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 March 31, 2001
--------------
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 April 30, 2001, 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............ 13
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 March 31, 2001, and the
related consolidated statements of income and cash flows for the three-month
periods ended March 31, 2001 and 2000. 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 and
statement of capitalization of MidAmerican Energy Company and subsidiaries as of
December 31, 2000, and the related consolidated statements of income,
comprehensive income, retained earnings, and cash flows for the year then ended
(not presented herein); and in our report dated January 18, 2001, 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, 2000 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
April 18, 2001
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
-------------------------
2001 2000
--------- ---------
OPERATING REVENUES
Regulated electric ............................. $ 294,390 $ 278,463
Regulated gas .................................. 366,858 179,902
Nonregulated ................................... 227,289 56,487
--------- ---------
888,537 514,852
--------- ---------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ............ 65,800 58,317
Cost of gas sold ............................. 292,450 111,498
Other operating expenses ..................... 96,452 101,891
Maintenance .................................. 27,790 24,739
Depreciation and amortization ................ 50,810 48,394
Property and other taxes ..................... 17,274 19,299
--------- ---------
550,576 364,138
--------- ---------
Nonregulated:
Cost of sales ................................ 219,204 51,138
Other ........................................ 4,181 3,599
--------- ---------
223,385 54,737
--------- ---------
Total operating expenses ....................... 773,961 418,875
--------- ---------
OPERATING INCOME ............................... 114,576 95,977
--------- ---------
NON-OPERATING INCOME
Interest and dividend income ................... 4,525 1,373
Other, net ..................................... (3,945) (2,119)
--------- ---------
580 (746)
--------- ---------
FIXED CHARGES
Interest on long-term debt ..................... 16,028 14,583
Other interest expense ......................... 1,177 2,900
Preferred dividends of subsidiary trust ........ 2,057 1,995
Allowance for borrowed funds ................... (492) (379)
--------- ---------
18,770 19,099
--------- ---------
INCOME BEFORE INCOME TAXES ..................... 96,386 76,132
INCOME TAXES ................................... 40,597 31,333
--------- ---------
NET INCOME ..................................... 55,789 44,799
PREFERRED DIVIDENDS ............................ 1,239 1,239
--------- ---------
EARNINGS ON COMMON STOCK ....................... $ 54,550 $ 43,560
========= =========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
-----------------------
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ............................................. $4,489,092 $4,471,839
Gas .................................................. 837,033 831,203
---------- ----------
5,326,125 5,303,042
Less accumulated depreciation and amortization ....... 2,728,440 2,680,420
---------- ----------
2,597,685 2,622,622
Construction work in progress ........................ 38,362 38,584
---------- ----------
2,636,047 2,661,206
---------- ----------
POWER PURCHASE CONTRACT .............................. 80,335 82,231
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................ 10,745 9,677
Receivables .......................................... 368,840 422,661
Inventories .......................................... 23,902 69,130
Prepaid taxes ........................................ 23,956 22,889
Other ................................................ 9,824 9,789
---------- ----------
437,267 534,146
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ........... 262,797 256,053
REGULATORY ASSETS .................................... 231,051 240,934
OTHER ASSETS ......................................... 56,294 48,996
---------- ----------
TOTAL ASSETS ......................................... $3,703,791 $3,823,566
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .......................... $1,125,910 $1,161,968
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) ........... 820,210 820,082
---------- ----------
2,127,879 2,163,809
---------- ----------
CURRENT LIABILITIES
Notes payable ........................................ 45,600 81,600
Current portion of long-term debt .................... 101,560 101,600
Current portion of power purchase contract ........... 16,554 16,554
Accounts payable ..................................... 244,491 308,784
Taxes accrued ........................................ 136,300 124,493
Interest accrued ..................................... 12,976 12,016
Other ................................................ 35,988 34,667
---------- ----------
593,469 679,714
---------- ----------
OTHER LIABILITIES
Power purchase contract .............................. 35,728 35,728
Deferred income taxes ................................ 537,286 540,608
Investment tax credit ................................ 64,247 66,209
Other ................................................ 345,182 337,498
---------- ----------
982,443 980,043
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ................. $3,703,791 $3,823,566
========== ==========
The accompanying notes are an integral part of these statements.
