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 September 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
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
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(class) (outstanding at October 31, 1996)
MIDAMERICAN ENERGY COMPANY
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 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
-2-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, except per share amounts)
Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
-------------------------- ------------------------- ------------------------
1996 1995 1996 1995 1996 1995
------------ ---------- ---------- ----------- ---------- ----------
OPERATING REVENUES
Electric utility ............................ $ 311,169 $ 338,626 $ 840,023 $ 847,989 $1,086,681 $1,083,901
Gas utility ................................. 72,902 64,609 354,506 312,436 501,658 444,636
Nonregulated ................................ 50,607 16,767 139,211 64,552 169,765 93,821
------------ ---------- ---------- ----------- --------- ---------
434,678 420,002 1,333,740 1,224,977 1,758,104 1,622,358
------------ ---------- ---------- ----------- --------- ---------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity ........... 61,164 65,625 177,662 177,694 230,229 228,928
Cost of gas sold ............................ 48,300 38,261 219,725 189,192 309,558 273,859
Other operating expenses .................... 82,357 110,388 260,126 295,143 364,631 389,351
Maintenance ................................. 24,741 20,103 68,616 63,298 90,681 92,318
Depreciation and amortization ............... 41,120 40,182 123,126 118,392 163,684 157,205
Property and other taxes .................... 22,686 25,447 71,788 77,683 90,455 102,494
------------ ---------- ---------- ----------- --------- ----------
280,368 300,006 921,043 921,402 1,249,238 1,244,155
------------ ---------- ---------- ----------- --------- ----------
Nonregulated:
Cost of sales ............................... 47,247 11,793 124,497 46,274 148,432 67,294
Other ....................................... 9,144 9,978 25,136 28,082 34,235 37,741
------------ ---------- ---------- ----------- --------- ----------
56,391 21,771 149,633 74,356 182,667 105,035
------------ ---------- ---------- ----------- --------- ----------
Total operating expenses .................... 336,759 321,777 1,070,676 995,758 1,431,905 1,349,190
------------ ---------- ---------- ----------- --------- ----------
OPERATING INCOME ............................ 97,919 98,225 263,064 229,219 326,199 273,168
------------ ---------- ---------- ----------- --------- ----------
NON-OPERATING INCOME
Interest income ............................. 564 1,288 3,088 3,332 4,241 5,039
Dividend income ............................. 4,179 4,354 13,081 12,143 17,892 16,494
Realized gains and losses
on securities, net .......................... (30) (291) 3,204 63 3,829 2,062
Other, net .................................. (4,187) (17,330) 541 (6,892) (3,034) (6,079)
------------ ---------- ---------- ----------- --------- ----------
526 (11,979) 19,914 8,646 22,928 17,516
------------ ---------- ---------- ----------- --------- ----------
INTEREST CHARGES
Interest on long-term debt .................. 25,818 26,280 77,523 79,389 103,684 105,606
Other interest expense ...................... 2,556 1,248 8,279 6,878 10,850 8,659
Allowance for borrowed funds ................ (830) (1,379) (3,286) (3,966) (4,872) (5,466)
------------ ---------- ---------- ----------- --------- ---------
27,544 26,149 82,516 82,301 109,662 108,799
------------ ---------- ---------- ----------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ....................... 70,901 60,097 200,462 155,564 239,465 181,885
INCOME TAXES ................................ 28,266 22,962 79,662 55,285 91,180 59,555
------------ ---------- ---------- ----------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ........... 42,635 37,135 120,800 100,279 148,285 122,330
DISCONTINUED OPERATIONS
Income (Loss) From Operations
(net of income taxes) ....................... (3,628) 322 2,910 1,945 4,024 1,892
Loss on disposal (net of income taxes) ...... (14,364) -- (14,364) -- (14,364) --
------------ ---------- ---------- ----------- --------- ---------
(17,992) 322 (11,454) 1,945 (10,340) 1,892
------------ ---------- ---------- ----------- --------- ---------
NET INCOME .................................. 24,643 37,457 109,346 102,224 137,945 124,222
PREFERRED DIVIDENDS ......................... 2,087 1,677 6,748 6,240 8,567 9,071
------------ ---------- ---------- ----------- ---------- ----------
EARNINGS ON COMMON STOCK .................... $ 22,556 $ 35,780 $ 102,598 $ 95,984 $ 129,378 $ 115,151
============ ========== ========== =========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING ........... 100,752 100,752 100,752 100,364 100,752 100,035
EARNINGS PER COMMON SHARE
Continuing operations ....................... $ 0.40 $ 0.35 $ 1.13 $ 0.94 $ 1.38 $ 1.13
Discontinued operations ..................... (0.18) 0.01 (0.11) 0.02 (0.10) 0.02
------------ ---------- ---------- ----------- ---------- ----------
Earnings per average common share ........... $ 0.22 $ 0.36 $ 1.02 $ 0.96 $ 1.28 $ 1.15
============ ========== ========== =========== ========== ==========
DIVIDENDS DECLARED PER SHARE ................ $ 0.30 $ 0.30 $ 0.90 $ 0.88 $ 1.20 $ 1.18
============ ========== ========== =========== ========== ==========
The accompanying notes are an integral part of these statements.
