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 June 30, 1996
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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
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(Exact name of registrant as specified in its charter)
IOWA 42-1425214
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 515-242-4300
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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
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(class) (outstanding at August 1, 1996)
MIDAMERICAN ENERGY COMPANY
INDEX
Page Number
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Part I. Financial Information:
Consolidated Statements of Income for the Three,
Six and Twelve Months Ended June 30, 1996 and 1995 3
Consolidated Balance Sheets as of June 30, 1996
and 1995 and December 31, 1995 4
Consolidated Statements of Cash Flows for the Three,
and Six Months Ended June 30, 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 22
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, except per share amounts)
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
---------------------- ------------------------ ------------------------
1996 1995 1996 1995 1996 1995
-------- -------- ---------- -------- ---------- ---------
OPERATING REVENUES
Electric utility ..................... $266,580 $263,132 $ 528,854 $509,363 $1,114,138 $ 1,034,409
Gas utility .......................... 85,618 75,475 281,604 247,827 493,365 437,359
Nonregulated ......................... 95,744 33,105 194,321 75,944 287,786 154,728
-------- -------- ---------- -------- ---------- ---------
447,942 371,712 1,004,779 833,134 1,895,289 1,626,496
-------- -------- ---------- -------- ---------- ---------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity .. 55,123 58,019 116,498 112,069 234,690 219,803
Cost of gas sold ................... 48,689 42,360 171,425 150,931 299,519 269,329
Other operating expenses ........... 90,168 94,946 177,769 184,755 392,662 364,126
Maintenance ........................ 25,139 21,904 43,875 43,195 86,043 96,061
Depreciation and amortization ...... 41,062 39,291 82,006 78,210 162,746 155,701
Property and other taxes ........... 23,925 25,253 49,102 52,236 93,216 101,493
-------- -------- ---------- -------- ---------- ----------
284,106 281,773 640,675 621,396 1,268,876 1,206,513
-------- -------- ---------- -------- ---------- ----------
Nonregulated:
Cost of sales ...................... 82,528 22,963 167,379 55,673 240,391 116,263
Other .............................. 10,870 10,664 21,327 20,912 44,645 37,765
-------- -------- ---------- -------- ---------- ----------
93,398 33,627 188,706 76,585 285,036 154,028
-------- -------- ---------- -------- ---------- ----------
Total operating expenses............ 377,504 315,400 829,381 697,981 1,553,912 1,360,541
-------- -------- ---------- -------- ---------- ----------
OPERATING INCOME ..................... 70,438 56,312 175,398 135,153 341,377 265,955
-------- -------- ---------- -------- ---------- ----------
NON-OPERATING INCOME
Interest income ...................... 1,019 984 2,524 2,044 4,965 4,727
Dividend income ...................... 4,396 4,051 8,902 7,789 18,067 16,615
Realized gains and losses
on securities, net ................... 509 (71) 3,234 354 3,568 4,091
Other, net ........................... 3,056 8,797 4,728 10,438 (16,177) 8,784
-------- -------- ---------- -------- ---------- ---------
8,980 13,761 19,388 20,625 10,423 34,217
-------- -------- ---------- -------- ---------- ---------
INTEREST CHARGES
Interest on long-term debt ........... 26,820 27,836 53,599 55,624 108,480 109,522
Other interest expense ............... 2,687 4,270 5,723 5,630 9,542 9,654
Allowance for borrowed funds ......... (1,020) (1,360) (2,456) (2,587) (5,421) (4,893)
-------- -------- ---------- -------- ---------- ---------
28,487 30,746 56,866 58,667 112,601 114,283
-------- -------- ---------- -------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ................ 50,931 39,327 137,920 97,111 239,199 185,889
INCOME TAXES ......................... 20,656 12,653 54,131 32,860 89,255 57,469
-------- -------- ---------- -------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS .... 30,275 26,674 83,789 64,251 149,944 128,420
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS .............. 904 516 914 516 815 (3,767)
-------- -------- ---------- -------- ---------- ---------
NET INCOME ........................... 31,179 27,190 84,703 64,767 150,759 124,653
PREFERRED DIVIDENDS .................. 2,184 2,282 4,661 4,563 8,157 9,967
-------- -------- ---------- -------- ---------- ---------
EARNINGS ON COMMON STOCK ............. $ 28,995 $ 24,908 $ 80,042 $ 60,204 $ 142,602 $ 114,686
======== ======== ========== ======== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING .... 100,752 100,377 100,752 100,101 100,752 99,578
EARNINGS PER COMMON SHARE
Continuing operations ................ $ 0.28 $ 0.24 $ 0.78 $ 0.59 $ 1.41 $ 1.19
Discontinued operations .............. 0.01 0.01 0.01 0.01 0.01 (0.04)
-------- -------- ---------- -------- ---------- ---------
Earnings per average
common share ......................... $ 0.29 $ 0.25 $ 0.79 $ 0.60 $ 1.42 $ 1.15
======== ======== ========== ======== =========== ===========
Dividends Declared Per Share ......... $ 0.30 $ 0.29 $ 0.60 $ 0.58 $ 1.20 $ 1.17
======== ======== ========== ======== =========== ===========
The accompanying notes are an integral part of these statements.
