period, and (4) the provisions, if any, for redemption of such medium-term note during the extension period, including the date or dates on which or the period or periods during which and the price or prices at which such redemption may occur during the extension period. Upon the sending by the trustee of an extension notice to the holder of a medium-term note, the stated maturity of such medium-term note will be extended automatically, and, except as modified by the extension notice and as described in the next two paragraphs, such medium-term note will have the same terms as prior to the sending of such extension notice.
Notwithstanding the foregoing, not later than 20 calendar days prior to the current stated maturity date for a medium-term note, we may, at our option, revoke the interest rate, in the case of a fixed rate note, or the spread and/or spread multiplier, in the case of a floating rate note, provided for in the applicable extension notice and establish a higher interest rate, in the case of a fixed rate note, or a spread and/or spread multiplier resulting in a higher interest rate, in the case of a floating rate note, for the extension period by causing the trustee to send by telegram, telex, facsimile transmission, hand delivery or letter (first class, postage prepaid) notice of such higher interest rate or spread and/or spread multiplier resulting in a higher interest rate, as the case may be, to the holder of such medium-term note. Such notice will be irrevocable. All medium-term notes with respect to which the stated maturity is extended will bear such higher interest rate, in the case of a fixed rate note, or spread and/or spread multiplier resulting in a higher interest rate, in the case of a floating rate note, for the extension period, whether or not tendered for repayment as provided in the next paragraph.
If we extend the stated maturity of a medium-term note (including, if such stated maturity has previously been extended, the stated maturity as previously extended), the holder of such medium-term note will have the option to elect repayment of such note, in whole but not in part, by us on the current stated maturity date (including the last day of the then current extension period, if any) at a price equal to the principal amount thereof plus accrued and unpaid interest to but excluding such date. In order for a medium-term note to be so repaid on the current stated maturity date, the holder thereof must follow the procedures set forth in the attached prospectus under ‘‘Redemption and Repayment’’ for optional repayment, except that the period for delivery of such medium-term note or notification to the trustee will be at least 25 but not more than 35 calendar days prior to the current stated maturity date. A holder who has tendered a medium-term note for repayment following receipt of an extension notice may revoke such tender for repayment by written notice to the trustee received prior to 5:00 P.M., New York City time, on the tenth calendar day prior to the current stated maturity date.
The applicable pricing supplement will indicate whether a medium-term note (other than an amortizing note) will mature at its current stated maturity date unless the term of all or any portion of any such note is renewed by the holder in accordance with the procedures described in such pricing supplement.
If so specified in the applicable pricing supplement, any medium-term note may be subject to all of the provisions, or any combination of the provisions, described above under ‘‘Reset Notes,’’ ‘‘Extension of Maturity’’ and ‘‘Renewable Notes.’’
MidAmerican Energy Company (the ‘‘Company’’) will not at any time directly or indirectly create or assume and will not cause or permit a Subsidiary directly or indirectly to create or assume, except in favor of the Company or a Wholly-Owned Subsidiary, any mortgage, pledge or other lien or encumbrance upon any Principal Facility or any interest it may have therein or upon any stock of any Regulated Subsidiary or any indebtedness of any Subsidiary to the Company or any other Subsidiary, whether now owned or hereafter acquired, without making effective provision (and the Company covenants that in such case it
Table of Contentswill make or cause to be made, effective provision) whereby the outstanding Securities and any other indebtedness of the Company then entitled thereto shall be secured by such mortgage, pledge, lien or encumbrance equally and ratably with any and all other obligations and indebtedness thereby secured, so long as any such other obligations and indebtedness shall be so secured (provided, that for the purpose of providing such equal and ratable security, the principal amount of outstanding Original Issue Discount Securities shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the Maturity thereof pursuant to the Indenture); provided, however, that the foregoing covenant shall not be applicable to (1) the lien of the Midwest Power Indenture, (2) Permitted Encumbrances or (3) any transfer, lease, use or other encumbrance of or on the Company's or any of its Subsidiary's transmission assets as otherwise required by applicable state or federal order, regulation, rule or statute.
For purposes of the foregoing covenant, the following terms have the following meanings:
‘‘Affiliate’’ of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, ‘‘control,’’ when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms ‘‘controlling’’ and ‘‘controlled’’ have meanings correlative to the foregoing.
‘‘Common Shareholders' Equity’’ means, at any time, the total shareholders' equity of the Company and its consolidated subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles, as of the end of the most recently completed fiscal quarter of the Company for which financial information is then available.
‘‘Indenture’’ means the Indenture dated as of October 1, 2006, as amended, between the Company and The Bank of New York Trust Company, NA, as trustee, with respect to the notes and the other senior debt securities of the Company, and indentures supplemental thereto.
‘‘Maturity’’ when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as provided therein or in the Indenture, whether at the Stated Maturity or by declaration of acceleration, call for redemption or by repayment or otherwise.
‘‘Midwest Power Indenture’’ means the 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 (Harris Trust and Savings Bank, successor trustee, succeeded by BNY Midwest Trust Company, as successor trustee), and indentures supplemental thereto.
‘‘Original Issue Discount Security’’ means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to the Indenture.
‘‘Permitted Encumbrances’’ means:
(a) (i) any mortgage, pledge or other lien or encumbrance on any property hereafter acquired or constructed by the Company or a Subsidiary, or on which property so constructed is located, and created prior to, contemporaneously with or within 360 days after, such acquisition or construction or the commencement of commercial operation of such property to secure or provide for the payment of any part of the purchase or construction price of such property, or (ii) any property subject to any mortgage, pledge, or other lien or encumbrance upon such property existing at the time of acquisition thereof by the Company or any Subsidiary, whether or not assumed by the Company or such Subsidiary, or (iii) any mortgage, pledge or other lien or encumbrance existing on the property, shares of stock, membership interests or indebtedness of a corporation or limited liability company at the time such corporation or limited liability company shall become a Subsidiary or any pledge of the shares of stock or membership interests of such corporation or limited liability company prior to, contemporaneously with or within 360 days after such corporation or limited liability company shall become a Subsidiary to secure or provide for the payment of any part of the
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Table of Contentspurchase price of such stock or membership interests, or (iv) any conditional sales agreement or other title retention agreement with respect to any property hereafter acquired or constructed; provided that, in the case of clauses (i) through (iv), the lien of any such mortgage, pledge or other lien does not spread to property owned prior to such acquisition or construction or to other property thereafter acquired or constructed other than additions to such acquired or constructed property and other than property on which property so constructed is located; and provided, further, that if a firm commitment from a bank, insurance company or other lender or investor (not including the Company, a Subsidiary or an Affiliate of the Company) for the financing of the acquisition or construction of property is made prior to, contemporaneously with or within the 360-day period hereinabove referred to, the applicable mortgage, pledge, lien or encumbrance shall be deemed to be permitted by this clause (a) whether or not created or assumed within such period;
(b) any mortgage, pledge or other lien or encumbrance created for the sole purpose of extending, renewing or refunding any mortgage, pledge, lien or encumbrance permitted by clause (a) of this definition; provided, however, that the principal amount of indebtedness secured thereby shall not exceed the principal amount of indebtedness so secured at the time of such extension, renewal or refunding and that such extension, renewal or refunding mortgage, pledge, lien or encumbrance shall be limited to all or any part of the same property that secured the mortgage, pledge or other lien or encumbrance extended, renewed or refunded;
(c) liens for taxes or assessments or governmental charges or levies not then due and delinquent or the validity of which is being contested in good faith, and against which an adequate reserve has been established; liens on any property created in connection with pledges or deposits to secure public or statutory obligations or to secure performance in connection with bids or contracts; materialmen's, mechanics', carrier's, workmen's, repairmen's or other like liens; or liens on any property created in connection with deposits to obtain the release of such liens; liens on any property created in connection with deposits to secure surety, stay, appeal or customs bonds; liens created by or resulting from any litigation or legal proceeding which is currently being contested in good faith by appropriate proceedings; leases and liens, rights of reverter and other possessory rights of the lessor thereunder; zoning restrictions, easements, rights-of-way or other restrictions on the use of real property or minor irregularities in the title thereto; and any other liens and encumbrances similar to those described in this clause (c), the existence of which, in the opinion of the board of directors of the Company, does not materially impair the use by the Company or a Subsidiary of the affected property in the operation of the business of the Company or a Subsidiary, or the value of such property for the purposes of such business;
(d) any mortgage, pledge or other lien or encumbrance created after October 1, 2006 on any property leased to or purchased by the Company or a Subsidiary after that date and securing, directly or indirectly, obligations issued by a State, a territory or a possession of the United States, or any political subdivision of any of the foregoing, or the District of Columbia, to finance the cost of acquisition or cost of construction of such property; provided that the interest paid on such obligations is entitled to be excluded from gross income of the recipient pursuant to Section 103(a)(1) of the Internal Revenue Code of 1986, as amended (or any successor to such provision), as in effect at the time of the issuance of such obligations;
(e) any mortgage, pledge or other lien or encumbrance on any property now owned or hereafter acquired or constructed by the Company or a Subsidiary, or on which property so owned, acquired or constructed is located, to secure or provide for the payment of any part of the construction price or cost of improvements of such property, and created prior to, contemporaneously with or within 360 days after, such construction or improvement; provided that if a firm commitment from a bank, insurance company or other lender or investor (not including the Company, a Subsidiary or an Affiliate of the Company) for the financing of the acquisition or construction of property is made prior to, contemporaneously with or within the 360-day period hereinabove referred to, the applicable mortgage, pledge, lien or encumbrance shall be deemed to be permitted by this clause (e) whether or not created or assumed within such period; and
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Table of Contents(f) any mortgage, pledge or other lien or encumbrance not otherwise described in clauses (a) through (e); provided that the aggregate amount of indebtedness secured by all such mortgages, pledges, liens or encumbrances does not exceed the greater of $100,000,000 or 10% of Common Shareholders' Equity.
‘‘Principal Facility’’ means the real property, fixtures, machinery and equipment relating to any facility owned by the Company or any Subsidiary, except any facility that is not of material importance to the business conducted by the Company and its Subsidiaries, taken as a whole.
‘‘Regulated Subsidiary’’ means any Subsidiary which owns or operates facilities used for the generation, transmission or distribution of electric energy and is subject to the jurisdiction of any governmental authority of the United States or any state or political subdivision thereof, as to any of its: rates; services; accounts; issuances of securities; affiliate transactions; or construction, acquisition or sale of any such facilities, except that any ‘‘exempt wholesale generator’’, as defined in 15 USC 79z-5a(a)(1), ‘‘qualifying facility’’, as defined in 18 CFR 292.101(b)(1), ‘‘foreign utility company’’, as defined in 15 USC 79z-5b(a)(3) and ‘‘power marketer’’, as defined in NORTHWEST POWER MARKETING COMPANY, L.L.C., 75 FERC PARA 61,281, shall not be a Regulated Subsidiary.
‘‘Securities’’ means the Company's Notes authenticated and delivered under the Indenture.
‘‘Stated Maturity’’ when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal or such installment of principal of (and premium, if any) or interest on such Security is due and payable.
‘‘Subsidiary’’ means a corporation or limited liability company more than 50% of the outstanding voting stock or voting membership interests of which is or are owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, (1) ‘‘voting stock’’ means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency, and (2) ‘‘voting membership interests’’ means membership interests which ordinarily have voting power for the election of directors (or the equivalent thereof), whether at all times or only so long as no senior class of membership interests have such voting power by reason of any contingency.
‘‘Wholly-Owned Subsidiary’’ means a Subsidiary of which all of the outstanding voting stock or membership interests (other than directors' qualifying shares) is or are at the time, directly or indirectly, owned by the Company, or by one or more Wholly-Owned Subsidiaries of the Company or by the Company and one or more Wholly-Owned Subsidiaries.
Events of Default
The following events will constitute events of default under the indenture:
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| • | we fail to pay interest on the debt securities and such failure continues for 30 days; |
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| • | we fail to pay principal of the debt securities when due; |
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| • | we breach any other covenant or representation in the indenture and such breach continues for 90 days after we receive a notice of default with respect thereto (or for such longer period if we are diligently pursuing a cure); |
| | |
| • | we default in the payment of any indebtedness other than the debt securities in excess of $100,000,000, or we breach any other provision of such indebtedness and such breach results in an acceleration of such indebtedness, and in each case such indebtedness is not discharged or such acceleration is not rescinded, as applicable, within 30 days after we receive a notice of default with respect thereto; |
| | |
| • | a final non-appealable judgment for the payment of money in excess of $100,000,000 is entered against us and is not discharged or satisfied within 45 days after we receive a notice of default with respect thereto; |
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| • | a decree or order is entered against us in an involuntary bankruptcy proceeding and is not vacated in 60 days, or a similar involuntary event relating to our bankruptcy or insolvency occurs and continues for 60 days; and |
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| • | we commence a voluntary bankruptcy case or take similar voluntary actions relating to our bankruptcy or insolvency. |
Upon the occurrence of an event of default under the indenture, the holders of at least a majority in aggregate principal amount of the debt securities may declare such debt securities to be immediately due and payable. Holders of a majority in principal amount of such debt securities may rescind the acceleration so long as the conditions set forth in the indenture have been satisfied.
Prior to acceleration, holders of a majority in aggregate principal amount of debt securities may waive an event of default, other than (1) an event of default related to non-payment of principal or interest and (2) an event of default related to a covenant or other provision of the indenture that cannot be modified without the consent of each holder of debt securities affected thereby.
Redemption and Repayment
Unless otherwise specified in the applicable pricing supplement, (1) the medium-term notes will not be subject to a sinking fund and (2) we will not be required to redeem the medium-term notes prior to the stated maturity upon the occurrence of specified events.