-5-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 55,789 $ 44,799
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .......................... 50,923 48,468
Deferred income taxes and investment tax credit, net ... (4,852) (2,707)
Amortization of other assets ........................... 12,941 12,095
Cash inflow of accounts receivable securitization ...... - 12,877
Impact of changes in working capital ................... 47,742 52,409
Other .................................................. (1,493) (807)
--------- ---------
Net cash provided .................................... 161,050 167,134
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................ (26,805) (28,988)
Quad Cities Generating Station decommissioning trust fund (2,075) (2,075)
Nonregulated capital expenditures ........................ (1,133) (617)
Other investing activities, net .......................... (2,690) (3,060)
--------- ---------
Net cash used ......................................... (32,703) (34,740)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ........................................... (91,239) (1,239)
Retirement of long-term debt, including reacquisition cost (40) (110,142)
Net decrease in notes payable ............................ (36,000) (23,452)
--------- ---------
Net cash used .......................................... (127,279) (134,833)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 1,068 (2,439)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 9,677 5,167
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 10,745 $ 2,728
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ................ $ 14,097 $ 17,240
========= =========
Income taxes paid ........................................ $ 13,054 $ 18,230
========= =========
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.
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 March 31, 2001 was $25 million. The estimate consists of $3 million for
investigation costs, $8 million for remediation costs, $12 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.
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
-7-
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. Insurance
recoveries have been received for some of the sites under investigation. Those
recoveries are intended to be used principally for accelerated remediation, as
specified by the Iowa Utilities Board, and are recorded as a regulatory
liability.
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.
On February 27, 2001, the Supreme Court, in Whitman v. American Trucking
Associations, upheld the standards, ruling that the Environmental Protection
Agency did not exceed its constitutional delegation of authority in establishing
the standards in 1997. The court ruled that the Clean Air Act's requirement for
the Environmental Protection Agency to establish National Ambient Air Quality
Standards at a level "requisite" to protect public health, or "sufficient, but
not more than necessary", is within the constitutional scope of discretion that
Congress can delegate to a federal agency. The court also explicitly held that
cost cannot be taken into account when setting the standards. The court remanded
-8-
the issue of implementation of the ozone standard. However, the Environmental
Protection Agency is moving forward with analyzing existing monitored data and
determining attainment status.
The impact of the new standards on MidAmerican Energy is currently unknown.
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, 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 will 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:
A pricing plan settlement agreement entered into in 1997 among MidAmerican
Energy, the Office of Consumer Advocate and other parties pursuant to a rate
proceeding before the Iowa Utilities Board establishing MidAmerican Energy's
Iowa retail electric rates, expired on December 31, 2000. With limited
exceptions, the pricing plan settlement agreement precluded MidAmerican Energy
from seeking an increase in these rates and the other parties, including the
Office of Consumer Advocate, from seeking a decrease in rates prior to January
1, 2001. The rates established by the pricing plan settlement agreement will
remain in effect until either the plan is renegotiated by the parties or a
change in rates is established pursuant to a rate proceeding, both of which are
subject to approval by the Iowa Utilities Board.
On March 14, 2001, the Office of the Consumer Advocate filed a petition
with the Iowa Utilities Board to reduce Iowa retail electric rates by
approximately $77 million annually. This filing is being contested by
MidAmerican Energy and, under Iowa law, the Iowa Utilities Board must rule on
the petition within ten months from March 14, 2001. The Iowa Utilities Board has
established a procedural schedule that sets a hearing date of September 24,
2001. Iowa law provides that the rates collected after the filing of the
petition are subject to refund with interest if they exceed rates finally
approved by the Iowa Utilities Board.
Under an Illinois restructuring law enacted in 1997, a sharing mechanism is
in place for MidAmerican Energy's Illinois regulated retail electric operations
whereby earnings above a computed threshold will be shared equally between
customers and shareholders. 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. MidAmerican Energy's computed level of return on common equity is
based on a rolling two-year average of the 30-year Treasury Bond rates plus a
premium of 5.50% for 1998 and 1999 and a premium of 8.5% for 2000 through 2004.
