UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 October 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............................................ 25
ITEM 6. Exhibits and Reports on Form 8-K............................. 27
Signatures.............................................................. 28
Exhibit Index........................................................... 29
-2-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Company and subsidiaries (the Company) as of September 30, 2001, and the
related consolidated statements of income for the three-month and nine-month
periods ended September 30, 2001 and 2000, and the related consolidated
statements of cash flows for the nine-month periods ended September 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 (not presented herein) 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
October 26, 2001
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
OPERATING REVENUES
Regulated electric .................... $ 386,674 $ 359,430 $ 986,864 $ 919,866
Regulated gas ......................... 56,354 71,573 510,509 349,628
Nonregulated .......................... 108,291 122,430 540,173 267,853
----------- ----------- ----------- -----------
551,319 553,433 2,037,546 1,537,347
----------- ----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 88,322 68,062 214,528 183,551
Cost of gas sold .................... 24,729 39,029 369,914 211,581
Other operating expenses ............ 113,362 102,906 315,247 307,660
Maintenance ......................... 34,735 29,761 93,681 84,438
Depreciation and amortization ....... 50,260 48,062 151,715 145,596
Property and other taxes ............ 17,614 18,380 53,431 56,789
----------- ----------- ----------- -----------
329,022 306,200 1,198,516 989,615
----------- ----------- ----------- -----------
Nonregulated:
Cost of sales ....................... 104,233 118,409 521,245 252,994
Other ............................... 4,724 5,609 13,255 14,479
----------- ----------- ----------- -----------
108,957 124,018 534,500 267,473
----------- ----------- ----------- -----------
Total operating expenses .............. 437,979 430,218 1,733,016 1,257,088
----------- ----------- ----------- -----------
OPERATING INCOME ...................... 113,340 123,215 304,530 280,259
----------- ----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .......... 3,051 4,594 11,339 7,179
Other, net ............................ (1,944) (1,924) (9,911) (5,984)
----------- ----------- ----------- -----------
1,107 2,670 1,428 1,195
----------- ----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............ 14,803 15,929 46,471 44,316
Other interest expense ................ 1,448 1,176 5,195 8,177
Preferred dividends of subsidiary trust 1,995 1,995 6,047 6,047
Allowance for borrowed funds .......... (351) (467) (1,104) (1,220)
----------- ----------- ----------- -----------
17,895 18,633 56,609 57,320
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 96,552 107,252 249,349 224,134
INCOME TAXES .......................... 39,988 42,821 104,360 91,029
----------- ----------- ----------- -----------
NET INCOME ............................ 56,564 64,431 144,989 133,105
PREFERRED DIVIDENDS ................... 976 1,239 3,483 3,716
----------- ----------- ----------- -----------
EARNINGS ON COMMON STOCK .............. $ 55,588 $ 63,192 $ 141,506 $ 129,389
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
---------------------------
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ............................................. $4,548,164 $4,471,839
Gas .................................................. 852,585 831,203
---------- ----------
5,400,749 5,303,042
Less accumulated depreciation and amortization ....... 2,816,103 2,680,420
---------- ----------
2,584,646 2,622,622
Construction work in progress ........................ 68,826 38,584
---------- ----------
2,653,472 2,661,206
---------- ----------
POWER PURCHASE CONTRACT .............................. 76,516 82,231
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................ 125,207 9,677
Receivables .......................................... 129,626 422,661
Inventories .......................................... 54,017 69,130
Prepaid taxes ........................................ 23,956 22,889
Other ................................................ 11,866 9,789
---------- ----------
344,672 534,146
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ........... 264,082 256,053
REGULATORY ASSETS .................................... 218,072 240,934
OTHER ASSETS ......................................... 70,160 48,996
---------- ----------
TOTAL ASSETS ......................................... $3,626,974 $3,823,566
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .......................... $1,219,240 $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) ........... 657,026 820,082
---------- ----------
2,044,705 2,163,809
---------- ----------
CURRENT LIABILITIES
Notes payable ........................................ -- 81,600
Current portion of long-term debt .................... 263,480 101,600
Current portion of power purchase contract ........... 16,554 16,554
Accounts payable ..................................... 136,974 308,784
Taxes accrued ........................................ 104,148 124,493
Interest accrued ..................................... 14,914 12,016
