UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
------------------
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Each Class On which Registered
------------------- ---------------------
7.98% MidAmerican Energy Company - Obligated
Preferred Securities of Subsidiary Trust New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $3.30 Series, no par value
Preferred Stock, $3.75 Series, no par value
Preferred Stock, $3.90 Series, no par value
Preferred Stock, $4.20 Series, no par value
Preferred Stock, $4.35 Series, no par value
Preferred Stock, $4.40 Series, no par value
Preferred Stock, $4.80 Series, no par value
Preferred Stock, $5.25 Series, no par value
Preferred Stock, $7.80 Series, no par value
- -------------------------------------------------------------------------------
Title of each Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of October 31, 2000, all 70,980,203 outstanding shares of MidAmerican Energy
Company's voting stock were held by its parent company, MHC Inc.
MIDAMERICAN ENERGY COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Independent Accountants' Report.......................... 3
Consolidated Statements of Income........................ 4
Consolidated Balance Sheets.............................. 5
Consolidated Statements of Cash Flows.................... 6
Notes to Consolidated Financial Statements............... 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................ 23
ITEM 6. Exhibits and Reports on Form 8-K......................... 24
Signatures............................................................. 25
Exhibit Index.......................................................... 26
-2-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Company and subsidiaries (the Company) as of September 30, 2000, and the
related consolidated statements of income for the three-month and nine-month
periods ended September 30, 2000 and 1999 and the related consolidated
statements of cash flows for the nine-month periods ended September 30, 2000 and
1999. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
MidAmerican Energy Company and subsidiaries as of December 31, 1999, and the
related consolidated statements of income, retained earnings and cash flows for
the year then ended (not presented herein); and in our report dated January 25,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
October 27, 2000
-3-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- --------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
OPERATING REVENUES
Regulated electric .................... $ 359,430 $ 352,861 $ 919,866 $ 894,339
Regulated gas ......................... 71,573 62,472 349,628 304,532
Nonregulated .......................... 122,430 43,062 267,853 106,113
--------- --------- ----------- -----------
553,433 458,395 1,537,347 1,304,984
--------- --------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 68,062 66,072 183,551 167,739
Cost of gas sold .................... 39,029 29,474 211,581 164,928
Other operating expenses ............ 102,906 107,828 307,660 328,854
Maintenance ......................... 29,761 26,969 84,438 85,440
Depreciation and amortization ....... 48,062 49,574 145,596 146,952
Property and other taxes ............ 18,380 17,731 56,789 58,544
--------- --------- ----------- -----------
306,200 297,648 989,615 952,457
--------- --------- ----------- -----------
Nonregulated:
Cost of sales ....................... 118,409 40,181 252,994 98,585
Other ............................... 5,609 3,723 14,479 11,845
--------- --------- ----------- -----------
124,018 43,904 267,473 110,430
--------- --------- ----------- -----------
Total operating expenses .............. 430,218 341,552 1,257,088 1,062,887
--------- --------- ----------- -----------
OPERATING INCOME ...................... 123,215 116,843 280,259 242,097
--------- --------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .......... 4,594 767 7,179 2,454
Other, net ............................ (1,924) (689) (5,984) (6,068)
--------- --------- ----------- -----------
2,670 78 1,195 (3,614)
--------- --------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............ 15,929 16,696 44,316 49,803
Other interest expense ................ 1,176 1,124 8,177 9,210
Preferred dividends of subsidiary trust 1,995 1,995 6,047 5,985
Allowance for borrowed funds .......... (467) (311) (1,220) (917)
--------- --------- ----------- -----------
18,633 19,504 57,320 64,081
--------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 107,252 97,417 224,134 174,402
INCOME TAXES .......................... 42,821 38,422 91,029 68,871
--------- --------- ----------- -----------
NET INCOME ............................ 64,431 58,995 133,105 105,531
PREFERRED DIVIDENDS ................... 1,239 1,239 3,716 3,716
--------- --------- ----------- -----------
EARNINGS ON COMMON STOCK .............. $ 63,192 $ 57,756 $ 129,389 $ 101,815
========= ========= =========== ===========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ............................................. $4,423,032 $4,348,740
Gas .................................................. 824,942 809,112
---------- ----------
5,247,974 5,157,852
Less accumulated depreciation and amortization ....... 2,662,908 2,548,160
---------- ----------
2,585,066 2,609,692
Construction work in progress ........................ 29,280 33,739
---------- ----------
2,614,346 2,643,431
---------- ----------
POWER PURCHASE CONTRACT .............................. 100,130 106,481
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................ 49,561 5,167
Receivables .......................................... 214,491 190,986
Inventories .......................................... 82,153 80,649
Prepaid taxes ........................................ 22,889 22,889
Other ................................................ 9,226 10,355
---------- ----------
378,320 310,046
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ........... 257,660 228,105
REGULATORY ASSETS .................................... 245,378 278,757
OTHER ASSETS ......................................... 57,657 25,737
---------- ----------
TOTAL ASSETS ......................................... $3,653,491 $3,592,557
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .......................... $1,187,244 $1,057,855
MidAmerican preferred securities, not subject to
mandatory redemption ............................... 31,759 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ................... 50,000 50,000
MidAmerican-obligated preferred securities of
subsidiary trust holding solely MidAmerican
junior subordinated debentures ................... 100,000 100,000
Long-term debt (excluding current portion) ........... 920,114 759,638
---------- ----------
2,289,117 1,999,252
---------- ----------
CURRENT LIABILITIES
Notes payable ........................................ -- 204,000
Current portion of long-term debt .................... 1,477 110,861
Current portion of power purchase contract ........... 15,767 15,767
Accounts payable ..................................... 179,178 131,186
Taxes accrued ........................................ 97,967 112,663
Interest accrued ..................................... 15,494 12,925
Other ................................................ 31,794 30,226
---------- ----------
341,677 617,628
---------- ----------
OTHER LIABILITIES
Power purchase contract .............................. 52,281 52,281
Deferred income taxes ................................ 556,866 561,000
Investment tax credit ................................ 67,111 71,757
Other ................................................ 346,439 290,639
---------- ----------
1,022,697 975,677
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ................. $3,653,491 $3,592,557
========== ==========
The accompanying notes are an integral part of these statements.