If so specified in the applicable pricing supplement, the medium-term notes will be subject to redemption prior to the stated maturity at our option on the date or dates and at the prices specified in the applicable pricing supplement. The selection of notes or portions thereof to be redeemed prior to the stated maturity will be in our sole discretion.
If so specified in the applicable pricing supplement, the medium-term notes will be repayable prior to the stated maturity at the option of the holders, in whole or in part, on the date or dates and at the prices specified in the applicable pricing supplement.
The terms generally applicable to redemptions and repayments of medium-term notes prior to maturity are described under ‘‘Redemption and Repayment’’ in the attached prospectus.
Repurchase
We may at any time purchase medium-term notes at any price or prices in the open market or otherwise. Medium-term notes so purchased by us may be held or resold or, at our discretion, may be surrendered to the trustee for cancellation.
Other Provisions
Any provisions with respect to the determination of an interest rate basis, the specifications of an interest rate basis, calculation of the interest rate applicable to, or the principal payable at maturity on, any medium-term note, its interest payment dates or any other matter relating thereto may be modified by the terms as specified on the face of such medium-term note, or in an annex relating thereto if so specified on the face thereof, and/or in the applicable pricing supplement.
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Table of ContentsUNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain material United States federal income tax consequences expected to result from the purchase, ownership and disposition of medium-term notes to beneficial owners (‘‘holders’’) of medium-term notes that purchase the medium-term notes at their original issuance for cash. This summary is based on the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), legislative history, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, changes to any of which subsequent to the date hereof may affect the tax consequences described herein. Any such change may apply retroactively. We cannot assure you that the Internal Revenue Service (‘‘IRS’’) will agree with the conclusions in this summary, and we have not sought and will not seek a ruling from the IRS on the expected federal income tax consequences described in this summary. Based on the facts and other information set forth in the attached prospectus and this prospectus supplement and subject to the limitations and assumptions set forth in this prospectus supplement, it is the opinion of Latham & Watkins LLP that the statements under this heading ‘‘United States Federal Income Tax Consequences,’’ insofar as they purport to summarize certain provisions of specific statutes and regulations referred to herein, are accurate summaries in all material respects.
This summary only applies to those holders holding medium-term notes as capital assets within the meaning of Section 1221 of the Code and assumes that the medium-term notes will be properly treated as indebtedness for United States federal income tax purposes. It does not address all of the tax consequences that may be relevant to a holder in light of the holder's particular circumstances or to holders subject to special rules (including, without limitation, pension plans and other tax-exempt investors, persons who are subject to alternative minimum tax, banks, thrifts, insurance companies, real estate investment trusts, ‘‘S’’ corporations, expatriates, regulated investment companies, brokers, dealers or traders in securities or commodities, persons whose functional currency is other than the United States dollar, and persons who hold medium-term notes as part of a straddle, hedging, conversion or other integrated transaction).
Persons considering the purchase of medium-term notes should consult their tax advisors with regard to the application of United States federal income tax laws to their particular situations as well as any tax consequences to them arising under the laws of any state, local or foreign taxing jurisdiction. State, local and foreign income tax laws may differ substantially from the corresponding United States federal income tax laws, and this discussion does not purport to describe any aspect of the tax laws of any state, local or foreign jurisdiction. Therefore, potential investors should consult their own tax advisors with respect to the various state, local and foreign tax consequences of an investment in medium-term notes.
You are urged to consult your tax advisor as to the particular tax consequences to your acquisition, ownership and disposition of the medium-term notes.
As used herein, the term ‘‘United States Holder’’ means a beneficial owner of a medium-term note who or which is, for United States federal income tax purposes, either (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust (1) the administration over which a United States court can exercise primary supervision and (2) all of the substantial decisions of which one or more United States persons have the authority to control, and other types of trusts considered to be United States persons for federal income tax purposes. A ‘‘Non-United States Holder’’ is a holder of a medium-term note that is not a United States Holder.
The tax consequences to a partner in a partnership holding the medium-term notes generally depend on the status of the partner and the activities of the partnership. Such partner should consult its own tax advisors as to such tax consequences.
UNITED STATES HOLDERS
Taxation of Interest
The taxation of interest on a medium-term note depends on whether it constitutes ‘‘qualified stated interest’’ (as defined below). Interest on a medium-term note that constitutes qualified stated interest is
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Table of Contentsincludible in a United States Holder's income as ordinary interest income when actually or constructively received, if such holder uses the cash method of accounting for federal income tax purposes, or when accrued, if such holder uses an accrual method of accounting for federal income tax purposes. Interest that does not constitute qualified stated interest is included in a United States Holder's income under the rules described below under ‘‘Original Issue Discount,’’ regardless of such holder's method of accounting. Notwithstanding the foregoing, interest that is payable on a medium-term note with a maturity of one year or less from its issue date (a ‘‘Short-Term Note’’) or on a medium-term note that is a Contingent Note (defined below) is included in a United States Holder's income under the rules described below under ‘‘Short-Term Notes’’ or ‘‘Original Issue Discount—Floating Rate Notes that are not VRDIs,’’ respectively.
Fixed Rate Notes
Interest on a fixed rate note will constitute ‘‘qualified stated interest’’ if the interest is unconditionally payable, or will be constructively received under Section 451 of the Code, in cash or in property (other than debt instruments issued by us) at least annually at a single fixed rate.
Floating Rate Notes
Interest on a floating rate note that is unconditionally payable, or will be constructively received under Section 451 of the Code, in cash or in property (other than debt instruments issued by us) at least annually will constitute ‘‘qualified stated interest’’ if the medium-term note is a ‘‘variable rate debt instrument’’ (‘‘VRDI’’) under the rules described below and the interest is payable at a single ‘‘qualified floating rate’’ or single ‘‘objective rate’’ (each as defined below). If the medium-term note is a VRDI but the interest is payable other than at a single qualified floating rate or at a single objective rate, special rules apply to determine the portion of such interest that constitutes ‘‘qualified stated interest.’’ See ‘‘Original Issue Discount—Floating Rate Notes that are VRDIs,’’ below.
Definition of Variable Rate Debt Instrument (VRDI), Qualified Floating Rate and Objective Rate
A medium-term note is a VRDI if all of the four following conditions are met. First, the ‘‘issue price’’ of the medium-term note (as described below) must not exceed the total noncontingent principal payments by more than an amount equal to the lesser of (i) .015 multiplied by the product of the total noncontingent principal payments and the number of complete years to maturity from the issue date (or, in the case of a medium-term note that provides for payment of any amount other than qualified stated interest before maturity, its weighted average maturity) and (ii) 15% of the total noncontingent principal payments.
Second, the medium-term note must provide for stated interest (compounded or paid at least annually) at (a) one or more qualified floating rates, (b) a single fixed rate and one or more qualified floating rates, (c) a single objective rate or (d) a single fixed rate and a single objective rate that is a ‘‘qualified inverse floating rate’’ (as defined below).
Third, the medium-term note must provide that a qualified floating rate or objective rate in effect at any time during the term of the medium-term note is set at the value of the rate on any day that is no earlier than three months prior to the first day on which that value is in effect and no later than one year following that first day.
Fourth, the medium-term note may not provide for any principal payments that are contingent except as provided in the first requirement set forth above.
Subject to certain exceptions, a variable rate of interest on a medium-term note is a ‘‘qualified floating rate’’ if variations in the value of the rate can reasonably be expected to measure contemporaneous fluctuations in the cost of newly borrowed funds in United States dollars. A variable rate will be considered a qualified floating rate if the variable rate equals (i) the product of an otherwise qualified floating rate and a fixed multiple (i.e., a spread multiplier) that is greater than 0.65, but not more than 1.35 or (ii) an otherwise qualified floating rate (or the product described in clause (i)) plus or minus a fixed rate (i.e., a spread). If the variable rate equals the product of an otherwise qualified floating rate and a single spread multiplier greater than 1.35 or less than or equal to 0.65, however, such rate will generally
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Table of Contentsconstitute an objective rate, described more fully below. A variable rate will not be considered a qualified floating rate if the variable rate is subject to a cap, floor, governor (i.e., a restriction on the amount of increase or decrease in the stated interest rate) or similar restriction that is reasonably expected as of the issue date to cause the yield on the medium-term note to be significantly more or less than the expected yield determined without the restriction (other than a cap, floor or governor that is fixed throughout the term of the medium-term note).
Subject to certain exceptions, an ‘‘objective rate’’ is a rate (other than a qualified floating rate) that is determined using a single fixed formula and that is based on objective financial or economic information that is neither within our control (or the control of a related party) nor unique to our circumstances (or the circumstances of a related party). For example, an objective rate generally includes a rate that is based on one or more qualified floating rates or on the yield of actively traded personal property (within the meaning of Section 1092(d)(1) of the Code). Notwithstanding the first sentence of this paragraph, a rate on a medium-term note is not an objective rate if it is reasonably expected that the average value of the rate during the first half of the medium-term note's term will be either significantly less than or significantly greater than the average value of the rate during the final half of the medium-term note's term. An objective rate is a ‘‘qualified inverse floating rate’’ if (a) the rate is equal to a fixed rate minus a qualified floating rate and (b) the variations in the rate can reasonably be expected to reflect inversely contemporaneous variations in the cost of newly borrowed funds (disregarding any caps, floors, governors or similar restrictions that would not, as described above, cause a rate to fail to be a qualified floating rate).
If interest on a medium-term note is stated at a fixed rate for an initial period of one year or less, followed by a variable rate that is either a qualified floating rate or an objective rate for a subsequent period, and the value of the variable rate on the issue date is intended to approximate the fixed rate, the fixed rate and the variable rate together constitute a single qualified floating rate or objective rate.
Original Issue Discount
Original issue discount (‘‘OID’’) with respect to a medium-term note is the excess, if any, of the medium-term note's ‘‘stated redemption price at maturity’’ over the medium-term note's ‘‘issue price.’’ A medium-term note's ‘‘stated redemption price at maturity’’ is the sum of all payments provided by the medium-term note (whether designated as interest or as principal) other than payments of qualified stated interest. The ‘‘issue price’’ of a medium-term note is the first price at which a substantial amount of the medium-term notes in the issuance that includes such note is sold for money (excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers).
As described more fully below, United States Holders of medium-term notes with OID that mature more than one year from their issue date generally will be required to include such OID in income as it accrues in accordance with the constant yield method described below, irrespective of the receipt of the related cash payments. A United States Holder's tax basis in a medium-term note is increased by each accrual of OID and decreased by each payment other than a payment of qualified stated interest.
The amount of OID with respect to a medium-term note will be treated as zero if the OID is less than an amount equal to .0025 multiplied by the product of the stated redemption price at maturity and the number of complete years to maturity (or, in the case of a medium-term note that provides for payment of any amount other than qualified stated interest prior to maturity, the weighted average maturity of the note). If the amount of OID with respect to a medium-term note is less than that amount, such de minimis OID that is not included in payments of stated interest is generally included in income as capital gain as principal payments are made. The amount includible in income with respect to a principal payment equals the product of the total amount of de minimis OID and a fraction, the numerator of which is the amount of such principal payment and the denominator of which is the stated principal amount of the medium-term note.
Fixed Rate Notes
In the case of OID with respect to a fixed rate note, the amount of OID includible in the income of a United States Holder for any taxable year is determined under the constant yield method, as follows.
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Table of ContentsFirst, the ‘‘yield to maturity’’ of the medium-term note is computed. The yield to maturity is the discount rate that, when used in computing the present value of all interest and principal payments to be made under the medium-term note (including payments of qualified stated interest), produces an amount equal to the issue price of the medium-term note. The yield to maturity is constant over the term of the medium-term note and, when expressed as a percentage, must be calculated to at least two decimal places.
Second, the term of the medium-term note is divided into ‘‘accrual periods.’’ Accrual periods may be of any length and may vary in length over the term of the medium-term note, provided that each accrual period is no longer than one year and that each scheduled payment of principal or interest occurs either on the final day or the first day of an accrual period.
Third, the total amount of OID on the medium-term note is allocated among accrual periods. In general, the OID allocable to an accrual period equals the product of the ‘‘adjusted issue price’’ of the medium-term note at the beginning of the accrual period and the yield to maturity of the medium-term note, less the amount of any qualified stated interest allocable to the accrual period. The adjusted issue price of a medium-term note at the beginning of the first accrual period is its issue price. Thereafter, the adjusted issue price of the medium-term note is its issue price, increased by the amount of OID previously includible in the gross income of any holder and decreased by the amount of any payment previously made on the medium-term note other than a payment of qualified stated interest.
Fourth, the ‘‘daily portions’’ of OID are determined by allocating to each day in an accrual period its ratable portion of the OID allocable to the accrual period.
A United States Holder includes in income in any taxable year the daily portions of OID for each day during the taxable year that such holder held medium-term notes. In general, under the constant yield method described above, United States Holders will be required to include in income increasingly greater amounts of OID in successive accrual periods.
Floating Rate Notes that are VRDIs
The taxation of OID (including interest that does not constitute qualified stated interest) on a floating rate note will depend on whether the medium-term note is a ‘‘VRDI,’’ as that term is defined above under ‘‘Taxation of Interest—Definition of Variable Rate Debt Instrument (VRDI), Qualified Floating Rate and Objective Rate.’’
In the case of a VRDI that provides for interest at a single variable rate, the amount of qualified stated interest and the amount of OID, if any, includible in income during a taxable year are determined under the rules applicable to fixed rate notes (described above) by assuming that the variable rate is a fixed rate equal to (i) in the case of a qualified floating rate or a qualified inverse floating rate, the value, as of the issue date, of the qualified floating rate or qualified inverse floating rate, or (ii) in the case of an objective rate (other than a qualified inverse floating rate), the fixed rate that reflects the yield that is reasonably expected for the medium-term note. Qualified stated interest allocable to an accrual period is increased (or decreased) if the interest actually paid during an accrual period exceeds (or is less than) the interest assumed to be paid during the accrual period.
