Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 9, 1998
CALENERGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-9874 94-2213782
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
302 South 36th Street, Suite 400, Omaha, Nebraska 68131
- -----------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, including area code: (402) 341-4500
N/A
- -----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
This report is filed for the purpose of incorporation by reference into the
registrant's registration statements file nos. 333-32821 and 333-62697.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
This report contains the following historical financial statements of
MidAmerican Energy Holdings Company:
Consolidated Financial Statements:
Report of Independent Accountants
Consolidated Statements of Income for the Three Years Ended December 31,
1997
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1997
Consolidated Statements of Capitalization as of December 31, 1997 and 1996
Consolidated Statements of Retained Earnings for the Three Years Ended
December 31, 1997
Notes to Consolidated Financial Statements
Interim Consolidated Financials Statements:
Consolidated Statements of Income for the Three, Six and Twelve Months
Ended June 30, 1998 and 1997
Consolidated Statements of Comprehensive Income for the Three, Six and
Twelve Months Ended June 30, 1998 and 1997
Consolidated Balance Sheets as of June 30, 1998 and 1997 and December 31,
1997
Consolidated Statements of Cash Flows for the Three and Six Months Ended
June 30, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
This report contains the following pro forma financial information of the
registrant and MidAmerican Energy Holdings Company:
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30, 1998
Unaudited Pro Forma Combined Condensed Statement of Operations for the Six
Months Ended June 30, 1998
Unaudited Pro Forma Combined Condensed Statement of Operations for the
Year Ended December 31, 1997
Notes to Unaudited Pro Forma Combined Condensed Financial Data
(c) Exhibits:
This report contains the following exhibits:
5.1 Opinion of Willkie Farr & Gallagher
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of IBJ Schroder Bank & Trust Company, as
Trustee under the Senior Debt Securities Indenture
99.1 Consent of PricewaterhouseCoopers LLP
MIDAMERICAN ENERGY HOLDINGS COMPANY
Consolidated Financial Statements:
Report of Independent Accountants ................................................... F-2
Consolidated Statements of Income for the Three Years Ended December 31, 1997 ...... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 ........................ F-4
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997 .. F-5
Consolidated Statements of Capitalization as of December 31, 1997 and 1996 ......... F-6
Consolidated Statements of Retained Earnings for the Three Years Ended
December 31, 1997 .................................................................. F-8
Notes to Consolidated Financial Statements .......................................... F-9
Interim Consolidated Financial Statements:
Consolidated Statements of Income for the Three, Six and Twelve Months Ended June
30, 1998 and 1997 .................................................................. F-34
Consolidated Statements of Comprehensive Income for the Three, Six and Twelve Months
Ended June 30, 1998 and 1997 ....................................................... F-35
Consolidated Balance Sheets as of June 30, 1998 and 1997 and December 31, 1997 ..... F-36
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30,
1998 and 1997 ...................................................................... F-37
Notes to Consolidated Financial Statements .......................................... F-38
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of MidAmerican Energy Holdings
Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of MidAmerican Energy Holdings Company and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MidAmerican
Energy Holdings Company and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
COOPERS & LYBRAND L.L.P.
