UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-11505
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MIDAMERICAN ENERGY COMPANY
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
IOWA 42-1425214
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Ave., P.O. Box 657, Des Moines, Iowa 50303
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 515-242-4300
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X* No
----- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, without par value 100,751,713
------------------------------- ---------------------------
(class) (outstanding at May 1, 1996)
* MidAmerican Energy Company ("MidAmerican") is the successor by merger of
Midwest Resources Inc. ("Midwest Resources"), Midwest Power Systems Inc.
("Midwest Power") and Iowa-Illinois Gas and Electric Company ("Iowa-Illinois")
with and into MidAmerican. The effective date of the merger was July 1, 1995,
and prior to such effective date, MidAmerican had no assets or operations. Prior
to such effective date, each of Iowa-Illinois, Midwest Resources and Midwest
Power was subject to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and accordingly filed in a
timely manner all reports required to be filed pursuant to Sections 13 or 15(d)
of the Exchange Act during the preceding 12 months.
MIDAMERICAN ENERGY COMPANY
INDEX
Page Number
-----------
Part I. Financial Information:
Consolidated Statements of Income for the Three
and Twelve Months Ended March 31, 1996 and 1995 3
Consolidated Balance Sheets as of March 31, 1996
and 1995 and December 31, 1995 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information 20
-2-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands except per share amounts)
Three Months Twelve Months
Ended March 31 Ended March 31
----------------------- -------------------------
1996 1995 1996 1995
--------- ----------- ----------- ----------
OPERATING REVENUES
Electric utility ................ $ 262,274 $ 246,231 $ 1,110,690 $ 1,022,008
Gas utility ..................... 195,986 172,352 483,222 437,879
Nonregulated .................... 98,577 42,839 225,147 163,023
--------- ----------- ----------- ----------
556,837 461,422 1,819,059 1,622,910
--------- ----------- ----------- ----------
OPERATING EXPENSES
Utility:
Cost of fuel,
energy and capacity ......... 61,375 54,050 237,586 211,729
Cost of gas sold .............. 122,736 108,571 293,190 273,277
Other operating expenses ...... 87,601 89,809 397,440 359,364
Maintenance ................... 18,736 21,291 82,808 99,175
Depreciation and amortization . 40,944 38,919 160,975 154,917
Property and other taxes ...... 25,177 26,983 94,544 98,746
--------- ------------ ----------- ----------
356,569 339,623 1,266,543 1,197,208
--------- ----------- ----------- ----------
Nonregulated:
Cost of sales ................. 84,851 32,710 180,826 118,322
Other ......................... 10,457 10,248 44,439 41,788
--------- ----------- ----------- ----------
95,308 42,958 225,265 160,110
--------- ----------- ----------- ----------
451,877 382,581 1,491,808 1,357,318
--------- ----------- ----------- ----------
OPERATING INCOME ................ 104,960 78,841 327,251 265,592
--------- ----------- ----------- ----------
NON-OPERATING INCOME
Interest income ................. 1,505 1,060 4,930 4,545
Dividend income ................. 4,506 3,738 17,722 17,040
Realized gains and losses
on securities, net ............ 2,725 425 2,988 5,868
Other, net ...................... 1,672 1,641 (10,436) 538
--------- ----------- ----------- ----------
10,408 6,864 15,204 27,991
--------- ----------- ----------- ----------
INTEREST CHARGES
Interest on long-term debt ...... 26,779 27,788 109,496 107,795
Other interest expense .......... 3,036 1,360 11,125 6,751
Allowance for borrowed funds .... (1,436) (1,227) (5,761) (4,464)
--------- ----------- ----------- ----------
28,379 27,921 114,860 110,082
--------- ----------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ........... 86,989 57,784 227,595 183,501
INCOME TAXES .................... 33,475 20,207 81,252 57,007
--------- ----------- ----------- ----------
INCOME FROM
CONTINUING OPERATIONS ......... 53,514 37,577 146,343 126,494
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS ...... 10 - 427 (4,886)
--------- ----------- ----------- -----------
NET INCOME ...................... 53,524 37,577 146,770 121,608
PREFERRED DIVIDENDS ............. 2,477 2,281 8,255 10,259
--------- ----------- ----------- ----------
EARNINGS ON COMMON STOCK ........ $ 51,047 $ 35,296 $ 138,515 $ 111,349
========= =========== =========== ==========
AVERAGE COMMON
SHARES OUTSTANDING ............ 100,752 99,869 100,636 99,036
EARNINGS PER COMMON SHARE
Continuing operations ........... $ 0.51 $ 0.35 $ 1.38 $ 1.17
Discontinued operations ......... - - - (0.05)
--------- ----------- ----------- -----------
Earnings per average
common share .................. $ 0.51 $ 0.35 $ 1.38 $ 1.12
========= =========== =========== ===========
The accompanying notes are an integral part of these statements.