If a medium-term note that is a VRDI does not provide for interest at a single variable rate as described above, the amount of interest and OID accruals are determined by constructing an equivalent fixed rate debt instrument, as follows.
First, in the case of an instrument that provides for interest at one or more qualified floating rates or at a qualified inverse floating rate and, in addition, at a fixed rate (other than a fixed rate that is treated as, together with a variable rate, a single qualified floating rate or objective rate), replace the fixed rate with a qualified floating rate (or qualified inverse floating rate) such that the fair market value of the instrument, so modified, as of the issue date would be approximately the same as the fair market value of the unmodified instrument.
Second, determine the fixed rate substitute for each variable rate provided by the medium-term note. The fixed rate substitute for each qualified floating rate provided by the medium-term note is the value of that qualified floating rate on the issue date. If the medium-term note provides for two or more
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Table of Contentsqualified floating rates with different intervals between interest adjustment dates (for example, the 30-day commercial paper rate and quarterly LIBOR), the fixed rate substitutes are based on intervals that are equal in length (for example, the 90-day commercial paper rate and quarterly LIBOR, or the 30-day commercial paper rate and monthly LIBOR). The fixed rate substitute for an objective rate that is a qualified inverse floating rate is the value of the qualified inverse floating rate on the issue date. The fixed rate substitute for an objective rate (other than a qualified inverse floating rate) is a fixed rate that reflects the yield that is reasonably expected for the medium-term note.
Third, construct an equivalent fixed rate debt instrument that has terms that are identical to those provided under the medium-term note, except that the equivalent fixed rate debt instrument provides for the fixed rate substitutes determined in the second step, in lieu of the qualified floating rates or objective rate provided by the medium-term note.
Fourth, determine the amount of qualified stated interest and OID for the equivalent fixed rate debt instrument under the rules (described above) for fixed rate notes. These amounts are taken into account as if the United States Holder held the equivalent fixed rate debt instrument. See ‘‘Taxation of Interest’’ and ‘‘Original Issue Discount—Fixed Rate Notes,’’ above.
Fifth, make appropriate adjustments for the actual values of the variable rates. In this step, qualified stated interest or OID allocable to an accrual period is increased (or decreased) if the interest actually accrued or paid during the accrual period exceeds (or is less than) the interest assumed to be accrued or paid during the accrual period under the equivalent fixed rate debt instrument.
Floating Rate Notes that are not VRDIs
Floating rate medium-term notes that are not VRDIs (‘‘Contingent Notes’’) will generally be taxable under the rules applicable to contingent payment debt instruments (the ‘‘Contingent Debt Regulations’’), as follows. First, we are required to determine, as of the issue date, the comparable yield for the Contingent Note. The comparable yield is generally the yield at which we would issue a fixed rate debt instrument with terms and conditions similar to those of the Contingent Note (including the level of subordination, term, timing of payments and general market conditions, but not taking into consideration the riskiness of the contingencies or the liquidity of the Contingent Note), and must not be less than the applicable federal rate announced monthly by the IRS (the ‘‘AFR’’). In certain cases where Contingent Notes are marketed or sold in substantial part to tax-exempt investors or other investors for whom the prescribed inclusion of interest is not expected to have a substantial effect on their U.S. income tax liability, the comparable yield for the Contingent Note, without proper evidence to the contrary, is presumed to be the AFR.
Second, solely for tax purposes, we construct a projected schedule of payments determined under the Contingent Debt Regulations for the Contingent Note (the ‘‘Schedule’’). The Schedule is determined as of the issue date and generally remains in place throughout the term of the Contingent Note. If a right to a contingent payment is based on market information, the amount of the projected payment is the forward price of the contingent payment. If a contingent payment is not based on market information, the amount of the projected payment is the expected value of the contingent payment as of the issue date. The Schedule must produce the comparable yield determined as set forth above. Otherwise, the Schedule must be adjusted under the rules set forth in the Contingent Debt Regulations.
Third, under the usual rules applicable to OID and based on the Schedule, the interest income on the Contingent Note for each accrual period is determined by multiplying the comparable yield of the Contingent Note (adjusted for the length of the accrual period) by the Contingent Note's adjusted issue price at the beginning of the accrual period (determined under rules set forth in the Contingent Debt Regulations). The amount so determined is then allocated on a ratable basis to each day in the accrual period that the United States Holder held the Contingent Note.
Fourth, appropriate adjustments are made to the interest income determined under the foregoing rules to account for any differences between the Schedule and actual contingent payments. Under the rules set forth in the Contingent Debt Regulations, differences between the actual amounts of any contingent payments made in a taxable year and the projected amounts of such payments are generally
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Table of Contentsaggregated and taken into account, in the case of a positive difference, as additional interest income, or, in the case of a negative difference, first as a reduction in interest income for such year and thereafter, subject to certain limitations, as ordinary loss.
We are required to provide the Schedule described above to each holder of a Contingent Note who requests it. If we do not create a Schedule or the Schedule is unreasonable, a United States Holder must determine its own projected payment schedule and explicitly disclose the use of such schedule and the reason therefor. Unless otherwise prescribed by the IRS, the United States Holder must make such disclosure on a statement attached to the United States Holder's timely filed federal income tax return for the taxable year in which the Contingent Note was acquired.
In general, any gain realized by a United States Holder on the sale, exchange or retirement of a Contingent Note is treated as interest income. In general, any loss on a Contingent Note accounted for under the method described above is ordinary loss to the extent it does not exceed such holder's prior interest inclusions on the Contingent Note (net of negative adjustments). Special rules apply in determining the tax basis of a Contingent Note and the amount realized on the retirement of a Contingent Note. In addition, special rules apply if there are no remaining contingent payments on the Contingent Note.
Other Rules
Certain medium-term notes having OID may be redeemed prior to maturity or may be repayable at the option of the holder. Such medium-term notes may be subject to rules that differ from the general rules discussed above relating to the tax treatment of OID. Purchasers of such medium-term notes with a redemption feature should consult their tax advisors with respect to such feature since the tax consequences with respect to OID will depend, in part, on the particular terms and the particular features of the purchased medium-term note.
Market Discount
If a United States Holder acquires a medium-term note having a maturity date of more than one year from the date of its issuance and has a tax basis in the medium-term note that is, in the case of a medium-term note that does not have OID, less than its stated redemption price at maturity, or, in the case of a medium-term note that has OID, less than its ‘‘revised issue price’’, the amount of such difference is treated as ‘‘market discount’’ for federal income tax purposes, unless such difference is less than 1/4 of one percent of the stated redemption price at maturity multiplied by the number of complete years to maturity (from the date of acquisition).
Under the market discount rules of the Code, a United States Holder is required to treat any principal payment (or, in the case of a medium-term note that has OID, any payment that does not constitute a payment of qualified stated interest) on, or any gain on the sale, exchange, retirement or other disposition of, a medium-term note as ordinary income to the extent of the accrued market discount that has not previously been included in income. Thus, partial principal payments are treated as ordinary income to the extent of accrued market discount that has not previously been included in income. If such note is disposed of by the United States Holder in certain otherwise nontaxable transactions, accrued market discount will be includible as ordinary income by the United States Holder as if such holder had sold the medium-term note at its then fair market value.
In general, the amount of market discount that has accrued is determined on a ratable basis. A United States Holder may, however, elect to determine the amount of accrued market discount on a constant yield to maturity basis. This election is made on a note-by-note basis and is irrevocable.
With respect to medium-term notes with market discount, a United States Holder may not be allowed to deduct immediately a portion of the interest expense on any indebtedness incurred or continued to purchase or to carry such medium-term notes. A United States Holder may elect to include market discount in income currently as it accrues, in which case the interest deferral rule set forth in the preceding sentence will not apply. Such an election will apply to all debt instruments acquired by the United States Holder on or after the first day of the first taxable year to which such election applies and
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Table of Contentsis irrevocable without the consent of the IRS. A United States Holder's tax basis in a medium-term note will be increased by the amount of market discount included in such holder's income under such an election.
In lieu of the foregoing rules, different rules apply in the case of Contingent Notes where a holder's tax basis in a Contingent Note is less than the Contingent Note's adjusted issue price (determined under special rules set out in the Contingent Debt Regulations). Accordingly, prospective purchasers of Contingent Notes should consult with their tax advisors with respect to the application of such rules to such medium-term notes.
Premium and Acquisition Premium
If a United States Holder purchases a medium-term note for an amount in excess of the sum of all amounts payable on the medium-term note after the date of acquisition (other than payments of qualified stated interest), such holder will be considered to have purchased such note with ‘‘amortizable bond premium’’ equal in amount to such excess, and generally will not be required to include any OID in income. Generally, a United States Holder may elect to amortize such premium as an offset to qualified stated interest income, using a constant yield method similar to that described above (see ‘‘Original Issue Discount’’), over the remaining term of the medium-term note (where such note is not redeemable prior to its maturity date). In the case of medium-term notes that may be redeemed prior to maturity, the premium is calculated assuming that we or the United States Holder will exercise or not exercise its redemption rights in a manner that maximizes the United States Holder's yield. A United States Holder who elects to amortize bond premium must reduce such holder's tax basis in the medium-term note by the amount of the premium used to offset qualified stated interest income as set forth above. An election to amortize bond premium applies to all taxable debt obligations then owned and thereafter acquired by such holder and may be revoked only with the consent of the IRS.
If a United States Holder purchases a medium-term note issued with OID at an ‘‘acquisition premium,’’ the amount of OID that the United States Holder includes in gross income is reduced to reflect the acquisition premium. A medium-term note is purchased at an acquisition premium if its adjusted basis, immediately after its purchase, is (a) less than or equal to the sum of all amounts payable on the medium-term note after the purchase date other than payments of qualified stated interest and (b) greater than the medium-term note's ‘‘adjusted issue price’’ (as described above under ‘‘Original Issue Discount —Fixed Rate Notes’’).
If a medium-term note is purchased at an acquisition premium, the United States Holder reduces the amount of OID otherwise includible in income during an accrual period by an amount equal to (i) the amount of OID otherwise includible in income multiplied by (ii) a fraction, the numerator of which is the excess of the adjusted basis of the medium-term note immediately after its acquisition by the purchaser over the adjusted issue price of the medium-term note and the denominator of which is the excess of the sum of all amounts payable on the medium-term note after the purchase date, other than payments of qualified stated interest, over the medium-term note's adjusted issue price.
As an alternative to reducing the amount of OID otherwise includible in income by this fraction, the United States Holder may elect to compute OID accruals by treating the purchase as a purchase at original issuance and applying the constant yield method described above.
In lieu of the foregoing rules, different rules apply in the case of Contingent Notes where a holder's tax basis in a Contingent Note is greater than the Contingent Note's adjusted issue price (determined under special rules set out in the Contingent Debt Regulations). Accordingly, prospective purchasers of Contingent Notes should consult with their tax advisors with respect to the application of such rules to such medium-term notes.
Short-Term Notes
In the case of a Short-Term Note, no interest is treated as qualified stated interest. United States Holders that report income for federal income tax purposes on an accrual method and certain other United States Holders, including banks and dealers in securities, are required to include OID in income
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Table of Contentson such Short-Term Note on a straight-line basis, unless an election is made to accrue the OID according to a constant yield method based on daily compounding.
Any other United States Holder of a Short-Term Note is not required to accrue OID for federal income tax purposes, unless it elects to do so, with the consequence that the reporting of such income is deferred until it is received. In the case of a United States Holder that is not required, and does not elect, to include OID in income currently, any gain realized on the sale, exchange or retirement of a Short-Term Note is ordinary income to the extent of the OID accrued on a straight-line basis (or, if elected, according to a constant yield method based on daily compounding) through the date of sale, exchange or retirement. In addition, United States Holders that are not required, and do not elect, to include OID in income currently are required to defer deductions for any interest paid on indebtedness incurred or continued to purchase or carry a Short-Term Note in an amount not exceeding the deferred interest income with respect to such Short-Term Note (which includes both the accrued OID and accrued interest that are payable but that have not been included in gross income), until such deferred interest income is realized. A United States Holder of a Short-Term Note may elect to apply the foregoing rules (except for the rule characterizing gain on sale, exchange or retirement as ordinary) with respect to ‘‘acquisition discount’’ rather than OID. Acquisition discount is the excess of the stated redemption price at maturity of the Short-Term Note over the United States Holder's basis in the Short-Term Note. This election applies to all obligations acquired by the taxpayer on or after the first day of the first taxable year to which such election applies, unless revoked with the consent of the IRS. A United States Holder's tax basis in a Short-Term Note is increased by the amount included in such holder's income on such a note.
Election to Treat All Interest as OID
United States Holders may elect to include in gross income all interest that accrues on a medium-term note, including any stated interest, acquisition discount, OID, market discount, de minimis OID, de minimis market discount and unstated interest (as adjusted by amortizable bond premium and acquisition premium), by using the constant yield method described above under ‘‘Original Issue Discount.’’ Such an election for a medium-term note with amortizable bond premium will result in a deemed election to amortize bond premium for all debt instruments owned and later acquired by the United States Holder with amortizable bond premium and may be revoked only with the permission of the IRS. Similarly, such an election for a medium-term note with market discount will result in a deemed election to accrue market discount in income currently for such note and for all other debt instruments acquired by the United States Holder with market discount on or after the first day of the taxable year to which such election first applies, and may be revoked only with the permission of the IRS. A United States Holder's tax basis in a medium-term note will be increased by each accrual of the amounts treated as OID under the constant yield election described in this paragraph.