Kansas City, Missouri
January 23, 1998
F-2
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
OPERATING REVENUES
Electric utility .............................................. $1,126,300 $1,099,008 $1,094,647
Gas utility ................................................... 536,306 536,753 459,588
Nonregulated .................................................. 259,675 236,851 95,106
---------- ---------- ----------
1,922,281 1,872,612 1,649,341
---------- ---------- ----------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity ............................ 235,760 234,317 230,261
Cost of gas sold ............................................. 346,016 345,014 279,025
Other operating expenses ..................................... 429,794 350,174 399,648
Maintenance .................................................. 98,090 88,621 85,363
Depreciation and amortization ................................ 170,540 164,592 158,950
Property and other taxes ..................................... 101,317 92,630 96,350
---------- ---------- ----------
1,381,517 1,275,348 1,249,597
---------- ---------- ----------
Nonregulated:
Cost of sales ................................................ 240,182 218,256 70,209
Other ........................................................ 30,076 35,370 37,181
---------- ---------- ----------
270,258 253,626 107,390
---------- ---------- ----------
Total operating expenses ..................................... 1,651,775 1,528,974 1,356,987
---------- ---------- ----------
OPERATING INCOME .............................................. 270,506 343,638 292,354
---------- ---------- ----------
NON-OPERATING INCOME
Interest income ............................................... 5,318 4,012 4,485
Dividend income ............................................... 13,792 16,985 16,954
Realized gains and losses on securities, net .................. 7,798 1,895 688
Other, net .................................................... 22,111 (4,020) (10,467)
---------- ---------- ----------
49,019 18,872 11,660
---------- ---------- ----------
FIXED CHARGES
Interest on long-term debt .................................... 89,898 102,909 105,550
Other interest expense ........................................ 10,034 10,941 9,449
Preferred dividends of subsidiaries ........................... 14,468 10,689 8,059
Allowance for borrowed funds .................................. (2,597) (4,212) (5,552)
---------- ---------- ----------
111,803 120,327 117,506
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ......... 207,722 242,183 186,508
INCOME TAXES .................................................. 68,390 98,422 66,803
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ............................. 139,332 143,761 119,705
---------- ---------- ----------
DISCONTINUED OPERATIONS
Income (Loss) from operations (net of income taxes) ........... (118) 2,117 3,059
Loss on disposal (net of income taxes) ........................ (4,110) (14,832) --
---------- ---------- ----------
(4,228) (12,715) 3,059
---------- ---------- ----------
NET INCOME .................................................... $ 135,104 $ 131,046 $ 122,764
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING ............................. 98,058 100,752 100,401
EARNINGS PER COMMON SHARE
Continuing operations ......................................... $ 1.42 $ 1.43 $ 1.19
Discontinued operations ....................................... ( 0.04) ( 0.13) 0.03
---------- ---------- ----------
Earnings per average common share ............................. $ 1.38 $ 1.30 $ 1.22
========== ========== ==========
DIVIDENDS DECLARED PER SHARE .................................. $ 1.20 $ 1.20 $ 1.18
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-3
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31
-----------------------------
1997 1996
------------- -------------
ASSETS
UTILITY PLANT
Electric ............................................................. $4,084,920 $ 4,010,847
Gas .................................................................. 756,874 723,491
---------- -----------
4,841,794 4,734,338
Less accumulated depreciation and amortization ....................... 2,275,099 2,153,058
---------- -----------
2,566,695 2,581,280
Construction work in progress ........................................ 55,418 49,305
---------- -----------
2,622,113 2,630,585
---------- -----------
POWER PURCHASE CONTRACT .............................................. 173,107 190,897
---------- -----------
INVESTMENT IN DISCONTINUED OPERATIONS ................................ -- 166,320
---------- -----------
CURRENT ASSETS
Cash and cash equivalents ............................................ 10,468 97,749
Receivables, less reserves of $347 and $2,093, respectively........... 207,471 312,015
Inventories .......................................................... 86,091 90,864
Other ................................................................ 18,452 11,031
---------- -----------
322,482 511,659
---------- -----------
INVESTMENTS .......................................................... 799,524 622,972
---------- -----------
OTHER ASSETS ......................................................... 360,865 399,415
---------- -----------
TOTAL ASSETS ......................................................... $4,278,091 $ 4,521,848
========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity .......................................... $1,301,286 $ 1,239,946
MidAmerican preferred securities, not subject to
mandatory redemption ................................................ 31,763 31,769
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities .................................... 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary trust
holding solely MidAmerican junior subordinated debentures ......... 100,000 100,000
Long-term debt (excluding current portion) ........................... 1,034,211 1,395,103
---------- -----------
2,517,260 2,816,818
---------- -----------
CURRENT LIABILITIES
Notes payable ........................................................ 138,054 161,990
Current portion of long-term debt .................................... 144,558 79,598
Current portion of power purchase contract ........................... 14,361 13,718
Accounts payable ..................................................... 145,855 169,806
Taxes accrued ........................................................ 92,629 82,254
Interest accrued ..................................................... 22,355 28,513
Other ................................................................ 38,766 22,830
---------- -----------
596,578 558,709
---------- -----------
OTHER LIABILITIES
Power purchase contract .............................................. 83,143 97,504
Deferred income taxes ................................................ 761,795 722,300
Investment tax credit ................................................ 83,127 88,842
Other ................................................................ 236,188 237,675
---------- -----------
1,164,253 1,146,321
---------- -----------
TOTAL CAPITALIZATION AND LIABILITIES ................................. $4,278,091 $ 4,521,848
========== ===========
The accompanying notes are an integral part of these statements.