-3-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
As of
March 31 December 31
---------------- -----------
1996 1995 1995
---- ---- ----
(Unaudited)
ASSETS
UTILITY PLANT
Electric ................................ $3,952,937 $3,805,609 $3,881,699
Gas ..................................... 682,725 663,743 695,741
---------- ---------- ----------
4,635,662 4,469,352 4,577,440
Less accumulated depreciation and
amortization .......................... 2,071,189 1,923,015 2,027,055
---------- ---------- ----------
2,564,473 2,546,337 2,550,385
Construction work in progress ........... 69,729 97,974 104,164
---------- ---------- ----------
2,634,202 2,644,311 2,654,549
---------- ---------- ----------
POWER PURCHASE CONTRACT ................. 210,651 221,083 212,148
---------- ---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS ... - 869 -
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............... 25,722 55,002 41,216
Receivables ............................. 231,482 175,696 250,902
Inventories ............................. 60,671 85,042 85,235
Other ................................... 12,407 13,658 22,252
---------- ---------- ----------
330,282 329,398 399,605
---------- ---------- ----------
INVESTMENTS ............................. 842,179 753,805 829,422
---------- ---------- ----------
OTHER ASSETS ............................ 409,985 403,423 417,594
---------- ---------- ----------
TOTAL ASSETS ............................ $4,427,299 $4,352,889 $4,513,318
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity ............. $1,244,250 $1,218,476 $1,225,715
Preferred shares, not subject
to mandatory redemption ............... 81,461 89,955 89,945
Preferred shares, subject to
mandatory redemption .................. 50,000 50,000 50,000
Long-term debt
(excluding current portion) ........... 1,381,240 1,389,771 1,403,322
---------- ---------- ----------
2,756,951 2,748,202 2,768,982
---------- ---------- ----------
CURRENT LIABILITIES
Notes payable ........................... 99,800 69,600 184,800
Current portion of
long-term debt ........................ 64,860 72,711 65,295
Current portion of power
purchase contract ..................... 13,029 12,080 13,029
Accounts payable ........................ 139,661 116,267 142,759
Taxes accrued ........................... 91,586 108,733 81,898
Interest accrued ........................ 24,658 24,163 30,635
Other ................................... 61,571 34,390 46,797
---------- ---------- ----------
495,165 437,944 565,213
---------- ---------- ----------
OTHER LIABILITES
Power purchase contract ................. 112,700 125,729 112,700
Deferred income taxes ................... 747,345 717,852 746,574
Investment tax credit ................... 93,591 99,724 95,041
Other ................................... 221,547 223,438 224,808
---------- ---------- ----------
1,175,183 1,166,743 1,179,123
---------- ---------- ----------
TOTAL CAPITALIZATION AND
LIABILITIES ........................... $4,427,299 $4,352,889 $4,513,318
========== ========== ==========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
March 31
--------
1996 1995
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $ 53,524 $ 37,577
Adjustments to reconcile net income to net
cash provided:
Depreciation, depletion and amortization ........... 51,385 50,013
Net increase (decrease) in deferred income taxes
and investment tax credit, net ................... 253 (8,995)
Amortization of other assets ....................... 6,034 3,920
Capitalized cost of real estate sold ............... 267 465
Gain on sale of securities, assets
and other investments ............................ (3,070) (820)
Impact of changes in working capital, net of
effects from discontinued operations ............. 69,216 46,382
Other .............................................. 5,026 9,652
--------- ---------
Net cash provided ............................... 182,635 138,194
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures .................... (28,518) (43,409)
Quad-Cities Nuclear Power Station
decommissioning trust fund ......................... (2,159) (2,201)
Deferred energy efficiency expenditures .............. (1,951) (5,389)
Nonregulated capital expenditures .................... (15,507) (11,809)
Purchase of securities ............................... (82,196) (14,363)
Proceeds from sale of securities ..................... 81,681 11,950
Proceeds from sale of assets and other investments ... 183 26,253
Other investing activities, net ...................... (577) 9,728
--------- ---------
Net cash used ...................................... (49,044) (29,240)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ....................................... (32,699) (31,399)
Issuance of long-term debt, net of issuance cost ..... - 39,554
Retirement of long-term debt, including
reacquisition cost ................................. (638) (48,618)
Reacquisition of preferred shares, including
reacquisition cost ................................. (8,750) -
Decrease in InterCoast Energy Company
unsecured revolving credit facility ................ (22,000) -
Issuance of common shares ............................ - 7,633
Decrease in notes payable ............................ (85,000) (54,900)
--------- ---------
Net cash used ...................................... (149,087) (87,730)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................... (15,496) 21,224
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 41,216 33,778
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 25,720 $ 55,002
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ............ $ 35,571 $ 35,601
========= =========
Income taxes paid .................................... $ 722 $ 3,955
========= =========
The accompanying notes are an integral part of these statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A) General:
The consolidated financial statements included herein have been prepared
by MidAmerican Energy Company (Company or MidAmerican), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of the
Company, all adjustments have been made to present fairly the financial
position, the results of operations and the changes in cash flows for the
periods presented. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these financial statements be read in conjunction with the consolidated
financial statements and the notes thereto incorporated by reference in the
Company's latest Annual Report on Form 10-K.
On July 1, 1995, Iowa-Illinois Gas and Electric Company (Iowa-Illinois),
Midwest Resources Inc. (Resources), and Midwest Power Systems Inc. (Midwest
Power) merged with and into the Company. The merger was accounted for as a
pooling-of-interests and the financial statements included herein are presented
as if the companies were merged as of the earliest period shown. MidAmerican is
a utility company with two wholly owned nonregulated subsidiaries: InterCoast
Energy Company (InterCoast) and Midwest Capital Group, Inc.
(Midwest Capital).
B) Environmental Matters:
The United States Environmental Protection Agency (EPA) and state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant (MGP) 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.
The Company is evaluating 27 properties which were, at one time, sites
of gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste materials
are present, whether such materials constitute an environmental or health risk,
and whether the Company has any responsibility for remedial action. The Company
is currently conducting field investigations at fifteen sites and has completed
investigations at three sites. In addition, the Company is currently removing
contaminated soil at three sites, and has completed removals at two sites. The
Company is continuing to evaluate several sites to determine the future
liability, if any, for conducting site investigations or other site activity.
