UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
333-90553 MIDAMERICAN FUNDING, LLC 47-0819200
(AN IOWA LIMITED LIABILITY COMPANY)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
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: None
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
(Title of each Class)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrants (1) have 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sect. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants' knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12-b-2 of the Act). Yes [ ] No [X]
All of the member's equity of MidAmerican Funding, LLC is held by its parent
company, MidAmerican Energy Holdings Company, as of February 1, 2004.
All common stock of MidAmerican Energy Company is held by its parent company,
MHC Inc., which is a direct, wholly owned subsidiary of MidAmerican Funding,
LLC. As of February 1, 2004, 70,980,203 shares of MidAmerican Energy Company
common stock, without par value, were outstanding.
MidAmerican Funding, LLC and MidAmerican Energy Company meet the conditions set
forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format specified in General
Instruction I(2) of Form 10-K.
-2-
MidAmerican Funding, LLC ("MidAmerican Funding"), and MidAmerican Energy Company
("MidAmerican Energy"), separately file this combined Form 10-K/A. Information
relating to each individual registrant is filed by such registrant on its own
behalf. Except for its subsidiaries, MidAmerican Energy makes no representation
as to information relating to any other subsidiary of MidAmerican Funding.
TABLE OF CONTENTS
Page
PART I
Item 1. Business...........................................................4
Item 2. Properties........................................................20
Item 3. Legal Proceedings.................................................21
Item 4. Submission of Matters to Vote of Security Holders.................21
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.................21
Item 6. Selected Financial Data...........................................22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........46
Item 8. Financial Statements and Supplementary Data.......................50
Item 9. Changes in and Disagreements with Accountants on Accounting......107
Item 9A. Controls and Procedures..........................................107
PART III
Item 10. Directors and Executive Officers of the Registrant...............108
Item 11. Executive Compensation...........................................110
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................110
Item 13. Certain Relationships and Related Transactions...................110
Item 14. Principal Accountant Fees and Services...........................111
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................................112
Signatures..................................................................115
Exhibit Index...............................................................117
EXPLANATORY NOTE
MidAmerican Funding and MidAmerican Energy originally filed a combined Annual
Report on Form 10-K on February 9, 2004. In accordance with accounting guidance
issued subsequent to that date, the originally filed Annual Report on Form 10-K
is being amended to reflect the reclassification of 2002 and prior years'
regulatory liabilities for the cost of removal of utility plant previously
recognized within accumulated depreciation as a separate regulatory liability.
This amendment does not reflect events occurring after the original filing of
the Form 10-K or modify or update those disclosures except as stated in the
preceding sentence.
-3-
PART I
ITEM 1. BUSINESS
MidAmerican Funding, LLC ("MidAmerican Funding"), is an Iowa limited liability
company that was formed in March 1999. Its sole member is MidAmerican Energy
Holdings Company ("MidAmerican Energy Holdings"). MidAmerican Funding owns all
of the outstanding common stock of MHC Inc., which owns all of the common stock
of MidAmerican Energy Company ("MidAmerican Energy"); InterCoast Capital Company
("InterCoast Capital", formerly named MidAmerican Capital Company); Midwest
Capital Group, Inc. ("Midwest Capital"); MidAmerican Services Company
("MidAmerican Services"); and MEC Construction Services Co. ("MEC
Construction"). MidAmerican Energy is a public utility company headquartered in
Des Moines, Iowa, and incorporated in the state of Iowa.
On March 12, 1999, MHC, formerly MidAmerican Energy Holdings Company, completed
a merger transaction with CalEnergy Company, Inc. On that date, MidAmerican
Funding, which was formed by CalEnergy Company, Inc. as a single member limited
liability company, acquired MHC. Also on that date, CalEnergy Company, Inc. was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings Company. As a result of this transaction, MHC and its subsidiaries,
including MidAmerican Energy, became wholly owned subsidiaries of MidAmerican
Funding. MHC, MidAmerican Funding and MidAmerican Energy Holdings Company are
exempt public utility holding companies headquartered in Des Moines, Iowa.
MidAmerican Energy Holdings is a privately owned company with publicly traded
fixed-income securities and is owned by an investor group consisting of
Berkshire Hathaway Inc., Walter Scott, Jr., David L. Sokol and Gregory E. Abel.
FORWARD-LOOKING STATEMENTS
This annual report contains statements that do not directly or exclusively
relate to historical facts. Such statements are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can typically be identified by the use of
forward-looking words, such as "may," "will," "could," "project," "believe,"
"anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast,"
and similar terms. These statements represent MidAmerican Funding's and/or
MidAmerican Energy's intentions, plans, expectations and beliefs and are subject
to risks, uncertainties and other factors. Many of these factors are outside the
control of MidAmerican Funding or MidAmerican Energy and could cause actual
results to differ materially from such forward-looking statements. These factors
include, among others:
- general economic and business conditions in the United States as a
whole and in the midwestern United States and MidAmerican Energy's
service territory in particular;
- governmental, statutory, regulatory or administrative initiatives;
- weather effects on sales and revenues;
- general industry trends;
- increased competition in the power generation industry;
- fuel and power costs and availability;
- changes in business strategy, development plans or vendor
relationships;
- availability, term and deployment of capital;
-4-
- availability of qualified personnel;
- unscheduled generation outages or repairs;
- risks relating to nuclear generation;
- financial or regulatory accounting principles or policies imposed by
the Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and similar
entities with regulatory oversight;
- other risks or unforeseen events, including wars, the effects of
terrorism, embargoes and other catastrophic events; and
- other business or investment considerations that may be disclosed from
time to time in MidAmerican Funding's or MidAmerican Energy's
Securities and Exchange Commission filings or in other publicly
disseminated written documents.
MidAmerican Funding and MidAmerican Energy undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The foregoing review of factors should
not be construed as exhaustive.
MIDAMERICAN FUNDING AND MHC
---------------------------
MidAmerican Funding conducts no business other than activities related to the
issuance of its debt securities and the ownership of MHC.
MHC conducts no business other than the ownership of its subsidiaries. MHC's
interests include 100% of the common stock of MidAmerican Energy, InterCoast
Capital, Midwest Capital, MidAmerican Services and MEC Construction. MidAmerican
Energy is primarily engaged in the business of generating, transmitting,
distributing and selling electric energy and in distributing, selling and
transporting natural gas. It accounts for the predominant part of MHC's assets
and earnings. InterCoast Capital manages equipment leases and other passive
investment activities. Midwest Capital functions as a regional business
development company in MidAmerican Energy's service territory. MidAmerican
Services provides comprehensive energy services to commercial and industrial
companies, and MEC Construction provides nonregulated utility construction
services.
Substantially all of MidAmerican Funding's operating revenues are from
MidAmerican Energy. Financial information on MidAmerican Funding's segments of
business is included in Note (12) of Notes to Consolidated Financial Statements
included in Item 8 of this Form 10-K.
MidAmerican Funding and its subsidiaries had 3,709 employees as of December 31,
2003.
MIDAMERICAN ENERGY
------------------
MidAmerican Energy is a public utility company headquartered in Iowa with $4.4
billion of assets as of December 31, 2003, and operating revenues for 2003
totaling $2.6 billion. MidAmerican Energy is principally engaged in the business
of generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican Energy
distributes electricity at retail in Council Bluffs, Des Moines, Fort Dodge,
Iowa City, Sioux City and Waterloo, Iowa; the Quad Cities (Davenport and
Bettendorf, Iowa and Rock Island, Moline and East Moline, Illinois); and a
number of adjacent communities and areas. It also distributes natural gas at
retail in Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City and
Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota; and a number of
adjacent communities and areas. As of December 31, 2003, MidAmerican Energy had
approximately 689,000 retail electric customers and 668,000 retail natural gas
customers.
-5-
In addition to retail sales, MidAmerican Energy sells electric energy and
natural gas to other utilities, marketers and municipalities. These sales are
referred to as wholesale sales. It also transports natural gas through its
distribution system for a number of end-use customers who have independently
secured their supply of natural gas.
Financial information on MidAmerican Energy's segments of business is included
in Note (12) of Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K.
MidAmerican Energy's regulated electric and gas operations are conducted under
franchises, certificates, permits and licenses obtained from state and local
authorities. The franchises, with various expiration dates, are typically for
25-year terms.
MidAmerican Energy has a diverse customer base consisting of residential,
agricultural, and a variety of commercial and industrial customer groups. Among
the primary industries served by MidAmerican Energy are those that are concerned
with food products, the manufacturing, processing and fabrication of primary
metals, real estate, farm and other non-electrical machinery, and cement and
gypsum products.
MidAmerican Energy also conducts a number of nonregulated business activities.
Refer to the "Nonregulated Operations" section later in Part I for further
discussion.
For the year ended December 31, 2003, MidAmerican Energy derived approximately
54% of its gross operating revenues from its regulated electric business, 36%
from its regulated gas business and 10% from its nonregulated business
activities. For 2002 and 2001, the corresponding percentages were 61% electric,
31% gas and 8% nonregulated; and 56% electric, 37% gas and 7% nonregulated,
respectively.
At December 31, 2003, MidAmerican Energy had 3,694 employees of which 1,735 were
covered by union contracts. MidAmerican Energy has five separate contracts with
locals of the International Brotherhood of Electrical Workers ("IBEW"), the
United Association of Plumbers and Pipefitters and the United Paper Workers
International Union. One contract with IBEW locals 109 and 499 expires February
28, 2006, and covers 1,678 employee members.
-6-
REGULATED ELECTRIC OPERATIONS
The following tables present historical regulated electric sales data related to
customer class and jurisdictions.
Total Regulated Electric Sales
By Customer Class
------------------------------
2003 2002 2001
----- ----- -----
Residential ................. 19.4% 19.8% 20.6%
Small general service (1) ... 14.0 14.2 15.3
Large general service (2) ... 25.4 24.5 25.8
Wholesale (3) ............... 32.7 32.4% 31.0
Other ....................... 8.5 9.1 7.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(1) Small general service generally includes commercial and industrial
customers with a demand of 200 kilowatts or less.
(2) Large general service generally includes commercial and industrial
customers with a demand of more than 200 kilowatts.
(3) Wholesale generally includes other utilities, marketers and
municipalities to whom electric energy is sold at wholesale for resale
to ultimate customers.
Regulated Retail Electric Sales
By State
-------------------------------
2003 2002 2001
---- ---- ----
Iowa......................... 88.8% 88.5% 88.6%
Illinois..................... 10.4 10.7 10.6
South Dakota................. 0.8 0.8 0.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
There are seasonal variations in MidAmerican Energy's electric business that are
principally related to the use of electricity for air conditioning. In 2003, 39%
of MidAmerican Energy's regulated electric revenues were reported in the months
of June, July, August and September.
The annual hourly peak demand on MidAmerican Energy's electric system usually
occurs as a result of air conditioning use during the cooling season. In August
2003, MidAmerican Energy reached a new record hourly peak demand of 3,935
megawatts ("MW"), which was 46 MW greater than MidAmerican Energy's previous
record hourly peak demand of 3,889 MW set in July 2002.
MidAmerican Energy's accredited net generating capability in the summer of 2003
was 4,787 MW. Accredited net generating capability represents the amount of
generation available to meet the requirements on MidAmerican Energy's system and
consists of MidAmerican Energy-owned generation, generation under power purchase
contracts and the net amount of capacity purchases and sales. The net generating
capability at any time may be less than it would otherwise be due to regulatory
restrictions, fuel restrictions and generating units being temporarily out of
service for inspection, maintenance, refueling or modifications.
-7-
The following table details net accredited generating capacity of MidAmerican
Energy, along with participation purchases and sales, net, for summer 2003
accreditation.
Company's Share
of Accredited
Percent Generating
Plant Ownership Fuel Capability (MW)
- -------------------------------------------- --------- ---- ---------------
Steam electric generating plants:
Council Bluffs Energy Center
Unit No. 1 ............................. 100.0 Coal 45
Unit No. 2 ............................. 100.0 Coal 88
Unit No. 3 ............................. 79.1 Coal 546
George Neal Station
Unit No. 1 ............................. 100.0 Coal 135
Unit No. 2 ............................. 100.0 Coal 300
Unit No. 3 ............................. 72.0 Coal 371
Unit No. 4 ............................. 40.6 Coal 261
Louisa Unit .............................. 88.0 Coal 616
Ottumwa Unit ............................. 52.0 Coal 368
Riverside Station
Unit No. 3 ............................. 100.0 Coal 5
Unit No. 5 ............................. 100.0 Coal 130
-----
2,865
-----
Combustion turbines:
Coralville - 4 units ..................... 100.0 Gas/Oil 64
Electrifarm - 3 units .................... 100.0 Gas/Oil 200
Greater Des Moines Energy Center - 2 units 100.0 Gas 327
Moline - 4 units ......................... 100.0 Gas/Oil 64
Parr - 2 units ........................... 100.0 Gas/Oil 32
Pleasant Hill Energy Center - 3 units .... 100.0 Oil 157
River Hills Energy Center - 8 units ...... 100.0 Gas/Oil 120
Sycamore Energy Center - 2 units ......... 100.0 Gas/Oil 148
-----
1,112
-----
Nuclear: Quad Cities Station
Unit No. 1 ............................... 25.0 Nuclear 218
Unit No. 2 ............................... 25.0 Nuclear 219
-----
437
-----
Hydro: Moline - 4 units .................... 100.0 Water 3
Portable power modules - 28 units .......... 100.0 Oil 56
-----
Accredited generating capacity ............. 4,473
Participation purchases and (sales), net:
Cordova Energy Company, LLC (1) .......... 250
Nebraska Public Power District (2) ....... 380
Other, net ............................... (316)
-----
Net accredited generating capability ....... 4,787
=====
(1) The amount shown above is MidAmerican Energy's entitlement (50%) of
the Cordova Energy Center's net accredited capacity under a power
purchase contract extending to May 2004. Cordova Energy Company LLC, a
subsidiary of MidAmerican Energy Holdings, owns Cordova Energy Center.
(2) The amount shown is capacity purchased under a power purchase contract
with the NPPD extending to December 2004. Subsequent to December 31,
2003, MidAmerican Energy entered into a power purchase contract with
NPPD for January 1, 2005, through December 31, 2009, that will result
in MidAmerican Energy obtaining 250 MW annually for the five-year
period.
-8-
MidAmerican Energy anticipates a continuing increase in demand for electricity
from its regulated customers. To meet anticipated demand and ensure adequate
electric generation in its service territory, MidAmerican Energy is currently
constructing two electric generating projects in Iowa and is developing a third.
Upon completion, the projects will provide service to regulated retail
electricity customers. MidAmerican Energy has obtained regulatory approval to
include the actual costs of the generation projects in its Iowa rate base as
long as actual costs do not exceed a cap MidAmerican Energy has deemed to be
reasonable. Wholesale sales may also be made from the projects to the extent the
power is not needed for regulated retail service.
The first project is a natural gas-fired, combined cycle unit with an estimated
cost of $357 million, excluding allowance for funds used during construction.
MidAmerican Energy will own and operate the plant. Commercial operation of the
simple cycle mode began on May 5, 2003. The plant, which will continue to be
operated in simple cycle mode during 2004, resulted in 327 MW of accredited
capacity in the summer of 2003. The combined cycle operation is expected to
commence in December 2004 and achieve an expected additional accredited capacity
of 190 MW.
The second project is currently under construction and will be a 790-MW (based
on expected accreditation) super-critical-temperature, low-sulfur coal-fired
plant. MidAmerican Energy will operate the plant and hold an undivided ownership
interest as a tenant in common with the other owners of the plant. MidAmerican
Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican
Energy expects its share of the estimated cost of the project to be
approximately $713 million, excluding allowance for funds used during
construction. Municipal, cooperative and public power utilities will own the
remainder, which is a typical ownership arrangement for large base-load plants
in Iowa. On May 29, 2003, the Iowa Utilities Board ("IUB") issued an order that
approves the ratemaking principles for the plant, and on June 27, 2003,
MidAmerican Energy received a certificate from the IUB allowing MidAmerican
Energy to construct the plant. On February 12, 2003, MidAmerican Energy executed
a contract with Mitsui & Co. Energy Development, Inc. for the engineering,
procurement and construction of the plant. On September 9, 2003, MidAmerican
Energy began construction of the plant, which it expects to be completed in the
summer of 2007. MidAmerican Energy is also seeking an order from the IUB
approving construction of the associated transmission facilities.
The third project is currently under development and is comprised of wind power
facilities totaling 310 MW based on the nameplate rating. Generally speaking,
accredited capacity ratings for the wind power facilities are considerably less
than the nameplate ratings due to the varying nature of wind. The current
projected accredited capacity for these wind power facilities is approximately
53 MW. If constructed, MidAmerican Energy will own and operate these facilities,
which are expected to cost approximately $323 million. MidAmerican Energy's plan
to construct the wind project is in conjunction with a settlement agreement that
extends through December 31, 2010, an Iowa retail electric rate freeze that was
previously scheduled to expire at the end of 2005. The settlement agreement,
which was filed with the IUB in conjunction with MidAmerican Energy's
application for ratemaking principles for the wind project, was approved by the
IUB on October 17, 2003. The obligation of MidAmerican Energy to construct the
wind project may be terminated by MidAmerican Energy if the Federal production
tax credit applicable to the wind energy facilities is not available at a rate
of 1.8 cents per kWh for a period of at least ten years after the facilities
begin generating electricity. The production tax credit is available only to
wind facilities placed in service before January 1, 2004. MidAmerican Energy has
received authorization from the IUB to construct the wind power project. If
MidAmerican Energy does not construct the facilities by December 31, 2007, the
rate extension from January 1, 2006 through December 31, 2010 may terminate.
MidAmerican Energy is interconnected with Iowa utilities and utilities in
neighboring states and is party to an electric generation and transmission
pooling agreement administered by the Mid-Continent Area Power Pool ("MAPP").
MAPP is a voluntary association of electric utilities doing business in
Minnesota, Nebraska, North Dakota and the Canadian provinces of Saskatchewan and
Manitoba and portions of Iowa, Montana, South Dakota and Wisconsin. Its
membership also includes power marketers, regulatory agencies and independent
power producers. MAPP facilitates operation of the transmission system, is
responsible for the safety and reliability of the bulk electric system, and has
responsibility for administration of MAPP's Open-Access Transmission Tariff.
Each MAPP participant is required to maintain for emergency purposes a net
generating capability reserve of at least 15% above its system peak demand. If a
participant's capability reserve falls below the 15% minimum,
-9-
significant penalties could be contractually imposed by MAPP. MidAmerican
Energy's reserve margin at peak demand for 2003 was approximately 22%.
MidAmerican Energy's transmission system connects its generating facilities with
distribution substations and interconnects with 14 other transmission providers
in Iowa and five adjacent states. Under normal operating conditions, MidAmerican
Energy's transmission system has adequate capacity to deliver energy to
MidAmerican Energy's distribution system and to export and import energy with
other interconnected systems. Refer to Item 2 of this Form 10-K for additional
information on transmission lines.
The Federal Energy Regulatory Commission (the "FERC") has undertaken several
measures to increase competition in the markets for wholesale electric energy,
including efforts to foster the development of regional transmission
organizations ("RTO") in its Order No. 2000 issued December 1999 and its July
2002 proposed rulemaking that would implement a standard market design ("SMD")
for wholesale electric markets.
In response to Order No. 2000, MidAmerican Energy and five other electric
utilities applied for FERC approval to create TRANSLink Transmission Company LLC
("TRANSLink") as a for-profit independent transmission company to be operated in
conjunction with a FERC-approved RTO. The FERC approved that application in
April 2002. In June 2003, the IUB issued an order disapproving MidAmerican
Energy's application for state regulatory approval of MidAmerican Energy's
participation in TRANSLink and inviting MidAmerican Energy to refile the
application once certain issues at the federal level have been resolved. On
November 21, 2003, in response to continued regulatory uncertainty, TRANSLink
suspended its operations and dissolved its interim management team. MidAmerican
Energy is currently evaluating options relating to its transmission options in
light of TRANSLink's current status.
If implemented, the FERC's July 2002 proposed rule for SMD would require
sweeping changes to the use and expansion of the interstate transmission and
wholesale bulk power systems in the United States. However, it is unclear when
or even whether FERC will issue a final rule and what form the final rule would
ultimately take. In response to significant criticism of its proposed rule, the
FERC subsequently indicated that it had changed its proposal and would adopt a
flexible approach to SMD that would accommodate regional differences.
Legislation that is currently pending in Congress would forbid the FERC from
implementing the SMD rule for several years, but it is not certain whether that
legislation will be adopted. Any final rule on SMD may impact the costs of
MidAmerican Energy's electricity and transmission products. A final rule on SMD
could directly or indirectly influence how transmission services are priced, the
availability of transmission services, and how transmission services are
obtained. In addition, the rule could affect how wholesale electricity is bought
and sold, as well as the geographic scope of the wholesale marketplace in which
MidAmerican Energy buys and sells electricity. MidAmerican Energy recognizes
there is considerable uncertainty as to the timing and outcome of this
rulemaking and will continue to evaluate the status of the adoption of SMD for
the wholesale markets. Transferring the operations and control of MidAmerican
Energy's transmission assets to other entities could increase costs for
MidAmerican Energy; however, the actual effect of any such transaction on
MidAmerican Energy's future transmission costs, or alternate RTO strategies, is
not yet known.
-10-
Energy Supply for Electric Operations
- -------------------------------------
MidAmerican Energy's total energy supplied to retail and wholesale electric
customers was from the following sources:
2003 2002 2001
---- ---- ----
MidAmerican Energy-owned generation ....... 77.9% 76.5% 82.6%
Energy purchased under long-term contracts 11.5 14.3 13.5
Energy purchased - other .................. 10.6 9.2 3.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Sources of fuel for MidAmerican Energy-owned electric generation were as follows
for the years ended December 31:
2003 2002 2001
---- ---- ----
Coal ...................................... 83.9% 79.1% 74.9%
Nuclear (a) ............................... 15.5 20.5 24.5
Gas ....................................... 0.5 0.3 0.5
Oil/Hydro ................................. 0.1 0.1 0.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(a) In 2001 and 2002, nuclear includes energy purchased through a power
purchase contract with Nebraska Public Power District. As a result of
a contract restructuring effective August 1, 2002, energy purchased
under that contract after the restructuring is excluded from the table
since it is similar to other purchased energy in that it is not
restricted to a particular energy source.
MidAmerican Energy is not allowed to automatically recover a portion of its
energy costs relating to retail sales in Iowa through energy adjustment clauses.
Accordingly, fluctuations in energy costs affect MidAmerican Energy's earnings.
All of the coal-fired generating stations operated by MidAmerican Energy are
fueled by low-sulfur, western coal from the Powder River Basin and Hanna Basin.
MidAmerican Energy's coal supply portfolio includes multiple suppliers and mines
under agreements of varying terms and quantities. MidAmerican Energy regularly
monitors the western coal market, looking for opportunities to improve its coal
supply portfolio. MidAmerican Energy believes its sources of coal supply are,
and will continue to be, satisfactory. Additional information regarding
MidAmerican Energy's coal supply contracts is included in Note (4)(f) of Notes
to Consolidated Financial Statements in Item 8 of this Form 10-K.
MidAmerican Energy has agreements with Union Pacific Railroad Company to deliver
coal directly to its Neal and Council Bluffs Energy Centers. Coal for
MidAmerican Energy's Louisa and Riverside Energy Centers is delivered to an
interchange point by Union Pacific for transportation to its destination by
Iowa, Chicago & Eastern Railroad Corporation. MidAmerican Energy has the ability
to use The Burlington Northern and Santa Fe Railway Company for delivery of a
small amount of coal to the Council Bluffs, Louisa and Riverside Energy Centers
should the need arise. MidAmerican Energy believes its coal transportation
arrangements are adequate to meet its coal delivery needs.
MidAmerican Energy uses natural gas and oil as fuel for intermediate and peak
demand electric generation, igniter fuel, transmission support and standby
purposes. These sources are presently in adequate supply and available to meet
MidAmerican Energy's needs.
MidAmerican Energy has an agreement with the Nebraska Public Power District
("NPPD"), to purchase electric capacity and energy through December 31, 2004.
Under the contract, as restructured effective August 1, 2002, MidAmerican Energy
will purchase 380 MW of the accredited capacity of Cooper Nuclear Station and a
-11-
minimum volume of energy in 2004. NPPD is not required to use Cooper Nuclear
Station to meet the minimum energy requirement. In January 2004, MidAmerican
Energy and NPPD entered into a series of agreements that will result in
MidAmerican purchasing 250 MW of NPPD capacity for a five-year period commencing
January 1, 2005.
MidAmerican Energy has an agreement with Cordova Energy Company LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant that started commercial
operation in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required to generate the energy purchased.
MidAmerican Energy is a 25% joint owner of Quad Cities Generating Station, a
nuclear power plant. Exelon Generation Company, LLC ("Exelon Generation"), the
other joint owner and the operator of Quad Cities Station, is a subsidiary of
Exelon Corporation.
Approximately one-third of the nuclear fuel assemblies in the core at Quad
Cities Station Units 1 and 2 is replaced every 24 months. MidAmerican Energy has
been advised by Exelon Generation that the majority of its uranium concentrate
and uranium conversion requirements for Quad Cities Station through 2005 can be
met under existing supplies or commitments. Exelon Generation foresees no
problem in obtaining the remaining requirements now or obtaining future
requirements. Exelon Generation further advises that enrichment services
contracted through 2007 provide flexibility as to the quantity purchased.
Commitments for fuel fabrication have been obtained through 2013. Exelon
Generation does not anticipate that it will have difficulty in contracting for
uranium concentrates for conversion, enrichment or fabrication of nuclear fuel
needed to operate Quad Cities Station.
REGULATED NATURAL GAS OPERATIONS
MidAmerican Energy is engaged in the procurement, transportation, storage and
distribution of natural gas for customers in the Midwest. MidAmerican Energy
purchases natural gas from various suppliers, transports it from the production
area to MidAmerican Energy's service territory under contracts with interstate
pipelines, stores it in various storage facilities to manage fluctuations in
system demand and seasonal pricing, and distributes it to customers through
MidAmerican Energy's distribution system.
MidAmerican Energy sells natural gas to end-use, or retail, customers and to
other utilities, marketers and municipalities. MidAmerican Energy also
transports through its distribution system natural gas purchased independently
by a number of end-use customers. During 2003, approximately 43% of total gas
delivered through MidAmerican Energy's system for end-use customers was under
gas transportation service.
There are seasonal variations in MidAmerican Energy's gas business that are
principally due to the use of natural gas for heating. In 2003, 58% of
MidAmerican Energy's regulated gas revenues were reported in the months of
January, February, March, and December.
-12-
The following tables present historical regulated gas sales data, excluding
transportation throughput, related to customer class and jurisdictions.
Total Regulated Gas Sales
By Customer Class
--------------------------
2003 2002 2001
---- ---- ----
Residential ................ 43.7% 39.0% 34.5%
Small general service (1) .. 20.8 19.7 18.2
Large general service (1) .. 1.9 1.5 1.5
Wholesale (2) .............. 28.1 38.6 44.1
Other ...................... 5.5 1.2 1.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(1) Small and large general service customers are classified primarily
based on the nature of their business and gas usage. Small general
service customers are business customers whose gas usage is
principally for heating. Large general service customers are business
customers whose principal gas usage is for their manufacturing
processes.
(2) Wholesale generally includes other utilities, marketers and
municipalities to whom natural gas is sold at wholesale for eventual
resale to ultimate customers.
Regulated Retail Gas Sales
By State
--------------------------
2003 2002 2001
---- ---- ----
Iowa ....................... 77.9% 78.0% 78.9%
Illinois ................... 10.0 10.0 9.8
South Dakota ............... 11.3 11.2 10.5
Nebraska ................... 0.8 0.8 0.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Fuel Supply and Capacity
- ------------------------
MidAmerican Energy purchases gas supplies from producers and third party
marketers. To ensure system reliability, a geographically diverse supply
portfolio with varying terms and contract conditions is utilized for the gas
supplies. MidAmerican Energy attempts to optimize the value of its regulatory
assets by engaging in sales for resale transactions. IUB and South Dakota Public
Utilities Commission rulings have allowed MidAmerican Energy to retain 50% of
the respective jurisdictional margins earned on sales for resale of natural gas,
with the remaining 50% being returned to customers through the purchased gas
adjustment clause discussed below.
MidAmerican Energy has rights to firm pipeline capacity to transport gas to its
service territory through direct interconnects to the pipeline systems of
Northern Natural Gas Company (an affiliate company), Natural Gas Pipeline
Company of America, Northern Border Pipeline Company and ANR Pipeline Company.
At times, the capacity available through MidAmerican Energy's firm capacity
portfolio may exceed the demand on MidAmerican Energy's distribution system.
Firm capacity in excess of MidAmerican Energy's system needs can be resold to
other companies to achieve optimum use of the available capacity. Past IUB and
South Dakota Public Utilities Commission rulings have allowed MidAmerican Energy
to retain 30% of the respective jurisdictional margins earned on the resold
capacity, with the remaining 70% being returned to customers through the
purchased gas adjustment clause.
MidAmerican Energy's cost of gas is recovered from customers through purchased
gas adjustment clauses. In 1995, the IUB gave initial approval of MidAmerican
Energy's Incentive Gas Supply Procurement Program. In November 2003, the IUB
extended the program through October 31, 2004. Under the program, as amended,
MidAmerican Energy is required to file with the IUB every six months a
comparison of its gas procurement costs to an index-based reference price. If
MidAmerican Energy's cost of gas for the period is less or greater than an
-13-
established tolerance band around the reference price, then MidAmerican Energy
shares a portion of the savings or costs with customers. A similar program is
currently in effect in South Dakota through October 31, 2005. Since the
implementation of the program, MidAmerican Energy has successfully achieved and
shared savings with its natural gas customers. Refer to the "Nonregulated
Operations" section below for additional information.
MidAmerican Energy utilizes leased gas storage to meet peak day requirements and
to manage the daily changes in demand due to changes in weather. The storage gas
is typically replaced during the summer months. In addition, MidAmerican Energy
also utilizes three liquefied natural gas plants and two propane-air plants to
meet peak day demands in the winter. The storage and peak shaving facilities
reduce MidAmerican Energy's dependence on gas purchases during the volatile
winter heating season. In addition, MidAmerican Energy has entered into various
financial and physical gas purchase agreements to mitigate the volatility of gas
prices during the winter heating season.
On February 2, 1996, MidAmerican Energy had its highest peak-day delivery of
1,143,026 million British thermal units ("MMBtus"). This peak-day delivery
consisted of approximately 88% traditional sales service and 12% transportation
service of customer-owned gas. As of January 31, 2004, MidAmerican Energy's
2003/2004 winter heating season peak-day delivery of 1,093,294 MMBtus was
reached on January 29, 2004. This peak-day delivery included approximately 73%
traditional sales service and 27% transportation service.
The supply sources utilized by MidAmerican Energy to meet its 2003/2004 peak-day
deliveries to its traditional sales service customers were:
Thousands Percent
of of
MMBtus Total
--------- -------
Leased storage and peak shaving plants 314.5 39.2%
Firm supply .......................... 487.8 60.8
----- -----
802.3 100.0%
===== =====
MidAmerican Energy has strategically built multiple pipeline interconnections
into several of its larger communities. Multiple pipeline interconnects create
competition among pipeline suppliers for transportation capacity to serve those
communities, thus reducing costs. In addition, multiple pipeline interconnects
give MidAmerican Energy the ability to optimize delivery of the lowest cost
supply from the various supply basins into these communities and increase
delivery reliability. Benefits to MidAmerican Energy's system customers are
shared with all jurisdictions through a consolidated purchased gas adjustment
clause.
MidAmerican Energy does not anticipate difficulties in meeting its future
demands through the use of its supply portfolio and pipeline interconnections
for the foreseeable future.
NONREGULATED OPERATIONS
MidAmerican Energy's nonregulated operations include a variety of activities
outside of the traditional regulated electric and gas services.
-14-
Historical gross margins, or revenues less related cost of sales, for
MidAmerican Energy's nonregulated operations are shown below (in millions):
2003 2002 2001
----- ----- ----
Nonregulated retail electric.............. $13.2 $11.4 $ 4.6
Nonregulated retail gas................... 4.9 2.7 2.0
Wholesale gas and electric................ 4.7 3.3 6.9
Income sharing arrangements under
regulated gas tariffs................... 5.0 3.1 4.4
Incentive gas supply procurement
program award........................... 3.8 3.4 4.1
Other .................................... 3.1 4.5 3.6
----- ----- -----
$34.7 $28.4 $25.6
===== ===== =====
As of May 1, 2002, all retail electric customers in Illinois, except for those
served by electric cooperatives and municipalities, had been phased in to allow
them to select their provider of electric supply services. MidAmerican Energy's
nonregulated electric retail revenues include revenues related to these supply
services provided to customers outside of MidAmerican Energy's delivery system
who choose their energy supplier. Revenues related to non-supply services, such
as distribution and transmission, are reflected in regulated electric revenues.
In September 2002, MidAmerican Energy began serving retail customers in Ohio.
MidAmerican Energy's nonregulated retail gas marketing services operate in Iowa,
Illinois and Ohio. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements.
MidAmerican Energy's wholesale gas and electric operations consist of
nonregulated wholesale electric and natural gas marketing operations through
which it buys from, and sells to, other utilities and marketers. These
operations are considered "energy trading" activities under generally accepted
accounting principles, and accordingly, related revenues are recorded net of the
related cost of sales on the statements of operations.
Nonregulated operations also include earnings from sharing arrangements under
applicable state regulations and tariffs filed with the IUB and the South Dakota
Public Utilities Commission ("SDPUC"), for MidAmerican Energy's regulated
natural gas operations. Under these arrangements, MidAmerican Energy is allowed
to keep a portion of the benefits of gas sales for resale and capacity release
transactions. MidAmerican Energy also has an Incentive Gas Supply Procurement
Program, under which it can receive awards for successful performance of gas
supply procurement. Refer to the preceding "Regulated Natural Gas Operations"
section for further discussion of the sharing arrangements and the gas
procurement program.
REGULATION
General Utility Regulation
- --------------------------
MidAmerican Energy is a public utility within the meaning of the Federal Power
Act and a natural gas company within the meaning of the Natural Gas Act.
Therefore, it is subject to regulation by the FERC in regard to numerous
activities, including the issuance of securities, accounting policies and
practices, electricity sales for resale rates, the establishment and regulation
of electric interconnections and transmission services and replacement of
certain gas utility property.
MidAmerican Energy is regulated by the IUB as to retail rates, services,
construction of utility property and in other respects as provided by the laws
of Iowa. MidAmerican Energy is regulated by the Illinois Commerce Commission
("ICC"), as to bundled retail rates, unbundled delivery services, services that
have not been declared to be competitive, issuance of securities, affiliate
transactions, construction, acquisition and sale of utility property,
acquisition and sale of securities and in other respects as provided by the laws
of Illinois. MidAmerican
-15-
Energy is also subject to regulation by the SDPUC as to electric and gas retail
rates and service as provided by the laws of South Dakota.