Extendible Notes, Renewable Notes and Reset Notes
If so specified in an applicable pricing supplement relating to a medium-term note, we or a holder may have the option to extend the maturity of or renew such note. See ‘‘Description of Medium-Term Notes—Extension of Maturity’’ and ‘‘Description of Medium-Term Notes—Renewable Notes’’ described above. In addition, we may have the option to reset the interest rate, the spread or the spread multiplier with respect to a medium-term note. See ‘‘Description of Medium-Term Notes—Reset Notes,’’ above. The treatment of a United States Holder of medium-term notes to which such options apply will depend, in part, on the terms we establish for such medium-term notes pursuant to the exercise of such option by us or a holder. Upon the exercise of any such option, the United States Holder of such medium-term notes may be treated for federal income tax purposes as having exchanged such medium-term notes (the ‘‘Old Notes’’) for new medium-term notes with revised terms (the ‘‘New Notes’’). If such holder is treated as having exchanged Old Notes for New Notes, such exchange may be treated as either a taxable exchange or a tax-free recapitalization.
Treasury Regulations promulgated under Section 1001 of the Code (the ‘‘Section 1001 Regulations’’) generally provide that the exercise of an option provided to an issuer or a holder to change a term of a debt instrument (such as the maturity or the interest rate) in a manner such as that contemplated for
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Table of Contentsextendible notes, renewable notes and reset notes will create a deemed exchange of Old Notes for New Notes if such exercise modifies such terms to a degree that is ‘‘economically significant.’’ With respect to certain types of debt instruments and subject to exceptions applicable to certain unilateral options, under the Section 1001 Regulations a deemed exchange for tax purposes occurs if the exercise of such an option alters the annual yield of the debt instrument by more than the greater of (i) 25 basis points or (ii) 5 percent of the annual yield of the debt instrument prior to modification. The exercise of an option that changes the timing of payments under a debt instrument generally creates a deemed exchange under the Section 1001 Regulations (whether or not the annual yield is altered) if there is a ‘‘material deferral’’ of scheduled payments. In this connection, the Section 1001 Regulations generally provide that a deferral of scheduled payments within a safe-harbor period which begins on the original due date for the first deferred payment and extends for a period not longer than the lesser of five years or 50 percent of the original term of the debt instrument will not be considered to be a material deferral. In addition, a change of terms pursuant to a unilateral option of an issuer is generally not treated as a ‘‘modification’’.
If the exercise of the option by us or a holder is not treated as an exchange of Old Notes for New Notes, no gain or loss will be recognized by a United States Holder as a result thereof. If the exercise of the option is treated as a taxable exchange of Old Notes for New Notes, a United States Holder will recognize gain or loss equal to the difference between the issue price of the New Notes and such holder's tax basis in the Old Notes. However, if the exercise of the option is treated as a tax-free recapitalization, no loss will be recognized by a United States Holder as a result thereof and gain, if any, will be recognized to the extent of the fair market value of the excess, if any, of the principal amount of securities received over the principal amount of securities surrendered. In this regard, the meaning of the term ‘‘principal amount’’ is not clear. Such term could be interpreted to mean ‘‘issue price’’ with respect to securities that are received and ‘‘adjusted issue price’’ with respect to securities that are surrendered.
The presence of such options may also affect the calculation of interest income and OID, among other things. For purposes of determining the yield and maturity of a medium-term note, if we have an unconditional option or combination of options to require payments to be made on the medium-term note under an alternative payment schedule or schedules (e.g., an option to extend or an option to call the medium-term note at a fixed premium), we will be deemed to exercise or not exercise an option or combination of options in a manner that minimizes the yield on the medium-term note. Conversely, a holder having such option or combination of such options will be deemed to exercise or not exercise such option or combination of options in a manner that maximizes the yield on such note. If both we and the holder have options, the foregoing rules are applied to the options in the order that they may be exercised. Thus, the deemed exercise of one option may eliminate other options that are later in time. If the exercise of such option or options actually occurs or does not occur, contrary to what is deemed to occur pursuant to the foregoing rules, then, solely for purposes of the accrual of OID, the yield and maturity of the medium-term note are redetermined by treating the medium-term note as reissued on the date of the occurrence or non-occurrence of the exercise for an amount equal to its adjusted issue price on that date. Depending on the terms of the options described above, the presence of such options may instead cause the medium-term notes to be taxable as Contingent Notes. See ‘‘Original Issue Discount—Floating Rate Notes that are not VRDIs.’’
The foregoing discussion of extendible notes, renewable notes and reset notes is provided for general information only. Additional tax considerations may arise from the ownership of such medium-term notes in light of the particular features or combination of features of such medium-term notes and, accordingly, persons considering the purchase of such medium-term notes are advised and expected to consult with their own legal and tax advisors regarding the tax consequences of the ownership of such medium-term notes.
Sale or Exchange of Notes
A United States Holder generally will recognize gain or loss upon the sale or exchange of a medium-term note equal to the difference between the amount realized upon such sale or exchange and the United States Holder's adjusted basis in the medium-term note. Such adjusted basis in the medium-term note generally will equal the cost of the medium-term note, increased by OID, acquisition discount or market discount previously included in respect thereof, and reduced (but not below zero) by
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Table of Contentsany payments on the medium-term note other than payments of qualified stated interest and by any premium that the United States Holder has taken into account. To the extent attributable to accrued but unpaid qualified stated interest, the amount realized by the United States Holder will be treated as a payment of interest. Generally, any gain or loss will be capital gain or loss if the medium-term note was held as a capital asset, except as provided under ‘‘Market Discount,’’ ‘‘Short-Term Notes’’ and ‘‘Original Issue Discount—Floating Rate Notes that are not VRDIs,’’ above. Special rules apply in determining the tax basis of a Contingent Note and the amount realized on the retirement of a Contingent Note. For non-corporate taxpayers, capital gain realized on the disposition of an asset (including a medium-term note) held for more than one year is taxed at a maximum rate of 15% (which rate is currently scheduled to increase to 20% for gains included in income for taxable years beginning on or after January 1, 2011). Capital gain on the disposition of an asset (including a medium-term note) held for not more than one year is taxed at the rates applicable to ordinary income. The distinction between capital gain or loss and ordinary income or loss is relevant for purposes of, among other things, limitations on the deductibility of capital losses.
NON-UNITED STATES HOLDERS
Payment of Interest
Generally, interest income (including OID) of a Non-United States Holder that is not effectively connected with a United States trade or business will be subject to a withholding tax at a 30% rate (or, if applicable, a lower treaty rate). However, interest paid on a medium-term note by us or our paying agent to a Non-United States Holder will qualify for the ‘‘portfolio interest exemption’’ and therefore will not be subject to United States federal income tax or withholding tax, provided that such interest income is not effectively connected with a United States trade or business of the Non-United States Holder and the Non-United States Holder (i) does not actually or constructively own 10% or more of the total combined voting power of all classes of our stock entitled to vote, (ii) is not for federal income tax purposes a controlled foreign corporation related, directly or indirectly, to us through stock ownership, (iii) is not a bank which acquired the medium-term notes in consideration for an extension of credit made pursuant to a loan agreement entered into in the ordinary course of business, and (iv) either (A) provides to us or our paying agent an IRS Form W-8BEN (or a suitable substitute form) signed under penalties of perjury that certifies as to its status as a Non-United States Holder and provides its name and address, or (B) is a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business and provides a statement to us or our paying agent under penalties of perjury in which it certifies that an IRS Form W-8BEN (or a suitable substitute form) has been received by it from the Non-United States Holder or qualifying intermediary and, if required, furnishes us or our paying agent with a copy thereof.
Except to the extent that an applicable treaty otherwise provides, a Non-United States Holder generally will be taxed in the same manner as a United States Holder with respect to interest if the interest income is effectively connected with a United States trade or business of the Non-United States Holder. Effectively connected interest received by a corporate Non-United States Holder may also, under certain circumstances, be subject to an additional ‘‘branch profits tax’’ at a 30% rate (or, if applicable, a lower treaty rate). Even though such effectively connected interest is subject to income tax, and may be subject to the branch profits tax, it is not subject to withholding tax if the holder delivers a properly executed IRS Form W-8ECI to us or our paying agent.
Sale or Exchange of Notes
A Non-United States Holder of a medium-term note generally will not be subject to United States federal income tax or withholding tax on any gain realized on the sale or exchange of the note unless (i) the gain is effectively connected with a United States trade or business of the Non-United States Holder or (ii) in the case of a Non-United States Holder who is an individual, such holder is present in the United States for a period or periods aggregating 183 days or more during the taxable year of the disposition and certain other conditions are met.
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Table of ContentsBACKUP WITHHOLDING AND INFORMATION REPORTING
United States Holders
Under Section 3406 of the Code and applicable Treasury regulations, a United States Holder of a medium-term note may be subject to backup withholding at the rate of up to 28% with respect to ‘‘reportable payments’’ unless the holder (1) is a corporation or comes within other exempt categories and, when required, demonstrates this fact, or (2) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. ‘‘Reportable payments’’ include (i) interest payments (including OID), (ii) under some circumstances, principal payments on the medium-term notes, and (iii) certain proceeds of a taxable sale or exchange of the medium-term notes. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a taxpayer identification number (TIN) to the payor in the manner required by the Code and applicable Treasury regulations, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a ‘‘notified payee underreporting’’ described in Section 3406(c) of the Code, or (iv) there has been a failure of the payee to certify under penalty of perjury that the payee is not subject to withholding under Section 3406(a)(1)(C) of the Code. In such event, the payor will be required to withhold an amount of up to 28% from any interest payment made with respect to the United States Holder's medium-term notes, any payment to the United States Holder of proceeds of a taxable sale or exchange of the medium-term notes, or any other ‘‘reportable payments.’’ Amounts paid as backup withholding do not constitute an additional tax and will be credited against the United States Holder's United States federal income tax liabilities, so long as the required information is provided timely to the IRS. The payor will report to United States Holders of the medium-term notes and to the IRS the amount of any ‘‘reportable payments’’ for each calendar year and the amount of tax withheld, if any, with respect to payment on the medium-term notes. A United States Holder of medium-term notes who does not provide the payor with his or her correct taxpayer identification number may be subject to penalties imposed by the IRS.
Non-United States Holders
No backup withholding or information reporting will generally be required with respect to interest on medium-term notes paid to Non-United States Holders if the beneficial owner of the medium-term note provides a statement described above in ‘‘Non-United States Holders—Payment of Interest’’ or the holder is an exempt recipient and, in each case, the payor does not have actual knowledge or reason to know that the beneficial owner is a U.S. person.
Information reporting requirements and backup withholding tax will not apply to any payment of the proceeds of the sale of a medium-term note effected outside of the United States by a foreign office of a ‘‘broker’’ (as defined in applicable Treasury Regulations), but information reporting will apply if such broker (i) is a United States person, (ii) is a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, (iii) is a controlled foreign corporation for United States federal income tax purposes or (iv) is a foreign partnership that, at any time during its taxable year, has more than 50% of its income or capital interests owned by United States persons or is engaged in the conduct of a United States trade or business. Payment of the proceeds of any such sale effected outside the United States by a foreign office of any broker that is described in (i), (ii), (iii) or (iv) of the preceding sentence will not be subject to information reporting requirements if such broker has documentary evidence in its records that the beneficial owner is a Non-United States Holder and certain other conditions are met, or the beneficial owner otherwise establishes an exemption. Payment of the proceeds of any such sale to or through the United States office of a broker is subject to information reporting and backup withholding requirements, unless the beneficial owner of the medium-term note provides the statement described above in ‘‘Non-United States Holders—Payment of Interest’’ or otherwise establishes an exemption.
Non-United States Holders of medium-term notes should consult their tax advisors regarding the application of information reporting and backup withholding in their particular situations, the availability of an exemption therefrom, and the procedure for obtaining such an exemption, if available. Any amounts
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Table of Contentswithheld from payment to a Non-United States Holder under the backup withholding rules will be allowed as a refund or a credit against such holder's United States federal income tax liability, provided that the required information is furnished timely to the IRS.
The foregoing discussion is included for general information only. Accordingly, each prospective purchaser is urged to consult with his or her tax advisor with respect to the United States federal income tax consequences of the ownership and disposition of the medium-term notes, including the application and effect of the laws of any state, local, foreign, or other jurisdiction.
PLAN OF DISTRIBUTION
General Information
Unless otherwise specified in the applicable pricing supplement, we will sell medium-term notes at 100% of their principal amount.
We may sell the medium-term notes in and/or outside of the United States using one or more of the following distribution methods:
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| • | sales of medium-term notes directly to investors on our own behalf; |
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| • | sales of medium-term notes to one or more underwriters for their own account that will resell the medium-term notes at a fixed public offering price or at varying prices determined at the time of the sale; or |
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| • | sales of medium-term notes through one or more agents that will sell the medium-term notes on our behalf. |
Certain of the Agents will make the medium-term notes available for distribution on the Internet through a proprietary Web site and/or a third-party system operated by MarketAxess Corporation, an Internet-based communications technology provider. MarketAxess Corporation is providing the system as a conduit for communications between certain of the Agents and their respective customers and is not a party to any transactions. MarketAxess Corporation, a registered broker-dealer, will receive compensation from such Agents based on transactions such Agents conduct through the system. Certain of the Agents will make the medium-term notes available to their respective customers through the Internet distributions, whether made through a proprietary or third-party system, on the same terms as distributions made through other channels.
The names of, and the compensation paid to, any underwriters or agents will be specified in the applicable pricing supplement. After any initial offering of medium-term notes by underwriters, the offering price (in the case of medium-term notes resold at a fixed offering price), any concession and the discount may be changed.
We reserve the right to withdraw, cancel or modify any offer to sell medium-term notes at any time without notice.