-3-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
As of
Sept. 30 December 31
------------------------ -----------
1996 1995 1995
---------- ---------- ----------
(Unaudited)
ASSETS
UTILITY PLANT
Electric........................................... $3,981,980 $3,853,520 $3,881,699
Gas................................................ 718,796 689,209 695,741
---------- ---------- ----------
4,700,776 4,542,729 4,577,440
Less accumulated depreciation and amortization..... 2,132,456 1,984,797 2,027,055
---------- ---------- ----------
2,568,320 2,557,932 2,550,385
Construction work in progress...................... 56,452 91,286 104,164
---------- ---------- ----------
2,624,772 2,649,218 2,654 549
---------- ---------- ----------
POWER PURCHASE CONTRACT............................ 207,725 223,183 212,148
---------- ---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS.............. 214,594 180,407 174,694
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents.......................... 23,138 26,356 32,915
Receivables........................................ 196,245 179,982 228,128
Inventories........................................ 91,061 90,200 85,235
Other.............................................. 10,275 11,779 18,428
---------- ---------- ----------
320,719 308,317 364,706
---------- ---------- ----------
INVESTMENTS........................................ 628,553 649,413 646,456
---------- ---------- ----------
OTHER ASSETS....................................... 399,755 409,270 414,938
---------- ---------- ----------
TOTAL ASSETS....................................... $4,396,118 $4,419,808 $4,467,491
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity........................ $1,238,615 $1,231,588 $1,225,715
Preferred shares, not subject to mandatory
redemption....................................... 77,534 89,955 89,945
Preferred shares, subject to mandatory redemption.. 50,000 50,000 50,000
Long-term debt (excluding current portion)......... 1,372,007 1,385,281 1,403,322
---------- ---------- ----------
2,738,156 2,756,824 2,768,982
---------- ---------- ----------
CURRENT LIABILITIES
Notes payable...................................... 157,728 135,700 184,800
Current portion of long-term debt.................. 77,624 74,159 65,295
Current portion of power purchase contract......... 13,029 12,080 13,029
Accounts payable................................... 102,423 119,087 130,432
Taxes accrued...................................... 61,307 85,671 81,898
Interest accrued................................... 24,091 24,103 30,635
Other.............................................. 59,702 62,253 37,890
---------- ---------- ----------
495,904 513,053 543,979
---------- ---------- ----------
OTHER LIABILITIES
Power purchase contract............................ 112,700 125,729 112,700
Deferred income taxes.............................. 732,233 716,137 721,981
Investment tax credit.............................. 90,692 96,819 95,041
Other ............................................. 226,433 211,246 224,808
---------- ---------- ----------
1,162,058 1,149,931 1,154,530
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES............... $4,396,118 $4,419,808 $4,467,491
========== ========== ==========
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 Nine Months Ended
September 30 September 30
---------------------- ----------------------
1996 1995 1996 1995
---------- --------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 24,643 $ 37,457 $ 109,346 $ 102,224
Adjustments to reconcile net income to net cash provided:
Depreciation, depletion and amortization ...................... 50,797 46,126 139,303 135,831
Net increase (decrease) in deferred income taxes and
investment tax credit, net ................................. 4,848 (8,272) 3,276 (10,643)
Amortization of other assets .................................. 5,626 7,171 17,559 14,761
Capitalized cost of real estate sold .......................... 397 334 2,895 969
Loss (income) from discontinued operations .................... 17,992 (322) 11,454 (1,945)
(Gain) Loss on sale of securities, assets and other investments (1,898) 94 (5,471) (9,618)
Other than temporary decline in value of investments .......... -- 14,497 2,566 14,848
Impact of changes in working capital, net of effects
from discontinued operations ............................... (23,383) 15,912 (14,422) 38,989
Other ......................................................... 11,109 (3,820) 17,327 1,539
-------- --------- --------- ---------
Net cash provided .......................................... 90,131 109,177 283,833 286,955
-------- --------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................... (35,468) (55,082) (101,061) (140,615)
Quad Cities Nuclear Power Station decommissioning trust fund .... (2,159) (2,159) (6,477) (6,519)
Deferred energy efficiency expenditures ......................... (5,753) (7,699) (13,200) (18,561)
Nonregulated capital expenditures ............................... (11,860) (2,152) (36,989) (11,419)
Purchase of securities .......................................... (33,755) (45,644) (168,049) (109,152)
Proceeds from sale of securities ................................ 33,381 14,345 197,472 42,229
Proceeds from sale of assets and other investments .............. 16,681 3,271 17,989 36,058
Investment in discontinued operations ........................... 5,221 (5,583) (34,022) (10,170)
Other investing activities, net ................................. 3,174 (12,618) 7,506 10,972
-------- --------- --------- ---------
Net cash provided (used) ...................................... (30,538) (113,321) (136,831) (207,177)
-------- --------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid .................................................. (32,310) (31,902) (97,412) (94,845)
Retirement of long-term debt, including reacquisition cost ...... (64,449) (74,452) (65,495) (88,515)