The Company's present estimate of probable remediation costs for the
sites discussed above is $22 million. This estimate has been recorded as a
liability and a regulatory asset for future recovery. The Illinois Commerce
Commission has approved the use of a tariff rider which permits recovery of the
actual costs of litigation, investigation and remediation relating to former MGP
sites. The Company's present rates in Iowa provide for a fixed annual recovery
of MGP costs. The Company is pursuing recovery of the remediation costs from
other PRPs and its insurance carriers.
The estimated recorded liabilities for these properties are based upon
preliminary data. Thus, actual costs could vary significantly from the
estimates. The estimate could change materially based on facts and circumstances
derived from site investigations, changes in required remedial action and
changes in technology relating to remedial alternatives. In addition, insurance
recoveries for some or all of the costs may be possible, but the liabilities
recorded have not been reduced by any estimate of such recoveries.
-6-
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 the Company's financial position or results of operations.
C) Discontinued Operations:
The Company reflected as discontinued operations at September 30, 1994,
all activities of a subsidiary that constructed generating facilities and a
subsidiary that constructed electric distribution and transmission systems.
Essentially all of the assets of these subsidiaries have been sold.
Midwest Capital, under the terms of certain sale agreements, has
indemnified the purchasers of the construction subsidiaries for specified losses
or claims relating to construction projects which occurred prior to the date of
their sale. In addition, Midwest Capital has guaranteed performance on a joint
venture turnkey engineering, procurement and construction contract for a
cogeneration project. The Company has provided a support agreement to Midwest
Capital related to this project. In October 1995, the project received
preliminary acceptance from the owner. Management believes that the likelihood
of a material adverse impact to the Company under any indemnity of the
provisions of the sale agreements or the construction contracts, or a material
cash payment by the Company under the support agreement is remote.
Net assets of the construction subsidiaries are separately presented on
the Consolidated Balance Sheets as Investment in Discontinued Operations.
Proceeds received from the disposition of the construction investments through
March 31, 1996, were $4.1 million. Revenues from discontinued activities, as
well as the results of operations and the estimated income (loss) on the
disposal of discontinued operations for the three and twelve months ended March
31 are as follows (in thousands):
Three Months Twelve Months
Ended March 31 Ended March 31
-------------- --------------
1996 1995 1996 1995
------ ------- ------- --------
OPERATING REVENUES $ - $ 6,269 $ 1,065 $ 35,456
=== ======= ======= ========
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS
Income (Loss) from discontinued
operations before income taxes $ - $ - $ 880 $ (1,626)
Income tax benefit (expense) 10 - (453) 505
--- ------- ------- --------
Income (Loss) from discontinued
operations 10 - 427 (1,121)
--- ------- ------- --------
LOSS ON DISPOSAL
Loss on disposal before income taxes $ - $ - $ - $(11,576)
Income tax benefit - - - 7,811
--------
Loss on disposal - - - (3,765)
--- ------- ------- --------
Total $10 $ - $ 427 $ (4,886)
=== ======= ======= ========
-7-
D) Statement of Financial Accounting Standards No. 121:
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121 (SFAS 121) regarding accounting for asset
impairments. This statement requires the Company to review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 also requires
rate-regulated companies to recognize an impairment for regulatory assets for
which future recovery is not probable. The adoption of SFAS 121 did not have a
material impact on the Company's results of operations or financial position.
(E) Holding Company:
The Company's Board of Directors and holders of a majority of the
outstanding shares of the Company's common stock have approved the formation of
a holding company for MidAmerican's organizational structure. The holding
company would have three wholly owned subsidiaries consisting of MidAmerican
(utility operations), InterCoast Energy Company and Midwest Capital Group, Inc..
Consummation of the holding company structure is subject to the receipt of
certain orders from the ICC, IUB, FERC, and the Nuclear Regulatory Commission.
Subject to such approvals, each share of MidAmerican common stock will be
exchanged for one share of the holding company's stock. It is management's
intent, if possible, to complete the formation of the holding company and share
exchange by the end of 1996.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
MidAmerican Energy Company (the Company or MidAmerican) was formed on July 1,
1995, as a result of the merger of Iowa-Illinois Gas and Electric Company
(Iowa-Illinois), Midwest Resources Inc. (Resources) and its utility subsidiary,
Midwest Power Systems Inc. (Midwest).
The Company's utility operations (the Utility) consist of two principal
business units: an electric business unit headquartered in Davenport, Iowa, and
a natural gas business unit headquartered in Sioux City, Iowa. The Company's
corporate headquarters, which includes various staff functions, is in Des
Moines, Iowa. InterCoast Energy Company (InterCoast) and Midwest Capital Group,
Inc. (Midwest Capital) are the nonregulated subsidiaries of the Company and are
headquartered in Des Moines. InterCoast conducts various nonregulated activities
of the Company, while Midwest Capital functions as a regional business
development company in the utility service territory.
The merger is accounted for as a pooling-of-interests, and the Consolidated
Financial Statements included in this Form 10-Q are presented as if the merger
was consummated as of the beginning of the earliest period presented. Portions
of the following discussion provide information related to material changes in
the Company's financial condition and results of operations between the periods
presented, based on the combined historical information of the predecessor
companies. It is not necessarily indicative of what would have occurred had the
merger actually been consummated at the beginning of the earliest period.
On April 24, 1996, the Company's common shareholders approved a proposal to
form a holding company. The holding company would have three wholly owned
subsidiaries consisting of MidAmerican (utility operations), InterCoast and
Midwest Capital. The Board of Directors and management believe a holding company
structure will provide a more flexible organization better designed to operate
in a more competitive environment. Certain orders must yet be received from the
Illinois Commerce Commission, the Iowa Utilities Board (IUB), the Federal Energy
Regulatory Commission (FERC), and the Nuclear Regulatory Commission. Subject to
such orders, each share of MidAmerican common stock will be exchanged for one
share of the holding company's common stock. It is management's intent, if
possible, to complete the formation of the holding company and share exchange by
the end of 1996.