The underwriters, if any, may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the medium-term notes in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the distributors of the medium-term notes to reclaim a selling concession from a syndicate member when the medium-term notes originally sold by the syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the medium-term notes to be higher than it would otherwise be in the absence of such transactions. These transactions, if commenced, may be discontinued at any time.
Distribution Agreement
We will enter into a distribution agreement with Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc., LaSalle Financial Services, Inc. and BNP Paribas Securities Corp. as Agents. We can also
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Table of Contentsadd additional persons as Agents under the distribution agreement. The Agents will agree in the distribution agreement to act as our agents with respect to the sale of the medium-term notes and to use their reasonable best efforts to solicit offers to purchase medium-term notes. We will pay a commission in an amount to be agreed upon by us and the Agents for each medium-term note sold through an Agent. We will have the sole right to accept offers to purchase medium-term notes and may reject any offer in whole or in part. Each Agent will have the right, in its discretion reasonably exercised, to reject in whole or in part any offer to purchase medium-term notes received by the Agent. The Agents for any issuance of medium-term notes will be specified in the applicable pricing supplement.
We may also sell medium-term notes to one or more Agents, acting as principal, at a discount to be agreed upon at the time of sale, for resale to one or more investors or to one or more broker-dealers acting as principal for purposes of the resale. The medium-term notes may be resold by the applicable Agents either (1) at varying prices related to prevailing market prices at the time of resale, as determined by the applicable Agents, or (2) if so agreed, at a fixed offering price. Unless otherwise specified in the applicable pricing supplement, if any medium-term note is resold by an Agent to any broker-dealer at a discount, the discount will not be in excess of the discount or commission received by the Agent from us. In addition, unless otherwise specified in the applicable pricing supplement, any medium-term note purchased by an Agent as principal will be purchased at 100% of the principal amount less a percentage equal to the commission which would be applicable to any agency sale of a medium-term note having an identical stated maturity.
The Agents may be deemed to be ‘‘underwriters’’ within the meaning of the Securities Act. We will agree to indemnify the Agents against liabilities specified in the distribution agreement, including liabilities under the Securities Act, or to contribute to payments the Agents may be required to make in respect of these liabilities. We will also agree in the distribution agreement to reimburse the Agents for their expenses, including the fees and expenses of counsel to the Agents.
We have been advised by the Agents that they may from time to time purchase and sell the medium-term notes in the secondary market. However, they are not obligated to do so. We cannot assure you that there will be a secondary market for the medium-term notes or that there will be liquidity in the secondary market if one does develop. At this time we do not plan to list the medium-term notes on any securities exchange.
The Agents and their affiliates may engage in transactions with, and perform other services for, us in the ordinary course of business.
The distribution agreement will not in any way prohibit us from selling the medium-term notes directly to investors on our own behalf, through agents other than the Agents or to underwriters other than the Agents.
LEGAL MATTERS
The legality of the medium-term notes will be passed upon for us by Paul J. Leighton, our Vice President and Assistant General Counsel, and by Latham & Watkins LLP, New York, New York, and for the Agents by LeBoeuf, Lamb, Greene & MacRae LLP, New York, New York. Latham & Watkins LLP and LeBoeuf, Lamb, Greene & MacRae LLP may rely on the opinion of Mr. Leighton as to matters of Iowa law. LeBoeuf, Lamb, Greene & MacRae LLP regularly serves as special counsel to us and to our affiliates on various matters. Mr. Leighton is an officer and full-time employee of ours.
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Prospectus
$600,000,000
MIDAMERICAN ENERGY COMPANY
Debt Securities and Preferred Stock
We will provide the specific terms of these securities in supplements to this prospectus. You should read this prospectus and the applicable prospectus supplement carefully before you invest.
Investing in the securities involves risks. See ‘‘Risk Factors’’ on page 3.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
These securities will not be listed on any securities exchange or included in any automated quotation system. Currently, there is no public market for these securities.
This prospectus may not be used to sell securities unless accompanied by a prospectus supplement.
The date of this prospectus is June 2, 2006.
TABLE OF CONTENTS
| | | | | | |
| | | | Page |
| MIDAMERICAN ENERGY COMPANY | | | | | 1 | |
| RATIO OF EARNINGS TO FIXED CHARGES | | | | | 2 | |
| RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS | | | | | 2 | |
| RISK FACTORS | | | | | 3 | |
| FORWARD-LOOKING STATEMENTS | | | | | 8 | |
| USE OF PROCEEDS | | | | | 9 | |
| DESCRIPTION OF DEBT SECURITIES | | | | | 10 | |
| DESCRIPTION OF CAPITAL STOCK | | | | | 16 | |
| PLAN OF DISTRIBUTION | | | | | 18 | |
| ABOUT THIS PROSPECTUS | | | | | 19 | |
| WHERE YOU CAN FIND MORE INFORMATION | | | | | 20 | |
| LEGAL MATTERS | | | | | 21 | |
| EXPERTS | | | | | 22 | |
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MIDAMERICAN ENERGY COMPANY
We are a public utility company headquartered in Des Moines, Iowa and incorporated in the State of Iowa. We were formed on July 1, 1995 as a result of the merger of Iowa-Illinois Gas and Electric Company, Midwest Resources Inc. and Midwest Power Systems Inc. We are an indirect wholly owned subsidiary of MidAmerican Energy Holdings Company, a global energy company with publicly traded fixed income securities that is majority-owned by Berkshire Hathaway Inc.
We are principally engaged in the business of generating, transmitting, distributing and selling electric energy and in distributing, selling and transporting natural gas. We distribute electricity at retail in Iowa, Illinois and South Dakota and distribute natural gas at retail in Iowa, Illinois, Nebraska and South Dakota. In addition to retail sales, we sell electric energy and natural gas to other utilities, marketers and municipalities outside of our delivery system, and transport natural gas through our distribution system for a number of end-use customers who have independently secured their supply of natural gas.
Our headquarters and principal executive offices are located at 666 Grand Avenue, Des Moines, Iowa 50309. Our telephone number is (515) 242-4300.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of our earnings to our fixed charges for the periods indicated.
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| | | | 12 Months Ended December 31, | | | Three Months Ended
March 31, 2006 |
| | | | 2001 | | | 2002 | | | 2003 | | | 2004 | | | 2005 |
| Ratio of earnings to fixed charges(1) | | | | | 4.43 | | | | | | 4.87 | | | | | | 5.20 | | | | | | 5.02 | | | | | | 4.78 | | | | | | 5.61 | |
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| (1) | For purposes of computing the ratio of earnings to fixed charges, ‘‘earnings’’ consist of net income from continuing operations plus income taxes, interest on long-term debt, other interest charges, preferred dividends of subsidiary trust and interest on leases. ‘‘Earnings’’ also include allowances for borrowed and other funds used during construction. ‘‘Fixed charges’’ consist of interest charges, preferred dividends of subsidiary trust and the estimated interest component of rentals. |
RATIO OF EARNINGS TO FIXED CHARGES
PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
The following table sets forth the ratio of our earnings to our fixed charges plus preferred stock dividend requirements for the periods indicated.
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| | | | 12 Months Ended December 31, | | | Three Months Ended
March 31, 2006 |
| | | | 2001 | | | 2002 | | | 2003 | | | 2004 | | | 2005 |
| Ratio of earnings to fixed charges plus preferred stock dividend requirements(1) | | | | | 4.02 | | | | | | 4.57 | | | | | | 5.04 | | | | | | 4.90 | | | | | | 4.68 | | | | | | 5.52 | |
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| (1) | For purposes of computing the ratio of earnings to fixed charges plus preferred stock dividend requirements, ‘‘earnings’’ consist of net income from continuing operations plus income taxes, interest on long-term debt, other interest charges, preferred dividends of subsidiary trust and interest on leases. ‘‘Earnings’’ also include allowances for borrowed and other funds used during construction. ‘‘Fixed charges’’ consist of interest charges, preferred dividends of subsidiary trust and the estimated interest component of rentals. ‘‘Preferred stock dividend requirements’’ represent the amount of pre-tax earnings that is required to pay the dividends on outstanding preferred stock. |
2
RISK FACTORS
Before you invest in any of the securities described in this prospectus, you should be aware of the significant risks described below. You should carefully consider these risks, together with all of the other information included in this prospectus, the accompanying prospectus supplement and the information incorporated by reference, before you decide to purchase our securities.
We Are Actively Pursuing, Developing and Constructing New Facilities, the Completion and Expected Cost of Which Is Subject to Significant Risk
We are constructing a new coal-fired electric generating plant in Iowa. In the future, we expect to pursue the development, construction, ownership and operation of additional new or expanded facilities, the completion of any of which is subject to substantial risk and may expose us to significant costs. We cannot assure you that our development or construction efforts on any particular project, or our efforts generally, will be successful. Also, a proposed new or expanded facility may cost more than planned to complete, and such excess costs, if found to be imprudent, may not be recoverable in rates. It is also possible that additional generation needs may be obtained through power purchase agreements, which could impose long-term purchase obligations on us and force us to rely on the operating performance of a third party. The inability to recover any costs through ratemaking decisions may materially affect our business, financial position, results of operations and ability to service our securities.
We Are Subject to Operating Uncertainties Which May Adversely Affect Our Financial Position, Results of Operations and Ability to Service the Securities
The operation of a complex electric and gas utility (including generating, transmission and distribution systems) involves many risks associated with operating uncertainties and events beyond our control. These risks include the breakdown or failure of power generation equipment, compressors, pipelines, transmission and distribution lines or other equipment or processes, fuel interruption, performance below expected levels of output, capacity or efficiency, operator error, operating limitations imposed by environmental or other regulatory requirements, labor disputes, sustained mild weather patterns and catastrophic events such as severe storms, fires, earthquakes or explosions. A casualty occurrence might result in injury or loss of life, extensive property damage or environmental damage. The realization of any of these risks could significantly reduce or eliminate revenues or significantly increase expenses. For example, if we cannot operate our electric facilities at full capacity due to restrictions imposed by environmental regulations, revenues could decrease due to decreased wholesale sales and/or expenses could increase due to the need to obtain energy from higher cost sources. Any reduction of revenues for such reason or any other reduction of revenues or increase in expenses resulting from the risks described above could decrease our net cash flow and provide fewer funds to service our securities. Further, we cannot assure you that our current and future insurance coverage will be sufficient to replace lost revenue or cover repair and replacement costs, especially in light of the recent catastrophic events in the insurance markets that make it more difficult or costly to obtain certain types of insurance.
Acts of Sabotage and Terrorism Aimed at Our Facilities, the Facilities of Our Fuel Suppliers or Customers, or at Regional Transmission Facilities Could Adversely Effect Our Business
Since the September 11, 2001 terrorist attacks, the United States government has issued warnings that energy assets, specifically the nation's electric utility infrastructure, may be the future targets of terrorist organizations. These developments have subjected our operations to increased risks. Damage to the assets of fuel suppliers, customer’s assets, our assets or at regional transmission facilities inflicted by terrorist groups or saboteurs could result in a significant decrease in revenues and significant repair costs, force an increase in security measures, cause changes in the insurance markets, and cause disruptions of fuel supplies, energy consumption and energy markets, particularly with respect to natural gas and electric energy. Any of these consequences from acts of terrorism could materially affect our results of operations and decrease the amount of funds available to make payments on our securities. Instability in the financial markets as a result of terrorism or war could also materially adversely affect our ability to raise capital.
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We Are Subject to Comprehensive Energy Regulation and Changes in Regulation and Rates May Adversely Affect Our Business, Financial Condition, Results of Operations and Ability to Service Our Securities
We are subject to comprehensive regulation by various United States federal, state and local regulatory agencies, all of which significantly influence our operating environment, rates, capital structure, costs and ability to recover costs from customers. These regulatory agencies include, among others, the Federal Energy Regulatory Commission, or the FERC, the Environmental Protection Agency, the Nuclear Regulatory Commission, or the NRC, the Iowa Utilities Board, or the IUB, the Illinois Commerce Commission, other state utility boards and numerous local agencies. Changes in regulations or the imposition of additional regulations by any of these entities or new legislation could have a material adverse impact on our results of operations. For example, such changes could result in increased retail competition in our service territory, the acquisition by a municipality (by negotiation or condemnation) of our distribution facilities or a negative impact on current transportation and cost recovery arrangements.
The structure of federal and state energy regulation is currently undergoing change and has in the past, and may in the future, be the subject of various challenges, initiatives and restructuring proposals by policymakers, utilities and other industry participants. Following the cascading blackouts that occurred in parts of the Midwest and Northeast United States and Eastern Canada on August 14, 2003, federal, state and Canadian officials, as well as non-governmental organizations charged with electric reliability responsibilities, are considering measures designed to promote the reliability of the electric transmission and distribution systems. The implementation of regulatory changes in response to such challenges, initiatives and restructuring proposals could result in the imposition of more comprehensive or stringent requirements on industry participants, which could result in increased compliance costs and could have a material adverse effect on our business, financial condition, results of operations and ability to service our securities.
We May Be Adversely Affected by Environmental, Health, Safety and Other Laws and Regulations
We are subject to a number of environmental, safety and other laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid wastes, hazardous substances and safety matters. We may incur substantial costs and liabilities in connection with our operations as a result of these regulations. In particular, the cost of future compliance with federal, state and local clean air laws, such as those that require certain generators, including some of our electric generating facilities, to limit nitrogen oxide, sulfur dioxide, carbon dioxide, mercury emissions and potential other pollutants or emissions, may require us to make significant capital expenditures, which may not be recoverable through future rates. In addition, these costs and liabilities may include those relating to claims for damages to property and persons resulting from our operations. The implementation of regulatory changes imposing more comprehensive or stringent requirements, to the extent such changes would result in increased compliance costs or additional operating restrictions, could have a material adverse effect on our business, financial condition, results of operations and ability to service our securities.