-5-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................... $ 133,105 $ 105,531
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ............................... 145,816 147,175
Deferred income taxes and investment tax credit, net ........ (8,780) (6,750)
Amortization of other assets ................................ 37,059 44,745
Cash inflows of accounts receivable securitization........... 12,877 5,643
Impact of changes in working capital ........................ 676 (18,536)
Other ....................................................... 7,146 12,328
--------- ---------
Net cash provided ......................................... 327,899 290,136
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................. (119,447) (115,997)
Quad Cities Nuclear Power Station decommissioning trust fund .. (6,227) (8,278)
Other investing activities, net ............................... (446) (11,717)
--------- ---------
Net cash used ............................................. (126,120) (135,992)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ................................................ (3,716) (40,422)
Issuance of long-term debt, net of issuance cost .............. 161,156 --
Retirement of long-term debt, including reacquisition cost .... (110,825) (763)
Net change in notes payable ................................... (204,000) (117,106)
--------- ---------
Net cash used ............................................. (157,385) (158,291)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 44,394 (4,147)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 5,167 5,370
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 49,561 $ 1,223
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ..................... $ 43,984 $ 53,614
========= =========
Income taxes paid ............................................. $ 109,677 $ 128,014
========= =========
The accompanying notes are an integral part of these statements.
-6-
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:
The consolidated financial statements included herein have been prepared by
MidAmerican Energy Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of MidAmerican Energy, all adjustments,
consisting of normal recurring adjustments, have been made to present fairly the
financial position, the results of operations and the changes in cash flows for
the periods presented. Prior year amounts have been reclassified to a basis
consistent with the current year presentation. All significant intercompany
transactions have been eliminated. Although MidAmerican Energy believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Energy's latest Annual Report on Form 10-K.
MidAmerican Energy is a public utility with electric and natural gas
operations and is the principal subsidiary of MHC Inc. MHC is a wholly owned
subsidiary of MidAmerican Funding, LLC, whose sole member is MidAmerican Energy
Holdings Company. MHC, MidAmerican Funding and MidAmerican Energy Holdings are
exempt public utility holding companies headquartered in Des Moines, Iowa.
B. ENVIRONMENTAL MATTERS:
(1) MANUFACTURED GAS PLANT FACILITIES -
The United States Environmental Protection Agency and the state
environmental agencies have determined that contaminated wastes remaining at
decommissioned manufactured gas plant facilities may pose a threat to the public
health or the environment if such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties which were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is currently conducting field investigations
at eighteen sites and has conducted interim removal actions at six of the
eighteen sites. In addition, MidAmerican Energy has completed investigations and
removals at four sites. MidAmerican Energy is continuing to evaluate several of
the sites to determine the future liability, if any, for conducting site
investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $22 million to
$68 million. MidAmerican Energy's estimate of the probable cost for these sites
as of September 30, 2000 was $26 million. The estimate consists of $3 million
for investigation costs, $8 million for remediation costs, $13 million for
groundwater treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 10 years.
-7-
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican Energy has potential legal
liability for the site and whether information exists to indicate that
contaminated wastes remain at the site. If so, the costs of performing a
preliminary investigation and the costs of removing known contaminated soil are
accrued. As the investigation is performed and if it is determined remedial
action is required, the best estimate of remedial costs is accrued. If
necessary, the estimate is revised when a consent order is issued. The estimated
recorded liabilities for these properties include incremental direct costs of
the remediation effort, costs for future monitoring at sites and costs of
compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liabilities for these properties are
based upon preliminary data. Thus, actual costs could vary significantly from
the estimates. The estimate could change materially based on facts and
circumstances derived from site investigations, changes in required remedial
action and changes in technology relating to remedial alternatives. In addition,
insurance recoveries for some or all of the costs may be possible, but the
liabilities recorded have not been reduced by any estimate of such recoveries.
The Illinois Commerce Commission has approved the use of a tariff rider
which permits recovery of the actual costs of litigation, investigation and
remediation relating to former manufactured gas plant sites. MidAmerican
Energy's present rates in Iowa provide for a fixed annual recovery of
manufactured gas plant costs. MidAmerican Energy intends to pursue recovery of
the remediation costs from other potentially responsible parties and its
insurance carriers.
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position or results of operations.
(2) CLEAN AIR ACT -
On July 18, 1997, the Environmental Protection Agency adopted revisions to
the National Ambient Air Quality Standards for ozone and a new standard for fine
particulate matter. Based on data to be obtained from monitors located
throughout each state, the Environmental Protection Agency will determine which
states have areas that do not meet the air quality standards (i.e., areas that
are classified as nonattainment). If a state has area(s) classified as
nonattainment area(s), the state is required to submit a State Implementation
Plan specifying how it will reach attainment of the standards through emission
reductions or other means. In August 1998, the Iowa Environmental Protection
Commission adopted by reference the National Ambient Air Quality Standards for
ozone and fine particulate matter.
In May 1999, the United States Court of Appeals for the District of
Columbia Circuit remanded the standards adopted in July 1997 back to the
Environmental Protection Agency indicating the Environmental Protection Agency
had not expressed sufficient justification for the basis of establishing the
standards and ruling that the Environmental Protection Agency has exceeded its
constitutionally-delegated authority in setting the standards. The Environmental
Protection Agency's appeal of the court's ruling to the full panel of the United
States District Court of Appeals for the District of Columbia was denied. In May
2000 the United States Supreme Court granted certiorari to review the appeals
court decision. Oral arguments are expected in the fall of 2000.
As a result of the court's initial decision and the current status of the
standards, the impact of any new standards on MidAmerican Energy is currently
unknown. If the Environmental Protection Agency successfully appeals the court's
decision, however, and the new standards are implemented, then MidAmerican
Energy's fossil fuel generating stations may be subject to emission reductions
if the stations are located in nonattainment areas. As part of an overall state
plan to achieve attainment of the standards,
-8-
MidAmerican Energy could be required to install control equipment on its fossil
fuel generating stations or decrease the number of hours during which these
stations operate. The degree to which MidAmerican Energy may be required to
install control equipment or decrease operating hours under a nonattainment
scenario would be determined by the state's assessment of MidAmerican Energy's
relative contribution, along with other emission sources, to the nonattainment
status. The installation of control equipment would result in increased costs to
MidAmerican Energy. A decrease in the number of hours during which the affected
stations operate would decrease the revenues of MidAmerican Energy.
