarially determined costs of the plans and the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act.
The Company currently provides certain postretirement health care and life insurance benefits for retired employees. Under the plans, substantially all of the Company's employees may become eligible for these benefits if they reach retirement age while working for the Company. However, the Company retains the right to change these benefits anytime at its discretion.
The Company also maintains noncontributory, nonqualified supplemental executive retirement plans for active and retired participants.
Net periodic pension, supplemental retirement and postretirement benefit costs for domestic employees included the following components for the Company (in thousands):
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| | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Pension Cost: | |
| Service cost | | $ | 20,235 | | | $ | 18,114 | | | $ | 13,014 | | | $ | 3,242 | |
| Interest cost | | | 34,177 | | | | 33,027 | | | | 28,329 | | | | 7,058 | |
| Expected return on plan assets | | | (38,213 | ) | | | (36,326 | ) | | | (38,532 | ) | | | (9,600 | ) |
| Amortization of net transition obligation | | | (2,591 | ) | | | (2,591 | ) | | | (2,074 | ) | | | (517 | ) |
| Amortization of prior service cost | | | 2,729 | | | | 2,729 | | | | 2,310 | | | | 575 | |
| Amortization of prior year gain | | | (2,482 | ) | | | (3,894 | ) | | | (3,297 | ) | | | (822 | ) |
| Regulatory expense | | | 6,639 | | | | — | | | | — | | | | — | |
| Net periodic pension cost (benefit) | | $ | 20,494 | | | $ | 11,059 | | | $ | (250 | ) | | $ | (64 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Postretirement Cost: | |
| Service cost | | $ | 6,028 | | | $ | 4,357 | | | $ | 2,089 | | | $ | 520 | |
| Interest cost | | | 13,928 | | | | 10,418 | | | | 6,688 | | | | 1,666 | |
| Expected return on plan assets | | | (4,880 | ) | | | (4,032 | ) | | | (3,947 | ) | | | (984 | ) |
| Amortization of net transition obligation | | | 4,110 | | | | 4,110 | | | | 3,290 | | | | 820 | |
| Amortization of prior service cost | | | 425 | | | | 425 | | | | 340 | | | | 85 | |
| Amortization of prior year (gain) loss | | | 2,385 | | | | 332 | | | | (699 | ) | | | (174 | ) |
| Net periodic pension cost | | $ | 21,996 | | | $ | 15,610 | | | $ | 7,761 | | | $ | 1,933 | |
|
The pension plan assets are in external trusts and are comprised of corporate equity securities, United States government debt, corporate bonds and insurance contracts. The postretirement benefit plans assets are in external trusts and are comprised primarily of corporate equity securities, corporate bonds, money market investment accounts and municipal bonds.
Although the supplemental executive retirement plans had no plan assets as of December 31, 2002, MidAmerican Energy has Rabbi trusts which hold corporate-owned life insurance and other investments to provide funding for the future cash requirements. Because these plans are nonqualified, the fair value of these assets is not included in the following table. The fair value of the Rabbi trust investments was $52.8 million and $50.4 million at December 31, 2002 and 2001, respectively.
The following table presents a reconciliation of the beginning and ending balances of the benefit obligation, fair value of plan assets and the funded status of the Company's plans to the net amounts recognized in the consolidated balance sheet as of December 31 (in thousands):
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| | | | | | | | | | | | | | | | | | |
| | | Pension
Benefits | | Postretirement
Benefits |
| | | 2002 | | 2001 | | 2002 | | 2001 |
| Reconciliation of benefit obligation: | |
| Benefit obligation at beginning of year | | $ | 518,208 | | | $ | 472,349 | | | $ | 194,917 | | | $ | 131,822 | |
| Service cost | | | 20,235 | | | | 18,114 | | | | 6,028 | | | | 4,357 | |
| Interest cost | | | 34,177 | | | | 33,027 | | | | 13,928 | | | | 10,418 | |
| Participant contributions | | | — | | | | — | | | | 4,505 | | | | 3,059 | |
| Plan amendments | | | — | | | | 652 | | | | — | | | | — | |
| Actuarial (gain) loss | | | 45,461 | | | | 17,333 | | | | 31,743 | | | | 57,101 | |
| Acquisition | | | 520 | | | | — | | | | 55,305 | | | | — | |
| Benefits paid | | | (25,422 | ) | | | (23,267 | ) | | | (14,985 | ) | | | (11,840 | ) |
| Benefit obligation at end of year | | | 593,179 | | | | 518,208 | | | | 291,441 | | | | 194,917 | |
| Reconciliation of the fair value of plan assets: | |
| Fair value of plan assets at beginning of year | | | 515,890 | | | | 555,208 | | | | 81,129 | | | | 75,090 | |
| Employer contributions | | | 4,681 | | | | 4,576 | | | | 24,034 | | | | 16,022 | |
| Participant contributions | | | — | | | | — | | | | 4,505 | | | | 3,059 | |
| Actual return on plan assets | | | (27,376 | ) | | | (20,627 | ) | | | (4,528 | ) | | | (1,202 | ) |
| Acquisition | | | — | | | | — | | | | 32,500 | | | | — | |
| Benefits paid | | | (25,422 | ) | | | (23,267 | ) | | | (14,985 | ) | | | (11,840 | ) |
| Fair value of plan assets at end of year | | | 467,773 | | | | 515,890 | | | | 122,655 | | | | 81,129 | |
| Funded status | | | (125,406 | ) | | | (2,318 | ) | | | (168,786 | ) | | | (113,788 | ) |
| Unrecognized net (gain) loss | | | 61,289 | | | | (52,244 | ) | | | 102,095 | | | | 63,328 | |
| Unrecognized prior service cost | | | 20,156 | | | | 22,885 | | | | 3,838 | | | | 4,264 | |
| Unrecognized net transition obligation (asset) | | | (3,383 | ) | | | (5,974 | ) | | | 41,102 | | | | 45,212 | |
| Net amount recognized in the consolidated balance sheet | | $ | (47,344 | ) | | $ | (37,651 | ) | | $ | (21,751 | ) | | $ | (984 | ) |
Amounts recognized in the consolidated balance
sheet consist of: | |
| Prepaid benefit cost | | $ | 11,305 | | | $ | 15,381 | | | $ | 1,494 | | | $ | 1,493 | |
| Accrued benefit liability | | | (99,392 | ) | | | (88,210 | ) | | | (23,245 | ) | | | (2,477 | ) |
| Intangible asset | | | 20,082 | | | | 22,796 | | | | — | | | | — | |
| Accumulated other comprehensive income | | | 20,661 | | | | 12,382 | | | | — | | | | — | |
| Net amount recognized | | $ | (47,344 | ) | | $ | (37,651 | ) | | $ | (21,751 | ) | | $ | (984 | ) |
|
Pension and Postretirement Assumptions are as follows for the years ended December 31:
| | | | | | | | | | | | | | |
| | | 2002 | | 2001 | | 2000 | |
| Assumptions used were: | |
| Discount rate | | | 5.75 | % | | | 6.50 | % | | | 7.00 | % | |
| Rate of increase in compensation levels | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | |
| Weighted average expected long-term rate of return on assets | | | 7.00 | % | | | 7.00 | % | | | 9.00 | % | |
|
For purposes of calculating the postretirement benefit obligation, it is assumed health care costs for all covered individuals will increase by 9.75% in 2003 and that the rate of increase thereafter will decrease to an ultimate rate of 5.25% by the year 2007.
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 2002 would increase by $4.1 million, and the
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postretirement benefit obligation at December 31, 2002, would increase by $47.5 million. If the assumed health care trend rates were to decrease by 1.0%, the total service and interest cost for 2002 would decrease by $3.1 million and the postretirement benefit obligation at December 31, 2002, would decrease by $37.0 million.
United Kingdom Operations
CE Electric UK participates in the Electricity Supply Pension Scheme, which provides pension and other related defined benefits, based on final pensionable pay, to substantially all employees throughout the Electricity Supply Industry in the United Kingdom.
The actuarial computation for December 31, 2002, 2001 and 2000 assumed interest rates of 5.75%, 5.75% and 6.0% respectively, an expected return on plan assets of 7.0%, 7.0% and 6.5%, respectively, and annual compensation increases of 2.5%, 2.5% and 3.0%, respectively, over the remaining service lives of employees covered under the plan. Amounts funded to the pension are primarily invested in equity and fixed income securities.
Net periodic pension cost (benefit) for CE Electric UK's plan for 2002, 2001 and 2000 included the following components (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Service cost – benefits earned during the period | | $ | 8,718 | | | $ | 7,781 | | | $ | 6,933 | | | $ | 1,727 | |
| Interest cost on projected benefit obligation | | | 56,817 | | | | 51,440 | | | | 40,640 | | | | 10,125 | |
| Expected return on plan assets | | | (85,927 | ) | | | (78,354 | ) | | | (50,800 | ) | | | (12,657 | ) |
| Amortization of prior service cost | | | 1,202 | | | | — | | | | — | | | | — | |
| Curtailment loss | | | 6,463 | | | | 7,061 | | | | 5,260 | | | | 1,310 | |
| Net periodic pension (benefit) cost | | $ | (12,727 | ) | | $ | (12,072 | ) | | $ | 2,033 | | | $ | 505 | |
|
As a result of the distribution price reviews in 1999, CE Electric UK implemented a review of staffing requirements primarily in its distribution business. Following discussions with the trade unions, CE Electric UK put in place a workforce reduction program. The pension curtailment related to this workforce reduction program was $6.9 million, $7.1 million and $6.6 million in 2002, 2001 and 2000, respectively.
The following table details the funded status and the amount recognized in the Company's consolidated balance sheets for CE Electric UK's plan as of December 31, 2002 and 2001 (in thousands):
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| | | | | | | | | | |
| | | 2002 | | 2001 |
| Change in benefit obligation: | |
| Benefit obligation at beginning of year | | $ | 974,079 | | | $ | 951,553 | |
| Service cost | | | 8,718 | | | | 7,781 | |
| Interest cost | | | 56,817 | | | | 51,440 | |
| Participant contributions | | | 3,006 | | | | 5,187 | |
| Benefits paid | | | (57,719 | ) | | | (48,991 | ) |
| FAS 88 curtailment | | | 5,712 | | | | 7,060 | |
| Northern Supply/Yorkshire swap net effect | | | — | | | | 43,803 | |
| Prior service cost | | | 17,286 | | | | — | |
| Experience gain and change of assumptions | | | (11,574 | ) | | | (19,596 | ) |
| Foreign currency exchange rate changes | | | 106,405 | | | | (24,158 | ) |
| Benefit obligation at end of the year | | | 1,102,730 | | | | 974,079 | |
| Change in plan assets: | |
| Fair value of plan assets at beginning of the year | | | 1,070,657 | | | | 1,166,111 | |
| Actual return on plan assets | | | (144,298 | ) | | | (68,010 | ) |
| Net asset transfer resulting from Northern Supply/Yorkshire Swap | | | — | | | | 46,541 | |
| Employer contributions | | | 3,607 | | | | 576 | |
| Participant contributions | | | 3,006 | | | | 5,187 | |
| Benefits paid | | | (57,719 | ) | | | (48,991 | ) |
| Foreign currency exchange rate changes | | | 101,174 | | | | (30,757 | ) |
| Fair value of plan assets at end of the year | | | 976,427 | | | | 1,070,657 | |
| Funded status | | | (126,303 | ) | | | 96,578 | |
| Unrecognized net loss | | | 465,211 | | | | 196,649 | |
| Net amount recognized in the consolidated balance sheet | | $ | 338,908 | | | $ | 293,227 | |
| Amounts recognized in the consolidated balance sheetconsist of: | |
| Prepaid benefit cost | | $ | 338,908 | | | $ | 293,227 | |
| Accrued benefit liability | | | (457,317 | ) | | | — | |
| Intangible asset | | | 16,433 | | | | — | |
| Accumulated other comprehensive income | | | 440,884 | | | | — | |
| Net amount recognized | | $ | 338,908 | | | $ | 293,227 | |
|
20. Commitments and Contingencies
Manufactured Gas Plants
The United States Environmental Protection Agency ("EPA"), 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 that 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. As of December 31, 2002, MidAmerican Energy has recorded a $17 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process.
Although the timing of potential incurred costs and recovery of costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican Energy's financial position or results of operations.
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Air Quality
In July 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. In February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the EPA. The impact of the new standards on MidAmerican Energy is currently unknown. These standards could be superceded, in whole or in part, by a variety of multi-pollutant emission reduction initiatives.