In addition, regulatory compliance for existing facilities and the construction of new facilities is a costly and time-consuming process, and intricate and rapidly changing environmental regulations may require major expenditures for permitting and create the risk of expensive delays or material impairment of value if projects cannot function as planned due to changing regulatory requirements or local opposition.
In addition to operational standards, environmental laws also impose obligations to clean up or remediate contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the contamination. Accordingly, we may become liable, either contractually or by operation of law, for remediation costs even if the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property. Given the nature of the past industrial operations conducted by us and others at our properties, there can be no assurance that all potential instances of soil or groundwater
4
contamination have been identified, even for those properties where an environmental site assessment or other investigation has been conducted. Although we have accrued reserves, where appropriate, for known remediation liabilities, future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination, may give rise to additional remediation liabilities which may be material. Any failure to recover increased environmental or safety costs incurred by us may have a material adverse effect on our business, financial condition, results of operations and ability to service the securities.
Increased Competition Resulting From Legislative, Regulatory and Restructuring Efforts Could Have a Significant Financial Impact on Us and Consequently Decrease Revenue
The wholesale generation segment of the electric industry has been and will continue to be significantly impacted by competition. Competition in the wholesale market has resulted in a proliferation of power marketers and a substantial increase in market activity. Many of these marketers have experienced financial difficulties and the market continues to be volatile. Margins from wholesale electric transactions have a material impact on our results of operations. Accordingly, significant changes in the wholesale electric markets, including those arising from regulatory and legislative decisions, could have a material adverse effect on our financial position, results of operations and ability to service our securities.
Our Operations Are Subject to Power and Fuel Price Fluctuations, Other Weather Risks, Commodity Price Risks and Credit Risks That Could Adversely Affect Our Results of Operations
We are exposed to commodity price risks, energy transmission price risks and credit risks in our operations. Specifically, such possible risks include commodity price changes, market supply shortages, interest rate changes and counterparty defaults, all of which could have an adverse effect on our financial condition, results of operations and ability to service our securities. In addition, the sale of electric power and natural gas is generally a seasonal business, which seasonality results in commodity price fluctuations. Revenues are negatively impacted by low commodity prices resulting from low demand for electricity. Demand for electricity often peaks during the hottest summer months and coldest winter months and declines during the other months. As a result of these variations in demand and resulting price fluctuations, our overall operating results in the future may fluctuate substantially on a seasonal basis. We historically earned less income when weather conditions were milder and expect that unusually mild weather in the future could decrease revenues and provide less funds to service our securities.
Also, in Iowa, we do not have an energy adjustment clause to pass through fuel price increases for electricity in our rates, so any significant increase in fuel or purchased power costs for electricity generation could have a negative impact on our results of operations despite efforts to minimize this negative impact through the use of hedging instruments. The effect of these risks could result in the inability to fulfill contractual obligations, significantly higher energy or fuel costs relative to corresponding sales contracts, or increased interest expense. Any of these consequences could decrease net cash flow and impair our ability to make payments on our securities.
Due to the Limited Number of Suppliers and Service Providers Engaged by Us, the Failure of Any of These Third Parties to Fulfill Its Contractual Obligation May Materially Increase Our Costs
Our electric generating facilities are often dependent on a single or limited number of entities to supply or transport gas, coal or other fuels, to dispose of wastes or to deliver electricity. The failure of any of these third parties to fulfill its contractual obligations could increase the costs to provide electric service to our customers.
We Are Subject to the Unique Risks Associated With Nuclear Generation
Regulatory requirements applicable in the future to nuclear generating facilities could adversely affect our results of operations. We are subject to certain generic risks associated with utility nuclear generation, which include the following:
(1) the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;
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(2) limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and
(3) uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.
The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generating facilities. In the event of noncompliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC have, in the past, necessitated substantial capital expenditures at nuclear plants, including the Quad Cities Station, and additional expenditures could be required in the future. In addition, although we have no reason to anticipate a serious nuclear incident at the Quad Cities Station, if an incident did occur, it could have a material but presently undeterminable adverse effect on our financial condition, results of operations and ability to service our securities.
MidAmerican Energy Holdings May Exercise Its Significant Influence Over Us in a Manner that Would Benefit MidAmerican Energy Holdings to the Detriment of Our Creditors and Preferred Stockholders
We are an indirect wholly owned subsidiary of MidAmerican Energy Holdings and, therefore, MidAmerican Energy Holdings has significant influence over the decision of all matters submitted for shareholder approval and our management and affairs. In circumstances involving a conflict of interest between MidAmerican Energy Holdings, on the one hand, and our creditors and preferred stockholders, on the other, MidAmerican Energy Holdings could exercise its influence in a manner that would benefit MidAmerican Energy Holdings to the detriment of our creditors and preferred stockholders.
The Rights of the Holders of Our Subordinated Debt Securities Will Be Subject to the Rights of the Holders of Our Senior Debt
Our subordinated debt securities will be subordinate and junior in right of payment to our senior debt, including the debt securities described in this prospectus. Unless otherwise specified in the applicable prospectus supplement, the subordination terms will provide that no payments on the subordinated debt securities may be made if any senior debt is not paid when due or the maturity of any senior debt has been accelerated because of a default. The indenture for the subordinated debt securities will not restrict our ability to incur senior debt. As of March 31, 2006 we had $1.64 billion of senior debt outstanding.
The Terms of the Indentures for the Securities Do Not Restrict Our Ability to Incur Additional Indebtedness that Could Have an Adverse Impact on Our Financial Condition
The indentures governing our rights and obligations with respect to the debt securities do not restrict our ability to incur indebtedness in addition to the debt securities. Accordingly, we could enter into acquisitions, refinancings, recapitalizations or other highly leveraged transactions that could significantly increase our total amount of outstanding indebtedness. The interest payments needed to service this increased level of indebtedness could have a material adverse effect on our operating results. A highly leveraged capital structure could also impair our overall credit quality, making it more difficult for us to finance our operations, and could result in a downgrade in the ratings of our indebtedness, including the debt securities, by credit rating agencies. Further, if our other indebtedness is accelerated due to an event of default under such indebtedness, resulting in an event of default under the indentures for the securities, we may not have sufficient funds to repay the other indebtedness and the securities simultaneously.
There Is No Existing Market for the Securities and We Cannot Assure You that an Active Trading Market Will Develop
There is no existing market for the securities and we cannot assure you that an active trading market will develop. If a market for the securities were to develop, future trading prices would depend on many factors, including prevailing interest rates, our operating results and the market for
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similar securities. We do not intend to apply for listing or quotation of the securities on any securities exchange or stock market. As a result, it may be difficult for you to find a buyer for your securities at the time you want to sell them, and even if you find a buyer, you might not get the price you want.
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FORWARD-LOOKING STATEMENTS
This prospectus contains or incorporates by reference statements that do not directly or exclusively relate to historical facts. Such statements are ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as ‘‘may,’’ ‘‘will,’’ ‘‘could,’’ ‘‘project,’’ ‘‘believe,’’ ‘‘anticipate,’’ ‘‘expect,’’ ‘‘estimate,’’ ‘‘continue,’’ ‘‘potential,’’ ‘‘plan,’’ ‘‘forecast,’’ and similar terms. These statements represent our intentions, plans, expectations and beliefs and are subject to risks, uncertainties and other factors. Many of these factors are outside our control and could cause actual results to differ materially from such forward-looking statements. These factors include, among others:
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| • | general economic and business conditions in the United States as a whole and in the midwestern United States, and our service territory in particular; |
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| • | the financial condition and creditworthiness or our significant customers and suppliers; |
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| • | governmental, statutory, regulatory or administrative initiatives, proceedings or decisions, including those related to the Energy Policy Act of 2005, affecting us or the United States electric or gas utility industries; |
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| • | weather effects on sales and revenues; |
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| • | changes in expected customer growth or usage of electricity or gas; |
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| • | economic or industry trends that could impact electricity or gas usage; |
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| • | increased competition in the power generation and electric or gas utility industries; |
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| • | fuel, fuel transportation and power costs and availability; |
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| • | changes in business strategy, development plans or vendor relationships; |
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| • | availability, term and deployment of capital; |
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| • | availability of qualified personnel; |
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| • | unscheduled generation outages or repairs; |
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| • | risks relating to nuclear generation; |
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| • | financial or regulatory accounting principles or policies imposed by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the Securities and Exchange Commission, or the SEC, the Federal Energy Regulatory Commission and similar entities with regulatory oversight; |
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| • | changes in, and compliance with, environmental laws, regulations, decisions and policies that could increase operating and capital improvement costs or affect plant output and/or delay print construction; |
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| • | other risks and unforeseen events, including wars, the effects of terrorism, embargoes and other catastrophic events; and |
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| • | other business or investment considerations that may be disclosed from time to time in our SEC filings or in other publicly disseminated written documents. |
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors should not be construed as exclusive.
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USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement, we will use the net proceeds from the sale of the securities described in this prospectus for general corporate purposes, which may include additions to working capital, reductions of our indebtedness, refinancing of existing securities and financing of capital expenditures. We do not presently contemplate a specific use of proceeds but will indicate such information in the prospectus supplement applicable to any offering of securities. We may invest funds not immediately required for such purposes in short-term securities. The amount and timing of sales of the securities described in this prospectus will depend on market conditions and the availability to us of other funds.
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DESCRIPTION OF DEBT SECURITIES
This prospectus describes the general terms and provisions of the debt securities that we may offer. When we offer to sell a particular series of debt securities, we will describe the specific terms of the series in a prospectus supplement to this prospectus. We will also indicate in the applicable prospectus supplement whether the general terms and provisions described in this prospectus apply to a particular series of debt securities.
General
We may issue senior debt securities or subordinated debt securities. The senior debt securities will be our direct secured or unsecured obligations and the subordinated debt securities will be our direct unsecured obligations. Each of the senior debt securities and the subordinated debt securities will be issued under an indenture to be entered into between us and a trustee named in the applicable prospectus supplement. The following summary of the indentures is not a complete description of all of the provisions of the indentures. We have filed (or will file prior to issuance of the applicable debt securities) forms of the indentures as exhibits to the registration statement of which this prospectus is a part. Except to the extent set forth in a prospectus supplement for a particular issue of debt securities, the indentures for the debt securities, as amended or supplemented from time to time, will be substantially similar to the indentures filed as exhibits to the registration statement and described below.
A prospectus supplement relating to a series of debt securities being offered will include specific terms relating to the offering. These terms will include some or all of the following:
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| • | the title of the series of debt securities; |
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| • | whether the series of debt securities are senior debt securities or subordinated debt securities; |
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| • | the aggregate principal amount (or any limit on the aggregate principal amount) of the series of debt securities and, if any debt securities of a series are to be issued at a discount from their face amount, the method of computing the accretion of such discount; |
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| • | if other than the entire principal amount thereof, the portion of the principal amount of the debt securities payable upon declaration of acceleration of the maturity thereof; |
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| • | the interest rate or method for calculation of the interest rate; |
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| • | the date from which interest will accrue; |
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| • | the record dates for principal and interest payable on debt securities; |
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| • | the dates when, places where and manner in which principal and interest will be payable; |
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| • | the securities registrar if other than the trustee; |
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| • | the terms of any mandatory redemption (including any sinking fund requirement) or any redemption at our option; |
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| • | the terms of any repurchase or remarketing rights of third parties; |
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| • | the terms of any redemption at the option of holders of the debt securities; |
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| • | the denominations in which the debt securities are issuable; |
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| • | whether the debt securities will be issued in registered or bearer form and the terms of any such forms of debt securities; |
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| • | whether the debt securities will be represented by a global security and the terms of any such global security; |
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| • | the currency or currencies (including any composite currency) in which principal or interest or both may be paid; |
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| • | if payments of principal or interest may be made in a currency other than that in which the debt securities are denominated, the method for determining such payments; |
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| • | provisions for electronic issuance of debt securities or issuance of debt securities in certificated form; |
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| • | any events of default, covenants and/or defined terms in addition to or in lieu of those set forth in the applicable indenture; |
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| • | whether and upon what terms debt securities may be defeased; |
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| • | whether the debt securities will have guaranties; |
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| • | any special tax implications of the debt securities; and |
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| • | any other terms in addition to or different from those contained in the applicable indenture. |
The debt securities will bear no interest or interest at a fixed or a floating rate. Debt securities bearing no interest or interest at a rate that at the time of issuance is below the prevailing market rate may be sold or deemed to be sold at a discount below their stated principal amount. With respect to any debt securities as to which we have the right to defer interest, the holders of such debt securities may be allocated interest income for federal and state income tax purposes without receiving equivalent, or any, interest payments. Any material federal income tax consequences applicable to any such discounted debt securities or to debt securities issued at par that are treated as having been issued at a discount for federal income tax purposes will be described in the applicable prospectus supplement.
Subordination Of Subordinated Debt Securities
The subordinated debt securities will be subordinate and junior in right of payment to the senior debt securities described in this prospectus and all of our other current and future senior debt. As of March 31, 2006, $1.64 billion of our senior debt was outstanding, $57.3 million of which is secured by certain of our assets. Unless otherwise specified in the applicable prospectus supplement, no payments on the subordinated debt securities may be made if (1) any senior debt is not paid when due or (2) the maturity of any senior debt has been accelerated because of a default. Upon any distribution of our assets to creditors upon a bankruptcy, insolvency, liquidation, reorganization or similar event with respect to us, all amounts due on our senior debt must be paid before any payments are made on the subordinated debt securities.
Subject to the payment in full of all senior debt, the rights of the holders of subordinated debt securities will be subrogated to the rights of the holders of our senior debt to receive payments or distributions applicable thereto until all amounts owing on the subordinated debt securities are paid in full.
The subordinated indenture will not limit the amount of senior debt that we can incur.