F-4
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
-----------------------------------------------
1997 1996 1995
--------------- ------------- -------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 135,104 $ 131,046 $ 122,764
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .................................. 197,454 190,511 181,636
Net decrease in deferred income taxes and
investment tax credit, net ................................... (71,191) (7,894) (961)
Amortization of other assets ................................... 33,761 20,541 19,630
Cash proceeds from accounts receivable sale .................... 70,000 -- --
Capitalized cost of real estate sold ........................... 1,859 3,568 1,744
Loss (income) from discontinued operations ..................... 4,228 12,715 (3,059)
Gain on sale of securities, assets and other investments ....... (9,996) (10,132) (1,050)
Other-than-temporary decline in value of investments ........... 3,795 15,566 17,971
Impact of changes in working capital, net of effects
from discontinued operations ................................. 28,098 (53,752) (21,024)
Other .......................................................... (867) 19,218 19,369
--------- ---------- ----------
Net cash provided ............................................ 392,245 321,387 337,020
--------- ---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................... (166,932) (154,198) (190,771)
Quad Cities Nuclear Power Station decommissioning trust fund..... (9,819) (8,607) (8,636)
Deferred energy efficiency expenditures ......................... (12,258) (20,390) (35,841)
Nonregulated capital expenditures ............................... (14,066) (55,788) (12,881)
Purchase of securities .......................................... (159,770) (198,947) (164,521)
Proceeds from sale of securities ................................ 180,890 243,290 94,493
Proceeds from sale of assets and other investments .............. 57,433 33,285 34,263
Investment in discontinued operations ........................... 181,321 (5,984) (9,752)
Other investing activities, net ................................. (1,360) 8,308 6,946
--------- ---------- ----------
Net cash provided (used) ....................................... 55,439 (159,031) (286,700)
--------- ---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ........................................... (117,605) (120,770) (118,828)
Issuance of long-term debt, net of issuance cost ................ -- 99,500 12,750
Retirement of long-term debt, including reacquisition cost ...... (122,300) (136,616) (110,351)
Reacquisition of preferred shares ............................... (6) (58,176) (10)
Reacquisition of common shares .................................. (96,618) -- --
Issuance of preferred shares, net of issuance cost .............. -- 96,850 --
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility ............................ (174,500) 44,500 95,000
Issuance of common shares ....................................... -- -- 15,083
Net increase (decrease) in notes payable ........................ (23,936) (22,810) 60,300
--------- ---------- ----------
Net cash used .................................................. (534,965) (97,522) (46,056)
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ (87,281) 64,834 4,264
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 97,749 32,915 28,651
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 10,468 $ 97,749 $ 32,915
========= ========== ==========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ....................... $ 96,805 $ 107,179 $ 116,843
========= ========== ==========
Income taxes paid ............................................... $ 130,521 $ 85,894 $ 69,319
========= ========== ==========
The accompanying notes are an integral part of these statements.