Reacquisition of preferred shares, including reacquisition cost . (1,075) -- (12,800) --
Increase in MidAmerican Capital Company
unsecured revolving credit facility ........................... 44,000 73,500 46,000 75,000
Issuance of common shares ....................................... -- -- -- 15,087
Net increase (decrease) in notes payable ........................ (6,762) 33,400 (27,072) 11,200
-------- --------- --------- ---------
Net cash provided (used) ...................................... (60,596) 546 (156,779) (82,073)
-------- --------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....................... (1,003) (3,598) (9,777) (2,295)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 24,141 29,954 32,915 28,651
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 23,138 $ 26,356 $ 23,138 $ 26,356
======== ========= ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ....................... $ 37,278 $ 32,967 $ 92,706 $ 88,878
======== ========= ========= =========
Income taxes paid ............................................... $ 32,586 $ 23,299 $ 82,324 $ 60,059
======== ========= ========= =========
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
(ICC) 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 has announced the discontinuation of certain nonstrategic
businesses in support of its strategy of becoming a leading regional energy and
communications provider. In October of 1996, the Company entered into a letter
of intent with KCS Energy, Inc. to sell an oil and gas exploration and
development subsidiary. In the third quarter of 1996, the Company recorded an
anticipated after-tax loss of $6.6 million for the transaction. The Company has
also announced its plan to divest a subsidiary that developed and continues to
operate a computerized information system facilitating the real-time exchange of
power in the electric industry. The Company expects the disposition to occur
during the first half of 1997 and has recorded a $4.0 million estimated
after-tax loss on disposal in the third quarter of 1996 . 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
the construction subsidiaries have been sold but some remaining activity has
been recorded in the periods reported. In addition, in the third quarter of 1996
the Company received a final settlement from the sale of a coal mining
subsidiary which was reflected as a discontinued operation by a predecessor
company in 1982. The final settlement, which resulted in an after-tax loss of
$3.3 million, included the reacquisition of preferred equity by the buyer and
the settlement of reclamation reserves.
Proceeds expected to be received from the disposition of the oil and gas
subsidiary are $217 million. Proceeds received from the coal mining subsidiary
settlement and the disposition of the construction subsidiaries were, $15
million and $4 million, respectively. Net assets of the discontinued operations
are separately presented on the Consolidated Balance Sheets as Investment in
Discontinued Operations. Revenues from discontinued activities, as well as the
results of operations and the estimated loss on the disposal of discontinued
operations for the three, nine and twelve months ended September 30 are as
follows (in thousands):
Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
-------------------- -------------------- ---------------------
1996 1995 1996 1995 1996 1995
-------- -------- --------- ------- --------- --------
OPERATING REVENUES $ 58,605 $ 14,621 $ 164,322 $42,780 $ 195,845 $ 56,269
======== ======== ========= ======= ========= ========
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS
Income (Loss) before income taxes $ (6,932) $ 421 $ 2,976 $ 2,945 $ 4,738 $ 2,933
Income tax benefit (expense) 3,304 (99) (66) (1,000) (714) (1,041)
-------- -------- --------- ------- --------- --------
Income (Loss) from discontinued
operations $ (3,628) $ 322 $ 2,910 $ 1,945 $ 4,024 $ 1,892
======== ======== ========= ======= ========= ========
LOSS ON DISPOSAL
Income before income taxes $ 9,840 $ -- $ 9,840 $ -- $ 9,840 $ --
Income tax expense (24,204) -- (24,204) -- (24,204) --
-------- -------- --------- ------- --------- --------
Loss on disposal $(14,364) $ -- $ (14,364) $ -- $ (14,364) $ --
======== ======== ========= ======= ========= ========
-7-
D) Subsidiary Company Restructuring:
During the second quarter of 1996, the Company restructured one of its
nonregulated subsidiaries and changed the subsidiary's name to MidAmerican
Capital. Following the restructuring, InterCoast Energy Company (InterCoast), a
newly formed subsidiary of MidAmerican Capital, filed a registration statement
with the Securities and Exchange Commission for an initial public offering (IPO)
of common stock. The primary assets of InterCoast are oil and gas exploration
properties. On July 29, 1996, the Company canceled the IPO due to adverse market
conditions. In October of 1996, the Company entered into a letter of intent to
sell the majority of the assets of InterCoast. See Note C) for additional
information. MidAmerican Capital is retaining the rail service businesses, the
marketable securities and passive investment activities, and a nonregulated
retail natural gas subsidiary.
E) 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 ICC,
the Nuclear Regulatory Commission and the Federal Energy Regulatory Commission
have approved, or issued orders that will permit, the formation of MidAmerican
Energy Holdings Company as the holding company for the Company and its
subsidiaries. Each share of MidAmerican common stock will be exchanged on a
tax-free basis for one share of the holding company's common stock. It is
management's intent to complete the formation of the holding company and share
exchange on or about December 1, 1996. The holding company will initially have
three wholly owned subsidiaries consisting of MidAmerican, MidAmerican Capital
and Midwest Capital.