Other ................................................ 33,651 34,667
---------- ----------
569,721 679,714
---------- ----------
OTHER LIABILITIES
Power purchase contract .............................. 35,728 35,728
Deferred income taxes ................................ 535,944 540,608
Investment tax credit ................................ 62,521 66,209
Other ................................................ 378,355 337,498
---------- ----------
1,012,548 980,043
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ................. $3,626,974 $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)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2001 2000
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 144,989 $ 133,105
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .......................... 152,226 145,816
Deferred income taxes and investment tax credit, net ... (12,374) (8,780)
Amortization of other assets ........................... 37,268 37,059
Net change in accrued customer rate credits ............ 16,869 (1,675)
Cash inflow of accounts receivable securitization ...... -- 12,877
Impact of changes in working capital ................... 114,731 676
Other .................................................. 7,330 8,821
--------- ---------
Net cash provided .................................... 461,039 327,899
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................ (150,867) (119,447)
Quad Cities Generating Station decommissioning trust fund (6,224) (6,227)
Nonregulated capital expenditures ........................ (1,984) (87)
Other investing activities, net .......................... 3,529 (359)
--------- ---------
Net cash used .......................................... (155,546) (126,120)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ........................................... (93,483) (3,716)
Issuance of long-term debt, net of issuance cost ......... -- 161,156
Retirement of long-term debt, including reacquisition cost (1,560) (110,825)
Reacquisition of preferred securities .................... (13,320) --
Net decrease in notes payable ............................ (81,600) (204,000)
--------- ---------
Net cash used .......................................... (189,963) (157,385)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 115,530 44,394
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 9,677 5,167
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 125,207 $ 49,561
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ................ $ 42,692 $ 43,984
========= =========
Income taxes paid ........................................ $ 166,537 $ 109,677
========= =========
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, as amended.
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 September 30, 2001 was $24 million. The estimate consists of $3 million
for investigation costs, $8 million for remediation costs, $11 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 increase operating costs and decrease wholesale electric
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 proposed settlement 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, 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. The Iowa Utilities
Board held a public hearing on the proposed settlement in October 2001, and
interested parties submitted briefs thereafter. The Iowa Utilities Board's
decision on approving the proposed settlement is pending.
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.
On September 21, 2001, MidAmerican Energy filed a petition with the South
Dakota Public Utilities Commission (SDPUC) to increase its South Dakota natural
gas rates by $3.7 million annually. Under South Dakota law, the SDPUC may
suspend the new rates for up to six months during the pendency of rate
proceedings.
-9-
On October 19, 2001 MidAmerican Energy filed a petition with the Illinois
Commerce Commission to increase its Illinois natural gas rates by $3.2 million
annually. A final decision on the petition is required within eleven months of
the date of filing.
D. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
MidAmerican Energy's utility operations are subject to the regulation of
the Iowa Utilities Board, the Illinois Commerce Commission, the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission.
MidAmerican Energy's accounting policies and the accompanying Consolidated
Financial Statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
A possible consequence of deregulation in the utility industry is that
Statement of Financial Accounting Standards No. 71 (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. 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 deregulation 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 enters into derivative financial instruments, including
futures, swaps, options and forward contracts, 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 reduce natural gas price volatility for regulated gas customers.
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. From time
to time, MidAmerican Energy also enters into derivative financial instruments
for trading purposes to profit from changing prices for natural gas and
electricity or to take advantage of 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, Regulated Cost of Fuel, Energy and Capacity or Nonregulated
Operating Revenues, depending upon the nature of the physical transaction being
hedged.