F-5
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31
------------------------------------------------
1997 1996
----------------------- ------------------------
COMMON SHAREHOLDERS' EQUITY
Common shares, no par; 350,000,000 shares authorized;
95,300,882 and 100,751,713 shares outstanding, respectively ......... $ 753,873 $ 801,431
Retained earnings .................................................... 409,296 440,971
Valuation allowance, net of income taxes ............................. 138,117 (2,456)
---------- ----------
1,301,286 51.7% 1,239,946 44.0%
---------- ---- ---------- ----
MIDAMERICAN PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding not subject to mandatory redemption:
$3.30 Series, 49,481 and 49,523 shares, respectively ................ 4,948 4,952
$3.75 Series, 38,310 and 38,320 shares, respectively ................ 3,831 3,832
$3.90 Series, 32,630 shares ......................................... 3,263 3,263
$4.20 Series, 47,369 shares ......................................... 4,737 4,737
$4.35 Series, 49,945 and 49,950 shares, respectively ................ 4,994 4,995
$4.40 Series, 50,000 shares ......................................... 5,000 5,000
$4.80 Series, 49,898 shares ......................................... 4,990 4,990
---------- ----------
31,763 1.2% 31,769 1.1%
---------- ---- ---------- ----
Cumulative shares outstanding; subject to mandatory redemption:
$5.25 Series, 100,000 shares ........................................ 10,000 10,000
$7.80 Series, 400,000 shares ........................................ 40,000 40,000
---------- ----------
50,000 2.0% 50,000 1.8%
---------- ---- ---------- ----
MIDAMERICAN-OBLIGATED PREFERRED SECURITIES
MidAmerican-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely
MidAmerican junior subordinated debentures:
7.98% Series, 4,000,000 shares ...................................... 100,000 4.0% 100,000 3.6%
---------- ---- ---------- ----
LONG-TERM DEBT
MidAmerican mortgage bonds:
5.05% Series, due 1998 .............................................. -- 49,100
6.25% Series, due 1998 .............................................. -- 75,000
7.875% Series, due 1999 ............................................. 60,000 60,000
6% Series, due 2000 ................................................. 35,000 35,000
6.75% Series, due 2000 .............................................. 75,000 75,000
7.125% Series, due 2003 ............................................. 100,000 100,000
7.70% Series, due 2004 .............................................. 55,630 60,000
7% Series, due 2005 ................................................. 90,500 100,000
7.375% Series, due 2008 ............................................. 75,000 75,000
8% Series, due 2022 ................................................. 50,000 50,000
7.45% Series, due 2023 .............................................. 6,940 26,500
8.125% Series, due 2023 ............................................. 100,000 100,000
6.95% Series, due 2025 .............................................. 12,500 21,500
MidAmerican pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003 ................ 8,064 8,424
5.95% Series, due 2023 (secured by general mortgage bonds) .......... 29,030 29,030
The accompanying notes are an integral part of these statements.
F-6
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31
---------------------------------------------------
1997 1996
-------------------------- ------------------------
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017 (3.7% and 3.5%, respectively) ................... $ 37,600 $ 37,600
Due 2023 (secured by general mortgage
bonds, 3.7% and 3.5%, respectively) .............................. 28,295 28,295
Due 2023 (3.7% and 3.5%, respectively) ............................ 6,850 6,850
Due 2024 (3.7% and 3.6%, respectively) ............................ 34,900 34,900
Due 2025 (3.7% and 3.5%, respectively) ............................ 12,750 12,750
MidAmerican notes:
8.75% Series, due 2002 .............................................. 240 240
6.5% Series, due 2001 ............................................... 100,000 100,000
6.4% Series, due 2003 through 2007 .................................. 2,000 2,000
Obligation under capital lease ...................................... 2,104 2,218
Unamortized debt premium and discount, net .......................... (3,192) (4,009)
----------- ----------
Total utility ..................................................... 919,211 1,085,398
----------- ----------
Nonregulated subsidiaries notes:
7.34% Series, due 1998 .............................................. -- 20,000
7.76% Series, due 1999 .............................................. 45,000 45,000
8.52% Series, due 2000 through 2002 ................................. 70,000 70,000
8% Series, due annually through 2004 ................................ -- 205
Borrowings under unsecured revolving credit facility (6.2%) ......... -- 64,000
Borrowings under unsecured revolving credit facility (6.1%) ......... -- 26,000
Borrowings under unsecured revolving credit facility (6.1%) ......... -- 84,500
----------- ----------
Total nonregulated subsidiaries ................................... 115,000 309,705
----------- ----------
1,034,211 41.1% 1,395,103 49.5%
----------- ----- ---------- -----
TOTAL CAPITALIZATION ................................................. $ 2,517,260 100.0% $2,816,818 100.0%
=========== ===== ========== =====
The accompanying notes are an integral part of these statements.
