UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 July 31, 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.............................................. 24
ITEM 6. Exhibits and Reports on Form 8-K............................... 26
Signatures................................................................ 27
Exhibit Index............................................................. 28
-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 June 30, 2001, and the
related consolidated statements of income for the three-month and six-month
periods ended June 30, 2001 and 2000, and the related consolidated statements of
cash flows for the six-month periods ended June 30, 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
July 20, 2001
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
OPERATING REVENUES
Regulated electric .................... $ 305,800 $ 281,973 $ 600,190 $ 560,436
Regulated gas ......................... 87,297 98,153 454,155 278,055
Nonregulated .......................... 204,593 88,936 431,882 145,423
----------- ----------- ----------- -----------
597,690 469,062 1,486,227 983,914
----------- ----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 60,406 57,172 126,206 115,489
Cost of gas sold .................... 52,735 61,054 345,185 172,552
Other operating expenses ............ 105,433 102,863 201,885 204,754
Maintenance ......................... 31,156 29,938 58,946 54,677
Depreciation and amortization ....... 50,645 49,140 101,455 97,534
Property and other taxes ............ 18,543 19,110 35,817 38,409
----------- ----------- ----------- -----------
318,918 319,277 869,494 683,415
----------- ----------- ----------- -----------
Nonregulated:
Cost of sales ....................... 197,808 83,447 417,012 134,585
Other ............................... 4,350 5,271 8,531 8,870
----------- ----------- ----------- -----------
202,158 88,718 425,543 143,455
----------- ----------- ----------- -----------
Total operating expenses .............. 521,076 407,995 1,295,037 826,870
----------- ----------- ----------- -----------
OPERATING INCOME ...................... 76,614 61,067 191,190 157,044
----------- ----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .......... 3,763 1,212 8,288 2,585
Other, net ............................ (4,022) (1,941) (7,967) (4,060)
----------- ----------- ----------- -----------
(259) (729) 321 (1,475)
----------- ----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............ 15,640 13,804 31,668 28,387
Other interest expense ................ 2,570 4,101 3,747 7,001
Preferred dividends of subsidiary trust 1,995 2,057 4,052 4,052
Allowance for borrowed funds .......... (261) (374) (753) (753)
----------- ----------- ----------- -----------
19,944 19,588 38,714 38,687
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 56,411 40,750 152,797 116,882
INCOME TAXES .......................... 23,775 16,875 64,372 48,208
----------- ----------- ----------- -----------
NET INCOME ............................ 32,636 23,875 88,425 68,674
PREFERRED DIVIDENDS ................... 1,268 1,238 2,507 2,477
----------- ----------- ----------- -----------
EARNINGS ON COMMON STOCK .............. $ 31,368 $ 22,637 $ 85,918 $ 66,197
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
-------------------------
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ............................................. $4,521,507 $4,471,839
Gas .................................................. 842,534 831,203
---------- ----------
5,364,041 5,303,042
Less accumulated depreciation and amortization ....... 2,775,637 2,680,420
---------- ----------
2,588,404 2,622,622
Construction work in progress ........................ 41,909 38,584
---------- ----------
2,630,313 2,661,206
---------- ----------
POWER PURCHASE CONTRACT .............................. 78,428 82,231
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................ 13,805 9,677
Receivables .......................................... 240,155 422,661
Inventories .......................................... 43,809 69,130
Prepaid taxes ........................................ 23,956 22,889
Other ................................................ 8,873 9,789
---------- ----------
330,598 534,146
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ........... 269,004 256,053
REGULATORY ASSETS .................................... 223,356 240,934
OTHER ASSETS ......................................... 67,583 48,996
---------- ----------
TOTAL ASSETS ......................................... $3,599,282 $3,823,566
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .......................... $1,164,395 $1,161,968
MidAmerican preferred securities, not subject to
mandatory redemption ............................... 31,759 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ................... 36,680 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) ........... 820,338 820,082
---------- ----------
2,153,172 2,163,809
---------- ----------
CURRENT LIABILITIES
Notes payable ........................................ 40,500 81,600
Current portion of long-term debt .................... 101,313 101,600
Current portion of power purchase contract ........... 16,554 16,554
Accounts payable ..................................... 155,051 308,784
Taxes accrued ........................................ 81,011 124,493
Interest accrued ..................................... 10,670 12,016
Other ................................................ 33,010 34,667
---------- ----------
438,109 679,714