-3-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
As of
-------------------------------------
June 30 December 31
----------------------- -----------
1996 1995 1995
---------- ---------- ----------
(Unaudited)
ASSETS
UTILITY PLANT
Electric ............................. $3,973,331 $3,842,667 $3,881,699
Gas .................................. 693,564 680,463 695,741
---------- ---------- ----------
4,666,895 4,523,130 4,577,440
Less accumulated depreciation
and amortization ..................... 2,103,783 1,955,601 2,027,055
---------- ---------- ----------
2,563,112 2,567,529 2,550,385
Construction work in progress ........ 68,393 75,650 104,164
---------- ---------- ----------
2,631,505 2,643,179 2,654 549
---------- ---------- ----------
POWER PURCHASE CONTRACT .............. 209,178 222,163 212,148
---------- ----------- ----------
CURRENT ASSETS
Cash and cash equivalents ............ 24,763 35,705 41,216
Receivables .......................... 198,175 145,398 250,902
Inventories .......................... 78,190 95,181 85,235
Other ................................ 11,806 24,270 22,252
---------- --------- ---------
312,934 300,554 399,605
--------- --------- ---------
INVESTMENTS .......................... 869,172 803,211 829,422
--------- --------- ---------
OTHER ASSETS ......................... 409,911 396,373 417,594
--------- --------- ---------
TOTAL ASSETS ......................... $4,432,700 $4,365,480 $4,513,318
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity .......... $1,242,588 $1,223,826 $1,225,715
Preferred shares, not subject to
mandatory redemption ............... 78,577 89,955 89,945
Preferred shares, subject to
mandatory redemption ............... 50,000 50,000 50,000
Long-term debt
(excluding current portion) .......... 1,405,350 1,398,539 1,403,322
--------- --------- ---------
2,776,515 2,762,320 2,768,982
--------- --------- ---------
CURRENT LIABILITIES
Notes payable ........................ 164,490 102,300 184,800
Current portion of long-term debt..... 64,461 72,528 65,295
Current portion of power
purchased contract ................. 13,029 12,080 13,029
Accounts payable ..................... 77,218 78,213 142,759
Taxes accrued ........................ 76,462 98,274 81,898
Interest accrued ..................... 29,643 30,925 30,635
Other ................................ 55,689 43,559 46,797
--------- --------- ---------
480,992 437,879 565,213
--------- --------- ---------
OTHER LIABILITIES
Power purchase contract .............. 112,700 125,729 112,700
Deferred income taxes ................ 750,388 725,305 746,574
Investment tax credit ................ 92,141 98,272 95,041
Other ................................ 219,964 215,975 224,808
--------- --------- ---------
1,175,193 1,165,281 1,179,123
--------- --------- ---------
TOTAL CAPITALIZATION
AND LIABILITIES ...................... $4,432,700 $4,365,480 $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)
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................... $ 31,179 $ 27,190 $ 84,703 $ 64,767
Adjustments to reconcile net
income to net cash provided:
Depreciation, depletion and amortization ..... 50,773 49,692 102,157 99,705
Net increase (decrease) in deferred income
taxes and investment tax credit, net ....... 1,494 9,610 1,747 615
Amortization of other assets ................. 5,899 3,670 11,933 7,590
Capitalized cost of real estate sold ......... 2,231 170 2,498 635
Gain on sale of securities, assets
and other investments ...................... (503) (8,892) (3,573) (9,712)
Impact of changes in working
capital, net of effects from
discontinued operations .................... (62,075) (23,035) 7,141 23,347
Other ........................................ 2,843 (4,432) 7,870 5,220
--------- --------- --------- ---------
Net cash provided .......................... 31,841 53,973 214,476 192,167
--------- --------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures .............. (37,075) (42,124) (65,593) (85,533)
Quad-Cities Nuclear Power Station
decommissioning trust fund ..................... (2,159) (2,159) (4,318) (4,360)
Deferred energy efficiency expenditures ........ (5,497) (5,473) (7,448) (10,862)
Nonregulated capital expenditures .............. (77,319) (23,214) (92,826) (35,783)
Purchase of securities ......................... (52,098) (40,981) (134,294) (55,344)
Proceeds from sale of securities ............... 82,409 15,984 164,090 27,884
Proceeds from sale of assets
and other investments .......................... 1,125 6,484 1,308 32,787
Other investing activities, net ................ 4,912 548 4,335 11,036
--------- --------- --------- ---------
Net cash used ................................ (85,702) (90,935) (134,746) (120,175)
--------- --------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ................................. (32,403) (31,544) (65,101) (62,943)
Issuance of long-term debt, net of issuance cost -- 9,500 -- 49,054
Retirement of long-term debt,
including reacquisition cost ................... (408) (445) (1,047) (49,063)
Reacquisition of preferred shares,
including reacquisition cost ................... (2,975) -- (11,725) --
Increase in MidAmerican Capital Company
unsecured revolving credit facility .......... 24,000 -- 2,000 --
Issuance of common shares ...................... -- 7,454 -- 15,087
Net increase (decrease) in notes payable ....... 64,690 32,700 (20,310) (22,200)
--------- --------- --------- ---------
Net cash provided (used)...................... 52,904 17,665 (96,183) (70,065)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ......................... (957) (19,297) (16,453) 1,927
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,720 55,002 41,216 33,778
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..... $ 24,763 $ 35,705 $ 24,763 $ 35,705
========= ========= ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ...... $ 19,857 $ 22,741 $ 55,428 $ 55,911
========= ========= ========= =========
Income taxes paid .............................. $ 49,016 $ 32,805 $ 49,738 $ 36,760
========= ========= ========= =========
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: MidAmerican
Capital Company (MidAmerican Capital) 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 of the sites and has
completed investigations at three of the sites. In addition, the Company is
currently removing contaminated soil at three of the sites, and has completed
removals at two of the sites. The Company is continuing to evaluate several of
the 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 intends to pursue 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.