-10-
For the nine months ended September 30, 2001, net gains $2,000 and $43,000,
representing the ineffectiveness of cash flow hedges, are reflected in Cost of
Gas Sold and Regulated Cost of Fuel, Energy and Capacity, respectively. During
the twelve months beginning October 1, 2001, it is anticipated that $4.9 million
of the $5.7 million after-tax net unrealized gains on cash flow hedges presently
recorded as accumulated other comprehensive income will be realized and recorded
in earnings. MidAmerican Energy has hedged a portion of its exposure to the
variability of cash flows for future transactions through December 2002.
Unrealized gains and losses on fair value hedges are recognized in income
as either Nonregulated Operating Revenues 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 hedges on
earnings. For the nine months ended September 30, 2001, a net pre-tax gain of
$3,000, 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.
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 Nine Months
Ended September 30, Ended September 30
------------------- -----------------------
2001 2000 2001 2000
-------- -------- ---------- ----------
Revenues:
Electric..................... $386,674 $359,430 $ 986,864 $ 919,866
Gas ....................... 56,354 71,573 510,509 349,628
Nonregulated and other (a)... 108,291 122,430 540,173 267,853
-------- -------- ---------- ----------
$551,319 $553,433 $2,037,546 $1,537,347
======== ======== ========== ==========
Earnings on Common Stock:
Electric..................... $ 63,522 $ 69,765 $ 133,804 $ 123,699
Gas ....................... (7,516) (4,586) 4,484 10,802
Nonregulated and other (a)... (418) (1,987) 3,218 (5,112)
-------- -------- ---------- ----------
$ 55,588 $ 63,192 $ 141,506 $ 129,389
======== ======== ========== ==========
(a) "Nonregulated and other" consists of nonregulated gas operations, CBEC
Railway and other nonregulated activities.
G. OTHER COMPREHENSIVE INCOME:
For the three months and nine months ended September 30, 2001, MidAmerican
Energy's total comprehensive income was $54.8 million and $147.2 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 nine months
ended September 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 $3.3 million and $(2.4)
million as of September 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
Operating revenues................ $387 $359 $987 $920
Cost of fuel, energy and capacity. 88 68 215 184
---- ---- ---- ----
Electric gross margin........... $299 $291 $772 $736
==== ==== ==== ====
Electric gross margin for the third quarter of 2001 increased $8 million
compared to the third quarter of 2000.
MidAmerican Energy's margins on wholesale sales, net of a reserve for
revenue sharing, increased $28.1 million compared to the third quarter of 2000.
Sales volumes for wholesale sales increased 4.4%. Wholesale sales are the sales
of energy to other utilities, municipalities and marketers outside of
MidAmerican Energy's delivery system.
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An increase in fuel costs per unit for Iowa retail customers reduced
electric gross margin by $20.4 million for the third quarter of 2001 compared to
the third quarter of 2000. Usage factors not dependent on weather decreased
electric margin by $2.0 million compared to the third quarter of 2000. A
fluctuation in temperature conditions accounted for an approximate $1 million
increase in gross margin compared to the third quarter of 2000. In total, retail
sales of electricity increased 1.7% for the three months ended September 30,
2001.
For the nine months ended September 30, 2001, compared to the first nine
months of 2000, electric gross margin increased $36 million.
MidAmerican Energy's margins on wholesale sales, net of a reserve for
revenue sharing, increased $50.2 million compared to the first nine months of
2000, and related sales volumes increased 20.4%. Revenues from electric
transmission services increased $4.0 million for the 2001 nine-month period
compared to the 2000 nine-month period due to additional revenue from
Mid-Continent Area Power Pool. Additionally, electric revenues for the nine
months ended September 30, 2001, reflect a $3.3 million increase in gains from
the sale of emission allowances.
Temperatures during the nine months ended September 30, 2001, were more
extreme than temperatures in the nine months ended September 30, 2000, resulting
in a $16 million increase in electric margin. Other usage factors not dependent
on weather decreased electric margin by $15.3 million compared to the first nine
months of 2000. An increase in fuel costs per unit for Iowa retail customers
reduced electric margin by $21.9 million for the nine months ended September 30,
2001, compared to the nine months ended September 30, 2000. In total, retail
sales of electricity increased 1.8% for the nine months ended September 30,
2001.