Rate Regulation
- ---------------
Under Iowa law, temporary collection of higher rates can begin, subject to
refund, 90 days after filing with the IUB for that portion of such higher rates
approved by the IUB based on prior ratemaking principles and a rate of return on
common equity previously approved. If the IUB has not issued a final order
within ten months after the filing date, the temporary rates cease to be subject
to refund and any balance of the requested rate increase may then be collected
subject to refund. Exceptions to the ten-month limitation provide for extensions
due to a utility's lack of due diligence in the rate proceeding, judicial
appeals and situations involving new generating units being placed in service.
MidAmerican Energy's cost of gas is collected in its Iowa gas rates through the
Iowa Uniform Purchased Gas Adjustment Clause.
In accordance with two electric rate settlements, approved by the IUB in 2001
and 2003, respectively, MidAmerican Energy's Iowa retail electric rates are
effectively frozen through December 31, 2010. Additionally, under the incentive
regulation aspects of the settlements, earnings exceeding a return on equity of
12% through December 31, 2005, and 11.75% for January 1, 2006 through December
31, 2010, are shared with customers. See Note (10) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for additional discussion of
this settlement. In accordance with a 2002 rate settlement, MidAmerican Energy's
Iowa retail gas rates are effectively fixed through November 2004.
South Dakota law authorizes its Public Utilities Commission to suspend new rates
for up to six months during the pendency of rate proceedings; however, the rates
are permitted to be implemented after six months subject to refund pending a
final order in the proceeding.
Under Illinois law, new rates may become effective 45 days after filing with the
ICC, or on such earlier date as the ICC may approve, subject to its authority to
suspend the proposed new rates, subject to hearing, for a period not to exceed
approximately eleven months after filing. Under Illinois electric tariffs,
MidAmerican Energy's Fuel Cost Adjustment Clause reflects changes in the cost of
all fuels used for retail electric generation, including certain fuel
transportation costs, nuclear fuel disposition costs and the effects of energy
transactions (other than wholesale capacity and energy sales) with other
utilities. MidAmerican Energy's cost of gas is reflected in its Illinois gas
rates through the Illinois Uniform Purchased Gas Adjustment Clause.
In December 1997, Illinois enacted a law to restructure Illinois' electric
utility industry. The law changes how and what electric services are regulated
by the ICC and transitions portions of the traditional electric services to a
competitive environment. In general, the law allows for certain limits on the
ICC's regulatory authority over a utility's generation and also relaxes its
regulatory authority over many corporate transactions, such as the transfer of
generation assets to affiliates. Special authority and limitations of authority
apply during the transition to a competitive marketplace. Also, the law permits
utilities to eliminate their fuel adjustment clauses and incorporates provisions
by which earnings in excess of allowed amounts are either partially refunded to
customers or are used to accelerate a company's regulatory asset cost recovery.
Electric rates in Illinois are frozen until 2007, subject to certain exceptions
allowing for increases, at which time bundled rates are subject to cost-based
ratemaking.
The FERC regulates MidAmerican Energy's rates charged to wholesale customers for
energy and transmission services. Most of MidAmerican Energy's electric
wholesale sales and purchases take place under market-based pricing allowed by
the FERC and are therefore subject to market volatility. Margins earned on
wholesale sales have historically been included as a component of retail cost of
service upon which retail rates are based.
Refer to the "Legislative and Utility Regulatory Matters" section of
Management's Discussion and Analysis in Item 7 of this Form 10-K for additional
discussion of matters affecting utility regulation.
-16-
Nuclear Regulation
- ------------------
MidAmerican Energy is subject to the jurisdiction of the Nuclear Regulatory
Commission ("NRC"), with respect to its license and 25% ownership interest in
Quad Cities Station Units 1 and 2. Exelon Generation is the operator of Quad
Cities Station and is under contract with MidAmerican Energy to secure and keep
in effect all necessary NRC licenses and authorizations.
The NRC regulations control the granting of permits and licenses for the
construction and operation of nuclear generating stations and subject such
stations to continuing review and regulation. The NRC review and regulatory
process covers, among other things, operations, maintenance, and environmental
and radiological aspects of such stations. The NRC may modify, suspend or revoke
licenses and impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations under such Act or the terms of such licenses. Quad Cities
Station Licenses currently expire in 2012. Exelon Generation submitted an
application to renew the Quad Cities Station licenses with the NRC in January
2003. Action by the NRC on the application is expected by November 2004.
Approval would result in the licenses allowing operation through 2032.
Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy is
responsible for the selection and development of repositories for, and the
permanent disposal of, spent nuclear fuel and high-level radioactive wastes.
Exelon Generation, as required by the Nuclear Waste Act, signed a contract with
the Department of Energy to provide for the disposal of spent nuclear fuel and
high-level radioactive waste beginning not later than January 1998. The
Department of Energy did not begin receiving spent nuclear fuel on the scheduled
date, and the schedule will be significantly delayed. The earliest expectation
for completion is now 2010. The costs to be incurred by the Department of Energy
for disposal activities are being financed by fees charged to owners and
generators of the waste. Exelon Generation has informed MidAmerican Energy that
existing on-site storage capability at Quad Cities Station is sufficient to
permit interim storage into 2005. For Quad Cities Station, Exelon Generation has
begun to develop an interim spent fuel storage installation ("ISFSI") at Quad
Cities Station to store spent nuclear fuel in dry casks in order to free space
in the storage pool. The first pad at the ISFSI is expected to facilitate
storage of casks to support operations at Quad Cities Station until at least
2017. Exelon Generation expects the bulk of the construction work will be done
in 2004 with the first cask loading to take place in 2005. In the 2017 to 2022
timeframe, Exelon Generation plans to add a second pad to the ISFSI to
accommodate storage of spent nuclear fuel through the end of operations at Quad
Cities Station.
Federal regulations provide that any nuclear operating facility may be required
to cease operation if the NRC determines there are deficiencies in state, local
or utility emergency preparedness plans relating to such facility, and the
deficiencies are not corrected. Exelon Generation has advised MidAmerican Energy
that an emergency preparedness plan for Quad Cities Station has been approved by
the NRC. Exelon Generation has also advised MidAmerican Energy that state and
local plans relating to Quad Cities Station have been approved by the Federal
Emergency Management Agency.
The NRC also regulates the decommissioning of nuclear power plants including the
planning and funding for the eventual decommissioning of the plants. In
accordance with these regulations, MidAmerican Energy submits a report to the
NRC every two years providing reasonable assurance that funds will be available
to pay the costs of decommissioning its share of Quad Cities Station.
MidAmerican Energy has established external trusts for the investment of funds
collected for nuclear decommissioning associated with Quad Cities Station.
Electric tariffs currently in effect include provisions for annualized
collection of estimated decommissioning costs at Quad Cities Station. In Iowa,
estimated Quad Cities Station decommissioning costs are reflected in base rates.
MidAmerican Energy's cost related to decommissioning funding in 2003 was $8.3
million.
-17-
Environmental Regulations
- -------------------------
MidAmerican Energy is subject to a number of federal, state and local
environmental laws and regulations affecting many aspects of our present and
future operations. These requirements relate to air emissions, water quality,
waste management, hazardous chemical use, noise abatement, land use aesthetics
and atomic radiation.
Environmental laws and regulations currently have, and future modifications may
have, the effect of (i) increasing the lead time for the construction of new
facilities, (ii) significantly increasing the total cost of new facilities,
(iii) requiring modification of MidAmerican Energy's existing facilities, (iv)
increasing the risk of delay on construction projects, (v) increasing
MidAmerican Energy's cost of waste disposal and (vi) reducing the reliability of
service provided by MidAmerican Energy and the amount of energy available from
MidAmerican Energy's facilities. Any of these items could have a substantial
impact on amounts required to be expended by MidAmerican Energy in the future.
Air Quality -
MidAmerican Energy's generating facilities are subject to applicable provisions
of the Clean Air Act and related air quality standards promulgated by the U.S.
Environmental Protection Agency ("EPA"). MidAmerican Energy has five jointly
owned, and six wholly owned, coal-fired generating units, which represent
approximately 60% of MidAmerican Energy's electric net accredited generating
capability. MidAmerican Energy believes it is in material compliance with
current air quality requirements. Refer to Note (4)(b) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for additional information
regarding air quality regulation.
Hazardous Materials and Waste Management -
The EPA and state environmental agencies have determined that contaminated
wastes remaining at certain 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 MidAmerican Energy may be a
potentially responsible party. MidAmerican Energy estimates the range of
possible costs for investigation, remediation and monitoring for these sites to
be $11 million to $30 million. As of December 31, 2003, MidAmerican Energy has
recorded a liability and regulatory asset of $14.0 million for these sites.
MidAmerican Energy's present rates in Iowa provide for a fixed annual recovery
of manufactured gas plant costs. Additional information relating to MidAmerican
Energy's manufactured gas plant facilities is included under Note (4)(a) of
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Pursuant to the Toxic Substances Control Act, a federal law administered by the
EPA, MidAmerican Energy developed a comprehensive program for the use, handling,
control and disposal of all polychlorinated biphenyls ("PCBs") contained in
electrical equipment. The future use of equipment containing PCBs will be
minimized. Capacitors, transformers and other miscellaneous equipment are being
purchased with a non-PCB dielectric fluid. MidAmerican Energy's exposure to PCB
liability has been reduced through the orderly replacement of a number of such
electrical devices with similar non-PCB electrical devices.
-18-
INTERCOAST CAPITAL
------------------
InterCoast Capital is a wholly owned nonregulated subsidiary of MHC primarily
engaged in investment activities. Investments include equipment leases,
marketable securities and energy-related venture capital interests. InterCoast
Capital manages these activities through its nonregulated investment
subsidiaries. As of December 31, 2003, InterCoast Capital had total assets of
$41.3 million, a majority of which relate to investments in equipment leases.
InterCoast Capital had equity participations in equipment leases totaling $29.5
million and $32.6 million at December 31, 2003 and 2002, respectively. At
December 31, 2003, approximately $20.9 million was invested in five commercial
passenger aircraft. Approximately $8.2 million of the December 31, 2003,
investment in equipment leases related to a seven percent undivided interest in
an electric generating station leased to a utility located in Arizona.
InterCoast Capital also has investments in safe harbor lease transactions. Refer
to Note (1)(f) of MidAmerican Funding's Notes to Consolidated Financial
Statements in Item 8 of this Form 10-K for additional discussion of equipment
leases.
In addition, InterCoast Capital and its subsidiaries have direct investments in
energy projects and indirect investments, through venture capital funds, in a
variety of nonregulated energy production technologies.
MIDWEST CAPITAL
---------------
Midwest Capital is a wholly owned nonregulated subsidiary of MHC with total
assets of $8.1 million as of December 31, 2003. Midwest Capital's primary
activity is the management of utility service area investments to support
economic development. Midwest Capital's principal interest is a 2,000-acre
master planned residential and business community in southeastern South Dakota.
The major construction phase of the planned community is complete, and the
marketing phase to sell developed residential and commercial lots is in
progress.
-19-
ITEM 2. PROPERTIES
MidAmerican Energy's utility properties consist of physical assets necessary and
appropriate to render electric and gas service in its service territories. It is
the opinion of management that the principal depreciable properties owned by
MidAmerican Energy are in good operating condition and well maintained.
MidAmerican Energy's most significant properties are its electric generation
facilities. For information regarding these facilities, please refer to the
"Regulated Electric Operations" discussion in Item 1 - Business of this Form
10-K. Additional electric property consists primarily of transmission and
distribution facilities.
The electric transmission system of MidAmerican Energy at December 31, 2003,
included 918 miles of 345-kilovolt ("kV") lines and 1,128 miles of 161-kV lines.
MidAmerican Energy's electric distribution system included approximately 220,400
transformers and 373 substations at December 31, 2003.
Gas property consists primarily of natural gas mains and services pipelines,
meters and related distribution equipment, including feeder lines to communities
served from natural gas pipelines owned by others. The gas distribution
facilities of MidAmerican Energy at December 31, 2003, included 21,182 miles of
gas mains and service pipelines.
Net utility plant in service by operating segment is as follows as of December
31, 2003 (in thousands):
Generation ............ $1,239,370
Energy delivery -
Electric distribution 1,271,110
Gas distribution .... 603,381
Transmission .......... 229,694
Marketing and sales ... 16,705
----------
$3,360,260
==========
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises, and substantially all of
the former Midwest Power Systems, a predecessor company, electric utility
property located in Iowa, or approximately 80% of gross utility plant, is
pledged to secure mortgage bonds.
-20-
ITEM 3. LEGAL PROCEEDINGS
MidAmerican Energy is one of dozens of companies named as defendants in a
January 20, 2004 consolidated class action lawsuit filed in the U.S. District
Court for the Southern District of New York. The suit alleges that the
defendants have engaged in unlawful manipulation of the prices of natural gas
futures and options contracts traded on the New York Mercantile Exchange
("NYMEX") during the period of January 1, 2000 to December 31, 2002. MidAmerican
Energy is mentioned as a company that has engaged in wash trades on Enron Online
(an electronic trading platform) that had the effect of distorting prices for
gas trades on the NYMEX. The plaintiffs to the class action do not specify the
amount of alleged damages. At this time MidAmerican Energy does not believe that
it has any material exposure in this lawsuit.
The original complaint in this matter, Cornerstone Propane Partners, L.P. v.
Reliant, et al. ("Cornerstone"), was filed on August 18, 2003 in the United
States District Court, Southern District of New York naming MidAmerican Energy.
On October 1, 2003, a second complaint , Roberto, E. Calle Gracey, et al.
("Calle Gracey"), was filed in the same court but did not name MidAmerican
Energy. On November 14, 2003, a third complaint, Dominick Viola ("Viola"), et
al., was filed in the same court and named MidAmerican Energy as a defendant. On
December 5, 2003, the court entered Pretrial Order No. 1, which among other
procedural matters, ordered the consolidation of the Cornerstone, Calle Gracey
and Viola complaints and permitted plaintiffs to file an amended complaint in
this matter. On January 20, 2004, plaintiffs filed In Re: Natural Gas Commodity
Litigation as the amended complaint reasserting their previous allegations.
Unless extended by agreement of the parties or by court order, MidAmerican
Energy's answer and/or responsive pleading in this matter is due February 19,
2004. MidAmerican Energy will coordinate with the other defendants and
vigorously defend the allegations against it.
Other than the litigation described above, MidAmerican Funding and its
subsidiaries currently have no material legal proceedings. Information on
MidAmerican Energy's environmental matters is included in Item 1 - Business and
in the "Environmental Matters" section of Management's Discussion and Analysis
in Item 7 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MidAmerican Funding is an Iowa limited liability company whose membership
interest is held solely by MidAmerican Energy Holdings.
-21-
ITEM 6. SELECTED FINANCIAL DATA
MIDAMERICAN ENERGY COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
DECEMBER 31
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues .............................. $2,595,812 $2,236,159 $2,367,249 $2,271,832 $1,762,350
Operating income ...................... 370,820 354,997 333,574 338,756 300,064
Net income ............................ 188,597 175,821 152,778 165,456 127,331
Earnings on common stock .............. 187,187 172,888 148,234 160,501 122,376
BALANCE SHEET DATA:
Total assets (a) ...................... $4,404,434 $4,209,642 $3,953,060 $4,175,473 $3,927,969
Long-term debt (b) .................... 1,128,647 1,053,418 820,594 921,682 870,499
Power purchase obligation (c) ......... - - 25,867 52,282 68,049
Short-term borrowings ................. 48,000 55,000 89,350 81,600 204,000
Preferred stock:
Not subject to mandatory redemption . 31,759 31,759 31,759 31,759 31,759
Subject to mandatory redemption ..... - - 126,680 150,000 150,000
Common shareholder's equity ........... 1,318,519 1,319,139 1,226,292 1,164,356 1,057,855
(a) In January 2003, MidAmerican Energy adopted Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," ("SFAS No. 143"). Accordingly, MidAmerican Energy recorded
$114.4 million of assets related to the asset retirement obligation ("ARO")
liability required by SFAS No. 143. Additionally, an accrual for non-legal
ARO costs of removing electric and gas assets that was previously reflected
in accumulated depreciation is now classified as a regulatory liability,
thus increasing total assets. The accrual was approximately $408.6 million
at December 31, 2003. Refer to Note (1)(j) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for further discussion.
MidAmerican Energy originally filed its Annual Report on Form 10-K on
February 9, 2004. In accordance with accounting guidance issued subsequent
to that date, prior year regulatory liabilities for the cost of removal of
utility plant previously recognized within accumulated depreciation have
been reclassified to Regulatory Liabilities on the Consolidated Balance
Sheets. The amounts reclassified were $385.7 million, $367.9 million,
$349.5 million and $318.4 million, as of December 31, 2002, 2001, 2000 and
1999, respectively.
(b) Includes amounts due within one year.
(c) On August 1, 2002, MidAmerican Energy's contract with the Nebraska Public
Power District regarding Cooper Nuclear Station was restructured. As a
result, the power purchase obligation and the related asset were removed
from the balance sheet. Refer to Note (1)(h) of Notes to Consolidated
Financial Statements later in Item 8 of this Form 10-K for further
discussion.
-22-
MIDAMERICAN FUNDING, LLC
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
MHC
MIDAMERICAN FUNDING (PREDECESSOR)
-------------------------------------------------------------- -------------
MAR. 12 JAN. 1
YEARS ENDED DECEMBER 31, THROUGH THROUGH
------------------------------------------------- DEC. 31, MAR. 11,
2003 2002 2001 2000 1999 1999
---------- ---------- ---------- ---------- ---------- --------
STATEMENT OF OPERATIONS DATA:
Revenues ......................... $2,600,239 $2,240,879 $2,388,650 $2,316,343 $1,411,542 $375,884
Operating income ................. 367,868 349,988 300,085 327,560 227,133 58,898
Income from continuing
operations (a) ................. 157,176 136,716 103,087 126,784 124,077 16,789
Net income ....................... 157,176 136,716 103,087 126,784 135,335 17,210
AS OF DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets (b) ................. $5,737,614 $5,551,747 $5,550,640 $5,774,916 $5,530,765
Long-term debt (c) ............... 1,828,647 1,753,418 1,544,969 1,670,636 1,642,476
Power purchase obligation (d) .... - - 25,867 52,282 68,049
Short-term borrowings ............ 48,000 55,000 91,780 81,600 204,000
Preferred securities not subject
to mandatory redemption ........ 31,759 31,759 31,759 31,759 31,759
Preferred securities subject
to mandatory redemption ........ - - 126,680 150,000 151,598
Member's equity .................. 1,863,769 1,879,191 1,981,840 1,877,175 1,800,416
(a) In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," beginning January 1, 2002,
MidAmerican Funding's goodwill is no longer amortized. Refer to Note (1)(k)
of MidAmerican Funding's Notes to Consolidated Financial Statements later
in Item 8 of this Form 10-K. In 2002, MidAmerican Funding recorded pre-tax
expense of $21.9 million of write downs for impaired assets and
investments, including a $12.6 million pre-tax write down of airplane
leases. In May 1999, MidAmerican Funding sold most of its investment in the
common stock of McLeodUSA and recorded an after-tax gain of $47.1 million.
For the period ended March 11, 1999, MHC expensed $18.6 million for
transaction costs related to its acquisition by MidAmerican Energy
Holdings.
(b) In January 2003, MidAmerican Energy adopted SFAS No. 143. Accordingly,
MidAmerican Energy recorded $114.4 million of assets related to the ARO
liability required by SFAS No. 143. Additionally, an accrual for non-legal
ARO costs of removing electric and gas assets that was previously reflected
in accumulated depreciation is now classified as a regulatory liability,
thus increasing total assets. The accrual was approximately $408.6 million
at December 31, 2003. Refer to Note (1)(j) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for further discussion.
MidAmerican Funding originally filed its Annual Report on Form 10-K on
February 9, 2004. In accordance with accounting guidance issued subsequent
to that date, prior year regulatory liabilities for the cost of removal of
utility plant previously recognized within accumulated depreciation have
been reclassified to Regulatory Liabilities on the Consolidated Balance
Sheets. The amounts reclassified were $385.7 million, $367.9 million,
$349.5 million and $318.4 million, as of December 31, 2002, 2001, 2000 and
1999, respectively.
(c) Includes amounts due within one year.
(d) On August 1, 2002, MidAmerican Energy's contract with the Nebraska Public
Power District regarding Cooper Nuclear Station was restructured. As a
result, the power purchase obligation and the related asset were removed
from the balance sheet. Refer to Note (1)(h) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K.
-23-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDEX
Page
----
General...................................................................25
Results of Operations.....................................................31
Liquidity and Capital Resources...........................................38
Credit Ratings Risks......................................................41
Legislative and Utility Regulatory Matters................................41
Environmental Matters.....................................................43
Generating Capability.....................................................43
New Accounting Pronouncements.............................................44
Critical Accounting Policies and Estimates................................45
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
MidAmerican Funding, LLC ("MidAmerican Funding"), is an Iowa limited liability
company that was formed in March 1999. The sole member of MidAmerican Funding is
MidAmerican Energy Holdings Company ("MidAmerican Energy Holdings"). MidAmerican
Funding owns all of the outstanding common stock of MHC Inc., which owns all of
the common stock of MidAmerican Energy Company ("MidAmerican Energy"),
InterCoast Capital Company (formerly MidAmerican Capital Company) Midwest
Capital Group, Inc., MidAmerican Services Company and MEC Construction Services
Co.
On March 12, 1999, MHC, formerly MidAmerican Energy Holdings Company, completed
a merger transaction with CalEnergy Company, Inc. On that date, MidAmerican
Funding, which was formed by CalEnergy Company, Inc. as a single member limited
liability company, acquired MHC. Also on that date, CalEnergy Company, Inc. was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings Company. As a result of this transaction, MHC and its subsidiaries,
including MidAmerican Energy became wholly owned subsidiaries of MidAmerican
Funding. MHC, MidAmerican Funding and MidAmerican Energy Holdings are exempt
public utility holding companies headquartered in Des Moines, Iowa.
Management's Discussion and Analysis ("MD&A") addresses the financial statements
of MidAmerican Energy and MidAmerican Funding as presented in this joint filing.
Information related to MidAmerican Energy, whether or not segregated, also
relates to MidAmerican Funding. Information related to other subsidiaries of
MidAmerican Funding pertains only to the discussion of the financial condition
and results of operations of MidAmerican Funding. Where necessary, discussions
have been segregated and labeled to allow the reader to identify information
applicable only to MidAmerican Funding.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Earnings Overview
- -----------------
MidAmerican Energy -
MidAmerican Energy's earnings on common stock improved $14.3 million to $187.2
million for 2003 compared to $172.9 million for 2002. Significant factors
contributing to the improvement in earnings were: 1) a reduction in costs
related to Cooper Nuclear Station due to a restructuring of the power purchase
contract in August 2002, 2) an increase in the number of electric and gas retail
customers, 3) an increase in retail gas rates, and 4) a decrease in Iowa
electric retail costs due to the recognition of cost recovery related to a coal
purchase contract with Enron Corp. The impact of these factors were partially
offset by increases in other expenses.
MidAmerican Funding -
MidAmerican Funding's net income for 2003 totaled $157.2 million compared to
$136.7 million for 2002. In addition to the factors discussed above for
MidAmerican Energy, net income for 2003 includes $4.0 million of after-tax loss
for write-downs of impaired investments. Net income for 2002 reflects $4.9
million of after-tax income related to a gain and interest income from the sale
of an investment in a communications company, $17.1 million after-tax loss for
impairments of investments and $4.0 million of additional income taxes.
-25-
Regulated Electric Gross Margin
- -------------------------------
2003 2002
-------- --------
(In millions)
Operating revenues ................... $1,398.0 $1,353.4
Less cost of fuel, energy and capacity 397.7 346.7
-------- -------
Electric gross margin ............. $1,000.3 $1,006.7
======== ========
Electric gross margin for 2003 decreased $6.4 million compared to 2002.
The most significant factor influencing the comparison of electric margin for
2003 and 2002 was a change in the classification of costs for energy purchased
under the Cooper Nuclear Station contract due to MidAmerican Energy and the
Nebraska Public Power District ("NPPD") restructuring their contract, effective
August 1, 2002. The restructuring affected both the classification of related
costs on MidAmerican Energy's statement of operations and the total cost to
MidAmerican Energy.
Prior to the restructuring, MidAmerican Energy paid for its share of Cooper
Nuclear Station costs based on 50% of the fixed and operating costs of Cooper
Nuclear Station, excluding depreciation but including debt service and in
exchange received 50% of the actual electrical output of the facility. During
that time, only MidAmerican Energy's share of nuclear fuel cost was classified
as a cost of fuel, energy and capacity, thus impacting electric margin. Other
costs under the contract were classified as other operating expenses.
Under the terms of the restructured contract, MidAmerican Energy pays for
contracted amounts of capacity and energy at fixed prices specified in the
contract and therefore, there is no distinction between fuel costs and any other
actual costs of operating Cooper Nuclear Station. Accordingly, all costs
incurred under the restructured contract are included in MidAmerican Energy's
cost of fuel, energy and capacity, consistent with the cost of power purchased
from other entities.
In aggregate, MidAmerican Energy's costs for the Cooper Nuclear Station contract
declined $46.7 million for 2003 compared to 2002, which is reflected as an
increase in cost of fuel, energy and capacity of $10.8 million and a decrease in
other operating expenses of $57.5 million. The $46.7 million aggregate decrease
was due to cost savings resulting from the restructuring of the contract. The
savings resulted from the restructured contract costs being less than 50% of
NPPD's historical fixed and operating costs of Cooper Nuclear Station that
MidAmerican Energy was required to pay under the original contract, $7.7 million
of amortization related to a cash payment from NPPD in August 2002 and $3.6
million of amortization related to decommissioning expense recognized from
December 2000 through July 2002. The cash payment and the previously recognized
decommissioning expense are being recognized into income based on the estimated
energy expected to be received for the remainder of the contract, which expires
December 31, 2004. Refer to Notes (1)(h) and (4)(c) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for additional discussion of
the Cooper Nuclear Station contract and related costs.
Restructuring the contract has enhanced MidAmerican Energy's ability to
economically purchase energy. The restructured contract provides 1) certainty of
price paid for capacity and energy, 2) market-competitive prices, and 3)
certainty of supply because NPPD must provide the contracted energy even if the
Cooper Nuclear Station is not available. Under the original contract,
MidAmerican Energy was subject to the fluctuating costs and plant outages of
Cooper Nuclear Station.
Following is a discussion of various factors other than the Cooper Nuclear
Station contract that affected gross margin. Margin variation explanations are
management's best estimate of the impact of weather, customer growth and other
factors based on historical consumption patterns. The effect of temperature
conditions during 2003 compared to 2002, resulted in approximately a $7.4
million decrease in electric margin. Other electricity usage factors, such as
changes due to individual customer conservation and a variety of circumstances
affecting customers within MidAmerican Energy's service territory, decreased
electric margin by $11.5 million compared to 2002. Conversely, a 1.1% increase
in the average number of retail customers improved electric gross margin by
$14.3 million compared to 2002. In total, retail electric sales volumes
increased 0.6% compared to 2002.
-26-
Lower fuel costs for Iowa retail electric sales, excluding the impact of
restructuring the Cooper contract, increased electric margin by $6.3 million
relative to 2002. The decrease in fuel costs for Iowa electric retail sales
includes the Iowa portion of $10.9 million of cost recovery recognized in the
second quarter of 2003 related to MidAmerican Energy's coal purchase contract
with Enron Corp. ("Enron"). In November 2001, MidAmerican Energy received
collateral from Enron for costs to MidAmerican Energy related to the coal
purchase contract as a result of a downgrade in Enron's credit ratings in 2001.
MidAmerican Energy recognized the value of the collateral in June 2003 after
resolution of related bankruptcy proceedings. The decrease in fuel costs due to
the coal purchase contract with Enron was partially offset by the Iowa portion
of $5.1 million of expense related to the write-off of the remaining value of
failed nuclear fuel assemblies at Quad Cities Station.
MidAmerican Energy sells and purchases electric capacity. The net margin from
those sales and purchases decreased $2.7 million compared to 2002. Revenues from
transmission services increased $5.2 million compared to 2002.
Regulated Gas Gross Margin
- --------------------------
2003 2002
------ ------
(In millions)
Operating revenues ....... $947.4 $695.8
Less cost of gas sold .... 720.6 482.8
------ ------
Gas gross margin ....... $226.8 $213.0
====== ======
Gas gross margin for 2003 increased $13.8 million compared to 2002.
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 purchase gas adjustment clauses. A 59.9% increase in the
average per-unit cost of gas compared to 2002 increased revenues and cost of gas
sold for 2003 by $269.9 million. That increase in cost of gas sold was partially
offset by the effect of a decrease in sales volumes related to sales for resale
customers.
The following table summarizes the variance in gas operating revenues, including
the impact of the fluctuation in the cost of gas sold. Amounts not related to
the increase in cost of gas have the same impact on gross margin (in millions):
2003 vs. 2002
-------------
Increase in cost of gas:
Price ..................... $269.9
Sales volumes ............. (32.1)
------
Total ................... 237.8
Increases in retail rates ... 12.3
Weather ..................... 4.0
Weather derivative .......... (2.5)
Transported gas ............. 3.0
Customer growth ............. 2.7
Other usage factors ......... (7.3)
Other ....................... 1.6
------
Total revenue variance $251.6
======
The increases in MidAmerican Energy's natural gas retail rates largely took
effect subsequent to the second quarter of 2002. On February 20, 2002, the South
Dakota Public Utilities Commission approved a settlement agreement allowing
increased natural gas rates of $3.1 million annually, effective immediately. On
June 12, 2002, the Iowa Utilities Board ("IUB") issued an order granting an
interim rate increase of approximately $13.8 million annually, effective
immediately. On November 8, 2002, the IUB approved a proposed settlement
-27-
agreement previously filed by MidAmerican Energy and the Iowa Office of Consumer
Advocate that provides for a final increase of $17.7 million annually for
MidAmerican Energy's Iowa retail natural gas customers. On September 11, 2002,
MidAmerican Energy received a final order from the Illinois Commerce Commission
to increase its Illinois natural gas rates by $2.2 million annually. Refer to
the "Legislative and Utility Regulatory Matters" section of MD&A for comments on
the Iowa gas rate settlement.
The increase in gas gross margin due to weather was the result of colder
temperature conditions in the first quarter of 2003 compared to the same quarter
in 2002, offset partially by milder temperature conditions in much of the
remainder of 2003. Other gas usage factors, such as changes due to individual
customer conservation, reaction to prices, and a variety of circumstances
affecting customers within MidAmerican Energy's service territory, decreased gas
margin. MidAmerican Energy's average number of gas retail customers increased
1.0% compared to 2002. Total natural gas retail sales volumes increased 3.0%.
MidAmerican Energy may enter into degree day swaps to offset a portion of the
financial impact of variations in weather conditions on its delivery margins for
the winter heating season. The net loss on such weather derivative financial
instruments partially offset the increased delivery margins due to colder
temperature conditions.
The transported gas increase relates to revenue from natural gas transported
through MidAmerican Energy's distribution system to a number of end-use
customers who have independently purchased their supply from third parties.
Regulated Operating Expenses
- ----------------------------
Regulated other operating expenses for 2003 decreased $34.3 million compared to
2002. As discussed in the "Regulated Electric Gross Margin" section above,
effective August 1, 2002, MidAmerican Energy and NPPD restructured their
contract for Cooper Nuclear Station. Prior to the restructuring, all costs
incurred under the contract, other than the cost of fuel to generate the energy
purchased by MidAmerican Energy, were classified as other operating expenses.
Following the restructuring, substantially all costs incurred by MidAmerican
Energy under the contract are classified as a cost of fuel, energy and capacity.
Accordingly, as a result of that change, MidAmerican Energy's other operating
expenses decreased $57.5 million in 2003 compared to 2002.
The decrease in other operating expenses due to Cooper Nuclear Station costs was
partially offset by increases totaling $15.0 million related to employee costs
for deferred compensation, health care costs, and pension and other
postretirement costs; and by a $4.7 million increase in electric distribution
costs; and a $3.2 million increase in safety costs.
Maintenance expenses increased $17.9 million compared to 2002 due principally to
a $12.4 million increase in fossil fuel generation maintenance costs due
generally to the timing of maintenance. Additionally, maintenance costs at Quad
Cities Station increased $2.5 million and general plant maintenance costs
increased $2.6 million.
Depreciation and amortization expense increased $12.7 million compared to 2002.
Utility plant depreciation increased $4.9 million due primarily to an April 2002
change in the estimated useful life of general utility plant assets. The change
in estimated useful lives from eleven years to eight years increased 2003
depreciation expense by approximately $3.4 million compared to 2002.
Amortization related to an Illinois revenue sharing arrangement accounted for
$4.5 million of the increase in depreciation and amortization expense.
Additionally, amortization for 2002 includes a $2.2 million gain related to the
restructuring of the Cooper Nuclear Station contract in 2002. Refer to the
"Legislative and Utility Regulatory Matters" section for an explanation of the
revenue sharing arrangements.
Property and other taxes increased $4.1 million due primarily to an increase in
property taxes as a result of higher levels of electricity generated and
delivered during the measurement period. Iowa law provides for property taxes
for electric and gas utilities to be based predominantly on energy consumption.
-28-
Nonregulated Gross Margin
- -------------------------
2003 2002
------- -------
(In millions)
MidAmerican Energy -
Nonregulated operating revenues ..... $ 250.4 $ 186.9
Less nonregulated cost of sales ..... 215.7 158.5
------- -------
Nonregulated gross margin ......... $ 34.7 $ 28.4
======= =======
2003 2002
------- -------
(In millions)
MidAmerican Funding Consolidated -
Nonregulated operating revenues ..... $ 254.8 $ 191.6
Less nonregulated cost of sales ..... 216.2 159.4
------- -------
Nonregulated gross margin ......... $ 38.6 $ 32.2
======= =======
MidAmerican Energy -
MidAmerican Energy's nonregulated gross margin for 2003 increased $6.3 million
compared to 2002. The following table presents the margins related to various
nonregulated activities (in millions):
2003 2002
---- ----
Nonregulated retail electric ....... $13.2 $11.4
Nonregulated retail gas ............ 4.9 2.7
Income sharing arrangements under
regulated gas tariffs ............ 5.0 3.1
Incentive gas supply procurement
program award .................... 3.8 3.4
Wholesale gas and electric ......... 4.7 3.3
Other .............................. 3.1 4.5
----- -----
$34.7 $28.4
Electric retail customers in Illinois, except for those served by electric
cooperatives and municipalities, are allowed to select their electric power
supplier. MidAmerican Energy's nonregulated electric retail revenues include
revenues related to these supply services provided to customers outside of
MidAmerican Energy's delivery system who choose their energy supplier. The
improvement in gross margin was due primarily to a 43.9% increase in sales
volumes. Nonregulated electric retail revenues increased $6.4 million to $69.5
million for 2003, while the related cost of sales increased $4.6 million to
$56.3 million.