In 2001, the state of Iowa passed legislation that, in part, requires rate-regulated utilities to develop a multi-year plan and budget for managing regulated emissions from their generating facilities in a cost-effective manner. MidAmerican Energy's proposed plan and associated budget (the "Plan") was filed with the IUB on April 1, 2002, in accordance with state law. MidAmerican Energy expects the IUB to rule on the prudence of the Plan in 2003. MidAmerican Energy is required to file Plan updates at least every two years.
The Plan provides MidAmerican Energy's projected air emission reductions considering the current proposals that are being debated at the federal level and describes a coordinated long-range plan to achieve these air emission reductions. The Plan also provides specific actions to be taken at each coal-fired generating facility and the related costs and timing for each action.
The Plan outlines $732.0 million in environmental investments to existing coal-fired generating units, some of which are jointly owned, over a nine-year period from 2002 through 2010. MidAmerican Energy's share of these investments is $546.6 million, $67.9 million of which was projected to be incurred in the years 2002 through 2005, when MidAmerican Energy's Iowa retail electric rates are effectively frozen. The Plan also identifies expenses that will be incurred at the generating facilities to operate and maintain the environmental equipment installed as a result of the Plan.
Following the expiration of MidAmerican Energy's 2001 settlement agreement on December 31, 2005, the Plan proposes the use of an adjustment mechanism for recovery of Plan costs, similar to the tracking mechanisms for cost recovery of renewable energy and energy efficiency expenditures that are presently part of MidAmerican Energy's regulated electric rates.
Under the New Source Review ("NSR"), provisions of the Clean Air Act ("CAA"), a utility is required to obtain a permit from the EPA prior to (1) beginning construction of a new major stationary source of a NSR-regulated pollutant or (2) making a physical or operational change (a "major modification") to an existing facility that potentially increases emissions, unless the changes are exempt under the regulations. In general, projects subject to NSR regulations are subject to pre-construction review and permitting under the Prevention of Significant Deterioration ("PSD"), provisions of the CAA. Under the PSD program, a project that emits threshold levels of regulated pollutants must undergo a Best Available Control Technology analysis and evaluate the most effective emissions controls. These controls must be installed in order to receive a permit. Routine maintenance, repair and replacement are not subject to the NSR provisions; however, these types of activities have historically been subject to changing interpretations under the NSR program. The EPA recently proposed a change to the NSR provisions relating to routine maintenance, repair and replacement. Violation of NSR regulations potentially subjects a utility to fines and/or other sanctions. The impact on MidAmerican Energy of any final rules is not currently known.
In recent years, the EPA has requested from several utilities information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the NSR and the New Source Performance Standards of the CAA. In December 2002, MidAmerican Energy received a request from the EPA to provide documentation related to its capital projects from January 1, 1980, to the present for its Neal, Council Bluffs, Louisa and Riverside Energy Centers. MidAmerican Energy has responded to this request and at this time cannot predict the outcome of request.
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Decommissioning Costs
Expected decommissioning costs for Quad Cities Station have been developed based on a site-specific decommissioning study that includes decontamination, dismantling, site restoration, dry fuel storage cost and an assumed shutdown date. Quad Cities Station decommissioning costs are included in as base rates in Iowa tariffs.
MidAmerican Energy's share of expected decommissioning costs for Quad Cities Station, in 2002 dollars, is $266 million. MidAmerican Energy has established external trusts for the investment of funds for decommissioning the Quad Cities Station. The total accrued balance as of December 31, 2002, was $159.8 million and is included in other liabilities. A like amount is reflected in properties, plants and equipment and represents the fair value of the assets held in the trusts.
MidAmerican Energy's depreciation expense included costs for Quad Cities Station nuclear decommissioning of $8.3 million for each of the years 2002, 2001 and 2000. The provision charged to depreciation expense is equal to the funding that is being collected in Iowa rates. The decommissioning funding component of MidAmerican Energy's Iowa tariff assumes decommissioning costs, related to the Quad Cities Station, will escalate at an annual rate of 5.0% and the assumed annual return on funds in the trust is 6.9%. Income (loss), net of investment fees, on the assets in the trust fund increase/(decrease) by a comparable amount MidAmerican Energy's decommissioning liability. Actual amounts were $(6.9) million, $(3.1) million and $3.2 million for 2002, 2001 and 2000, respectively.
Nuclear Insurance
MidAmerican Energy maintains financial protection against catastrophic loss associated with its interest in Quad Cities Station through a combination of insurance purchased by Exelon Generation Company, LLC ("Exelon Generation"), the operator and joint owner of Quad Cities Station, insurance purchased directly by MidAmerican Energy, and the mandatory industry-wide loss funding mechanism afforded under the Price-Anderson Amendments Act of 1988. The general types of coverage are: nuclear liability, property coverage and nuclear worker liability.
Exelon Generation purchases nuclear liability insurance for Quad Cities Station 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 Secondary Financial Protection program under which the licensees of nuclear generating facilities could be assessed for liability incurred due to a serious nuclear incident at any commercial nuclear reactor in the United States. Currently, MidAmerican Energy's aggregate maximum potential share of an assessment for Quad Cities Station is approximately $44 million per incident, payable in installments not to exceed $5 million annually.
The property insurance covers for property damage, stabilization and decontamination of the facility, disposal of the decontaminated material and premature decommissioning arising out of a covered loss. For Quad Cities Station, Exelon Generation purchased primary and excess property insurance protection for the combined interests in Quad Cities Station, with coverage limits totaling $2.1 billion. MidAmerican Energy also directly purchased 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 Quad Cities Station. The property and related coverages purchased directly by MidAmerican Energy and by Exelon Generation, which includes the interests of MidAmerican Energy, are underwritten by an industry mutual insurance company and contain provisions for retrospective premium assessments should two or more full policy-limit losses occur in one policy year. Currently, the maximum retrospective amounts that could be assessed against MidAmerican Energy from industry mutual policies for its obligations associated with Quad Cities Station total $6.3 million.
The master nuclear worker liability coverage, which is purchased by Exelon Generation for Quad Cities Station, 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 in nuclear-related industries.
Fuel, Energy and Operating Lease Commitments
MidAmerican Energy has supply and related transportation contracts for its fossil fueled generating stations. The contracts, with expiration dates ranging from 2003 to 2007, require minimum payments of
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$76.4 million, $61.2 million, $43.6 million, $2.6 million and $2.6 million for the years 2003 through 2007, respectively. MidAmerican Energy expects to supplement these coal contracts with additional contracts and spot market purchases to fulfill its future fossil fuel needs.
MidAmerican Energy also has contracts with non-affiliated companies to purchase electric capacity. The contracts, with expiration dates ranging from 2003 to 2028, require minimum payments of $40.2 million, $37.8 million, $2.9 million, $2.2 million and $2.2 million for the years 2003 through 2007, respectively, and $45.6 million for the total of the years thereafter.
MidAmerican Energy has various natural gas supply and transportation contracts for its gas operations. The minimum commitments under these contracts are $51.9 million, $46.8 million, $37.2 million, $13.1 million and $10.2 million for the years 2003 through 2007, respectively, and $16.6 million for the total of the years thereafter.
HomeServices is the lessee on operating leases primarily for office space for its various brokerage offices. The minimum payments under these leases are $36.0 million, $30.1 million, $25.7 million, $22.4 million and $17.9 million for the years 2003 through 2007, respectively, and $40.7 million for the total of the years thereafter.
MidAmerican Energy, Kern River, Northern Natural Gas and CE Electric UK have various non-cancelable operating leases primarily for office space and rail cars. The minimum payments under these leases are $24.8 million, $16.9 million, $12.7 million, $10.6 million and $9.4 million for the years 2003 through 2007, respectively, and $46.0 million for the total of the years thereafter.
MidAmerican Energy is the lessee on operating leases for coal railcars that contain guarantees of the residual value of such equipment throughout the term of the leases. Events triggering the residual guarantees include termination of the lease, loss of the equipment or purchase of the equipment. Lease terms are for five years with provisions for extensions. At December 31, 2002, the maximum amount of such guarantees specified in these leases totals $31.5 million.
Pipeline Litigation
In 1998, the United States Department of Justice informed the then current owners of Kern River and Northern Natural Gas that Jack Grynberg, an individual, had filed claims in the United States District Court for the District of Colorado under the False Claims Act against such entities and certain of their subsidiaries including Kern River and Northern Natural Gas. Mr. Grynberg has also filed claims against numerous other energy companies and alleges that the defendants violated the False Claims Act in connection with the measurement and purchase of hydrocarbons. The relief sought is an unspecified amount of royalties allegedly not paid to the federal government, treble damages, civil penalties, attorneys' fees and costs. On April 9, 1999, the United States Department of Justice announced that it declined to intervene in any of the Grynberg qui tam cases, including the actions filed against Kern River and Northern Natural Gas in the United States District Court for the District of Colorado. On October 21, 1999, the Panel on Multi-District Litigation transferred the Grynberg qui tam cases, including the ones filed against Kern River and Northern Natural Gas, to the United States District Court for the District of Wyoming for pre-trial purposes. Motions to dismiss the complaint, filed by various defendants including Northern Natural Gas and Williams, which was the former owner of Kern River, were denied on May 18, 2001. On October 9, 2002, the United States District Court for the District of Wyoming dismissed Grynberg's Royalty Valuation Claims. Grynberg has appealed this dismissal to the United States Court of Appeals for the Tenth Circuit. In connection with the purchase of Kern River from Williams in March 2002, Williams agreed to indemnify the Company against any liability for this claim; however, no assurance can be given as to the ability of Williams to perform on this indemnity should it become necessary. No such indemnification was obtained in connection with the purchase of Northern Natural Gas in August 2002. The Company believes that the Grynberg cases filed against Kern River and Northern Natural Gas are without merit and Williams, on behalf of Kern River pursuant to its indemnification, and Northern Natural Gas, intend to defend these actions vigorously.
On June 8, 2001, a number of interstate pipeline companies, including Kern River and Northern Natural Gas, were named as defendants in a nationwide class action lawsuit which had been pending in the 26th Judicial District, District Court, Stevens County Kansas, Civil Department against other defendants,
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generally pipeline and gathering companies, since May 20, 1999. The plaintiffs allege that the defendants have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs. In November 2001, Kern River and Northern Natural Gas, along with the coordinating defendants, filed a motion to dismiss under Rules 9B and 12B of the Kansas Rules of Civil Procedure. In January 2002, Kern River and most of the coordinating defendants filed a motion to dismiss for lack of personal jurisdiction. The court has yet to rule on these motions. The plaintiffs filed for certification of the plaintiff class on September 16, 2002. On January 13, 2003, oral arguments were heard on coordinating defendants' opposition to class certification. On April 10, 2003, the court entered an order denying the plaintiffs' motion for class certification. It is anticipated that the plaintiffs will appeal this decision. Williams has agreed to indemnify the Company against any liability associated with Kern River for this claim; however, no assurance can be given as to the ability of Williams to perform on this indemnity should it become necessary. Williams, on behalf of Kern River and other entities, anticipates joining with Northern Natural Gas and other defendants in contesting certification of the plaintiff class. Kern River and Northern Natural Gas believe that this claim is without merit and that Kern River's and Northern Natural Gas' gas measurement techniques have been in accordance with industry standards and its tariff.
Kern River's 2003 Expansion Project
The 2003 Expansion Project is a new parallel 717-mile loop pipeline that will begin in Lincoln County, Wyoming and terminate in Kern County, California. The 2003 Expansion Project began construction on August 6, 2002 and is expected to be completed and operational by May 1, 2003 at a total cost of approximately $1.2 billion. The 2003 Expansion Project is being financed with approximately 70% debt and 30% equity, consistent with Kern River's original capital structure, the application for the FERC approval described above and the limitations contained in the indenture for Kern River's existing secured senior notes.
Construction is being initially funded with the proceeds of an $875.0 million facility entered into by Kern River on June 21, 2002, for approximately 70% of the projected capitalized costs of the 2003 Expansion Project. The remaining approximately 30% of the capitalized costs of the 2003 Expansion Project is being funded with equity from the Company. The credit facility is structured as a two-year construction facility followed by a term loan with a final maturity 15 years after completion of the 2003 Expansion Project. However, Kern River presently intends to refinance the construction financing facility through a bond offering or other capital markets transaction following completion of the 2003 Expansion Project. Prior to completion of the 2003 Expansion Project, the holders of the construction financing facility will have limited recourse to Kern River and its assets and cash flow, and will have recourse to the Company's completion guarantee described below. Following completion of the 2003 Expansion Project, until such time as the Kern River construction financing facility is refinanced, the lenders under the construction financing facility will share equally and ratably with the existing holders of Kern River's senior Notes in all of the collateral pledged to such Senior Note holders.