-9-
RESULTS OF OPERATIONS
EARNINGS
The following table provides a summary of the earnings contributions of the
Company's operations for each of the periods presented:
Periods Ended March 31,
-----------------------
Three Months Twelve Months
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
Earnings (in millions)
Electric utility $ 22.3 $ 18.6 $115.4 $ 93.2
Gas utility 22.8 15.7 19.9 11.9
------ ------ ------ ------
Utility operations 45.1 34.3 135.3 105.1
Nonregulated operations 5.9 1.0 2.8 11.1
Income (loss) from
discontinued operations - - 0.4 (4.9)
------ ------ ------ ------
Consolidated earnings $ 51.0 $ 35.3 $138.5 $111.3
====== ====== ====== ======
Earnings Per Common Share
Electric utility $ 0.22 $ 0.18 $ 1.15 $ 0.94
Gas utility 0.23 0.16 0.20 0.12
------ ------ ------ ------
Utility operations 0.45 0.34 1.35 1.06
Nonregulated operations 0.06 0.01 0.03 0.11
Income (loss) from
discontinued operations - - - (0.05)
------ ------ ------ ------
Consolidated earnings $ 0.51 $ 0.35 $ 1.38 $ 1.12
====== ====== ====== ======
Earnings per share for the first quarter of 1996 increased 16 cents compared
to the first quarter of 1995. Gross margins of utility electric and natural gas
operations accounted for most of the increase in utility earnings per share.
Gross margin is the amount of revenues remaining after deducting electric fuel
costs or the cost of gas sold, as appropriate. Realization of cost savings
resulting from the merger also had a favorable effect on utility earnings.
Earnings of nonregulated subsidiaries contributed 5 cents per share more in the
1996 quarter than in the 1995 quarter. The increase in earnings of nonregulated
subsidiaries resulted primarily from improved oil and gas production earnings
due to increased volumes, higher prices and reduced expenses. In addition, an
increase in gains on sales of securities contributed to the increase in
nonregulated earnings.
For the twelve months ended March 31, 1996, earnings per share were 26 cents
greater than the comparable 1995 period. Increases in utility gross margins due
primarily to increases in electric and gas retail sales volumes resulting from
hot weather in the third quarter of 1995 and cold weather in the first quarter
of 1996 were the main cause of the increase. Electric and gas service rate
increases filed prior to the merger also contributed to the increase in gross
margins. A portion of the rate increases relate directly to increases in certain
operating expenses and thus did not materially increase earnings. A reduction in
nuclear operations and maintenance expenses also favorably affected earnings.
Twelve months ended March 31, 1996, earnings were reduced by merger-related
costs. As part of the process of merging the operations of MidAmerican's
predecessors, the Company developed a restructuring plan which included employee
incentive early retirement,
-10-
relocation and separation programs. During the last half of 1995 the
Company recorded $33.4 million of restructuring costs which included the
Company's estimate of the remaining amount of such costs to be incurred. These
costs are primarily reflected in Other Operating Expenses in the Consolidated
Statements of Income.
In addition, the Company incurred costs to consummate the merger. These
costs, which are included in Other Non-Operating Income, in the Consolidated
Statements of Income, totalled $4.4 million and $4.8 million in 1996 and 1995
twelve-month periods, respectively.
In total, restructuring and transaction costs reduced earnings for the 1996
twelve-month period by 24 cents per share, while transaction costs reduced the
1995 twelve-month period earnings by 5 cents per share.
Write-downs of certain assets of the Company's nonregulated subsidiaries also
reduced earnings for twelve months ended March 31, 1996, by approximately $10.2
million, or 10 cents per share. The pre-tax amount of the write-downs, which is
included in Other Non-Operating Income, in the Consolidated Statements of
Income, reflects other-than-temporary declines of $18.0 million in the value of
those nonregulated investments. The investments are primarily alternative energy
projects. The 1996 twelve-month period also reflects aftertax gains totalling
approximately $5.0 million on the sales of a partnership interest and a
subsidiary. The pre-tax amount of $8.5 million is reflected in Other
Non-Operating Income.
UTILITY GROSS MARGIN
Electric Gross Margin:
----------------------
Periods Ended March 31,
-----------------------
Three Months Twelve Months
------------ -------------
1996 1995 1996 1995
---- ---- ------ ------
(In millions)
Operating revenues $262 $246 $1,111 $1,022
Cost of fuel, energy and capacity 61 54 238 212
---- ---- ------ ------
Electric gross margin $201 $192 $ 873 $ 810
==== ===== ====== ======
Electric gross margin increased for each 1996 period presented compared to
the 1995 periods due to changes in revenues. Changes in the cost of electric
fuel, energy and capacity (collectively, Energy Costs) reflect fluctuations in
generation levels and mix, fuel cost, and energy and capacity purchases. The
Company has been allowed to recover Energy Costs from most of its electric
utility customers through energy adjustment clauses (EACs) in revenues.
Variations in revenues collected through the EACs, reflecting changes in Energy
Costs per unit sold and volumes sold, do not affect gross margin or net income.
For the 1996 three months ended period, electric gross margin increased 4.7%
reflecting a 4.9% increase in electric retail sales. This was due in part to a
14% increase in heating degree days as a result of colder weather in the 1996
quarter. In addition, an increase in the number of customers contributed to the
increase in sales.