The two-year average above which sharing must occur for 2000 was 12.83%. Using
the same 30-year Treasury Bond average, the computed level of return would be
14.33% 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.
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
-9-
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 (SFAS 71) may no longer
apply. SFAS 71 sets forth accounting principles for operations that are
regulated and meet the stated criteria. For operations that meet the criteria,
SFAS 71 allows, among other things, the deferral of expense or income that would
otherwise be recognized 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.
E. DERIVATIVE FINANCIAL INSTRUMENTS:
In January 2001 MidAmerican Energy adopted Statement of Financial
Accounting Standards (SFAS) Nos. 133 and 138, pertaining to the accounting for
derivative instruments and hedging activities. These pronouncements require that
derivative instruments be recorded at fair value on the balance sheet and
changes in fair value recognized in income. To the extent that derivative
instruments are used for hedging purposes, and are highly effective as hedges,
hedge accounting is permitted, as discussed below, which mitigates the impact
on earnings of changes in the fair value of the derivatives.
MidAmerican Energy uses a variety of derivative financial instruments to
hedge the effect of price changes on cash flows from expected future physical
transactions (cash flow hedges) and the fair value of physical purchase and sale
commitments (fair value hedges) and to minimize price volatility for regulated
gas purchases. The objective of MidAmerican Energy's hedging program is to
minimize the impact of changing prices for natural gas and electricity on its
cash flows. Instruments used for gas hedging transactions include futures
contracts, swaps and options. Instruments used for electric hedging transactions
include forward contracts and options. Small volumes of derivative financial
instruments are traded from time to time to profit from price arbitrage
opportunities.
Unrealized gains and losses on cash flow hedges of future transactions are
recorded in other comprehensive income. Only hedges that are highly effective in
offsetting the risk of variability in future cash flows are accounted for in
this manner. Future transactions include purchases of gas for resale to
regulated and nonregulated customers, purchases of gas for storage, and
purchases and sales of wholesale electric energy. When the associated hedged
future transaction occurs or if a hedging relationship is no longer appropriate,
the unrealized gains and losses are reversed from other comprehensive income and
recognized in net income. Realized gains on cash flow hedges are recorded in
Cost of Gas Sold, Nonregulated Cost of Sales, or Nonregulated Operating
Revenues, depending upon the nature of the physical transaction being hedged.
For the quarter ended March 31, 2001, $33,000 of net gains were realized
from the ineffectiveness of cash flow hedges. During the twelve months beginning
April 1, 2001, it is anticipated that all of the net unrealized gains (losses)
on cash flow hedges presently recorded as accumulated other comprehensive income
will be reclassified into earnings.
Unrealized gains and losses on fair value hedges are recognized in income
as either Nonregulated Operating Revenues, Nonregulated Cost of Sales, or Cost
of Gas Sold depending upon the nature of the item being hedged. Purchase and
sales commitments hedged by fair value hedges are recorded at fair value, with
the changes in values also recognized in income and substantially offsetting the
impact of the
-10-
hedges on earnings. A net pre-tax gain of $69,000, representing the
ineffectiveness of fair value hedges, is included in Nonregulated Cost of Sales.
Unrealized gains and losses on derivatives held for trading purposes are
recognized in income each reporting period as Nonregulated Operating Revenues.
As of March 31, 2001, MidAmerican Energy held the following instruments as
hedges:
Notional Unit of Fair Value
Amount Measure Asset (Liability)
------ ------- -----------------
Natural Gas Futures - Net Short 240,000 MMBtu $2,456,840
Natural Gas Swaps 895,607 MMBtu 528,478
Electricity Forward
Contracts - Net Short 120,800 MWh (925,600)
A $1/MMBtu increase in the price of natural gas would increase the fair
value of the natural gas instruments by $1.1 million. A $5/MWh increase in
electricity would decrease the fair value of the electricity forwards contracts
by $0.6 million.