F-7
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
------------ ------------ ------------
BEGINNING OF YEAR ..................................... $ 440,971 $ 430,589 $ 426,683
--------- --------- ---------
NET INCOME ............................................ 135,104 131,046 122,764
--------- --------- ---------
DEDUCT (ADD):
Loss on repurchase of common shares ................... 49,174 -- --
Dividends declared on common shares of $1.20, $1.20 and
$1.18 per share, respectively......................... 117,605 120,770 118,828
Other ................................................. -- (106) 30
--------- --------- ---------
166,779 120,664 118,858
--------- --------- ---------
END OF YEAR ........................................... $ 409,296 $ 440,971 $ 430,589
========= ========= =========
The accompanying notes are an integral part of these statements.
F-8
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) MERGER AND FORMATION OF THE COMPANY:
MidAmerican Energy Holdings Company (Company or Holdings) is a holding
company for MidAmerican Energy Company (MidAmerican), MidAmerican Capital
Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest
Capital). Prior to December 1, 1996, MidAmerican held the capital stock of
MidAmerican Capital and Midwest Capital. Effective December 1, 1996, each share
of MidAmerican common stock was exchanged for one share of Holdings common
stock. As part of the transaction, MidAmerican distributed the capital stock of
MidAmerican Capital and Midwest Capital to Holdings.
MidAmerican was formed on July 1, 1995, as a result of the merger of
Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources Inc.
(Midwest Resources) and its utility subsidiary, Midwest Power Systems Inc.
(Midwest Power). Each outstanding share of preferred and preference stock of
the predecessor companies was converted into one share of a similarly
designated series of MidAmerican preferred stock, no par value. Each
outstanding share of common stock of Midwest Resources and Iowa-Illinois was
converted into one share and 1.47 shares, respectively, of MidAmerican common
stock, no par value. The merger was accounted for as a pooling-of-interest and
the financial statements included herein are presented as if the merger and the
formation of the holding company had occurred as of the earliest period shown.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include the Company and
its wholly owned subsidiaries, MidAmerican, MidAmerican Capital and Midwest
Capital. All significant intercompany transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
(C) REGULATION:
MidAmerican's utility operations are subject to the regulation of the Iowa
Utilities Board (IUB), the Illinois Commerce Commission (ICC), the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission
(FERC). MidAmerican's accounting policies and the accompanying Consolidated
Financial Statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
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 majority of MidAmerican's electric and gas
utility operations currently meet the criteria of SFAS 71, but its
applicability is periodically reexamined. On December 16, 1997, MidAmerican's
generation operations serving Illinois were no longer subject to the provisions
of SFAS 71 due to passage of restructuring legislation in Illinois. Thus,
MidAmerican was required to write off regulatory assets and liabilities from
its balance sheet related to its Illinois generation operations. The net amount
of such write-off's were immaterial. If other utility operations no longer meet
the criteria of SFAS 71, MidAmerican would be required to write off the related
regulatory assets and liabilities from its balance
F-9
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sheet and thus, a material adjustment to earnings in that period could result.
The following regulatory assets, primarily included in Other Assets in the
Consolidated Balance Sheets, represent probable future revenue to MidAmerican
because these costs are expected to be recovered in charges to utility
customers (in thousands):
1997 1996
----------- -----------
Deferred income taxes .......................... $143,851 $140,649
Energy efficiency costs ........................ 111,471 112,244
Debt refinancing costs ......................... 34,923 40,230
FERC Order 636 transition costs ................ 9,279 25,033
Environmental costs ............................ 20,417 22,577
Retirement benefit costs ....................... 595 11,025
Enrichment facilities decommissioning .......... 8,781 11,089
Unamortized costs of retired plant ............. 5,771 8,953
Other .......................................... 4,201 2,655
-------- --------
Total ........................................ $339,289 $374,455
======== ========
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
records unbilled revenues, and related energy costs, representing the estimated
amount customers will be billed for services rendered between the meter-reading
dates in a particular month and the end of such month. Accrued unbilled
revenues were $80.2 million and $70.1 million at December 31, 1997 and 1996,
respectively, and are included in Receivables on the Consolidated Balance
Sheets.