F) Proposed Merger:
On August 5, 1996, the Company announced that it had proposed to merge with
IES Industries Inc. (IES), a utility holding company headquartered in Cedar
Rapids, Iowa. The IES board of directors rejected the Company's proposal in
favor of a pending merger with WPL Holdings and Interstate Power Co. (the
Wisconsin Transaction). The Company solicited proxies against the Wisconsin
Transaction for use at the IES annual meeting of shareholders which was held on
September 5, 1996. At that meeting, a majority of the IES common shareholders
voted in favor of the Wisconsin Transaction and the Company has discontinued its
attempt to merge with IES. The Company incurred tax deductible costs of $8.6
million in the attempt which are included in Other, Net on the Consolidated
Statements of Income during the third quarter of 1996.
-8-
G) McLeod, Inc. Investment:
At September 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. The
Company's investment in McLeod is considered restricted stock and, as such, is
recorded at cost. At September 30, 1996, the carrying amount and fair value of
this investment were $36.3 million and $270.8 million, respectively.
H) Rate Matters:
On June 4, 1996, the Company filed a new electric pricing proposal in Iowa
and Illinois. The proposal would reduce electric revenues, on a graduated basis,
to the level of approximately $25 million annually within five years and
eliminate automatic fuel adjustment clauses. The price reductions, possible due
to merger and restructuring 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 proposals, if approved,
would provide the Company more flexibility to negotiate with customers who have
service options and to mitigate strandable costs.
On October 15, 1996, the ICC ordered the Company to reduce rates for its
Illinois customers by 10%, or $13.1 million annually, effective November 3,
1996, and commenced an investigation into the reasonableness of the Company's
rates. Hearings have not been scheduled. The Company is reviewing the effect
this order will have on its electric pricing proposal.
On August 1, 1996, the Iowa Office of Consumer Advocate (OCA) requested the
IUB to order the Company to reduce electric rates by 10.7%, or approximately
$101 million annually in Iowa electric revenues. On September 6, 1996, the IUB
docketed the OCA request and initiated an investigation into the Company's
rates. The IUB also consolidated the investigation with the Company's
alternative regulation and pricing proposal for purposes of the hearing which is
scheduled to begin in December 1996. The Company intends to reduce its electric
rates in Iowa to the levels proposed in its pricing proposal filed on June 4,
1996. The planned effective date for the initial reduction, which has been
approved by the IUB, is November 1, 1996. The Company has recorded a liability
for the portion of its Iowa electric revenues between August 1, 1996, and
September 30, 1996, that were in excess of those proposed in the pricing
proposal.
While the ultimate outcome can not be accurately predicted, based upon the
Company's analysis of the issues asserted in this filing , management believes
that the resolution of the OCA's filing will not differ materially from the
cumulative effect of the pricing plan proposed by MidAmerican.
I) 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 September 30, 1996, the Company had
approximately $385 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 the subsidiary's
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.
Three transactions are reflected as discontinued operations in the
Company's consolidated financial statements in this Form 10-Q. The transactions,
discussed below, are part of the Company's effort to redirect certain of its
nonregulated investments in order to support its strategy of becoming a leading
regional energy and communications provider.
In October 1996, the Company announced that it has entered into a letter of
intent with KCS Energy Inc.(KCS) of Edison, New Jersey, to sell a portion of the
Company's nonregulated operations for a total of $217 million. The sale includes
the oil and gas exploration and development operations of the Company. The
Company and KCS expect to complete the transaction by the end of 1996. In
September 1996, the Company recorded an anticipated after-tax loss of $6.6
million for the transaction.
Also in October, the Company received $15.3 million in cash as final
settlement for the sale of a former coal mining subsidiary which was reflected
as discontinued operations in 1982 by one of the Company's predecessors. The
final settlement included reacquisition by the buyer of preferred equity issued
to the Company and the settlement of reclamation reserves. The Company recorded
an after-tax loss on disposal of $3.3 million in September 1996.
-10-
In addition, the Company intends to divest a subsidiary that develops and
continues to operate a computerized information system facilitating real-time
exchange of power in the electric industry. The Company expects the disposition
to occur during the first half of 1997 and, accordingly, recorded a $4.0 million
anticipated after-tax loss on disposal of those operations in September 1996.
The related income (loss) from operations and the anticipated losses on
disposal are reflected as discontinued operations in each of the periods
presented in the Consolidated Statements of Income. Also included in
discontinued operations in the Consolidated Statements of Income are amounts
related to the discontinuance of the Company's construction subsidiaries in
1994. Net assets of the discontinued operations are separately presented in the
Consolidated Balance Sheets as Investment in Discontinued Operations.
During the third quarter, the Company made an investment in a company that
is a leading provider of digital wireless communications in the Midwest. The
investment expands the Company's presence in the communications industry. The
Company also has an investment in a growing telecommunications company that made
an initial public offering of its common stock in June 1996.