Proceeds received from the disposition of the construction investments
through June 30, 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, six and twelve months ended
June 30 are as follows (in thousands):
Three Months Six Months Twelve Months
------------ ---------- -------------
Ended June 30 Ended June 30 Ended June 30
--------------- ----------------- ------------------
1996 1995 1996 1995 1996 1995
------- ----- ------- ------- ------- --------
Operating Revenues $ -- $ -- $ -- $ 6,269 $ 1,065 $ 47,996
======= ===== ======= ======= ======= ========
Income (Loss) from
Discontinued Operations
Income (Loss) from discontinued
operations before income taxes $ 1,530 $ 880 $ 1,530 $ 880 $ 1,530 $ 144
Income tax benefit (expense) (626) (364) (616) (364) (715) (146)
------- ----- ------- ------- ------- --------
Income (Loss) from
discontinued operations 904 516 914 516 815 (2)
------- ----- ------- ------- ------- --------
Loss on Disposal
Loss on disposal before income taxes $ -- $ -- $ -- $ -- $ -- $(11,576)
Income tax benefit -- -- -- -- -- 7,811
------- ----- ------- ------- ------- --------
Loss on disposal -- -- -- -- -- (3,765)
------- ----- ------- ------- ------- --------
Total $ 904 $ 516 $ 914 $ 516 $ 815 $ (3,767)
======= ===== ======= ======= ======= ========
-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) InterCoast Energy Company Restructuring:
During the second quarter, the Company restructured one of its nonregulated
subsidiaries, the former InterCoast Energy Company, and changed its name to
MidAmerican Capital. In addition, the Company formed a new subsidiary under
MidAmerican Capital, named InterCoast Energy Company (InterCoast). The new
InterCoast has as its subsidiaries the Company's wholesale nonregulated energy
companies, including InterCoast Oil and Gas Company, formerly named Medallion
Production Company. MidAmerican Capital retained the rail service businesses,
the marketable securities and passive investment activities, and a nonregulated
retail natural gas subsidiary.
Following the restructuring, InterCoast filed a registration statement with
the Securities and Exchange Commission for an initial public offering (IPO) of
common stock. On July 29, 1996, the Company canceled the IPO as a result of
adverse general market conditions for initial public offerings. The Company has
engaged Dillon Read & Co. Inc. to assist in evaluating strategic alternatives
for InterCoast, including possible divestiture.
F) Holding Company:
The Company's Board of Directors, holders of a majority of the outstanding
shares of the Company's common stock, the Iowa Utilities Board (IUB), the
Nuclear Regulatory Commission and the Federal Energy Regulatory Commission have
approved, or issued orders that will permit, the formation of a holding company
for MidAmerican's organizational structure. The holding company would initially
have three wholly owned subsidiaries consisting of MidAmerican (utility
operations), MidAmerican Capital and Midwest Capital. Approval must yet be
received from the Illinois Commerce Commission. Subject to such approval, 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.
G) Merger:
On August 5, 1996, the Company announced that it has proposed a merger with
IES Industries Inc., (IES) in a cash and stock transaction valued at $39 per IES
common share based on the closing price of MidAmerican common stock on August 2,
1996. IES is a holding company headquartered in Cedar Rapids, Iowa. As of
December 31, 1995, IES had total assets of $2.0 billion and total operating
revenues of $851 million. Its principal subsidiary, IES Utilities Inc., serves
334,000 electric customers and 175,000 gas customers in Iowa.
The aggregate value of the transaction would be approximately $1.17
billion. The combination would provide shareholders of IES with a 21% premium
over the implied value of the consideration they would receive in a pending
merger with WPL Holdings and Interstate Power Co. (the Wisconsin Transaction),
along with a 42% dividend increase over the dividend proposed in the Wisconsin
Transaction. The proposal calls for a cash and stock transaction in which the
aggregate compensation will be no more than 40% cash and the remainder in
MidAmerican common stock. IES common shareholders receiving cash would receive
$39 per share of IES common stock and IES common shareholders receiving stock
would receive, on a tax-free basis, 2.346 shares
-8-
of MidAmerican common stock per share of IES common stock. If an agreement
between IES and MidAmerican with respect to a business combination is not
reached, MidAmerican intends to solicit proxies against the Wisconsin
Transaction for use at the IES annual meeting of shareholders, presently
scheduled to be held on September 5, 1996.