C. RATE MATTERS:
Under a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, electric prices for Iowa industrial and
commercial customers were reduced through a retail access pilot project,
negotiated individual electric contracts and a tariffed rate reduction for some
non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as
well as prices. The contracts range in length from five to ten years, and some
have price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to ten-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes, and transition costs. While the contract prices are fixed (except
for the potential adjustment elements), the costs MidAmerican Energy incurs to
fulfill these contracts will vary. On an aggregate basis the annual revenues
under contract are approximately $180 million.
Under the 1997 pricing plan settlement agreement, if MidAmerican Energy's
annual Iowa electric jurisdictional return on common equity exceeds 12%, then
earnings above the 12% level will be shared equally between customers and
MidAmerican Energy; if the return exceeds 14%, then two-thirds of MidAmerican
Energy's share of those earnings above the 14% level will be used for
accelerated recovery of regulatory assets. The year 2000 is the last year this
Iowa electric retail revenue sharing plan remains in effect. The 1997 pricing
plan settlement agreement also precludes MidAmerican Energy from filing for
increased rates prior to 2001 unless the return falls below 9%. Other parties
signing the agreement are prohibited from filing for reduced rates prior to 2001
unless the return after reflecting credits to customers, exceeds 14%.
Under an Illinois restructuring law enacted in 1997, a similar sharing
mechanism is in place for MidAmerican Energy's Illinois electric operations. A
two-year average return on common equity greater than a two-year average
benchmark will trigger an equal sharing of earnings on the excess. The benchmark
is a calculation of average 30-year Treasury Bond rates plus 5.5% for 1998 and
1999 and 8.5% for 2000 through 2004. The initial calculation, which was due
March 31, 2000, was based on 1998 and 1999 results. The two-year average above
which sharing must occur for 1999 was 11.21%. Using the same 30-year Treasury
bond average, the computed level of return would be 12.71% for 2000 and 14.21%
for 2001 through 2004. The law allows MidAmerican Energy to mitigate the sharing
of earnings above the threshold return on common equity through accelerated
recovery of regulatory assets.
-9-
D. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
MidAmerican Energy's utility operations are subject to the regulation of
the Iowa Utilities Board, the Illinois Commerce Commission, the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission.
MidAmerican Energy's accounting policies and the accompanying consolidated
financial statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
A possible consequence of deregulation in the utility industry is that
Statement of Financial Accounting Standards No. 71 may no longer apply. SFAS No.
71 sets forth accounting principles for operations that are regulated and meet
certain criteria. For operations that meet the criteria, SFAS 71 allows, among
other things, the deferral of costs that would otherwise be expensed when
incurred. With the exception of the generation operations serving the Illinois
jurisdiction, MidAmerican Energy's electric and gas utility operations currently
meet the criteria of SFAS 71, but its applicability is periodically reexamined.
If portions of its utility operations no longer meet the criteria of SFAS 71,
MidAmerican Energy could be required to write off the related regulatory assets
and liabilities from its balance sheet and thus, a material adjustment to
earnings in that period could result if regulatory assets are not recovered in
transition provisions of any resulting legislation. As of September 30, 2000,
MidAmerican Energy had $245 million of regulatory assets on its Consolidated
Balance Sheet.
E. SEGMENT INFORMATION:
MidAmerican Energy has two reportable operating segments: electric and gas.
The electric segment derives most of its revenue from retail sales of regulated
electricity to residential, commercial, and industrial customers and sales to
other utilities. The gas segment derives most of its revenue from retail sales
of regulated natural gas to residential, commercial, and industrial customers
and also earns significant revenues by transporting gas owned by others through
its distribution systems. Pricing for electric and gas sales are established
separately by regulatory agencies; therefore, management also reviews each
segment separately to make decisions regarding allocation of resources and in
evaluating performance. Common operating costs, interest income, interest
expense, income tax expense and equity in the net income or loss of investees
are allocated to each segment.
-10-
The following table provides MidAmerican Energy information on an operating
segment basis (in thousands):
Three Months Nine Months
Ended September 30 Ended September 30
------------------------ ---------------------------
2000 1999 2000 1999
--------- ----------- ----------- ------------
Revenues:
Electric ................. $ 359,430 $ 352,861 $ 919,866 $ 894,339
Gas ...................... 71,573 62,472 349,628 304,532
Nonregulated and other (a) 122,430 43,062 267,853 106,113
--------- ----------- ----------- -----------
$ 553,433 $ 458,395 $ 1,537,347 $ 1,304,984
========= =========== =========== ===========
Earnings on common stock:
Electric ................. $ 69,765 $ 65,655 $ 123,699 $ 103,614
Gas ...................... (4,586) (7,342) 10,802 988
Nonregulated and other (a) (1,987) (557) (5,112) (2,787)
--------- ----------- ----------- -----------
$ 63,192 $ 57,756 $ 129,389 $ 101,815
========= =========== =========== ===========
(a) "Nonregulated and other" consists of nonregulated gas operations, CBEC
Railway and other nonregulated activities.
F. OTHER COMPREHENSIVE INCOME:
For the three months and nine months ended September 30, 2000 and 1999,
there were no differences between MidAmerican Energy's comprehensive income and
earnings on common stock.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
------------
MidAmerican Energy Company is a public utility with electric and natural
gas operations. MidAmerican Energy is headquartered in Des Moines, Iowa, and is
the principal subsidiary of MHC Inc. MHC has the following nonregulated
subsidiaries: MidAmerican Capital Company, MidAmerican Services Company and
Midwest Capital Group, Inc. MHC is a wholly owned subsidiary of MidAmerican
Funding, LLC, whose sole member is MidAmerican Energy Holdings Company.
MHC, MidAmerican Funding and MidAmerican Energy Holdings are exempt public
utility holding companies headquartered in Des Moines.
FORWARD-LOOKING STATEMENTS
From time to time, MidAmerican Energy may make forward-looking statements
within the meaning of the federal securities laws that involve judgments,
assumptions and other uncertainties beyond its control. These forward-looking
statements may include, among others, statements concerning revenue and cost
trends, cost recovery, cost reduction strategies and anticipated outcomes,
pricing strategies, changes in the utility industry, planned capital
expenditures, financing needs and availability, statements of MidAmerican
Energy's expectations, beliefs, future plans and strategies, anticipated events
or trends and similar comments concerning matters that are not historical facts.