MidAmerican Energy's nonregulated retail gas marketing services operate in Iowa,
Illinois and Ohio. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements. The improvement in gross margin from these operations
was due almost entirely to a 75.0% increase in the margin per unit sold.
Additionally, sales volumes increased 4.6% compared to 2002. Nonregulated retail
gas revenues increased $55.5 million to $162.4 million due principally to an
increase in the average price per unit sold, which reflects a 44.4% increase in
the average cost of gas. Related nonregulated cost of gas increased $53.3
million to $157.5 million for 2003.
-29-
Nonregulated operations also include earnings from sharing arrangements under
applicable state regulations and tariffs filed with the IUB and the South Dakota
Public Utilities Commission for MidAmerican Energy's regulated natural gas
operations. Under these arrangements, MidAmerican Energy is allowed to keep a
portion of the benefits of gas sales for resale and capacity release
transactions. MidAmerican Energy also has an Incentive Gas Supply Procurement
Program ("IGSPP") in Iowa and a similar program in South Dakota, under which it
can receive awards for successful performance of gas supply procurement. Under
the IGSPP, if MidAmerican Energy's cost of gas varies from an established
reference price range, then the savings or cost is shared between customers and
shareholders. The IGSPP extends through October 31, 2004, and the South Dakota
program extends through October 31, 2005.
Interest and Dividend Income
- ----------------------------
MidAmerican Energy -
Interest and dividend income decreased $3.9 million for 2003 compared to 2002
due to a reduction in interest income on a note receivable associated with
MidAmerican Energy's accounts receivable sold. The related agreement terminated
on October 29, 2002.
MidAmerican Funding -
Interest income related to notes receivable with MidAmerican Funding's parent
company decreased $4.7 million compared to 2002. The related note receivable
balances have been zero throughout 2003. Additionally, 2002 includes $5.0
million from the settlement of an investment in a communications company.
Marketable Securities Gains and Losses, Net
- -------------------------------------------
MidAmerican Funding -
Net losses on marketable securities decreased compared to 2002 due primarily to
$4.4 million of losses recorded in 2002 related to other-than-temporary declines
in MidAmerican Funding's available-for-sale common stock investments.
Other Income and Expense
- ------------------------
MidAmerican Energy -
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 ("FERC").
Accordingly, other income for the capitalized allowance on equity funds used
during construction totaled $11.4 million in 2003 and $8.6 million in 2002.
MidAmerican Energy anticipates recording income for the allowance on equity
funds used during construction over the next several years while the announced
generating plants are constructed.
Other income also includes net earnings related to the cash surrender value of
corporate-owned life insurance policies. Such income totaled $6.3 million and
$1.3 million for 2003 and 2002, respectively. The increase was due to general
improvement in the stock market.
Other income for 2002 includes $1.3 million of income from a fee charged to
MidAmerican Energy Funding Corporation for servicing MidAmerican Energy's
accounts receivable sold to them. Likewise, other expense for 2002 includes a
discount on sold accounts receivable. The discount was designed to cover the
expenses of MidAmerican Energy Funding Corporation, including bad debt expense,
subservicer fees, monthly administrative costs and interest. The discount was
recorded in other expense because it is not reflected in utility cost of service
for regulatory purposes. The discount totaled $6.4 million for 2002. The related
arrangement terminated October 29, 2002.
-30-
MidAmerican Funding -
Other income for 2003 and 2002 includes $1.8 million and $7.9 million,
respectively, of income from equity method investments. Of the $7.9 million for
2002, $5.3 million relates to a distribution of common stock held by a venture
capital fund investment.
Additionally, other income for 2003 includes $3.1 million of income related to
the settlement of a lawsuit. Other income for 2002 also includes gains of $2.6
million from the sale of an investment in a communications company and $0.5
million from the sale of rail cars.
Other expense for MidAmerican Funding in 2003 includes losses of $4.3 million
for the write-down of an impaired energy project and $2.1 million for the
write-off of a receivable from a venture capital investment. Other expense in
2002 includes write-downs for impaired assets and investments. MidAmerican
Funding has investments in commercial passenger aircraft, including two aircraft
leased to United Air Lines, Inc., which it accounts for as leveraged leases.
Evaluation of these investments resulted in a $12.6 million write-down in 2002.
Additionally, MidAmerican Funding recorded a $5.1 million loss for the
impairment of an equity method investment, a $2.7 million loss related to a
receivable from a venture capital investment and losses totaling $1.5 million
from impairments on three venture capital fund investments in 2002.
Fixed Charges and Preferred Dividends
- -------------------------------------
MidAmerican Energy -
Preferred dividends of MidAmerican Energy's subsidiary trust decreased due to
the reacquisition of all of the related preferred securities on March 11, 2002.
Dividends for MidAmerican Energy's preferred securities, which are reflected
after Net Income on MidAmerican Energy's Consolidated Statements of Operations,
decreased due to preferred securities reacquired in May 2002. Preferred
dividends for 2002 reflect a $0.7 million loss on reacquisition of preferred
securities.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Earnings Overview
- -----------------
MidAmerican Energy -
MidAmerican Energy's earnings on common stock improved $24.7 million to $172.9
million for 2002 compared to $148.2 million for 2001. Significant factors
contributing to the improvement in earnings were: 1) warmer temperatures during
the 2002 cooling season, 2) a reduction in costs related to Cooper Nuclear
Station due to a restructuring of the power purchase contract in August 2002 and
3) an increase in retail gas rates.
MidAmerican Funding -
MidAmerican Funding's net income for 2002 totaled $136.7 million compared to
$103.1 million for 2001. In accordance with SFAS No. 142, MidAmerican Funding's
goodwill ceased being amortized effective January 1, 2002. Net income for 2001
was reduced by $34.4 million for goodwill amortization. After considering the
difference due to goodwill amortization, net income for 2002 declined $0.8
million compared to 2001. In addition to the factors discussed above for
MidAmerican Energy, net income for 2002 reflects $4.9 million of after-tax
income related to a gain and interest income from the sale of an investment in a
communications company, $17.1 million of after-tax loss for impairments of
investments and $4.0 million of additional income taxes.
-31-
Regulated Electric Gross Margin
- -------------------------------
2002 2001
-------- --------
(In millions)
Operating revenues........................ $1,353.4 $1,318.1
Less cost of fuel, energy and capacity.... 346.7 275.9
-------- --------
Electric gross margin................... $1,006.7 $1,042.2
======== ========
Electric gross margin for 2002 decreased $35.5 million compared to 2001.
Effective August 1, 2002, MidAmerican Energy and NPPD restructured their
contract for Cooper Nuclear Station. In aggregate, MidAmerican Energy's costs
for the Cooper Nuclear Station contract declined $13.0 million for 2002 compared
to 2001. Refer to the "Regulated Electric Gross Margin" section for 2003
compared to 2002 for a discussion of the restructuring. As a result of the
restructuring, MidAmerican Energy's costs under the contract are now classified
differently on its statement of operations. The change in cost classification,
partially offset by savings from the contract restructuring, resulted in a $33.2
million decrease in electric gross margin compared to 2002.
In addition to the effect of restructuring the contract for Cooper Nuclear
Station, MidAmerican Energy's gross margin on electric wholesale sales decreased
$23.1 million for 2002 compared to 2001. Lower margins per unit sold reduced
electric wholesale gross margin by $48.9 million but were offset by a $25.8
million improvement due to a 21.1% increase in wholesale sales volumes.
Wholesale sales are the sales of energy to other utilities, municipalities and
marketers inside and outside of MidAmerican Energy's delivery system.
Warmer temperatures in the 2002 cooling season resulted in approximately a $16.0
million increase in electric margin compared to 2001. Other electricity usage
factors, such as changes due to individual customer conservation and a variety
of circumstances affecting customers within the MidAmerican Energy's service
territory, increased electric margin by $16.3 million compared to 2001. A 1.0%
increase in the average number of customers improved electric gross margin by
$8.6 million for 2002. Additionally, a decrease in fuel costs related to Iowa
retail electric sales, excluding the impact of restructuring the Cooper Nuclear
Station contract, increased electric margin by $7.9 million relative to 2001. In
total, retail electric sales volumes increased 3.9% for 2002.
Electric revenues from the recovery of energy efficiency program costs decreased
$14.9 million compared to 2001. The decrease in 2002 was due to completion in
the third quarter of 2001 of the final recovery phase for deferred energy
efficiency costs. Deferred energy efficiency costs were costs previously
incurred by MidAmerican Energy, which, in accordance with rate treatment, were
not charged to expense until recovery from customers began. Recovery of deferred
energy efficiency costs occurred over a four-year period from the date
collection began for each phase. The decrease in recovery of deferred costs was
offset partially by an increase in the recovery of current energy efficiency
costs. Changes in these revenues are substantially matched with corresponding
changes in other operating expenses. Approximately $13.9 million of MidAmerican
Energy's 2002 electric revenues were from the recovery of energy efficiency
program costs compared to $28.8 million in 2001.
MidAmerican Energy sells and purchases electric capacity. The net margin from
those sales and purchases decreased $2.3 million compared to 2001. Also,
MidAmerican Energy's gains from sales of emission allowances decreased $3.2
million in 2002 due to a gain in 2001. Revenues from transmission services
decreased $2.5 million compared to 2001, and electric revenues from recovery
mechanisms related to Cooper Nuclear Station and manufactured gas plant costs
decreased $2.6 million.
-32-
Regulated Gas Gross Margin
- --------------------------
2002 2001
------ ------
(In millions)
Operating revenues ......... $695.8 $869.1
Less cost of gas sold ...... 482.8 674.9
------ ------
Gas gross margin ......... $213.0 $194.2
====== ======
Gas gross margin for 2002 increased $18.8 million compared to 2001.
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 purchase gas adjustment clauses. A 22.9% decrease in the
per-unit cost of gas compared to 2001 decreased revenues and cost of gas sold
for 2002 by approximately $135.2 million. The remainder of the decrease in cost
of gas sold was due to a decrease in volumes purchased as a result of a
reduction in sales volumes related to sales-for-resale customers.
The following table summarizes the variance in gas operating revenues, including
the impact of the fluctuation in the cost of gas sold (in thousands):
2002 vs. 2001
-------------
Decrease in cost of gas:
Price ........................ $(135.2)
Sales volumes ................ (56.9)
-------
Total ........................ (192.1)
Increases in retail rates .... 11.5
Weather ...................... 1.0
Weather derivative ........... (1.3)
Customer growth .............. 2.0
Other usage factors .......... 5.7
Other ........................ (0.1)
-------
Total revenue variance ....... $(173.3)
=======
The increases in retail rates reflects the impact of a portion of several rate
increases throughout 2002. On February 20, 2002, the South Dakota Public
Utilities Commission approved a settlement agreement allowing increased natural
gas rates of $3.1 million annually, effective immediately. On June 12, 2002, the
IUB issued an order granting an interim rate increase of approximately $13.8
million annually, effective immediately. On November 8, 2002, the IUB approved a
proposed settlement agreement previously filed by MidAmerican Energy and the
Office of Consumer Advocate that provides for a final increase of $17.7 million
annually for MidAmerican Energy's Iowa retail natural gas customers. On
September 11, 2002, MidAmerican Energy received a final order from the Illinois
Commerce Commission to increase its Illinois natural gas rates by $2.2 million
annually. Refer to the "Legislative and Utility Regulatory Matters" section of
MD&A for comments on the Iowa gas rate settlement.
The increase in gas gross margin due to weather was the result of colder
temperature conditions in the second and fourth quarters of 2002 compared to the
same quarters in 2001, offset partially by milder temperature conditions in the
remainder of 2002. Other gas usage factors, such as changes due to individual
customer conservation, reaction to prices, and a variety of circumstances
affecting customers within MidAmerican Energy's service territory, increased gas
margin in 2003. MidAmerican Energy's average number of gas retail customers
increased 1.2% compared to 2001. Total natural gas retail sales volumes
increased 1.3%.
MidAmerican Energy entered into a degree day swap in 2002 to offset a portion of
the financial impact of variations in weather conditions on its delivery margins
for the winter heating season. The loss on such weather derivative financial
instrument offset the increased delivery margins due to colder temperature
conditions.
-33-
Regulated Operating Expenses
- ----------------------------
Regulated other operating expenses for 2002 decreased $54.9 million for
MidAmerican Energy and $50.8 million for MidAmerican Funding compared to 2001.
Effective August 1, 2002, MidAmerican Energy and NPPD restructured their
contract for Cooper Nuclear Station. Refer to the "Regulated Electric Gross
Margin" section for 2003 compared to 2002 for a discussion of the restructuring.
Accordingly, as a result of that change, MidAmerican Energy's other operating
expenses decreased $46.2 million for 2002 compared to 2001.
Other substantive decreases in other operating expenses included $10.4 million
in energy efficiency program costs, $6.5 million in the provision for
uncollectible accounts receivable and $2.5 million related to information
technology. The decreases were partially offset by increases compared to 2001
for pension and other postretirement costs, which increased $10.8 million,
health care costs, which increased $4.2 million, and Quad Cities Station
(nuclear) costs, which increased $3.9 million.
Maintenance expenses decreased $2.9 million for 2002 compared to 2001 due to a
$5.6 million decrease in electric distribution maintenance expenses as a result
of a reduction in costs for tree-trimming activity. Fossil-fuel generation
maintenance expenses increased $1.9 million for 2002.
Depreciation and amortization expense for 2002 increased $16.7 million compared
to 2001 due to a $13.5 million increase in utility plant depreciation due
principally to a change in the estimated useful life of general utility plant
assets. In April 2002, MidAmerican Energy changed the estimated lives for its
general utility plant assets from eleven years to eight years, resulting in
approximately a $10.1 million increase in depreciation expense in 2002. A $7.8
million increase related to the establishment of a regulatory liability for the
electric revenue sharing arrangement in Iowa also contributed to the increase.
Refer to the "Legislative and Utility Regulatory Matters" section of MD&A for
further discussion. The increases were partially offset by a gain related to the
restructuring of the Cooper Nuclear Station contract.
Property and other taxes fluctuated in 2002 and 2001 compared to each preceding
year due primarily to changes in MidAmerican Energy's Iowa property tax assessed
values.
Nonregulated Gross Margin
- -------------------------
2002 2001
------ ------
(In millions)
MidAmerican Energy -
Nonregulated operating revenues ........ $186.9 $180.0
Less nonregulated cost of sales ........ 158.5 154.4
------ ------
Nonregulated gross margin .............. $ 28.4 $ 25.6
====== ======
MidAmerican Funding Consolidated -
Nonregulated operating revenues ........ $191.6 $201.4
Less nonregulated cost of sales ........ 159.4 170.5
------ ------
Nonregulated gross margin .............. $ 32.2 $ 30.9
====== ======
-34-
MidAmerican Energy -
MidAmerican Energy's nonregulated gross margin for 2002 increased $2.8 million
compared to 2001. The following table presents the margins related to various
nonregulated activities (in millions):
2002 2001
---- ----
Nonregulated retail electric .......... $11.4 $ 4.6
Nonregulated retail gas ............... 2.7 2.0
Incentive gas supply procurement
program award ......................... 3.4 4.1
Income sharing arrangements under
regulated gas tariffs ................. 3.1 4.4
Wholesale gas and electric ............ 3.3 6.9
Other ................................. 4.5 3.6
----- -----
$28.4 $25.6
===== =====
All electric retail customers in Illinois, except for those served by electric
cooperatives and municipalities, are allowed to select their electric power
supplier. The improvement in gross margin was due to an increase in sales
volumes as a result of the addition of customers and an increase in margin per
unit sold as a result of decreases in the related cost of energy. Nonregulated
electric retail revenues increased $29.7 million to $63.1 million for 2002 while
cost of sales increased $22.1 million to $51.7 million.
Gross margin for MidAmerican Energy's nonregulated retail natural gas operations
increased $0.7 million to $2.7 million for 2002. The improvement in gross margin
reflects a 19.8% increase in margin per unit sold and a 12.0% increase in sales
volumes. Revenues from nonregulated retail natural gas operations decreased
$11.8 million to $106.9 million for 2002 due to a decrease in the average price
per unit sold, reflective of a 20.3% decrease in the average cost of gas. The
decrease due to average price was partially offset by the increase in sales
volumes. Related nonregulated cost of gas decreased $12.5 million to $104.2
million for 2002.
Nonregulated revenues include earnings from sharing arrangements under regulated
natural gas tariffs. MidAmerican Energy also has incentive gas procurement
programs, such that if MidAmerican Energy's cost of gas varies from an
established reference price range, then the savings or cost is shared between
customers and shareholders. Earnings from the sharing arrangements totaled $6.5
million for 2002 and $8.5 million for 2001.
Nonregulated revenues for 2001 include $6.2 million from MidAmerican Energy's
market access service project. Related cost of sales totaled $5.4 million. The
pilot project, which concluded in May 2001, allowed larger Iowa customers that
were participating in the project to choose their electric power supplier.
Nonregulated Operating Expenses: Other
- --------------------------------------
MidAmerican Funding -
MidAmerican Funding's nonregulated other operating expenses, exclusive of
MidAmerican Energy amounts, decreased $34.1 million for 2002 compared to 2001.
MidAmerican Funding's goodwill is no longer being amortized as a result of the
adoption of SFAS No. 142 on January 1, 2002. Amortization of MidAmerican
Funding's goodwill totaled $34.4 million for 2001.
-35-
Interest and Dividend Income
- ----------------------------
MidAmerican Energy -
Interest and dividend income decreased $4.2 million for 2002 compared to 2001
due to a $5.9 million reduction in interest income on a note receivable
associated with MidAmerican Energy's accounts receivable sold. The related
agreement terminated on October 29, 2002. A more favorable cash position
increased interest income on short-term investments compared to 2001, partially
offsetting the decrease in interest income on the note receivable. The improved
cash position was due principally to the issuance of $400 million of notes in
February 2002.
MidAmerican Funding -
Excluding MidAmerican Energy, interest income for MidAmerican Funding increased
$2.0 million for 2002 compared to 2001. Interest income for 2002 includes $5.0
million from the settlement of an investment in a communications company but was
partially offset by a $2.6 million decrease in interest income related to note
receivables with MidAmerican Funding's parent company. Refer to Note (16) of
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a
discussion of the notes with the parent company.
Dividend income decreased in 2002 and 2001 compared to each preceding year due
to the on-going liquidation of the preferred stock investment portfolio.
Marketable Securities Gains and Losses, Net
- -------------------------------------------
MidAmerican Funding -
Net losses on marketable securities increased $4.0 million for 2002 compared to
2001. In 2002, MidAmerican Funding recorded losses totaling $4.3 million for
other-than-temporary declines in its available-for-sale common stock
investments. Additionally, other losses on marketable securities increased $2.0
million in 2002. The first quarter of 2001 includes a $2.4 million pre-tax loss
related to the re-characterization of marketable securities to "trading" as
allowed by SFAS No. 133, thus increasing 2002 income relative to 2001.
Other Income and Expense
- ------------------------
MidAmerican Energy -
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 FERC. Accordingly, other income for the capitalized
allowance on equity funds used during construction totaled $8.6 million in 2002
and $1.6 million in 2001. MidAmerican Energy anticipates recording income for
the allowance on equity funds used during construction over the next several
years while the announced generating plants are constructed.
Other income includes net earnings related to the cash surrender value of
corporate-owned life insurance policies. Such income totaled $1.3 million and
$5.3 million for 2002 and 2001, respectively. The income for 2001 includes a
gain from common stock received as a result of an initial stock offering by an
insurance provider.
Other income includes income from a fee charged to MidAmerican Energy Funding
Corporation for servicing MidAmerican Energy's accounts receivable sold to them.
Subservicer fee income totaled $1.3 million and $2.9 million for 2002 and 2001,
respectively. Likewise, other expense includes a discount on sold accounts
receivable. The discount is designed to cover the expenses of MidAmerican Energy
Funding Corporation, including bad debt expense, subservicer fees, monthly
administrative costs and interest. The discount totaled $6.4 million and $16.0
million for 2002 and 2001, respectively. The related arrangement terminated
October 29, 2002.
-36-
MidAmerican Funding -
Other income of MidAmerican Funding includes $7.9 million and $5.1 million of
income from equity method investments in 2002 and 2001, respectively. Equity
income for 2002 includes $5.3 million of income for a distribution of common
stock held by a venture capital fund investment. In 2001, equity income includes
$2.3 million related to a gain on a common stock distribution from one of
MidAmerican Funding's venture capital fund investments.
Other income for 2002 also includes a $2.6 million gain on the sale of an
investment in a communications company and $0.5 million from the sale of rail
cars.
Other expense for MidAmerican Funding in 2002 includes write-downs for impaired
assets and investments. MidAmerican Funding has investments in commercial
passenger aircraft, including two leased to United Air Lines, Inc., which it
accounts for as leveraged leases. Evaluation of these investments resulted in a
$12.6 million pre-tax write-down. Additionally, MidAmerican Funding recorded a
$5.1 million loss for the impairment of an equity method investment, a $2.7
million loss related to a receivable from a venture capital investment and
losses totaling $1.5 million from impairments on three venture capital fund
investments.
Fixed Charges and Preferred Dividends
- -------------------------------------
MidAmerican Energy -
The increase in interest on long-term debt for 2002 compared to 2001 was due to
the issuance of $400 million of notes in February 2002, net of the impact of
debt maturities in 2001 and lower variable interest rates in 2002.
Other interest expense decreased for 2002 compared to 2001 due principally to
interest in 2001 related to income tax assessments. Additionally, other interest
expense decreased due to a reduction in short-term debt outstanding.
Preferred dividends of MidAmerican Energy's subsidiary trust decreased in 2002
due to the reacquisition of all of the related preferred securities on March 11,
2002. Dividends for MidAmerican Energy's preferred securities, which are
reflected after Net Income on MidAmerican Energy's Consolidated Statements of
Operations, decreased due to preferred securities reacquired in May and November
2001 and May 2002.
-37-
LIQUIDITY AND CAPITAL RESOURCES
MidAmerican Energy and MidAmerican Funding have 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 by operating activities was $441.3 million, $352.8 million and
$478.8 million for 2003, 2002 and 2001, respectively. MidAmerican Funding's net
cash provided by operating activities was $416.7 million, $365.6 million and
$461.0 million for 2003, 2002 and 2001, respectively.
Utility Construction Expenditures
- ---------------------------------
MidAmerican Energy's primary need for capital is utility construction
expenditures. For 2003, utility construction expenditures totaled $376.2
million, including allowance for funds used during construction and Quad Cities
Station nuclear fuel purchases.
Forecasted utility construction expenditures, including allowance for funds used
during construction, are $844 million for 2004. Capital expenditure needs are
reviewed regularly by management and may change significantly as a result of
such reviews. MidAmerican Energy expects to meet these capital expenditures with
cash flows from operations and the issuance of long-term debt.
MidAmerican Energy anticipates a continuing increase in demand for electricity
from its regulated customers. To meet anticipated demand and ensure adequate
electric generation in its service territory, MidAmerican Energy is currently
constructing two electric generating projects in Iowa and is developing a third.
Upon completion, the projects will provide service to regulated retail
electricity customers. MidAmerican Energy has obtained regulatory approval to
include the actual costs of the generation projects in its Iowa rate base as
long as actual costs do not exceed an agreed cap that MidAmerican Energy has
deemed to be reasonable. If the caps are exceeded, MidAmerican Energy has the
right to demonstrate the prudence of the expenditures above the caps subject to
regulatory review. Wholesale sales may also be made from the projects to the
extent the power is not needed for regulated retail service. MidAmerican Energy
expects to invest approximately $1.4 billion in the three projects, of which
approximately $314 million has been invested through December 31, 2003.
The first project is a natural gas-fired combined cycle unit with an estimated
cost of $357 million, excluding allowance for funds used during construction.
MidAmerican Energy will own and operate the plant. Commercial operation of the
simple cycle mode began on May 5, 2003. The plant, which will continue to be
operated in simple cycle mode during 2004, resulted in 327 megawatts ("MW") of
accredited capacity in the summer of 2003. The combined cycle operation is
expected to commence in December 2004 and achieve an expected additional
accredited capacity of 190 MW.
The second project is currently under construction and will be a 790-MW (based
on expected accreditation) super-critical-temperature, low-sulfur coal-fired
plant. MidAmerican Energy will operate the plant and hold an undivided ownership
interest as a tenant in common with the other owners of the plant. MidAmerican
Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican
Energy expects its share of the estimated cost of the project to be
approximately $713 million, excluding allowance for funds used during
construction. Municipal, cooperative and public power utilities will own the
remainder, which is a typical ownership arrangement for large base-load plants
in Iowa. On May 29, 2003, the IUB issued an order that approves the ratemaking
principles for the plant, and on June 27, 2003, MidAmerican Energy received a
certificate from the IUB allowing MidAmerican Energy to construct the plant. On
February 12, 2003, MidAmerican Energy executed a contract with Mitsui & Co.
Energy Development, Inc. for the engineering, procurement and construction of
the plant. On September 9, 2003, MidAmerican Energy began construction of the
plant, which it expects to be completed in the summer of 2007. MidAmerican
Energy is also seeking an order from the IUB approving construction of the
associated transmission facilities.
-38-
The third project is currently under development and is comprised of wind power
facilities totaling 310 MW based on the nameplate rating. Generally speaking,
accredited capacity ratings for wind power facilities are considerably less than
the nameplate ratings due to the varying nature of wind. The current projected
accredited capacity for these wind power facilities is approximately 53 MW. If
constructed, MidAmerican Energy will own and operate these facilities, which are
expected to cost approximately $323 million. MidAmerican Energy's plan to
construct the wind project is in conjunction with a settlement agreement that
extends through December 31, 2010, an Iowa retail electric rate freeze that was
previously scheduled to expire at the end of 2005. The settlement agreement,
which was filed with the IUB as part of MidAmerican Energy's application for
ratemaking principles for the wind project, was approved by the IUB on October
17, 2003. The obligation of MidAmerican Energy to construct the wind project may
be terminated by MidAmerican Energy if the Federal production tax credit
applicable to the wind energy facilities is not available at a rate of 1.8 cents
per kWh for a period of at least ten years after the facilities begin generating
electricity. The production tax credit is available only to wind facilities
placed in service before January 1, 2004. MidAmerican Energy has also received
authorization from the IUB to construct the wind power project. If MidAmerican
Energy does not construct the wind power facilities by December 31, 2007, the
rate extension from January 1, 2006, through December 31, 2010, may terminate.
Refer to the "Rate Matters" discussion below for more information regarding the
rate aspects of the settlement.
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.
MidAmerican Energy currently contributes $8.3 million annually to external
trusts established for the investment of funds for decommissioning Quad Cities
Station. Approximately 65% of the fair value of the trusts' funds is 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 nuclear decommissioning is reflected as depreciation expense
in the Consolidated Statements of Operations. 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.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
MidAmerican Energy and MidAmerican Funding have various contractual obligations
and commercial commitments. The following table summarizes as of December 31,
2003, the material cash obligations of MidAmerican Energy and MidAmerican
Funding (in millions).
Period Payments are Due
--------------------------------------------------
2005- 2007- After
Type of Obligation Total 2004 2006 2008 2008
- ------------------ -------- ------ ------ ------ --------
MidAmerican Energy:
Long-term debt, excluding unamortized
debt premium and discount, net .... $1,134.1 $ 56.1 $251.6 $ 2.0 $ 824.4
Operating leases (1) ................ 25.4 7.2 9.8 6.1 2.3
Coal, electricity and natural gas
contract commitments (1) .......... 602.9 188.8 204.5 101.2 108.4
-------- ------ ------ ------ --------
Total ............................. 1,762.4 252.1 465.9 109.3 935.1
MidAmerican Funding parent:
Long-term debt ...................... 700.0 - - - 700.0
-------- ------ ------ ------ --------
Total ............................. $2,462.4 $252.1 $465.9 $109.3 $1,635.1
======== ====== ====== ====== ========
(1) The operating leases and coal, energy and natural gas commitments are not
reflected on the Consolidated Balance Sheets. Refer to Note (4)(f) in Notes
to Consolidated Financial Statements in Item 8 of this Form 10-K for a
discussion of the nature of these commitments.
-39-
MidAmerican Energy has other types of commitments that are subject to change and
relate primarily to the items listed below. For additional information, refer,
where applicable, to the respective referenced note in Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K.
- Construction expenditures: Refer to the "Utility Construction
Expenditures" section above.
- Manufactured gas plant facilities (see Note (4)(a))
- Nuclear decommissioning costs (see Note (4)(d))
- Residual guarantees on operating leases (see Note (4)(g))
Debt Authorizations and Credit Facilities
- -----------------------------------------
MidAmerican Energy has authority from the FERC to issue through April 14, 2005,
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. The facility expires
January 13, 2005.
MidAmerican Energy has on file with the Securities and Exchange Commission
registration statements providing for the issuance of $880 million in various
forms of senior and subordinated long-term debt and preferred securities.
MidAmerican Energy has authorization from the FERC to issue various forms of
long-term debt in the amount of $880 million through November 30, 2004, and $455
million for December 1, 2004 through November 30, 2005. Such funds would be used
to refinance maturing debt and to finance a portion of the cost of the
generation projects noted above.
MidAmerican Energy is required to obtain authorization from the Illinois
Commerce Commission ("ICC") 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 ICC 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 ICC is required to hold a hearing before
issuing its authorization. MidAmerican Energy currently has authority from the
ICC to issue up to $895 million of long-term debt for refinancing purposes and
capital expenditures.
In conjunction with the March 1999 merger, MidAmerican Energy committed to the
IUB to use commercially reasonable efforts to maintain an investment grade
rating on its long-term debt and to maintain its common equity level above 42%
of total capitalization unless circumstances beyond its control result in the
common equity level decreasing to below 39% of total capitalization. MidAmerican
Energy must seek the approval of the IUB of a reasonable utility capital
structure if MidAmerican Energy's common equity level decreases below 42% of
total capitalization, unless the decrease is beyond the control of MidAmerican
Energy. MidAmerican Energy is also required to seek the approval of the IUB if
MidAmerican Energy's equity level decreases to below 39%, even if the decrease
is due to circumstances beyond the control of MidAmerican Energy. If MidAmerican
Energy's common equity level were to drop below the required thresholds,
MidAmerican Energy's ability to issue debt could be restricted.
Debt Issuances and Redemptions
- ------------------------------
On January 14, 2003, MidAmerican Energy issued $275 million of 5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.
On February 10, 2003, MidAmerican Energy redeemed all $75 million of its 7.375%
series of mortgage bonds, and on March 17, 2003, it redeemed all $6.94 million
of its 7.45% series of mortgage bonds. Additionally, MidAmerican Energy's 7.125%
series of mortgage bonds totaling $100 million matured on February 3, 2003. On
-40-
October 17, 2003, MidAmerican Energy redeemed all $12.5 million of its 6.95%
series of mortgage bonds at 103.48% of the principal amount.
Other Financing Information
- ---------------------------
MidAmerican Funding or one of its subsidiaries, including MidAmerican Energy,
may from time to time seek to retire its outstanding debt through cash purchases
and/or exchanges for other securities, in open market purchases, privately
negotiated transactions or otherwise. The repurchases or exchanges, if any, will
depend on prevailing market conditions, the issuing company's liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
CREDIT RATINGS RISKS
Debt and preferred securities of MidAmerican Funding and MidAmerican Energy are
rated by nationally recognized credit rating agencies. Assigned credit ratings
are based on each rating agency's assessment of MidAmerican Funding's or
MidAmerican Energy's ability to, in general, meet the obligations of the debt or
preferred securities issued by the rated company. The credit ratings are not a
recommendation to buy, sell or hold securities, and there is no assurance that a
particular credit rating will continue for any given period of time. Other than
the energy trading agreements discussed below, neither MidAmerican Funding nor
MidAmerican Energy has any credit agreements that require termination or a
material change in collateral requirements or payment schedule in the event of a
downgrade in the credit ratings of the respective company's securities.
In conjunction with its wholesale marketing and trading activities, MidAmerican
Energy must meet credit quality standards as required by counterparties.
MidAmerican Energy has energy trading agreements that, in accordance with
industry practice, either specifically require it to maintain investment grade
credit ratings or provide the right for counterparties to demand "adequate
assurances" in the event of a material adverse change in MidAmerican Energy's
creditworthiness. If one or more of MidAmerican Energy's credit ratings decline
below investment grade, MidAmerican Energy may be required to post cash
collateral, letters of credit or other similar credit support to facilitate
ongoing wholesale marketing and trading activities. As of December 31, 2003,
MidAmerican Energy's estimated potential collateral requirements totaled
approximately $89 million. MidAmerican Energy's collateral requirements could
fluctuate considerably due to seasonality, market price volatility, a loss of
key MidAmerican Energy generating facilities or other related factors.
LEGISLATIVE AND UTILITY REGULATORY MATTERS
Electric Deregulation
- ---------------------
Under Illinois law, as of December 31, 2000, all non-residential customers in
Illinois are allowed to select their provider of electric supply services.
Residential customers all received the opportunity to select their electric
supplier beginning May 1, 2002.
In Iowa and elsewhere, the pace of deregulation has slowed considerably as a
result of the energy crisis and related events in California beginning in 2000.
These and other events have heightened concerns nationally about deregulation of
the electric utility industry.
Rate Matters
- ------------
Under two settlement agreements approved by the IUB, MidAmerican Energy's Iowa
retail electric rates in effect on December 31, 2000, are effectively frozen
through December 31, 2010. The settlement agreements specifically allow the
filing of electric rate design or cost of service rate changes that are intended
to keep MidAmerican Energy's overall Iowa retail electric revenue unchanged, but
could result in changes to individual tariffs. The settlement agreements also
each provide that portions of revenues associated with Iowa retail electric
-41-
returns on equity within specified ranges will be recorded as a regulatory
liability to be used to offset a portion of the cost to Iowa customers of future
generating plant investment.
Under the first settlement agreement, which was approved by the IUB on December
21, 2001, and is effective through December 31, 2005, an amount equal to 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 is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy's application for ratemaking principles on a
wind power project and was approved by the IUB on October 17, 2003, provides
that during the period January 1, 2006 through December 31, 2010, an amount
equal to 40% of revenues associated with returns on equity between 11.75% and
13%, 50% of revenues associated with returns on equity between 13% and 14%, and
83.3% of revenues associated with returns on equity above 14%, in each year will
be recorded as a regulatory liability. An amount equal to the regulatory
liability is recorded as a regulatory charge in depreciation and amortization
expense when the liability is accrued. Future depreciation will be reduced as a
result of the credit applied to generating plant balances as the regulatory
liability is reduced. The liability is being reduced as it is credited against
plant in service in amounts equal to the allowance for funds used during
construction associated with generating plant additions. Interest expense is
accrued on the portion of the regulatory liability related to prior years. As of
December 31, 2003 and 2002, the related regulatory liability reflected on the
Consolidated Balance Sheets was $144.4 million and $102.9 million, respectively.