F. SEGMENT INFORMATION:
MidAmerican Energy has two reportable operating segments: regulated
electric and regulated gas, referred to as the electric and gas segments. The
electric segment derives most of its revenue from retail sales of regulated
electricity to residential, commercial, and industrial customers and from
wholesale sales to other utilities. The gas segment derives most of its revenue
from retail sales of 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.
-11-
The following table provides MidAmerican Energy information on an operating
segment basis (in thousands):
Three Months
Ended March 31,
-----------------------
2001 2000
-------- --------
Revenues:
Electric..................... $294,390 $278,463
Gas.......................... 366,858 179,902
Nonregulated and other (a)... 227,289 56,487
-------- --------
$888,537 $514,852
======== ========
Earnings on Common Stock:
Electric..................... $ 34,435 $ 27,771
Gas.......................... 17,875 14,838
Nonregulated and other (a)... 2,240 951
-------- --------
$ 54,550 $ 43,560
======== ========
(a) "Nonregulated and other" consists of nonregulated gas operations, CBEC
Railway and other nonregulated activities.
G. OTHER COMPREHENSIVE INCOME:
For the three months ended March 31, 2001, MidAmerican Energy's total
comprehensive income was $53.9 million. The difference from Earnings on Common
Stock is due to the effective portion of net gains and losses on MidAmerican
Energy's derivative instruments classified as cash flow hedges. For the three
months ended March 31, 2000, there was no difference between MidAmerican
Energy's total comprehensive income and Earnings on Common Stock.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
------------
MidAmerican Energy Company is a public utility company headquartered in Des
Moines, Iowa, and incorporated in the state of Iowa. It 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.
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
Ended March 31,
---------------
2001 2000
---- ----
(In millions)
Operating revenues................... $294 $278
Cost of fuel, energy and capacity.... 66 58
---- ----
Electric gross margin.............. $228 $220
==== ====
Electric gross margin for the first quarter of 2001 increased $8 million
compared to the first quarter of 2000. Temperatures during the three months
ended March 31, 2001, were colder than temperatures in the first quarter of
2000, resulting in a $9 million increase in electric margin. Other usage factors
not dependent on weather decreased electric margin by $7.3 million compared to
the first quarter of 2000. In total, retail sales of electricity increased 2.0%
for the three months ended March 31, 2001.
-13-
MidAmerican Energy's margins on wholesale sales, net of a reserve for
revenue sharing, increased $3.3 million compared to the first quarter of 2000.
Sales volumes for wholesale sales increased 20.2% for the three months ended
March 31, 2001, relative to the comparable period in 2000. Wholesale sales are
the sales of energy to other utilities, municipalities and marketers outside of
MidAmerican Energy's delivery system. Additionally, electric revenues for the
three months ended March 31, 2001, reflect a gain of $3.2 million on the sale of
emission allowances.
Regulated Gas Gross Margin -
Three Months
Ended March 31,
-----------------
2001 2000
---- ----
(In millions)
Operating revenues........... $367 $180
Cost of gas sold............. 292 111
---- ----
Gas gross margin........... $ 75 $ 69
==== ====
Regulated gas revenues include purchase gas adjustment clauses through
which MidAmerican Energy is allowed to recover the cost of gas sold from most of
its gas utility customers. Consequently, fluctuations in the cost of gas sold do
not affect gross margin or net income because revenues reflect comparable
fluctuations in revenues from the purchase gas adjustment clauses. An increase
in the per-unit cost of gas for the three-month period ended March 31, 2001,
compared to the same period in 2000, increased revenues and cost of gas sold by
approximately $160 million.
Temperatures during the three months ended March 31, 2001, were colder than
temperatures in the first quarter of 2000, resulting in a $7 million increase in
gas gross margin. Other rate and usage factors decreased gross margin by $0.4
million compared to the first quarter of 2000.
REGULATED OPERATING EXPENSES
Regulated other operating expenses decreased $5.4 for the first quarter of
2001 compared to the first quarter of 2000. The decrease was due to reductions
in health care and other benefit costs, Quad Cities Station operating expenses,
information technology expenses, energy efficiency program costs, and
assessments from utility regulatory agencies.