On April 24, 1996, the Company's common shareholders approved a proposal to
form a holding company, MidAmerican Energy Holdings Company. The holding company
would be an exempt holding company under the Public Utility Holding Company Act
of 1935 and would initially have three wholly owned subsidiaries consisting of
MidAmerican, 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. The
Company has received orders from the Federal Energy Regulatory Commission
(FERC), the Iowa Utilities Board (IUB), the Illinois Commerce Commission (ICC)
and the Nuclear Regulatory Commission (NRC) which permit the formation of a
holding company. It is management's intent to complete the formation of the
holding company and share exchange on or about December 1, 1996. Each share of
MidAmerican common stock will be exchanged on a tax free basis for one share of
the holding company's common stock.
On August 5, 1996, the Company announced that it had proposed to merge with
IES Industries Inc. (IES), a holding company headquartered in Cedar Rapids,
Iowa. The IES board of directors rejected the Company's proposal in favor of a
pending merger with WPL Holdings and Interstate Power Co. (the Wisconsin
Transaction). The Company solicited proxies against the Wisconsin Transaction
for use at the IES annual meeting of shareholders which was held on September 5,
1996. At that meeting, a majority of the IES common shareholders voted in favor
of the Wisconsin Transaction, and the Company has discontinued its attempt to
merge with IES. In the effort, the Company incurred tax deductible costs of $8.6
million which are included in Other, Net for each 1996 period presented in the
Consolidated Statements of Income.
-11-
FORWARD-LOOKING STATEMENTS
From time to time, the Company or one of its subsidiaries individually may
make forward-looking statements within the meaning of the federal securities
laws that involve judgments, assumptions and other uncertainties beyond the
control of the Company or any of its subsidiaries individually. These forward-
looking statements may include, among others, statements concerning revenue and
cost trends, cost recovery, cost reduction strategies and anticipated outcomes,
pricing strategies, changes in the utility industry, planned capital
expenditures, financing needs and availability, statements of the Company's
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar comments concerning matters that are not historical facts. Investors
and other users of the forward-looking statements are cautioned that such
statements are not a guarantee of future performance of the Company and that
such forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in, or
implied by, such statements. Some, but not all, of the risks and uncertainties
include weather effects on sales and revenues, competitive factors, general
economic conditions in the Company's service territory and federal and state
regulatory actions.
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 September 30
Three Months Nine Months Twelve Months
1996 1995 1996 1995 1996 1995
-------- -------- --------- -------- --------- ---------
Earnings (in millions)
Electric utility $ 48.4 $ 54.7 $ 95.9 $ 96.2 $ 111.5 $ 104.5
Gas utility (6.8) (10.3) 15.4 2.1 26.0 10.9
-------- -------- --------- -------- --------- ---------
Utility operations 41.6 44.4 111.3 98.3 137.5 115.4
Nonregulated operations (1.0) (8.9) 2.8 (4.2) 2.2 (2.1)
Income (loss) from
discontinued operations (18.0) 0.3 (11.5) 1.9 (10.3) 1.9
-------- -------- --------- -------- --------- ---------
Consolidated earnings $ 22.6 $ 35.8 $ 102.6 $ 96.0 $ 129.4 $ 115.2
======== ======== ========= ======== ========= =========
Earnings Per Common Share
Electric utility $ 0.48 $ 0.54 $ 0.95 $ 0.96 $ 1.10 $ 1.04
Gas utility (0.07) (0.10) 0.15 0.02 0.26 0.11
--------- --------- ---------- --------- ---------- ----------
Utility operations 0.41 0.44 1.10 0.98 1.36 1.15
Nonregulated operations (0.01) (0.09) 0.03 (0.04) 0.02 (0.02)
Income (loss) from
discontinued operations (0.18) 0.01 (0.11) 0.02 (0.10) 0.02
--------- --------- ---------- --------- ---------- ----------
Consolidated earnings $ 0.22 $ 0.36 $ 1.02 $ 0.96 $ 1.28 $ 1.15
========= ========= ========== ========= ========== ==========
Discontinued operations, as discussed in Corporate Overview, reduced
earnings for each of the 1996 periods.
Earnings per share for the third quarter of 1996 decreased 14 cents
compared to the third quarter of 1995. Gross margin for utility electric
operations reduced earnings per share by 14 cents. Approximately 12 cents per
share was due to cooler than normal weather during the 1996 third quarter. Gross
margin is the amount of electric or gas revenues remaining after deducting
electric fuel costs or the cost of gas sold, as appropriate. In addition, costs
related to the merger proposal to IES reduced earnings per share by 5 cents in
the 1996 third quarter. Realization of cost savings resulting from the Company's
merger and the absence of 1995 merger-
-12-
related costs had a favorable effect on 1996 utility earnings compared to the
third quarter of 1995. Nonregulated continuing operations reported less of a
loss in the third quarter of 1996 than in the 1995 quarter because the third
quarter of 1995 included an 8 cents per share charge for write-downs of certain
assets of nonregulated subsidiaries.
Earnings per share for the nine months ended September 30, 1996, increased
6 cents compared to the nine months ended September 30, 1995. Realization of
cost savings resulting from the merger and the absence of 1995 merger-related
costs had a favorable effect on the comparison of 1996 and 1995 earnings. The
cost of the IES merger proposal partially offset the improvement in utility
earnings. Earnings of nonregulated continuing operations improved 7 cents per
share in the 1996 nine-month period compared to the 1995 period due primarily to
the impact of the write-downs mentioned above.