These type of forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results and performance of MidAmerican Energy to differ materially
from any expected future results or performance, expressed or implied, by the
forward-looking statements. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, MidAmerican Energy has
identified important factors that could cause actual results to differ
materially from those expectations, including weather effects on sales and
revenues, fuel prices, fuel transportation and other operating uncertainties,
acquisition uncertainty, uncertainties relating to economic and political
conditions and uncertainties regarding the impact of regulations, changes in
government policy, utility industry deregulation and competition. MidAmerican
Energy assumes no responsibility to update forward-looking information contained
herein.
RESULTS OF OPERATIONS
---------------------
REGULATED GROSS MARGIN
Regulated Electric Gross Margin:
- --------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
Operating revenues .............. $359 $353 $920 $894
Cost of fuel, energy and capacity 68 66 184 168
---- ---- ---- ----
Electric gross margin ........... $291 $287 $736 $726
==== ==== ==== ====
-12-
MidAmerican Energy's electric gross margin for the third quarter of 2000
increased $4 million compared to the third quarter of 1999. A refund accrual for
a revenue sharing arrangement in Iowa was $3.6 million less in the third quarter
of 2000 than in the 1999 quarter, resulting in an increase in electric margin.
Temperatures during the three months ended September 30, 2000, were
slightly higher than temperatures in the third quarter of 1999, resulting in a
$1 million increase in electric margin. Growth in the number of customers and
other usage factors not dependent on weather increased electric margin by $2.8
million compared to the third quarter of 1999. In total, retail sales of
electricity increased 3.3% for the three months ended September 30, 2000,
compared to the same period in 1999.
A higher cost of sales for Iowa retail sales resulted in a $2.0 million
decrease in electric margin compared to the third quarter of 1999. Additionally,
electric margin decreased $1.0 million due to a decrease in margins on
off-system sales compared to the quarter ended September 30, 1999. Related sales
volumes increased 6.9%; however, prices of off-system sales were less than in
the 1999 quarter. Off-system sales are the supply of energy to other utilities,
municipalities and marketers which in turn distribute it to end-use customers.
Electric gross margin for the nine months ended September 30, 2000,
increased $10 million compared to the same period in 1999.
A refund accrual for a revenue sharing arrangement in Iowa was $5.1 million
less in the nine months ended September 30, 2000, than in the 1999 nine-month
period, resulting in an increase in electric margin.
Growth in the number of customers and other usage factors not dependent on
weather increased electric margin by $13.4 million compared to the nine-month
period ended September 30, 1999. Temperatures during the nine months ended
September 30, 2000, were more moderate than temperatures in the first nine
months of 1999, resulting in a $6 million decrease in electric margin. In total,
retail sales of electricity increased 2.7% for the first nine months of 2000
compared to the same period in 1999.
MidAmerican Energy's margins on off-system sales increased $1.5 million for
the nine months ended September 30, 2000, compared to the nine months ended
September 30, 1999. Related off-system sales volumes increased 3.6% compared to
the 1999 period.
Electric revenues from the recovery of energy efficiency program costs,
decreased $1.2 million compared to the nine months ended September 30, 1999.
Changes in these revenues are substantially matched with corresponding changes
in other operating expenses. The decrease in energy efficiency program costs is
due to the completion in 1999 of two of the four-year recovery phases. One phase
remains and will be completed in 2001. Refer to the discussion under "Energy
Efficiency" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A for
further discussion of energy efficiency cost recovery.
Additionally, electric revenues from recovery mechanisms related to Cooper
Nuclear Station costs, decommissioning costs and manufactured gas plant costs
decreased $3.0 million compared to the nine months ended September 30, 1999. The
decreases relate principally to corresponding decreases in costs for which the
recovery mechanisms were established.
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Regulated Gas Gross Margin:
- ---------------------------
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
Operating revenues.. $72 $62 $350 $305
Cost of gas sold ... 39 29 212 165
--- --- ---- ----
Gas gross margin.. $33 $33 $138 $140
=== === ==== ====
MidAmerican Energy's regulated gas revenues include purchase gas adjustment
clauses through which MidAmerican Energy is allowed to recover the cost of gas
sold from most of its gas utility customers. Consequently, fluctuations in the
cost of gas sold do not affect gross margin or net income because revenues
reflect comparable fluctuations from the purchase gas adjustment clauses. An
increase in the per-unit cost of gas for the three- and nine-month periods ended
September 30, 2000 compared to the same periods in 1999 increased revenues and
cost of gas sold by approximately $13 million and $63 million, respectively.
Gross margin for gas transported decreased $0.7 million due to a 6.9%
decrease in volumes transported compared to the quarter ended September 30,
1999. The decrease was partially offset by the impact of higher retail rates in
Illinois and other usage factors.
Compared to the first nine months of 1999, gas gross margin decreased
approximately $2 million. Warmer temperatures in the nine months ended September
30, 2000, resulted in a $6 million decrease in gas margin compared to the same
period in 1999. Customer growth and other usage factors not dependent on weather
resulted in a $1.1 million increase in margin compared to the nine months ended
September 30, 1999. In total, retail sales of natural gas decreased 9.9%
compared to the 1999 period.
Changes in retail gas rates increased gas margin by approximately $5.5
million compared to the first nine months of 1999. On January 22, 1999, the IUB
approved a $6.7 million annual interim increase in gas rates for Iowa retail
customers. An additional increase was implemented on May 27, 1999, as a result
of the Iowa Utilities Board's approval of a final rate increase of $13.9 million
annually. Rates for South Dakota customers increased $2.4 million annually
effective May 1, 1999. On July 11, 2000, the Illinois Commerce Commission issued
an order approving a gas rate increase totaling $2.1 million annually effective
July 18, 2000.
Recovery of gas energy efficiency costs decreased $2.5 million for the
first nine months of 2000 compared to the first nine months of 1999. Consistent
with electric revenues, changes in gas revenues from energy efficiency cost
recovery are substantially offset by corresponding changes in other operating
expenses.
-14-
REGULATED OPERATING EXPENSES
Regulated other operating expenses decreased $4.9 million for the third
quarter of 2000 compared to the third quarter of 1999. Decreases in health care
and other benefit costs, injuries and damages costs and nuclear operations costs
were the major causes of the decrease. Energy efficiency program costs,
information technology expenses and assessments from utility regulatory agencies
also decreased compared to the third quarter of 1999.