MidAmerican's Illinois and South Dakota jurisdictional sales, or
approximately 11% of total retail electric sales, and the majority of its total
retail gas sales are subject to adjustment clauses. These clauses allow
MidAmerican to adjust the amounts charged for electric and gas service as the
costs of gas, fuel for generation or purchased power change. The costs
recovered in revenues through use of the adjustment clauses are charged to
expense in the same period.
(E) DEPRECIATION AND AMORTIZATION:
MidAmerican's provisions for depreciation and amortization for its utility
operations are based on straight-line composite rates. The average depreciation
and amortization rates for the years ended December 31 were as follows:
1997 1996 1995
--------- --------- ---------
Electric .......... 3.8% 3.8% 3.9%
Gas ............... 3.4% 3.7% 3.7%
Utility plant is stated at original cost which includes overhead costs,
administrative costs and an allowance for funds used during construction.
The cost of repairs and minor replacements is charged to maintenance
expense. Property additions and major property replacements are charged to
plant accounts. The cost of depreciable units of utility plant retired or
disposed of in the normal course of business is eliminated from the utility
plant accounts and such cost, plus net removal cost, is charged to accumulated
depreciation.
An allowance for the estimated annual decommissioning costs of the Quad
Cities Nuclear Power Station (Quad Cities) equal to the level of funding is
included in depreciation expense. See Note 4(e) for additional information
regarding decommissioning costs.
F-10
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(F) INVESTMENTS:
Investments, managed primarily through the Company's nonregulated
subsidiaries, include the following amounts as of December 31 (in thousands):
1997 1996
----------- -----------
Investments:
Marketable securities ...................... $467,207 $219,890
Equipment leases ........................... 73,928 89,791
Nuclear decommissioning trust fund ......... 93,251 76,304
Energy projects ............................ 21,180 24,467
Special-purpose funds ...................... 10,057 44,863
Real estate ................................ 42,424 45,457
Corporate owned life insurance ............. 33,471 27,395
Coal transportation ........................ 14,516 18,623
Communications ............................. 10,000 56,333
Security ................................... 8,551 5,367
Other ...................................... 24,939 14,482
-------- --------
Total ...................................... $799,524 $622,972
======== ========
Marketable securities generally consist of preferred stocks, common stocks
and mutual funds held by MidAmerican Capital. Investments in marketable
securities classified as available-for-sale are reported at fair value with net
unrealized gains and losses reported as a net of tax amount in Common
Shareholders' Equity until realized. Investments in marketable securities that
are classified as held-to-maturity are reported at amortized cost. An
other-than-temporary decline in the value of a marketable security is
recognized through a write-down of the investment to earnings.
Investments held by the nuclear decommissioning trust fund for the Quad
Cities units are classified as available-for-sale and are reported at fair
value with net unrealized gains and losses reported as adjustments to the
accumulated provision for nuclear decommissioning.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
The Company considers all cash and highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
Net cash provided (used) from changes in working capital, net of effects
from discontinued operations was as follows (in thousands):
1997 1996 1995
------------ ------------- -------------
Receivables ........................ $ 34,544 $ (84,802) $ (31,314)
Inventories ........................ 4,773 (5,629) 7,013
Other current assets ............... (7,421) 6,732 (4,140)
Accounts payable ................... (23,950) 47,751 15,903
Taxes accrued ...................... 10,375 356 (9,755)
Interest accrued ................... (6,158) (2,122) (24)
Other current liabilities .......... 15,935 (16,038) 1,293
--------- --------- ---------
Total ............................ $ 28,098 $ (53,752) $ (21,024)
========= ========= =========
F-11
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Under a long-term power purchase contract with Nebraska Public Power
District (NPPD), expiring in 2004, MidAmerican purchases one-half of the output
of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated Balance
Sheets include a liability for MidAmerican's fixed obligation to pay 50% of
NPPD's Nuclear Facility Revenue Bonds and other fixed liabilities. A like
amount representing MidAmerican's right to purchase power is shown as an asset.