Global Securities
The debt securities of any series may be represented, in whole or in part, by one or more global securities. Each global security will:
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| • | be registered in the name of a depositary or nominee thereof that we will identify in the applicable prospectus supplement; |
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| • | be deposited with the depositary or nominee or custodian; and |
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| • | bear any required legends. |
No global security may be exchanged in whole or in part for debt securities registered in the name of any person other than the depositary or any nominee unless:
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| • | the depositary has notified us that it is unwilling or unable to continue as depositary or has ceased to be qualified to act as depositary; |
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| • | we execute and deliver to the trustee an officers’ certificate to the effect that the global security shall be exchangeable; |
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| • | an event of default occurs and is continuing; or |
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| • | any other circumstances described in the applicable prospectus supplement occur. |
As long as the depositary, or its nominee, is the registered holder of a global security, the depositary or nominee will be considered the sole owner and holder of the debt securities represented by the global security for all purposes under the debt securities and the applicable indenture. Except in the above limited circumstances, owners of beneficial interests in a global security:
| | |
| • | will not be entitled to have the debt securities registered in their names; |
| | |
| • | will not be entitled to physical delivery of certificated debt securities; and |
| | |
| • | will not be considered to be holders of those debt securities under the debt securities or the applicable indenture. |
Payments on a global security will be made to the depositary or its nominee as the holder of the global security. Some jurisdictions have laws that require that certain purchasers of securities take physical delivery of the securities in definitive form. These laws may impair the ability to transfer beneficial interests in a global security.
Institutions that have accounts with the depositary or its nominee are referred to as ‘‘participants.’’ Ownership of beneficial interests in a global security will be limited to participants and to persons that may hold beneficial interests through participants. The depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of debt securities represented by the global security to the accounts of its participants.
Ownership of beneficial interests in a global security will be shown on and effected through records maintained by the depositary, with respect to participants’ interests, or any participant, with respect to interests of persons held by participants on their behalf.
Payments, transfers, exchanges and other matters relating to beneficial interests in a global security will be subject to policies and procedures of the depositary. The depositary policies and procedures may change from time to time. Neither we nor the trustee will have any responsibility or liability for the depositary’s or any participant’s records with respect to beneficial interests in a global security.
Exchange Of Global Securities For Certificated Securities
Except as otherwise may be set forth in the applicable prospectus supplement, the global securities may be exchanged for debt securities in certificated form only in the following circumstances:
| | |
| • | if the depositary notifies us that it is unwilling or unable to continue as depositary for the global securities, or if the depositary is no longer registered as a clearing agency under the Securities Exchange Act, and we do not appoint a replacement depositary within 90 days; |
| | |
| • | an event of default under the applicable indenture occurs; or |
| | |
| • | if we determine that an issue of debt securities will no longer be represented by global securities. |
If any global securities are exchangeable for certificated securities as described above, we will execute, and the trustee will authenticate upon our order, certificated securities of like tenor and terms in certificated form in an aggregate principal amount equal to the principal amount of such global securities. These certificated securities will be delivered to persons specified by the depositary in exchange for the beneficial interests in the global securities being exchanged.
Redemption And Repayment
The applicable prospectus supplement will specify the following:
| | |
| • | if the debt securities are subject to any sinking fund and the terms of any such sinking fund; |
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| | |
| • | if we may elect to redeem the debt securities prior to maturity and the terms of any such optional redemption; |
| | |
| • | if we will be required to redeem the securities prior to maturity upon the occurrence of certain events and the terms of any such mandatory redemption; and |
| | |
| • | if the holders of the debt securities will have the right to repayment of the debt securities prior to maturity and the terms of any such optional repayment. |
If we elect or are required to redeem debt securities, a redemption notice will be sent to each holder of debt securities to be redeemed at least 30 but not more than 60 days prior to the redemption date. The redemption notice will include the following: (1) the redemption date, the places of redemption and the redemption price; (2) a statement that payment of the redemption price will be made on surrender of the debt securities at the places of redemption; (3) a statement that accrued interest to the redemption date will be paid as specified in the notice and that after the redemption date interest will cease to accrue; (4) if less than all of the debt securities of a series are to be redeemed, the particular debt securities or portions thereof to be redeemed; (5) if any debt securities are to be redeemed in part only, the portion of the debt securities to be redeemed and a statement that, upon surrender of the debt securities for redemption, new debt securities having the same terms will be issued in an amount equal to the unredeemed portion; and (6) if applicable, a statement that redemption is subject to the receipt by the trustee prior to the redemption date of sufficient funds to make such redemption.
If notice of redemption is given as specified above, the debt securities called for redemption will become due and payable on the date and at the places stated in the notice at the applicable redemption price, together with accrued interest to the redemption date. After the redemption date, the debt securities subject to redemption will cease to bear interest and will not be entitled to the benefits of the applicable indenture, other than the right to receive payment of the redemption price together with accrued interest to the redemption date.
If debt securities are repayable at the option of the holders prior to maturity, a holder that elects to have its debt securities repaid will be required to deliver such debt securities (or a guarantee of delivery from an eligible institution) to the trustee at least 30 but not more than 45 days prior to the repayment date. For debt securities represented by global securities held by the depositary, the repayment option may be exercised by a direct participant in the depositary on behalf of the beneficial owner by sending written notice to the trustee (specifying certain information regarding the debt securities to be repaid) at least 30 but not more than 60 days prior to the repayment date.
Covenants
In addition to other covenants, if any, as may be described in the applicable prospectus supplement and except as may otherwise be set forth in the applicable prospectus supplement, the indentures will contain the following covenants:
| | |
| • | a covenant which requires us to maintain an office for payment and registration of transfer or exchange of the debt securities in New York, New York; |
| | |
| • | a covenant which requires us to notify the trustee in writing of any event of default under an indenture within five days after we become aware of such event of default; |
| | |
| • | a covenant which requires us to maintain our corporate existence, rights and franchises, unless the maintenance of such rights and franchises is no longer desirable in the conduct of our business; and |
| | |
| • | a covenant which prohibits us from consolidating with or merging with or into any other person or conveying, transferring or leasing our properties substantially as an entirety to any other person, unless the surviving company or transferee, as applicable, is a U.S. company and assumes all of our obligations under the indenture. |
The covenant described immediately above includes a phrase relating to a conveyance, transfer or lease of our properties ‘‘substantially as an entirety.’’ Although there is a limited body of case law
13
interpreting the phrase ‘‘substantially as an entirety,’’ there is no precise established definition of the phrase under applicable law. Accordingly, the nature and extent of the restriction on our ability to convey, transfer or lease our properties substantially as an entirety, and the protections provided to the holders of debt securities by such restriction, may be uncertain.
Events Of Default
Except as described in the applicable prospectus supplement, the following events will constitute events of default under the applicable indenture:
| | |
| • | we fail to pay interest on the debt securities and such failure continues for 30 days; |
| | |
| • | we fail to pay principal of the debt securities when due; |
| | |
| • | we breach any other covenant or representation in the indenture and such breach continues for 60 days (such period to be extended to up to 90 days if we are diligently pursuing a cure) after we receive a notice of default with respect thereto; |
| | |
| • | a decree or order is entered against us in an involuntary bankruptcy proceeding and is not vacated in 90 days, or a similar involuntary event relating to our bankruptcy or insolvency occurs and continues for 90 days; and |
| | |
| • | we commence a voluntary bankruptcy case or take similar voluntary actions relating to our bankruptcy or insolvency. |
Upon the occurrence of an event of default under an indenture, the holders of at least a majority in aggregate principal amount of the applicable debt securities may declare such debt securities to be immediately due and payable. Holders of a majority in principal amount of such debt securities may rescind the acceleration so long as the conditions set forth in the applicable indenture have been satisfied.
Prior to acceleration, holders of a majority in aggregate principal amount of an issuance of debt securities may waive an event of default, other than (1) an event of default related to non-payment of principal or interest and (2) an event of default related to a covenant or other provision of the indenture that cannot be modified without the consent of each holder of debt securities affected thereby.
Modifications To The Indenture
Except as otherwise set forth in the applicable prospectus supplement, each indenture will contain provisions which allow us and the trustee to amend the indenture without the consent of any holder of debt securities for the following purposes:
| | |
| • | to cure ambiguities or to cure, correct or supplement any defective or inconsistent provisions; |
| | |
| • | to add additional covenants, events of default or collateral, or to surrender a right or power conferred upon us in the indenture; |
| | |
| • | to establish the form of additional debt securities in accordance with the terms of the indenture; |
| | |
| • | to evidence the succession of another company to us and the assumption by the successor of our obligations under the indenture; |
| | |
| • | to grant to or confer upon the trustee for the benefit of the holders any additional rights, remedies, powers or authority; |
| | |
| • | to permit the trustee to comply with any duties imposed upon it by law; |
| | |
| • | to specify further the duties and responsibilities of, and to define further the relationships among, the trustee and any authenticating agent or paying agent for the debt securities; and |
| | |
| • | to change or eliminate any of the provisions of the indenture, so long as the change or elimination becomes effective only when there are no debt securities outstanding that were created prior to the execution of the supplemental indenture or other document evidencing such change or elimination. |
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Except as set forth in the applicable prospectus supplement, each indenture will contain provisions which allow us and the trustee to amend the indenture for any other purpose with the consent of holders of a majority in principal amount of the applicable issue of debt securities, other than amendments which (1) extend the stated maturity of the debt securities, (2) reduce the principal amount of the debt securities, (3) reduce the interest rate for the debt securities, (4) extend the dates for scheduled payments of principal and interest, (5) impair the right of a holder of debt securities to institute suit for the payment of its debt securities, or (6) reduce the percentage of holders of debt securities required to consent to amendments or waive defaults under the indenture. The items described in (1) through (5) above will require the consent of all holders affected by the change. The item described in (6) above will require the consent of all holders.
Governing Law
The senior indenture and the subordinated indenture will be governed by the laws of the State of New York.
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DESCRIPTION OF CAPITAL STOCK
We have the authority under our articles of incorporation to issue 350,000,000 shares of common stock, no par value, and 100,000,000 shares of preferred stock, no par value. As of March 31, 2006, 70,980,203 shares of our common stock were outstanding, all of which are owned by MHC Inc. The common stock is not listed on any exchange. All outstanding shares of common stock are fully paid and non-assessable.
Also as of March 31, 2006, the following shares of our preferred stock were outstanding: 49,451 shares of the $3.30 series; 38,305 shares of the $3.75 series; 32,630 shares of the $3.90 series; 47,362 shares of the $4.20 series; 49,945 shares of the $4.35 series; 35,697 shares of the $4.40 series; and 49,898 shares of the $4.80 series. All outstanding shares of preferred stock are fully paid and non-assessable. The terms of these preferred securities are described in an amendment to our articles of incorporation which is incorporated herein by reference.
Common Stock
The shares of our authorized common stock are identical in all respects and have equal rights and privileges. Each holder of our common stock is entitled to one vote in the election of directors and other matters. Common shareholders may receive dividends when declared by our board of directors. Dividends may be paid in cash, stock or another form. In certain cases, common shareholders may not receive dividends until we have satisfied our obligations to any preferred shareholders. If we liquidate, dissolve or wind-up our business, either voluntarily or not, common shareholders will share equally in the assets remaining after we pay our creditors and preferred shareholders.
Preferred Stock
We may issue, from time to time, shares of one or more series or classes of our preferred stock with such preferences and designations as our board of directors may determine. The following summary description sets forth some of the general terms of the preferred stock. We will describe the specific terms of any series of preferred stock that we issue in a prospectus supplement. To the extent the description contained in the prospectus supplement differs from this summary description, you should rely on the information in the prospectus supplement. You should also read our articles of incorporation and bylaws before purchasing the preferred stock.
Our board of directors is authorized to determine for each series of preferred stock, and the applicable prospectus supplement will set forth with respect to any such series:
| | |
| • | the designation of such series and the number of shares that constitute such series; |
| | |
| • | the dividend rate (or the method of calculation thereof), if any, on the shares of such series and the priority as to payment of dividends with respect to other classes or series of our capital stock; |
| | |
| • | the dividend periods (or the method of calculating the dividend periods); |
| | |
| • | the voting rights of the shares, if any; |
| | |
| • | the liquidation preference and the priority as to payment of such liquidation preference with respect to the classes or series of preferred stock and any other rights of the shares of such series if we liquidate, dissolve or wind-up our affairs; |
| | |
| • | whether and on what terms we can redeem or repurchase the shares of preferred stock; |
| | |
| • | whether the preferred stock of such series will have the benefit of a sinking fund; and |
| | |
| • | any other material terms. |
The shares of a series of preferred stock will not have any preferences, voting powers or relative, participating, optional or other special rights except as set forth above or in the applicable prospectus supplement, our articles of incorporation or the applicable certificate of designation or as otherwise required by law.
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Except as set forth in the applicable prospectus supplement, no series of preferred stock will be redeemable or receive the benefit of a sinking fund. If we voluntarily or involuntarily liquidate, dissolve or wind up our affairs, the holders of each series of preferred stock will be entitled to receive the liquidation preference per share specified in the prospectus supplement plus any accrued and unpaid dividends. Holders of preferred stock will be entitled to receive these amounts before any distribution is made to the holders of common stock, but only after the liquidation preference has been fully paid on any shares of senior ranking preferred stock, if any. Neither the par value nor the liquidation preference is indicative of the price at which the preferred stock will actually trade on or after the date of issuance.
We will designate the transfer agent for each series of preferred stock in the applicable prospectus supplement.