For the nine months ended September 30, 2000, other operating expenses
decreased $21.2 million compared to the same period in 1999. Information
technology expenses for system maintenance and implementation were $7.3 million
lower for the nine months ended September 30, 2000, due principally to
consulting and other costs in the 1999 period to support newly implemented
systems and for Y2K preparation. Energy efficiency costs and Cooper Tracker
costs decreased $5.0 million compared to the nine months ended September 30,
1999. Costs related to manufactured gas plant clean up decreased $1.1 million
due primarily to the timing of expenditures. Other factors contributing to the
decrease were reductions in employee incentive plan costs and injuries and
damages costs and an increase in 2000 of a reserve distribution from an
insurance fund compared to the distribution in 1999.
Maintenance expenses increased $2.8 million for the three months ended
September 30, 2000, compared to the same period in 1999 due to the timing of
coal-fired generating plant maintenance and increased forestry service costs.
Maintenance expenses for the nine months ended September 30, 2000, decreased
$1.0 million due to reductions in nuclear generating plant and general
maintenance expenses and a recovery from insurance of transformer failure costs
incurred in prior periods. The decreases were partially offset by an increase in
forestry service costs.
Depreciation and amortization expense decreased compared to the 1999
periods due to decreases in nuclear decommissioning expense and amortization of
regulatory assets for MidAmerican Energy's Illinois operations. Utility plant
depreciation increased due to the increase in utility plant.
Property and other taxes decreased for the nine months ended September 30,
2000, compared to the 1999 period due to a reduction in MidAmerican Energy's
Iowa property tax assessed values. Property taxes increased for third quarter
comparison due to the effect of adjustments to the accruals in each of the third
quarters.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Nonregulated Gas Gross Margin -
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions)
Operating revenues $113.2 $ 34.1 $239.3 $ 92.1
Cost of gas sold . 112.1 33.7 236.4 91.2
------ ------ ------ ------
Gross margin ... $ 1.1 $ 0.4 $ 2.9 $ 0.9
====== ====== ====== ======
Revenues from nonregulated natural gas marketing operations increased $79.1
million for the third quarter of 2000 compared to the same period in 1999. An
increase in the average price per unit sold, reflective of a 70% increase in the
average cost of gas, accounted for $46.3 million of the increase in revenues.
Sales volumes increased 12 million MMBtus (96%) resulting in a $32.8 million
increase in
-15-
revenues. The increase in sales volumes was driven principally by the addition
of larger-use wholesale customers. The increase in related cost of sales
reflects the increases in cost per unit sold and sales volumes.
Revenues from nonregulated natural gas marketing operations increased
$147.2 million for the nine months ended September 30, 2000, compared to the
same period in 1999. An increase in the average price per unit sold, reflective
of a 69% increase in the average cost of gas, accounted for $97.7 million of the
increase in revenues. Sales volumes increased 22 million MMBtus (54%) resulting
in a $49.5 million increase in revenues. The increase in sales volumes was
driven principally by the addition of larger-use wholesale customers. The
increase in related cost of sales reflects the increases in cost per unit sold
and sales volumes.
Other Nonregulated Revenues and Cost of Sales -
Nonregulated revenues for the third quarter of 2000 include $4.8 million
from MidAmerican Energy's market access service project, compared to $6.6
million in the third quarter of 1999, the initial quarter for the project. The
pilot project allows participating Iowa customers with at least 4 megawatts of
load to choose their electric power supplier. MidAmerican Energy's revenues from
project participants related to non-supply services, such as distribution and
transmission, are reflected in regulated electric revenues. Cost of sales
decreased $1.9 million to $4.2 million related to the market access service
project.
Revenues and cost of sales for the market access service project increased
$6.8 million and $6.9 million, respectively, for the nine months ended September
30, 2000.
Beginning October 1, 1999, some non-residential customers in Illinois are
allowed to select their electric power supplier. MidAmerican Energy's
nonregulated revenues for the nine months ended September 30, 2000, include $1.9
million in agency fees and other revenues related to these supply services.
Related cost of sales totaled $2.7 million. For the three months ended September
30, 2000, revenues and cost of sales totaled $0.5 million and $1.6 million,
respectively.
MidAmerican Energy performs work for its customers that is not regulated,
including distribution maintenance and forestry services. Increased efforts in
these services also contributed to the increase in nonregulated revenues.
Nonregulated Operating Expenses: Other -
Other operating expenses for MidAmerican Energy's nonregulated services
increased $1.9 million and $2.6 million for the three months and nine months
ended September 30, 2000, compared to the same periods in 1999. The increase was
due principally to costs related to nonregulated distribution services performed
for customers.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and dividend income -
The increase in interest income for the three months and nine months ended
September 30, 2000, was due principally to interest from a joint plant operator
for funds held by them. Additionally, a more favorable cash position and an
increase in a note receivable related to accounts receivable sold contributed to
the increase in interest income.
-16-
Other, Net -
Other, Net, which includes a number of non-operating income and deduction
items, decreased $1.2 million for the three months ended September 30, 2000,
compared to the same period in 1999. For the nine months ended September 30,
2000, Other, Net increased $0.1 million compared to the 1999 period.
Other, Net includes a discount on sold accounts receivable, net of a
subservicer fee charged to MidAmerican Energy Funding Corporation for servicing
the accounts. The discount is designed to cover the expenses of MidAmerican
Energy Funding Corporation, including bad debt expense, subservicer fees,
monthly administrative costs and interest. The discount is recorded in Other,
Net because it is not reflected in utility cost of service for regulatory
purposes. The discount, net of the subservicer fee, reduced Other, Net by $2.5
million and $1.8 million in the third quarter of 2000 and 1999, respectively,
and $6.9 million and $6.4 million in the nine months ended September 30, 2000
and 1999, respectively.
Other, Net for the three months and nine months ended September 30, 1999,
also includes a $1.9 million gain on the sale of rail cars. Income related to
the cash surrender value of corporate-owned life insurance policies totaled $0.6
million and $1.9 million for the three months and nine months ended September
30, 2000, respectively, compared to a net loss of $0.5 million and $1.6 million
for the three months and nine months ended September 30, 1999, respectively.