-11-
An increase in electric retail rates also was a cause of the increase in
revenues and gross margin. Retail rates in the first quarter of 1995 reflect
interim rates representing an increase of $13.6 million in annual electric
revenues in connection with an Iowa electric rate filing, which the Company
began collecting in January 1995. The first quarter of 1996 reflects a final
rate increase in the proceeding, which was effective in August 1995,
representing an increase of $20.3 million in annual electric revenues.
Approximately $8 million of the $20.3 million increase in annual electric
revenues relates to additional expensing of other postretirement employee
benefit (OPEB) costs. Additionally, in August 1995, the Company began collection
of $18.6 million over a four-year prospective period related to an energy
efficiency cost recovery filing. Revenue increases for energy efficiency cost
recovery have an immaterial impact on net income due to corresponding increases
in other operating expenses, reflecting the amortization of previously deferred
energy efficiency costs.
Revenues increased $10.6 million due to increased revenues from sales for
resale. Effective November 1995, the margin on most electric sales for resale is
flowed through to retail customers and has a minimal effect on gross margin.
For twelve months ended March 31, 1996, electric gross margin increased 7.8%
compared to the comparable 1995 period. Electric retail sales increased 4.4% due
primarily to greater cooling and heating sales as a result of warmer weather in
the 1995 cooling season and colder weather in the first quarter of 1996 than in
the comparable prior year periods.
In addition to the electric rate increases discussed above, the comparison of
the twelve-month gross margins was affected by two energy efficiency cost
recovery filings. In October 1994 and January 1995, the Company implemented rate
increases for Iowa energy efficiency cost recovery filings which allow a total
increase in electric revenues of $31.7 million over a four-year period. As
stated above, a corresponding increase in other operating expenses results in an
immaterial impact on net income for revenue increases from energy efficiency
cost recovery.
Revenues from sales for resale accounted for $35.9 million of the increase in
electric revenues for the 1996 twelve-month period. Sales for resale have a
lower margin than other sales and, accordingly, increases in related revenues do
not increase gross margin and net income as much as increases in retail
revenues. As stated above, the effect on gross margin of fluctuations in
revenues from sales for resale was substantially eliminated effective in
November 1995.
Gas Gross Margin:
-----------------
Periods Ended March 31,
-----------------------
Three Months Twelve Months
------------ -------------
1996 1995 1996 1995
---- ---- ---- ----
(In millions)
Operating revenues $196 $172 $483 $438
Cost of gas sold 123 108 293 273
---- ---- ---- ----
Gas gross margin $ 73 $ 64 $190 $165
==== ==== ==== ====
Gas gross margin increased for each 1996 period presented compared to the
1995 periods due to changes in revenues. The Company has been allowed to recover
the cost of gas sold
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from most of its gas utility customers through purchase gas adjustment
clauses (PGAs) in revenues. Variations in revenues collected through the PGAs,
reflecting changes in the cost of gas per unit and volumes sold, do not affect
gross margin or net income.
For the comparative three months ended periods, gas gross margin increased
14.1% from 1995 to 1996 reflecting a 14.2% increase in natural gas retail sales
due in part to a 13% increase in heating degree days. In addition, an increase
in the number of customers contributed to the increase in sales.
An increase in gas retail rates also was a cause of the increase in revenues
and gross margin. Retail rates in the first quarter of 1995 reflect interim
rates representing an increase of $8.2 million in annual gas revenues in
connection with an Iowa gas rate filing, which the Company began collecting in
October 1994. The first quarter of 1996 reflects a final rate increase in the
proceeding, which was effective in August 1995, representing an increase of
$10.6 million in annual gas revenues. Approximately $2.5 million of the $10.6
million increase in annual gas revenues relates to additional expensing of OPEB
costs.
For twelve months ended March 31, 1996, gas gross margin increased 15.2%
compared to the comparable 1995 period. Gas retail sales increased 11.2% due
primarily to greater heating sales as a result of colder weather in the
1995-1996 heating season than in the comparable prior twelve-month period.
In addition to the gas rate increase discussed above, the comparison of the
twelve-month gas gross margins was affected by an energy efficiency cost
recovery filing. In January 1995, the Company implemented a gas service rate
increase for an Iowa energy efficiency cost recovery filing which allows an
increase in gas revenues of $6.7 million over a four-year period. Revenue
increases for energy efficiency cost recovery have an immaterial impact on net
income due to corresponding increases in other operating expenses.
UTILITY OPERATING EXPENSES
Other operating expenses for the quarter ended March 31, 1996, decreased $2.2
million compared to the first quarter of 1995 due primarily to savings from work
force reductions following the merger. These decreases were partially offset by
increased injuries and damages expenses and, as discussed above, amortization of
deferred energy efficiency and OPEB costs.
For the twelve months ended March 31, 1996, other operating expenses
increased $38.1 million compared to the 1995 period due primarily to costs
related to the restructuring plan discussed in the opening section of Results of
Operations. Utility operating expenses include $31.9 million of the $33.4
million total restructuring costs. In addition, the 1996 twelve-month period
includes a $7.2 million increase from the amortization of deferred energy
efficiency and OPEB costs. The increases for the 1996 period were partially
offset by a $5.9 million reduction in nuclear operations costs.
Maintenance expenses decreased $2.6 million and $16.4 million for the three
months and twelve months ended March 31, 1996, compared to the 1995 periods. The
timing of power plant maintenance and a reduction in various distribution
maintenance accounted for much of the variation between the periods. Quad-Cities
Station maintenance expenses decreased $4.0 million for the twelve months ended
March 31, 1996, due in part to the 1994 outage.
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Depreciation expense increased compared to each prior period due primarily to
additions to utility plant in service.