Pursuant to the Company's completion guarantee, it has guaranteed that "completion" of the 2003 Expansion Project will occur on or prior to the earliest of any abandonment by Kern River of the project, the occurrence of certain other acceleration events and June 30, 2004. The potential acceleration events include any downgrading of the Company's public debt rating to below investment grade by either S&P or Moody's unless a satisfactory substitute guarantor assumes the Company's obligations under the completion guarantee within 60 days after any such downgrade; Berkshire Hathaway ceasing to own at least a majority of the outstanding capital stock of the Company; and certain other customary events of default by the Company. In the completion guarantee, the Company has also agreed to cause capital contributions to be made to Kern River in a minimum aggregate amount of at least $375 million by June 30, 2004 or upon any earlier event of abandonment of the project. For purposes of the Company's completion guarantee, the term "completion" is defined in the Kern River construction financing agreement to mean satisfaction of a number of conditions, the most significant of which include the requirements that the 2003 Expansion Project be substantially complete and operable and able to permit Kern River to perform its obligations under all of the long-term firm gas transportation service agreements entered into in connection with the 2003 Expansion Project; that the shippers under such agreements shall have begun to incur the obligation to pay reservation fees thereunder; and that the
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FERC shall have authorized Kern River to begin collecting rates under its tariff and its shipper agreements; provided that the 2003 Expansion Project shall still be deemed to have been completed if it is less than substantially complete but it demonstrates at least 80% design capacity and Kern River's debt service coverage ratios as defined in its Senior Notes indenture are not less than 1:55 to 1:0. There are a number of other conditions to completion, including requirements that all conditions to completion of the expansion contained in Kern River's Senior Notes indenture be satisfied and all of Kern River's obligations under its construction financing agreement then share pari passu in all collateral available to Kern River's senior secured noteholders. The Company's completion guarantee shall terminate upon the earlier of completion of the 2003 Expansion Project or repayment in full of all obligations under the Kern River credit facility.
Philippines
Casecnan Construction Arbitration
On February 12, 2001, the contractor filed a Request for Arbitration with the International Chamber of Commerce seeking schedule relief of up to 153 days through August 31, 2001 resulting from various alleged force majeure events. In its March 20, 2001 Supplement to Request for Arbitration, the contractor requested compensation for alleged additional costs of approximately $4 million it incurred from the claimed force majeure events to the extent it is unable to recover from its insurer. On April 20, 2001, the contractor filed a further supplement seeking an additional compensation for damages of approximately $62 million for the alleged force majeure event (and geologic conditions) related to the collapse of the surge shaft. The contractor also has alleged that the circumstances in which CE Casecnan assumed control of the Casecnan Project and placed it into commercial operation on December 11, 2001 amounted to a repudiation of the construction contract and has filed a claim for unspecified quantum meruit damages, and has further alleged that the delay liquidated damages clause which provides for payments of $125,000 per day for each day of delay in completion of the Project for which the contractor is responsible is unenforceable. The arbitration is being conducted applying New York law and in accordance with the rules of the International Chamber of Commerce.
Hearings have been held in connection with this arbitration in July 2001, September 2001, January 2002, March 2002, November 2002 and January 2003. As part of those hearings, on June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from making calls on the demand guaranty posted by Banca di Roma in support of the contractor's obligations to CE Casecnan for delay liquidated damages. As a result of the continuing nature of that injunction, on April 26, 2002, CE Casecnan and the contractor mutually agreed that no demands would be made on the Banca di Roma demand guaranty except pursuant to an arbitration award. As of December 31, 2002, however, CE Casecnan has received approximately $6.0 million of liquidated damages from demands made on the demand guarantees posted by a separate financial institution on behalf of the contractor. On November 7, 2002, the International Chamber of Commerce issued the arbitration tribunal's partial award with respect to the contractor's force majeure and geologic conditions claims. The arbitration panel awarded the contractor 18 days of schedule relief in the aggregate for all of the force majeure events and awarded the contractor $3.8 million with respect to the cost of the collapsed surge shaft. The $3.8 million is shown as part of the accounts payable and accrued expenses balance at the end of December 31, 2002. All of the contractor's other claims with respect to force majeure and geologic conditions were denied.
Further hearings on the contractor's repudiation and quantum meruit claims, the alleged unenforceability of the delay liquidated damages clause and certain other matters had been scheduled for March 24 through March 28, 2003, but were postponed as a result of the commencement of military action in Iraq. The arbitral tribunal has requested the parties to indicate the earliest possible date on which they are available and will then reschedule the hearings.
If the contractor were to prevail on its claim that the delay liquidated damages clause is unenforceable, CE Casecnan would not be entitled to collect such delay damages for the period from March 31, 2001 through December 11, 2001. If the contractor were to prevail in its repudiation claim and prove quantum meruit damages in excess of amounts already paid to the contractor, CE Casecnan could be liable to make additional payments to the contractor. CE Casecnan believes all such allegations and claims are without merit and is vigorously contesting the contractor's claims.
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Casecnan NIA Arbitration
Under the terms of the Project Agreement, NIA has the option of timely reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an increase in the Water Delivery Fee. The payment of certain other taxes by CE Casecnan results automatically in an increase in the Water Delivery Fee. As of December 31, 2002, CE Casecnan has paid approximately $56.7 million in taxes which as a result of the foregoing provisions has resulted in an increase in the Water Delivery Fee. NIA has failed to pay the portion of the Water Delivery Fee each month which relates to the payment of these taxes by CE Casecnan. As a result of this non-payment, on August 19, 2002, CE Casecnan filed a Request for Arbitration against NIA, seeking payment of such portion of the Water Delivery Fee and enforcement of the relevant provision of the Project Agreement going forward. The arbitration will be conducted in accordance with the rules of the International Chamber of Commerce. NIA is expected to file its answer late in the first quarter or early in the second quarter, 2003. The three member arbitration panel has been confirmed by the International Chamber of Commerce and an initial organizational hearing is scheduled for the second quarter, 2003.
Casecnan Stockholder Litigation
Pursuant to the share ownership adjustment mechanism in the CE Casecnan stockholder agreement, which is based upon pro forma financial projections of the Casecnan Project prepared following commencement of commercial operations, in February 2002, MidAmerican, through its indirect wholly owned subsidiary CE Casecnan Ltd., advised the minority stockholder LaPrairie Group Contractors (International) Ltd., ("LPG"), that MidAmerican's indirect ownership interest in CE Casecnan had increased to 100% effective from commencement of commercial operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the State of California, City and County of San Francisco against, inter alia, CE Casecnan Ltd. and MidAmerican. In the complaint, LPG seeks compensatory and punitive damages for alleged breaches of the stockholder agreement and alleged breaches of fiduciary duties allegedly owed by CE Casecnan Ltd. and MidAmerican to LPG. The complaint also seeks injunctive relief against all defendants and a declaratory judgment that LPG is entitled to maintain its 15% interest in CE Casecnan. The impact, if any, of this litigation on the Company cannot be determined at this time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San Lorenzo"), an original shareholder substantially all of whose shares in CE Casecnan a subsidiary of the Company purchased in 1998, threatened to initiate legal action in the Philippines in connection with certain aspects of its option to repurchase such shares on or prior to commercial operation of the Project. CE Casecnan believes that San Lorenzo has no valid basis for any claim and, if named as a defendant in any action that may be commenced by San Lorenzo, will vigorously defend any such action.
21. Segment Information:
With its 2002 acquisitions of Kern River and Northern Natural Gas, the Company has identified seven reportable operating segments principally based on management structure: MidAmerican Energy, Kern River, Northern Natural Gas, CE Electric UK, CalEnergy Generation-Domestic, CalEnergy Generation-Foreign, and HomeServices. Information related to the Company's reportable operating segments is shown below (in thousands).
F-57
| | | | | | | | | | | | | | | | | | |
| | |
Year Ended December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Operating revenue: | |
| MidAmerican Energy | | $ | 2,240,879 | | | $ | 2,388,650 | | | $ | 1,860,499 | | | $ | 455,844 | |
| Kern River | | | 127,254 | | | | — | | | | — | | | | — | |
| Northern Natural Gas | | | 176,880 | | | | — | | | | — | | | | — | |
| CE Electric UK | | | 795,366 | | | | 1,443,997 | | | | 1,499,768 | | | | 498,142 | |
| CalEnergy Generation – Domestic | | | 38,546 | | | | 37,299 | | | | 2,757 | | | | 438 | |
| CalEnergy Generation – Foreign | | | 326,316 | | | | 203,482 | | | | 146,798 | | | | 40,124 | |
| HomeServices | | | 1,138,332 | | | | 641,934 | | | | 408,492 | | | | 60,603 | |
| Segment operating revenue | | | 4,843,573 | | | | 4,715,362 | | | | 3,918,314 | | | | 1,055,151 | |
| Corporate/other | | | (49,563 | ) | | | (18,581 | ) | | | (214 | ) | | | 1,214 | |
| Total operating revenue | | $ | 4,794,010 | | | $ | 4,696,781 | | | $ | 3,918,100 | | | $ | 1,056,365 | |
| Depreciation and amortization: | |
| MidAmerican Energy | | $ | 269,412 | | | $ | 286,590 | | | $ | 184,955 | | | $ | 45,184 | |
| Kern River | | | 17,165 | | | | — | | | | — | | | | — | |
| Northern Natural Gas | | | 18,151 | | | | — | | | | — | | | | — | |
| CE Electric UK | | | 116,792 | | | | 133,865 | | | | 108,637 | | | | 31,964 | |
| CalEnergy Generation – Domestic | | | 8,714 | | | | 5,439 | | | | 2,183 | | | | 250 | |
| CalEnergy Generation – Foreign | | | 88,036 | | | | 66,315 | | | | 52,685 | | | | 13,514 | |
| HomeServices | | | 22,072 | | | | 17,201 | | | | 8,695 | | | | 2,891 | |
| Segment depreciation and amortization | | | 540,342 | | | | 509,410 | | | | 357,155 | | | | 93,803 | |