Fixed Charges -
The decrease in interest on long-term debt was due to long-term debt
maturities in 1999 and 2000. The decreases resulting from maturities of
long-term debt were partially offset by interest on $162 million of 7.375%
medium-term notes issued July 24, 2000.
Other interest expense decreased in the nine months ended September 30,
2000, compared to the nine months ended September 30, 1999, due to a decrease in
short-term debt outstanding. The decrease was partially offset by the effect of
a credit to interest on state income taxes in the third quarter of 1999. In
addition, the nine months ended September 30, 2000, includes $0.6 million of
interest related to a gas supplier tax refund that is refundable to customers.
LIQUIDITY AND CAPITAL RESOURCES
MidAmerican Energy has available a variety of sources of liquidity and
capital resources, both internal and external. These resources provide funds
required for current operations, construction expenditures, dividends, debt
retirement and other capital requirements.
As reflected on the Consolidated Statements of Cash Flows, MidAmerican
Energy's net cash provided from operating activities was $328 million and $290
million the first nine months of 2000 and 1999, respectively.
INVESTING ACTIVITIES AND PLANS
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first nine months of 2000, utility construction
expenditures totaled $119 million, including allowance for funds
-17-
used during construction, or capitalized financing costs, and Quad Cities
Station nuclear fuel purchases. All such expenditures were met with cash
generated from utility operations.
Forecasted utility construction expenditures, including allowance for funds
used during construction for 2000 are $211 million and $732 million for 2001
through 2004. Capital expenditure needs are reviewed regularly by management and
may change significantly as a result of such reviews. MidAmerican Energy
presently expects that all utility construction expenditures for the next five
years will be met with cash generated from utility operations, net of dividends.
The actual level of cash generated from utility operations is affected by, among
other things, economic conditions in the utility service territory, weather and
federal and state regulatory actions.
Nuclear Decommissioning -
Each licensee of a nuclear facility is required to provide financial
assurance for the cost of decommissioning its licensed nuclear facility. In
general, decommissioning of a nuclear facility means to safely remove the
facility from service and restore the property to a condition allowing
unrestricted use by the operator. Based on information presently available,
MidAmerican Energy expects to contribute approximately $42 million during the
period 2000 through 2004 to external trusts established for the investment of
funds for decommissioning Quad Cities Station. Approximately 65% of the trust's
funds are invested in domestic corporate debt and common equity securities. The
remainder is invested in investment grade municipal and U.S. Treasury bonds.
In addition, MidAmerican Energy makes payments to the Nebraska Public Power
District related to decommissioning Cooper. These payments are reflected in
other operating expenses in the Consolidated Statements of Income. Nebraska
Public Power District estimates call for MidAmerican Energy to pay approximately
$57 million to Nebraska Public Power District for Cooper decommissioning during
the period 2000 through 2004. Nebraska Public Power District invests the funds
predominantly in U.S. Treasury Bonds and other U.S. Government securities.
Approximately 20% was invested in domestic corporate debt. MidAmerican Energy's
obligation for Cooper decommissioning may be affected by the actual plant
shutdown date and the status of the power purchase contract at that time. In
July 1997, Nebraska Public Power District filed a lawsuit in United States
District Court for the District of Nebraska naming MidAmerican Energy as the
defendant and seeking a declaration of MidAmerican Energy's rights and
obligations in connection with Cooper nuclear decommissioning funding. Refer to
Part II, Item 1. Legal Proceedings, for further discussion of the litigation.
Cooper and Quad Cities Station decommissioning costs charged to Iowa
customers are to a large extent included in base rates, and recovery of
increases in those amounts must be sought through the normal ratemaking process.
Cooper decommissioning costs charged to Illinois customers are recovered through
a rate rider on customer billings that is reviewed annually.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
Debt Authorization and Credit Facilities -
MidAmerican Energy currently has authority from the Federal Energy
Regulatory Commission to issue short-term debt in the form of commercial paper
and bank notes aggregating $400 million. As of September 30, 2000, MidAmerican
Energy had in place a $250 million commercial paper program which is supported
by $250 million of revolving credit facilities. In addition, MidAmerican Energy
has a $5 million bank line of credit. MidAmerican Energy also has a revolving
credit facility which is dedicated to
-18-
providing liquidity for its obligations under outstanding pollution control
revenue bonds that are periodically remarketed.
MidAmerican Energy has authorization from the Federal Energy Regulatory
Commission to issue up to an additional $500 million in various forms of
long-term debt. MidAmerican Energy will also need authorization from the
Illinois Commerce Commission prior to issuing any securities. If 90% or more of
the proceeds from a securities issuance are used for refinancing purposes,
MidAmerican Energy need only provide the Illinois Commerce Commission with an
"informational statement" prior to the issuance which sets forth the type,
amount and use of the proceeds of the securities to be issued. If less than 90%
of the proceeds are used for refinancing, MidAmerican Energy must file a
comprehensive application seeking authorization prior to issuance. The Illinois
Commerce Commission is required to hold a hearing before issuing its
authorization.
Accounts Receivable Sold -
In 1997, MidAmerican Energy entered into a revolving agreement, which
expires in 2002, to sell all of its right, title and interest in the majority of
its billed accounts receivable to MidAmerican Energy Funding Corporation, a
special purpose entity established to purchase accounts receivable from
MidAmerican Energy. Funding Corp. in turn sells receivable interests to outside
investors. In consideration for the sale, MidAmerican Energy received $70
million in cash and the remaining balance in the form of a subordinated note,
bearing interest at 8%, from Funding Corp. As of September 30, 2000, the
revolving cash balance was $70 million, and the amount outstanding under the
subordinated note was $57 million. As part of the agreement, the creditors of
Funding Corp. will be entitled to be satisfied out of the assets of Funding
Corp. prior to any value being returned to MidAmerican Energy or its creditors.
Therefore, the accounts receivable sold are not reflected on MidAmerican
Energy's Consolidated Balance Sheets. As of September 30, 2000, $128.7 million
of accounts receivable, net of reserves, were sold under the agreement.
OPERATING ACTIVITIES AND OTHER MATTERS
Industry Evolution -
Legislation to initiate retail electric competition was introduced in the
Iowa legislature in the 2000 session, but it did not pass. Deregulation of the
gas supply function related to small volume customers is also being considered
by the Iowa Utilities Board. MidAmerican Energy has actively participated in the
legislative and regulatory processes. MidAmerican Energy cannot predict the
timing or ultimate outcome of any potential electric restructuring legislation
or gas restructuring in Iowa.