NONREGULATED OPERATING REVENUES
Revenues for the Company's nonregulated subsidiaries increased significantly
for the 1996 quarter compared to the 1995 quarter. Revenues of a wholesale
natural gas marketing firm acquired in December 1995 contributed $29.0 million
to the increase. Increases in sales volumes and prices for a nonregulated retail
natural gas marketing subsidary resulted in a $19.5 million increase in
revenues. In addition, revenues from gas production increased due to greater
production levels and higher prices.
Revenues for the 1996 twelve-month period increased significantly compared to
the 1995 period as well. Revenues of the recently acquired wholesale natural gas
firm contributed $43.2 million to the increase. Increases in oil and gas
production volumes and in sales of retail natural gas also contributed to the
increase.
NONREGULATED OPERATING EXPENSES
Cost of sales includes expenses directly related to sales of oil, natural gas
and real estate. The factors discussed above for revenues, including natural gas
sales volumes, gas prices and the newly acquired wholesale natural gas firm also
affected the increase in cost of sales for each 1996 period compared to the 1995
periods.
Other nonregulated expenses increased $2.7 million for the 1996 twelve-month
period compared to the twelve months ended March 31, 1995. The 1996 period
includes $1.5 million of merger-related expenses for the Company's restructuring
plan.
REALIZED GAINS AND LOSSES ON SECURITIES, NET
Realized gains and losses on securities increased for the 1996 quarter due to
an increase in gains on the disposition of equity fund holdings and managed
preferred stock portfolios. For the comparative twelve-month periods, realized
gains and losses on securities decreased $2.9 million for 1996 compared to 1995
due primarily to the sale of a single holding in 1994 which generated a $5.9
million pre-tax gain.
NON-OPERATING INCOME - OTHER, NET
The adjustments to nonregulated investments discussed at the beginning of
Results of Operations were the primary cause of the decrease in Other, Net, for
the twelve months ended March 31, 1996, compared to the 1995 period. Gains
totalling $8.5 million on the sales of a partnership interest in a gas marketing
organization and a telecommunication subsidiary in the 1996 twelve months ended
period partially offset the decreases. In addition, merger transaction costs
reduced Other, Net in both twelve-month periods.
INTEREST CHARGES
Decreased interest on long-term debt in the 1996 first quarter compared to
the 1995 quarter was due to a lower overall balance and rate on debt of
nonregulated subsidiaries.
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Increased interest on long-term debt in the 1996 twelve-month period
compared to the 1995 twelve-month period was due primarily to the issuance of
$60 million of 7.875% Series of mortgage bonds in November 1994. Higher utility
commercial paper balances and increased interest rates were the main causes of
the increase in other interest expense.
DISCONTINUED OPERATIONS
In 1994, the Company announced its intent to divest its construction
subsidiaries and recognized the anticipated loss on disposal. The sale of
certain assets of one of the subsidiaries was completed in December 1994, and
the sale of the other construction subsidiary was completed in March 1995.
Settlement of a construction receivable in the second quarter of 1995 resulted
in $0.4 million of income in 1995.
PREFERRED DIVIDENDS
The increase in preferred dividends for the 1996 quarter compared to the
first quarter of 1995 was due to a loss on the redemption of shares of the
$1.7375 Series of preferred shares in March 1996. The decrease in preferred
dividends for the twelve months ended March 31, 1996, compared to the 1995
period was due mostly to the redemption of three series of preferred shares in
December 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has available a variety of sources of liquidity and capital
resources, both internal and external. These resources provide funds required
for current operations, debt retirement, dividends, construction expenditures
and other capital requirements.
For the first quarter of 1996, the Company had net cash provided from
operating activities of $183 million and net cash used of $49 million and $149
million for investing and financing activities, respectively.
INVESTING ACTIVITIES
Utility construction expenditures, including allowance for funds used during
construction (AFUDC), Quad-Cities Station nuclear fuel purchases and Cooper
capital improvements, were $29 million for the first quarter of 1996.
Forecasted utility construction expenditures for 1996 are $166 million
including AFUDC. Capital expenditures needs are reviewed regularly by the
Company's management and may change significantly as a result of such reviews.
For the years 1996 through 2000, the Company forecasts $818 million for utility
construction expenditures. The Company presently expects that all utility
construction expenditures for 1996 through 2000 will be met with cash generated
from utility operations, net of dividends.
In general, decommissioning of a nuclear facility means to safely remove the
facility from service and restore the property to a condition allowing
unrestricted use by the operator. Based on information presently available, the
Utility expects to contribute $45 million during the period 1996 through 2000 to
an external trust established for the investment of funds for decommissioning
the Quad-Cities Station. The funds are invested predominately in
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investment grade municipal, and U.S. Treasury, bonds. In addition, a
portion of the payments made under the power purchase contract with NPPD are for
decommissioning funding related to Cooper. The Cooper costs are reflected in
Other Operating Expenses in the Consolidated Statements of Income. Based on NPPD
estimates, the Utility expects to pay approximately $54 million for Cooper
decommissioning during the period 1996 through 2000. NPPD invests the funds in
instruments similar to those of the Quad-Cities Station trust fund. The
Company's obligation for Cooper decommissioning may be affected by the actual
plant shutdown date and the status of the power purchase contract at that time.
The Company currently recovers Quad-Cities Station decommissioning costs charged
to Illinois customers through a rate rider on customer billings. Cooper and
Quad-Cities Station decommissioning costs charged to Iowa customers are included
in base rates, and increases in those amounts must be sought through the normal
ratemaking process.