H) McLeod, Inc. Investment:
At June 30, 1996, the Company had investments in Class A and Class B Common
Stock of McLeod, Inc. (McLeod). The Class B Common Stock is Convertible into
Class A Common Stock. On June 14, 1996, McLeod made an initial public offering
of its Class A Common Stock. As part of an investor agreement, the Company is
prohibited from selling or otherwise disposing of any of the common stock of
McLeod for a period of two years from the date of the IPO. Under the provisions
of Financial Accounting Standard No. 115, the Company's investment in McLeod is
considered restricted stock and, as such, is recorded at cost. At June 30, 1996,
the carrying amount and fair value of this investment were $36.3 million and
$196.9 million, respectively.
I) Rate Matters:
On June 4, 1996, the Company filed a new electric pricing proposal in Iowa
and Illinois. The proposal would reduce electric revenues by approximately $100
million over five years and eliminate automatic fuel adjustment clauses. The
proposal would provide the Company more flexibility to negotiate with customers
who have service options and to mitigate strandable costs. Both states have
docketed the filings, and hearings in the cases are scheduled to begin in
October 1996.
On August 1, 1996, the Iowa Office of Consumer Advocate (OCA) requested the
IUB to order the Company to reduce annual electric rates by 10.7%, or
approximately $101 million annually in Iowa electric revenues. The Company has
asked the IUB to reject the case citing that, among other things, it fails to
recognize the changes occurring in the electric utility industry. Should the IUB
docket the case and, after hearings on the case, order a decrease in revenues,
certain amounts collected subsequent to August 1, 1996, would be subject to
refund. The Company cannot predict the IUB's response to the filing nor the
outcome of such a case should it be accepted by the IUB.
J) Accounting for the Effects of Certain Types of Regulation:
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for 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. A
possible consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71. 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 June 30, 1996, the Company had approximately
$390 million of regulatory assets in its Consolidated Balance Sheet.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CORPORATE OVERVIEW
MidAmerican Energy Company (the Company or MidAmerican), headquartered in
Des Moines, Iowa, 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 merger has been accounted for as a pooling-of-interests, and the
Consolidated Financial Statements included in this Form 10-Q are presented as if
the merger occurred 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 predecessor companies actually merged at the beginning of the
earliest period.
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. MidAmerican
Capital Company (formerly InterCoast Energy Company), discussed below, and
Midwest Capital Group, Inc. (Midwest Capital) are the Company's nonregulated
subsidiaries and are headquartered in Des Moines. Midwest Capital functions as a
regional business development company in the utility service territory.
During the second quarter the Company restructured one of its nonregulated
subsidiaries, the former InterCoast Energy Company, and changed its name to
MidAmerican Capital Company (MidAmerican Capital). In addition, the Company
formed a new subsidiary under MidAmerican Capital, named InterCoast Energy
Company (InterCoast). The new InterCoast has as its subsidiaries the Company's
wholesale nonregulated energy companies, including InterCoast Oil and Gas
Company, formerly named Medallion Production Company. MidAmerican Capital
retained the rail service businesses, the marketable securities and passive
investment activities, and a nonregulated retail natural gas subsidiary.
Following the restructuring, InterCoast filed a registration statement with
the Securities and Exchange Commission for an initial public offering (IPO) of
common stock. On July 29, 1996, the Company canceled the IPO as a result of
adverse general market conditions for initial public offerings. The Company has
engaged Dillon Read & Co. Inc. to assist in evaluating strategic alternatives
for InterCoast, including possible divestiture of InterCoast.
On April 24, 1996, the Company's common shareholders approved a proposal to
form a holding company. The holding company would initially have three wholly
owned subsidiaries consisting of MidAmerican (utility operations), MidAmerican
Capital 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. As of the date of this
filing, the Company has received orders from the Federal Energy Regulatory
Commission (FERC), the Iowa Utilities Board (IUB) and the Nuclear Regulatory
Commission (NRC) which permit the formation of a holding company. Approval must
yet be received from the Illinois Commerce Commission (ICC). Subject to such
approval, 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.
On August 5, 1996, the Company announced that it has proposed a merger with
IES Industries Inc., (IES) in a cash and stock transaction valued at $39 per IES
common share based on the closing price of MidAmerican
-10-
common stock on August 2, 1996. IES is a holding company headquartered in
Cedar Rapids, Iowa. As of December 31, 1995, IES had total assets of $2.0
billion and total operating revenues of $851 million. Its principal subsidiary,
IES Utilities Inc., serves 334,000 electric customers and 175,000 gas customers
in Iowa.