---------- ----------
OTHER LIABILITIES
Power purchase contract .............................. 35,728 35,728
Deferred income taxes ................................ 539,378 540,608
Investment tax credit ................................ 63,751 66,209
Other ................................................ 369,144 337,498
---------- ----------
1,008,001 980,043
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ................. $3,599,282 $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)
SIX MONTHS
ENDED JUNE 30,
----------------------
2001 2000
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 88,425 $ 68,674
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .......................... 101,681 97,681
Deferred income taxes and investment tax credit, net ... (8,239) (5,687)
Amortization of other assets ........................... 25,893 24,490
Net change in accrued customer rate credits ............ 13,190 (6,988)
Cash inflow of accounts receivable securitization ...... -- 12,877
Impact of changes in working capital ................... 7,458 3,638
Other .................................................. 5,977 (5,094)
--------- ---------
Net cash provided .................................... 234,385 189,591
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................ (74,247) (80,780)
Quad Cities Generating Station decommissioning trust fund (4,150) (4,152)
Nonregulated capital expenditures ........................ (1,845) (38)
Other investing activities, net .......................... (2,801) (2,764)
--------- ---------
Net cash used .......................................... (83,043) (87,734)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ........................................... (92,507) (2,477)
Retirement of long-term debt, including reacquisition cost (287) (110,784)
Reacquisition of preferred securities .................... (13,320) --
Net increase (decrease) in notes payable ................. (41,100) 10,711
--------- ---------
Net cash used .......................................... (147,214) (102,550)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 4,128 (693)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 9,677 5,167
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 13,805 $ 4,474
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ................ $ 32,694 $ 34,395
========= =========
Income taxes paid ........................................ $ 107,217 $ 89,477
========= =========
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 that were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is currently conducting field investigations
at eighteen sites and has conducted interim removal actions at six of the
eighteen sites. In addition, MidAmerican Energy has completed investigations and
removals at four sites. MidAmerican Energy is continuing to evaluate several of
the sites to determine the future liability, if any, for conducting site
investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $22 million to
$68 million. MidAmerican Energy's estimate of the probable cost for these sites
as of June 30, 2001 was $24 million. The estimate consists of $2 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:
In 1997, pursuant to a rate proceeding before the Iowa Utilities Board,
MidAmerican Energy, the Office of Consumer Advocate and other parties entered
into a pricing plan settlement agreement establishing MidAmerican Energy's Iowa
retail electric rates. That settlement agreement expired on December 31, 2000.
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. On June 11, 2001, MidAmerican Energy
responded to that petition by filing a request with the Iowa Utilities Board to
increase MidAmerican Energy's Iowa retail electric rates by $51 million
annually. On July 12, 2001, MidAmerican Energy, the Office of Consumer Advocate
and other parties jointly filed a settlement agreement with the Iowa Utilities
Board that, if approved, will freeze the rates in effect on December 31, 2000,
through December 31, 2005, and, with modifications, will reinstate the revenue
sharing provisions of the 1997 pricing plan settlement agreement. Under the
proposed settlement agreement, 50% of revenues associated with returns on equity
between 12% and 14%, and 83.33% of revenues associated with returns on equity
above 14%, in each year would be deferred as a regulatory liability to be used
to offset a portion of the cost of future generating plant investments.
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 Consolidated
Financial Statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
-9-
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, Regulated Cost of Fuel, Energy and
Capacity or Nonregulated Operating Revenues, depending upon the nature of the
physical transaction being hedged.
For the six months ended June 30, 2001, net gains of $6,000, $16,000 and
$353,000, representing the ineffectiveness of cash flow hedges, are reflected in
Nonregulated Operating Revenues, Cost of Gas Sold and Regulated Cost of Fuel,
Energy and Capacity, respectively. During the twelve months beginning July 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
realized and recorded in 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. For the six months ended June 30, 2001, a net pre-tax loss
of $10,000, representing the ineffectiveness of fair value hedges, is included
in Nonregulated Operating Revenues.
Unrealized gains and losses on derivatives held for trading purposes are
recognized in income each reporting period as Nonregulated Operating Revenues.