The 2003 settlement agreement also provides that if Iowa retail electric returns
on equity fall below 10% in any consecutive 12-month period after January 1,
2006, MidAmerican Energy may seek to file for a general increase in rates.
However, prior to filing for a general increase in rates, MidAmerican Energy is
required by the settlement agreement to conduct 30 days of good faith
negotiations with all of the signatories to the settlement agreement to attempt
to avoid a general increase in rates.
Illinois bundled electric rates are frozen until 2007, subject to certain
exceptions allowing for increases, at which time bundled rates are subject to
cost-based ratemaking. Illinois law provides for Illinois earnings above a
computed level of return on common equity to be shared equally between regulated
retail electric customers and MidAmerican Energy. MidAmerican Energy's computed
level of return on common equity is based on a rolling two-year average of the
Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve
System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for
2005 and 2006. The two-year average above which sharing must occur for 2003 was
13.73%. The law allows MidAmerican Energy to mitigate the sharing of earnings
above the threshold return on common equity through accelerated recovery of
electric assets.
Transmission Developments
- -------------------------
The Federal Energy Regulatory Commission (the "FERC") has undertaken several
measures to increase competition in the markets for wholesale electric energy,
including efforts to foster the development of regional transmission
organizations ("RTO") in its Order No. 2000 issued December 1999 and its July
2002 proposed rulemaking that would implement a standard market design ("SMD")
for wholesale electric markets.
In response to Order No. 2000, MidAmerican Energy and five other electric
utilities applied for FERC approval to create TRANSLink Transmission Company LLC
("TRANSLink") as a for-profit independent transmission company to be operated in
conjunction with a FERC-approved RTO. The FERC approved that application in
April 2002. In June 2003, the IUB issued an order disapproving MidAmerican
Energy's application for state regulatory approval of MidAmerican Energy's
participation in TRANSLink and inviting MidAmerican Energy to refile the
application once certain issues at the federal level have been resolved. On
November 21, 2003, in response to continued regulatory uncertainty, TRANSLink
suspended its operations and dissolved its interim management team. MidAmerican
Energy is currently evaluating options relating to its transmission options in
light of TRANSLink's current status.
If implemented, the FERC's July 2002 proposed rule for SMD would require
sweeping changes to the use and expansion of the interstate transmission and
wholesale bulk power systems in the United States. However, it is
-42-
unclear when or even whether FERC will issue a final rule and what form the
final rule would ultimately take. In response to significant criticism of its
proposed rule, the FERC subsequently indicated that it had changed its proposal
and would adopt a flexible approach to SMD that would accommodate regional
differences. Legislation that is currently pending in Congress would forbid the
FERC from implementing the SMD rule for several years, but it is not certain
whether that legislation will be adopted. Any final rule on SMD may impact the
costs of MidAmerican Energy's electricity and transmission products. A final
rule on SMD could directly or indirectly influence how transmission services are
priced, the availability of transmission services, and how transmission services
are obtained. In addition, the rule could affect how wholesale electricity is
bought and sold, as well as the geographic scope of the wholesale marketplace in
which MidAmerican Energy buys and sells electricity. MidAmerican Energy
recognizes there is considerable uncertainty as to the timing and outcome of
this rulemaking and will continue to evaluate the status of the adoption of SMD
for the wholesale markets. Transferring the operations and control of
MidAmerican Energy's transmission assets to other entities could increase costs
for MidAmerican Energy; however, the actual effect of any such transaction on
MidAmerican Energy's future transmission costs, or alternate RTO strategies, is
not yet known.
ENVIRONMENTAL MATTERS
The U.S. Environmental Protection Agency ("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. As of December 31, 2003, MidAmerican Energy has recorded a
$14.0 million liability for these sites and a corresponding regulatory asset for
future recovery through the regulatory process. Refer to Note (4)(a) of Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K 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.
MidAmerican Energy's generating facilities are subject to applicable provisions
of the Clean Air Act and related air quality standards promulgated by the EPA.
The Clean Air Act provides the framework for regulation of certain air emissions
and permitting and monitoring associated with those emissions. MidAmerican
Energy is believes it is in material compliance with current regulations. Refer
to Note (4)(b) of Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for further discussion of air quality standards affecting MidAmerican
Energy.
GENERATING CAPABILITY
In August 2003, retail customer usage of electricity caused a new record hourly
peak demand of 3,935 MW on MidAmerican Energy's electric system, surpassing the
previous record of 3,889 MW set in July 2002. 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.
For the 2003 cooling season, MidAmerican Energy's reserve was approximately 22%
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. However, significantly higher-than-normal
-43-
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.
MidAmerican Energy is financially exposed to movements in energy prices since it
no longer recovers its energy costs through an energy adjustment clause in Iowa.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, MidAmerican Energy adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet
of legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal operation of
such assets. Concurrent with the recognition of the liability, the estimated
cost of an asset retirement obligation is capitalized and depreciated over the
remaining life of the asset.
On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset
retirement obligation ("ARO") liabilities; $12.6 million of associated ARO
assets, net of accumulated depreciation; $101.8 million of regulatory assets;
and reclassified $1.0 million of accumulated depreciation to the ARO liability
in conjunction with adoption of SFAS No. 143. Adoption of SFAS No. 143 did not
impact net income. The initial ARO liability recognized includes $266.5 million
that pertains to obligations associated with the decommissioning of the Quad
Cities Station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded as of December 31, 2002. As of
December 31, 2003, $184.2 million of assets reflected in Investments and
Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for
satisfying the Quad Cities Station obligation.
The change in the balance of the ARO liability during 2003 is summarized as
follows (in thousands):
Balance January 1, 2003 .......................... $ 275,228
Revision to nuclear decommissioning ARO liability. (21,902)
Capitalized accretion ............................ 15,798
---------
Balance December 31, 2003 ........................ $ 269,124
=========
The revision to the nuclear decommissioning ARO liability was due to the results
of a decommissioning study in 2003. Accretion on the ARO liability is
capitalized as a regulatory asset. In addition to the ARO liabilities,
MidAmerican Energy has accrued for the cost of removing other electric and gas
assets through its depreciation rates, in accordance with accepted regulatory
practices. The accrued balance was previously included in accumulated
depreciation but was reclassified to regulatory liabilities in conjunction with
the adoption of SFAS No. 143. As of December 31, 2003 and 2002, the estimated
amount of such accruals included in regulatory liabilities was approximately
$408.6 million and $385.7 million, respectively, based on the cost of removal
component in current depreciation rates.
The ARO liability, computed on a pro forma basis as if SFAS No. 143 had been
applied during each of the periods presented in the consolidated financial
statements, would have been as follows (in thousands):
As of January 1, 2001 ........ $249,694
As of December 31, 2001 ...... 262,035
As of December 31, 2002 ...... 275,228
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 149 also amends certain
other existing pronouncements and requires contracts with comparable
characteristics to be accounted for
-44-
similarly. The most significant impact of adopting SFAS No. 149 was that
MidAmerican Energy's contracts for the sale or purchase of electric energy that
are not considered capacity contracts are no longer afforded "normal" treatment
and must be marked to market. SFAS No. 149 was effective for MidAmerican Energy
and MidAmerican Funding for contracts entered into or modified after June 30,
2003. Adoption of SFAS No. 149 did not have a material effect on the results of
operations, financial position or cash flows of MidAmerican Energy and
MidAmerican Funding.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
MidAmerican Energy's and MidAmerican Funding's significant accounting policies
are described in Note (1) of Notes to Consolidated Financial Statements later in
Item 8 of this Form 10-K.
Accounting for Regulated Entities
- ---------------------------------
MidAmerican Funding's and MidAmerican Energy's most critical accounting policy
is the application of Statement of Financial Accounting Standards ("SFAS") No.
71, "Accounting for the Effects of Certain Types of Regulation," at MidAmerican
Energy. A possible consequence of deregulation in the utility industry is that
SFAS No. 71 may no longer apply. SFAS No. 71 sets forth accounting principles
for operations that are regulated and meet the stated criteria. For operations
that meet the criteria, SFAS No. 71 requires, 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 No. 71, but its applicability is periodically
reexamined. If portions of its utility operations no longer meet the criteria of
SFAS No. 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.
Revenue Recognition
- -------------------
Revenues are recorded as services are rendered to customers. MidAmerican Energy
records unbilled revenues representing the estimated amount customers will be
billed for services rendered between the meter-reading dates in a particular
month and the end of that month. The unbilled revenues estimate is reversed in
the following month. To the extent the estimated amount differs from the amount
subsequently billed, revenues will be affected. At December 31, 2003 and 2002,
$61.5 million and $55.1 million, respectively, of unbilled revenues are included
in accounts receivable.
Excess of Cost Over Fair Value of Assets Acquired
- -------------------------------------------------
MidAmerican Funding's excess of cost over fair value of assets acquired, or
goodwill, must be evaluated annually in accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets," to determine if the carrying value might be
impaired. Determination of the fair values of the related reporting units
involves substantial estimates, as ready markets are not available for all of
the involved assets and liabilities. Accordingly, a change in the assumptions
and/or estimates used in the determination of the fair values of the reporting
units could significantly affect the outcome, possibly resulting in an
impairment of related goodwill.
Contingent Liabilities
- ----------------------
MidAmerican Funding establishes reserves for estimated loss contingencies when
it is management's assessment that a loss is probable and the amount of the loss
can be reasonably estimated. Revisions to contingent liabilities are recorded in
the period in which different facts or information become known or circumstances
change that affect the previous assumptions with respect to the likelihood or
amount of loss. Reserves for contingent liabilities and subsequent revisions are
reflected in income when the reserves or revisions are recorded or as regulatory
treatment dictates. Reserves for contingent liabilities are based upon
management's assumptions and estimates, advice of legal counsel or other third
parties regarding the probable outcomes of the matter. Should the
-45-
outcome differ from the assumptions and estimates, revisions to the estimated
reserves for contingent liabilities would be required.
Accrued Pension and Postretirement Expense
- ------------------------------------------
Pension and postretirement costs are accrued throughout the year based on
results of an annual study performed by external actuaries. In addition to the
benefits granted to employees, the timing of the cost of these plans is impacted
by assumptions used by the actuaries, including assumptions provided by
MidAmerican Energy for the discount rate and long-term rate of return on assets.
Both of these factors require estimates and projections by management and can
fluctuate from period to period. Actual returns on assets are significantly
affected by stock and bond markets, over which management has little control.
The interest rate at which projected benefits are discounted significantly
affects amounts expensed. If management increased the assumed discount rate by
1%, pension and postretirement costs for 2003 would have decreased by $10.9
million. Refer to Note (11) of Notes to Consolidated Financial Statements later
in Item 8 of this Form 10-K for disclosures about MidAmerican Energy retirement
plans and costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MidAmerican Funding, including MidAmerican Energy, is exposed to loss of net
income, cash flows and asset values due to market risk, including: 1) changes in
the market price of gas and electricity used in its regulated and nonregulated
businesses, 2) changes in the value of open positions in its nonregulated
trading operations, 3) variations in the severity of weather conditions from
normal, and 4) changes in interest rates. See also Note (9) of Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion
of MidAmerican Funding's and MidAmerican Energy's exposures to credit risk. To
manage these exposures, MidAmerican Energy enters into various financial
derivative instruments, including futures, over-the-counter swaps and forward
physical contracts. Senior management provides the overall direction, structure,
conduct and control of MidAmerican Energy's risk management activities,
including authorization and communication of risk management policies and
procedures, the use of financial derivative instruments, 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.
-46-
As of December 31, 2003, MidAmerican Energy held derivative instruments used for
non-trading and trading purposes with the following fair values (in thousands):
Maturity in Maturity in
Contract Type 2004 2005-07 Total
------------- -------- ----------- -----------
Non-trading:
Regulated electric assets .............. $ 5,924 $ 217 $ 6,141
Regulated electric (liabilities) ....... (14,275) - (14,275)
Regulated gas assets ................... 9,008 - 9,008
Regulated weather (liabilities) ........ (1,775) - (1,775)
Nonregulated electric assets ........... 2,953 1,676 4,629
Nonregulated electric (liabilities) .... (1,711) (1,131) (2,842)
Nonregulated gas assets ................ 11,498 798 12,296
Nonregulated gas (liabilities) ......... (11,867) (739) (12,606)
-------- ------- --------
Total ............................. (245) 821 576
-------- ------- --------
Trading:
Nonregulated gas assets ................ 389 247 636
Nonregulated gas (liabilities) ......... (419) - (419)
-------- ------- --------
Total ............................. (30) 247 217
-------- ------- --------
Total MidAmerican Energy assets ........ $ 29,772 $ 2,938 $ 32,710
======== ======= ========
Total MidAmerican Energy (liabilities) . $(30,047) $(1,870) $(31,917)
======== ======= ========
Commodity Price Risk
- --------------------
Under the current regulatory framework, MidAmerican Energy is allowed to recover
its cost of gas from all of its regulated gas customers through a purchased gas
adjustment clause included in revenues. Because the majority of MidAmerican
Energy's firm natural gas supply contracts contain pricing provisions based on a
daily or monthly market index, MidAmerican Energy's regulated gas customers,
although ensured of the availability of gas supplies, retain the risk associated
with market price volatility.
MidAmerican Energy uses natural gas futures, options and over-the-counter
agreements to mitigate a portion of the market price risk retained by its
regulated gas customers through the purchased gas adjustment clause. The net
amounts of realized and unrealized gains and losses on swap agreements, futures
and options contracts are included in the cost of gas sold and recovered in
revenues from regulated gas customers. Accordingly, net unrealized gains or
losses on these derivative positions are recorded as regulatory liabilities or
assets.
MidAmerican Energy is exposed to variations in the price of fuel for generation
and the price of purchased power. Fuel price risk is mitigated through physical
and financial forward contracts. Under typical operating conditions, MidAmerican
Energy has sufficient generation to supply its regulated retail electric needs.
MidAmerican Energy may incur a loss as a result of having to pay higher costs
for electric power than it is permitted to recover from its customers under
current electric rates. Forward electricity purchase and sales contracts
utilized for regulated purposes are marked to market with net unrealized gains
and losses recorded as regulatory liabilities or assets.
MidAmerican Energy also derives revenues from nonregulated retail sales of
natural gas and electricity to commercial and industrial end users. Pricing
provisions are individually negotiated with these customers and may include
fixed prices, prices based on a daily or monthly market index or prices based on
MidAmerican Energy's actual costs. MidAmerican Energy enters into natural gas
futures, options and swap agreements to hedge gas commodity prices for physical
delivery to nonregulated customers. Forward physical supply contracts are
generally entered into in close proximity to entering into retail electric
contracts to offset the impact of variances in electricity prices. All
nonregulated retail electric contracts are considered "normal" sales and gains
and losses on such contracts are recognized when settled. All other nonregulated
gas and electric contracts are recorded at fair value.
-47-
Derivative instruments are used for two types of economic hedges. Hedges that
offset the variability in earnings and cash flows related to firm commitments
are referred to as fair value hedges. Realized gains and losses on fair value
hedges are recognized in income as operating revenues and cost of fuel, energy
and capacity, respectively, depending upon the nature of the item being hedged.
Hedges that offset the variability in earnings and cash flows related to
forecasted transactions are referred to as cash flow hedges. Beginning in the
fourth quarter of 2003, net unrealized gains and losses on all hedges utilized
for regulated purposes are recorded as regulatory assets or liabilities.
Unrealized gains or losses on cash flow hedges used for nonregulated purposes
are recorded as other comprehensive income and reflected in net income when the
forecasted transaction is realized. Realized gains and losses on cash flow
hedges are recognized in income as either operating revenues; cost of fuel,
energy and capacity; or cost of gas sold, depending upon the nature of the
physical transaction being hedged.
During the twelve months beginning January 1, 2004, it is anticipated that $5.3
million of the net deferred unrealized gains/losses on cash flow hedges recorded
in regulatory liabilities/assets and $59,000 of accumulated other comprehensive
income on nonregulated cash flow hedges will be realized and recorded in
earnings as the hedged transactions settle. MidAmerican Energy has hedged a
portion of its exposure to the variability of cash flows for forecasted
transactions through December 2006.
Weather Risk
- ------------
MidAmerican Energy and its customers are exposed to the effect of variations in
weather conditions on sales and purchases of electricity and natural gas.
MidAmerican Energy may enter into degree day swaps to offset a portion of the
financial impact of those variations on MidAmerican Energy or its customers.
Trading Risk
- ------------
MidAmerican Energy also uses natural gas and electricity derivative instruments
for proprietary trading purposes under strict guidelines outlined by senior
management. Derivative instruments held for proprietary trading purposes are
recorded at fair value and any unrealized gains or losses are reported in
earnings.
MidAmerican Energy uses value at risk, or VaR, calculations to measure and
control its exposure to market risk sensitive instruments. VaR is an estimate of
the potential loss on a portfolio over a specified holding period, based on
normal market conditions and within a given statistical confidence interval.
MidAmerican Energy calculates VaR separately for its electric and gas
proprietary trading activities based on a variance-covariance method using
historical prices to estimate volatilities and correlations, a one-day holding
period and a 95% level of confidence.
VaR (in millions)
---------------------
2003 2002
---- ----
At December 31.................. $0.2 $0.1
High during year................ 1.6 0.6
Low during year................. - -
Average during year............. 0.1 0.1
-48-
The fair value of MidAmerican Energy's proprietary trading activities at
December 31, 2003 and the periods in which net unrealized gains and losses are
expected to be realized are as follows (in thousands):
Maturity in Maturity in
Type in 2004 in 2005-07 Total
---- ----------- ----------- -----
Exchange prices and
prices actively quoted ................ $ 389 $131 $ 520
Prices provided by other external sources (419) 116 (303)
----- ---- -----
Total ................................ $ (30) $247 $ 217
===== ==== =====
Interest Rate Risk
- ------------------
MidAmerican Energy -
As of December 31, 2003, MidAmerican Energy had fixed-rate long-term debt
totaling $1.0 billion with a fair value of $1.1 billion. These instruments are
fixed-rate and therefore do not expose MidAmerican Energy to the risk of
earnings loss due to changes in market interest rates. However, the fair value
of these instruments would decrease by approximately $46 million if interest
rates were to increase by 10% from their levels at December 31, 2003. In
general, such a decrease in fair value would impact earnings and cash flows only
if MidAmerican Energy were to reacquire all or a portion of these instruments
prior to their maturity.
As of December 31, 2003, MidAmerican Energy had long-term floating rate
obligations totaling $120 million and short-term floating rate obligations
totaling $48 million which expose MidAmerican Energy to risk of increased
interest expense in the event of increases in short-term interest rates. This
market risk is not hedged. The carrying value of the long-term and short-term
floating rate obligations at December 31, 2003, approximated fair value. If the
floating interest rates were to increase by 10% from December 31, 2003, levels,
MidAmerican Energy's interest expense for the floating rate obligations would
increase by approximately $0.2 million annually based on December 31, 2003,
principal balances.
MidAmerican Funding -
As of December 31, 2003, MidAmerican Funding parent company had fixed-rate
long-term debt totaling $700 million with a fair value of $746 million. These
instruments are fixed-rate and therefore do not expose MidAmerican Funding to
the risk of earnings loss due to changes in market interest rates. However, the
fair value of these instruments would decrease by approximately $36 million if
interest rates were to increase by 10% from their levels at December 31, 2003.
In general, such a decrease in fair value would impact earnings and cash flows
only if MidAmerican Funding were to reacquire all or a portion of these
instruments prior to their maturity.
-49-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MidAmerican Energy
------------------
Independent Auditors' Report...............................................51
Consolidated Balance Sheets................................................52
Consolidated Statements of Operations......................................53
Consolidated Statements of Comprehensive Income............................54
Consolidated Statements of Cash Flows......................................55
Consolidated Statements of Capitalization..................................56
Consolidated Statements of Retained Earnings...............................57
Notes to Consolidated Financial Statements.................................58
MidAmerican Funding
-------------------
Independent Auditors' Report...............................................86
Consolidated Balance Sheets................................................87
Consolidated Statements of Operations......................................88
Consolidated Statements of Comprehensive Income............................89
Consolidated Statements of Cash Flows......................................90
Consolidated Statements of Capitalization..................................91
Consolidated Statements of Retained Earnings...............................92
Notes to Consolidated Financial Statements.................................93
-50-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of MidAmerican Energy Company and subsidiaries (the
"Company") as of December 31, 2003 and 2002, and the related consolidated
statements of operations, comprehensive income, retained earnings, and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 15. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MidAmerican Energy Company and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note (1)(j) to the consolidated financial statements, the
Company changed its accounting policy for asset retirement obligations in 2003.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
February 9, 2004
(March 1, 2004 as to Notes (1)(b), (1)(c),(1)(j) and (12))
-51-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF DECEMBER 31,
---------------------------
2003 2002
----------- -----------
ASSETS
UTILITY PLANT, NET
Electric .................................................... $ 5,030,960 $ 4,731,002
Gas ......................................................... 922,099 900,209
----------- -----------
5,953,059 5,631,211
Accumulated depreciation and amortization ................... (2,810,336) (2,625,432)
----------- -----------
3,142,723 3,005,779
Construction work in progress ............................... 217,537 205,988
----------- -----------
3,360,260 3,211,767
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ................................... 3,151 28,500
Receivables, less reserves of $7,484 and $7,615, respectively 300,643 321,321
Inventories ................................................. 85,465 88,492
Other ....................................................... 42,459 28,655
----------- -----------
431,718 466,968
----------- -----------
INVESTMENTS AND NONREGULATED PROPERTY, NET .................. 299,103 273,864
REGULATORY ASSETS ........................................... 261,696 204,586
OTHER ASSETS ................................................ 51,657 52,457
----------- -----------
TOTAL ASSETS ................................................ $ 4,404,434 $ 4,209,642
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity ................................. $ 1,318,519 $ 1,319,139
MidAmerican Energy preferred securities ..................... 31,759 31,759
Long-term debt, excluding current portion ................... 1,072,496 947,691
----------- -----------
2,422,774 2,298,589
----------- -----------
CURRENT LIABILITIES
Notes payable ............................................... 48,000 55,000
Current portion of long-term debt ........................... 56,151 105,727
Accounts payable ............................................ 198,273 239,531
Taxes accrued ............................................... 72,558 83,063
Interest accrued ............................................ 10,235 9,731
Other ....................................................... 67,160 55,464
----------- -----------
452,377 548,516
----------- -----------
OTHER LIABILITIES
Deferred income taxes ....................................... 415,788 424,153
Investment tax credits ...................................... 52,510 56,886
Asset retirement obligations ................................ 269,124 159,757
Regulatory liabilities ...................................... 574,490 499,168
Other ....................................................... 217,371 222,573
----------- -----------
1,529,283 1,362,537
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES ........................ $ 4,404,434 $ 4,209,642
=========== ===========
The accompanying notes are an integral part of these financial statements.
-52-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
OPERATING REVENUES
Regulated electric .................... $ 1,397,997 $ 1,353,431 $ 1,318,129
Regulated gas ......................... 947,393 695,799 869,132
Nonregulated .......................... 250,422 186,929 179,988
----------- ----------- -----------
2,595,812 2,236,159 2,367,249
----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 397,727 346,685 275,904
Cost of gas sold .................... 720,633 482,837 674,883
Other operating expenses ............ 360,090 394,436 449,328
Maintenance ......................... 153,405 135,487 138,343
Depreciation and amortization ....... 279,650 266,983 250,315
Property and other taxes ............ 80,122 76,025 71,705
----------- ----------- -----------
1,991,627 1,702,453 1,860,478
----------- ----------- -----------
Nonregulated:
Cost of sales ....................... 215,664 158,463 154,448
Other ............................... 17,701 20,246 18,749
----------- ----------- -----------
233,365 178,709 173,197
----------- ----------- -----------
Total operating expenses ............ 2,224,992 1,881,162 2,033,675
----------- ----------- -----------
OPERATING INCOME ...................... 370,820 354,997 333,574
----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .......... 4,956 8,832 13,069
Other income .......................... 18,721 14,063 12,291
Other expense ......................... (3,205) (8,790) (18,104)
----------- ----------- -----------
20,472 14,105 7,256
----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............ 72,207 71,401 60,880
Other interest expense ................ 3,813 3,412 8,401
Preferred dividends of subsidiary trust - 1,574 7,980
Allowance for borrowed funds .......... (4,586) (3,336) (1,661)
----------- ----------- -----------
71,434 73,051 75,600
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 319,858 296,051 265,230
INCOME TAXES .......................... 131,261 120,230 112,452
----------- ----------- -----------
NET INCOME ............................ 188,597 175,821 152,778
PREFERRED DIVIDENDS ................... 1,416 2,933 4,544
----------- ----------- -----------
EARNINGS ON COMMON STOCK .............. $ 187,181 $ 172,888 $ 148,234
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-53-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
YEARS ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
EARNINGS ON COMMON STOCK ............................................. $ 187,181 $ 172,888 $ 148,234
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes .............................................. (7,372) (2,458) 7,690
Income tax (expense) benefit ..................................... 3,065 1,022 (3,197)
--------- --------- ---------
(4,307) (1,436) 4,493
--------- --------- ---------
Less realized gains (losses) reflected in net income during period-
Before income taxes .............................................. 5,513 2,277 1,757
Income tax (expense) benefit ..................................... (2,292) (946) (731)
--------- --------- ---------
3,221 1,331 1,026
--------- --------- ---------
Less net unrealized gains (losses) reclassified to regulatory assets
and liabilities -
Before income taxes ............................................ (12,369) - -
Income tax benefit ............................................. 5,142 - -
--------- --------- ---------
(7,227) - -
--------- --------- ---------
Other comprehensive income (loss) .................................... (301) (2,767) 3,467
--------- --------- ---------
COMPREHENSIVE INCOME ................................................. $ 186,880 $ 170,121 $ 151,701
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-54-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 188,597 $ 175,821 $ 152,778
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ......................... 280,803 268,446 251,099
Deferred income taxes and investment tax credit, net .. 544 (63,335) (32,550)
Amortization of other assets and liabilities .......... 20,891 32,150 44,963
Change in accrued customer rate credits ............... - - (21,531)
Power purchase contract restructuring receipt ......... - 39,100 -
Cash outflows of accounts receivable securitization ... - (44,000) (26,000)
Impact of changes in working capital-
Receivables, net .................................... 20,678 (157,581) 328,921
Inventories ......................................... 3,027 (5,153) (14,209)
Other current assets ................................ (13,804) 6,263 (2,240)
Accounts payable .................................... (47,765) 51,268 (134,973)
Taxes accrued ....................................... (10,505) 28,888 (70,318)
Interest accrued .................................... 504 (1,978) (307)
Other current liabilities ........................... 11,696 11,650 9,147
Other.................................................. (13,407) 11,262 (6,022)
--------- --------- ---------
Net cash provided by operating activities ......... 441,259 352,801 478,758
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................ (376,218) (356,636) (250,073)
Non-cash and accrued utility construction expenditures ... 32,081 25,349 (705)
Quad Cities Station decommissioning trust fund ........... (8,299) (8,299) (8,299)
Nonregulated capital expenditures ........................ (1,257) (822) (2,221)
Other investing activities, net .......................... 12,527 10,362 4,597
--------- --------- ---------
Net cash used in investing activities ................. (341,166) (330,046) (256,701)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ........................................... (188,916) (80,433) (94,544)
Issuance of long-term debt, net of issuance cost ......... 272,550 391,145 -
Retirement of long-term debt, including reacquisition cost (202,076) (163,957) (101,600)
Reacquisition of preferred securities .................... - (126,680) (23,320)
Net increase (decrease) in notes payable ................. (7,000) (34,350) 7,750
--------- --------- ---------
Net cash used in financing activities ................. (125,442) (14,275) (211,714)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... (25,349) 8,480 10,343
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........... 28,500 20,020 9,677
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................. $ 3,151 $ 28,500 $ 20,020
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid, net of amounts capitalized ................ $ 65,105 $ 67,068 $ 61,344
========= ========= =========
Income taxes paid ........................................ $ 142,660 $ 133,142 $ 217,140
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-55-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands, except share amounts)
AS OF DECEMBER 31,
-----------------------------------------
2003 2002
-------------------- -------------------
COMMON SHAREHOLDER'S EQUITY
Common shares, no par; 350,000,000 shares authorized;
70,980,203 shares outstanding .................................... $ 561,024 $ 561,024
Retained earnings .................................................. 757,096 757,415
Accumulated other comprehensive income:
Unrealized gain on cash flow hedges .............................. 399 700
---------- ----------
1,318,519 54.4% 1,319,139 57.4%
---------- ----- ---------- -----
PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding; not subject to mandatory redemption:
$3.30 Series, 49,451 shares ...................................... 4,945 4,945
$3.75 Series, 38,305 shares ...................................... 3,831 3,831
$3.90 Series, 32,630 shares ...................................... 3,263 3,263
$4.20 Series, 47,362 shares ...................................... 4,736 4,736
$4.35 Series, 49,945 shares ...................................... 4,994 4,994
$4.40 Series, 50,000 shares ...................................... 5,000 5,000
$4.80 Series, 49,898 shares ...................................... 4,990 4,990
----------- ---------
31,759 1.3% 31,759 1.4%
----------- ----- --------- -----
LONG-TERM DEBT
Mortgage bonds:
7.7% Series, due 2004 ............................................ - 55,630
7.0% Series, due 2005 ............................................ 90,500 90,500
7.375% Series, due 2008 .......................................... - 75,000
7.45% Series, due 2023 ........................................... - 6,940
6.95% Series, due 2025 ........................................... - 12,500
Pollution control revenue obligations:
6.1% Series due 2007 ............................................. 1,000 1,000
5.95% Series, due 2023 (secured by general mortgage bonds) ....... 29,030 29,030
Variable rate series -
Due 2016 and 2017, 1.26% and 1.64%, respectively ............... 37,600 37,600
Due 2023 (secured by general mortgage bonds),
1.26% and 1.64%, respectively ................................ 28,295 28,295
Due 2023, 1.26% and 1.64%, respectively ........................ 6,850 6,850
Due 2024, 1.26% and 1.64%, respectively ........................ 34,900 34,900
Due 2025, 1.26% and 1.64%, respectively ........................ 12,750 12,750
Notes:
6.375% Series, due 2006 .......................................... 160,000 160,000
5.125% Series, due 2013 .......................................... 275,000 -
6.75% Series, due 2031 ........................................... 400,000 400,000
Obligation under capital lease ..................................... 2,060 2,161
Unamortized debt premium and discount, net ......................... (5,489) (5,465)
---------- --------
1,072,496 44.3% 947,691 41.2%
---------- ----- --------- -----
TOTAL CAPITALIZATION ............................................... $2,422,774 100.0% $2,298,589 100.0%
========== ===== ========== =====
The accompanying notes are an integral part of these financial statements.
-56-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands)
YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------
BEGINNING OF YEAR ....................... $757,415 $662,027 $603,793
-------- -------- --------
NET INCOME .............................. 188,597 175,821 152,778
-------- -------- --------
DEDUCT:
Loss on reacquisition of preferred shares - 750 235
Dividends declared on preferred shares .. 1,416 2,183 4,309
Dividends declared on common shares ..... 187,500 77,500 90,000
-------- -------- --------
188,916 80,433 94,544
-------- -------- --------
END OF YEAR ............................. $757,096 $757,415 $662,027
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-57-
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
----
(1) Summary of Significant Accounting Policies ........................ 59
(2) Jointly Owned Utility Plant........................................ 64
(3) Inventories........................................................ 64
(4) Commitments and Contingencies...................................... 64
(5) Long-term Debt..................................................... 69
(6) Short-term Borrowing............................................... 70
(7) Preferred Securities............................................... 70
(8) Risk Management and Energy Trading................................. 70
(9) Concentration of Credit Risk....................................... 72
(10) Rate Matters....................................................... 74
(11) Retirement Plans................................................... 75
(12) Segment Information................................................ 79
(13) Income Taxes....................................................... 82
(14) Fair Value of Financial Instruments................................ 83
(15) Non-Operating Other Income and Expense............................. 83
(16) Affiliated Company Transactions.................................... 84
(17) Unaudited Quarterly Operating Results.............................. 85
-58-
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Company Organization
--------------------
MidAmerican Energy Company ("MidAmerican Energy") is a public utility with
electric and natural gas operations and is the principal subsidiary of MHC Inc.
("MHC"). MHC has the following nonregulated subsidiaries: InterCoast Capital
Company, MidAmerican Services Company, Midwest Capital Group, Inc. and MEC
Construction Services Co. MHC is the direct wholly owned subsidiary of
MidAmerican Funding, LLC, ("MidAmerican Funding"), which is an Iowa limited
liability company with MidAmerican Energy Holdings Company ("MidAmerican Energy
Holdings") as its sole member. MHC, MidAmerican Funding and MidAmerican Energy
Holdings are exempt public utility holding companies headquartered in Des
Moines, Iowa.
(b) Principles of Consolidation and Preparation of Financial Statements
-------------------------------------------------------------------
The accompanying consolidated financial statements include MidAmerican Energy
and subsidiaries under its control. All significant intercompany transactions
have been eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. Certain classifications of
amounts for 2003 are different than that of prior years. Accordingly, historical
amounts have been reclassified.
MidAmerican Energy originally issued its 2003 consolidated financial statements
on February 9, 2004. In accordance with accounting guidance issued subsequent to
that date, MidAmerican Energy has adjusted its consolidated financial statements
to reflect the reclassification of $385.7 million of 2002 regulatory liabilities
and $367.9 million of 2001 regulatory liabilities for the cost of removal of
utility plant previously recognized in Accumulated Depreciation and Amortization
to Regulatory Liabilities on the Consolidated Balance Sheets. Prior to this
reclassification, the following 2002 balances were: Utility Plant, Net, $2.8
billion; Total Assets, $3.8 billion; Other Liabilities, $1.0 billion; and Total
Capitalization and Liabilities, $3.8 billion. Subsequent to this
reclassification, the 2002 balances are: Utility Plant, Net, $3.2 billion; Total
Assets, $4.2 billion; Other Liabilities, $1.4 billion; and Total Capitalization
and Liabilities, $4.2 billion.