| Corporate/other | | | (14,440 | ) | | | 29,292 | | | | 26,196 | | | | 3,475 | |
| Total depreciation and amortization | | $ | 525,902 | | | $ | 538,702 | | | $ | 383,351 | | | $ | 97,278 | |
| Interest expense, net: | |
| MidAmerican Energy | | $ | 119,225 | | | $ | 113,980 | | | $ | 94,425 | | | $ | 24,579 | |
| Kern River | | | 33,036 | | | | — | | | | — | | | | — | |
| Northern Natural Gas | | | 22,987 | | | | — | | | | — | | | | — | |
| CE Electric UK | | | 183,472 | | | | 112,308 | | | | 74,335 | | | | 21,189 | |
| CalEnergy Generation – Domestic | | | 20,913 | | | | 10,835 | | | | 1,829 | | | | 793 | |
| CalEnergy Generation – Foreign | | | 68,338 | | | | 30,875 | | | | 34,458 | | | | 9,713 | |
| HomeServices | | | 4,256 | | | | 3,884 | | | | 2,328 | | | | 785 | |
| Segment interest expense, net | | | 452,227 | | | | 271,882 | | | | 207,375 | | | | 57,059 | |
| Corporate/other | | | 157,683 | | | | 140,912 | | | | 104,029 | | | | 28,755 | |
| Total interest expense, net | | $ | 609,910 | | | $ | 412,794 | | | $ | 311,404 | | | $ | 85,814 | |
|
F-58
| | | | | | | | | | | | | | | | | | |
| | |
Year Ended December 31, | | March 14, 2000
through
December 31, 2000 | | MEHC
(Predecessor)
January 1, 2000
through
March 13, 2000 |
| | | 2002 | | 2001 | |
| Income before provisions for income taxes: | |
| MidAmerican Energy | | $ | 241,005 | | | $ | 211,300 | | | $ | 181,797 | | | $ | 63,315 | |
| Kern River | | | 60,700 | | | | — | | | | — | | | | — | |
| Northern Natural Gas | | | 42,882 | | | | — | | | | — | | | | — | |
| CE Electric UK | | | 266,755 | | | | 173,816 | | | | 83,108 | | | | 58,673 | |
| CalEnergy Generation – Domestic | | | (4,963 | ) | | | 46,765 | | | | 30,697 | | | | 2,877 | |
| CalEnergy Generation – Foreign | | | 149,915 | | | | 94,542 | | | | 49,787 | | | | 15,976 | |
| HomeServices | | | 69,979 | | | | 42,945 | | | | 31,015 | | | | (4,929 | ) |
| Segment income before provision for income taxes | | | 826,273 | | | | 569,368 | | | | 376,404 | | | | 135,912 | |
| Corporate/other | | | (183,175 | ) | | | (65,484 | ) | | | (157,200 | ) | | | (44,742 | ) |
| Total income before provision for income taxes | | $ | 643,098 | | | $ | 503,884 | | | $ | 219,204 | | | $ | 91,170 | |
| Provision for income taxes: | |
| MidAmerican Energy | | $ | 99,782 | | | $ | 95,688 | | | $ | 77,450 | | | $ | 27,943 | |
| Kern River | | | 23,014 | | | | — | | | | — | | | | — | |
| Northern Natural Gas | | | 16,947 | | | | — | | | | — | | | | — | |
| CE Electric UK | | | 25,245 | | | | 163,253 | | | | 30,065 | | | | 18,761 | |
| CalEnergy Generation – Domestic | | | (15,203 | ) | | | 2,706 | | | | (1,929 | ) | | | (8 | ) |
| CalEnergy Generation – Foreign | | | 37,577 | | | | 29,712 | | | | 29,194 | | | | 373 | |
| HomeServices | | | 28,207 | | | | 15,953 | | | | 12,300 | | | | (1,992 | ) |
| Segment provision for income taxes | | | 215,569 | | | | 307,312 | | | | 147,080 | | | | 45,077 | |
| Corporate/other | | | (115,981 | ) | | | (57,248 | ) | | | (93,803 | ) | | | (14,069 | ) |
| Total provision for income taxes | | $ | 99,588 | | | $ | 250,064 | | | $ | 53,277 | | | $ | 31,008 | |
| Capital expenditures: | |
| MidAmerican Energy | | $ | 358,194 | | | $ | 252,615 | | | $ | 194,045 | | | $ | 23,977 | |
| Kern River | | | 769,464 | | | | — | | | | — | | | | — | |
| Northern Natural Gas | | | 62,409 | | | | — | | | | — | | | | — | |
| CE Electric UK | | | 222,622 | | | | 176,464 | | | | 95,806 | | | | 22,210 | |
| CalEnergy Generation – Domestic | | | 61,920 | | | | 52,940 | | | | 151,289 | | | | 53,011 | |
| CalEnergy Generation – Foreign | | | 7,830 | | | | 83,954 | | | | 87,781 | | | | 22,263 | |
| HomeServices | | | 18,273 | | | | 9,878 | | | | 6,996 | | | | 2,052 | |
| �� Segment capital expenditures | | | 1,500,712 | | | | 575,851 | | | | 535,917 | | | | 123,513 | |
| Corporate/other | | | 7,373 | | | | 901 | | | | 2,812 | | | | 28 | |
| Total capital expenditures | | $ | 1,508,085 | | | $ | 576,752 | | | $ | 538,729 | | | $ | 123,541 | |
|
F-59
| | | | | | | | | | |
| | | As of December 31, |
| | | 2002 | | 2001 |
| Identifiable assets: | |
| MidAmerican Energy | | $ | 6,034,742 | | | $ | 5,848,035 | |
| Kern River | | | 1,797,850 | | | | — | |
| Northern Natural Gas | | | 2,162,367 | | | | — | |
| CE Electric UK | | | 4,717,524 | | | | 4,340,147 | |
| CalEnergy Generation – Domestic | | | 909,832 | | | | 870,664 | |
| CalEnergy Generation – Foreign | | | 974,852 | | | | 950,035 | |
| HomeServices | | | 488,270 | | | | 322,552 | |
| Segment identifiable assets | | | 17,085,437 | | | | 12,331,433 | |
| Corporate/other | | | 931,018 | | | | 295,219 | |
| Total identifiable assets | | $ | 18,016,455 | | | $ | 12,626,652 | |
| Long-lived assets: | |
| MidAmerican Energy | | $ | 4,999,637 | | | $ | 4,879,884 | |
| Kern River | | | 1,594,225 | | | | — | |
| Northern Natural Gas | | | 1,818,469 | | | | — | |
| CE Electric UK | | | 3,936,598 | | | | 3,650,385 | |
| CalEnergy Generation – Domestic | | | 594,282 | | | | 571,404 | |
| CalEnergy Generation – Foreign | | | 724,908 | | | | 805,050 | |
| HomeServices | | | 384,899 | | | | 262,175 | |
| Segment long-lived assets | | | 14,053,018 | | | | 10,168,898 | |
| Corporate/other | | | 15,201 | | | | 7,019 | |
| Total long-lived assets | | $ | 14,068,219 | | | $ | 10,175,917 | |
|
The remaining differences from the segment amounts to the consolidated amounts described as "Corporate/Other" relate principally to the corporate functions including administrative costs, corporate cash and related interest income, intersegment eliminations, and fair value adjustments relating to acquisitions.
Excess of cost over fair value as of December 31, 2001 and changes for the period from January 1, 2002 through December 31, 2002 by segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | MidAmerican
Energy | | Kern River | | Northern
Natural Gas | | CE Electric
UK | | CalEnergy
Generation-
Domestic | | Home-
Services | | Total |
| Goodwill at December 31, 2001 | | $ | 2,160,004 | | | $ | — | | | $ | — | | | $ | 1,104,262 | | | $ | 142,726 | | | $ | 231,554 | | | $ | 3,638,546 | |
| Acquisitions/purchase price accounting adjustments | | | — | | | | 32,547 | | | | 414,721 | | | | 56,626 | | | | — | | | | 108,914 | | | | 612,808 | |
| Goodwill written off related tosale of business unit | | | — | | | | — | | | | — | | | | (49,587 | ) | | | — | | | | — | | | | (49,587 | ) |
| Translation adjustment | | | — | | | | — | | | | — | | | | 86,296 | | | | — | | | | — | | | | 86,296 | |
| Other adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred tax adjustments | | | (8,946 | ) | | | — | | | | — | | | | (1,675 | ) | | | (15,962 | ) | | | (477 | ) | | | (27,060 | ) |
| Stock option adjustments | | | (1,776 | ) | | | — | | | | — | | | | (601 | ) | | | (324 | ) | | | (170 | ) | | | (2,871 | ) |
| Goodwill at December 31, 2002 | | $ | 2,149,282 | | | $ | 32,547 | | | $ | 414,721 | | | $ | 1,195,321 | | | $ | 126,440 | | | $ | 339,821 | | | $ | 4,258,132 | |
|
F-60
DEALER PROSPECTUS DELIVERY OBLIGATION
Until July 22, 2003, all dealers that effect transactions in these securities, whether or not participating in the offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
All tendered original series C notes, executed letters of transmittal, and other related documents should be directed to the exchange agent. Requests for assistance and for additional copies of this prospectus, the letter of transmittal and other related documents should be directed to the exchange agent.
EXCHANGE AGENT:
THE BANK OF NEW YORK
By Facsimile:
(212) 298-1915
Confirm by telephone:
(212) 815-5920
By Mail, Hand or Courier:
The Bank of New York
Corporate Trust Department
Reorganization Unit
101 Barclay Street
Floor 7 East
New York, New York 10286
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the Registrant's directors and officers pursuant to the following provisions or otherwise, the Registrant has been advised that, although the validity and scope of the governing statute have not been tested in court, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In addition, indemnification may be limited by state securities laws.
Sections 490.850-490.859 of the Iowa Business Corporation Act permit corporations organized thereunder to indemnify directors, officers, employees and agents against liability under certain circumstances. The Restated Articles of Incorporation, as amended, and the Restated Bylaws, as amended, of MidAmerican Energy Holdings Company provide for indemnification of directors, officers and employees to the full extent provided by the Iowa Business Corporation Act. The Articles of Incorporation and the Bylaws state that the indemnification provided therein shall not be deemed exclusive. MidAmerican Energy Holdings Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of MidAmerican Energy Holdings Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not MidAmerican Energy Holdings Company would have the power to indemnify such person against such expense, liability or loss under the Iowa Business Corporation Act. Pursuant to Section 490.857 of the Iowa Business Corporation Act, the Articles of Incorporation and the Bylaws, MidAmerican Energy Holdings Company, through MidAmerican Energy Holdings Company, maintains directors' and officers' liability insurance coverage. MidAmerican Energy Holdings Company has also entered into indemnification agreements with certain directors and officers, and expects to enter into similar agreements with future directors and officers, to further assure such persons indemnification as permitted by Iowa law.
As permitted by Section 490.202 of the Iowa Business Corporation Act and Article XI.B. of the Articles of Incorporation, the Articles of Incorporation are deemed to provide that no director shall be personally liable to MidAmerican Energy Holdings Company or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except liability for any of the following: (1) the amount of a financial benefit received by a director to which the director is not entitled; (2) an intentional infliction of harm on the corporation or the shareholders; (3) a violation of section 490.833 (relating to certain unlawful distributions to shareholders); or (4) an intentional violation of criminal law.
The Registrant's Amended and Restated Articles of Incorporation and Bylaws provides that if the proceeding for which indemnification is sought is by or in the right of the Registrant, indemnification may be made only for reasonable expenses and may not be made in any proceeding in which the person is adjudged liable to the Registrant. Further, any such person may not be indemnified in any proceeding that charges improper personal benefit to the person in which the person is adjudged to be liable.
The Registrant's Amended and Restated Articles of Incorporation and Bylaws allow the Registrant to maintain liability insurance to protect itself and any director, officer, employee, or agent against any expense, liability or loss whether or not the Registrant would have the power to indemnify such person against such incurred expense, liability, or loss.
The Registrant has also entered into indemnification agreements with certain directors and officers, and expects to enter into similar agreements with future directors and officers, to further assure such persons' indemnification as permitted by Iowa law.
The rights to indemnification conferred on any person by the Registrant's Amended and Restated Articles of Incorporation and Bylaws are not exclusive of any right which any person may have or acquire under any statute, provision of the Registrant's Amended and Restated Articles of Incorporation, Bylaws, agreement, or vote of shareholders or disinterested directors.