The introduction of competition in the wholesale market has resulted in a
proliferation of power marketers and a substantial increase in market activity.
The wholesale market has also increased in volatility. As this market matures,
volatility may decline.
With the elimination of the energy adjustment clause in Iowa, MidAmerican
Energy is financially exposed to movements in energy prices. Although
MidAmerican Energy has sufficient low cost generation under typical operating
conditions for its retail electric needs, a loss of adequate generation by
MidAmerican Energy at a time of high market prices could subject MidAmerican
Energy to losses on its energy sales.
-19-
Legislative and Regulatory Evolution -
In December 1997, the Governor of Illinois signed into law a bill to
restructure Illinois' electric utility industry and transition it to a
competitive market. Under the law, beginning October 1, 1999, larger
non-residential customers in Illinois and 33% of the remaining non-residential
Illinois customers are allowed to select their provider of electric supply
services. All other non-residential customers will have supplier choice starting
December 31, 2000. Residential customers all receive the opportunity to select
their electric supplier on May 1, 2002.
In addition to rate reductions implemented in 1998, the law provides for
Illinois earnings above a certain level of return on common equity to be shared
equally between customers and MidAmerican Energy beginning in April 2000.
MidAmerican Energy's return on common equity level will be based on a rolling
two-year average, with the first determination being based on an average of 1998
and 1999. The level of return at which MidAmerican Energy will be required to
share earnings is a multi-step calculation of average 30-year Treasury Bond
rates plus 5.50% for 1998 and 1999. Legislation passed in July 1999 increased
the benchmark for 2000 through 2004 to 8.5% above the 30-year Treasury bond
rate. The two-year average above which sharing must occur for 1999 was 11.21%.
Using the same 30-year Treasury bond average, the computed level of return would
be 12.71% for 2000 and 14.21% for 2001 through 2004. The law allows MidAmerican
Energy to mitigate the sharing of earnings above the threshold return on common
equity through accelerated recovery of regulatory assets.
MidAmerican Energy continues its involvement in proceedings which detail
the new competitive environment and to evaluate the impact of the law on its
operations and the opportunities the law presents, including proceedings
involving the unbundling of customer billing and meter reading.
In December 1999, the Federal Energy Regulatory Commission issued Order No.
2000 establishing among other things minimum characteristics and functions for
regional transmission organizations. Public utilities that were not a member of
an independent system operator at the time of the order are required to submit a
plan by which its transmission facilities would be transferred to a regional
transmission organization on a schedule that would allow the regional
transmission organization to commence operating by December 15, 2001.
MidAmerican Energy, which was not a member of an independent system operator, is
presently evaluating options to comply with the order.
Accounting Effects of Industry Restructuring -
A possible consequence of deregulation in the utility industry is that
Statement of Financial Accounting Standards No. 71 may no longer apply. SFAS 71
sets forth accounting principles for operations that are regulated and meet
certain criteria. For operations that meet the criteria, SFAS 71 allows, among
other things, the deferral of costs that would otherwise be expensed when
incurred. With the exception of the generation operations serving the Illinois
jurisdiction, MidAmerican Energy's electric and gas utility operations currently
meet the criteria required by SFAS 71, but its applicability is periodically
reexamined. If portions of its utility operations no longer meet the criteria of
SFAS 71, MidAmerican Energy could be required to write off the related
regulatory assets and liabilities from its balance sheet, and thus, a material
adjustment to earnings in that period could result if regulatory assets are not
recovered in transition provisions of any resulting legislation. As of September
30, 2000, MidAmerican Energy had $245 million of regulatory assets on its
Consolidated Balance Sheet.
-20-
Energy Efficiency -
MidAmerican Energy's regulatory assets as of September 30, 2000, included
$24.3 million of deferred energy efficiency costs. Based on the current level of
recovery, MidAmerican Energy expects to recover these costs by the end of 2001.
MidAmerican Energy is also allowed to recover its ongoing energy efficiency
costs on a current basis. Recovery of these costs is being collected from
customers based on projected annual costs of $16.4 million, which may be
adjusted annually. Amortization of the deferred energy efficiency costs and
current expenditures for energy efficiency costs will be reflected in other
operating expenses over the related periods of recovery. The total of such costs
for the years 2000 and 2001 is estimated to be $40 million and $34 million,
respectively.
Rate Matters: Electric -
Under a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, electric prices for MidAmerican Energy's Iowa
industrial and commercial customers were reduced through a retail access pilot
project, negotiated individual electric contracts and a tariffed rate reduction
for some non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as
well as prices. The contracts range in length from five to ten years, and some
have price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to ten-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes, and transition costs. While the contract prices are fixed (except
for the potential adjustment elements), the costs MidAmerican Energy incurs to
fulfill these contracts will vary. MidAmerican Energy presently intends to
manage this risk through hedging and other similar arrangements. On an aggregate
basis the annual revenues under contract are approximately $180 million.
Under the 1997 pricing plan settlement agreement, if MidAmerican Energy's
annual Iowa electric jurisdictional return on common equity exceeds 12%, then
earnings above the 12% level will be shared equally between customers and
MidAmerican Energy. If the return exceeds 14%, then two-thirds of MidAmerican
Energy's share of those earnings above the 14% level will be used for
accelerated recovery of certain regulatory assets. The year 2000 is the last
year this Iowa electric retail revenue sharing plan remains in effect. The
pricing plan settlement agreement also precludes MidAmerican Energy from filing
for increased rates prior to 2001 unless the return falls below 9%. Other
parties signing the agreement are prohibited from filing for reduced rates prior
to 2001 unless the return, after reflecting credits to customers, exceeds 14%.
The agreement also eliminated MidAmerican Energy's energy adjustment clause,
and, as a result, the cost of fuel is not directly passed on to customers.
Environmental Matters -
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties which were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an
-21-
environmental or health risk, and whether MidAmerican Energy has any
responsibility for remedial action. MidAmerican Energy's estimate of the
probable costs for these sites as of September 30, 2000, was $26 million. This
estimate has been recorded as a liability and a regulatory asset for future
recovery through the regulatory process. Refer to Note B(1) of Notes to
Consolidated Financial Statements for further discussion of MidAmerican Energy's
environmental activities related to manufactured gas plant sites and cost
recovery.