(c) Accounting for the Effects of Certain Types of Regulation
---------------------------------------------------------
MidAmerican Energy's utility operations are subject to the regulation of the
Iowa Utilities Board ("IUB"); the Illinois Commerce Commission ("ICC"); the
South Dakota Public Utilities Commission, and the Federal Energy Regulatory
Commission ("FERC"). 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 ("SFAS") No. 71, "Accounting for the Effects
of Certain Types of Regulation," may no longer apply. SFAS No. 71 sets forth
accounting principles for operations that are regulated and meet the stated
criteria. For operations that meet the criteria, SFAS No. 71 requires, 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 No. 71, but its applicability is
periodically reexamined. If portions of its utility operations no longer meet
the criteria of SFAS No. 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.
-59-
The following regulatory assets represent costs that are expected to be
recovered in future charges to utility customers. The regulatory liabilities
represent income to be recognized or returned to customers in future periods.
As of December 31,
-----------------------------------------
Weighted Average
Remaining Life 2003 2002
---------------- -------- --------
(In thousands)
Regulatory assets:
Deferred income taxes, net....................... 22 years $108,464 $122,301
Asset retirement obligations..................... 30 years 77,104 -
Debt refinancing costs........................... 7 years 19,698 22,187
Unrealized loss on regulated hedges.............. 1 year 14,248 -
Environmental costs.............................. 4 years 13,995 16,588
Minimum pension liability adjustment............. 15 years 10,996 12,072
Nuclear generation assets........................ 9 years 7,522 8,573
Cooper Nuclear Station capital improvement costs. 1 year 7,314 16,841
Enrichment facilities decommissioning............ 4 years 1,116 1,459
Other............................................ Various 1,239 4,565
-------- --------
Total......................................... $261,696 $204,586
======== ========
Regulatory liabilities:
Cost of removal accrual.......................... 22 years $408,608 $385,691
Iowa electric settlement accrual................. 4 years 144,418 102,871
Unrealized gain on regulated hedges.............. 1 year 15,122 -
Environmental insurance recovery................. 3 years 3,781 8,678
Nuclear insurance reserve........................ 30 years 2,561 1,928
-------- --------
Total......................................... $574,490 $499,168
======== ========
Of the regulatory assets listed, only the Cooper capital improvements are
included in rate base and earn a return. The amortization of the assets is
recoverable over periods shown above.
Refer to Note (1)(h) for additional information regarding the power purchase
contract for Cooper Nuclear Station. For a discussion of the Iowa electric
settlement reserve, refer to Note (10).
(d) Revenue Recognition
-------------------
Revenues are recorded as services are rendered to customers. MidAmerican Energy
records unbilled revenues representing the estimated amount customers will be
billed for services rendered between the meter-reading dates in a particular
month and the end of that month. Accrued unbilled revenues were $61.5 million
and $55.1 million at December 31, 2003 and 2002, respectively, and are included
in Receivables on the Consolidated Balance Sheets.
MidAmerican Energy's Illinois and South Dakota jurisdictional sales, or
approximately 11% of total retail electric sales, and all of its retail gas
sales are subject to adjustment clauses. MidAmerican Energy also has costs that
are recovered, at least in part, through bill riders, including energy
efficiency costs. The clauses and riders allow MidAmerican Energy to adjust the
amounts charged for electric and gas service as the related costs change. The
costs recovered in revenues through use of the adjustment clauses and bill
riders are charged to expense in the same period. At any given time, these costs
may be over or under collected from customers. The total under collection
included in Receivables at December 31, 2003 and 2002, was $55.7 million and
$48.3 million, respectively.
-60-
(e) Depreciation and Amortization
-----------------------------
MidAmerican Energy's provisions for depreciation and amortization for its
utility operations are based on straight-line composite rates. In April 2002,
MidAmerican Energy changed the estimated useful lives of its electric utility
general plant assets from eleven years to eight years. The impact of that change
is reflected in the average electric depreciation and amortization rates below
for 2003 and 2002. As a result of the change in estimated useful lives, net
income for 2002 was reduced by approximately $5.9 million. The average
depreciation and amortization rates applied to depreciable utility plant for the
years ended December 31 were as follows:
2003 2002 2001
---- ---- ----
Electric ........... 4.3% 4.4% 4.2%
Gas ................ 3.5% 3.5% 3.5%
Utility plant is stated at original cost which includes overhead costs,
administrative costs and an allowance for funds used during construction.
The cost of repairs and minor replacements is charged to maintenance expense.
Property additions and major property replacements are charged to plant
accounts. In addition to asset retirement obligations required by SFAS No. 143,
as discussed in Note (1)(j), MidAmerican Energy accrues for the cost of removing
electric and gas assets through its depreciation rates. The estimated amount of
such accruals is included in regulatory liabilities. The cost of depreciable
units of utility plant retired or disposed of in the normal course of business
are eliminated from the utility plant accounts and such cost is charged to
accumulated depreciation.
Additionally, depreciation and amortization expense for 2003, 2002 and 2001
includes $54.1 million, $55.0 million and $47.1 million, respectively, for a
regulatory charge pursuant to the terms of an electric rate settlement in Iowa.
Refer to Note (10) for a discussion of the settlement.
An allowance for the estimated annual decommissioning costs of the Quad Cities
Generating Station equal to the level of funding into the related external
trusts is also included in depreciation expense. See Note (4)(d) for additional
information regarding decommissioning costs.
(f) Investments and Nonregulated Property, Net
------------------------------------------
Investments and Nonregulated Property, Net includes the following amounts as of
December 31 (in thousands):
2003 2002
-------- --------
Nuclear decommissioning trust fund ................... $184,171 $159,757
Rabbi trusts ......................................... 96,237 90,501
Coal transportation property, net of accumulated
depreciation of $1,996 and $1,705, respectively .... 9,923 10,215
Non-utility property, net of accumulated depreciation
of $2,169 and $1,293, respectively ................. 8,727 8,329
Note receivable from affiliate ....................... - 5,016
Other ................................................ 45 46
-------- --------
Total ................................................ $299,103 $273,864
======== ========
Investments held by the nuclear decommissioning trust fund for the Quad Cities
Station units are classified as available-for-sale and are reported at fair
value. An amount equal to the net unrealized gains and losses on those
investments is recorded as an adjustment to the asset retirement obligation
regulatory asset, which is included in Regulatory Assets on the Consolidated
Balance Sheets. Funds are invested in the trust in accordance with applicable
federal investment guidelines and are restricted for use as reimbursement for
costs of decommissioning MidAmerican Energy's Quad Cities Station.
-61-
The investment in Rabbi trusts represents the cash value of corporate-owned life
insurance policies on certain key executives and the fair value of other related
investments. The Rabbi trusts were established to administer various
nonqualified executive and director compensation plans, and investments in each
trust are restricted for use in meeting the costs and obligations of the trust
and related compensation plans.
The coal transportation property is owned and operated by CBEC Railway Inc., a
subsidiary of MidAmerican Energy. The property is depreciated on a straight-line
basis over 37 years.
Non-utility property consists of property such as computer software, land and
other assets not used for regulated utility purposes. The depreciable property
consists primarily of computer software, which is amortized on a straight-line
basis over five years.
The note receivable from affiliate was with Midwest Capital Group, Inc. and was
paid in July 2003.
(g) Consolidated Statements of Cash Flows
-------------------------------------
MidAmerican Energy considers all cash and highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
(h) Accounting for Cooper Nuclear Station Power Purchase Contract
-------------------------------------------------------------
MidAmerican Energy has a power purchase contract with the Nebraska Public Power
District for the purchase of capacity and energy, which expires December 31,
2004. The current terms of the contract are the result of an agreement signed by
the parties that restructured the contract effective August 1, 2002.
Cooper Nuclear Station ("Cooper") capital improvement costs prior to 1997,
including carrying costs, were deferred in accordance with then applicable rate
regulation. These costs are being amortized and recovered in rates over either a
five-year period from the time the related assets were put in service or the
remaining term of the original power purchase contract, namely through September
2004. From July 11, 1997, through July 31, 2002, the Iowa portion of capital
improvement costs was recovered currently from customers and expensed as
incurred. For jurisdictions other than Iowa, MidAmerican Energy began charging
Cooper capital improvement costs to expense, as incurred in January 1997. Under
the terms of the restructured power purchase contract, MidAmerican Energy no
longer pays for Cooper capital improvements.
The fuel cost portion of the original power purchase contract was included in
Cost of Fuel, Energy and Capacity on the Consolidated Statements of Operations.
All other costs MidAmerican Energy incurred in relation to this long-term power
purchase contract prior to its restructuring were included in Other Operating
Expenses on the Consolidated Statements of Operations. Beginning August 2002,
all costs related to this power purchase contract, excluding the amortization of
Cooper capital improvement costs discussed above and the amortization of
previously recognized decommissioning expense, are reflected in Cost of Fuel,
Energy and Capacity on the Consolidated Statements of Operations.
See Note (4)(c) for additional information regarding the power purchase
contract.
(i) Accounting for Derivatives
--------------------------
On January 1, 2001, MidAmerican Energy adopted SFAS No. 133 pertaining to the
accounting for derivative instruments and hedging activities. SFAS No. 133
requires an entity to recognize all of its derivatives as either assets or
liabilities in its statement of financial position and measure those instruments
at fair value. If the conditions specified in SFAS No. 133 are met, those
instruments may be designated as hedges. Changes in the value of hedge
instruments used for regulated utility purposes are recorded as regulatory
assets or liabilities and, therefore, would not impact earnings until realized.
Due to the relative immateriality of the adoption of SFAS No.
-62-
133, a cumulative-effect presentation is not reflected in the Consolidated
Statement of Operations or the Consolidated Statement of Comprehensive Income
for 2001.
Pursuant to Emerging Issues Task Force Issue No. 02-3, effective July 1, 2002,
revenue and cost of sales from derivative instruments used for trading purposes
are presented as net nonregulated revenue on the statement of operations. Prior
to that time, such amounts were presented gross. Accordingly, all historical
amounts have been reclassified to conform to the net presentation.
See Note (8) for further discussion on risk management and the use of derivative
instruments to manage such risk.
(j) New Accounting Pronouncements
-----------------------------
In January 2003, MidAmerican Energy adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet
of legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal operation of
such assets. Concurrent with the recognition of the liability, the estimated
cost of an asset retirement obligation is capitalized and depreciated over the
remaining life of the asset.
On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset
retirement obligation ("ARO") liabilities; $12.6 million of associated ARO
assets, net of accumulated depreciation; $101.8 million of regulatory assets;
and reclassified $1.0 million of accumulated depreciation to the ARO liability
in conjunction with the adoption of SFAS No. 143. Adoption of SFAS No. 143 did
not impact net income. The initial ARO liability recognized includes $266.5
million that pertains to obligations associated with the decommissioning of the
Quad Cities Station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded as of December 31, 2002. As of
December 31, 2003, $184.2 million of assets reflected in Investments and
Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for
satisfying the Quad Cities Station obligation.
The change in the balance of the ARO liability during 2003 is summarized as
follows (in thousands):
Balance January 1, 2003 .......................... $ 275,228
Revision to nuclear decommissioning ARO liability (21,902)
Capitalized accretion ............................ 15,798
---------
Balance December 31, 2003 ........................ $ 269,124
=========
The revision to the nuclear decommissioning ARO liability was due to the results
of a decommissioning study in 2003. Accretion on the ARO liability is
capitalized as a regulatory asset. In addition to the ARO liabilities,
MidAmerican Energy has accrued for the cost of removing other electric and gas
assets through its depreciation rates, in accordance with accepted regulatory
practices. The accrued balance was previously included in accumulated
depreciation but was reclassified to regulatory liabilities in conjunction with
the adoption of SFAS No. 143. As of December 31, 2003 and 2002, the estimated
amount of such accruals included in regulatory liabilities was approximately
$408.6 million and $385.7 million, respectively, based on the cost of removal
component in current depreciation rates.
The ARO liability, computed on a pro forma basis as if SFAS No. 143 had been
applied during each of the periods presented in the consolidated financial
statements, would have been as follows (in thousands):
As of January 1, 2001 ........ $249,693
As of December 31, 2001 ...... 262,035
As of December 31, 2002 ...... 275,228
On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends SFAS No. 133 for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 149 also amends certain other existing
pronouncements and requires contracts with
-63-
comparable characteristics to be accounted for similarly. The most significant
impact of adopting SFAS No. 149 was that MidAmerican Energy's contracts for the
sale or purchase of electric energy that are not considered capacity contracts
are no longer afforded "normal" treatment and must be marked to market. SFAS No.
149 was effective for MidAmerican Energy and MidAmerican Funding for contracts
entered into or modified after June 30, 2003. Adoption of SFAS No. 149 did not
have a material effect on the results of operations, financial position or cash
flows of MidAmerican Energy or MidAmerican Funding.
(2) JOINTLY OWNED UTILITY PLANT
Under joint plant ownership agreements with other utilities, MidAmerican Energy
as a tenant in common had undivided interests at December 31, 2003, in jointly
owned generating plants as shown in the table below.
MidAmerican Energy uses the proportional consolidation method to account for its
share of each facility. The dollar amounts below represent MidAmerican Energy's
share in each jointly owned unit. Each participant has provided financing for
its share of each unit. Operating costs of each facility are assigned to joint
owners based on ownership percentage or energy purchased, depending on the
nature of the cost. Operating Expenses on the Consolidated Statements of
Operations include MidAmerican Energy's share of the expenses of these units
(dollars in millions).
Nuclear Coal-fired
----------- ---------------------------------------------
Council
Quad Cities Neal Bluffs Neal Ottumwa Louisa
Units Unit Unit Unit Unit Unit
No. 1 & 2 No. 3 No. 3 No. 4 No. 1 No. 1
----------- ----- ------- ----- ------- ------
In service date........................ 1972 1975 1978 1979 1981 1983
Utility plant in service............... $273 $149 $301 $175 $214 $548
Accumulated depreciation............... $144 $103 $219 $123 $142 $341
Accredited capacity at MidAmerican
Energy 2003 peak (megawatts, 100%)... 1,747 515 690 643 708 700
Percent ownership...................... 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
(3) INVENTORIES
Inventories include the following amounts as of December 31 (in thousands):
2003 2002
------- -------
Materials and supplies, at average cost $31,987 $30,265
Gas in storage, at LIFO cost ........... 25,371 27,405
Coal stocks, at average cost ........... 24,723 27,863
Fuel oil, at average cost .............. 1,759 1,865
Other .................................. 1,625 1,094
------- -------
Total .................................. $85,465 $88,492
======= =======
At December 31, 2003 prices, the current cost of gas in storage was $80.2
million.
(4) COMMITMENTS AND CONTINGENCIES
(a) Manufactured Gas Plant Facilities
---------------------------------
The United States Environmental Protection Agency ("EPA"), 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.
-64-
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 a health or
environmental risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is actively working with the regulatory
agencies and has received regulatory closure on 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 approximately $11
million to $30 million. As of December 31, 2003, MidAmerican Energy has recorded
a $14.0 million liability for these sites and a corresponding regulatory asset
for future recovery through the regulatory process. MidAmerican Energy projects
that these amounts will be incurred or paid over the next four years.
The estimated liability is determined through a site-specific cost evaluation
process. The estimate includes incremental direct costs of remediation, site
monitoring costs 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 IUB and are recorded as a
regulatory liability.
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, results of operations or cash
flows.
(b) Air Quality
-----------
MidAmerican Energy's generating facilities are subject to applicable provisions
of the Clean Air Act and related air quality standards promulgated by the EPA.
The Clean Air Act provides the framework for regulation of certain air emissions
and permitting and monitoring associated with those emissions. MidAmerican
Energy believes it is in material compliance with current air quality
requirements.
The EPA has in recent years implemented more stringent standards for ozone and
fine particulate matter. Designations regarding attainment of the eight-hour
ozone standard have recently been reviewed by the EPA, and the EPA has concluded
that the entire state of Iowa is in attainment of the standards. On December 4,
2003, the EPA announced the development of its Interstate Air Quality Rule, a
proposal to require coal-burning power plants in 29 states and the District of
Columbia to reduce emissions of sulfur dioxide ("SO2") and nitrogen oxides
("NOX") in an effort to reduce ozone and fine particulate matter in the Eastern
United States. It is likely that MidAmerican Energy's coal-burning facilities
will be impacted by this proposal.
In December 2000, the EPA concluded that mercury emissions from coal-fired
generating stations should be regulated. The EPA is currently considering two
regulatory alternatives for the regulation of mercury from coal-fired utilities
as necessary to protect public health. One of these alternatives would require
reductions of mercury from all coal-fired facilities greater than 25 MW through
application of Maximum Achievable Control Technology with compliance assessed on
a facility basis. The other alternative would regulate the mercury emissions of
coal-fired facilities that pose a health hazard through a market based
cap-and-trade mechanism similar to the SO2 allowance system. The EPA is
currently under a deadline to finalize the mercury rule by December 2004. Any of
these new or stricter standards could, in whole or in part, be superceded or
made more stringent by one of a number of multi-pollutant emission reduction
proposals currently under consideration at the federal level, including the
"Clear Skies Initiative," and other pending legislative proposals that
contemplate 70% to 90% reductions of SO2, NOX and mercury, as well as possible
new federal regulation of carbon dioxide and other gases that may affect global
climate change.
-65-
Depending on the outcome of the final regulations, MidAmerican Energy may be
required to install control equipment on its generating stations or decrease the
number of hours during which its generating stations operate. However, until
final regulations are issued, the impact of the regulations on MidAmerican
Energy cannot be predicted.
While legislative action is necessary for the Clear Skies Initiative or other
multi-pollutant emission reduction legislation to become effective, MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions required to meet emissions reductions of this nature. On
April 1, 2002, in accordance with an Iowa law passed in 2001, MidAmerican Energy
filed with the IUB its first multi-year plan and budget for managing SO2 and NOX
from its generating facilities in a cost-effective manner. The plan provides
specific actions to be taken at each coal-fired generating facility and the
related costs and timing for each action. Mercury emissions reductions were not
addressed in the plan. On July 17, 2003, the IUB issued an order that affirmed
an administrative law judge's approval of the plan, as amended. Accordingly, the
IUB order provides that the approved expenditures will not be subject to a
subsequent prudence review in a future electric rate case, but it rejected the
future application of a tracker mechanism to recover emission reduction costs.
However, pursuant to an unrelated rate settlement agreement approved by the IUB
on October 17, 2003, if prior to January 1, 2011, capital and operating
expenditures to comply with environmental requirements cumulatively exceed $325
million, then MidAmerican Energy may seek to recover the additional expenditures
from customers. At this time, MidAmerican Energy does not expect these capital
expenditures to exceed such amount.
Under the New Source Review ("NSR") provisions of the Clean Air Act, a utility
is required to obtain a permit from the EPA or a state regulatory agency prior
to (1) beginning construction of a new major stationary source of an
NSR-regulated pollutant or (2) making a physical or operational change (a "major
modification") to an existing facility that potentially increases emissions,
unless the changes are exempt under the regulations. In general, projects
subject to NSR regulations are subject to pre-construction review and permitting
under the Prevention of Significant Deterioration ("PSD") provisions of the
Clean Air Act. Under the PSD program, a project that emits threshold levels of
regulated pollutants must undergo a Best Available Control Technology analysis
and evaluate the most effective emissions controls. These controls must be
installed in order to receive a permit. Violations of NSR regulations, which may
be alleged by the EPA, states, and environmental groups, amoung others
potentially subject a utility to material expenses for fines and other sanctions
and remedies including requiring installation of enhanced pollution controls and
funding supplemental environmental projects.
In recent years, the EPA has requested from several utilities information and
support regarding their capital projects for various generating plants. The
requests were issued as part of an industry-wide investigation to assess
compliance with the NSR and the New Source Performance Standards of the Clean
Air Act. In December 2002 and April 2003, MidAmerican Energy received requests
from the EPA to provide documentation related to its capital projects from
January 1, 1980, to the present for a number of its generating plants.
MidAmerican Energy has submitted information to the EPA in responses to these
requests, and there are currently no outstanding data requests pending from the
EPA. MidAmerican Energy cannot predict the outcome of these requests at this
time. However, on August 27, 2003, the EPA announced changes to its New Source
Review rules that clarify what constitutes routine repair, maintenance and
replacement for purposes of triggering NSR requirements. The EPA concluded
equipment that is repaired, maintained or replaced with an expenditure not
greater than 20 percent of the value of the source will not trigger the New
Source Revisions of the Clean Air Act. Since the NSR changes were announced, the
EPA's enforcement branch has indicated it would apply the clarified routine
repair, maintenance and replacement rules to its pending investigation. A number
of states and local air districts have challenged the EPA's clarifications of
the rule and a panel of the U.S. Circuit Court of Appeals for the District of
Columbia Circuit issued an order on December 24, 2003, staying the EPA's
implementation of its clarifications of the equipment replacement rule, meaning
that the previous rules without the expanded exemption remain in effect.
-66-
(c) Cooper Nuclear Station Power Purchase Contract
----------------------------------------------
Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power
District ("NPPD") restructured their power purchase contract for Cooper. Under
the terms of the restructured contract, NPPD is required to provide to
MidAmerican Energy through December 31, 2004, 380 megawatts of the accredited
capacity of Cooper and a minimum volume of energy in 2004. MidAmerican Energy is
likewise required to purchase at the contract prices the capacity and minimum
megawatt-hours delivered. MidAmerican Energy's minimum payments under the
contract total $63.8 million for 2004.
In December 2000, MidAmerican Energy ceased contributing decommissioning funds
to NPPD and maintained a separate fund for estimated Cooper decommissioning
costs. Through July 31, 2002, MidAmerican Energy had accrued and retained $18.3
million in this separate fund. In conjunction with the power purchase contract
restructuring, NPPD also paid MidAmerican Energy $39.1 million. MidAmerican
Energy is recognizing the $39.1 million cash payment and the $18.3 million
previously accrued for decommissioning into income based on the estimated energy
expected to be received for the remainder of the contract.
In January 2004, MidAmerican Energy and NPPD entered into a series of agreements
that will result in MidAmerican Energy purchasing 250 MW of NPPD capacity for a
five-year period commencing January 1, 2005.
(d) Nuclear Decommissioning Costs
-----------------------------
Expected decommissioning costs for Quad Cities Station have been developed based
on a site-specific decommissioning study that includes decontamination,
dismantling, site restoration, dry fuel storage cost and an assumed shutdown
date. Quad Cities Station decommissioning costs are included in base rates in
Iowa tariffs.
MidAmerican Energy's share of expected decommissioning costs for Quad Cities
Station, in 2003 dollars, is $260 million and is the asset retirement obligation
for Quad Cities Station. Refer to Note (1)(j) for a discussion of asset
retirement obligations. MidAmerican Energy has established external trusts for
the investment of funds for decommissioning the Quad Cities Station. The fair
value of the assets held in the trusts is reflected in Investments and
Nonregulated Property, Net.
MidAmerican Energy's depreciation and amortization expense included costs for
Quad Cities Station nuclear decommissioning of $8.3 million for each of the
years 2003, 2002 and 2001. The regulatory provision charged to expense is equal
to the funding that is being collected in Iowa rates. Realized and unrealized
gains and (losses) on the assets in the trust fund were $16.1 million, $(6.9)
million and $(3.1) million for 2003, 2002 and 2001, respectively.
(e) Nuclear Insurance
-----------------
MidAmerican Energy maintains financial protection against catastrophic loss
associated with its interest in Quad Cities Station through a combination of
insurance purchased by Exelon Generation Company, LLC (the operator and joint
owner of Quad Cities Station), insurance purchased directly by MidAmerican
Energy, and the mandatory industry-wide loss funding mechanism afforded under
the Price-Anderson Amendments Act of 1988. The general types of coverage are:
nuclear liability, property coverage and nuclear worker liability.
Exelon Generation purchases nuclear liability insurance for Quad Cities Station
in the maximum available amount of $300 million, which includes coverage for
MidAmerican Energy's ownership. In accordance with the Price-Anderson Amendments
Act of 1988, excess liability protection above that amount is provided by a
mandatory industry-wide Secondary Financial Protection program under which the
licensees of nuclear generating facilities could be assessed for liability
incurred due to a serious nuclear incident at any commercial nuclear reactor in
the United States. Currently, MidAmerican Energy's aggregate maximum potential
share of an assessment for Quad Cities Station is approximately $50.3 million
per incident, payable in installments not to exceed $5 million annually.
-67-
The property insurance covers property damage, stabilization and decontamination
of the facility, disposal of the decontaminated material and premature
decommissioning arising out of a covered loss. For Quad Cities Station, Exelon
Generation purchased primary and excess property insurance protection for the
combined interests in Quad Cities Station, with coverage limits totaling $2.1
billion. MidAmerican Energy also directly purchased extra expense or business
interruption coverage for its share of replacement power and other extra
expenses in the event of a covered accidental outage at Quad Cities Station. The
property and related coverages purchased directly by MidAmerican Energy and by
Exelon Generation, which includes the interests of MidAmerican Energy, are
underwritten by an industry mutual insurance company and contain provisions for
retrospective premium assessments should two or more full policy-limit losses
occur in one policy year. Currently, the maximum retrospective amounts that
could be assessed against MidAmerican Energy from industry mutual policies for
its obligations associated with Quad Cities Station total $7.6 million.
The master nuclear worker liability coverage, which is purchased by Exelon
Generation for Quad Cities Station, is an industry-wide guaranteed-cost policy
with an aggregate limit of $300 million for the nuclear industry as a whole,
which is in effect to cover tort claims in nuclear-related industries.
The current Price-Anderson Act expired in August 2002 and is pending
congressional action for reauthorization. Its contingent financial obligations
still apply to reactors licensed by the Nuclear Regulatory Commission as of its
expiration date. It is anticipated that the Price-Anderson Act will be renewed
with increased third party financial protection requirements for nuclear
incidents.
(f) Fuel, Energy and Operating Lease Commitments
--------------------------------------------
MidAmerican Energy has supply and related transportation contracts for its
fossil fueled generating stations. As of December 31, 2003, the contracts, with
expiration dates ranging from 2004 to 2010, required minimum payments of $83.3
million, $69.9 million, $54.5 million, $50.2 million and $16.1 million for the
years 2004 through 2008, respectively, and $31.0 million for the total of the
years thereafter. MidAmerican Energy expects to supplement these coal contracts
with additional contracts and spot market purchases to fulfill its future fossil
fuel needs. Additionally, MidAmerican Energy has a transportation contract for a
natural gas-fired generating plant. The contract, which expires in 2012,
requires minimum payments of $0.8 million for 2004 and $6.2 million for each
year thereafter.
MidAmerican Energy has a contract with Cordova Energy Company, LLC, a subsidiary
of MidAmerican Energy Holdings, to purchase electric capacity and energy from a
natural gas-fired combined cycle generation plant. As of December 31, 2003, the
minimum payments under the contract, which terminates in May 2004, totaled $9.8
million for 2004. The minimum payments are based on MidAmerican Energy's 50% of
the projected monthly net capacity ratings of the plant.
MidAmerican Energy also has contracts with non-affiliated companies to purchase
electric capacity. As of December 31, 2003, the contracts, with expiration dates
ranging from 2004 to 2028, required minimum payments of $38.6 million, $3.6
million, $2.3 million, $2.2 million and $2.2 million for the years 2004 through
2008, respectively, and $40.1 million for the total of the years thereafter.
MidAmerican Energy has various natural gas supply and transportation contracts
for its gas operations. As of December 31, 2003, the minimum commitments under
these contracts were $56.3 million, $43.8 million, $18.0 million, $13.9 million
and $4.2 million for the years 2004 through 2008, respectively, and $12.5
million for the total of the years thereafter.
MidAmerican Energy has non-cancelable operating leases primarily for computer
equipment, office space and rail cars. As of December 31, 2003, the minimum
payments under these leases were $7.2 million, $5.7 million, $4.1 million, $3.7
million and $2.4 million for the years 2004 through 2008, respectively, and $2.3
million for the total of the years thereafter.
-68-
(g) Guarantees
----------
MidAmerican Energy is the lessee on operating leases for coal railcars that
contain guarantees of the residual value of such equipment throughout the term
of the leases. Events triggering the residual guarantees include termination of
the lease, loss of the equipment or purchase of the equipment. Lease terms are
for five years with provisions for extensions. As of December 31, 2003, the
maximum amount of such guarantees specified in these leases totaled $31.0
million. These guarantees are not reflected on the Consolidated Balance Sheets.
(h) Other Commitments and Contingencies
-----------------------------------
MidAmerican Energy is involved in a number of other legal proceedings and
claims. While management is unable to predict the ultimate outcome of these
matters, it is not expected that their resolution will have a material adverse
effect on the results of operations and financial condition.
(5) LONG-TERM DEBT
MidAmerican Energy's sinking fund requirements and maturities of long-term debt
for 2004 through 2008 are approximately $56 million, $91 million, $161 million,
$2 million and zero, respectively. Refer to MidAmerican Energy's Consolidated
Statements of Capitalization for detail of long-term debt.
MidAmerican Energy's Variable Rate Pollution Control Revenue Obligations bear
interest at rates that are periodically established through remarketing of the
bonds in the short-term tax-exempt market. MidAmerican Energy, at its option,
may change the mode of interest calculation for these bonds by selecting from
among several alternative floating or fixed rate modes. The interest rates shown
in the Consolidated Statements of Capitalization are the weighted average
interest rates as of December 31, 2003 and 2002. MidAmerican Energy maintains a
revolving credit facility agreement to provide liquidity for holders of these
issues.
The indentures securing mortgage bonds contain certain covenants that obligate
MidAmerican Energy to (i) timely pay principal and interest on such bonds; (ii)
timely pay taxes; and (iii) maintain (a) its corporate existence, (b) its
properties, (c) related property insurance and (d) the liens created by the
indentures. The indenture pertaining to MidAmerican Energy's unsecured senior
notes contains certain covenants that obligate MidAmerican Energy to (i) timely
pay principal and interest on such notes and (ii) maintain its corporate
existence. In addition, this indenture provides that if MidAmerican Energy were
to issue secured debt in the future, then such unsecured senior notes, as may
then be existing, would equally and ratably be secured thereby. As of December
31, 2003, MidAmerican Energy was in compliance with all of its applicable
long-term debt covenants.
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises and substantially all of
the former Midwest Power Systems Inc., a predecessor company, electric utility
property in Iowa, or approximately 80% of gross utility property, is pledged to
secure mortgage bonds.
MidAmerican Energy does not guarantee any of MidAmerican Funding's long-term
debt. However, all of MidAmerican Energy's common stock is security for
MidAmerican Funding's long-term debt. Among other sources, MidAmerican Funding
may use distributions from MidAmerican Energy to make payments on its long-term
debt. Refer to Note (5) of MidAmerican Funding's Notes to Consolidated Financial
Statements.
On January 14, 2003, MidAmerican Energy issued $275 million of 5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.
-69-
(6) SHORT-TERM BORROWING
Interim financing of working capital needs and the construction program may be
obtained from the sale of commercial paper or short-term borrowing from banks.
Information regarding short-term debt follows (dollars in thousands):
2003 2002
------- -------
Balance at year-end ............................... $48,000 $55,000
Weighted average interest rate on year-end balance... 1.0% 1.3%
Average daily amount outstanding during the year..... $ 1,927 $ 8,934
Weighted average interest rate on average
daily amount outstanding during the year........... 1.2% 1.8%
MidAmerican Energy has authority from the FERC to issue through April 14, 2005,
short-term debt in the form of commercial paper and bank notes aggregating $500
million. MidAmerican Energy has in place a $370.4 million revolving credit
facility which supports its $250 million commercial paper program and its
variable rate pollution control revenue obligations. The facility expires
January 13, 2005. In addition, MidAmerican Energy has a $5.0 million line of
credit, which expires July 1, 2004.
(7) PREFERRED SECURITIES
The total outstanding cumulative preferred securities of MidAmerican Energy are
not subject to mandatory redemption requirements and may be redeemed at the
option of MidAmerican Energy at prices which, in the aggregate, total $32.6
million. The aggregate total the holders of all preferred securities outstanding
at December 31, 2003, are entitled to upon involuntary bankruptcy is $31.8
million plus accrued dividends. Annual dividend requirements for all preferred
securities outstanding at December 31, 2003, total $1.3 million.
(8) RISK MANAGEMENT AND ENERGY TRADING
MidAmerican Energy is exposed to loss of net income, cash flows and asset values
due to market risk, including: 1) changes in the market price of gas and
electricity used in its regulated and nonregulated businesses, 2) changes in the
value of open positions in its nonregulated trading operations, 3) variations in
the severity of weather conditions from normal, and 4) changes in interest
rates. See also Note (9) of Notes to Consolidated Financial Statements in Item 8
of this Form 10-K for a discussion of MidAmerican Energy's exposure to credit
risk. To manage these exposures, MidAmerican Energy enters into various
financial derivative instruments, including futures, over-the-counter swaps and
forward physical contracts. Senior management provides the overall direction,
structure, conduct and control of MidAmerican Energy's risk management
activities, including authorization and communication of risk management
policies and procedures, the use of financial derivative instruments, 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.
-70-
As of December 31, 2003, MidAmerican Energy held derivative instruments used for
non-trading and trading purposes with the following fair values (in thousands):
Maturity in Maturity in
Contract Type 2004 2005-07 Total
------------- ----------- ----------- ---------
Non-trading:
Regulated electric assets .............. $ 5,924 $ 217 $ 6,141
Regulated electric (liabilities) ....... (14,275) - (14,275)
Regulated gas assets ................... 9,008 - 9,008
Regulated weather (liabilities) ........ (1,775) - (1,775)
Nonregulated electric assets ........... 2,953 1,676 4,629
Nonregulated electric (liabilities) .... (1,711) (1,131) (2,842)
Nonregulated gas assets ................ 11,498 798 12,296
Nonregulated gas (liabilities) ......... (11,867) (739) (12,606)
-------- ------- --------
Total ................................ (245) 821 576
-------- ------- --------
Trading:
Nonregulated gas assets ................ 389 247 636
Nonregulated gas (liabilities) ......... (419) - (419)
-------- ------- --------
Total ................................ (30) 247 217
-------- ------- --------
Total MidAmerican Energy assets ........ $ 29,772 $ 2,938 $ 32,710
======== ======= ========
Total MidAmerican Energy (liabilities) . $(30,047) $(1,870) $(31,917)
======== ======= ========
Commodity Price Risk
- --------------------
Under the current regulatory framework, MidAmerican Energy is allowed to recover
its cost of gas from all of its regulated gas customers through a purchased gas
adjustment clause included in revenues. Because the majority of MidAmerican
Energy's firm natural gas supply contracts contain pricing provisions based on a
daily or monthly market index, MidAmerican Energy's regulated gas customers,
although ensured of the availability of gas supplies, retain the risk associated
with market price volatility.
MidAmerican Energy uses natural gas futures, options and over-the-counter
agreements to mitigate a portion of the market price risk retained by its
regulated gas customers through the purchased gas adjustment clause. The net
amounts of realized and unrealized gains and losses on swap agreements, futures
and options contracts are included in the cost of gas sold and recovered in
revenues from regulated gas customers. Accordingly, net unrealized gains or
losses on these derivative positions are recorded as regulatory liabilities or
assets.