Regulated Gas Gross Margin -
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(In millions)
Operating revenues.... $ 56 $ 72 $511 $350
Cost of gas sold...... 25 39 370 212
---- ---- ---- ----
Gas gross margin.... $ 31 $ 33 $141 $138
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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 nine-month period ended September 30, 2001,
compared to the same period in 2000, increased revenues and cost of gas sold by
approximately $136 million.
Gas gross margin decreased $2 million for the third quarter of 2001
compared to the 2000 quarter due to conservation by customers and a fluctuation
in temperature conditions. Total gas retail sales decreased 6.0%.
Compared to the first nine months of 2000, gas gross margin increased $3
million due to the colder-than-normal temperature conditions in the first
quarter of 2001, offset partially by conservation by customers due to high
natural gas prices.
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REGULATED OPERATING EXPENSES
Regulated other operating expenses increased $10.5 million for the third
quarter of 2001 compared to the third quarter of 2000. Increases include a $3.9
million increase in the allowance for uncollectible accounts as a result of the
high natural gas prices, a $3.0 million increase in health care benefits costs
and a $2.6 million increase in pension and other post-employment benefits costs.
Regulated other operating expenses increased $7.6 million for the nine
months ended September 30, 2001 compared to the nine-month period in 2000.
Increases include a $7.2 million increase in the allowance for uncollectible
accounts as a result of the high natural gas prices, a $6.2 million increase in
pension and other post-employment benefits costs and a $3.4 million increase in
electric distribution expense. The increases were partially offset by reductions
in Quad Cities Station operating expenses, electric transmission expense, Cooper
Nuclear Station costs, energy efficiency program costs, information technology
expenses and assessments from utility regulatory agencies.
Maintenance expenses for the three months ended September 30, 2001,
increased $5.0 million compared to the 2000 period due principally to an
increase in fossil fuel generating plant maintenance costs. For the nine months
ended September 30, 2001, compared to the nine months ended September 30, 2000,
maintenance expenses increased $9.2 million. Electric distribution maintenance
increased $4.4 million in part due to a more aggressive tree-trimming program.
Fossil fuel generating plant maintenance expense increased $3.8 million, while
maintenance costs for Quad Cities Station (nuclear) decreased $2.9 million. Gas
distribution system maintenance increased $1.9 million and maintenance costs for
general plant increased $1.3 million.
Depreciation and amortization expense increased $2.2 million for the third
quarter of 2001 and $6.1 million for the first nine 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.
Property and other taxes for the three months and nine months ended
September 30, 2001, decreased $0.8 million and $3.4 million, respectively,
relative to their comparable periods in 2000 due principally to a decrease in
Iowa property taxes. For the nine-month comparision, the 2000 period included an
accrual for use taxes, which increased total taxes for that period.
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NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Nonregulated Gross Margin -
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(In millions)
Operating revenues... $108 $122 $540 $268
Cost of sales........ 104 118 521 253
---- ---- ---- ----
Gross margin.... $ 4 $ 4 $ 19 $ 15
==== ==== ==== ====
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 82%
of the nonregulated natural gas revenues for the nine months ended September 30,
2001, are related to wholesale sales.
Gross margin for the nonregulated natural gas operations increased $0.4
million to $1.4 million for the third quarter of 2001. The improvement in gross
margin reflects an increase in sales volumes partially offset by a decrease in
margin per unit. Revenues from nonregulated natural gas operations decreased for
the third quarter of 2001 compared to the third quarter of 2000 due to a
decrease in the average price per unit sold, reflective of a 34% decrease in the
average cost of gas. The decrease in price per unit was offset partially by an
increase in sales volumes of 12 million MMBtus (48%). Cost of sales decreased
for the three months ended September 30, 2001, due to the variances in the
per-unit cost of gas sold and sales volumes.