As of June 30, 2001, MidAmerican Energy held the following instruments as
hedges:
Notional Unit of Fair Value
Amount Measure Asset (Liability)
------ ------- -----------------
Natural Gas Futures - Net Short 4,930,000 MMBtu $9,904,550
Natural Gas Swaps 418,916 MMBtu (4,465,108)
Natural Gas Options - Long 950,000 MMBtu (1,676,334)
Natural Gas Options - Short 950,000 MMBtu 1,011
Electricity Forward
Contracts - Net Short 305,600 MWh 588,056
A $1/MMBtu increase in the price of natural gas would increase the fair
value of the natural gas instruments by $5.3 million. A $5/MWh increase in
electricity would decrease the fair value of the electricity forwards contracts
by $1.5 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, municipalities and marketers. 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 most 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 Six Months
Ended June 30, Ended June 30
-------------------- ----------------------
2001 2000 2001 2000
-------- -------- ---------- --------
Revenues:
Electric................... $305,800 $281,973 $ 600,190 $560,436
Gas ..................... 87,297 98,153 454,155 278,055
Nonregulated and other (a). 204,593 88,936 431,882 145,423
-------- -------- ---------- --------
$597,690 $469,062 $1,486,227 $983,914
======== ======== ========== ========
Earnings on Common Stock:
Electric................... $ 35,847 $ 26,163 $ 70,282 $ 53,934
Gas ..................... (5,875) 550 12,000 15,388
Nonregulated and other (a). 1,396 (4,076) 3,636 (3,125)
-------- -------- ---------- --------
$ 31,368 $ 22,637 $ 85,918 $ 66,197
======== ======== ========== ========
(a) "Nonregulated and other" consists of nonregulated gas operations, CBEC
Railway and other nonregulated activities.
G. OTHER COMPREHENSIVE INCOME:
For the three months and six months ended June 30, 2001, MidAmerican
Energy's total comprehensive income was $38.4 million and $92.3 million,
respectively. 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 and six months
ended June 30, 2000, there was no difference between MidAmerican Energy's total
comprehensive income and Earnings on Common Stock. Accumulated other
comprehensive income (loss), which also includes recognition of the minimum
pension liability in the fourth quarter of 2000, was $4.0 million and $(2.4)
million as of June 30, 2001, and December 31, 2000.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
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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
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REGULATED GROSS MARGIN
Regulated Electric Gross Margin -
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
Operating revenues................ $306 $282 $600 $560
Cost of fuel, energy and capacity. 60 57 126 115
---- ---- ---- ----
Electric gross margin........... $246 $225 $474 $445
==== ==== ==== ====
Electric gross margin for the second quarter of 2001 increased $21 million
compared to the second quarter of 2000.
MidAmerican Energy's margins on wholesale sales, net of a reserve for
revenue sharing, increased $18.9 million compared to the second quarter of 2000.
Sales volumes for wholesale sales increased 38.8%. Wholesale sales are the sales
of energy to other utilities, municipalities and marketers outside of
MidAmerican Energy's delivery system.
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Temperatures during the three months ended June 30, 2001, were hotter than
temperatures in the second quarter of 2000, resulting in increased usage and a
corresponding $6 million increase in electric margin. Other usage factors not
dependent on weather decreased electric margin by $6.0 million compared to the
second quarter of 2000. In total, retail sales of electricity increased 1.7% for
the three months ended June 30, 2001.
For the six months ended June 30, 2001, compared to the first six months of
2000, electric gross margin increased $29 million.
MidAmerican Energy's margins on wholesale sales, net of a reserve for
revenue sharing, increased $22.2 million compared to the first six months of
2000, and related sales volumes increased 27.5%. 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
six months ended June 30, 2001, reflect a $3.3 million increase in gains from
the sale of emission allowances.
Temperatures during the six months ended June 30, 2001, were more extreme
than temperatures in the six months ended June 30, 2000, resulting in a $15
million increase in electric margin. Other usage factors not dependent on
weather decreased electric margin by $13.2 million compared to the first six
months of 2000. In total, retail sales of electricity increased 1.8% for the six
months ended June 30, 2001.
Regulated Gas Gross Margin -
Three Months Six Months
Ended June 30, Ended June 30,
---------------- --------------
2001 2000 2001 2000
----- ---- ---- ----
(In millions)
Operating revenues. $ 87 $ 98 $454 $278
Cost of gas sold... 53 61 345 173
----- ---- ---- ----
Gas gross margin. $ 34 $ 37 $109 $105
===== ==== ==== ====
Regulated gas revenues include purchase gas adjustment clauses through
which MidAmerican Energy is allowed to recover the cost of gas sold from its
retail 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 six-month period ended June 30, 2001, compared to
the same period in 2000, increased revenues and cost of gas sold by
approximately $150 million.
Gas gross margin decreased $3 million for the second quarter of 2001
compared to the 2000 quarter due primarily to conservation by customers
following the colder-than-normal temperature conditions in the first quarter and
high gas prices. Temperatures during the second quarter of 2001 were warmer than
temperatures in the second quarter of 2000, which also contributed to the
decrease in gas margin. Total gas retail sales decreased 7.0%.