II-1
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
| | | | | | |
| Exhibit No. | | Description |
| | 3.1 | | | Amended and Restated Articles of Incorporation of MEHC effective March 6, 2002. (incorporated by reference to Exhibit 3.3 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
| | 3.2 | | | Bylaws of MEHC (incorporated by reference to Exhibit 3.2 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 4.1 | | | Indenture, dated as of October 4, 2002, by and between MEHC and The Bank of New York, relating to the 4.625% Senior Notes due 2007, the 5.875% Senior Notes due 2012 and the 3.50% Senior Notes due 2008 (incorporated by reference to Exhibit 4.1 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.2 | | | First Supplemental Indenture, dated as of October 4, 2002, by and between MEHC and The Bank of New York, relating to the 4.625% Senior Notes due 2007 and the 5.875% Senior Notes due 2012 (incorporated by reference to Exhibit 4.2 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.3 | | | Second Supplemental Indenture, dated as of May 16, 2003, by and between MEHC and the Bank of New York relating to the 3.50% Senior Notes due 2008.* |
| | 4.4 | | | Registration Rights Agreement, dated as of May 13, 2003, by and between MEHC and Credit Suisse First Boston LLC (as Representative for the Initial Purchasers).* |
| | 4.5 | | | Indenture for the 6¼% Convertible Junior Subordinated Debentures due 2012, dated as of February 26, 1997, between MEHC, as issuer, and the Bank of New York, as Trustee (incorporated by reference to Exhibit 10.129 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1995). |
| | 4.6 | | | Indenture, dated as of October 15, 1997, among MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to MEHC's Current Report on Form 8-K dated October 23, 1997). |
| | 4.7 | | | Form of First Supplemental Indenture for the 7.63% Senior Notes in the principal amount of $350,000,000 due 2007, dated as of October 28, 1997, among MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to Exhibit 4.2 to MEHC's Current Report on Form 8-K dated October 23, 1997). |
| | 4.8 | | | Form of Second Supplemental Indenture for the 6.96% Senior Notes in the principal amount of $215,000,000 due 2003, 7.23% Senior Notes in the principal amount of $260,000,000 due 2005, 7.52% Senior Notes in the principal amount of $450,000,000 due 2008, and 8.48% Senior Notes in the principal amount of $475,000,000 due 2028, dated as of September 22, 1998 between MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to MEHC's Current Report on Form 8-K dated September 17, 1998). |
| | 4.9 | | | Form of Third Supplemental Indenture for the 7.52% Senior Notes in the principal amount of $100,000,000 due 2008, dated as of November 13, 1998, between MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to MEHC's Current Report on Form 8-K dated November 10, 1998). |
| | 4.10 | | | Indenture, dated as of March 14, 2000, among MEHC and the Bank of New York, as Trustee (incorporated by reference to Exhibit 4.9 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 4.11 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of March 14, 2000 (incorporated by reference to Exhibit 4.10 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 4.12 | | | Indenture, dated as of March 12, 2002 between MEHC and the Bank of New York, as Trustee (incorporated by reference to Exhibit 4.11 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
|
II-2
| | | | | | |
| Exhibit No. | | Description |
| | 4.13 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of March 7, 2002 (incorporated by reference to Exhibit 4.12 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
| | 4.14 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of March 12, 2002 (incorporated by reference to Exhibit 4.13 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
| | 4.15 | | | Amended and Restated Declaration of Trust of MidAmerican Capital Trust III, dated as of August 16, 2002 (incorporated by reference to Exhibit 4.14 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.16 | | | Amended and Restated Declaration of Trust of MidAmerican Capital Trust II, dated as of March 12, 2002 (incorporated by reference to Exhibit 4.15 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.17 | | | Amended and Restated Declaration of Trust of MidAmerican Capital Trust I, dated as of March 14, 2000 (incorporated by reference to Exhibit 4.16 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.18 | | | Indenture, dated as of August 16, 2002 between MEHC and the Bank of New York, as Trustee (incorporated by reference to Exhibit 4.17 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.19 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of August 16, 2002 (incorporated by reference to Exhibit 4.18 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.20 | | | Shareholders Agreement dated as of March 14, 2000 (incorporated by reference to Exhibit 4.19 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 5.1 | | | Opinion of Willkie Farr & Gallagher.** |
| | 8.1 | | | Opinion of Willkie Farr & Gallagher with respect to certain tax matters.** |
| | 10.1 | | | Employment Agreement between MEHC and David L. Sokol, dated May 10, 1999 (incorporated by reference to Exhibit 10.1 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.2 | | | Amendment No. 1 to the Amended and Restated Employment Agreement between MEHC and David L. Sokol, dated March 14, 2000 (incorporated by reference to Exhibit 10.2 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.3 | | | Non-Qualified Stock Options Agreements of David L. Sokol dated March 14, 2000 (incorporated by reference to Exhibit 10.3 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.4 | | | Amended and Restated Employment Agreement between MEHC and Gregory E. Abel, dated May 10, 1999 (incorporated by reference to Exhibit 10.3 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.5 | | | Non-Qualified Stock Options Agreements of Gregory E. Abel dated March 14, 2000 (incorporated by reference to Exhibit 10.5 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.6 | | | Employment Agreement between MEHC and Patrick J. Goodman, dated April 21, 1999 (incorporated by reference to Exhibit 10.5 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.7 | | | MidAmerican Energy Holdings Company Amended and Restated Long Term Incentive Partnership Plan dated January 1, 2003 (incorporated by reference to Exhibit 10.1 to MEHC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). |
|
II-3
| | | | | | |
| Exhibit No. | | Description |
| | 10.8 | | | 125 MW Power Plant—Upper Mahiao Agreement dated September 6, 1993 between PNOC-Energy Development Corporation and Ormat, Inc. as amended by the First Amendment to 125 MW Power Plant Upper Mahiao Agreement dated as of January 28, 1994, the Letter Agreement dated February 10, 1994, the Letter Agreement dated February 18, 1994 and the Fourth Amendment to 125 MW Power Plant—Upper Mahiao Agreement dated as of March 7, 1994 (incorporated by reference to Exhibit 10.95 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.9 | | | Credit Agreement dated April 8, 1994 among CE Cebu Geothermal Power Company, Inc., the Banks thereto, Credit Suisse as Agent (incorporated by reference to Exhibit 10.96 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.10 | | | Credit Agreement dated as of April 8, 1994 between CE Cebu Geothermal Power Company, Inc., Export-Import Bank of the United States (incorporated by reference to Exhibit 10.97 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.11 | | | Pledge Agreement among CE Philippines Ltd, Ormat-Cebu Ltd., Credit Suisse as Collateral Agent and CE Cebu Geothermal Power Company, Inc. dated as of April 8, 1994 (incorporated by reference to Exhibit 10.98 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.12 | | | Overseas Private Investment Corporation Contract of Insurance dated April 8, 1994 between the Overseas Private Investment Corporation and MEHC through its subsidiaries CE International Ltd., CE Philippines Ltd., and Ormat-Cebu Ltd. (incorporated by reference to Exhibit 10.99 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.13 | | | 180 MW Power Plant—Mahanagdong Agreement dated September 18, 1993 between PNOC-Energy Development Corporation and CE Philippines Ltd. and MEHC, as amended by the First Amendment to Mahanagdong Agreement dated June 22, 1994, the Letter Agreement dated July 12, 1994, the Letter Agreement dated July 29, 1994, and the Fourth Amendment to Mahanagdong Agreement dated March 3, 1995 (incorporated by reference to Exhibit 10.100 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.14 | | | Credit Agreement dated as of June 30, 1994 among CE Luzon Geothermal Power Company, Inc., American Pacific Finance Company, the Lenders party thereto, and Bank of America National Trust and Savings Association as Administrative Agent (incorporated by reference to Exhibit 10.101 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.15 | | | Credit Agreement dated as of June 30, 1994 between CE Luzon Geothermal Power Company, Inc. and Export-Import Bank of the United States (incorporated by reference to Exhibit 10.102 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.16 | | | Finance Agreement dated as of June 30, 1994 between CE Luzon Geothermal Power Company, Inc. and Overseas Private Investment Corporation (incorporated by reference to Exhibit 10.103 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.17 | | | Pledge Agreement dated as of June 30, 1994 among CE Mahanagdong Ltd., Kiewit Energy International (Bermuda) Ltd., Bank of America National Trust and Savings Association as Collateral Agent and CE Luzon Geothermal Power Company, Inc. (incorporated by reference to Exhibit 10.104 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
|
II-4
| | | | | | |
| Exhibit No. | | Description |
| | 10.18 | | | Overseas Private Investment Corporation Contract of Insurance dated July 29, 1994 between Overseas Private Investment Corporation and MEHC, CE International Ltd., CE Mahanagdong Ltd. and American Pacific Finance Company and Amendment No. 1 dated August 3, 1994 (incorporated by reference to Exhibit 10.105 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.19 | | | 231 MW Power Plant—Malitbog Agreement dated September 10, 1993 between PNOC-Energy Development Corporation and Magma Power Company and the First and Second Amendments thereto dated December 8, 1993 and March 10, 1994, respectively (incorporated by reference to Exhibit 10.106 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.20 | | | Credit Agreement dated as of November 10, 1994 among Visayas Power Capital Corporation, the Banks parties thereto and Credit Suisse Bank Agent (incorporated by reference to Exhibit 10.107 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.21 | | | Finance Agreement dated as of November 10, 1994 between Visayas Geothermal Power Company and Overseas Private Investment Corporation (incorporated by reference to Exhibit 10.108 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.22 | | | Pledge and Security Agreement dated as of November 10, 1994 among Broad Street Contract Services, Inc., Magma Power Company, Magma Netherlands B.V. and Credit Suisse as Bank Agent (incorporated by reference to Exhibit 10.109 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.23 | | | Overseas Private Investment Corporation Contract of Insurance dated December 21, 1994 between Overseas Private Investment Corporation and Magma Netherlands, B.V. (incorporated by reference to Exhibit 10.110 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.24 | | | Agreement as to Certain Common Representations, Warranties, Covenants and Other Terms, dated November 10, 1994 between Visayas Geothermal Power Company, Visayas Power Capital Corporation, Credit Suisse, as Bank Agent, Overseas Private Investment Corporation and the Banks named therein (incorporated by reference to Exhibit 10.111 to MEHC's 1994 Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.25 | | | Trust Indenture dated as of November 27, 1995 between the CE Casecnan Water and Energy Company, Inc. and Chemical Trust Company of California (incorporated by reference to Exhibit 4.1 to CE Casecnan Water and Energy Company, Inc.'s Registration Statement on Form S-4 dated January 25, 1996). |
| | 10.26 | | | Amended and Restated Casecnan Project Agreement between the National Irrigation Administration and CE Casecnan Water and Energy Company Inc. dated June 26, 1995 (incorporated by reference to Exhibit 10.1 to CE Casecnan Water and Energy Company, Inc.'s Registration Statement on Form S-4 dated January 25, 1996). |
| | 10.27 | | | Term Loan and Revolving Facility Agreement, dated as of October 28, 1996, among CE Electric UK Holdings, CE Electric UK plc and Credit Suisse (incorporated by reference to Exhibit 10.130 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1995). |
| | 10.28 | | | Indenture and First Supplemental Indenture, dated March 11, 1999, between MidAmerican Funding LLC and IBJ Whitehall Bank & Trust Company and the First Supplement thereto relating to the $700 million Senior Notes and Bonds (incorporated by reference to MEHC's Annual Report on Form 10-K for the year ended December 31, 1998). |
|
II-5
| | | | | | |
| Exhibit No. | | Description |
| | 10.29 | | | 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 (incorporated by reference to Exhibit 4(b)-1 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654). |
| | 10.30 | | | First Supplemental Indenture dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee (incorporated by reference to Exhibit 4(b)-2 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654). |
| | 10.31 | | | Second Supplemental Indenture dated as of January 15, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee (incorporated by reference to Exhibit 4(b)-3 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654). |
| | 10.32 | | | Third Supplemental Indenture dated as of May 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee (incorporated by reference to Exhibit 4.4 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654). |
| | 10.33 | | | Fourth Supplemental Indenture dated as of October 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.5 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654). |
| | 10.34 | | | Fifth Supplemental Indenture dated as of November 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.6 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654). |
| | 10.35 | | | Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.15 to the MidAmerican Energy Company Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-11505). |
| | 10.36 | | | Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947 (incorporated by reference to Exhibit 7B filed by Iowa-Illinois Gas and Electric Company as part of Commission File No. 2-6922). |