Capital expenditures of nonregulated subsidiaries were $16 million for the
first quarter of 1996. Capital expenditures of nonregulated subsidiaries depend
upon the availability of suitable investment opportunities and other factors and
may vary significantly from forecasted amounts. Excluding the following
acquisition, capital expenditures are forecasted to be approximately $85 million
for 1996, primarily related to InterCoast.
In April 1996, Medallion Production Company (Medallion), an oil and gas
subsidiary of InterCoast, acquired certain interests of Enron Oil and Gas
Company and Enron Oil and Gas Marketing, Inc. The acquisition, which was in
excess of $50 million, increases Medallion's 1995 year-end proved reserves to
approximately 42 million barrels of oil equivalent, or an increase of
approximately 30%.
InterCoast invests in a variety of marketable securities which it holds for
indefinite periods of time. For the first quarter of 1996, InterCoast had net
cash inflows of $3 million from its marketable securities investment activities.
In the Consolidated Statements of Cash Flows, the lines Purchase of Securities
and Proceeds from Sale of Securities consist primarily of the gross amounts of
these activities, including realized gains and losses on investments in
marketable securities.
FINANCING ACTIVITIES
The Utility currently has authority from the FERC to issue short-term debt in
the form of commercial paper and bank notes aggregating $400 million. As of
March 31, 1996, the Utility had a $250 million revolving credit facility
agreement to provide short-term financing for utility operations. The Utility's
commercial paper borrowings, which totalled $100 million at March 31, 1996, are
currently supported by the revolving credit facility. The Utility also has lines
of credit and revolving credit facilities which are dedicated to provide
liquidity for its obligations under outstanding pollution control revenue bonds
that are periodically remarketed.
The Utility has $347 million of long-term debt maturities and sinking fund
requirements for 1996 through 2000, $1 million of which matures in 1996.
In March 1996 the Company redeemed 350,000 shares, or $8.75 million, of the
$1.7375 Series preferred shares.
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The Utility is currently considering several long-term financing options for
1996. Proceeds from those issuances would be used to reduce commercial paper
outstanding and to refinance higher cost securities.
As of December 31, 1995, the Utility had the capability to issue
approximately $1.3 billion of mortgage bonds under the current Midwest
indenture. The Utility does not expect to issue additional debt under the
Iowa-Illinois indenture, but may if necessary.
The Company has the necessary authority to issue up to 6,000,000 shares of
common stock through its Shareholder Options Plan (the Company's dividend
reinvestment and stock purchase plan). Since the effective date of the merger,
the Company has used open market purchases of its common stock rather than
original issue shares to meet share obligations under its Employee Stock
Purchase Plan and the Shareholder Options Plan. The Company currently plans to
continue using open market purchases to meet share obligations under these
plans.
Several financial relationships between the Company's utility and
nonregulated operations were eliminated subsequent to the merger. One support
agreement remains between the Utility and Midwest Capital related to a
performance guarantee by Midwest Capital of a joint venture turnkey engineering,
procurement and construction contract for a cogeneration project. The project
received preliminary acceptance from the owner in 1995, which pursuant to the
construction contract, eliminates the potential for liquidated damages being
incurred related to the project. Midwest Capital also has $25 million of
long-term debt outstanding at March 31, 1996, that matures in 1996 and is
supported by a guarantee from the Utility. In addition, Midwest Capital has a
$25 million line of credit with the Utility.
InterCoast has two floating-rate-to-fixed interest rate swaps each in the
amount of $32 million. The interest rate swaps have fixed rates of 5.97% and
6.00%, respectively, and are for three-year and two-year terms, respectively,
with an optional third year on the latter.
InterCoast's aggregate amounts of maturities and sinking fund requirements
for long-term debt outstanding at March 31, 1996, are $39 million for 1996 and
$265 million for the years 1996 through 2000. Amounts due in 1996 are expected
to be refinanced with debt.
On April 24, 1996, the Company's Board of Directors declared a quarterly
dividend on common shares of $0.30 per share payable June 1, 1996. The dividend
represents an annual rate of $1.20 per share.
OPERATING ACTIVITIES
The Utility is subject to regulation by several utility regulatory agencies.
The operating environment and the recoverability of costs from utility customers
are significantly influenced by the regulation of those agencies. The Company
anticipates that changes in the utility industry will create a more competitive
environment. Although these anticipated changes may create opportunities, they
will also create additional challenges and risks for utilities. The Company is
evaluating strategies that will assist it in a more competitive environment.
On April 25, 1996, the Company announced its intent to file in Iowa and
Illinois a new electric pricing proposal. The proposal would reduce electric
revenues by approximately $100 million over five years and eliminate automatic
fuel adjustment clauses. The price reductions,
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possible due to merger-related cost savings, reduce price disparity within
customer classes and are expected to move the Company closer to prices that can
be sustained in a competitive market.
A possible consequence of competition in the utility industry is the
discontinued applicability of Statement of Financial Accounting Standards (SFAS)
No. 71. SFAS 71 sets forth accounting principles for all, or a portion, of a
company's operations that are regulated and meet certain criteria. For
operations that meet the criteria, SFAS 71 allows, among other things, the
deferral of costs that would otherwise be expensed when incurred. The Company's
electric and gas utility operations are currently subject to the provisions of
SFAS 71, but its applicability is periodically reexamined. If a portion of the
Company's utility operations no longer meets the criteria of SFAS 71, the
Company would be required to eliminate from its balance sheet the regulatory
assets and liabilities related to those operations that resulted from actions of
its regulators. Although the amount of such an elimination would depend on the
specific circumstances, a material adjustment to earnings in the appropriate
period could result from the discontinuance of SFAS 71. As of March 31, 1996,
the Company had approximately $390 million of regulatory assets in its
Consolidated Balance Sheet.