Compared to the first six months of 2000, gas gross margin increased $4
million due primarily to temperature conditions in the first quarter of 2001.
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REGULATED OPERATING EXPENSES
Regulated other operating expenses increased $2.6 million for the second
quarter of 2001 compared to the second quarter of 2000. Increases in the
allowance for uncollectible accounts as a result of the high natural gas prices
and in pension and other post-employment benefits costs accounted for $3.6
million of the increase. This was partially offset by a decrease of $0.8 million
in Cooper Nuclear Station costs.
Regulated other operating expenses decreased $2.9 million for the six
months ended June 30, 2001 compared to the six-month period in 2000. Decreases
in Quad Cities Station and Cooper costs resulted in a $3.8 million decrease in
other operating expenses. Reductions in health care and other benefit costs,
energy efficiency program costs, information technology expenses and assessments
from utility regulatory agencies also contributed to the decrease. The decreases
were partially offset by increases in the allowance for uncollectible accounts
as a result of the high natural gas prices and in pension and other
post-employment benefits costs totaling $7.0 million.
Maintenance expenses for the three and six months ended June 30, 2001,
compared to the 2000 periods increased $1.2 million and $4.3 million,
respectively, due principally to increased electric and gas distribution
expenses. Maintenance expense related to Quad Cities Station decreased for both
2001 periods compared to the respective 2000 periods.
Depreciation and amortization expense increased $1.5 million for the second
quarter of 2001 and $3.9 million for the first six months of 2001 compared to
the respective periods in 2000. The increases were due principally to an
increase in depreciation rates implemented in 2001. An increase in utility plant
also contributed to the increases. The comparative increase for the quarter was
reduced by additional depreciation expense in the second quarter of 2000 due to
the reclassification of transmission plant to distribution plant in conjunction
with the Federal Energy Regulatory Commission's orders on open access
transmission.
Property and other taxes for the three months and six months ended June 30,
2001, decreased $0.6 million and $2.6 million, respectively, relative to their
comparable periods in 2000 due principally to an increase in use taxes in the
second quarter of 2000.
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NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Nonregulated Gross Margin -
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
Operating revenues.. $205 $89 $432 $145
Cost of sales....... 198 83 417 135
---- --- ---- ----
Gross margin...... $ 7 $ 6 $ 15 $ 10
==== === ==== ====
Nonregulated revenues and cost of sales consist substantially of
nonregulated natural gas marketing operations. The nonregulated natural gas
marketing operations include wholesale and retail activities. Approximately 81%
of the nonregulated natural gas revenues for the six months ended June 30, 2001,
are related to wholesale sales.
Revenues from nonregulated natural gas operations increased $114.1 million
to $194.1 million for the second quarter of 2001. An increase in the average
price per unit sold, reflective of a 19% increase in the average cost of gas,
accounted for $32.0 million of the increase in revenues. Sales volumes increased
22 million MMBtus (103%) resulting in an $82.1 million increase in revenues.
Cost of sales increased $111.8 million to $191.3 million for the three months
ended June 30, 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 $2.3 million to $2.8 million for the second quarter of 2001. The
improvement in gross margin reflects an increase in margin per unit and sales
volumes.
Revenues from nonregulated natural gas operations increased $284.7 million
to $410.8 million for the first six months of 2001. An increase in the average
price per unit sold, reflective of a 71% increase in the average cost of gas,
accounted for $169.9 million of the increase in revenues. Sales volumes
increased 35 million MMBtus (91%) resulting in a $114.7 million increase in
revenues. Cost of sales increased $280.5 million to $404.8 million for the six
months ended June 30, 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 $4.2 million to $6.0 million for the first six months of 2001. The
improvement in gross margin reflects an increase in margin per unit and sales
volumes.
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
June 30, 2001, compared to the three months ended June 30, 2000, related
revenues increased $3.2 million, and related cost of sales increased $3.8
million, resulting in a $0.6 million decrease in gross margin. For the six-month
period ended June 30, 2001, revenues increased $5.4 million to $6.8 million, and
related cost of sales increased $4.3 million to $5.4 million, resulting in a
$1.1 million increase in gross margin.
Nonregulated revenues for the second quarter of 2001 include $2.6 million
from MidAmerican Energy's market access service project compared to $4.5 million
in the second 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 related to the market access service project
decreased $1.5 million to $2.1 million for the second quarter of 2001. For the
six-month comparison, revenues from the project totaled $6.2 million and $8.6
million for 2001 and 2000, respectively. The related cost of sales totaled $5.4
million and $8.3 million for 2001 and 2000, respectively.