Although the timing of potential incurred costs and recovery of costs in
rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position or results of operations.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter. In
May 1999, the U.S. Court of Appeals for the District of Columbia Circuit
remanded the standards adopted in July 1997 back to the EPA indicating the EPA
had not expressed sufficient justification for the basis of establishing the
standards and ruling that the EPA has exceeded its constitutionally-delegated
authority in setting the standards. As a result of the court's initial decision
and the current status of the standards, the impact of any new standards on
MidAmerican Energy is currently unknown. If the EPA successfully appeals the
court's decision, however, and the new standards are implemented, then
MidAmerican Energy could incur increased costs and a decrease in revenues. Refer
to Note B(2) of Notes to Consolidated Financial Statements for further
discussion of this issue.
Generating Capability -
MidAmerican Energy is interconnected with Iowa and neighboring utilities
and is involved in an electric power pooling agreement known as Mid-Continent
Area Power Pool. Each MAPP participant is required to maintain for emergency
purposes a net generating capability reserve of at least 15% above its system
peak demand. MidAmerican Energy was able to maintain its capacity reserve
requirement during the 2000 cooling season and was not adversely affected by the
seasonal high prices in the off-system market.
MidAmerican Energy believes it has adequate electric capacity reserve and
continues to manage its generating resources to ensure an adequate reserve in
the future. However, significantly higher-than-normal temperatures during the
cooling season could cause MidAmerican Energy's reserve to fall below the 15%
minimum. If MidAmerican Energy fails to maintain the appropriate reserve,
significant penalties could be contractually imposed by MAPP.
ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and amended by SFAS 138 and is effective for MidAmerican
Energy beginning January 1, 2001. SFAS 133 requires an entity to recognize all
of its derivatives as either assets or liabilities in its statement of financial
position and measure those instruments at fair value. MidAmerican Energy is in
the process of evaluating the impact of this accounting standard. Based on
derivative positions in place at September 30, 2000, MidAmerican Energy believes
the adoption of the standard will not have a material impact on its financial
position or results of operations. The adoption of the standard will not have
any impact on its cash flows.
-22-
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition". SAB 101 provides
additional guidance on revenue recognition criteria and related disclosure
requirements. This SAB is effective beginning in the fourth quarter of 2000.
Management does not anticipate that the final adoption of SAB 101 will have a
material impact on MidAmerican Energy's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MidAmerican Energy is exposed to market risk, including changes in the
market price of certain commodities and interest rates. The exposure to changes
in market prices and interest rates at September 30, 2000 is not materially
different than at December 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
MidAmerican Energy and its subsidiaries have no material legal proceedings
except for the following:
Environmental Matters
- ---------------------
For information relating to MidAmerican Energy's environmental matters,
reference is made to Note B of Notes to Consolidated Financial Statements.
Cooper Litigation
- -----------------
On July 23, 1997, Nebraska Public Power District filed a complaint, in the
United States District Court for the District of Nebraska, naming MidAmerican
Energy as the defendant and seeking declaratory judgment as to three issues
under the parties' long-term power purchase agreement for Cooper capacity and
energy. More specifically, Nebraska Public Power District sought a declaratory
judgment in the following respects:
(1) that MidAmerican Energy is obligated to pay 50% of all costs and
expenses associated with decommissioning Cooper, and that in the event
Nebraska Public Power District continues to operate Cooper after
expiration of the power purchase agreement (September 2004),
MidAmerican Energy is not entitled to reimbursement of any
decommissioning funds it has paid to date or will pay in the future;
(2) that the current method of allocating transition costs as a part of
the decommissioning cost is proper under the power purchase agreement;
and
(3) that the current method of investing decommissioning funds is proper
under the power purchase agreement.
MidAmerican Energy filed its answer and contingent counterclaims. The
contingent counterclaims filed by MidAmerican Energy are generally as follows:
(1) that MidAmerican Energy has no duty under the power purchase agreement
to reimburse or pay 50% of the decommissioning costs unless conditions
to reimbursement occur;
-23-
(2) that Nebraska Public Power District has the duty to repay all amounts
that MidAmerican Energy has prefunded for decommissioning in the event
the Nebraska Public Power District operates the plant after the term
of the power purchase agreement;
(3) that Nebraska Public Power District is equitably estopped from
continuing to operate the plant after the term of the power purchase
agreement;
(4) that Nebraska Public Power District has granted MidAmerican Energy an
option to continue taking 50% of the power from the plant;
(5) that the term "monthly power costs" as defined in the power purchase
agreement does not include costs and expenses associated with
decommissioning the plant;
(6) that MidAmerican Energy has no duty to pay for nuclear fuel,
operations and maintenance projects or capital improvements that have
useful lives after the term of the power purchase agreement;
(7) that transition costs are not included in any decommissioning costs
and expenses;
(8) that Nebraska Public Power District has breached its duty to
MidAmerican Energy in making investments of decommissioning funds;
(9) that reserves in named accounts are excessive and should be refunded
to MidAmerican Energy; and
(10) that Nebraska Public Power District must credit MidAmerican Energy for
payments by MidAmerican Energy for low-level radioactive waste
disposal.
On October 6, 1999, the court rendered summary judgment for Nebraska Public
Power District on the above-mentioned issue concerning liability for
decommissioning (issue one in the first paragraph above) and the related
contingent counterclaims filed by MidAmerican Energy (issues one, two, three and
five in the second paragraph above). The court referred all remaining issues in
the case to mediation, and cancelled the November 1999 trial date. MidAmerican
Energy has appealed the court's summary judgment. Oral arguments concerning
MidAmerican Energy's appeal of the summary judgment were held before the United
States Court of Appeals, Eighth Circuit, on October 16, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(A) EXHIBITS
Exhibits Filed Herewith
- -----------------------
Exhibit 15 - Awareness Letter of Independent Accountants
Exhibit 27 - Financial Data Schedules (for electronic filing only).
(B) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY COMPANY
--------------------------------------
(Registrant)
Date November 9, 2000 /s/ Patrick J. Goodman
------------------- -------------------------------------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
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15 Awareness Letter of Independent Accountants
27 Financial Data Schedules (for electronic filing only).
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