| | 10.37 | | | Sixth Supplemental Indenture dated as of July 1, 1967 (incorporated by reference to Exhibit 2.08 filed by Iowa-Illinois Gas and Electric Company as part of Commission File No. 2-28806). |
| | 10.38 | | | Twentieth Supplemental Indenture dated as of May 1, 1982 (incorporated by reference to Exhibit 4.B.23 to the Iowa-Illinois Gas and Electric Company Quarterly Report on Form 10-Q for the period ended June 30, 1982, Commission File No. 1-3573). |
| | 10.39 | | | Resignation and Appointment of successor Individual Trustee (incorporated by reference to Exhibit 4.B.30 filed by Iowa-Illinois Gas and Electric Company as part of Commission File No. 33-39211). |
| | 10.40 | | | Twenty-Eighth Supplemental Indenture dated as of May 15, 1992 (incorporated by reference to Exhibit 4.31.B to the Iowa-Illinois Gas and Electric Company Current Report on Form 8-K dated May 21, 1992, Commission File No. 1-3573). |
| | 10.41 | | | Twenty-Ninth Supplemental Indenture dated as of March 15, 1993 (incorporated by reference to Exhibit 4.32.A to the Iowa-Illinois Gas and Electric Company Current Report on Form 8-K dated March 24, 1993, Commission File No. 1-3573). |
| | 10.42 | | | Thirtieth Supplemental Indenture dated as of October 1, 1993 (incorporated by reference to Exhibit 4.34.A to the Iowa-Illinois Gas and Electric Company Current Report on Form 8-K dated October 7, 1993, Commission File No. 1-3573). |
|
II-6
| | | | | | |
| Exhibit No. | | Description |
| | 10.43 | | | Thirty-First Supplemental Indenture dated as of July 1, 1995, between Iowa-Illinois Gas and Electric Company and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.16 to the MidAmerican Energy Company Annual Report on Form 10-K for the year ended dated December 31, 1995, Commission File No. 1-11505). |
| | 10.44 | | | Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967 (incorporated by reference to Exhibit 4-C-2 filed by Iowa Power Inc. as part of Registration Statement No. 2-27681). |
| | 10.45 | | | Amendments Nos. 1 and 2 to Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District (incorporated by reference to Exhibit 4-C-2a filed by Iowa Power Inc. as part of Registration Statement No. 2-35624). |
| | 10.46 | | | 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 (incorporated by reference to Exhibit 5-C-2-b filed by Iowa Power Inc. as part of Registration Statement No. 2-42191). |
| | 10.47 | | | 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 (incorporated by reference to Exhibit 5-C-2-c filed by Iowa Power Inc. as part of Registration Statement No. 2-51540). |
| | 10.48 | | | 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 (incorporated by reference to Exhibit 10.2 to the former MidAmerican Energy Holdings Company and MidAmerican Energy Company respective Quarterly Reports on the combined Form 10-Q for the quarter ended September 30, 1997, Commission File Nos. 333-90553 and 1-11505, respectively). |
| | 10.49 | | | Amendment No. 6 dated July 31, 2002, to the Power Sales Contract between MidAmerican Energy Company and Nebraska Public Power District, dated September 22, 1967 (incorporated by reference to Exhibit 10.1 to the MidAmerican Funding, LLC and MidAmerican Energy Company respective Quarterly Reports on the combined Form 10-Q for the quarter ended June 20, 2002, Commission File Nos. 1-12459 and 1-11505, respectively). |
| | 10.50 | | | CalEnergy Company, Inc. Voluntary Deferred Compensation Plan effective December 1, 1997, First Amendment dated as of August 17, 1999 and Second Amendment effective March 2000 (incorporated by reference to Exhibit 10.50 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.51 | | | MidAmerican Energy Holdings Company Executive Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10.51 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.52 | | | MidAmerican Energy Company First Amended and Restated Supplemental Retirement Plan for Designated Officers dated as of May 10, 1999 (incorporated by reference to Exhibit 10.52 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.53 | | | MidAmerican Energy Company Restated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.54 | | | MidAmerican Energy Holdings Company Restated Deferred Compensation Plan—Board of Directors (incorporated by reference to Exhibit 10 to MEHC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). |
| | 10.55 | | | MidAmerican Energy Company Combined Midwest Resources/Iowa Resources Restated Deferred Compensation Plan—Board of Directors (incorporated by reference to Exhibit 10.63 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
|
II-7
| | | | | | |
| Exhibit No. | | Description |
| | 10.56 | | | Midwest Resources Inc. Supplemental Retirement Plan (formerly the Midwest Energy Company Supplemental Retirement Plan) (incorporated by reference to Exhibit 10.10 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654). |
| | 10.57 | | | Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement Plan (incorporated by reference to Exhibit 10.24 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654). |
| | 10.58 | | | Iowa-Illinois Gas and Electric Company Supplemental Retirement Plan for Designated Officers, as amended as of July 28, 1994 (incorporated by reference to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-3573). |
| | 10.59 | | | Iowa-Illinois Gas and Electric Company Compensation Deferral Plan for Designated Officers, as amended as of July 1, 1993 (incorporated by reference to Exhibit 10.K.2 to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573). |
| | 10.60 | | | Iowa-Illinois Gas and Electric Company Compensation Deferral Plan for Key Employees, dated as of April 26, 1991 (incorporated by reference to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-3573). |
| | 10.61 | | | Iowa-Illinois Gas and Electric Company Board of Directors' Compensation Deferral Plan (incorporated by reference to Exhibit 10.K.4 to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-3573). |
| | 10.62 | | | Iowa Utilities Board Settlement Agreement among MidAmerican Energy Company, Office of Consumer Advocate, Iowa Energy Consumers, Aluminum Company of America, Deere & Company, Cargill Inc., U.S. Gypsum Company, Interstate Power Company and IES Utilities, Inc. (incorporated by reference to Exhibit 10.16 to the MidAmerican Funding, LLC and MidAmerican Energy Company respective Annual Reports on the combined Form 10-K for the year ended December 31, 2000, Commission File Nos. 333-90553 and 1-11505, respectively). |
| | 10.63 | | | Share Sale Agreement among NPower Yorkshire Limited, Innogy Holdings plc, CE Electric UK plc and Northern Electric plc dated as of August 6, 2001 (incorporated by reference to Exhibit 10.63 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.64 | | | Purchase Agreement among The Williams Companies, Inc., Williams Gas Pipeline Company, LLC, Williams Western Pipeline Company LLC, Kern River Acquisition, LLC and MEHC, KR Holding, LLC, KR Acquisition 1, LLC and KR Acquisition 2, LLC, dated as of March 7, 2002 (incorporated by reference to Exhibit 99.2 to MEHC's Current Report on Form 8-K dated March 28, 2002). |
| | 10.65 | | | Stock Purchase Agreement among The Williams Companies, Inc., MEHC Investment, Inc. and MEHC dated as of March 7, 2002 (incorporated by reference to Exhibit 99.3 to MEHC's Current Report on Form 8-K dated March 28, 2002). |
| | 10.66 | | | Completion Guarantee given by MEHC to Union Bank of California, Administrative Agent, dated as of June 21, 2002 (incorporated by reference to Exhibit 99.2 to MEHC's Current Report on Form 8-K dated June 27, 2002). |
| | 10.67 | | | Purchase and Sale Agreement between Dynegy Inc., NNGC Holding Company, Inc. and MEHC, dated as of July 28, 2002 (incorporated by reference to Exhibit 99.2 to MEHC's Current Report on Form 8-K dated July 30, 2002). |
| | 10.68 | | | Executive Incremental Profit Sharing Plan (incorporated by reference to Exhibit 10.2 to MEHC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). |
| | 12.1 | | | Statement regarding Computation of Ratio of Earnings to Fixed Charges.* |
|
II-8
| | | | | | |
| Exhibit No. | | Description |
| | 15.1 | | | Awareness Letter of Independent Accountants.** |
| | 21.1 | | | Subsidiaries of the Registrant.* |
| | 23.1 | | | Consent of Willkie Farr & Gallagher (included in their opinions filed as Exhibits 5.1 and Exhibit 8.1).** |
| | 23.2 | | | Consent of Deloitte & Touche LLP.** |
| | 24.1 | | | Powers of Attorney.* |
| | 25.1 | | | Statement on Form T-1 of Eligibility of Trustee relating to the 3.50% Senior Notes due 2008.* |
| | 99.1 | | | Form of Letter of Transmittal relating to the 3.50% Senior Notes due 2008.* |
| | 99.2 | | | Form of Notice of Guaranteed Delivery relating to the 3.50% Senior Notes due 2008.* |
| | 99.3 | | | Form of Letter to Clients relating to the 3.50% Senior Notes due 2008.* |
| | 99.4 | | | Form of Letter to Nominees relating to the 3.50% Senior Notes due 2008.* |
|
II-9
Item 22. Undertakings
The undersigned registrant hereby undertakes that, for the purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant, pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by any such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether or not such indemnification is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
| (1) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective |
| (2) | For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Des Moines, State of Iowa, on the 11th day of June, 2003.
MIDAMERICAN ENERGY HOLDINGS COMPANY
By:/s/ Douglas L. Anderson
| Douglas L. Anderson
Senior Vice President and General Counsel |
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed below by the following persons, in the capacities and on the dates indicated.
| | | | |
| Signature | | Title | | Date |
|
| * | | Chairman of the Board of Directors, Chief Executive Officer and Director (principal executive officer) | | June 11, 2003 |
|
| David L. Sokol |
|
| * | | President, Chief Operating Officer and Director | | June 11, 2003 |
|
| Gregory E. Abel |
|
| * | | Senior Vice President and Chief
Financial Officer (principal financial officer) | | June 11, 2003 |
|
| Patrick J. Goodman |
|
| * | | Director | | June 11, 2003 |
|
| Edgar D. Aronson |
|
| * | | Director | | June 11, 2003 |
|
| Stanley J. Bright |
|
| * | | Director | | June 11, 2003 |
|
| Walter Scott, Jr. |
|
| * | | Director | | June 11, 2003 |
|
| Marc D. Hamburg |
|
| * | | Director | | June 11, 2003 |
|
| Warren E. Buffett |
|
| * | | Director | | June 11, 2003 |
|
| John K. Boyer |
|
| * | | Director | | June 11, 2003 |
|
| W. David Scott |
|
| * | | Director | | June 11, 2003 |
|
| Richard R. Jaros |
|
Douglas L. Anderson, by signing his name below, signs this document on behalf of each of the above-named persons specified by an asterisk (*) pursuant to a power of attorney duly executed by such persons filed with the Securities and Exchange Commission in the Registrant's Registration Statement on Form S-4 on May 30, 2003.
/s/ Douglas L. Anderson
Douglas L. Anderson
Attorney-in-fact
II-11
| | | | | | |
MidAmerican Energy Holdings Company
Parent Company Only
Condensed Balance Sheets | | SCHEDULE I |
|
As of December 31, 2002 and 2001
(In thousands)
| | | | | | | | | | |
| | | 2002 | | 2001 |
| ASSETS | | | | | | | | |
| Current assets – | | | | | | | | |
| Cash and cash equivalents | | $ | 320,629 | | | $ | 2,524 | |
| Investments in and advances to subsidiaries and joint ventures | | | 5,459,832 | | | | 3,432,528 | |
| Equipment, net | | | 15,984 | | | | 17,605 | |
| Excess of cost over fair value of net assets acquired | | | 1,185,963 | | | | 1,211,814 | |
| Deferred charges and other assets | | | 151,126 | | | | 129,501 | |
| Total assets | | $ | 7,133,534 | | | $ | 4,793,972 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and other accrued liabilities | | $ | 94,389 | | | $ | 68,445 | |
| Current portion of long-term debt | | | 215,000 | | | | — | |
| Short-term debt | | | — | | | | 153,500 | |
| Total current liabilities | | | 309,389 | | | | 221,945 | |
| Non-current liabilities | | | 11,885 | | | | 6,480 | |
| Notes payable – affiliate | | | 94,795 | | | | 197,153 | |
| Parent company debt | | | 2,324,457 | | | | 1,834,498 | |
| Total liabilities | | | 2,740,526 | | | | 2,260,076 | |
| Deferred income | | | 35,313 | | | | 37,578 | |
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts | | | 2,063,412 | | | | 788,151 | |
| Stockholders' equity: | | | | | | | | |
| Zero coupon convertible preferred stock – authorized 50,000 shares, no par value, 41,263 and 34,563 shares issued and outstanding at December 31, 2002 and 2001 | | | — | | | | — | |
| Common stock – authorized 60,000 shares, no par value; 9,281 shares issued and outstanding at December 31, 2002 and 2001 | | | — | | | | — | |
| Additional paid in capital | | | 1,956,509 | | | | 1,553,073 | |
| Retained earnings | | | 584,009 | | | | 223,926 | |
| Accumulated other comprehensive loss, net | | | (246,235 | ) | | | (68,832 | ) |
| Total stockholders' equity | | | 2,294,283 | | | | 1,708,167 | |
| Total liabilities and stockholders' equity | | $ | 7,133,534 | | | $ | 4,793,972 | |
|
The notes to the consolidated MEHC financial statements are an integral part of this
financial statement schedule.
S-1
| | | | | | |
MidAmerican Energy Holdings Company
Parent Company Only
Condensed Statements of Operations | | SCHEDULE I |
|
For the three years ended December 31, 2002
(In thousands)
| | | | | | | | | | | | | | |
| | | 2002 | | 2001 | | 2000 |
| Revenue: | | | | | | | | | |
Equity in undistributed earnings of subsidiary companies
and joint ventures | | $ | 460,631 | | | $ | 608,896 | | | $ | 390,194 | |
Cash dividends and distributions from subsidiary companies
and joint ventures | | | 351,847 | | | | 87,625 | | | | 96,342 | |
| Interest and other income | | | 18,243 | | | | 2,248 | | | | 13,818 | |
| Total revenue | | | 830,721 | | | | 698,769 | | | | 500,354 | |
| | | | | | | | | | |
| Costs and expenses: | | | | | | | | | |
| General and administration | | | 29,368 | | | | 41,078 | | | | 45,089 | |
| Depreciation and amortization | | | 815 | | | | 31,537 | | | | 25,716 | |
| Interest, net of capitalized interest | | | 173,240 | | | | 148,680 | | | | 141,891 | |
| Total costs and expenses | | | 203,423 | | | | 221,295 | | | | 212,696 | |
| Income before provision for income taxes | | | 627,298 | | | | 477,474 | | | | 287,658 | |
| Provision for income taxes | | | 99,588 | | | | 250,064 | | | | 84,285 | |
| Income before minority interest | | | 527,710 | | | | 227,410 | | | | 203,373 | |
| Minority interest | | | 147,667 | | | | 80,137 | | | | 70,804 | |
| Income before and cumulative effect of change in accounting principle | | | 380,043 | | | | 147,273 | | | | 132,569 | |
| Cumulative effect of change in accounting principle, net of tax | | | — | | | | (4,604 | ) | | | — | |
| Net income available to common stockholders | | $ | 380,043 | | | $ | 142,669 | | | $ | 132,569 | |
|
The notes to the consolidated MEHC financial statements are an integral part of this
financial statement schedule.