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MidAmerican Energy's nonregulated revenues in the second quarter of 2001
include $2.1 million of pre-tax income from an award for successful performance
under an incentive gas procurement program. Similar awards of $1.0 million and
$0.9 million were recorded in the first and second quarters of 2000,
respectively.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and Dividend Income -
The increases in interest income for the three-month and six-month periods
were due principally to increases of $2.3 million and $4.9 million,
respectively, for 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.
Other, Net -
Other, Net, which includes a number of non-operating income and deduction
items, decreased Non-Operating Income by $4.0 million and $1.9 million in the
three months ended June 30, 2001 and 2000, respectively. Other, Net reduced
Non-Operating Income by $8.0 million and $4.1 million for the six-month periods
ended June 30, 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 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 $3.3 million and $2.2 million in
the second quarter of 2001 and 2000, respectively, and by $8.8 million and $4.4
million for the six months ended June 30, 2001 and 2000, respectively.
Income related to corporate-owned life insurance policies decreased $0.7
million and $1.1 million in the three months and six months ended June 30, 2001,
respectively, compared to the same periods in 2000. Income from equity
investments decreased $0.6 million compared to the second quarter of 2000.
Other, Net for the first six months of 2001 reflects a $1.4 million gain on
the sale of MidAmerican Energy rail cars.
Fixed Charges -
The increase in interest on long-term debt in 2001 compared to the
respective periods in 2000 was due to interest on $162 million of MidAmerican
Energy medium-term notes issued in July 2000, net of the impact of maturities of
long-term debt in 2000.
Other interest expense decreased in the 2001 periods compared to the
respective periods in 2000 due principally to a reduction in short-term debt
outstanding. Additionally, the second quarter of 2000 includes $0.6 million of
interest related to a gas supplier refund that is refundable to customers. These
decreases were partially offset by interest related to a federal income tax
assessment.
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LIQUIDITY AND CAPITAL RESOURCES
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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 $234 million and $190
million for the six months ended June 30, 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 six months of 2001, utility construction
expenditures totaled $74 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. Capital expenditure needs
are reviewed regularly by management and may change significantly as a result of
such reviews. On July 10, 2001, MidAmerican Energy announced plans to develop
and construct two electric generating plants in Iowa, requiring an investment of
approximately $1.5 billion. Participation by others in a portion of the second
plant is being discussed. The two plants will provide approximately 1,400
megawatts of generating capacity. MidAmerican Energy expects to begin
construction in Spring 2002 on the first project, a 540-megawatt natural
gas-fired combined cycle unit which has an estimated cost of $340 million. It is
anticipated that the first phase of the project will be completed in 2003 with
the remainder being completed in 2005. MidAmerican Energy presently expects that
all utility construction expenditures for the next five years will be met with
the issuance of long-term debt and 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 60% 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. 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
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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 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 June 30, 2001, the
revolving cash balance was $70 million, and the amount outstanding under the
subordinated note was $121.8 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 June 30, 2001, $191.3
million of accounts receivable, net of reserves, were sold under the agreement.
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OPERATING ACTIVITIES AND OTHER MATTERS
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.
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
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 required by SFAS 71, but its
applicability is periodically reexamined. If portions of its utility operations
no longer meet the criteria of SFAS 71, MidAmerican Energy could be required to
write off the related regulatory assets and liabilities from its balance sheet,
and thus, a material adjustment to earnings in that period could result if
regulatory assets are not recovered in transition provisions of any resulting
legislation. As of June 30, 2001, MidAmerican Energy had $223.4 million of
regulatory assets and $9.4 million of regulatory liabilities on its Consolidated
Balance Sheet.
Energy Efficiency -
MidAmerican Energy's regulatory assets as of June 30, 2001, included $9.6
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
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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 -
In 1997, pursuant to a rate proceeding before the Iowa Utilities Board,
MidAmerican Energy, the Office of Consumer Advocate and other parties entered
into a pricing plan settlement agreement establishing MidAmerican Energy's Iowa
retail electric rates. That settlement agreement expired on December 31, 2000.