In 1992, the FERC issued Order No. 636, directing a restructuring by
interstate pipeline companies for their natural gas sales and transportation
services. The unbundling of pipeline services increased the Company's access to
supply options and its supply responsibilities. Certain transition costs
incurred by interstate natural gas pipelines for their compliance with Order 636
will be paid to the pipeline companies over the next several years. The
Company's Consolidated Balance Sheet as of March 31, 1996, includes a $37
million noncurrent liability and regulatory asset recorded for transition costs.
The Company may incur other transition costs in conjunction with future
purchases of gas, but does not expect these billings to have a material impact
on the cost of gas. The Company is currently recovering costs related to Order
636 from its customers.
Electric and gas utilities in Iowa are currently required to spend
approximately 2% and 1.5%, respectively, of their annual Iowa jurisdictional
revenues on energy efficiency activities. As discussed in Results of Operations,
the Company is collecting a total of approximately $14.3 million annually for
certain of the previously deferred costs related to prior energy efficiency
filings. As of March 31, 1996, the Company had approximately $69 million of
energy efficiency costs deferred on its Consolidated Balance Sheet for which
recovery will be sought in future energy efficiency filings. In May 1996, the
Iowa legislature approved a bill eliminating mandatory spending levels for
energy efficiency programs and allowing quicker recovery of energy efficiency
expenditures as determined by the IUB. As of the filing of this Form 10-Q, the
bill was yet to be signed by the Governor.
The United States Environmental Protection Agency (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.
The Company is evaluating 27 properties which were, at one time, sites of gas
manufacturing plants in which it may be a potentially responsible party (PRP).
The purpose of these evaluations is to determine whether waste materials are
present, whether such materials constitute an environmental or health risk,
and whether the Company has any
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responsibility for remedial action. The Company's present estimate of
probable remediation costs for these sites is $22 million. This estimate has
been recorded as a liability and a regulatory asset for future recovery through
the regulatory process. Refer to Note (B) of Notes for further discussion of the
Company's environmental activities related to manufactured gas plant sites and
cost recovery.
Although the timing of potential incurred costs and recovery of such cost 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 the Company's financial position or results of operations.
ACCOUNTING ISSUES
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
121 regarding accounting for asset impairments. This statement, which was
adopted by the Company in the first quarter of 1996, requires the Company to
review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. SFAS 121 also requires rate-regulated companies to recognize an
impairment for regulatory assets that are not probable of future recovery.
Adoption of SFAS 121 did not have a material impact on the Company's results of
operations or financial position.
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry, including
those of the Company, regarding the recognition, measurement and classification
of nuclear decommissioning costs in the financial statements. In response to
these questions, the FASB has issued an Exposure Draft (ED), "Accounting for
Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which
addresses the accounting for closure and removal costs, including
decommissioning of nuclear power plants. The Company is in the process of
reviewing the ED and its potential impacts on the Company. If current electric
utility industry accounting practices for such decommissioning are changed, the
annual provision for decommissioning could increase relative to 1995, and the
total estimated cost for decommissioning could be recorded as a liability with
recognition of an increase in the cost of related nuclear power plant. The
Company has not determined what impact, if any, it would have on the Company's
operation and financial position.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries have no material legal proceedings
except for the following:
Environmental Matters
For information relating to the Company's Environmental Matters,
reference is made to Part I, Note (B) of Notes to Consolidated Financial
Statements.
Cooper Litigation
On May 26, 1995, the Company filed a lawsuit naming Nebraska Public Power
District (NPPD) as defendant. The action is filed in the U.S. District Court for
the Southern District of Iowa and is identified as No. 4-95-CV-80356. The legal
proceeding is based upon a long-term power purchase agreement between the
Company and NPPD, pursuant to which the Company purchases one-half the output of
NPPD's Cooper Nuclear Station (Cooper) and pays one-half the cost of operating
Cooper. NPPD, in turn, is obligated to operate the plant in an efficient and
economical manner consistent with good business and utility practices and in
compliance with the terms of its operating license issued to it by the Nuclear
Regulatory Commission (NRC). In 1993 and 1994, as a response to NPPD actions,
the NRC issued numerous notices of violations to NPPD; as a result of these
violations and other safety issues identified by the NRC and NPPD, Cooper
experienced unplanned outages and outages were unduly extended. NPPD's failure
to meet its obligations with respect to the operation of Cooper deprived the
Company of the benefits it was entitled to under the power sales contract,
causing the Company to lose profits and incur increased costs of operation,
which damages the Company seeks to collect from NPPD. Similar litigation has
been filed against NPPD by the Lincoln Electric System (LES), a municipal
utility serving the City of Lincoln, Nebraska, and purchasing one-eighth of the
output of Cooper pursuant to a similar power purchase contract. The LES legal
proceeding is pending in Nebraska state court.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Filed Herewith
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On February 20, 1996, the Company filed a report on Form 8-K, dated
February 20, 1996, regarding certain financial information of
MidAmerican Energy Company. The financial information included
management's discussion and analysis of financial condition and results
of operations; consolidated statements of income, cash flows and
retained earnings for the years ended December 31, 1995, 1994 and 1993;
consolidated balance sheets and consolidated statements of
capitalization as of December 31, 1995 and 1994; notes to the
consolidated financial statements; report of the independent public
accountants; report of management; and supplemental financial and
statistical data.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MidAmerican Energy Company
--------------------------
(Registrant)
Date May 9, 1995 L. E. Cooper
------------ --------------------------
L. E. Cooper
Group Vice President
Finance and Accounting
(Chief Financial Officer)
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