The aggregate value of the transaction would be approximately $1.17
billion. The combination would provide shareholders of IES with a 21% premium
over the implied value of the consideration they would receive in a pending
merger with WPL Holdings and Interstate Power Co. (the Wisconsin Transaction),
along with a 42% dividend increase over the dividend proposed in the Wisconsin
Transaction. The proposal calls for a cash and stock transaction in which the
aggregate compensation will be no more than 40% cash and the remainder in
MidAmerican common stock. IES common shareholders receiving cash would receive
$39 per share of IES common stock and IES common shareholders receiving stock
would receive, on a tax-free basis, 2.346 shares of MidAmerican common stock per
share of IES common stock. If an agreement between IES and MidAmerican with
respect to a business combination is not reached, MidAmerican intends to solicit
proxies against the Wisconsin transaction for use at the IES annual meeting of
shareholders, presently scheduled to be held on September 5, 1996.
FORWARD-LOOKING INFORMATION
From time to time, the Company may make "forward-looking statements" within
the meaning of the federal securities laws. These forward-looking statements
include, among others, statements concerning the Company's revenue and cost
trends, cost recovery, cost reduction strategies and anticipated outcomes,
pricing strategies, changes in the utility industry, planned capital
expenditures, financing needs and availability, statements of the Company's
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar comments concerning matters that are not historical facts.
Forward-looking statements made by the Company are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in, or implied by, the statements. Some, but not all, of the risks and
uncertainties include general economic conditions in the Company's service
territory, competitive factors, federal and state regulatory actions and
potential weather effects on sales and revenues.
-11-
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 June 30
---------------------
Three Months Six Months Twelve Months
------------ ---------- -------------
1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------
Earnings (in millions)
Electric utility $ 25.3 $ 22.8 $ 47.5 $ 41.5 $117.9 $ 92.8
Gas utility (0.6) (3.2) 22.2 12.4 22.4 12.4
------ ------ ------ ------ ------ ------
Utility operations 24.7 19.6 69.7 53.9 140.3 105.2
Nonregulated operations 3.4 4.8 9.4 5.8 1.5 13.3
Income (loss) from
discontinued operations 0.9 0.5 0.9 0.5 0.8 (3.8)
------ ------ ------ ------ ------ ------
Consolidated earnings $ 29.0 $ 24.9 $ 80.0 $ 60.2 $142.6 $114.7
====== ====== ====== ====== ====== ======
Earnings Per Common Share
Electric utility $ 0.25 $ 0.22 $ 0.47 $ 0.42 $ 1.17 $ 0.93
Gas utility -- (0.03) 0.22 0.12 0.22 0.13
------ ------ ------ ------ ------ ------
Utility operations 0.25 0.19 0.69 0.54 1.39 1.06
Nonregulated operations 0.03 0.05 0.09 0.05 0.02 0.13
Income (loss) from
discontinued operations 0.01 0.01 0.01 0.01 0.01 (0.04)
------ ------ ------ ------ ------ ------
Consolidated earnings $ 0.29 $ 0.25 $ 0.79 $ 0.60 $ 1.42 $ 1.15
====== ====== ====== ====== ====== ======
Earnings per share for the second quarter of 1996 increased 4 cents
compared to the second quarter of 1995. Gross margins of utility electric and
natural gas operations contributed favorably to 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 and the absence of merger-related costs also
had a favorable effect on 1996 utility earnings compared to the second quarter
of 1995. Total earnings of nonregulated subsidiaries decreased due to $5.0
million of aftertax gains in the second quarter of 1995 due to the sale of a
partnership interest in a gas marketing organization and a telecommunications
subsidiary. The decrease was partially offset by an improvement in earnings of a
nonregulated oil and gas production subsidiary for the 1996 quarter compared to
the 1995 quarter.
Earnings per share for the six months ended June 30, 1996, increased 19
cents compared to the six months ended June 30, 1995. Gross margins of utility
electric and natural gas operations accounted for most of the increase in
utility earnings per share. Realization of cost savings resulting from the
merger and the absence of merger-related costs in 1996 also had a favorable
effect on utility earnings. Earnings of nonregulated subsidiaries contributed 4
cents per share more in the 1996 six-month period than in the comparable 1995
period due primarily to improved oil and gas earnings.
-12-
For the twelve months ended June 30, 1996, earnings per share were 27 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.
During 1995, the Company's 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, relocation and separation programs. The Company recorded $33.4
million of restructuring costs during 1995. Of the total, $6.0 million was
recorded in the second quarter, $24.6 million in the third quarter and $2.8
million in the fourth quarter. These costs are primarily reflected in Other
Operating Expenses in the Consolidated Statements of Income.
In addition, the Company incurred transaction costs to complete the merger.
In the third and fourth quarters of 1994, the Company expensed $4.5 million of
merger transaction costs. During 1995, the Company expensed $4.6 million of
merger transaction costs, $3.8 million of which were expensed in the third
quarter. These costs are included in Other Non-Operating Income in the
Consolidated Statements of Income.
In total, restructuring and transaction costs reduced earnings for the 1995
three-month and six-month periods by 4 cents per share. Earnings were reduced by
20 cents per share and 9 cents per share for such costs for the 1996 and 1995
twelve-month periods, respectively.
Write-downs of certain assets of the Company's nonregulated subsidiaries
also reduced earnings for twelve months ended June 30, 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 1995 twelve-month period also reflects the aftertax gains
on the sales of a partnership interest in a gas marketing organization and a
telecommunications subsidiary discussed previously.