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. On June 11, 2001, MidAmerican Energy
responded to that petition by filing a request with the Iowa Utilities Board to
increase MidAmerican Energy's Iowa retail electric rates by $51 million
annually. On July 12, 2001, MidAmerican Energy, the Office of Consumer Advocate
and other parties jointly filed a settlement agreement with the Iowa Utilities
Board that, if approved, will freeze the rates in effect on December 31, 2000,
through December 31, 2005, and, with modifications, will reinstate the revenue
sharing provisions of the 1997 pricing plan settlement agreement. Under the
proposed settlement agreement, 50% of revenues associated with returns on equity
between 12% and 14%, and 83.33% of revenues associated with returns on equity
above 14%, in each year would be deferred as a regulatory liability to be used
to offset a portion of the cost of future generating plant investments.
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 that were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy's estimate of the probable costs for these
sites as of June 30, 2001, was $24 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.
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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 system
peak demand.
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. MidAmerican Energy has announced plans to add a
540-megawatt natural gas fired combined cycle unit to be completed in two phases
between 2003 and 2005. An additional 900 megawatts of coal-fired generation is
expected to be operational later this decade. 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.
As a result of the 1997 pricing settlement agreement's elimination of the
energy adjustment clause in Iowa, MidAmerican Energy is financially exposed to
movements in energy prices. Although MidAmerican Energy believes it 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.
MidAmerican Energy has been able to maintain its capacity reserve
requirement and has not been adversely affected by seasonal high prices in the
wholesale market.
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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.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets" which establish accounting
and reporting for business combinations. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001, to be accounted for using
the purchase method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized but will be tested
for impairment on an annual basis. These standards are effective for MidAmerican
Energy beginning on January 1, 2002. MidAmerican Energy does not anticipate any
impact on its results of operations, cash flows or financial condition as a
result of the adoption of these standards.
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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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MidAmerican Energy and its subsidiaries have no material legal proceedings
except for the following:
Environmental Matters
- ---------------------
For information 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;
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(6) that MidAmerican Energy has no duty to pay for nuclear fuel,
operations and maintenance projects or capital improvements that have
useful lives after the term of the power purchase agreement;
(7) that transition costs are not included in any decommissioning costs
and expenses;
(8) that Nebraska Public Power District has breached its duty to
MidAmerican Energy in making investments of decommissioning funds;
(9) that reserves in named accounts are excessive and should be refunded
to MidAmerican Energy; and
(10) that Nebraska Public Power District must credit MidAmerican Energy for
payments by MidAmerican Energy for low-level radioactive waste
disposal.
On October 6, 1999, the court rendered summary judgment for Nebraska Public
Power District on the above-mentioned issue concerning liability for
decommissioning (issue one in the first paragraph above) and the related
contingent counterclaims filed by MidAmerican Energy (issues one, two, three and
five in the second paragraph above). The court referred all remaining issues in
the case to mediation, and cancelled the November 1999 trial date.
MidAmerican Energy 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 on issues one and five in the second paragraph above.
Additionally, it remanded the case for trial on all other claims and
counterclaims.
Since the remand to the District Court from the Eighth Circuit Court of
Appeals, the Nebraska Public Power District has been granted permission, over
MidAmerican Energy's objections, to amend its complaint. The amended complaint
asserts that even though the Eighth Circuit Court of Appeals held that
MidAmerican Energy has no liability under the power purchase agreement to
reimburse or pay the Nebraska Public Power District a 50% share of
decommissioning costs unless certain conditions occur, MidAmerican Energy has
unconditional liability for a 50% share based on agreements other than the power
purchase agreement as originally written. The Nebraska Public Power District's
post-remand contentions -- all strongly disputed by MEC -- are that MidAmerican
Energy has unconditional liability for a 50% share of decommissioning based on
any of the following alternative theories: (i) the parties without written
amendment either modified the power purchase agreement or made a separate
agreement that imposes unconditional liability on MidAmerican Energy for
decommissioning costs; (ii) absent unconditional liability for a 50% share of
decommissioning costs, MidAmerican Energy would be unjustly enriched; (iii)
MidAmerican Energy has unconditional liability for a 50% share of
decommissioning costs based on promissory estoppel; or (iv) Nebraska Public
Power District is entitled to have the power purchase agreement reformed to
provide that MidAmerican Energy has unconditional liability for a 50% share of
decommissioning costs. MidAmerican Energy will strongly dispute at trial these
contentions and theories put forth by the Nebraska Public Power District. Trial
in these matters is scheduled to begin on March 4, 2002.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(A) EXHIBITS
Exhibit 15 - Awareness Letter of Independent Accountants
(B) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY COMPANY
--------------------------------------------
(Registrant)
Date August 10, 2001 /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
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