Gross margin for the nonregulated natural gas operations increased $4.6
million to $7.4 million for the first nine months of 2001 compared to the first
nine months of 2000. The improvement in gross margin reflects an increase in
margin per unit and sales volumes. Revenues from nonregulated natural gas
operations increased $281.8 million for the first nine months of 2001. An
increase in the average price per unit sold, reflective of a 25% increase in the
average cost of gas, accounted for $105.3 million of the increase in revenues.
Sales volumes increased 47 million MMBtus (74%) resulting in a $176.5 million
increase in revenues. Cost of sales increased $277.2 million for the nine months
ended September 30, 2001, due to the increases in the per-unit cost of gas sold
and sales volumes.
As of December 31, 2000, all non-residential customers in Illinois had been
phased in to allow them to select their electric power supplier. For the three
months ended September 30, 2001, compared to the three months ended September
30, 2000, gross margin related to these sales decreased $0.2 million while gross
margin for the nine-month period ended September 30, 2001, increased $0.8
million.
Nonregulated revenues for the third quarter of 2000 included $4.8 million
from MidAmerican Energy's market access service project. The pilot project which
concluded in May 2001, allowed larger Iowa customers that were 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 totaled $4.2 million
for the third quarter of 2000. For the nine-month comparison, revenues from the
project totaled $6.2 million and $13.4 million for 2001 and 2000, respectively;
the related cost of sales totaled $5.4 million and $12.5 million for 2001 and
2000, respectively.
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MidAmerican Energy's nonregulated revenues in the third quarter of 2001
include $1.9 million from an award for successful performance under an incentive
gas procurement program. Awards totaled $4.1 million and $1.9 million for the
first nine months of 2001 and 2000, respectively.
MidAmerican Energy's nonregulated revenues for the 2000 periods include
revenues for nonregulated transmission and distribution services, some of which
are now performed by affiliated companies. The revenues totaled $1.9 million in
the third quarter of 2000 and $4.3 million in the nine months ended September
30, 2000.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and Dividend Income -
Interest income decreased $1.5 million for the three-month period ended
September 30, 2001, and increased $4.2 million for the nine-month period ended
September 30, 2001, relative to their comparable periods in 2000. A decrease in
interest from a joint plant operator for funds held by it reduced interest
income by approximately $2.3 million for each of the 2001 periods presented.
Interest income increased $1.0 million and $5.9 million in the three-month and
nine-month periods, 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. A
reduction in interest rates also reduced interest income for the periods.
Other, Net -
Other, Net, which includes a number of non-operating income and deduction
items, decreased Non-Operating Income by $1.9 million for the three months ended
September 30 in both 2001 and 2000. Other, Net reduced Non-Operating Income by
$9.9 million for the nine-month period ended September 30, 2001, and $6.0
million for the nine-month period ended September 30, 2000.
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 $3.1 million and $2.5 million in
the third quarter of 2001 and 2000, respectively, and by $11.9 million and $6.9
million for the nine months ended September 30, 2001 and 2000, respectively.
Other, Net for the first nine months of 2001 reflects a $1.4 million gain
on the sale of MidAmerican Energy rail cars.
Income related to corporate-owned life insurance policies decreased $0.2
million and $1.2 million in the three months and nine months ended September 30,
2001, respectively, compared to the same periods in 2000.
Other, Net, for the 2001 quarter and nine months ended September 30,
reflects $0.8 million of income for an allowance for equity funds used during
construction. As a regulated public utility, MidAmerican Energy is allowed to
capitalize, and record as income, a cost of construction for equity funds used,
based on guidelines set forth by the Federal Energy Regulatory Commission.
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Fixed Charges -
The decrease in interest on long-term debt for the third quarter of 2001
compared to the third quarter of 2000 is due to maturities of long-term debt and
lower interest rates on variable rate debt. The increase in interest on
long-term debt for the nine months ended September 30, 2001, compared to the
nine-month period in 2000 is due to interest on $162 million of MidAmerican
Energy medium-term notes issued in July 2000, net of the impact of maturities in
2000 of long-term debt and lower interest rates.