For the twelve months ended September 30, 1996, earnings per share were 13
cents greater than the comparable 1995 period. An increase in gross margin for
utility gas operations contributed to improved utility earnings. The improvement
was due primarily to an increase in gas retail sales volumes resulting from cold
weather in the first quarter of 1996. Electric and gas service rate increases
effective in August 1995 also contributed to 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 maintenance expenses
and property and other taxes also favorably affected earnings.
During 1995, the Company's earnings were reduced by merger-related costs.
As part of the process of combining 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 reflected in Other
Operating Expenses in the Consolidated Statements of Income.
In addition, the Company incurred transaction costs to complete the merger.
In the fourth quarter of 1994, the Company expensed $2.1 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 nine-month periods by 18 cents per share and 22 cents per share,
respectively. Earnings were reduced by 2 cents per share and 24 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 each of the twelve-month periods. For the twelve
months ended September 30, 1996, earnings from continuing operations of
nonregulated subsidiaries were reduced by $1.8 million as a result of such
write-downs. For the 1995 twelve-month period, earnings from continuing
operations on nonregulated subsidiaries were reduced by $8.4 million due to such
write- downs. 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 in the value of those nonregulated investments of
$3.0 million and $15.0 million for the 1996 and 1995 periods, respectively. The
investments are primarily alternative energy projects. The 1995 nine-month and
twelve-month periods also reflect $5.0 million in after-tax gains on the sales
of a partnership interest in a gas marketing organization and a
telecommunications subsidiary.
-13-
UTILITY GROSS MARGIN
Electric Gross Margin:
Periods Ended September 30
--------------------------
Three Months Nine Months Twelve Months
------------ ----------- -------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ------ ------
(In millions)
Operating revenues $311 $339 $840 $848 $1,087 $1,084
Cost of fuel, energy and capacity 61 66 178 178 230 229
---- ---- ---- ---- ------ ------
Electric gross margin $250 $273 $662 $670 $ 857 $ 855
==== ==== ==== ==== ====== ======
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 decreased for the 1996 three-month and nine-month
periods compared to the comparable 1995 periods. The decreases were due
primarily to cooler than normal weather conditions in the third quarter of 1996
and hotter than normal weather in the third quarter of 1995. Cooling degree days
were 22 percent less than normal in the third quarter of 1996 compared to being
28 percent greater than normal in the third quarter of 1995 Decreases in retail
sales due to cooler weather were partially offset by increases from customer
growth and improved sales to large general service customers. For the
twelve-months-ended comparison, retail sales were relatively unchanged. Colder
weather during the 1995-1996 heating season than in the 1994-1995 season helped
to offset the impact of the mild cooling season in 1996. Customer growth,
increased sales to large general service customers and rate increases, discussed
below, contributed to the slight increase in electric margin for the 1996
twelve-months-ended period compared to the 1995 period.
An increase in electric retail rates also contributed to 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 1996 periods 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 increased for each of the 1996 periods
compared to the 1995 periods. Variations in the amount of available generation
was the primary cause 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 energy sales for resale is flowed
through to retail customers and has a minimal effect on gross margin.
-14-
Gas Gross Margin:
Periods Ended September 30,
Three Months Nine Months Twelve Months
------------ ----------- -------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
Operating revenues $ 73 $ 65 $355 $312 $502 $445
Cost of gas sold 48 38 220 189 310 274
---- ---- ---- ---- ---- ----
Gas gross margin $ 25 $ 27 $135 $123 $192 $171
==== ==== ==== ==== ==== ====
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 the nine-month and twelve-month periods in
1996 compared to the 1995 periods. The increases were due both to price and
sales increases. Retail sales increased 7.1% and 10.5% for nine and twelve
months ended September 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 colder weather conditions in the 1995-1996 heating
season than during the 1994-1995 heating season. The nine months ended September
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 September 30, 1996. The Company has 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 1995 quarters 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 1996 quarters 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.
UTILITY OPERATING EXPENSES
Other operating expenses for the quarter ended September 30, 1996,
decreased $28.0 million compared to the third quarter of 1995 due primarily to
the restructuring costs included in the 1995 quarter as discussed in the
Earnings section of Results of Operations. In addition, savings from work force
reductions and other efficiencies 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 nine months ended September 30, 1996,
decreased $35.0 million compared to the comparable period in 1995. In addition
to the items affecting the quarter comparison, the nine months ended September
30,1996, reflects decreases in manufactured gas plant clean-up costs due
primarily to timing.
For the twelve months ended September 30, 1996, other operating expenses
decreased $24.7 million compared to the 1995 period due primarily to costs
related to the restructuring plan discussed in the Earnings
-15-
section of Results of Operations. Restructuring costs resulted in a $26.2
million decrease in utility other operating expenses between the periods. In
addition, the 1996 period reflects merger savings and a $4.6 million reduction
in nuclear operations costs. The 1996 twelve-month period reflects a $5.0
million increase from the amortization of deferred energy efficiency and OPEB
costs. Increases in consulting services expenses and some general administrative
costs also increased other operating expenses.