-13-
UTILITY GROSS MARGIN
- --------------------
Electric Gross Margin:
----------------------
Periods Ended June 30
---------------------------------------
Three Month Six Months Twelve Months
----------- ---------- -------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ------ ------
(In millions)
Operating revenues $267 $263 $529 $509 $1,114 $1,034
Cost of fuel, energy and capacity 55 58 116 112 235 220
---- ---- ---- ---- ------ ------
Electric gross margin $212 $205 $413 $397 $ 879 $ 814
==== ==== ==== ==== ====== ======
Variations in gross margin are the result of changes in revenues due to
price and sales volume variances. 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.
The electric gross margin increased for each of the 1996 periods compared
to the 1995 periods. The increases were due both to price and sales increases.
Retail sales increased 3.1%, 4.0% and 5.2% for three, six and twelve months
ended June 30, 1996, respectively, compared to the related 1995 periods. The
increases in sales were due in part to weather conditions in the 1996 periods
that were more conducive to increased sales to retail customers. Temperatures
during the second quarter of 1996 were more extreme than in the second quarter
of 1995, resulting in greater needs for heating and cooling. The six months
ended June 30, 1996, was also affected by colder weather during the first
quarter of 1996 than in the comparable period in 1995. A significantly warmer
third quarter in 1995 than in the third quarter of 1994 additionally increased
sales for the twelve months ended June 30, 1996. In addition, the Company
continued to have steady customer growth.
An increase in electric retail rates also contributed to the increase in
revenues and gross margin. Retail rates in the first and second quarters 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 and second quarters of 1996
reflect the 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 increased 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.
In addition to the electric rate increases discussed above, the comparison
of the twelve-month gross margins was affected by two other 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 decreased for the three months ended
comparison and increased for the six and twelve months ended comparisons.
Variations in the amount of available generation was the primary cause
-14-
of the differences. 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. 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.
Gas Gross Margin:
-----------------
Periods Ended June 30,
----------------------
Three Months Six Months Twelve Months
------------ ---------- -------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
Operating revenues $ 86 $ 75 $282 $248 $493 $437
Cost of gas sold 49 42 171 151 300 269
----- ----- ---- ----- ---- ----
Gas gross margin $ 37 $ 33 $111 $ 97 $193 $168
===== ===== ==== ===== ==== ====
Similar to electric gross margin, variations in gas gross margin are the
result of changes in revenues due to price and sales volume variances. The
Company has been allowed to recover the cost of gas sold 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.
Gas gross margin increased for each 1996 period presented compared to the
1995 periods. The increases were due both to price and sales increases. Retail
sales increased 0.8%, 10.8% and 12.3% for three, six and twelve months ended
June 30, 1996, respectively, compared to the related 1995 periods. As stated in
the electric gross margin discussion, the increases in sales were due in part to
weather conditions in the 1996 periods that were more conducive to increased
sales to retail customers. Temperatures during part of the second quarter of
1996 were colder than in the second quarter of 1995, resulting in greater needs
for heating. However, a decrease in sales to industrial customers offset most of
the increase in sales due to the colder temperatures. The six months ended June
30, 1996, was significantly affected by colder weather during the first quarter
of 1996 than in the comparable period in 1995. Colder temperatures in the fourth
quarter of 1995 than in the fourth quarter of 1994 also increased sales for the
twelve months ended June 30, 1996. In addition, the Company continued to have
growth in the number of natural gas customers.
An increase in gas retail rates also was a cause of the increase in
revenues and gross margin. Retail rates in the first and second quarters 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 and second quarters of 1996 reflect the
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
increased expensing of OPEB costs.
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.
-15-
UTILITY OPERATING EXPENSES
- --------------------------
Other operating expenses for the quarter ended June 30, 1996, decreased
$4.8 million compared to the second quarter of 1995 due primarily to $6.0
million of restructuring costs included in the 1995 quarter as discussed in the
Earnings section of Results of Operations. In addition, a decrease in nuclear
operating expenses and savings from work force reductions following the merger
contributed to the decrease. These decreases were partially offset by increased
outside services and, as discussed above, amortization of deferred energy
efficiency and OPEB costs.
Other operating expenses for the six months ended June 30, 1996, decreased
$7.0 million compared to the comparable period in 1995. In addition to the items
affecting the quarter comparison, the six months ended June 30,1996, reflects
decreases in manufactured gas plant clean-up costs due primarily to timing.
For the twelve months ended June 30, 1996, other operating expenses
increased $28.5 million compared to the 1995 period due primarily to costs
related to the restructuring plan discussed in the Earnings section of Results
of Operations. Of the total increase in utility operating expenses, $20.0
million is due to the restructuring costs. In addition, the 1996 twelve-month
period reflects a $7.1 million increase from the amortization of deferred energy
efficiency and OPEB costs. Increases in consulting services expenses and some
general administrative costs also contributed to the increase. The increases for
the 1996 period were partially offset by a $5.0 million reduction in nuclear
operations costs.