Maintenance expenses increased $3.1 million for the three months ended
March 31, 2001, compared to the 2000 period due principally to increased
electric and gas distribution expenses.
Depreciation and amortization expense increased $2.4 million compared to
the first quarter of 2000 due principally to the increase in utility plant and
an increase in depreciation rates implemented in 2001.
Property and other taxes decreased $2.0 million for the three months ended
March 31, 2001, compared to the 2000 period due to a decrease in Iowa property
taxes and an adjustment to payroll taxes in the first quarter of 2001.
-14-
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Nonregulated Gross Margin -
Three Months
Ended March 31,
---------------
2001 2000
---- ----
(In millions)
Operating revenues.............. $227 $56
Cost of sales................... 219 51
---- ---
Gross margin.................. $ 8 $ 5
==== ===
Nonregulated revenues and cost of sales consist substantially of
nonregulated natural gas marketing operations. Revenues from nonregulated
natural gas marketing operations increased $170.6 million compared to the first
quarter of 2000 to $216.7 million for the first quarter of 2001. An increase in
the average price per unit sold, reflective of a 171% increase in the average
cost of gas, accounted for $135.5 million of the increase in revenues. Sales
volumes increased 13 million MMBtus (76%) resulting in a $35.1 million increase
in revenues. Cost of sales increased $168.7 million to $213.5 million for the
three months ended March 31, 2001, due to the increases in the per-unit cost of
gas sold and sales volumes. Gross margin for the nonregulated natural gas
operations increased $1.9 million to $3.2 million for the first quarter of 2001.
The improvement in gross margin reflects an increase in margin per unit and
sales volumes.
Nonregulated revenues for the first quarter of 2001 include $3.6 million
from MidAmerican Energy's market access service project compared to $4.2 million
in the first quarter of 2000. The pilot project allows larger Iowa customers
that are participating in the project 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 $1.3 million to $3.3 million related
to the market access service project.
As of December 31, 2000, all non-residential customers in Illinois have
been allowed to select their electric power supplier. For the three months ended
March 31, 2001, compared to the three months ended March 31, 2000, related
revenues increased $2.1 million to $3.6 million, and related cost of sales
increased $0.4 million to $1.9 million, resulting in a $1.7 million increase in
gross margin.
MidAmerican Energy's nonregulated revenues in the first three months of
2000 include $1.0 million of pre-tax income from an award for successful
performance under an incentive gas procurement program. A similar award was not
recorded in the 2001 period.
Nonregulated Operating Expenses: Other -
Nonregulated other operating expenses increased $0.6 million for the three
months ended March 31, 2001, due to an increase in costs related to MidAmerican
Energy's nonregulated retail services.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and Dividend Income -
The increase in interest income was due principally to a $2.5 million
increase in interest income on a note receivable related to MidAmerican Energy's
accounts receivable sold. The increase in the note receivable is a result of the
increased balance in receivables sold.
-15-
Other, Net -
Other, Net, which includes a number of non-operating income and deduction
items, reduced Non-operating Income by $3.9 million and $2.1 million in the
three months ended March 31, 2001 and 2000, respectively. 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 $5.5 million and $2.1 million in the
first quarter of 2001 and 2000, respectively. Other, Net for the first quarter
of 2001 also reflects a $1.4 million gain on the sale of MidAmerican Energy rail
cars.
Fixed Charges -
The increase in interest on long-term debt was due to interest on $162
million of MidAmerican Energy medium-term notes issued in July 2000, net of the
impact of debt maturities in 2000.
Other interest expense decreased compared to the first quarter of 2000 due
principally to a reduction in short-term debt outstanding at MidAmerican Energy.
-16-
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 $161 million and $167
million for the three months ended March 31, 2001 and 2000, respectively.
INVESTING ACTIVITIES AND PLANS
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first three months of 2001, utility construction
expenditures totaled $27 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases. All such expenditures were met with cash generated from utility
operations, net of dividends.