Maintenance expenses increased for the three months and nine months ended
September 30, 1996, compared to the 1995 periods. The timing of power plant
maintenance and an increase in general plant maintenance accounted for much of
the variation between the periods. For the comparable twelve-months- ended
periods, maintenance expenses decreased $1.6 million due primarily to the timing
of power plant maintenance.
Depreciation expense increased compared to each prior period due primarily
to additions to utility plant in service.
Property and other taxes decreased due to a reduction in property and
payroll taxes. Lower than expected assessed property values and tax rates
reduced property tax expense for the 1996 periods compared to the 1995 periods.
A decrease in the number of employees as a result of the merger caused the
reduction in payroll tax expense.
NONREGULATED OPERATING REVENUES
Revenues for the Company's nonregulated subsidiaries increased
significantly for each 1996 period compared to the comparable 1995 period. The
increase is due primarily to revenues from natural gas marketing subsidiaries,
some of which did not exist in the 1995 periods.
NONREGULATED OPERATING EXPENSES
Cost of sales includes expenses directly related to sales of natural gas.
The increase in cost of sales is due to the newly established natural gas
subsidiaries which did not exist in 1995.
REALIZED GAINS AND LOSSES ON SECURITIES, NET
Realized gains and losses on securities increased for the nine months ended
September 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
During the 1996 third quarter, the Company sold the Hub Tower, a Des Moines
office building, and recorded a $1.8 million pre-tax gain on the sale. The
Company had written the property down to anticipated market values in 1992 and
in December 1995. The nine months ended September 30, 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 each of the 1995 periods presented. Of the
total adjustments to these investments, $14.4 million is reflected in the third
quarter of 1995. Merger transaction costs also reduced Other, Net in the 1995
periods. The 1996 periods include $8.6 million of costs associated with the
merger proposal to IES Industries Inc.
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.
-16-
PREFERRED DIVIDENDS
Preferred dividends for the 1996 periods include losses on the redemption
of shares of the $1.7375 Series of preferred shares. During 1996, the Company
has redeemed 512,000 shares of the $1.7375 series. A change in the dividend
payment date compared to that of a predecessor company resulted in lower
preferred dividends in the 1995 third quarter. Preferred dividends for the
twelve months ended September 30, 1996, compared to the 1995 period were 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 nine months of 1996, the Company had net cash provided from
operating activities of $284 million and net cash used of $137 million and $157
million for investing and financing activities, respectively.
INVESTING ACTIVITIES AND PLANS
Utility Capital Expenditures:
- -----------------------------
Utility construction expenditures, including allowance for funds used
during construction (AFUDC), Quad Cities Station nuclear fuel purchases and
Cooper capital improvements, were $101 million for the first nine 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 approximately $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.
Nonregulated Capital Expenditures:
- ----------------------------------
Capital expenditures of nonregulated subsidiaries were $37 million for the
first nine months of 1996. Capital expenditures of nonregulated subsidiaries
depend primarily upon the availability of suitable investment opportunities
which meet the Company's objectives.
-17-
During the third quarter, a nonregulated subsidiary of the Company made a
$10 million investment in convertible preferred stock of a leading provider of
digital wireless communications in the Midwest.
MidAmerican Capital invests in a variety of marketable securities which it
holds for indefinite periods of time. For the first nine 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. At September 30, 1996, the carrying amount and fair value
of the Company's investment were $36.3 million and $270.8 million, respectively.
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, and accordingly, no market value adjustments
have been reflected in the Company's financial statements. The Company has
agreed to make an additional equity investment in McLeod of $10 million in
connection with a planned public offering of McLeod's common stock.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
Corporate:
- ----------
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. In August 1996, Midwest Capital extended the
maturity date of approximately $25 million of long-term debt which was supported
by a guarantee from the Utility. During the third quarter of 1996, Midwest
Capital sold the Hub Tower, a Des Moines office building and retired the $25
million debt. Proceeds from the sale provided most of the funds necessary to
retire the debt. The deficiency was funded by a $4.5 million capital
contribution in extinguishment of the guarantee. In addition, Midwest Capital
has a $25 million line of credit with the Utility.
On October 30, 1996, the Company's Board of Directors declared a quarterly
dividend on common shares of $0.30 per share payable December 1, 1996. The
dividend represents an annual rate of $1.20 per share.
Utility:
- --------
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
September 30, 1996, the Utility had a $250 million revolving credit facility
agreement and a $10 million line of credit to provide short-term financing for
utility operations. The Utility's commercial paper borrowings, which totalled
$157 million at September 30, 1996, are supported by the revolving credit
facility and the line of credit. 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.
-18-
The Utility has $346 million of long-term debt maturities and sinking fund
requirements for 1997 through 2000, of which $50 million matures in 1997.