MidAmerican Energy is exposed to variations in the price of fuel for generation
and the price of purchased power. Fuel price risk is mitigated through physical
and financial forward contracts. Under typical operating conditions, MidAmerican
Energy has sufficient generation to supply its regulated retail electric needs.
MidAmerican Energy may incur a loss as a result of having to pay higher costs
for electric power than it is permitted to recover from its customers under
current electric rates. Forward electricity purchase and sales contracts
utilized for regulated purposes are marked to market with net unrealized gains
and losses recorded as regulatory liabilities or assets.
MidAmerican Energy also derives revenues from nonregulated retail sales of
natural gas and electricity to commercial and industrial end users. Pricing
provisions are individually negotiated with these customers and may include
fixed prices, prices based on a daily or monthly market index or prices based on
MidAmerican Energy's actual costs. MidAmerican Energy enters into natural gas
futures, options and swap agreements to hedge gas commodity prices for physical
delivery to nonregulated customers. Forward physical supply contracts are
generally entered into in close proximity to entering into retail electric
contracts to offset the impact of variances in electricity prices. All
nonregulated retail electric contracts are considered "normal" sales and gains
and losses on such contracts are recognized when settled. All other nonregulated
gas and electric contracts are recorded at fair value.
-71-
Derivative instruments are used for two types of economic hedges. Hedges that
offset the variability in earnings and cash flows related to firm commitments
are referred to as fair value hedges. Realized gains and losses on fair value
hedges are recognized in income as operating revenues and cost of fuel, energy
and capacity, respectively, depending upon the nature of the item being hedged.
Hedges that offset the variability in earnings and cash flows related to
forecasted transactions are referred to as cash flow hedges. Beginning in the
fourth quarter of 2003, net unrealized gains and losses on all hedges utilized
for regulated purposes are recorded as regulatory assets or liabilities.
Unrealized gains or losses on cash flow hedges used for nonregulated purposes
are recorded as other comprehensive income and reflected in net income when the
forecasted transaction is realized. Realized gains and losses on cash flow
hedges are recognized in income as either operating revenues; cost of fuel,
energy and capacity; or cost of gas sold, depending upon the nature of the
physical transaction being hedged.
During the twelve months beginning January 1, 2004, it is anticipated that $5.3
million of the net deferred unrealized gains/losses on cash flow hedges recorded
in regulatory liabilities/assets and $59,000 of accumulated other comprehensive
income on nonregulated cash flow hedges will be realized and recorded in
earnings as the hedged transactions settle. MidAmerican Energy has hedged a
portion of its exposure to the variability of cash flows for forecasted
transactions through December 2006.
Weather Risk
- ------------
MidAmerican Energy and its customers are exposed to the effect of variations in
weather conditions on sales and purchases of electricity and natural gas.
MidAmerican Energy may enter into degree day swaps to offset a portion of the
financial impact of those variations on MidAmerican Energy or its customers.
Trading Risk
- ------------
MidAmerican Energy also uses natural gas and electricity derivative instruments
for proprietary trading purposes under strict guidelines outlined by senior
management. Derivative instruments held for trading purposes are recorded at
fair value and any unrealized gains or losses are reported in earnings.
The fair value of MidAmerican Energy's proprietary trading activities at
December 31, 2003 and the periods in which net unrealized gains and losses are
expected to be realized are as follows (in thousands):
Maturity in Maturity in
Type 2004 2005-07 Total
---- ----------- ----------- ------
Exchange prices and
prices actively quoted ................ $ 389 $131 $ 520
Prices provided by other external sources (419) 116 (303)
----- ---- -----
Total ................................. $ (30) $247 $ 217
===== ==== =====
(9) CONCENTRATION OF CREDIT RISK
Regulated Utility Operations
- ----------------------------
MidAmerican Energy's regulated electric utility operations serve approximately
601,000 customers in Iowa, 84,000 customers in western Illinois and 4,000
customers in southeastern South Dakota. MidAmerican Energy's regulated gas
utility operations serve 524,000 customers in Iowa, 65,000 customers in western
Illinois, 75,000 customers in southeastern South Dakota and 5,000 customers in
northeastern Nebraska. The largest communities served by MidAmerican Energy are
the Iowa and Illinois Quad-Cities; Des Moines, Sioux City, Cedar Rapids,
Waterloo, Iowa City and Council Bluffs, Iowa; and Sioux Falls, South Dakota.
MidAmerican Energy's utility operations grant unsecured credit to customers,
substantially all of whom are local businesses and residents. As of December 31,
2003, billed receivables from MidAmerican Energy's utility customers, totaled
$132.6 million.
-72-
Nonregulated Retail Operations
- ------------------------------
MidAmerican Energy's nonregulated retail operations provide energy services to
approximately 3,400 gas and electric customers in Iowa, Illinois, and Ohio. In
the ordinary course of business, MidAmerican Energy's nonregulated retail
operations grant unsecured credit to customers, substantially all of which are
commercial, industrial, non-profit, or other business concerns. MidAmerican
Energy analyzes each counterparty's financial condition prior to entering into
any agreement to provide energy services. As of December 31, 2003, billed
receivables from MidAmerican Energy's nonregulated retail customers totaled
$19.5 million. Billed receivables from any one customer did not exceed 11.3% of
total nonregulated retail billed receivables.
Wholesale Operations
- --------------------
MidAmerican Energy extends unsecured credit to high volume industrial end-users,
other utilities, energy marketers, and financial institutions in conjunction
with wholesale energy marketing and trading activities. MidAmerican Energy
analyzes the financial condition of each wholesale counterparty before entering
into any transactions, establishes limits on the amount of unsecured credit to
be extended to each counterparty, and evaluates the appropriateness of unsecured
credit limits on an ongoing basis. Credit exposures relative to approved limits
are monitored daily, with all exceptions to approved limits reported to senior
management. MidAmerican Energy defines credit exposure as the potential loss in
value in the event of non-payment or non-performance by a counterparty, which
includes not only accounts receivable, but also the replacement, or
mark-to-market value of contracts for future performance. MidAmerican Energy
seeks to negotiate contractual arrangements with wholesale counterparties to
provide for net settlement of monthly accounts receivable and accounts payable
and net settlement of contracts for future performance in the event of default.
Accounts payable are deducted from calculations of credit exposure for
counterparties with whom such contractual arrangements exist. MidAmerican Energy
also seeks to negotiate contractual arrangements that provide for the exchange
of collateral in the event that credit exposure to a particular counterparty (1)
exceeds a specified threshold or (2) in the event of a material adverse change
in such counterparty's financial condition or downgrade in its credit ratings to
below "investment grade" by a nationally recognized statistical rating
organization such as Moody's or Standard & Poor's. MidAmerican Energy
periodically requests and receives collateral, typically in the form of cash or
letters of credit, from counterparties with credit exposure in excess of
established limits. As of December 31, 2003, 81.8% of MidAmerican Energy's
credit exposure, net of collateral, from wholesale operations was with
counterparties having "investment grade" credit ratings and credit exposure to
any single counterparty, net of collateral, did not exceed 10.6% of aggregate
credit exposure, net of collateral, to all wholesale counterparties.
MidAmerican Energy's credit exposure with respect to wholesale natural gas,
electricity, and derivatives transactions is summarized below as of December 31,
2003 (dollars in thousands).
Credit % of Credit
Credit Rating Equivalent Credit Collateral Exposure, Net Exposure, Net
(Standard & Poor's / Moody's) Exposure Held of Collateral of Collateral
- ----------------------------- -------- ---------- ------------- -------------
AA-/Aa3 and above ........... $ 8,386 $ - $ 8,386 16.4%
A-/A3 to A+/A1 .............. 21,797 - 21,797 42.7
BBB-/Baa3 to BBB+/Baa1 ...... 11,581 - 11,581 22.7
BB-/Ba3 to BB+/Ba1 .......... 2,799 - 2,799 5.5
B+/B1 or lower .............. 24 400 - -
Unrated ..................... 8,876 3,456 6,484 12.7
------- ------ ------- ------
Total credit exposure ....... $53,463 $3,856 $51,047 100.0%
======= ====== ======= ======
-73-
(10) RATE MATTERS
Under two settlement agreements approved by the IUB, MidAmerican Energy's Iowa
retail electric rates in effect on December 31, 2000, are effectively frozen
through December 31, 2010. The settlement agreements specifically allow the
filing of electric rate design or cost of service rate changes that are intended
to keep MidAmerican Energy's overall Iowa retail electric revenue unchanged, but
could result in changes to individual tariffs. The settlement agreements also
each provide that portions of revenues associated with Iowa retail electric
returns on equity within specified ranges will be recorded as a regulatory
liability to be used to offset a portion of the cost to Iowa customers of future
generating plant investment.
Under the first settlement agreement, which was approved by the IUB on December
21, 2001, and is effective through December 31, 2005, an amount equal to 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 is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy's application for ratemaking principles on a
wind power project and was approved by the IUB on October 17, 2003, provides
that during the period January 1, 2006 through December 31, 2010, an amount
equal to 40% of revenues associated with returns on equity between 11.75% and
13%, 50% of revenues associated with returns on equity between 13% and 14%, and
83.3% of revenues associated with returns on equity above 14%, in each year will
be recorded as a regulatory liability. An amount equal to the regulatory
liability is recorded as a regulatory charge in depreciation and amortization
expense when the liability is accrued. Future depreciation will be reduced as a
result of the credit applied to generating plant balances as the regulatory
liability is reduced. The liability is being reduced as it is credited against
plant in service in amounts equal to the allowance for funds used during
construction associated with generating plant additions. Interest expense is
accrued on the portion of the regulatory liability related to prior years. As of
December 31, 2003 and 2002, the related regulatory liability reflected on the
Consolidated Balance Sheets was $144.4 million and $102.9 million, respectively.
The 2003 settlement agreement also provides that if Iowa retail electric returns
on equity fall below 10% in any consecutive 12-month period after January 1,
2006, MidAmerican Energy may seek to file for a general increase in rates.
However, prior to filing for a general increase in rates, MidAmerican Energy is
required by the settlement agreement to conduct 30 days of good faith
negotiations with all of the signatories to the settlement agreement to attempt
to avoid a general increase in rates. Also, if MidAmerican Energy does not
construct the wind power facilities by December 31, 2007, the rate extension
from January 1, 2006, through December 31, 2010, may terminate.
Illinois bundled electric rates are frozen until 2007, subject to certain
exceptions allowing for increases, at which time bundled rates are subject to
cost-based ratemaking. Illinois law provides for Illinois earnings above a
computed level of return on common equity to be shared equally between regulated
retail electric customers and MidAmerican Energy. MidAmerican Energy's computed
level of return on common equity is based on a rolling two-year average of the
Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve
System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for
2005 and 2006. The two-year average above which sharing must occur for 2003 was
13.73%. The law allows MidAmerican Energy to mitigate the sharing of earnings
above the threshold return on common equity through accelerated recovery of
electric assets.
On November 8, 2002, the IUB approved a gas rate settlement agreement previously
filed with it by MidAmerican Energy and the Iowa Office of Consumer Advocate.
The settlement agreement provided for an increase in rates of $17.7 million
annually for MidAmerican Energy's Iowa retail natural gas customers and
effectively froze base rates through November 2004. However, MidAmerican Energy
will continue collecting fluctuating gas costs through its purchased gas
adjustment clause. The new rates were implemented for usage beginning November
25, 2002.
-74-
(11) RETIREMENT PLANS
MidAmerican Energy sponsors a noncontributory defined benefit pension plan
covering substantially all employees of MidAmerican Energy Holdings and its
domestic energy subsidiaries. Benefit obligations under the plan are based on
participants' compensation, years of service and age at retirement. Funding to
an external trust is based upon the actuarially determined costs of the plan and
the requirements of the Internal Revenue Code and the Employee Retirement Income
Security Act. MidAmerican Energy has been allowed to recover accrued pension
costs related to its employees in its electric and gas service rates.
MidAmerican Energy also maintains noncontributory, nonqualified supplemental
executive retirement plans for active and retired participants.
MidAmerican Energy also currently sponsors certain postretirement health care
and life insurance benefits covering substantially all retired employees of
MidAmerican Energy Holdings and its domestic subsidiaries. Under the plans,
substantially all of MidAmerican Energy's employees may become eligible for
these benefits if they reach retirement age while working for MidAmerican
Energy. However, MidAmerican Energy retains the right to change these benefits
anytime, subject to the provisions in its collective bargaining agreements.
MidAmerican Energy expenses postretirement benefit costs on an accrual basis and
includes provisions for such costs in its electric and gas service rates.
Net periodic pension, supplemental retirement and postretirement benefit costs
included the following components for MidAmerican Energy and the aforementioned
affiliates for the years ended December 31. For purposes of calculating the
expected return on pension plan assets, a market-related value is used.
Market-related value is equal to fair value except for gains and losses on
equity investments which are amortized into market-related value on a
straight-line basis over five years.
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Pension Cost Postretirement Cost
----------------------------- ------------------------------
2003 2002 2001 2003 2002 2001
------- ------- ------- -------- ------- -------
Components of net periodic benefit cost (in thousands):
Service cost.................................. $24,693 $20,235 $18,114 $ 8,175 $ 6,028 $ 4,357
Interest cost................................. 34,533 34,177 33,027 16,065 13,928 10,418
Expected return on plan assets................ (38,396) (38,213) (36,326) (6,008) (4,880) (4,032)
Amortization of net transition obligation..... (2,591) (2,591) (2,591) 4,110 4,110 4,110
Amortization of prior service cost............ 2,761 2,729 2,729 593 425 425
Amortization of prior year (gain) loss........ 1,483 (2,482) (3,894) 3,716 2,385 332
Regulatory expense............................ 3,320 6,639 - - - -
------- ------- ------- ------- ------- -------
Net periodic (benefit) cost................... $25,803 $20,494 $11,059 $26,651 $21,996 $15,610
======= ======= ======= ======= ======= =======
Weighted-average assumptions used to determine
benefit obligations at December 31:
Discount rate................................. 5.75% 5.75% 6.50% 5.75% 5.75% 6.50%
Rate of compensation increase................. 5.00% 5.00% 5.00%
Weighted-average assumptions used to determine
net benefit cost for years ended December 31:
Discount rate................................. 5.75% 6.50% 7.00% 5.75% 6.50% 7.00%
Expected return on plan assets................ 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Rate of compensation increase................. 5.00% 5.00% 5.00%
Assumed health care cost trend rates at December 31:
2003 2002
----- -----
Health care cost trend rate assumed for next year ....................... 11.00% 9.75%
Rate that the cost trend rate gradually declines to ..................... 5.00% 5.25%
Year that the rate reaches the rate it is assumed to remain at........... 2010 2006
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects in thousands:
Increase (Decrease) in Expense
-------------------------------------------
One Percentage-Point One Percentage-Point
Increase Decrease
-------------------- -------------------
Effect on total service and interest cost... $ 5,484 $ (4,136)
Effect on postretirement benefit obligation. $47,583 $(37,761)
In 2003, 2002 and 2001, MidAmerican Energy was allocated pension cost of $14.2
million, $12.4 million and $5.8 million, respectively. Postretirement cost
allocated to MidAmerican Energy in 2003, 2002 and 2001 totaled $22.4 million,
$19.6 million and $14.6 million, respectively. Net periodic benefit costs
assigned to MidAmerican Energy affiliates are reimbursed currently in accordance
with its intercompany affiliate services agreements.
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The following table presents a reconciliation of the beginning and ending
balances of the benefit obligation, fair value of plan assets and the funded
status of the aforementioned plans to the net amounts measured and recognized in
the Consolidated Balance Sheets as of December 31:
Pension Benefits Postretirement Benefits
---------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Reconciliation of the fair value of plan assets:
Fair value of plan assets at beginning of year . $ 467,773 $ 515,890 $ 122,655 $ 81,129
Employer contributions ......................... 5,044 4,681 32,566 24,034
Participant contributions ...................... - - 6,371 4,505
Actual return on plan assets ................... 105,438 (27,376) 15,853 (4,528)
Acquisition .................................... - - - 32,500
Benefits paid .................................. (26,687) (25,422) (19,596) (14,985)
--------- --------- --------- ---------
Fair value of plan assets at end of year ....... $ 551,568 $ 467,773 $ 157,849 $ 122,655
--------- --------- --------- ---------
Reconciliation of benefit obligation:
Benefit obligation at beginning of year ........ $ 593,179 $ 518,208 $ 291,441 $ 194,917
Service cost ................................... 24,693 20,235 8,175 6,028
Interest cost .................................. 34,533 34,177 16,065 13,928
Participant contributions ...................... - - 6,371 4,505
Plan amendments ................................ - 520 - 2,205
Actuarial (gain) loss .......................... (5,670) 45,461 (5,023) 31,743
Acquisition .................................... - - - 53,100
Benefits paid .................................. (26,687) (25,422) (19,596) (14,985)
--------- --------- --------- ---------
Benefit obligation at end of year .............. $ 620,048 $ 593,179 $ 297,433 $ 291,441
--------- --------- --------- ---------
Funded status .................................. $ (68,480) $(125,406) $(139,584) $(168,786)
Amounts not recognized:
Unrecognized net (gain) loss ................. (12,907) 61,289 83,509 102,095
Unrecognized prior service cost .............. 17,915 20,676 5,451 6,043
Unrecognized net transition obligation (asset) (792) (3,383) 36,992 41,102
--------- --------- --------- ---------
Net amount recognized in the
Consolidated Balance Sheets .................. $ (64,264) $ (46,824) $ (13,632) $ (19,546)
========= ========= ========= =========
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost ........................... 39 $ 11,825 - $ 1,493
Accrued benefit liability ...................... (100,490) (99,392) - (3,881)
Intangible assets .............................. 17,367 20,082 - -
Regulatory assets .............................. 18,820 20,661 - -
Liability of affiliate company ................. - - (13,632) (17,158)
--------- --------- --------- ---------
Net amount recognized .......................... $ (64,264) $ (46,824) $ (13,632) $ (19,546)
========= ========= ========= =========
The accumulated benefit obligation for all defined benefit pension plans was
$554.6 million and $526.7 million at December 31, 2003 and 2002, respectively.
The projected benefit obligation (included in the table above), accumulated
benefit obligation and fair value of plan assets for the supplemental executive
retirement plan which had an accumulated benefit obligation in excess of plan
assets were $105.1 million, $100.5 million and zero as of December 31, 2003 and
$103.4 million, $99.1 million and zero as of December 31, 2002, respectively. A
minimum liability must be recognized for those plans whose accumulated benefit
obligation exceeds plan assets. In accordance with SFAS No. 71, the minimum
pension liability adjustment was reclassified from accumulated other
comprehensive income to regulatory assets.
Although the supplemental executive retirement plan had no assets as of December
31, 2003, MidAmerican Energy and its parent have Rabbi trusts that hold
corporate-owned life insurance and other investments to provide
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funding for the future cash requirements. Because this plan is nonqualified, the
fair value of these assets is not included in the plan asset table above. The
fair value of the Rabbi trust investments was $88.1 million and $76.2 million at
December 31, 2003 and 2002, respectively including $27.1 million and $18.0
million held by MidAmerican Energy Holdings at December 31, 2003 and 2002,
respectively.
Plan Assets
- -----------
MidAmerican Energy's investment policy for its pension and postretirement plans
is to balance risk and return through a diversified portfolio of high-quality
equity and fixed income securities. Equity targets for the pension and
postretirement plans are as indicated in the tables below. Maturities for fixed
income securities are managed such that sufficient liquidity exists to meet
near-term benefit payment obligations. The plans retain outside investment
advisors to manage plan investments within the parameters outlined by the
MidAmerican Energy's Pension and Employee Benefits Plans Administrative
Committee. The weighted average return on assets assumption is based on
historical performance for the types of assets in which the plans invest.
MidAmerican Energy's pension plan asset allocation at December 31, 2003 and
2002, are as follows:
Percentage of Plan Assets
-------------------------
at December 31
-------------- Target
Asset Category 2003 2002 Range
-------------- ---- ---- ------
Equity securities ................ 70% 60% 65-75%
Debt securities .................. 23 33 20-30
Real estate ...................... 7 7 0-10
Other ............................ - - 0-5
--- ---
Total .......................... 100% 100%
=== ===
MidAmerican Energy's postretirement benefit plan asset allocation at December
31, 2003, and 2002, are as follows:
Percentage of Plan Assets
-------------------------
at December 31 Target
Asset Category 2003 2002 Range
-------------- ---- ---- -----
Equity securities................ 49% 34% 45-55%
Debt securities.................. 48 48 45-55
Real estate...................... - - -
Other............................ 3 18 0-10
--- ---
Total.......................... 100% 100%
=== ===
Cash Flows
- ----------
Employer contributions to the pension and postretirement plans are expected to
be $5.1 million and $27.6 million, respectively, for 2004. MidAmerican Energy's
policy is to contribute the minimum required amount to the pension plan and the
amount expensed to its postretirement plans.
MidAmerican Energy sponsors defined contribution pension plans (401(k) plans)
covering substantially all employees. MidAmerican Energy's contributions vary
depending on the plan but are based primarily on each participant's level of
contribution and cannot exceed the maximum allowable for tax purposes. Total
contributions were $8.3 million, $8.1 million and $7.2 million for 2003, 2002
and 2001, respectively.
In December 2003, the President signed into law the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Medicare Act"). The Medicare Act
introduces a prescription drug benefit under
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Medicare as well as a subsidy to sponsors of retiree health care plans that
provide a benefit to participants that is at least actuarially equivalent to
Medicare Part D. The Medicare Act is expected to ultimately reduce MidAmerican
Energy's postretirement costs from what they would have been absent such
changes. Detailed regulations pertaining to the Medicare Act have yet to be
promulgated, and therefore, MidAmerican Energy cannot determine precisely how it
will implement the Medicare Act's provisions. Additionally, accounting guidance
regarding the recognition of the impacts of the Medicare Act is pending.
Accordingly, MidAmerican Energy continues to evaluate its options and cannot
predict the magnitude or timing of any resulting cost savings. As permitted by
FASB Staff Position 106-1, MidAmerican Energy has elected to defer recognizing
the effects of the Medicare Act in its post-retirement plan accounting at
December 31, 2003.
(12) SEGMENT INFORMATION
MidAmerican Energy has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated and nonregulated wholesale electricity and
natural gas. The energy delivery segment derives its revenue principally from
the sale and delivery of regulated retail electricity and natural gas, while the
transmission segment obtains most of its revenue from the sale of electric
transmission capacity. The marketing and sales segment receives its revenue
principally from nonregulated retail sales of natural gas and electricity.
Common operating costs, interest income, interest expense and income tax expense
are allocated to each segment based on MidAmerican Energy allocators most
related to the nature of the cost.
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. Regulated electric retail revenues are billed to
external customers by the energy delivery segment based on bundled tariffs that
do not segregate components for the other segments. For internal segment
reporting purposes, MidAmerican Energy has developed transfer prices to transfer
the appropriate portion of those revenues to the other segments. The transfer
prices are based on cost of service or tariffed rates, except for the generation
segment which receives the residual.
MidAmerican Energy's external revenues by product and services are displayed on
the Consolidated Statements of Operations.
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The following tables provide information on an operating segment basis as of and
for the years ended December 31 (in thousands):
2003 2002 2001
----------- ----------- -----------
Segment Profit Information
--------------------------
Operating revenues:
External revenues -
Generation ........................... $ 522,349 $ 415,921 $ 516,915
Energy delivery ...................... 1,812,547 1,625,600 1,664,462
Transmission ......................... 25,916 20,721 22,852
Marketing & sales .................... 235,000 173,917 163,020
----------- ----------- -----------
Total .............................. 2,595,812 2,236,159 2,367,249
----------- ----------- -----------
Intersegment revenues -
Generation ........................... 629,939 651,342 606,164
Energy delivery ...................... (690,126) (708,953) (663,977)
Transmission ......................... 57,946 55,207 55,086
Marketing & sales .................... 2,241 2,404 2,727
----------- ----------- -----------
Total .............................. - - -
----------- ----------- -----------
Consolidated ........................... $ 2,595,812 $ 2,236,159 $ 2,367,249
=========== =========== ===========
Depreciation and amortization expense (a):
Generation ............................. $ 145,645 $ 139,054 $ 133,681
Energy delivery ........................ 121,296 117,893 106,496
Transmission ........................... 11,641 8,972 8,900
Marketing & sales ...................... 2,221 2,527 2,022
----------- ----------- -----------
Total ................................ $ 280,803 $ 268,446 $ 251,099
=========== =========== ===========
Interest and dividend income:
Generation ............................. $ 2,284 $ 3,783 $ 5,450
Energy delivery ........................ 2,307 4,468 6,727
Transmission ........................... 346 530 822
Marketing & sales ...................... 19 51 70
----------- ----------- -----------
Total ................................ $ 4,956 $ 8,832 $ 13,069
=========== =========== ===========
Fixed charges:
Generation ............................. $ 30,364 $ 29,989 $ 31,726
Energy delivery ........................ 37,745 40,737 42,654
Transmission ........................... 4,416 4,892 5,401
Marketing & sales ...................... 325 366 363
----------- ----------- -----------
Total ................................ 72,850 75,984 80,144
Preferred dividends .................... (1,416) (2,933) (4,544)
----------- ----------- -----------
Consolidated ......................... $ 71,434 $ 73,051 $ 75,600
=========== =========== ===========
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2003 2002 2001
----------- ----------- -----------
Segment Profit Information (continued)
--------------------------------------
Income before income taxes:
Generation ............................. $ 153,046 $ 150,040 $ 142,637
Energy delivery ........................ 111,089 101,176 84,334
Transmission ........................... 47,364 40,403 39,514
Marketing & sales ...................... 6,943 1,499 (5,799)
----------- ----------- -----------
Total ................................ 318,442 293,118 260,686
Preferred dividends .................. 1,416 2,933 4,544
----------- ----------- -----------
Consolidated ....................... $ 319,858 $ 296,051 $ 265,230
=========== =========== ===========
Segment Asset Information
-------------------------
Capital expenditures:
Generation ............................. $ 215,952 $ 197,666 $ 87,296
Energy delivery ........................ 143,507 151,178 159,302
Transmission ........................... 16,759 7,504 3,733
Marketing & sales ...................... 1,257 1,110 1,963
----------- ----------- -----------
Total ................................ $ 377,475 $ 357,458 $ 252,294
=========== =========== ===========
Total assets:
Generation ............................. $ 1,639,541 $ 1,544,527 $ 1,426,938
Energy delivery ........................ 2,535,061 2,453,471 2,321,919
Transmission ........................... 242,435 239,325 242,837
Marketing & sales ...................... 56,743 52,143 51,164
----------- ----------- -----------
Total ................................ 4,473,780 4,289,466 4,042,858
Reclassifications and
intersegment eliminations (b) ........ (69,346) (79,824) (89,798)
----------- ----------- -----------
Consolidated ......................... $ 4,404,434 $ 4,209,642 $ 3,953,060
=========== =========== ===========
(a) Depreciation and amortization expense above includes depreciation related
to nonregulated operations, which is included in Nonregulated Operating
Expense - Other on the Consolidated Statements of Operations.
(b) Reclassifications and intersegment eliminations relate principally to the
reclassification of income tax balances in accordance with generally
accepted accounting principles and the elimination of intersegment accounts
receivables and payables.
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(13) INCOME TAXES
MidAmerican Energy is included in the MidAmerican Energy Holdings consolidated
income tax return. However, MidAmerican Energy's income tax liability is
computed on a stand-alone basis.
MidAmerican Energy's income tax expense includes the following for the years
ended December 31 (in thousands):
2003 2002 2001
--------- --------- ---------
Current:
Federal .................. $ 97,304 $ 135,657 $ 111,674
State .................... 33,411 47,908 33,327
--------- --------- ---------
130,715 183,565 145,001
--------- --------- ---------
Deferred:
Federal .................. 9,996 (44,179) (23,199)
State .................... (5,074) (14,750) (4,433)
--------- --------- ---------
4,922 (58,929) (27,632)
--------- --------- ---------
Investment tax credit, net . (4,376) (4,406) (4,917)
--------- --------- ---------
Total .................... $ 131,261 $ 120,230 $ 112,452
========= ========= =========
The following table is a reconciliation of the statutory federal income tax rate
and the effective federal and state income tax rate indicated by the
Consolidated Statements of Operations for the years ended December 31:
2003 2002 2001
---- ---- ----
Statutory federal income tax rate ................. 35% 35% 35%
Amortization of investment tax credit ............. (1) (1) (2)
State income tax, net of federal income tax benefit 5 8 7
Other ............................................. 2 (1) 2
--- --- ---
Effective federal and state income tax rate ....... 41% 41% 42%
=== === ===
Included in Deferred Income Taxes on the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
2003 2002
-------- --------
Deferred tax assets related to:
Revenue sharing ............................. $ 63,243 $ 46,428
Nuclear reserves and decommissioning ........ 35,956 28,411
Pensions .................................... 35,429 32,004
Investment tax credits ...................... 35,213 38,296
Accrued liabilities ......................... 5,955 1,094
Fuel cost recoveries ........................ - 9,558
Other ....................................... 5,927 3,190
-------- --------
181,723 158,981
Deferred tax liabilities related to:
Depreciable property ........................ 436,384 418,809
Income taxes recoverable through future rates 142,598 159,411
Fuel cost recoveries ........................ 12,864 -
Reacquired debt ............................. 5,665 4,914
-------- --------
597,511 583,134
Net deferred income tax liability ............. $415,788 $424,153
======== ========
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(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair value of
MidAmerican Energy's long-term debt, including the current portion, as of
December 31 (in thousands):
2003 2002
---------- ----------
Carrying amount................. $1,128,647 $1,053,418
Estimated fair value............ 1,184,974 1,113,366
Investments in the Quad Cities Station decommissioning trust are reported at
market value in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As of December 31, 2003, the total
fair value of the investments was $184.2 million and the related total amortized
cost was $157.8 million. As of December 31, 2002, the total fair value of the
investments was $159.8 million and the related total amortized cost was $143.0
million. Refer to Notes (1)(f) and (4)(d) for further discussion of the Quad
Cities Station decommissioning trust.
(15) NON-OPERATING OTHER INCOME AND EXPENSE
Non-Operating Income - Other Income and Other Expense, as shown on the
Consolidated Statements of Operations include the following for the years ended
December 31 (in thousands):
2003 2002 2001
------- ------- -------
Other income:
Allowance for equity funds used during construction $11,377 $ 8,621 $ 1,571
Corporate-owned life insurance income ............. 6,314 1,333 5,258
Fee for sold receivables .......................... - 1,340 2,864
Gain on sale of assets ............................ - 1,164 1,387
Other ............................................. 1,030 1,605 1,211
------- ------- -------
Total ........................................... $18,721 $14,063 $12,291
======= ======= =======
Other Expense for the years ended December 31, 2002 and 2001, consisted
principally of a discount on sold receivables totaling $6.4 million and $16.0
million, respectively.
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(16) AFFILIATED COMPANY TRANSACTIONS
The companies identified as affiliates are MidAmerican Energy Holdings and its
subsidiaries. The basis for these charges is provided for in service agreements
between MidAmerican Energy and its affiliates.
MHC incurred charges which are of general benefit to all of its subsidiaries.
These costs were for administrative and general salaries and expenses, outside
services, director fees, pension, deferred compensation, and retirement costs,
some of which originated at MidAmerican Energy. MHC reimbursed MidAmerican
Energy for charges originating at MidAmerican Energy in the amount of $0.4
million, $0.5 million and $0.4 million for 2003, 2002 and 2001, respectively.
MidAmerican Energy, in turn, was allocated a share of costs from MHC totaling
$1.2 million, $0.9 million and $1.0 million for 2003, 2002 and 2001,
respectively.
MidAmerican Energy was also reimbursed for charges incurred on behalf of its
affiliates. The majority of these reimbursed expenses was for employee wages and
benefits, insurance, building rent, computer costs, administrative services,
travel expense, and general and administrative expense; including treasury,
legal, shareholder relations and accounting functions. The amount of such
expenses was $49.1 million, $34.5 million and $27.0 million for 2003, 2002 and
2001, respectively.
In 2001, MidAmerican Energy acquired a gas turbine equipment purchase contract
from MidAmerican Energy Holdings for $22.0 million. MidAmerican Energy also
reimbursed MidAmerican Energy Holdings in the amount of $12.2 million, $10.4
million and $8.8 million in 2003, 2002 and 2001, respectively, for its allocated
share of corporate expenses.
MidAmerican Energy leased unit trains from an affiliate for the transportation
of coal to MidAmerican Energy's generating stations. Unit train costs, including
maintenance, were approximately $0.1 million annually for 2002 and 2001.
MidAmerican Energy purchased the remaining leased railcars from MidAmerican
Rail, Inc. for $0.6 million in October 2002.
MidAmerican Energy sold natural gas to AmGas, an affiliate, in the amount of
$11.6 million in 2001.
MidAmerican Energy has an agreement with Cordova Energy Company, LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant which started commercial
operation in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required to generate the energy purchased.
MidAmerican Energy's payments for monthly capacity charges totaled $26.6 million
for 2003, $21.2 million for 2002 and $18.1 million for 2001.
In August 2002, Northern Natural Gas Company ("NNG") became an affiliate of
MidAmerican Energy when NNG was purchased by MidAmerican Energy Holdings. NNG
has been and is one of MidAmerican Energy's suppliers of natural gas
transportation and storage capacity. MidAmerican Energy had net purchases of
$53.5 million of natural gas transportation and storage capacity from NNG in
2003 and $17.9 million in August through December 2002.
MidAmerican Energy had accounts receivable from affiliates of $7.4 million and
$9.4 million as of December 31, 2003 and 2002, respectively, that are included
in Receivables on the Consolidated Balance Sheets. MidAmerican Energy also had
accounts payable to affiliates of $1.6 million and $2.8 million as of December
31, 2003 and 2002, respectively, that are included in Accounts Payable on the
Consolidated Balance Sheets.
MidAmerican Energy had a $5.0 million long-term note receivable from Midwest
Capital as of December 31, 2002, which was paid off in 2003.
MidAmerican Energy may make distributions on its capital stock subject to
regulatory restrictions agreed to by MidAmerican Energy in March 1999 whereby it
committed to the IUB to use commercially reasonable efforts to maintain an
investment grade rating on its long-term debt and to maintain its common equity
level above 42% of
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total capitalization unless circumstances beyond its control result in the
common equity level decreasing to below 39% of total capitalization. MidAmerican
Energy must seek the approval of the IUB of a reasonable utility capital
structure if its common equity level decreases below 42% of total
capitalization, unless the decrease is beyond the control of MidAmerican Energy.