S-2
| | | | | | |
MidAmerican Energy Holdings Company
Parent Company Only
Condensed Statements of Cash Flows | | SCHEDULE I |
|
For the three years ended December 31, 2002
(In thousands)
| | | | | | | | | | | | | | |
| | | 2002 | | 2001 | | 2000 |
| Cash flows from operating activities | | $ | (188,300 | ) | | $ | (272,906 | ) | | $ | (299,862 | ) |
| | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | |
| Decrease (increase) in advances to and investments in subsidiaries and joint ventures | | | (1,692,742 | ) | | | 204,118 | | | | 143,052 | |
| Acquisition of MEHC (Predecessor) | | | — | | | | — | | | | (2,048,266 | ) |
| Other, net | | | 10,307 | | | | (5,297 | ) | | | 28,458 | |
| Net cash flows from investing activities | | | (1,682,435 | ) | | | 198,821 | | | | (1,876,756 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from issuance of common and preferred stock | | | 402,000 | | | | — | | | | 1,428,024 | |
| Proceeds from issuance of trust preferred securities | | | 1,273,000 | | | | — | | | | 454,772 | |
| Proceeds from issuances of parent company debt | | | 700,000 | | | | — | | | | — | |
| Repayments of parent company debt | | | — | | | | (32 | ) | | | — | |
| Net (repayment of) proceeds from revolver | | | (153,500 | ) | | | 68,500 | | | | 85,000 | |
| Other | | | (32,660 | ) | | | (82 | ) | | | (23,893 | ) |
| Net cash flows from financing activities | | | 2,188,840 | | | | 68,386 | | | | 1,943,903 | |
| Net increase (decrease) in cash and cash equivalents | | | 318,105 | | | | (5,699 | ) | | | (232,715 | ) |
| Cash and cash equivalents at beginning of year | | | 2,524 | | | | 8,223 | | | | 240,938 | |
| Cash and cash equivalents at end of year | | $ | 320,629 | | | $ | 2,524 | | | $ | 8,223 | |
| Supplemental disclosures: | | | | | | | | | |
| Interest paid, net of interest capitalized | | $ | 164,267 | | | $ | 148,999 | | | $ | 144,147 | |
| Income taxes paid | | $ | 101,225 | | | $ | 133,139 | | | $ | 94,405 | |
|
The notes to the consolidated MEHC financial statements are an integral part of this
financial statement schedule.
S-3
SCHEDULE II
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C | | Column D | | Column E |
| | | Balance at
Beginning
of Year | | Additions | | Deductions | | Balance at
End
of Year |
| Description | | Charged
to Income | | Other
Accounts | | Acquisition
Reserves(2) | |
Reserves Deducted From Assets
To Which They Apply: | |
Reserve for uncollectible accounts
receivable: | |
| Year ended 2002 | | $ | 7,319 | | | $ | 27,782 | | | $ | — | | | $ | 10,142 | | | $ | (5,501 | ) | | $ | 39,742 | |
| Year ended 2001 | | $ | 32,685 | | | $ | 17,061 | | | $ | — | | | $ | — | | | $ | (42,427 | ) | | $ | 7,319 | |
| Year ended 2000 | | $ | 18,666 | | | $ | 40,024 | | | $ | — | | | $ | — | | | $ | (26,005 | ) | | $ | 32,685 | |
| Reserves Not Deducted From Assets (1): | |
| Year ended 2002 | | $ | 13,631 | | | $ | 2,798 | | | $ | 247 | | | $ | — | | | $ | (5,695 | ) | | $ | 10,981 | |
| Year ended 2001 | | $ | 25,063 | | | $ | 5,046 | | | $ | — | | | $ | — | | | $ | (16,478 | ) | | $ | 13,631 | |
| Year ended 2000 | | $ | 17,696 | | | $ | 10,832 | | | $ | — | | | $ | — | | | $ | (3,465 | ) | | $ | 25,063 | |
|
| (1) | Reserves not deducted from assets include estimated liabilities for losses retained by MEHC for workers compensation, public liability and property damage claims. |
| (2) | Acquisition reserves represent the reserve recorded at Kern River and Northern Natural Gas at the date of acquisition. |
The notes to the consolidated MEHC financial statements are an integral part of this financial
statement schedule.
S-4
EXHIBIT INDEX
| | | | | | |
| Exhibit No. | | Description |
| | 3.1 | | | Amended and Restated Articles of Incorporation of MEHC effective March 6, 2002. (incorporated by reference to Exhibit 3.3 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
| | 3.2 | | | Bylaws of MEHC (incorporated by reference to Exhibit 3.2 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 4.1 | | | Indenture, dated as of October 4, 2002, by and between MEHC and The Bank of New York, relating to the 4.625% Senior Notes due 2007, the 5.875% Senior Notes due 2012 and the 3.50% Senior Notes due 2008 (incorporated by reference to Exhibit 4.1 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.2 | | | First Supplemental Indenture, dated as of October 4, 2002, by and between MEHC and The Bank of New York, relating to the 4.625% Senior Notes due 2007 and the 5.875% Senior Notes due 2012 (incorporated by reference to Exhibit 4.2 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.3 | | | Second Supplemental Indenture, dated as of May 16, 2003, by and between MEHC and the Bank of New York relating to the 3.50% Senior Notes due 2008.* |
| | 4.4 | | | Registration Rights Agreement, dated as of May 13, 2003, by and between MEHC and Credit Suisse First Boston LLC (as Representative for the Initial Purchasers).* |
| | 4.5 | | | Indenture for the 6¼% Convertible Junior Subordinated Debentures due 2012, dated as of February 26, 1997, between MEHC, as issuer, and the Bank of New York, as Trustee (incorporated by reference to Exhibit 10.129 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1995). |
| | 4.6 | | | Indenture, dated as of October 15, 1997, among MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to MEHC's Current Report on Form 8-K dated October 23, 1997). |
| | 4.7 | | | Form of First Supplemental Indenture for the 7.63% Senior Notes in the principal amount of $350,000,000 due 2007, dated as of October 28, 1997, among MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to Exhibit 4.2 to MEHC's Current Report on Form 8-K dated October 23, 1997). |
| | 4.8 | | | Form of Second Supplemental Indenture for the 6.96% Senior Notes in the principal amount of $215,000,000 due 2003, 7.23% Senior Notes in the principal amount of $260,000,000 due 2005, 7.52% Senior Notes in the principal amount of $450,000,000 due 2008, and 8.48% Senior Notes in the principal amount of $475,000,000 due 2028, dated as of September 22, 1998 between MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to MEHC's Current Report on Form 8-K dated September 17, 1998). |
| | 4.9 | | | Form of Third Supplemental Indenture for the 7.52% Senior Notes in the principal amount of $100,000,000 due 2008, dated as of November 13, 1998, between MEHC and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by reference to MEHC's Current Report on Form 8-K dated November 10, 1998). |
| | 4.10 | | | Indenture, dated as of March 14, 2000, among MEHC and the Bank of New York, as Trustee (incorporated by reference to Exhibit 4.9 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 4.11 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of March 14, 2000 (incorporated by reference to Exhibit 4.10 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
|
| | | | | | |
| Exhibit No. | | Description |
| | 4.12 | | | Indenture, dated as of March 12, 2002 between MEHC and the Bank of New York, as Trustee (incorporated by reference to Exhibit 4.11 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
| | 4.13 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of March 7, 2002 (incorporated by reference to Exhibit 4.12 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
| | 4.14 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of March 12, 2002 (incorporated by reference to Exhibit 4.13 to MEHC's Annual Report on Form 10-K for the year ended December 31, 2001). |
| | 4.15 | | | Amended and Restated Declaration of Trust of MidAmerican Capital Trust III, dated as of August 16, 2002 (incorporated by reference to Exhibit 4.14 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.16 | | | Amended and Restated Declaration of Trust of MidAmerican Capital Trust II, dated as of March 12, 2002 (incorporated by reference to Exhibit 4.15 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.17 | | | Amended and Restated Declaration of Trust of MidAmerican Capital Trust I, dated as of March 14, 2000 (incorporated by reference to Exhibit 4.16 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.18 | | | Indenture, dated as of August 16, 2002 between MEHC and the Bank of New York, as Trustee (incorporated by reference to Exhibit 4.17 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.19 | | | Subscription Agreement executed by Berkshire Hathaway Inc. dated as of August 16, 2002 (incorporated by reference to Exhibit 4.18 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 4.20 | | | Shareholders Agreement dated as of March 14, 2000 (incorporated by reference to Exhibit 4.19 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 5.1 | | | Opinion of Willkie Farr & Gallagher.** |
| | 8.1 | | | Opinion of Willkie Farr & Gallagher with respect to certain tax matters.** |
| | 10.1 | | | Employment Agreement between MEHC and David L. Sokol, dated May 10, 1999 (incorporated by reference to Exhibit 10.1 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.2 | | | Amendment No. 1 to the Amended and Restated Employment Agreement between MEHC and David L. Sokol, dated March 14, 2000 (incorporated by reference to Exhibit 10.2 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.3 | | | Non-Qualified Stock Options Agreements of David L. Sokol dated March 14, 2000 (incorporated by reference to Exhibit 10.3 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.4 | | | Amended and Restated Employment Agreement between MEHC and Gregory E. Abel, dated May 10, 1999 (incorporated by reference to Exhibit 10.3 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.5 | | | Non-Qualified Stock Options Agreements of Gregory E. Abel dated March 14, 2000 (incorporated by reference to Exhibit 10.5 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
|
| | | | | | |
| Exhibit No. | | Description |
| | 10.6 | | | Employment Agreement between MEHC and Patrick J. Goodman, dated April 21, 1999 (incorporated by reference to Exhibit 10.5 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.7 | | | MidAmerican Energy Holdings Company Amended and Restated Long Term Incentive Partnership Plan dated January 1, 2003 (incorporated by reference to Exhibit 10.1 to MEHC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). |
| | 10.8 | | | 125 MW Power Plant—Upper Mahiao Agreement dated September 6, 1993 between PNOC-Energy Development Corporation and Ormat, Inc. as amended by the First Amendment to 125 MW Power Plant Upper Mahiao Agreement dated as of January 28, 1994, the Letter Agreement dated February 10, 1994, the Letter Agreement dated February 18, 1994 and the Fourth Amendment to 125 MW Power Plant—Upper Mahiao Agreement dated as of March 7, 1994 (incorporated by reference to Exhibit 10.95 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.9 | | | Credit Agreement dated April 8, 1994 among CE Cebu Geothermal Power Company, Inc., the Banks thereto, Credit Suisse as Agent (incorporated by reference to Exhibit 10.96 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.10 | | | Credit Agreement dated as of April 8, 1994 between CE Cebu Geothermal Power Company, Inc., Export-Import Bank of the United States (incorporated by reference to Exhibit 10.97 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.11 | | | Pledge Agreement among CE Philippines Ltd, Ormat-Cebu Ltd., Credit Suisse as Collateral Agent and CE Cebu Geothermal Power Company, Inc. dated as of April 8, 1994 (incorporated by reference to Exhibit 10.98 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.12 | | | Overseas Private Investment Corporation Contract of Insurance dated April 8, 1994 between the Overseas Private Investment Corporation and MEHC through its subsidiaries CE International Ltd., CE Philippines Ltd., and Ormat-Cebu Ltd. (incorporated by reference to Exhibit 10.99 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.13 | | | 180 MW Power Plant—Mahanagdong Agreement dated September 18, 1993 between PNOC-Energy Development Corporation and CE Philippines Ltd. and MEHC, as amended by the First Amendment to Mahanagdong Agreement dated June 22, 1994, the Letter Agreement dated July 12, 1994, the Letter Agreement dated July 29, 1994, and the Fourth Amendment to Mahanagdong Agreement dated March 3, 1995 (incorporated by reference to Exhibit 10.100 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.14 | | | Credit Agreement dated as of June 30, 1994 among CE Luzon Geothermal Power Company, Inc., American Pacific Finance Company, the Lenders party thereto, and Bank of America National Trust and Savings Association as Administrative Agent (incorporated by reference to Exhibit 10.101 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.15 | | | Credit Agreement dated as of June 30, 1994 between CE Luzon Geothermal Power Company, Inc. and Export-Import Bank of the United States (incorporated by reference to Exhibit 10.102 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
|
| | | | | | |
| Exhibit No. | | Description |