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PLAN OF DISTRIBUTION
We may offer and sell or exchange the securities described in this prospectus:
| | |
| • | through one or more underwriters, |
| | |
| • | through one or more dealers, |
| | |
| • | directly to one or more purchasers (through a specific bidding or auction process or otherwise), or |
| | |
| • | through a combination of any such methods of sale. |
The distribution of the securities described in this prospectus may be effected from time to time in one or more transactions either:
| | |
| • | at a fixed price or prices, which may be changed, |
| | |
| • | at market prices prevailing at the time of sale, |
| | |
| • | at prices relating to such prevailing market prices, |
| | |
| • | at negotiated prices, or |
| | |
| • | at a fixed exchange ratio in return for other of our securities. |
Offers to purchase or exchange the securities may be solicited by agents designated by us from time to time. Any such agent will be named, and any commissions payable by us to such agent will be set forth, in the applicable prospectus supplement. Unless otherwise indicated in the applicable prospectus supplement, any such agent will be acting on a best efforts basis for the period of its appointment. Any such agent may be deemed to be an underwriter, as that term is defined in the Securities Act, of the securities so offered and sold.
If an underwriter or underwriters are utilized in the sale of the securities, we will execute an underwriting agreement with such underwriter or underwriters at the time an agreement for such sale is reached. The names of the specific managing underwriter or underwriters, as well as any other underwriters, and the terms of the transactions, including compensation of the underwriters and dealers, which may be in the form of discounts, concessions or commissions, if any, will be set forth in the applicable prospectus supplement, which will be used by the underwriters to make resales of the securities.
If a dealer is utilized in the sale of the securities, we or an underwriter will sell such securities to the dealer as principal. The dealer may then resell such securities to the public at varying prices to be determined by such dealer at the time of resale. The name of the dealer and the terms of the transactions will be set forth in the applicable prospectus supplement relating thereto.
Offers to purchase or exchange the securities may be solicited directly by us and sales or exchanges thereof may be made by us directly to institutional investors or others. The terms of any such sales, including the terms of any bidding or auction process, if utilized, will be described in the applicable prospectus supplement relating thereto.
We may enter into agreements with agents, underwriters and dealers under which we agree to indemnify them against certain liabilities, including liabilities under the Securities Act, or to contribute to payments they may be required to make in respect thereof. The terms and conditions of such indemnification or contribution will be described in the applicable prospectus supplement. Certain of the agents, underwriters or dealers, or their affiliates, may be customers of, engage in transactions with or perform services for us in the ordinary course of business.
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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission using a ‘‘shelf’’ registration process. Using this process, we may offer the securities described in this prospectus, either separately or with other securities registered hereunder, in one or more offerings with an aggregate principal amount of up to $600,000,000. This prospectus provides you with a general description of the securities we may offer. Each time we offer securities, we will provide a prospectus supplement to this prospectus. The prospectus supplement will describe the specific terms of that offering. The prospectus supplement may also add, update or change the information contained in this prospectus. Please carefully read this prospectus and the applicable prospectus supplement, in addition to the information contained in the documents we refer you to under the heading ‘‘Where You Can Find More Information.’’
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission's public reference rooms in Washington, D.C.. Please call the Securities and Exchange Commission at 1-800-732-0330 for further information on the public reference room. You may also obtain copies of these materials from the public reference section of the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Our Securities and Exchange Commission filings are also available to the public from the Securities and Exchange Commission's web site at http://www.sec.gov.
This prospectus is part of a registration statement we have filed with the Securities and Exchange Commission relating to the securities described in this prospectus. As permitted by Securities and Exchange Commission rules, this prospectus does not contain all of the information set forth in the registration statement. You should read the registration statement for further information about us and the securities described in this prospectus. You may inspect the registration statement and its exhibits without charge at the office of the Securities and Exchange Commission at 100 F Street, N.E., in Washington, D.C. 20549, and you may obtain copies from the Securities and Exchange Commission at prescribed rates. You may also access the registration statement at the Securities and Exchange Commission's web site described above.
The Securities and Exchange Commission allows us to ‘‘incorporate by reference’’ the information that we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus. The information filed by us with the Securities and Exchange Commission in the future will automatically update and supersede this information. We incorporate by reference, among others, our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 except for Part II Item 8, ‘‘Financial Statements and Supplementary Data’’ and Part IV Item 15(a)(2), ‘‘Financial Statement Schedules,’’ our Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31, 2006, our Current Report on Form 8-K filed on May 16, 2006, and any filings made by us with the Securities and Exchange Commission under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the initial filing of the registration statement that contains this prospectus and until the termination of the offering of securities commenced by us pursuant to this prospectus.
You may request a copy of these filings, at no cost, by writing or calling us at the following address or telephone number:
Treasurer
MidAmerican Energy Company
666 Grand Avenue
Des Moines, Iowa 50309
(515) 242-4300
You should rely only on the information incorporated by reference or provided in this prospectus or any prospectus supplement. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of these documents.
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LEGAL MATTERS
The validity of the debt securities described in this prospectus has been passed upon for us by Latham & Watkins LLP, 885 Third Avenue, Suite 1000, New York, New York 10022. The validity of the preferred stock described in this prospectus has been passed upon for us by Paul J. Leighton, Esq., our Assistant General Counsel.
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EXPERTS
The consolidated financial statements and the related financial statement schedule as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, incorporated by reference in this prospectus from MidAmerican Energy Company's (the ‘‘Company’’) Current Report on Form 8-K dated May 16, 2006, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and has been so incorporated 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, 2006 and 2005, which is incorporated herein by reference, Deloitte & Touche LLP, an independent registered public accounting firm, have applied limited procedures in accordance with the standards of the Public Company Accounting Oversight Board (United States) for a review of such information. However, as stated in their report included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, and incorporated by reference 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 that 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.
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Table of ContentsPricing Supplement No. 1 dated October 3, 2006
This pricing supplement accompanies and supplements the prospectus dated
June 2, 2006, and the prospectus supplement dated October 3, 2006.
MidAmerican Energy Company
Medium-Term Notes
Due from Nine Months to 30 Years from Date of Issue
| | | | | | |
| Principal Amount: $350,000,000 | | | | | | |
Issue Price: ![[ ]](https://capedge.com/proxy/424B5/0000950136-06-008350/ebox.gif) 100% | | | ![[X]](https://capedge.com/proxy/424B5/0000950136-06-008350/xbox.gif) | | | Other: See ‘‘Plan of Distribution’’ below. |
| Authorized Denominations: | | | | | | $1,000 and integral multiples of $1,000 Other: |
| Original Issue Date: October 6, 2006 | | | | | | |
| Stated Maturity: October 15, 2036 | | | | | | |
| Extension of Stated Maturity: | | | | | | MidAmerican Energy does not have the option to extend the stated maturity. |
| | | | | | | MidAmerican Energy does have the option to extend the stated maturity.
Extension Period(s): ______ period(s) of [one] [two] [three] [four] [five] year(s)
Final Maturity Date: |
|
| |
| Form: | The notes are book-entry notes.
The notes are certificated notes. |
Fixed Rate Notes
Interest Rate: 5.800%
Interest Payment Dates: January 15 and July 15 Other: February 15 and August 15 commencing February 15, 2007
| | |
| Interest Rate Reset: | MidAmerican Energy does not have the option to reset the interest rate.
MidAmerican Energy does have the option to reset the interest rate.
Reset Date(s):
Reset Formula: |
Record Dates: January 1 and July 1 Other: February 1 and August 1
Floating Rate Notes
Initial Interest Rate: %
Interest Rate Basis:
Commercial Paper Rate
LIBOR
Designated LIBOR Page: LIBOR Reuters, page LIBOR Telerate, page
Prime Rate
Treasury Rate
Other:
Interest Reset Period: Daily Weekly Monthly Quarterly
Semiannual beginning in and Annual beginning in
Interest Reset Dates: As specified in the prospectus Other:
Interest Payment Period: Monthly Quarterly Semiannual Annual
Interest Payment Dates:
Third Wednesday of each month
Third Wednesday of each March, June, September and December
Third Wednesday of each and Third Wednesday of each
Other:
Interest Determination Date: As specified in the prospectus Other:
Calculation Date: As specified in the prospectus Other:
Table of ContentsIndex Maturity:
Spread: None basis points
| | | | | | |
| Spread Reset: | | | | | | MidAmerican Energy does not have the option to reset the spread. |
| | | | | | | MidAmerican Energy does have the option to reset the spread. |
| | | | | | | Reset Date(s): |
| | | | | | | Reset Formula: |
|
Spread Multiplier: None %
| | | | | | |
| Spread Multiplier Reset: | | | | | | MidAmerican Energy does not have the option to reset the spread multiplier. |
| | | | | | | MidAmerican Energy does have the option to reset the spread multiplier. |
| | | | | | | Reset Date(s): |
| | | | | | | Reset Formula: |
|
Maximum Interest Rate: None %
Minimum Interest Rate: None %
Calculation Agent: The Bank of New York Trust Company, NA Other:
Original Issue Discount Notes
Yield-to-Maturity:
Amortizing Notes. An amortization schedule is attached to this pricing supplement and is incorporated in this pricing supplement by reference.
| | | | | | |
| Redemption: | | | | | | The notes may not be redeemed prior to maturity at the option of MidAmerican Energy. |
| | | | | | | The notes may be redeemed prior to maturity at the option of MidAmerican Energy. The redemption provisions are attached to this pricing supplement as Annex 1. |
| Repayment: | | | | | | The notes may not be repaid prior to maturity at the option of the holders. |
| | | | | | | The notes may be repaid prior to maturity at the option of the holders. |
| | | | | | | Repayment Date(s): At any time On the following dates: |
| | | | | | | Repayment Price: |
| Sinking Fund: | | | | | | The notes do not have the benefit of sinking fund provisions. |
| | | | | | | The notes do have the benefit of sinking fund provisions. A schedule of mandatory sinking fund payments is attached to this pricing supplement and is incorporated in this pricing supplement by reference. |
| Renewal: | | | | | | The notes are not renewable at the option of the holders. |
| | | | | | | The notes are renewable at the option of the holders. |
|
| |
| Annex(es) Attached: | The following annex(es) is(are) attached to this pricing supplement and is(are) incorporated in this pricing supplement by reference: Annex 1 (redemption provisions). |
| | | | | | |
| Agent(s): | | | | | | Credit Suisse Securities (USA) LLC |
| | | | | | | J.P. Morgan Securities Inc. |
| | | | | | | BNP Paribas Securities Corp. |
| | | | | | | LaSalle Financial Services, Inc. |
| | | | | | | Calyon Securities (USA) |
| | | | | | | Citigroup Global Markets Inc. |
| | | | | | | Wedbush Morgan Securities Inc. |
| | | | | | | Wells Fargo Securities, LLC |
| | | | | | | Other: |
|
Capacity of Agent(s): Agent(s) Other Underwriter(s) Dealer(s)
Discount or Commission:
Discount: See ‘‘Plan of Distribution’’ below.
Commission:
Table of ContentsPrincipal amount of notes to be severally purchased by each Agent:
| | | | | | |
| Agent | | | Amount |
| Credit Suisse Securities (USA) LLC | | | | $ | 122,500,000 | |
| J.P. Morgan Securities Inc. | | | | | 87,500,000 | |
| BNP Paribas Securities Corp. | | | | | 42,000,000 | |
| LaSalle Financial Services, Inc. | | | | | 42,000,000 | |
| Calyon Securities (USA) | | | | | 14,000,000 | |
| Citigroup Global Markets Inc. | | | | | 14,000,000 | |
| Wedbush Morgan Securities Inc. | | | | | 14,000,000 | |
| Wells Fargo Securities, LLC | | | | | 14,000,000 | |
| Total Principal Amount of Notes | | | | $ | 350,000,000 | |
|
Time of Sale: 2:00 P.M. on October 3, 2006
Plan of Distribution
The net proceeds to MidAmerican Energy (before deducting estimated expenses payable by MidAmerican Energy) are expected to be 99.84% of the principal amount, or $349,440,000. The Agents have advised the Company that the Agents propose to offer the Notes from time to time for sale in negotiated transactions or otherwise, at prices to be determined at the time of sale.
Table of ContentsAnnex 1
REDEMPTION PROVISIONS
The notes will be redeemable as a whole at any time or in part, from time to time, at the option of MidAmerican Energy Company, at a redemption price equal to the sum of (a) the greater of (i) 100% of the principal amount of the notes being redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the redemption date to the maturity date, computed by discounting such payments, in each case, to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 20 basis points, plus (b) accrued interest on the principal amount thereof to the date of redemption.
‘‘Treasury Rate’’ means, with respect to any redemption date, the rate per annum equal to the semi-annual 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.
‘‘Comparable Treasury Issue’’ means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such notes. ‘‘Independent Investment Banker’’ means one of the Reference Treasury Dealers appointed by the trustee after consultation with MidAmerican Energy Company.
‘‘Comparable Treasury Price’’ means, with respect to any redemption date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated ‘‘Composite 3:30 p.m. Quotations for U.S. Government Securities’’, or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, the average of the Reference Treasury Dealer Quotations actually obtained by the trustee for such redemption date. ‘‘Reference Treasury Dealer Quotations’’ means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such redemption date.
‘‘Reference Treasury Dealer’’ means each of Credit Suisse Securities (USA) LLC and J.P. Morgan Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a ‘‘Primary Treasury Dealer’’), MidAmerican Energy Company shall substitute therefor another Primary Treasury Dealer.
Notice of any redemption will be mailed at least 30 days but no more than 60 days before the redemption date to each holder of the notes to be redeemed. If, at the time notice of redemption is given, the redemption moneys are not held by the trustee, the redemption may be made subject to their receipt on or before the date fixed for redemption and such notice shall be of no effect unless such moneys are so received.
Upon payment of the redemption price, on and after the redemption date interest will cease to accrue on notes or portions thereof called for redemption.
Capitalized terms used but not defined in this annex have the meanings given to such terms in the prospectus or prospectus supplement.