Maintenance expenses increased $3.2 million for the three months ended June
30, 1996, compared to the 1995 period. The timing of power plant maintenance and
an increase in certain general plant maintenance accounted for much of the
variation between the periods. For the comparable twelve months ended periods,
maintenance expenses decreased $10.0 million. A majority of the decrease was due
to the timing of power plant maintenance. In addition, Quad-Cities Station
maintenance expenses decreased $3.2 million for the twelve months ended June 30,
1996, due in part to a 1994 outage.
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 each 1996 period compared to the comparable 1995 period. The
increases are due to revenues of oil and gas subsidiaries. Revenues of a
wholesale natural gas marketing firm acquired in December 1995 are present only
in the 1996 periods and accounted for approximately one-half of the increase for
each period. Increases in sales volumes and prices for a nonregulated retail
natural gas marketing subsidiary, as well as increased revenues from gas
production due to greater production levels and higher prices, also resulted in
increases in revenues for each 1996 period shown.
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 $6.7 million for the 1996
twelve-month period compared to the twelve months ended June 30, 1995. The 1996
period includes $1.5 million of merger-related expenses for the Company's
restructuring plan.
-16-
REALIZED GAINS AND LOSSES ON SECURITIES, NET
- --------------------------------------------
Realized gains and losses on securities increased for the six months ended
June 30, 1996, due to an increase in gains on the disposition of equity fund
holdings and managed preferred stock portfolios.
NON-OPERATING INCOME-OTHER, NET
- -------------------------------
The second quarter of 1995 includes pre-tax gains totalling $8.5 million on
the sales of a partnership interest in a gas marketing organization and a
telecommunication subsidiary. In addition, the adjustments to nonregulated
investments discussed at the beginning of Results of Operations decreased Other,
Net, for the twelve months ended June 30, 1996, compared to the 1995 period.
Merger transaction costs also reduced Other, Net in both twelve-month periods.
INTEREST CHARGES
- ----------------
Decreased interest on long-term debt in the 1996 periods compared to the
1995 periods was due to a lower overall rate on debt of nonregulated
subsidiaries. For the 1996 twelve-month period compared to the 1995 twelve-month
period the decreases were partially offset by increased utility interest due to
the issuance of $60 million of 7.875% Series of mortgage bonds in November 1994.
Other interest expense decreased for the 1996 quarter compared to the 1995
quarter due to interest paid to the Internal Revenue Service in 1995.
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 certain operating items outstanding at the time of sale have
resulted in income from discontinued operations in 1996 and 1995.
PREFERRED DIVIDENDS
- -------------------
Preferred dividends for the 1996 periods include losses on the redemption
of shares of the $1.7375 Series of preferred shares in March and June 1996. The
reductions in preferred shares resulted in a decrease in dividends in the second
quarter. During 1996, the Company has redeemed 469,000 shares of the $1.7375
series. Preferred dividends for the twelve months ended June 30, 1996, compared
to the 1995 period were additionally reduced by the redemption of three other
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 six months of 1996, the Company had net cash provided from
operating activities of $214 million and net cash used of $135 million and $96
million for investing and financing activities, respectively.
-17-
INVESTING ACTIVITIES
- --------------------
Utility construction expenditures, including allowance for funds used
during construction (AFUDC), Quad-Cities Station nuclear fuel purchases and
Cooper capital improvements, were $66 million for the first six months 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.
Operators of a nuclear facility are required to set aside funds to provide
for costs of future decommissioning of their nuclear facility. In general,
decommissioning of a nuclear facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator. Based on information presently available, 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 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 $57 million to NPPD 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 $93 million for the
first six months of 1996. In April 1996, InterCoast Oil and Gas Company (IOG), a
subsidiary of InterCoast, acquired certain oil and gas interests. The
acquisition, which was in excess of $50 million, increases IOG's 1995 year-end
proved reserves to approximately 42 million barrels of oil equivalent, or an
increase of approximately 30%. 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 oil
and gas acquisition by IOG, capital expenditures are forecasted to be
approximately $85 million for 1996, primarily related to InterCoast.
MidAmerican Capital invests in a variety of marketable securities which it
holds for indefinite periods of time. For the first six months of 1996,
MidAmerican Capital had net cash inflows of $38 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.
The Company, through one of its nonregulated subsidiaries, has an
investment in Class A and Class B common stock of McLeod, Inc. (McLeod), a
telecommunications company. The Class B stock is convertible to Class A stock on
a one-for-one basis. On June 14, 1996, McLeod made an initial public offering
(IPO) of common stock. The Company's investment represents approximately 18% of
the total outstanding common stock of the company on the date of the IPO. At
June 30, 1996, the carrying amount and fair value of the Company's investment
were $36.3 million and $196.9 million, respectively. As part of an investor
agreement,
-18-
the Company is prohibited from selling or otherwise disposing of any of the
common stock of McLeod for a period of two years from the date of the IPO, and
accordingly, no market value adjustments have been reflected in the Company's
financial statements.
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
June 30, 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 $164 million at June 30, 1996, are
supported by the revolving credit facility. The Utility also has a revolving
credit facility which is 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, of which $1 million matures in 1996.