Forecasted utility construction expenditures, including allowance for funds
used during construction are $223 million for 2001 and $871 million for 2002
through 2005. 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 $41 million during the
period 2001 through 2005 to external trusts established for the investment of
funds for decommissioning Quad Cities Station. Approximately 55% of the trusts'
funds are now invested in domestic corporate debt and common equity securities.
The remainder is invested in investment grade municipal and U.S. Treasury bonds.
Funding for Quad Cities Station is reflected in depreciation expense in the
Consolidated Statements of Income.
Based on information presently available and assuming a September 2004
shutdown of Cooper, MidAmerican Energy expects to accrue approximately $55
million for Cooper decommissioning during the period 2001 through 2004. Amounts
related to Cooper decommissioning are reflected in Other Operating Expenses in
the Consolidated Statements of Income. The funds that were previously provided
to Nebraska Public Power District, with the understanding that Cooper will be
shutdown in September 2004, are invested predominately in U.S. Treasury Bonds
and other U.S. Government securities. Approximately 30% of the funds are
invested in domestic corporate debt. MidAmerican Energy's obligation, if any,
for Cooper decommissioning will be affected by the actual plant shutdown date.
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.
-17-
Cooper and Quad Cities Station decommissioning costs charged to Iowa
customers are included in base rates, and recovery of increases in those amounts
must be sought through the normal ratemaking process. Cooper decommissioning
costs charged to Illinois customers are recovered through a rate rider on
customer billings.
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 $500 million. MidAmerican Energy currently has in
place a $370.4 million revolving credit facility that supports its $250 million
commercial paper program and its variable rate pollution control revenue
obligations. In addition, MidAmerican Energy has a $5 million line of credit.
MidAmerican Energy has on file with the Securities and Exchange Commission
a registration statement for $500 million in various forms of senior and
subordinated, unsecured long-term debt and preferred securities.
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. MidAmerican Energy Funding Corporation in turn sells
receivable interests to outside investors. In consideration for the sale,
MidAmerican Energy received cash and a subordinated note, bearing interest at
8%, from MidAmerican Energy Funding Corporation. As of March 31, 2001, the
revolving cash balance was $70 million, and the amount outstanding under the
subordinated note was $213.0 million. The agreement is structured as a true
sale, under which the creditors of MidAmerican Energy Funding Corporation will
be entitled to be satisfied out of the assets of MidAmerican Energy Funding
Corporation 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 March 31, 2001, $284.8
million of accounts receivable, net of reserves, were sold under the agreement.
-18-
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 price 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 generation under typical operating conditions
for its retail electric needs, a loss of adequate generation by MidAmerican
Energy requiring the purchase of replacement power at a time of high market
prices could subject MidAmerican Energy to losses on its energy sales.
Legislative and Regulatory Evolution -
In December 1997, the Governor of Illinois signed into law a bill to
restructure Illinois' electric utility industry and transition it to a
competitive market. Under the law, larger non-residential customers in Illinois
and 33% of the remaining non-residential Illinois customers were allowed to
select their provider of electric supply services beginning October 1, 1999.
Starting December 31, 2000, all other non-residential customers were allowed
supplier choice. Residential customers all receive the opportunity to select
their electric supplier beginning May 1, 2002.
The law provides for Illinois earnings above a computed level of return on
common equity to be shared equally between customers and MidAmerican Energy.
MidAmerican Energy's computed level of return on common equity is based on a
rolling two-year average of the 30-year Treasury Bond rates plus a premium of
5.50% for 1998 and 1999 and a premium of 8.5% for 2000 through 2004. The
two-year average above which sharing must occur for 2000 was 12.83%. Using the
same 30-year Treasury bond average, the computed level of return would be 14.33%
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.
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 were 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. On October
16, 2000, MidAmerican Energy filed with the Federal Energy Regulatory Commission
a plan for MidAmerican Energy to comply with Order No. 2000 by participating in
the formation of a for-profit independent transmission company. MidAmerican
Energy continues in its effort to form such a company.
-19-
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 the
required criteria. For operations that meet the criteria, SFAS 71 allows, among
other things, the deferral of expense or income that would otherwise be
recognized 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 March 31, 2001, MidAmerican Energy had $221.8 million of
regulatory assets, net of regulatory liabilities, on its Consolidated Balance
Sheet.