| | 10.16 | | | Finance Agreement dated as of June 30, 1994 between CE Luzon Geothermal Power Company, Inc. and Overseas Private Investment Corporation (incorporated by reference to Exhibit 10.103 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.17 | | | Pledge Agreement dated as of June 30, 1994 among CE Mahanagdong Ltd., Kiewit Energy International (Bermuda) Ltd., Bank of America National Trust and Savings Association as Collateral Agent and CE Luzon Geothermal Power Company, Inc. (incorporated by reference to Exhibit 10.104 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.18 | | | Overseas Private Investment Corporation Contract of Insurance dated July 29, 1994 between Overseas Private Investment Corporation and MEHC, CE International Ltd., CE Mahanagdong Ltd. and American Pacific Finance Company and Amendment No. 1 dated August 3, 1994 (incorporated by reference to Exhibit 10.105 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.19 | | | 231 MW Power Plant—Malitbog Agreement dated September 10, 1993 between PNOC-Energy Development Corporation and Magma Power Company and the First and Second Amendments thereto dated December 8, 1993 and March 10, 1994, respectively (incorporated by reference to Exhibit 10.106 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.20 | | | Credit Agreement dated as of November 10, 1994 among Visayas Power Capital Corporation, the Banks parties thereto and Credit Suisse Bank Agent (incorporated by reference to Exhibit 10.107 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.21 | | | Finance Agreement dated as of November 10, 1994 between Visayas Geothermal Power Company and Overseas Private Investment Corporation (incorporated by reference to Exhibit 10.108 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.22 | | | Pledge and Security Agreement dated as of November 10, 1994 among Broad Street Contract Services, Inc., Magma Power Company, Magma Netherlands B.V. and Credit Suisse as Bank Agent (incorporated by reference to Exhibit 10.109 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.23 | | | Overseas Private Investment Corporation Contract of Insurance dated December 21, 1994 between Overseas Private Investment Corporation and Magma Netherlands, B.V. (incorporated by reference to Exhibit 10.110 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.24 | | | Agreement as to Certain Common Representations, Warranties, Covenants and Other Terms, dated November 10, 1994 between Visayas Geothermal Power Company, Visayas Power Capital Corporation, Credit Suisse, as Bank Agent, Overseas Private Investment Corporation and the Banks named therein (incorporated by reference to Exhibit 10.111 to MEHC's 1994 Annual Report on Form 10-K for the year ended December 31, 1993). |
| | 10.25 | | | Trust Indenture dated as of November 27, 1995 between the CE Casecnan Water and Energy Company, Inc. and Chemical Trust Company of California (incorporated by reference to Exhibit 4.1 to CE Casecnan Water and Energy Company, Inc.'s Registration Statement on Form S-4 dated January 25, 1996). |
| | 10.26 | | | Amended and Restated Casecnan Project Agreement between the National Irrigation Administration and CE Casecnan Water and Energy Company Inc. dated June 26, 1995 (incorporated by reference to Exhibit 10.1 to CE Casecnan Water and Energy Company, Inc.'s Registration Statement on Form S-4 dated January 25, 1996). |
|
| | | | | | |
| Exhibit No. | | Description |
| | 10.27 | | | Term Loan and Revolving Facility Agreement, dated as of October 28, 1996, among CE Electric UK Holdings, CE Electric UK plc and Credit Suisse (incorporated by reference to Exhibit 10.130 to MEHC's Annual Report on Form 10-K for the year ended December 31, 1995). |
| | 10.28 | | | Indenture and First Supplemental Indenture, dated March 11, 1999, between MidAmerican Funding LLC and IBJ Whitehall Bank & Trust Company and the First Supplement thereto relating to the $700 million Senior Notes and Bonds (incorporated by reference to MEHC's Annual Report on Form 10-K for the year ended December 31, 1998). |
| | 10.29 | | | 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 (incorporated by reference to Exhibit 4(b)-1 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654). |
| | 10.30 | | | First Supplemental Indenture dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee (incorporated by reference to Exhibit 4(b)-2 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654). |
| | 10.31 | | | Second Supplemental Indenture dated as of January 15, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee (incorporated by reference to Exhibit 4(b)-3 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654). |
| | 10.32 | | | Third Supplemental Indenture dated as of May 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee (incorporated by reference to Exhibit 4.4 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654). |
| | 10.33 | | | Fourth Supplemental Indenture dated as of October 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.5 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654). |
| | 10.34 | | | Fifth Supplemental Indenture dated as of November 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.6 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654). |
| | 10.35 | | | Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.15 to the MidAmerican Energy Company Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-11505). |
| | 10.36 | | | Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947 (incorporated by reference to Exhibit 7B filed by Iowa-Illinois Gas and Electric Company as part of Commission File No. 2-6922). |
| | 10.37 | | | Sixth Supplemental Indenture dated as of July 1, 1967 (incorporated by reference to Exhibit 2.08 filed by Iowa-Illinois Gas and Electric Company as part of Commission File No. 2-28806). |
| | 10.38 | | | Twentieth Supplemental Indenture dated as of May 1, 1982 (incorporated by reference to Exhibit 4.B.23 to the Iowa-Illinois Gas and Electric Company Quarterly Report on Form 10-Q for the period ended June 30, 1982, Commission File No. 1-3573). |
|
| | | | | | |
| Exhibit No. | | Description |
| | 10.39 | | | Resignation and Appointment of successor Individual Trustee (incorporated by reference to Exhibit 4.B.30 filed by Iowa-Illinois Gas and Electric Company as part of Commission File No. 33-39211). |
| | 10.40 | | | Twenty-Eighth Supplemental Indenture dated as of May 15, 1992 (incorporated by reference to Exhibit 4.31.B to the Iowa-Illinois Gas and Electric Company Current Report on Form 8-K dated May 21, 1992, Commission File No. 1-3573). |
| | 10.41 | | | Twenty-Ninth Supplemental Indenture dated as of March 15, 1993 (incorporated by reference to Exhibit 4.32.A to the Iowa-Illinois Gas and Electric Company Current Report on Form 8-K dated March 24, 1993, Commission File No. 1-3573). |
| | 10.42 | | | Thirtieth Supplemental Indenture dated as of October 1, 1993 (incorporated by reference to Exhibit 4.34.A to the Iowa-Illinois Gas and Electric Company Current Report on Form 8-K dated October 7, 1993, Commission File No. 1-3573). |
| | 10.43 | | | Thirty-First Supplemental Indenture dated as of July 1, 1995, between Iowa-Illinois Gas and Electric Company and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4.16 to the MidAmerican Energy Company Annual Report on Form 10-K for the year ended dated December 31, 1995, Commission File No. 1-11505). |
| | 10.44 | | | Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967 (incorporated by reference to Exhibit 4-C-2 filed by Iowa Power Inc. as part of Registration Statement No. 2-27681). |
| | 10.45 | | | Amendments Nos. 1 and 2 to Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District (incorporated by reference to Exhibit 4-C-2a filed by Iowa Power Inc. as part of Registration Statement No. 2-35624). |
| | 10.46 | | | 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 (incorporated by reference to Exhibit 5-C-2-b filed by Iowa Power Inc. as part of Registration Statement No. 2-42191). |
| | 10.47 | | | 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 (incorporated by reference to Exhibit 5-C-2-c filed by Iowa Power Inc. as part of Registration Statement No. 2-51540). |
| | 10.48 | | | 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 (incorporated by reference to Exhibit 10.2 to the former MidAmerican Energy Holdings Company and MidAmerican Energy Company respective Quarterly Reports on the combined Form 10-Q for the quarter ended September 30, 1997, Commission File Nos. 333-90553 and 1-11505, respectively). |
| | 10.49 | | | Amendment No. 6 dated July 31, 2002, to the Power Sales Contract between MidAmerican Energy Company and Nebraska Public Power District, dated September 22, 1967 (incorporated by reference to Exhibit 10.1 to the MidAmerican Funding, LLC and MidAmerican Energy Company respective Quarterly Reports on the combined Form 10-Q for the quarter ended June 20, 2002, Commission File Nos. 1-12459 and 1-11505, respectively). |
| | 10.50 | | | CalEnergy Company, Inc. Voluntary Deferred Compensation Plan effective December 1, 1997, First Amendment dated as of August 17, 1999 and Second Amendment effective March 2000 (incorporated by reference to Exhibit 10.50 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
|
| | | | | | |
| Exhibit No. | | Description |
| | 10.51 | | | MidAmerican Energy Holdings Company Executive Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10.51 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.52 | | | MidAmerican Energy Company First Amended and Restated Supplemental Retirement Plan for Designated Officers dated as of May 10, 1999 (incorporated by reference to Exhibit 10.52 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.53 | | | MidAmerican Energy Company Restated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.54 | | | MidAmerican Energy Holdings Company Restated Deferred Compensation Plan—Board of Directors (incorporated by reference to Exhibit 10 to MEHC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). |
| | 10.55 | | | MidAmerican Energy Company Combined Midwest Resources/Iowa Resources Restated Deferred Compensation Plan—Board of Directors (incorporated by reference to Exhibit 10.63 to MEHC's Annual Report on Form 10-K/A for the year ended December 31, 1999). |
| | 10.56 | | | Midwest Resources Inc. Supplemental Retirement Plan (formerly the Midwest Energy Company Supplemental Retirement Plan) (incorporated by reference to Exhibit 10.10 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654). |
| | 10.57 | | | Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement Plan (incorporated by reference to Exhibit 10.24 to the Midwest Resources Inc. Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654). |
| | 10.58 | | | Iowa-Illinois Gas and Electric Company Supplemental Retirement Plan for Designated Officers, as amended as of July 28, 1994 (incorporated by reference to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-3573). |
| | 10.59 | | | Iowa-Illinois Gas and Electric Company Compensation Deferral Plan for Designated Officers, as amended as of July 1, 1993 (incorporated by reference to Exhibit 10.K.2 to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573). |
| | 10.60 | | | Iowa-Illinois Gas and Electric Company Compensation Deferral Plan for Key Employees, dated as of April 26, 1991 (incorporated by reference to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-3573). |
| | 10.61 | | | Iowa-Illinois Gas and Electric Company Board of Directors' Compensation Deferral Plan (incorporated by reference to Exhibit 10.K.4 to the Iowa-Illinois Gas and Electric Company Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-3573). |
| | 10.62 | | | Iowa Utilities Board Settlement Agreement among MidAmerican Energy Company, Office of Consumer Advocate, Iowa Energy Consumers, Aluminum Company of America, Deere & Company, Cargill Inc., U.S. Gypsum Company, Interstate Power Company and IES Utilities, Inc. (incorporated by reference to Exhibit 10.16 to the MidAmerican Funding, LLC and MidAmerican Energy Company respective Annual Reports on the combined Form 10-K for the year ended December 31, 2000, Commission File Nos. 333-90553 and 1-11505, respectively). |
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| | | | | | |
| Exhibit No. | | Description |
| | 10.63 | | | Share Sale Agreement among NPower Yorkshire Limited, Innogy Holdings plc, CE Electric UK plc and Northern Electric plc dated as of August 6, 2001 (incorporated by reference to Exhibit 10.63 of MEHC's Registration Statement No. 333-101699 dated December 6, 2002). |
| | 10.64 | | | Purchase Agreement among The Williams Companies, Inc., Williams Gas Pipeline Company, LLC, Williams Western Pipeline Company LLC, Kern River Acquisition, LLC and MEHC, KR Holding, LLC, KR Acquisition 1, LLC and KR Acquisition 2, LLC, dated as of March 7, 2002 (incorporated by reference to Exhibit 99.2 to MEHC's Current Report on Form 8-K dated March 28, 2002). |
| | 10.65 | | | Stock Purchase Agreement among The Williams Companies, Inc., MEHC Investment, Inc. and MEHC dated as of March 7, 2002 (incorporated by reference to Exhibit 99.3 to MEHC's Current Report on Form 8-K dated March 28, 2002). |
| | 10.66 | | | Completion Guarantee given by MEHC to Union Bank of California, Administrative Agent, dated as of June 21, 2002 (incorporated by reference to Exhibit 99.2 to MEHC's Current Report on Form 8-K dated June 27, 2002). |
| | 10.67 | | | Purchase and Sale Agreement between Dynegy Inc., NNGC Holding Company, Inc. and MEHC, dated as of July 28, 2002 (incorporated by reference to Exhibit 99.2 to MEHC's Current Report on Form 8-K dated July 30, 2002). |
| | 10.68 | | | Executive Incremental Profit Sharing Plan (incorporated by reference to Exhibit 10.2 to MEHC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003). |
| | 12.1 | | | Statement regarding Computation of Ratio of Earnings to Fixed Charges.* |
| | 15.1 | | | Awareness Letter of Independent Accountants.** |
| | 21.1 | | | Subsidiaries of the Registrant.* |
| | 23.1 | | | Consent of Willkie Farr & Gallagher (included in their opinions filed as Exhibits 5.1 and Exhibit 8.1).** |
| | 23.2 | | | Consent of Deloitte & Touche LLP.** |
| | 24.1 | | | Powers of Attorney.* |
| | 25.1 | | | Statement on Form T-1 of Eligibility of Trustee relating to the 3.50% Senior Notes due 2008.* |
| | 99.1 | | | Form of Letter of Transmittal relating to the 3.50% Senior Notes due 2008.* |
| | 99.2 | | | Form of Notice of Guaranteed Delivery relating to the 3.50% Senior Notes due 2008.* |
| | 99.3 | | | Form of Letter to Clients relating to the 3.50% Senior Notes due 2008.* |
| | 99.4 | | | Form of Letter to Nominees relating to the 3.50% Senior Notes due 2008.* |
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