Management is considering several long-term financing options, including
unsecured debt and preferred securities, for the remainder of 1996 and early
1997. Proceeds from those financings would be used to reduce commercial paper
outstanding and to refinance existing securities. The Company currently has
authority from the FERC for $500 million of long-term debt in the form of
secured first mortgage bonds and unsecured debentures. Similar authority has
been requested from the ICC, and the Company expects to file a registration
statement with the Securities and Exchange Commission in the fourth quarter.
Nonregulated:
- -------------
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 September 30, 1996, are $294
million for the years 1997 through 2000, of which $30 million is in 1997.
OPERATING ACTIVITIES AND OTHER MATTERS
Utility Operations and Competition:
- -----------------------------------
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 electric utility industry that will create a
more competitive environment for the entire electric industry as long as
appropriate transitional steps are in place to accomodate moving from a
regulated cost-of-service industry to a competitive industry. 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.
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 September 30, 1996, the Company had
approximately $385 million of regulatory assets in its Consolidated Balance
Sheet.
Energy Efficiency:
- ------------------
In May 1996, the Iowa legislature approved a bill enhancing energy
efficiency program flexibility, 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
previously deferred energy efficiency costs for which the Company has received
approval to collect. The Consolidated Balance Sheet as of September 30, 1996,
included approximately $26 million of such approved costs yet to be collected
from customers. In addition, the Company had
-19-
approximately $81 million of energy efficiency costs deferred and included as
regulatory assets in its September 30, 1996, Consolidated Balance Sheet for
which recovery will be sought in future energy efficiency filings. The Company
expects final rules on the implementation of the new legislation in the first
quarter of 1997, at which time the Company will seek approval to accelerate
recovery of deferred and current energy efficiency costs.
Rate Matters:
- -------------
On June 4, 1996, the Company filed a new electric pricing proposal in Iowa
and Illinois. The proposal would reduce electric revenues, on a graduated basis,
to the level of approximately $25 million annually within five years and
eliminate automatic fuel adjustment clauses. The price reductions, possible due
to merger and restructuring 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 proposals, if approved,
would provide the Company more flexibility to negotiate with customers who have
service options and to mitigate strandable costs.
On October 15, 1996, the ICC ordered the Company to reduce rates for its
Illinois customers by 10%, or $13.1 million annually, effective November 3,
1996, and commenced an investigation into the reasonableness of the Company's
rates. Hearings have not been scheduled. The Company is reviewing the effect
this order will have on its electric pricing proposal.
On August 1, 1996, the Iowa Office of Consumer Advocate (OCA) requested the
IUB to order the Company to reduce electric rates by 10.7%, or approximately
$101 million annually in Iowa electric revenues. On September 6, 1996, the IUB
docketed the OCA request and initiated an investigation into the Company's
rates. The IUB also consolidated the investigation with the Company's
alternative regulation and pricing proposal for purposes of the hearing which is
scheduled to begin in December 1996. The Company intends to reduce its electric
rates in Iowa to the levels proposed in its pricing proposal filed on June 4,
1996. The planned effective date for the initial reduction, which has been
approved by the IUB, is November 1, 1996. The Company has recorded a liability
for the portion of its Iowa electric revenues between August 1, 1996, and
September 30, 1996, that were in excess of those proposed in the pricing
proposal.
While the ultimate outcome cannot be accurately predicted, based upon the
Company's analysis of the issues asserted in this filing, management believes
that the resolution of the OCA's filing will not differ materially from the
cumulative effect of the pricing plan proposed by the Company.
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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 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.
Rate Matters
- ------------
For information relating to the Company's Rate Matters, reference is made
to Part I. Note (H) 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. The Company's
position is that 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 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits
Exhibits Filed Herewith
- -----------------------
Exhibit 12.1 - Computation of ratios of earnings to fixed charges and
computation of ratios of earnings to fixed charges plus preferred dividend
requirements - (Consolidated).
Exhibit 12.2 - Computation of ratios of earnings to fixed charges and
computation of ratios of earnings to fixed charges plus preferred dividend
requirements - (Utility Only).
Exhibit 27 - Financial Data Schedules (for electronic filing only).
Exhibit 99.1 - Unaudited Proforma Statements of Income for the nine
months and twelve months ended September 31, 1996, and for the twelve months
ended December 31, 1995, and Balance Sheet as of September 30, 1996, reflecting
the distribution of the capital stock of MidAmerican Capital Company and Midwest
Capital Group to MidAmerican Energy Holdings Company, scheduled for December 1,
1996.
Exhibit 99.2 - Selected Consolidated Financial Data of MidAmerican
Energy Company for the twelve months ended and as of December 31, 1991, 1992,
1993, 1994 and 1995 and September 30, 1996 and for the nine months ended
September 30, 1995 and 1996 and as of September 30, 1995.
Exhibit 99.3 - Selected Proforma Utility Only Financial Data of
MidAmerican Energy Company for the twelve months ended and as of December 31,
1991, 1992, 1993, 1994 and 1995 and September 30, 1996 and for the nine months
ended September 30, 1995 and 1996 and as of September 30, 1995.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MidAmerican Energy Company
--------------------------
(Registrant)
Date November 1, 1996 P. G. Lindner
---------------------- ---------------------------
P. G. Lindner
Group Vice President and
Chief Financial Officer
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