Energy Efficiency -
MidAmerican Energy's regulatory assets as of March 31, 2001, included $16.0
million of deferred energy efficiency costs. Based on the current level of
recovery, MidAmerican Energy expects to recover these costs by the end of 2001.
MidAmerican Energy is also allowed to recover its ongoing energy efficiency
costs on a current basis. These costs are being collected from customers based
on projected annual expenditures 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.
Rate Matters: Electric -
A pricing plan settlement agreement entered into in 1997 among MidAmerican
Energy, the Office of Consumer Advocate and other parties pursuant to a rate
proceeding before the Iowa Utilities Board establishing MidAmerican Energy's
Iowa retail electric rates, expired on December 31, 2000. With limited
exceptions, the pricing plan settlement agreement precluded MidAmerican Energy
from seeking an increase in these rates and the other parties, including the
Office of Consumer Advocate, from seeking a decrease in rates prior to January
1, 2001. The rates established by the pricing plan settlement agreement will
remain in effect until either the plan is renegotiated by the parties and
approved by the Iowa Utilities Board or a change in rates is established
pursuant to a rate proceeding, both of which are subject to approval by the Iowa
Utilities Board. 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.
On March 14, 2001, the Office of the Consumer Advocate filed a petition
with the Iowa Utilities Board to reduce Iowa retail electric rates by
approximately $77 million annually. This filing is being contested by
MidAmerican Energy and, under Iowa law, the Iowa Utilities Board must rule on
the petition within ten months from March 14, 2001. The Iowa Utilities Board has
established a procedural schedule that sets a hearing date of September 24,
2001. Iowa law provides that the rates collected after the filing of the
petition may be subject to refund with interest if they exceed rates finally
approved by the Iowa Utilities Board.
Under the pricing plan settlement agreement, if MidAmerican Energy's annual
Iowa electric jurisdictional return on common equity exceeded 12%, then earnings
above the 12% level were to be shared equally between customers and MidAmerican
Energy. If the return exceeded 14%, then two-thirds of MidAmerican Energy's
share of those earnings above the 14% level were to be used for accelerated
recovery of certain regulatory assets. In the first quarter of 2001, MidAmerican
Energy credited $21.6
-20-
million to its Iowa non-contract customers related to the return calculation for
2000, which was approved by the Iowa Utilities Board, subject to additional
refund. This Iowa electric retail revenue sharing arrangement ceased with the
expiration of the pricing plan settlement agreement on December 31, 2000.
MidAmerican Energy has negotiated individual electric contracts with some
of its commercial and industrial customers in Iowa. The negotiated electric
contracts have differing terms and conditions as well as prices. The vast
majority of the contracts expire during the period 2003 through 2005, although
some large customers have contracts extending to 2008. Some of the contracts
have price renegotiation and early termination provisions exercisable by either
party. 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.
Environmental Matters -
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties which were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy's estimate of the probable costs for these
sites as of March 31, 2001, was $25 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. On February 27, 2001, the United States
Supreme Court upheld the standards, ruling that the EPA did not exceed its
constitutional delegation of authority in establishing the standards in 1997.
The impact of the new standards on MidAmerican Energy is currently unknown.
MidAmerican Energy could incur increased costs and a decrease in revenues if its
generating stations are located in nonattainment areas. 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
-21-
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 wholesale market.
MidAmerican Energy believes it has adequate electric capacity reserve
through 2004 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 January 2001 MidAmerican Energy adopted SFAS Nos. 133 and 138,
pertaining to the accounting for derivative instruments and hedging activities.