Management is considering several long-term financing options for 1996. Proceeds
from those financings 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 one
indenture.
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 June 30, 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.
MidAmerican Capital 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.
MidAmerican Capital's aggregate amounts of maturities and sinking fund
requirements for long-term debt outstanding at June 30, 1996, are $39 million
for 1996 and $289 million for the years 1996 through 2000.
On July 24, 1996, the Company's Board of Directors declared a quarterly
dividend on common shares of $0.30 per share payable September 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 supports changes in the utility industry that will create a more
competitive environment for the entire electric industry. Although these
anticipated changes may create opportunities, they will also create additional
-19-
challenges and risks for utilities. The Company is evaluating strategies that
will assist it in a more competitive environment.
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 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 June 30, 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 June 30, 1996, includes a $34 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.
In May 1996, the Iowa legislature approved a bill eliminating mandatory
spending levels for energy efficiency programs and allowing more timely recovery
of energy efficiency expenditures as determined by the IUB. The new legislation
became effective July 1, 1996. Previously, electric and gas utilities in Iowa
were 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 some of the previously deferred costs related to prior
energy efficiency filings. As of June 30, 1996, the Company had approximately
$75 million of energy efficiency costs deferred and included as regulatory
assets in its Consolidated Balance Sheet for which recovery will be sought in
future energy efficiency filings.
On June 4, 1996, the Company filed a new electric pricing proposal in Iowa
and Illinois. The proposal would reduce electric revenues by approximately $100
million over five years and eliminate automatic fuel adjustment clauses. The
price reductions, 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. In addition, the proposal
will provide the Company more flexibility to negotiate with customers who have
service options and to mitigate strandable costs. Both states have docketed the
filings, and hearings in the cases are scheduled to begin in October 1996.
On August 1, 1996, the Iowa Office of Consumer Advocate (OCA) requested the
IUB to order the Company to reduce annual electric rates by 10.7%, or
approximately $101 million annually in Iowa electric revenues. The Company has
asked the IUB to reject the case citing that, among other things, it fails to
recognize the changes occurring in the electric utility industry. The Company
cannot predict the IUB's response to the filing nor the outcome of such a case
should it be accepted by the IUB. However, the Company strongly disagrees with
the requested reduction and believes the Company's electric pricing proposal
achieves proper price levels, is designed to meet the needs of the changing
utility industry and creates an environment beneficial to all parties involved.
-20-
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 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 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. 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. Due to the continuing evolution of the exposure draft, the Company is
uncertain as to the impact on its results of operations 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.
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Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held its 1996 Annual Meeting of Shareholders on April 24, 1996.
At the annual meeting, shareholders elected the seventeen persons nominated and
approved two additional matters presented to them for a vote. The results of the
votes are as follows:
For Against
---------- ---------
Election of Directors:
Name -
John W. Aalfs 78,691,743 2,091,239
B. T. Asher 78,686,998 2,095,985
S. J. Bright 78,645,284 2,137,698
R. A. Burnett 78,636,642 2,146,341
R. D. Christensen 78,657,617 2,125,365
R. E. Christiansen 78,602,222 2,180,760
J. W. Colloton 78,601,725 2,181,257
F. S. Cottrell 78,671,173 2,111,810
J. W. Eugster 78,733,423 2,049,559
M. Foster, Jr. 78,526,299 2,256,683
N. Gentry 78,724,143 2,107,832
J. M. Hoak, Jr. 78,738,274 2,044,708
R. L. Lawson 78,256,096 2,526,886
R. L. Peterson 78,493,850 2,289,132
N. L. Seifert 78,627,662 2,155,320
W. S. Tinsman 78,753,168 2,029,814
L. L. Woodruff 78,655,097 2,127,885
For Against Abstain
---------- --------- ---------
Approval of the
Agreement and Plan
of Exchange (Holding
company proposal): 64,837,297 2,658,969 2,106,790
Approval of the 1995
Long-Term Incentive
Plan: 69,378,101 8,798,936 2,700,984
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibits Filed Herewith
-----------------------
Exhibit 3.1- Restated Bylaws of MidAmerican Energy Company, as
amended July 24, 1996
Exhibit 12 - Computation of ratios of earnings to fixed charges and
computation of ratios of earnings to fixed charges plus preferred
dividend requirements.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On April 30, 1996, the Company filed a report on Form 8-K, dated
April 25, 1996, regarding the announcement of the development of an
innovative market-based pricing proposal. The press release issued in
conjunction with the announcement was filed as an Exhibit to the
report.
On May 29, 1996, the Company filed a report on Form 8-K, dated
May 28, 1996. The report included information regarding the announcement
of the restructuring of one of MidAmerican Energy Company's wholly owned
nonregulated subsidiaries and a plan for an initial public offering of
common stock in the newly restructured company. The press release issued
in conjunction with the announcement was filed as an Exhibit to the
report.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MidAmerican Energy Company
--------------------------
(Registrant)
Date August 12, 1996 P. G. Lindner
------------------------------- --------------------------------
P. G. Lindner
Group Vice President
(Principal financial officer)
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