MidAmerican Energy is also required to seek the approval of the IUB if
MidAmerican Energy's equity level decreases to below 39%, even if the decrease
is due to circumstances beyond the control of MidAmerican Energy. A transfer of
assets between MidAmerican Energy and any of its affiliates, subject to certain
nonmaterial exceptions, requires the prior approval of either or both the IUB
and the Illinois Commerce Commission.
(17) UNAUDITED QUARTERLY OPERATING RESULTS
2003
--------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands)
Operating revenues .............. $815,196 $535,883 $576,001 $668,732
Operating income ................ 116,158 70,148 131,191 53,323
Income from continuing operations 58,692 33,132 64,305 32,468
Earnings on common stock ........ 58,255 32,805 63,978 32,143
2002
--------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands)
Operating revenues .............. $574,284 $492,688 $554,381 $614,806
Operating income ................ 92,567 65,589 135,574 61,267
Income from continuing operations 43,384 29,251 70,510 32,676
Earnings on common stock ........ 42,536 27,821 70,183 32,348
Quarterly data reflect seasonal variations common in the utility industry. The
increase in earnings for the first quarter of 2003 compared to 2002 was due to
colder weather in the first quarter of 2003 and a decrease in expenses related
to Cooper Nuclear Station as a result of the restructuring of the related
contract in August 2002.
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INDEPENDENT AUDITORS' REPORT
Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of MidAmerican Funding, LLC and subsidiaries (the
"Company") as of December 31, 2003 and 2002, and the related consolidated
statements of operations, comprehensive income, retained earnings, and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 15. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MidAmerican Funding, LLC and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note (1)(j) and (1)(k) to the consolidated financial statements,
the Company changed its accounting policy for asset retirement obligations in
2003 and for goodwill and other intangible assets in 2002.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
February 9, 2004
(March 1, 2004 as to Notes (1)(b), (1)(c), (1)(j) and (12))
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MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF DECEMBER 31,
---------------------------
2003 2002
----------- -----------
ASSETS
UTILITY PLANT, NET
Electric ..................................................... $ 5,030,960 $ 4,731,002
Gas .......................................................... 922,099 900,209
----------- -----------
5,953,059 5,631,211
Accumulated depreciation and amortization .................... (2,810,336) (2,625,432)
----------- -----------
3,142,723 3,005,779
Construction work in progress ................................ 217,537 205,988
----------- -----------
3,360,260 3,211,767
----------- -----------
CURRENT ASSETS
Cash and cash equivalents .................................... 4,558 28,915
Marketable securities, trading ............................... - 4,939
Receivables, less reserves of $7,554 and $7,685, respectively 305,198 321,698
Inventories .................................................. 85,465 88,492
Other ........................................................ 43,572 30,070
----------- -----------
438,793 474,114
----------- -----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ................... 350,746 333,382
GOODWILL ..................................................... 1,274,454 1,275,143
REGULATORY ASSETS ............................................ 261,696 204,586
OTHER ASSETS ................................................. 51,665 52,755
----------- -----------
TOTAL ASSETS ................................................. $ 5,737,614 $ 5,551,747
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity .............................................. $ 1,863,769 $ 1,879,191
MidAmerican Energy preferred security ........................ 31,759 31,759
Long-term debt, excluding current portion .................... 1,772,496 1,647,691
----------- -----------
3,668,024 3,558,641
----------- -----------
CURRENT LIABILITIES
Notes payable ................................................ 48,000 55,000
Note payable to affiliate .................................... 10,450 -
Current portion of long-term debt ............................ 56,151 105,727
Accounts payable ............................................. 200,549 242,733
Taxes accrued ................................................ 79,304 85,987
Interest accrued ............................................. 26,017 25,487
Other ........................................................ 68,044 56,291
----------- -----------
488,515 571,225
----------- -----------
OTHER LIABILITIES
Deferred income taxes ........................................ 453,320 461,862
Investment tax credits ....................................... 52,510 56,886
Asset retirement obligations ................................. 269,124 159,757
Regulatory liabilities ....................................... 574,490 499,168
Other ........................................................ 231,631 244,208
----------- -----------
1,581,075 1,421,881
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES ......................... $ 5,737,614 $ 5,551,747
=========== ===========
The accompanying notes are an integral part of these financial statements.
-87-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
OPERATING REVENUES
Regulated electric ...................... $ 1,397,997 $ 1,353,431 $ 1,318,129
Regulated gas ........................... 947,393 695,799 869,132
Nonregulated ............................ 254,849 191,649 201,389
----------- ----------- -----------
2,600,239 2,240,879 2,388,650
----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ..... 397,727 346,685 275,904
Cost of gas sold ...................... 720,633 482,837 674,883
Other operating expenses .............. 360,090 394,436 445,192
Maintenance ........................... 153,405 135,487 138,343
Depreciation and amortization ......... 279,650 266,983 250,315
Property and other taxes .............. 80,122 76,025 71,705
----------- ----------- -----------
1,991,627 1,702,453 1,856,342
----------- ----------- -----------
Nonregulated:
Cost of sales ......................... 216,175 159,391 170,541
Other ................................. 24,569 29,047 61,682
----------- ----------- -----------
240,744 188,438 232,223
----------- ----------- -----------
Total operating expenses ................ 2,232,371 1,890,891 2,088,565
----------- ----------- -----------
OPERATING INCOME ........................ 367,868 349,988 300,085
----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income ............ 4,975 19,636 23,344
Marketable securities gains (losses), net 204 (5,094) (1,124)
Other income ............................ 24,527 26,972 21,711
Other expense ........................... (10,096) (31,273) (18,737)
----------- ----------- -----------
19,610 10,241 25,194
----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt .............. 119,333 119,129 109,224
Other interest expense .................. 4,061 3,431 6,417
Preferred dividends of subsidiaries ..... 1,416 4,507 12,524
Allowance for borrowed funds ............ (4,586) (3,336) (1,661)
----------- ----------- -----------
120,224 123,731 126,504
----------- ----------- -----------
INCOME BEFORE INCOME TAXES .............. 267,254 236,498 198,775
INCOME TAXES ............................ 110,078 99,782 95,688
----------- ----------- -----------
NET INCOME .............................. $ 157,176 $ 136,716 $ 103,087
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-88-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
YEARS ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
NET INCOME ............................................................. $ 157,176 $ 136,716 $ 103,087
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) during period-
Before income taxes ................................................ 384 (9,512) (5,315)
Income tax (expense) benefit ....................................... (135) 3,329 1,860
--------- --------- ---------
249 (6,183) (3,455)
--------- --------- ---------
Less realized gains (losses) reflected in net income during period-
Before income taxes .............................................. 71 (4,735) (2,410)
Income tax benefit ............................................... (25) 1,657 844
--------- --------- ---------
46 (3,078) (1,566)
--------- --------- ---------
Net unrealized gains (losses) .................................. 203 (3,105) (1,889)
--------- --------- ---------
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes ................................................ (7,372) (2,458) 7,690
Income tax (expense) benefit ....................................... 3,065 1,022 (3,197)
--------- --------- ---------
(4,307) (1,436) 4,493
--------- --------- ---------
Less realized gains (losses) reflected in net income during period-
Before income taxes .............................................. 5,513 2,277 1,757
Income tax (expense) benefit ..................................... (2,292) (946) (731)
--------- --------- ---------
3,221 1,331 1,026
--------- --------- ---------
Less net unrealized gains (losses) reclassified to regulatory assets
and liabilities -
Before income taxes ............................................ (12,369) - -
Income tax benefit ............................................. 5,142 - -
--------- --------- ---------
(7,227) - -
--------- --------- ---------
Net unrealized gains (losses) .................................. (301) (2,767) 3,467
--------- --------- ---------
Other comprehensive income (loss) ...................................... (98) (5,872) 1,578
--------- --------- ---------
COMPREHENSIVE INCOME ................................................... $ 157,078 $ 130,844 $ 104,665
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-89-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 157,176 $ 136,716 $ 103,087
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ............................ 281,001 269,412 286,590
Deferred income taxes and investment tax credit, net ..... 4,558 (74,561) (32,543)
Amortization of other assets and liabilities ............. 19,118 29,827 38,750
Gain on sale of securities, assets and other investments . (151) (3,840) (1,358)
Loss from impairment of assets and investments ........... 6,375 23,584 -
Income on equity investments ............................. (1,755) (7,919) (5,118)
Net changes in accrued customer rate credits ............. - - (21,531)
Power purchase contract restructuring receipt ............ - 39,100 -
Cash outflows of accounts receivable securitization ...... - (44,000) (26,000)
Impact of changes in working capital -
Marketable securities, trading ......................... 4,939 15,804 30,794
Receivables, net ....................................... 16,500 (109,729) 315,397
Inventories ............................................ 3,027 (5,153) (14,209)
Other current assets ................................... (13,502) 6,526 511
Accounts payable ....................................... (48,691) 40,477 (148,371)
Taxes accrued .......................................... (6,683) 24,718 (70,109)
Interest accrued ....................................... 530 (2,326) (142)
Other current liabilities .............................. 11,753 11,529 6,909
Other .................................................... (17,520) 15,450 (1,702)
--------- --------- ---------
Net cash provided by operating activities ............ 416,675 365,615 460,955
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures .......................... (376,218) (356,636) (250,073)
Non-cash and accrued utility construction expenditures ..... 32,081 25,349 (705)
Quad Cities Station decommissioning trust fund ............. (8,299) (8,299) (8,299)
Nonregulated capital expenditures .......................... (2,312) (1,558) (2,541)
Purchase of assets and long-term investments ............... - (1,500) (2,274)
Proceeds from sale of available-for-sale securities ........ 71 4,555 -
Proceeds from sale of assets and other investments ......... 326 12,138 358
Note receivable from affiliate ............................. - 151,888 (53,800)
Other investing activities, net ............................ 11,895 9,984 6,555
--------- --------- ---------
Net cash used in investing activities .................... (342,456) (164,079) (310,779)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ...................................... (172,500) (233,493) -
Issuance of long-term debt, net ............................ 272,550 391,352 198,150
Retirement of long-term debt, including reacquisition cost . (202,076) (187,290) (324,933)
Reacquisition of preferred securities ...................... - (126,680) (23,320)
Note payable to affiliate .................................. 10,450 - -
Net increase (decrease) in notes payable ................... (7,000) (36,780) 10,179
--------- --------- ---------
Net cash used in financing activities .................... (98,576) (192,891) (139,924)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... (24,357) 8,645 10,252
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 28,915 20,270 10,018
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 4,558 $ 28,915 $ 20,270
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid, net of amounts capitalized .................. $ 112,434 $ 116,185 $ 109,026
========= ========= =========
Income taxes paid .......................................... $ 117,566 $ 124,002 $ 200,098
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-90-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31,
------------------------------------
2003 2002
---------- ----------
MEMBER'S EQUITY
Paid in capital .................................................... $1,669,753 $1,669,753
Retained earnings .................................................. 193,347 208,671
Accumulated other comprehensive income, net:
Unrealized gain on securities .................................... 270 67
Unrealized gain on cash flow hedges .............................. 399 700
---------- ----------
1,863,769 50.8% 1,879,191 52.8%
---------- ----- ---------- -----
MIDAMERICAN ENERGY PREFERRED SECURITIES
(100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding; not subject to mandatory redemption:
$3.30 Series, 49,451 shares ...................................... 4,945 4,945
$3.75 Series, 38,305 shares ...................................... 3,831 3,831
$3.90 Series, 32,630 shares ...................................... 3,263 3,263
$4.20 Series, 47,362 shares ...................................... 4,736 4,736
$4.35 Series, 49,945 shares ...................................... 4,994 4,994
$4.40 Series, 50,000 shares ...................................... 5,000 5,000
$4.80 Series, 49,898 shares ...................................... 4,990 4,990
---------- ----------
31,759 0.9% 31,759 0.9%
---------- ----- ---------- -----
LONG-TERM DEBT
MidAmerican Energy mortgage bonds:
7.7% Series, due 2004 ............................................ - 55,630
7.0% Series, due 2005 ............................................ 90,500 90,500
7.375% Series, due 2008 .......................................... - 75,000
7.45% Series, due 2023 ........................................... - 6,940
6.95% Series, due 2025 ........................................... - 12,500
MidAmerican Energy pollution control revenue obligations:
6.1% Series, due 2007 ............................................ 1,000 1,000
5.95% Series, due 2023 (secured by general mortgage bonds) ....... 29,030 29,030
Variable rate series -
Due 2016 and 2017, 1.26% and 1.64%, respectively ............... 37,600 37,600
Due 2023 (secured by general mortgage bonds)
1.26% and 1.64%, respectively ................................ 28,295 28,295
Due 2023, 1.26% and 1.64%, respectively ........................ 6,850 6,850
Due 2024, 1.26% and 1.64%, respectively ........................ 34,900 34,900
Due 2025, 1.26% and 1.64%, respectively ........................ 12,750 12,750
MidAmerican Energy notes:
6.375% Series, due 2006 ........................................ 160,000 160,000
5.125% Series, due 2013 ........................................ 275,000 -
6.75% Series, due 2031 ......................................... 400,000 400,000
Obligation under capital lease ..................................... 2,060 2,161
Unamortized debt premium and discount, net ......................... (5,489) (5,465)
---------- ----------
Total utility .................................................. 1,072,496 29.2% 947,691 26.6%
---------- ----- ---------- -----
MidAmerican Funding parent debt:
6.339% Senior Secured Notes Due 2009 ............................. 175,000 175,000
6.75% Senior Secured Notes Due 2011 .............................. 200,000 200,000
6.927% Senior Secured Notes Due 2029 ............................. 325,000 325,000
---------- ----------
Total MidAmerican Funding parent ............................... 700,000 19.1% 700,000 19.7%
---------- ----- ---------- -----
1,772,496 48.3% 1,647,691 46.3%
---------- ----- ---------- -----
TOTAL CAPITALIZATION ............................................... $3,668,024 100.0% $3,558,641 100.0%
========== ===== ========== =====
The accompanying notes are an integral part of these financial statements.
-91-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands)
YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
-------- -------- ---------
BEGINNING OF PERIOD ............... $208,671 $305,448 $202,361
NET INCOME ........................ 157,176 136,716 103,087
DEDUCT DIVIDENDS DECLARED ......... 172,500 233,493 -
-------- -------- --------
END OF PERIOD ..................... $193,347 $208,671 $305,448
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-92-
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
(1) Summary of Significant Accounting Policies ........................... 94
(2) Jointly Owned Utility Plant........................................... 97
(3) Inventories........................................................... 97
(4) Commitments and Contingencies......................................... 97
(5) Long-term Debt........................................................ 97
(6) Short-term Borrowing.................................................. 99
(7) Preferred Securities.................................................. 99
(8) Risk Management and Energy Trading.................................... 99
(9) Concentration of Credit Risk.......................................... 99
(10) Rate Matters.......................................................... 99
(11) Retirement Plans......................................................100
(12) Segment Information...................................................100
(13) Income Taxes..........................................................103
(14) Fair Value of Financial Instruments...................................104
(15) Non-Operating Other Income and Expense................................105
(16) Affiliated Company Transactions.......................................105
(17) Unaudited Quarterly Operating Results.................................107
-93-
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Company Organization
MidAmerican Funding, LLC ("MidAmerican Funding") is an Iowa limited liability
company with MidAmerican Energy Holdings Company ("MidAmerican Energy Holdings")
as its sole member. MidAmerican Funding's direct wholly owned subsidiary is MHC
Inc. ("MHC"), which constitutes substantially all of MidAmerican Funding's
assets, liabilities and business activities except those related to MidAmerican
Funding's long-term debt securities. MHC, MidAmerican Funding and MidAmerican
Energy Holdings are exempt public utility holding companies headquartered in Des
Moines, Iowa. MHC's principal subsidiary is MidAmerican Energy Company
("MidAmerican Energy"), a public utility with electric and natural gas
operations. Other direct wholly owned subsidiaries of MHC are InterCoast Capital
Company ("InterCoast Capital", formerly MidAmerican Capital Company), Midwest
Capital Group, Inc., MidAmerican Services Company and MEC Construction Services
Co.
(b) Principles of Consolidation and Preparation of Financial Statements
The accompanying Consolidated Financial Statements include MidAmerican Funding
and its subsidiaries. All significant intercompany transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. Certain classification of
amounts for 2003 are different than that of prior years. Accordingly, historical
amounts have been reclassified.
MidAmerican Funding originally issued its 2003 consolidated financial statements
on February 9, 2004. In accordance with accounting guidance issued subsequent to
that date, MidAmerican Funding has adjusted its consolidated financial
statements to reflect the reclassification of $385.7 million of 2002 regulatory
liabilities and $367.9 million of 2001 regulatory liabilities for the cost of
removal of utility plant previously recognized in Accumulated Depreciation and
Amortization to Regulatory Liabilities on the Consolidated Balance Sheets. Prior
to this reclassification, the following 2002 balances were: Utility Plant, Net,
$2.8 billion; Total Assets, $5.2 billion; Other Liabilities, $1.0 billion; and
Total Capitalization and Liabilities, $5.2 billion. Subsequent to this
reclassification, the 2002 balances are: Utility Plant, Net, $3.2 billion; Total
Assets, $5.6 billion; Other Liabilities, $1.4 billion; and Total Capitalization
and Liabilities, $5.6 billion.
(c) Regulation
Refer to Note (1)(c) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(d) Revenue Recognition
Refer to Note (1)(d) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(e) Depreciation and Amortization
Refer to Note (1)(e) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
-94-
(f) Investments and Nonregulated Property, Net
------------------------------------------
Investments and Nonregulated Property, Net includes the following amounts as of
December 31 (in thousands):
2003 2002
-------- --------
Nuclear decommissioning trust fund .................. $184,171 $159,757
Rabbi trusts ........................................ 99,957 94,026
Equipment leases .................................... 29,549 32,625
Coal transportation property, net of accumulated
depreciation of $1,996 and $1,705, respectively ... 9,923 10,215
MidAmerican Energy non-utility property,
net of accumulated depreciation of
$2,169 and $1,293, respectively ................... 8,727 8,329
Energy projects ..................................... 7,567 11,162
Real estate, net of accumulated depreciation of
$526 and $477, respectively ....................... 5,755 5,244
Other venture capital investments ................... 2,596 7,272
Marketable securities, available-for-sale ........... 533 258
Other ............................................... 1,968 4,494
-------- --------
Total .......................................... $350,746 $333,382
======== ========
Investments held by the nuclear decommissioning trust fund for the Quad Cities
Station units are classified as available-for-sale and are reported at fair
value. An amount equal to the net unrealized gains and losses on those
investments is recorded as an adjustment to the asset retirement obligation
regulatory asset, which is included in Regulatory Assets on the Consolidated
Balance Sheets. Funds are invested in accordance with applicable federal
investment guidelines and are restricted for use as reimbursement for costs of
decommissioning MidAmerican Energy's Quad Cities Station.
The investment in Rabbi trusts represents the cash value of corporate-owned life
insurance policies on certain key executives and the fair value of other related
investments. The Rabbi trusts were established to administer various
nonqualified executive and director compensation plans, and investments in each
trust are restricted for use in meeting the costs and obligations of the trust
and related compensation plans.
Equipment leases, which are accounted for as leveraged leases and held by
InterCoast Capital, are comprised primarily of equity financing provided for
five commercial passenger aircraft leased to major domestic airlines and a seven
percent undivided interest in an electric generating station, which is leased to
a utility located in Arizona. InterCoast Capital's initial equity investment in
the aircraft represented 20% - 34% of the purchase price; the remaining amount
was furnished by third-party non-recourse lenders. InterCoast Capital has also
invested in safe harbor lease transactions involving ferryboats leased to
entities engaged in providing recreational boat tours. The investments are
exposed to the credit risk of the lessees. The carrying pre-tax values as of
December 31 (in thousands) and the years of termination for the equipment leases
are as follows:
Year of
2003 2002 Termination
------- ------- -----------
Aircraft..................... $20,926 $23,321 2008/2009
Electric generation station.. 8,191 8,811 2015
Safe harbor.................. 432 493 periodically
through 2015
------- -------
Total........................ $29,549 $32,625
======= =======
The coal transportation property is owned and operated by CBEC Railway Inc., a
subsidiary of MidAmerican Energy. The property is depreciated on a straight-line
basis over 37 years.
-95-
Energy projects consist of investments in solar electric generating facilities,
a hydroelectric development company, energy marketing assets and a gas-fired
cogeneration plant. The investments are supported by long-term sales contracts
to electric utilities primarily based on market price.
MidAmerican Energy non-utility property consists of property such as computer
software, land and other assets not used for regulated utility purposes. The
depreciable property consists primarily of computer software, which is amortized
on a straight-line basis over five years.
Other venture capital investments include investments in independently managed
funds, consisting principally of energy-related venture capital funds. The
investments are accounted for using the cost or equity method of accounting,
depending on MidAmerican Funding's level of ownership and management control.
Most of the special purpose funds have stated termination dates, ranging from
2004 through 2007. At the time of fund termination, any remaining investments in
the fund are liquidated and distributions are made to investors.
The investment in real estate is comprised primarily of a 1,920 acre planned
residential and commercial development community located in the southeast corner
of South Dakota. As of December 31, 2003, 43.8% of the development available for
sale had been sold.
Marketable securities, which consist of investments in common stocks, are
classified as available-for-sale and reported at fair value, with net unrealized
gains and losses reported as a net of tax amount in Member's Equity until
realized. An other-than-temporary decline in the value of a marketable security
is recognized through a write-down of the investment and charged to earnings.
(g) Consolidated Statements of Cash Flows
MidAmerican Funding considers all cash and highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash and cash
equivalents for the Consolidated Statements of Cash Flows.
(h) Accounting for Cooper Nuclear Station Power Purchase Contract
Refer to Note (1)(h) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(i) Accounting for Derivatives
Refer to Note (1)(i) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(j) New Accounting Pronouncements
Refer to Note (1)(j) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(k) Goodwill
On January 1, 2002, MidAmerican Funding adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which dictates the accounting for acquired goodwill
and other intangible assets. SFAS No. 142 requires that amortization of goodwill
and indefinite-lived intangible assets be discontinued and that entities
disclose net income for prior periods adjusted to exclude such amortization and
related income tax effects, as well as a reconciliation from the originally
reported net income to the adjusted net income. MidAmerican Funding's related
amortization consisted solely of goodwill amortization, which had no income tax
effect. Amortization expense was included in Nonregulated Operating Expenses -
Other in the Consolidated Statements of Operations. Following is a
reconciliation of net income as originally reported to adjusted net income for
the years ended December 31 (in thousands):
-96-
2003 2002 2001
-------- -------- --------
Net income as originally reported .. $157,176 $136,716 $103,087
Goodwill amortization .............. - - 34,415
-------- -------- --------
Net income as adjusted ............. $157,176 $136,716 $137,502
======== ======== ========
Based on MidAmerican Funding's annual goodwill impairment test completed as of
October 31, 2003, no impairment was indicated for goodwill. In the fourth
quarter of 2003, MidAmerican Funding adjusted goodwill for a change in related
deferred income taxes due to resolution of tax issues existing at the time of
purchase. The following table shows the change in the carrying amount of
goodwill by reportable segment for the years ended December 31, 2003 and 2002
(in thousands):
Energy Trans- Marketing
Generation Delivery mission & Sales Total
---------- --------- ------- --------- ----------
Balance at January 1, 2002 ... $ 927,819 $ 267,152 $ 84,172 $ - $1,279,143
Income tax adjustment ........ - (4,000) - - (4,000)
--------- --------- -------- ------- ----------
Balance at December 31, 2002.. 927,819 263,152 84,172 - 1,275,143
Income tax adjustment ........ (338) (246) (105) - (689)
--------- --------- -------- ------- ----------
Balance at December 31, 2003.. $ 927,481 $ 262,906 $ 84,067 $ - $1,274,454
========= ========= ======== ======= ==========
(2) JOINTLY OWNED UTILITY PLANT
Refer to Note (2) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(3) INVENTORIES
Refer to Note (3) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(4) COMMITMENTS AND CONTINGENCIES
Refer to Notes (4)(a) through (4)(g) of MidAmerican Energy's Notes to
Consolidated Financial Statements for MidAmerican Energy commitments and
contingencies disclosures.
(h) Other Commitments and Contingencies
InterCoast Capital has issued a letter of credit totaling $6.0 million in
conjunction with an energy project investment, $0.9 million of which was drawn
as of December 31, 2003. The letter of credit is reflected in Other
Liabilities-Other on MidAmerican Funding`s Consolidated Balance Sheets.
MidAmerican Funding is involved in a number of other legal proceedings and
claims. While management is unable to predict the ultimate outcome of these
matters, it is not expected that their resolution will have a material adverse
effect on the results of operations and financial condition.
(5) LONG-TERM DEBT
MidAmerican Funding's sinking fund requirements and maturities of long-term debt
for 2004 through 2008 are approximately $56 million, $91 million, $161 million,
$2 million and zero, respectively. Refer to MidAmerican Funding's Consolidated
Statements of Capitalization for detail of long-term debt.
MidAmerican Energy's Variable Rate Pollution Control Revenue Obligations bear
interest at rates that are periodically established through remarketing of the
bonds in the short-term tax-exempt market. MidAmerican Energy, at its option,
may change the mode of interest calculation for these bonds by selecting from
among several alternative floating or fixed rate modes. The interest rate shown
in the Consolidated Statements of
-97-
Capitalization is the weighted average interest rate as of December 31, 2003 and
2002. MidAmerican Energy maintains a revolving credit facility agreement to
provide liquidity for holders of these issues.
On January 14, 2003, MidAmerican Energy issued $275 million of 5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.
MidAmerican Funding parent company long-term debt is secured by a pledge of the
common stock of MHC. The notes and bonds:
o are the direct senior secured obligations of MidAmerican Funding;
o rank on an equal basis with all of MidAmerican Funding's other
existing and future senior obligations;
o rank senior to all of MidAmerican Funding's existing and future
subordinated indebtedness; and
o effectively rank junior to all indebtedness and other liabilities,
including preferred stock, of the direct and indirect subsidiaries of
MidAmerican Funding, to the extent of the assets of these
subsidiaries.
MidAmerican Funding may redeem any series of the notes and bonds in whole or in
part at any time at a redemption price equal to the sum of:
o the greater of the following:
(1) 100% of the principal amount of the series being redeemed, and
(2) the sum of the present values of the remaining scheduled payments
of principal and interest on the series being redeemed,
discounted to the date of redemption on a semiannual basis at the
treasury yield plus (x) 15 basis points in the case of the 2009
notes (y) 20 basis points in the case of the 2011 notes , or (z)
25 basis points in the case of the 2029 Bonds, plus
o accrued and unpaid interest on the securities being redeemed to the
date of redemption.
MidAmerican Funding uses distributions that it receives from its subsidiaries to
make payments on the Notes and Bonds. These subsidiaries must make payments on
their own indebtedness before making distributions to MidAmerican Funding. The
distributions are also subject to utility regulatory restrictions agreed to by
MidAmerican Energy in March 1999 whereby it committed to the Iowa Utilities
Board ("IUB") to use commercially reasonable efforts to maintain an investment
grade rating on its long-term debt and to maintain its common equity level above
42% of total capitalization unless circumstances beyond its control result in
the common equity level decreasing to below 39% of total capitalization.
MidAmerican Energy must seek the approval of the IUB of a reasonable utility
capital structure if MidAmerican Energy's common equity level decreases below
42% of total capitalization, unless the decrease is beyond the control of
MidAmerican Energy. MidAmerican Energy is also required to seek the approval of
the IUB if MidAmerican Energy's equity level decreases to below 39%, even if the
decrease is due to circumstances beyond the control of MidAmerican Energy.
As of December 31, 2003, MidAmerican Funding and MidAmerican Energy were each in
compliance with all of their applicable long-term debt covenants.
Each of MidAmerican Funding's direct or indirect subsidiaries is organized as a
legal entity separate and apart from MidAmerican Funding and its other
subsidiaries. It should not be assumed that any asset of any subsidiary of
MidAmerican Funding will be available to satisfy the obligations of MidAmerican
Funding or any of its other subsidiaries; provided, however, that unrestricted
cash or other assets which are available for distribution may, subject to
applicable law and the terms of financing arrangements of such parties, be
advanced, loaned, paid as dividends or otherwise distributed or contributed to
MidAmerican Funding, one of its subsidiaries or affiliates thereof.
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises and substantially all of
the former Midwest Power Systems Inc., a predecessor company, electric utility
property in Iowa, or approximately 80% of MidAmerican Energy's gross utility
plant, is pledged to secure mortgage bonds.
-98-
(6) SHORT-TERM BORROWING
Interim financing of working capital needs and the construction program may be
obtained with unaffiliated parties from the sale of commercial paper or
short-term borrowing from banks. Information regarding short-term debt follows
(dollars in thousands):
2003 2002
------- -------
Balance at year-end .................................. $48,000 $55,000
Weighted average interest rate on year-end balance.... 1.0% 1.3%
Average daily amount outstanding during the year ..... $ 1,960 $ 9,068
Weighted average interest rate on average daily
amount outstanding during the year ................ 1.2% 1.8%
MidAmerican Energy has authority from the FERC to issue through April 14, 2005,
short-term debt in the form of commercial paper and bank notes aggregating $500
million. MidAmerican Energy has in place a $370.4 million revolving credit
facility expiring January 13, 2005, which supports its $250 million commercial
paper program and its variable rate pollution control revenue obligations. In
addition, MidAmerican Energy has a $5.0 million line of credit, which expires
July 1, 2004. As of December 31, 2003, commercial paper and bank notes totaled
$48.0 million for MidAmerican Energy. MHC has a $4.0 million line of credit,
expiring July 1, 2004, under which zero was outstanding at December 31, 2003. As
of December 31, 2003, InterCoast Capital had a $5.1 million line of credit
expiring July 1, 2004, to support a $5.1 million letter of credit, net of
amounts drawn, provided to an energy project in which it has invested. A
liability is reflected on MidAmerican Funding's Consolidated Balance Sheets for
the letter of credit, net of amounts drawn.
(7) PREFERRED SECURITIES
Refer to Note (7) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(8) RISK MANAGEMENT AND ENERGY TRADING
Refer to Note (8) of MidAmerican Energy's Notes to Consolidated Financial
Statements for a discussion of MidAmerican Funding's commodity price, energy
trading and weather risks.
(9) CONCENTRATION OF CREDIT RISK
Refer to Note (9) of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding concentration of credit risk for
MidAmerican Energy.
As disclosed in Note (1)(f), MidAmerican Capital has provided equity capital for
five commercial aircraft leased to major domestic airlines. As of December 31,
2003, the net receivables under these agreements totaled $20.9 million.
(10) RATE MATTERS
Refer to Note (10) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
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(11) RETIREMENT PLANS
Refer to Note (11) of MidAmerican Energy's Notes to Consolidated Financial
Statements for additional information regarding MidAmerican Funding's pension,
supplemental retirement and postretirement benefit plans.
MidAmerican Funding allocated pension and postretirement costs to its parent and
other affiliates in each of the years ended December 31, as follows (in
millions):
2003 2002 2001
----- ---- ----
Pension costs ........... $11.6 $8.1 $5.2
Postretirement costs .... 4.2 1.5 1.0
(12) SEGMENT INFORMATION
MidAmerican Funding has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated and nonregulated wholesale electricity and
natural gas. The energy delivery segment derives its revenue principally from
the sale and delivery of regulated retail electricity and natural gas, while the
transmission segment obtains most of its revenue from the sale of electric
transmission capacity. The marketing and sales segment receives its revenue
principally from nonregulated retail sales of natural gas and electricity.
Common operating costs, interest income, interest expense and income tax expense
are allocated to each segment based on MidAmerican Energy allocators most
related to the nature of the cost.
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. Regulated electric retail revenues are billed to
external customers by the energy delivery segment based on bundled tariffs that
do not segregate components for the other segments. For internal segment
reporting purposes, MidAmerican Energy has developed transfer prices to transfer
the appropriate portion of those revenues to the other segments. The transfer
prices are based on cost of service or tariffed rates, except for the generation
segment which receives the residual.
MidAmerican Funding's external revenues by product and services are displayed on
the Consolidated Statements of Operations.
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The following tables provide information on an operating segment basis as of and
for the years ended December 31 (in thousands):
2003 2002 2001
----------- ----------- -----------
Segment Profit Information
--------------------------
Operating revenues:
External revenues -
Generation .......................... $ 522,349 $ 415,921 $ 516,915
Energy delivery ..................... 1,812,547 1,625,600 1,664,462
Transmission ........................ 25,916 20,721 22,852
Marketing & sales ................... 235,000 173,917 163,020
Other ............................... 4,427 4,720 21,401
----------- ----------- -----------
Total ............................. 2,600,239 2,240,879 2,388,650
----------- ----------- -----------
Intersegment revenues -
Generation .......................... 629,939 651,342 606,164
Energy delivery ..................... (690,126) (708,953) (664,099)
Transmission ........................ 57,946 55,207 55,086
Marketing & sales ................... 2,241 2,404 2,727
Other ............................... - - 122
----------- ----------- -----------
Total ............................. - - -
----------- ----------- -----------
Consolidated ........................... $ 2,600,239 $ 2,240,879 $ 2,388,650
=========== =========== ===========
Depreciation and amortization expense (a):
Generation ............................. $ 145,645 $ 139,054 $ 133,681
Energy delivery ........................ 121,296 117,893 106,496
Transmission ........................... 11,641 8,972 8,900
Marketing & sales ...................... 2,221 2,527 2,022
Other .................................. 198 966 35,491
----------- ----------- -----------
Total ............................... $ 281,001 $ 269,412 $ 286,590
=========== =========== ===========
Interest and dividend income:
Generation ............................. $ 2,284 $ 3,783 $ 5,450
Energy delivery ........................ 2,307 4,468 6,727
Transmission ........................... 346 530 822
Marketing & sales ...................... 19 51 70
Other .................................. 117 12,283 15,382
----------- ----------- -----------
Total ............................... 5,073 21,115 28,451
Intersegment eliminations .............. (98) (1,479) (5,107)
----------- ----------- -----------
Consolidated ........................ $ 4,975 $ 19,636 $ 23,344
=========== =========== ===========
Fixed charges:
Generation ............................. $ 30,364 $ 29,989 $ 31,726
Energy delivery ........................ 37,745 40,737 42,654
Transmission ........................... 4,416 4,892 5,401
Marketing & sales ...................... 325 366 363
Other .................................. 47,472 49,226 51,467
----------- ----------- -----------
Total ............................... 120,322 125,210 131,611
Intersegment eliminations .............. (98) (1,479) (5,107)
----------- ----------- -----------
Consolidated ........................ $ 120,224 $ 123,731 $ 126,504
=========== =========== ===========
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2003 2002 2001
----------- ----------- -----------
Segment Profit Information (continued)
--------------------------------------
Income before income taxes:
Generation ............................. $ 153,046 $ 150,040 $ 142,637
Energy delivery ........................ 111,089 101,176 84,334
Transmission ........................... 47,364 40,403 39,514
Marketing & sales ...................... 6,943 1,499 (5,799)
Other .................................. (51,188) (56,620) (61,911)
----------- ----------- -----------
Total ............................... $ 267,254 $ 236,498 $ 198,775
=========== =========== ===========
Segment Asset Information
Capital expenditures:
Generation ............................. $ 215,952 $ 197,666 $ 87,296
Energy delivery ........................ 143,507 151,178 159,302
Transmission ........................... 16,759 7,504 3,733
Marketing & sales ...................... 1,257 1,110 1,963
Other .................................. 1,055 736 320
----------- ----------- -----------
Total ............................... $ 378,530 $ 358,194 $ 252,614
=========== =========== ===========
Total assets (b):
Generation ............................. $ 2,567,360 $ 2,472,346 $ 2,354,830
Energy delivery ........................ 2,797,524 2,716,623 2,589,092
Transmission ........................... 326,607 323,497 327,015
Marketing & sales ...................... 56,743 52,143 51,164
Other .................................. 200,863 179,141 506,331
----------- ----------- -----------
Total ............................... 5,949,097 5,743,750 5,828,432
Reclassifications and
intersegment eliminations (c) ...... (211,483) (192,003) (277,792)
----------- ----------- -----------
Consolidated .......................... $ 5,737,614 $ 5,551,747 $ 5,550,640
=========== =========== ===========
(a) Depreciation and amortization expense above includes depreciation related
to nonregulated operations and, for 2001, goodwill amortization, which are
included in Nonregulated Operating Expenses - Other on the Consolidated
Statements of Operations.