These pronouncements require that derivative instruments be recorded at fair
value on the balance sheet and changes in fair value recognized in income. The
Financial Accounting Standards Board's Derivatives Implementation Group
continues to identify and provide guidance on various implementation issues
related to SFAS 133/138 that are in varying stages of review and clearance by
the Derivatives Implementation Group and the FASB. MidAmerican Energy is
monitoring the issues being reviewed by the Derivatives Implementation Group and
the FASB to determine what, if any, impact they may have on MidAmerican Energy's
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. To manage the price
volatility relating to these exposures, MidAmerican Energy enters into various
financial derivative instruments. Senior management provides overall direction,
structure, conduct and control of MidAmerican Energy's risk management
activities, including the use of financial derivative instruments, authorization
and communication of risk management policies and procedures, strategic hedging
program guidelines, appropriate market and credit risk limits, and appropriate
systems for recording, monitoring and reporting the results of transactional and
risk management activities. Refer to Note E in Notes to Consolidated Financial
Statements for further discussion of derivatives used to hedge price risks.
MidAmerican Energy's exposure to interest rate risk did not change materially
from December 31, 2000.
MidAmerican Energy uses hedge accounting for derivative instruments
pertaining to its natural gas purchasing, wholesale electricity activities and
financing activities. Refer to Note E in Notes to Consolidated Financial
Statements for further discussion of the accounting for derivative instruments.
-22-
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 on MidAmerican Energy's environmental matters, reference is
made to Note B of Notes to Consolidated Financial Statements.
Cooper Litigation
- -----------------
On July 23, 1997, Nebraska Public Power District filed a complaint, in the
United States District Court for the District of Nebraska, naming MidAmerican
Energy as the defendant and seeking declaratory judgment as to three issues
under the parties' long-term power purchase agreement for Cooper capacity and
energy. More specifically, Nebraska Public Power District sought a declaratory
judgment in the following respects:
(1) that MidAmerican Energy is obligated to pay 50% of all costs and
expenses associated with decommissioning Cooper, and that in the event
Nebraska Public Power District continues to operate Cooper after
expiration of the power purchase agreement (September 2004),
MidAmerican Energy is not entitled to reimbursement of any
decommissioning funds it has paid to date or will pay in the future;
(2) that the current method of allocating transition costs as a part of
the decommissioning cost is proper under the power purchase agreement;
and
(3) that the current method of investing decommissioning funds is proper
under the power purchase agreement.
MidAmerican Energy filed its answer and contingent counterclaims. The
contingent counterclaims filed by MidAmerican Energy are generally as follows:
(1) that MidAmerican Energy has no duty under the power purchase agreement
to reimburse or pay 50% of the decommissioning costs unless conditions
to reimbursement occur;
(2) that Nebraska Public Power District has the duty to repay all amounts
that MidAmerican Energy has prefunded for decommissioning in the event
the Nebraska Public Power District operates the plant after the term
of the power purchase agreement;
(3) that Nebraska Public Power District is equitably estopped from
continuing to operate the plant after the term of the power purchase
agreement;
(4) that Nebraska Public Power District has granted MidAmerican Energy an
option to continue taking 50% of the power from the plant;
(5) that the term "monthly power costs" as defined in the power purchase
agreement does not include costs and expenses associated with
decommissioning the plant;
-23-
(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 appealed the court's summary judgment ruling. On
December 12, 2000, the United States Court of Appeals for the Eighth Circuit
reversed the ruling of the district court and granted summary judgment in favor
of MidAmerican Energy issues one and five in the second paragraph above.
Additionally, it remanded the case for trial on all other claims and
counterclaims. It is not likely that a trial will occur prior to fall of 2001.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(A) EXHIBITS
Exhibit 15 - Awareness Letter of Independent Accountants
(B) REPORTS ON FORM 8-K
On March 19, 2001, MidAmerican Energy filed a current report on Form 8-K
dated March 15, 2001. The report discussed a petition filed with the Iowa
Utilities Board on March 14, 2001, in which the Office of the Consumer Advocate
of the Iowa Department of Justice requests a reduction of MidAmerican Energy's
Iowa retail electric rates by approximately $77 million annually.
-24-
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 May 11, 2001 /s/ Patrick J. Goodman
-------------- -------------------------------------------------
Patrick J. Goodman
Senior Vice President and Chief Financial Officer
-25-
EXHIBIT INDEX
Exhibit No.
- -----------
15 Awareness Letter of Independent Accountants
-26-