Other interest expense increased $0.3 million in the third quarter of 2001
compared to the third quarter of 2000 due to interest related to a state income
tax assessment in 2001. The increase was partially offset by a decrease in
interest due to a reduction in short-term debt outstanding. Other interest
expense decreased $3.0 million in the nine-months ended September 30, 2001,
compared to the nine-month period in 2000 due to a reduction in short-term debt
outstanding. Additionally, the 2000 period 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 state and federal income
tax assessments in 2001.
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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 $461 million and $328
million for the nine months ended September 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 nine months of 2001, utility construction
expenditures totaled $151 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 $368 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 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. 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 September 30, 2001, the
revolving cash balance was $70 million, and the amount outstanding under the
subordinated note was $76.3 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 September 30, 2001,
$146.1 million of accounts receivable, net of reserves, were sold under the
agreement.
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Other Financing Information -
MidAmerican Energy may from time to time seek to retire its outstanding
debt through cash purchases and/or exchanges for equity securities, in open
market purchases, privately negotiated transactions or otherwise. The
repurchases or exchanges, if any, will depend on prevailing market conditions,
MidAmerican Energy's liquidity requirements, contractual restrictions and other
factors. The amounts involved may be material.
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 (FERC) 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 FERC a plan for
MidAmerican Energy to comply with Order No. 2000 by participating in the
formation of a for-profit independent transmission company. On September 28,
2001, MidAmerican Energy and five other electric utilities filed with the FERC a
plan to create TRANSLink Transmission Co. LLC and integrate their electric
transmission systems into a single, coordinated system.
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. 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 deregulation
legislation.
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As of September 30, 2001, MidAmerican Energy had $218.1 million of regulatory
assets and $9.5 million of regulatory liabilities on its Consolidated Balance
Sheet.
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 proposed settlement 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, 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. The Iowa Utilities
Board held a public hearing on the proposed settlement in October 2001, and
interested parties submitted briefs thereafter. The Iowa Utilities Board's
decision on approving the proposed settlement is pending.
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.
On September 21, 2001, MidAmerican Energy filed a petition with the South
Dakota Public Utilities Commission (SDPUC) to increase its South Dakota natural
gas rates by $3.7 million annually. Under South Dakota law, the SDPUC may
suspend the new rates for up to six months during the pendency of rate
proceedings.
On October 19, 2001 MidAmerican Energy filed a petition with the Illinois
Commerce Commission to increase its Illinois natural gas rates by $3.2 million
annually. A final decision on the petition is required within eleven months of
the date of filing.
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.
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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 September 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.
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 (MAPP). 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 2003 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 price variations in
the wholesale market.
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ACCOUNTING ISSUES
In June 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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses the accounting for legal obligations
associated with the retirement of tangible, long-lived assets and the associated
asset retirement costs. This pronouncement is effective for years beginning
after June 15, 2002. MidAmerican Energy is evaluating the impact that adoption
of this standard will have on its 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.
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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
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For information on MidAmerican Energy's environmental matters, reference is
made to Note B of Notes to Consolidated Financial Statements.
Cooper Litigation
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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
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(A) EXHIBITS
Exhibit 15 - Awareness Letter of Independent Accountants
(B) REPORTS ON FORM 8-K
On July 10, 2001, MidAmerican Energy filed a Current Report on Form 8-K
dated July 10, 2001, announcing its plan to develop and construct two electric
generating plants in Iowa, representing an investment of $1.5 billion. It also
announced that it had agreed upon a proposed settlement of its pending Iowa
electric rate proceeding, subject to approval by the Iowa Utilities Board. The
related press release dated July 10, 2001, was included as an exhibit.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY COMPANY
---------------------------------
(Registrant)
Date November 9, 2001 /s/ Patrick J. Goodman
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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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