(b) Total assets by operating segment reflect the assignment of goodwill to
applicable reporting units in accordance with SFAS No. 142.
(c) Reclassifications and intersegment eliminations relate principally to the
reclassification of income tax balances in accordance with generally
accepted accounting principles and the elimination of intersegment accounts
receivables and payables.
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(13) INCOME TAXES
MidAmerican Funding is included in the MidAmerican Energy Holdings consolidated
income tax returns. However, MidAmerican Funding's income tax liability is
computed on a stand-alone basis.
MidAmerican Funding's income tax expense includes the following for the years
ended December 31 (in thousands):
2003 2002 2001
--------- --------- ---------
Current:
Federal ................ $ 79,848 $ 129,922 $ 99,662
State .................. 25,672 44,421 28,569
--------- --------- ---------
105,520 174,343 128,231
--------- --------- ---------
Deferred:
Federal ................ 8,471 (54,193) (23,373)
State .................. 463 (15,962) (4,253)
--------- --------- ---------
8,934 (70,155) (27,626)
Investment tax credit, net (4,376) (4,406) (4,917)
--------- --------- ---------
Total .................. $ 110,078 $ 99,782 $ 95,688
========= ========= =========
The following table is a reconciliation of the statutory federal income tax rate
and the effective federal and state income tax rate indicated by the
Consolidated Statements of Operations for the years ended December 31:
2003 2002 2001
---- ---- ----
Statutory federal income tax rate ................... 35% 35% 35%
Amortization of investment tax credit ............... (2) (2) (2)
State income tax, net of federal income tax benefit.. 6 8 8
Goodwill amortization ............................... - - 6
Other ............................................... 2 1 1
--- --- ---
Effective federal and state income tax rate ......... 41% 42% 48%
=== === ===
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Included in Deferred Income Taxes in the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
2003 2002
-------- --------
Deferred tax assets related to:
Revenue sharing ................................ $ 63,243 $ 46,428
Nuclear reserves and decommissioning ........... 35,956 28,411
Pensions ....................................... 35,410 31,985
Investment tax credits ......................... 35,213 38,296
Accrued liabilities ............................ 6,989 1,094
Unrealized losses, net ......................... 1,002 718
Fuel cost recoveries ........................... - 9,558
Other .......................................... 7,743 6,859
-------- --------
185,556 163,349
-------- --------
Deferred tax liabilities related to:
Depreciable property ........................... 477,749 460,886
Income taxes recoverable through future rates .. 142,598 159,411
Fuel cost recoveries ........................... 12,864 -
Reacquired debt ................................ 5,665 4,914
-------- --------
638,876 625,211
-------- --------
Net deferred income tax liability ................ $453,320 $461,862
======== ========
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair value of the
named financial instruments as of December 31 (in thousands):
2003 2002
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- -----------
Financial instruments owned:
Equity investments carried at cost ......... $ 3,960 $ 7,684 $ 6,072 $ 9,288
Financial instruments issued:
Long-term debt, including current portion .. 1,828,647 1,931,086 1,753,418 1,849,314
Substantially all of MidAmerican Funding's investments in debt and equity
securities as of December 31, 2003 and 2002, relate to its Quad Cities Station
decommissioning trust. Refer to Note (14) in MidAmerican Energy's Notes to
Consolidated Financial Statements for additional information.
On January 1, 2001, InterCoast Capital's portfolio of preferred stock
investments was transferred from the available-for-sale category to the trading
category, as permitted by SFAS No. 133. Liquidation of the portfolio was
completed in 2003. For trading securities held at December 31, 2002, unrealized
gains and losses reflected in the Consolidated Statement of Operations totaled a
net gain of $0.1 million for the year ended December 31, 2002. Earnings for the
year ended December 31, 2001, include gross gains of $3.4 million and gross
losses of $5.8 million as a result of the transfer in January 2001. Unrealized
gains and losses on trading securities held at December 31, 2001, including the
effect of the transfer of those securities to the trading category, totaled a
net loss of $1.6 million for the year ended December 31, 2001.
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(15) NON-OPERATING OTHER INCOME AND EXPENSE
Non-Operating Income - Other Income and Other Expense as shown on the
Consolidated Statements of Operations include the following for the years ended
December 31 (in thousands):
2003 2002 2001
------- ------- -------
Other income:
Allowance for equity funds used during
construction ..................................... $11,377 $ 8,621 $ 1,571
Corporate-owned life insurance income .............. 6,317 1,330 5,265
Lawsuit settlement ................................. 3,083 - -
Income from equity method investments .............. 1,755 7,919 5,118
Gross-up of contributions for construction ......... 866 969 885
Other venture capital investments .................. 223 358 1,783
Energy project distribution ........................ 109 408 857
Gain on sale of assets, net ........................ 57 4,212 1,358
Fee for sold receivables ........................... - 1,340 2,864
Other .............................................. 740 1,815 2,010
------- ------- -------
Total ............................................ $24,527 $26,972 $21,711
======= ======= =======
Other expense:
Write down of equity method investments ............ $ 4,307 $ 5,118 $ -
Write down of other venture capital investments .... 2,068 1,468 -
Write down of impaired airplane leases ............. - 12,634 -
Discount on sold receivables ....................... - 6,397 16,010
Write off interest receivable related to a venture
capital investment ............................... - 2,718 -
Other - primarily items not recoverable from
MidAmerican Energy's regulated utility customers.. 3,721 2,938 2,727
------- ------- -------
Total ............................................ $10,096 $31,273 $18,737
======= ======= =======
The impairment of airplane leases in 2002 was the result of the financial
decline of United Air Lines, Inc. Fair values for the leases were determined as
a result of lease restructuring negotiations and by obtaining values for similar
planes in the market at the time.
(16) AFFILIATED COMPANY TRANSACTIONS
The companies identified as affiliates are MidAmerican Energy Holdings and its
subsidiaries. The basis for these charges is provided for in service agreements
between MidAmerican Funding and its affiliates. MidAmerican Funding reimbursed
MidAmerican Energy Holdings in the amount of $12.2 million, $10.4 million and
$13.8 million in 2003, 2002 and 2001, respectively, for its allocated share of
corporate expenses. In 2001, MidAmerican Energy acquired a gas turbine equipment
purchase contract from MidAmerican Energy Holdings for $22.0 million.
MidAmerican Funding was reimbursed for charges incurred on behalf of its
affiliates. The majority of these reimbursed expenses was for allocated employee
wages and benefits, insurance, computer costs, administrative services, travel
expenses and general and administrative expenses: including treasury, legal and
accounting functions. The amount of such expenses was $46.2 million, $29.8
million and $20.1 million for 2003, 2002 and 2001, respectively.
MidAmerican Energy has an agreement with Cordova Energy Company LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant which started commercial
operational in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required
-105-
to generate the energy purchased. MidAmerican Energy's payment for monthly
capacity charges totaled $26.6 million for 2003, $21.2 million for 2002 and
$18.1 million for 2001.
In August 2002, Northern Natural Gas Company ("NNG") became an affiliate of
MidAmerican Funding when NNG was purchased by MidAmerican Energy Holdings. NNG
has been and is one of MidAmerican Energy's suppliers of natural gas
transportation and storage capacity. MidAmerican Energy had net purchases of
$53.5 million of natural gas transportation and storage capacity from NNG in
2003 and $17.9 million in August through December 2002.
MHC has a $200 million revolving credit arrangement with MidAmerican Energy
Holdings carrying interest at the 30-day LIBOR rate plus 25 basis points.
Outstanding balances are unsecured and due on demand. As of December 31, 2003,
the outstanding balance was $10.5 million at an interest rate of 1.42% and is
reflected as Note Payable to Affiliate on the Consolidated Balance Sheet.
MidAmerican Energy Holdings has a $100 million revolving credit arrangement,
carrying interest at the 30-day LIBOR rate plus 25 basis points, to borrow from
MHC. Outstanding balances are unsecured and due on demand. The outstanding
balance was zero at December 31, 2002, and throughout 2003. At December 31,
2001, the outstanding balance on the note was $78.9 million. In 2002 and 2001, a
subsidiary of MHC had a note receivable from MidAmerican Energy Holdings
carrying interest of 5.75% annually. The outstanding balance was zero at
December 31, 2002. At December 31, 2001, the outstanding balance on the note was
$73.0 million. MidAmerican Funding's interest income from the notes totaled $4.7
million and $7.2 million in 2002 and 2001, respectively.
MidAmerican Funding had accounts receivable from affiliates of $11.3 million and
$8.8 million as of December 31, 2003 and 2002, respectively, included in
Receivables on the Consolidated Balance Sheets. MidAmerican Funding also had
accounts payable to affiliates of $1.4 million and $2.7 million as of December
31, 2003 and 2002, respectively, which is included in Accounts Payable on the
Consolidated Balance Sheets.
The indenture pertaining to MidAmerican Funding's long term debt restricts
MidAmerican Funding from paying a distribution on its equity securities, unless
after making such distribution either its debt to total capital ratio does not
exceed 0.67:1 and its interest coverage ratio is not less than 2.2:1 or its
senior secured long term debt rating is at least BBB or its equivalent.
MidAmerican Funding may seek a release from this restriction upon delivery to
the indenture trustee of written confirmation from the ratings agencies that
without this restriction MidAmerican Funding's senior secured long term debt
would be rated at least BBB+.
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(17) UNAUDITED QUARTERLY OPERATING RESULTS
2003
-----------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands)
Operating revenues ...... $815,916 $536,440 $577,281 $670,602
Operating income ........ 115,743 69,604 130,706 51,815
Net income .............. 50,353 26,293 57,444 23,086
2002
-----------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands)
Operating revenues....... $575,035 $493,856 $556,284 $615,704
Operating income......... 91,379 64,817 133,803 59,989
Net income............... 38,428 22,705 63,547 12,036
Quarterly data reflect seasonal variations common in the utility industry. The
increase in earnings for the first quarter of 2003 compared to 2002 was due to
colder weather in the first quarter of 2003 and a decrease in expenses related
to Cooper Nuclear Station as a result of the restructuring of the related
contract in August 2002. The increase in net income for the fourth quarter of
2003 compared to 2002 is due principally to the impairment of airplane leases in
2002. Refer to Note (15) of these Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
With the supervision and participation of MidAmerican Funding's and MidAmerican
Energy's management, including their respective persons acting as chief
executive officer and chief financial officer, each company performed an
evaluation regarding the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated
under the Securities and Exchange Act of 1934, as amended) as of December 31,
2003. Based on that evaluation, MidAmerican Funding's and MidAmerican Energy's
management, including their respective persons acting as chief executive officer
and chief financial officer, concluded that their respective disclosure controls
and procedures were effective. There have been no significant changes in
MidAmerican Funding's or MidAmerican Energy's internal controls or in other
factors that could significantly affect internal controls.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MIDAMERICAN ENERGY
Information concerning the current directors and executive officers of
MidAmerican Energy is as follows:
Identification
- --------------
Served in Served as
Present Present Director
Name Age Position Position Since Since
- ---- --- -------- -------------- ---------
Jack L. Alexander 56 Senior Vice President 1998 2002
and Director
Keith D. Hartje 54 Senior Vice President 1999
Todd M. Raba 47 Senior Vice President 2001 2002
and Director
Brian K. Hankel 41 Vice President, Treasurer 1999 2002
and Director
Thomas B. Specketer 47 Vice President and 1999
and Controller
The Board of Directors elects officers annually. There are no family
relationships among these officers, nor any arrangements or understanding
between any officer and any other person pursuant to which the officer was
selected.
Business Experience
- -------------------
JACK L. ALEXANDER has been Director of MidAmerican Energy since September 2002
and Senior Vice President of MidAmerican Energy since November 1998. Mr.
Alexander served as Vice President of MidAmerican Energy from November 1996 to
October 1998 and held various executive and management positions with
MidAmerican Energy and its predecessors for more than five years prior thereto.
KEITH D. HARTJE has been Senior Vice President of MidAmerican Energy since March
1999. Mr. Hartje served as Vice President of MidAmerican Energy from 1996 to
March 1999 and held various executive and management positions with MidAmerican
Energy and its predecessors for more than five years prior thereto.
TODD M. RABA has been Director of MidAmerican Energy since September 2002 and
Senior Vice President of MidAmerican Energy since July 2001. Mr. Raba joined
MidAmerican Energy in 1997 as Vice President. Prior to joining MidAmerican
Energy, he was employed for 13 years with Rollins Environmental Services.
BRIAN K. HANKEL has been Director of MidAmerican Energy since September 2002 and
Vice President and Treasurer of MidAmerican Energy since March 1999. Mr. Hankel
has been Vice President and Treasurer of MidAmerican Energy Holdings since
January 1997.
THOMAS B. SPECKETER has been Vice President and Controller of MidAmerican Energy
since September 1999. Mr. Specketer served as Manager Tax Compliance of
MidAmerican Energy from March 1999 to August
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1999 and held various other tax and accounting management positions for
MidAmerican Energy and its predecessors for more than five years prior to that.
MIDAMERICAN FUNDING
Information concerning the current managers and executive officers of
MidAmerican Funding is as follows:
Identification
- --------------
Served in Served as
Present Present Manager
Name Age Position Position Since Since
- ---- --- -------- -------------- ---------
David L. Sokol 47 Chief Executive Officer
and Manager 1999 1999
Gregory E. Abel 41 President and Chief Operating
Officer and Manager 1999 2001
Douglas L. Anderson 46 Vice President and
General Counsel 2002
Patrick J. Goodman 37 Vice President and Treasurer 1999
Ronald W. Roskens 71 Independent Manager 2003 2003
The Board of Managers elects officers annually. There are no family
relationships among these officers, nor any arrangements or understanding
between any officer and any other person pursuant to which the officer was
selected.
Business Experience
- -------------------
DAVID L. SOKOL has been MidAmerican Funding's Chief Executive Officer and
Chairman of the Board of Managers since MidAmerican Funding's formation in March
1999. Mr. Sokol has been Chief Executive Officer of MidAmerican Energy Holdings
since April 1993 and served as President of MidAmerican Energy Holdings from
April 1993 until January 1995. He has been Chairman of the Board of Directors of
MidAmerican Energy Holdings since May 1994 and a director since March 1991.
Formerly, among other positions held in the independent power industry, Mr.
Sokol served as President and Chief Executive Officer of Kiewit Energy Company
and Ogden Projects, Inc.
GREGORY E. ABEL has been MidAmerican Funding's President and Chief Operating
Officer since its formation in March 1999 and a manager since 2001. Mr. Abel
joined MidAmerican Energy Holdings in 1992. Mr. Abel is a Chartered Accountant,
and from 1984 to 1992, he was employed by PriceWaterhouse. As a Manager in the
San Francisco office of PriceWaterhouse, he was responsible for clients in the
energy industry.
DOUGLAS L. ANDERSON has been MidAmerican Funding's Vice President and General
Counsel since May 2002. Mr. Anderson joined MidAmerican Energy Holdings in 1993
and has served in various legal positions including General Counsel of
MidAmerican Energy Holdings' independent power affiliates. From 1990 to 1993,
Mr. Anderson was a corporate attorney with Fraser, Stryker. Prior to that, Mr.
Anderson was a principal in the firm Anderson and Anderson.
PATRICK J. GOODMAN has been MidAmerican Funding's Vice President and Treasurer
since April 1999. Mr. Goodman joined MidAmerican Energy Holdings in June 1995,
and served in various accounting positions including Senior Vice President and
Chief Accounting Officer. Prior to joining MidAmerican Energy Holdings,
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Mr. Goodman was a financial manager for National Indemnity Company and a senior
associate at Coopers & Lybrand.
RONALD W. ROSKENS has been MidAmerican Funding's Independent Manager since
January 2003. Dr. Roskens has served since 1996 as the President of Global
Connections, Inc. (Omaha, Nebraska), an international business consulting firm.
Dr. Roskens has previously served as Administrator of the U.S. Agency for
International Development, President of the University of Nebraska System and
Executive Vice President and professor at Kent State University. He is a
director of ConAgra Inc.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
During the fiscal year ended December 31, 2003 and as of the date of this
Report, MidAmerican Funding's Board of Managers and MidAmerican Energy's Board
of Directors had no committees, including any audit committee. Neither
MidAmerican Funding nor MidAmerican Energy have any securities listed on any
securities exchange and neither is required to have an audit committee. However,
the audit committee of MEHC is acting as the audit committee for the companies.
CODE OF ETHICS
MidAmerican Funding and MidAmerican Energy each have adopted a code of ethics
that applies to its principal executive officer or officers, principal financial
officer and to its controller, or persons acting in such capacities. The code of
ethics is filed as an exhibit to this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by Item 12 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees billed to MidAmerican Funding and its subsidiaries, including
MidAmerican Energy, and to MidAmerican Energy separately, during the fiscal
years ending December 31, 2003 and 2002 by their principal accounting firm,
Deloitte & Touche LLP and their respective affiliates (collectively, "Deloitte &
Touche"), are set forth below. The Audit Committees of MidAmerican Funding's
Board of Managers and MidAmerican Energy's Board of Directors have each
considered whether the provision of the non-audit services described below is
compatible with maintaining the principal accountant's independence.
MidAmerican Funding MidAmerican Energy
------------------- -----------------
2003 2002 2003 2002
------ ------ ------ ------
(In thousands)
Audit Fees (1) .............. $626.0 $529.7 $563.4 $476.7
Audit-Related Fees (2) ...... 32.3 43.1 29.1 38.8
Tax Fees (3) ................ 282.0 407.3 253.8 365.6
All Other Fees (4) .......... - - - -
------ ------ ------ ------
Total aggregate fees billed $940.3 $980.1 $846.3 $881.1
====== ====== ====== ======
(1) Includes the aggregate fees billed for each of the last two fiscal years
for professional services rendered by Deloitte & Touche for the audit of
MidAmerican Funding's and MidAmerican Energy's respective annual financial
statements and the review of their respective financial statements included
in Form 10-Q or for services that are normally provided by Deloitte &
Touche in connection with statutory and regulatory filings or engagements
for those fiscal years.
(2) Includes the aggregate fees billed in each of the last two fiscal years for
assurance and related services by Deloitte & Touche that are reasonably
related to the performance of the audit or review of each registrant's
financial statements. Services included in this category include audits of
benefit plans, due diligence for possible acquisitions and consultation
pertaining to new and proposed accounting and regulatory rules.
(3) Includes the aggregate fees billed in each of the last two fiscal years for
professional services rendered by Deloitte & Touche for tax compliance, tax
advice, and tax planning.
(4) Includes the aggregate fees billed in each of the last two fiscal years for
products and services provided by Deloitte & Touche, other than the
services reported as "Audit Fees", "Audit-Related Fees", or "Tax Fees".
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements (included herein)
Consolidated financial statements of MidAmerican Energy and MidAmerican
Funding, as well as the Independent Auditors' Report, are included in Item
8 of this Form 10-K.
(a)(2) Financial Statement Schedules
The following schedules should be read in conjunction with the
aforementioned financial statements.
Page
----
MidAmerican Energy Company Consolidated Valuation and Qualifying
Accounts (Schedule II) ...............................................113
MidAmerican Funding, LLC Consolidated Valuation and Qualifying
Accounts (Schedule II)................................................114
Other schedules are omitted because they are not required or the information
therein is not applicable, or is reflected in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K
On October 20, 2003, MidAmerican Energy filed a Form 8-K, dated October 20,
2003, discussing the Iowa Utilities Board's approval on October 17, 2003, of a
settlement agreement between MidAmerican Energy and the Iowa Office of Consumer
Advocate. A related news release is included as an exhibit to the filing.
(c) Exhibits
See Exhibits Index on page 117.
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SCHEDULE II
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(IN THOUSANDS)
Column A Column B Column C Column D Column E
Balance at Additions Balance
Beginning Charged at End
Description of Year to Income Deductions of Year
----------- ---------- --------- ---------- --------
Reserves Deducted From Assets
To Which They Apply:
Reserve for uncollectible
accounts receivable:
Year ended 2003.............. $7,615 $ 9,909 $(10,040) $7,484
====== ======= ======== ======
Year ended 2002.............. $ 627 $ 8,982 $ (1,994) $7,615
====== ======= ========= ======
Year ended 2001.............. $ 102 $15,266 $(14,741) $ 627
====== ======= ======== ======
Reserves Not Deducted From
Assets (1):
Year ended 2003................ $8,198 $ 3,427 $ (2,846) $8,779
====== ======= ======== ======
Year ended 2002................ $7,802 $ 2,798 $ (2,402) $8,198
====== ======= ======== ======
Year ended 2001................ $8,146 $ 2,766 $ (3,110) $7,802
====== ======= ======== ======
(1) Reserves not deducted from assets include estimated liabilities for losses
retained by MidAmerican Energy for workers compensation, public liability
and property damage claims.
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SCHEDULE II
MIDAMERICAN FUNDING, LLC
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(IN THOUSANDS)
Column A Column B Column C Column D Column E
Balance at Additions Balance
Beginning Charged at End
Description of Year to Income Deductions of Year
----------- ---------- --------- ---------- --------
Reserves Deducted From Assets
To Which They Apply:
Reserve for uncollectible
accounts receivable:
Year ended 2003............. $7,685 $ 9,909 $(10,040) $7,554
====== ======= ======== ======
Year ended 2002............. $ 733 $ 8,946 $ (1,994) $7,685
====== ======= ======== ======
Year ended 2001............. $ 300 $15,314 $(14,881) $ 733
====== ======= ======== ======
Reserves Not Deducted From
Assets (1):
Year ended 2003............. $9,166 $ 3,427 $ (2,856) $9,737
====== ======= ======== ======
Year ended 2002............. $8,770 $ 2,798 $ (2,402) $9,166
====== ======= ======== ======
Year ended 2001............. $9,867 $ 2,612 $ (3,709) $8,770
====== ======= ======== ======
(1) Reserves not deducted from assets include estimated liabilities for losses
retained by MHC for workers compensation, public liability and property
damage claims.
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SIGNATURES
MIDAMERICAN ENERGY
Pursuant to the requirements of Section 13 or 15(d) 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: March 3, 2004 By /s/ Jack L. Alexander*
------------------------------------
(Jack L. Alexander)
Senior Vice President
(co-chief executive officer)
By /s/ Todd M. Raba*
------------------------------------
(Todd M. Raba)
Senior Vice President
(co-chief executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Thomas B. Specketer* Vice President and Controller March 3, 2004
- ---------------------------- (principal financial and
(Thomas B. Specketer) accounting officer)
/s/ Jack L. Alexander* Senior Vice President March 3, 2004
- ---------------------------- and Director
(Jack L. Alexander)
/s/ Brian K. Hankel* Vice President and March 3, 2004
- ---------------------------- Director
(Brian K. Hankel)
/s/ Todd M. Raba* Senior Vice President March 3, 2004
- ---------------------------- and Director
(Todd M. Raba)
*By: /s/ Paul J. Leighton Attorney-in-Fact March 3, 2004
-----------------------
(Paul J. Leighton)
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MIDAMERICAN FUNDING, LLC
Pursuant to the requirements of Section 13 or 15(d) 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 FUNDING, LLC
------------------------
Registrant
Date: March 3, 2004 By /s/ David L. Sokol*
-----------------------------
(David L. Sokol)
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ David L. Sokol* Chief Executive Officer March 3, 2004
- ----------------------------
(David L. Sokol)
/s/ Patrick J. Goodman* Vice President and Treasurer March 3, 2004
- ---------------------------- (principal financial and
(Patrick J. Goodman) accounting officer)
/s/ Gregory E. Abel* Manager March 3, 2004
- ----------------------------
(Gregory E. Abel)
/s/ Ronald W. Roskens* Manager March 3, 2004
- ----------------------------
(Ronald W. Roskens)
*By: /s/ Paul J. Leighton Attorney-in-Fact March 3, 2004
-----------------------
(Paul J. Leighton)
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EXHIBIT INDEX
EXHIBITS FILED HEREWITH
MidAmerican Energy
- ------------------
23 Consent of Deloitte & Touche LLP
31.1 Section 302 Certification for Form 10-K/A (co-chief executive officer)
31.2 Section 302 Certification for Form 10-K/A (co-chief executive officer)
31.3 Section 302 Certification for Form 10-K/A (chief financial officer)
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(co-chief executive officer)
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(co-chief executive officer)
32.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(chief financial officer)
MidAmerican Funding
- -------------------
31.4 Section 302 Certification for Form 10-K/A (chief executive officer)
31.5 Section 302 Certification for Form 10-K/A (chief financial officer)
32.4 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(chief executive officer)
32.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(chief financial officer)
EXHIBITS INCORPORATED BY REFERENCE
MidAmerican Energy
- ------------------
3.1 Restated Articles of Incorporation of MidAmerican Energy Company, as
amended October 27, 1998. (Filed as Exhibit 3.3 to MidAmerican Energy 's
Quarterly Report on Form 10-Q for the period ended September 30, 1998,
Commission File No. 1-11505.)
3.2 Restated Bylaws of MidAmerican Energy Company, as amended July 24, 1996.
(Filed as Exhibit 3.1 to MidAmerican Energy's Quarterly Report on
Form 10-Q for the period ended June 30, 1996, Commission File No.
1-11505.)
14.1 Code of Ethics for Chief Executive Officer, Chief Financial Officer and
Chief Accounting Officer. (Filed as Exhibit 14.1 to MidAmerican Energy's
Annual Report on Form 10-K for the year ended December 31, 2003,
Commission File No. 1-11505.)
24.1 Power of Attorney (Filed as Exhibit 24.1 to MidAmerican Energy's
Annual Report on Form 10-K for the year ended December 31, 2003,
Commission File No. 1-11505.)
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MidAmerican Funding
- -------------------
3.1 Articles of Organization of MidAmerican Funding, LLC
3.2 Operating Agreement of MidAmerican Funding, LLC
4.1 Indenture, dated as of March 11, 1999, by and between MidAmerican Funding,
LLC and IBJ Whitehall Bank & Trust Company, as Trustee
4.2 First Supplemental Indenture, dated as of March 11, 1999, by and between
MidAmerican Funding, LLC and IBJ Whitehall Bank & Trust Company, as
Trustee
4.3 Second Supplemental Indenture, dated as of March 1, 2001, by and between
MidAmerican Funding, LLC and The Bank of New York, as Trustee (Filed as
Exhibit 4.4 to MidAmerican Funding's Registration Statement No. 333-56624)
4.4 Registration Rights Agreement, dated March 9, 1999, by and among
MidAmerican Funding, LLC, Credit Suisse First Boston Corporation, Lehman
Brothers, Inc., Goldman Sachs & Co. and Merrill Lynch & Co.
14.2 Code of Ethics for Chief Executive Officer, Chief Financial Officer and
Chief Accounting Officer. (Filed as Exhibit 14.2 to MidAmerican Funding's
Annual Report on Form 10-K for the year ended December 31, 2003,
Commission File No. 333-90553.)
24.2 Power of Attorney (Filed as Exhibit 24.2 to MidAmerican Funding's
Annual Report on Form 10-K for the year ended December 31, 2003,
Commission File No. 333-90553.)
MidAmerican Energy and MidAmerican Funding
- ------------------------------------------
4.1 General Mortgage Indenture and Deed of Trust dated as of January 1, 1993,
between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of
New York, Trustee. (Filed as Exhibit 4(b)-1 to Midwest Resources Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1992,
Commission File No. 1-10654.)
4.2 First Supplemental Indenture dated as of January 1, 1993, between Midwest
Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee.
(Filed as Exhibit 4(b)-2 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1992, Commission File No. 1-10654.)
4.3 Second Supplemental Indenture dated as of January 15, 1993, between
Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York,
Trustee. (Filed as Exhibit 4(b)-3 to Midwest Resources' Annual Report on
Form 10-K for the year ended December 31, 1992, Commission File No.
1-10654.)
4.4 Third Supplemental Indenture dated as of May 1, 1993, between Midwest
Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee.
(Filed as Exhibit 4.4 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1993, Commission File No. 1-10654.)
4.5 Fourth Supplemental Indenture dated as of October 1, 1994, between Midwest
Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as
Exhibit 4.5 to Midwest Resources' Annual Report on Form 10-K for the year
ended December 31, 1994, Commission File No. 1-10654.)
4.6 Fifth Supplemental Indenture dated as of November 1, 1994, between Midwest
Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as
Exhibit 4.6 to Midwest Resources' Annual Report on Form 10-K for the year
ended December 31, 1994, Commission File No. 1-10654.)
4.7 Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947. (Filed
by Iowa-Illinois Gas and Electric Company (Iowa-Illinois) as Exhibit 7B to
Commission File No. 2-6922.)
4.8 Sixth Supplemental Indenture dated as of July 1, 1967. (Filed by
Iowa-Illinois Gas and Electric Company as Exhibit 2.08 to Commission File
No. 2-28806.)
4.9 Twentieth Supplemental Indenture dated as of May 1, 1982. (Filed as
Exhibit 4.B.23 to Iowa-Illinois' Quarterly Report on Form 10-Q for the
period ended June 30, 1982, Commission File No. 1-3573.)
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4.10 Resignation and Appointment of successor Individual Trustee. (Filed by
Iowa-Illinois Gas and Electric Company (Iowa-Illinois) as Exhibit 4.B.30
to Commission File No. 33-39211.)
4.11 Twenty-Eighth Supplemental Indenture dated as of May 15, 1992. (Filed as
Exhibit 4.31.B to Iowa-Illinois' Current Report on Form 8-K dated May 21,
1992, Commission File No. 1-3573.)
4.12 Thirtieth Supplemental Indenture dated as of October 1, 1993. (Filed as
Exhibit 4.34.A to Iowa-Illinois' Current Report on Form 8-K dated October
7, 1993, Commission File No. 1-3573.)
4.13 Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest
Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as
Exhibit 4.15 to MidAmerican Energy's Annual Report on Form 10-K dated
December 31, 1995, Commission File No. 1-11505.)
4.14 Thirty-First Supplemental Indenture dated as of July 1, 1995, between
Iowa-Illinois Gas and Electric Company and Harris Trust and Savings Bank,
Trustee. (Filed as Exhibit 4.16 to MidAmerican Energy's Annual Report on
Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.1 MidAmerican Energy Company Restated Executive Deferred Compensation Plan.
(Filed as Exhibit 10.2 to MidAmerican Energy's Quarterly Report on Form
10-Q dated March 31, 1999, Commission File No. 1-11505.)
10.2 MidAmerican Energy Company Combined Midwest Resources/Iowa Resources
Restated Deferred Compensation Plan - Board of Directors. (Filed as
Exhibit 10.1 to MidAmerican Energy's Quarterly Report on Form 10-Q dated
March 31, 1999, Commission File No. 1-11505.)
10.3 MidAmerican Energy Company First Amended and Restated Supplemental
Retirement Plan for Designated Officers. (Filed as Exhibit 10.52 to
MidAmerican Energy Holding Company's Registration Statement No.
333-101699.)
10.4 Midwest Resources Inc. Supplemental Retirement Plan (formerly the Midwest
Energy Company Supplemental Retirement Plan). (Filed as Exhibit 10.10 to
Midwest Resources' Annual Report on Form 10-K for the year ended December
31, 1993, Commission File No. 1-10654.)
10.5 Iowa-Illinois Gas and Electric Company Supplemental Retirement Plan for
Principal Officers, as amended as of July 28, 1994. (Filed as an Exhibit
to Iowa-Illinois' Annual Report on Form 10-K for the year ended December
31, 1994, Commission File No. 1-3573.)
10.6 Iowa-Illinois Gas and Electric Company Compensation Deferral Plan for
Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit
10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended
December 31, 1993, Commission File No. 1-3573.)
10.7 Iowa-Illinois Gas and Electric Company Board of Directors' Compensation
Deferral Plan. (Filed as Exhibit 10.K.4 to Iowa-Illinois' Annual Report
on Form 10-K for the year ended December 31, 1992, Commission File No.
1-3573.)
10.8 Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement
Plan. (Filed as Exhibit 10.24 to Midwest Resources' Annual Report on
Form 10-K for the year ended December 31, 1994, Commission File No.
1-10654.)
10.9 Form of Indemnity Agreement between MidAmerican Energy Company and its
directors and officers. (Filed as Exhibit 10.37 to MidAmerican Energy's
Annual Report on Form 10-K dated December 31, 1995, Commission File No.
1-11505.)
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10.10 Iowa Utilities Board Order Approving Settlement With Modifications, issued
December 21, 2001, in regards to MidAmerican Energy Company (Filed as
Exhibit 10.7 to MidAmerican Energy's Annual Report on Form 10-K dated
December 31, 2001, Commission File No. 1-11505.)
10.11 Stipulation and Agreement in Regard to MidAmerican Energy Company
Ratemaking Principles for Wind Energy Investment, approved by the Iowa
Utilities Board on October 17, 2003 (Filed as Exhibit 10 to MidAmerican
Funding's and MidAmerican Energy's joint Form 10-Q for the quarter ended
September 30, 2003; Commission File Nos. 333-90553 and 1-11505,
respectively.)
Note: Pursuant to (b) (4) (iii)(A) of Item 601 of Regulation S-K, the Company
has not filed as an exhibit to this Form 10-K certain instruments with
respect to long-term debt not registered in which the total amount of
securities authorized thereunder does not exceed 10% of total assets of
the Company, but hereby agrees to furnish to the Commission on request any
such instruments.
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