Capital improvement costs prior to July 11, 1997, including carrying
costs, were deferred, and are being amortized and recovered in rates over
either a five-year period or the term of the NPPD contract. Beginning July 11,
1997, capital improvement costs are recovered currently from customers and are
expensed as incurred.
The fuel cost portion of the power purchase contract is included in Cost
of Fuel, Energy and Capacity on the Consolidated Statements of Income. All
other costs MidAmerican incurs in relation to its long-term power purchase
contract with NPPD are included in Other Operating Expenses on the Consolidated
Statements of Income.
See Notes 4(d), 4(e) and 4(f) for additional information regarding the
power purchase contract.
(I) ACCOUNTING FOR DERIVATIVES:
1) Preferred Stock Hedge Instruments:
The Company is exposed to market value risk from changes in interest rates
for certain fixed rate sinking fund preferred and perpetual preferred stocks
(fixed rate preferred stocks) included in Investments on the Consolidated
Balance Sheets. The Company reviews the interest rate sensitivity of these
securities and purchases put options on U.S. Treasury securities (put options)
to reduce interest rate risk on preferred stocks. The Company does not purchase
or sell put options for speculative purposes. The Company's intent is to
substantially offset any change in market value of the fixed rate preferred
stocks due to a change in interest rates with a change in market value of the
put options.
The preferred stocks are publicly traded securities and, as such, changes
in their fair value are reported, net of income taxes, as a valuation allowance
in shareholders' equity. Unrealized gains and losses on the associated put
options are included in the determination of the fair value of the preferred
stocks. The fair value of the put options, including unrealized gains and
losses, included in the determination of the fair value of the preferred
securities as of December 31, 1997 and 1996 was $1.9 million and $5.1 million,
respectively. Realized gains and losses on the put options are included in
Realized Gains and Losses on Securities, Net in the Consolidated Statements
Income in the period the underlying hedged fixed rate preferred stocks are
sold. At December 31, 1997, the Company held put options with a notional value
of $3.2 million.
2) Gas Futures Contracts and Swaps:
The Company uses gas futures contracts and swap contracts to reduce its
exposure to changes in the price of natural gas purchased to meet the needs of
its customers and to manage margins on natural gas storage opportunities.
Investments in natural gas futures contracts, which total $1.6 million and $0.8
million as of December 31, 1997 and 1996, are included in Receivables on the
Consolidated Balance Sheets. Gains and losses on gas futures contracts that
qualify for hedge accounting are deferred and reflected as adjustments to the
carrying value of the hedged item or included in Other Assets on the
Consolidated Balance Sheets until the underlying physical transaction is
recorded if the instrument is used to hedge an anticipated future transaction.
The net gain or loss on gas futures contracts is included in the determination
of income in the same period as the expense for the physical delivery of the
natural gas.
F-12
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized gains and losses on gas futures contracts and the net amounts
exchanged or accrued under the natural gas swap contracts are included in Cost
of Gas Sold, Other Net or Nonregulated-Costs of Sales consistent with the
expense for the physical commodity. Deferred net gains (losses) related to the
Company's gas futures contracts are $(0.4) million and $0.8 million as of
December 31, 1997 and 1996, respectively.
The Company periodically evaluates the effectiveness of its natural gas
hedging programs. If a high degree of correlation between prices for the
hedging instruments and prices for the physical delivery is not achieved, the
contracts are recorded at fair value and the gains or losses are included in
the determination of income. At December 31, 1997 the Company held the
following hedging instruments:
NOTIONAL VOLUME WEIGHTED AVERAGE
(MMBTU) (PER MMBTU)
----------------- -----------------
Natural Gas Futures (Long) .................... 3,670,000 $2.277
Natural Gas Futures (Short) ................... 1,670,000 $2.305
Natural Gas Swaps (Fixed to Variable) ......... 2,497,400
Weighted average variable price .............. $2.558
Weighted average fixed price ................. $3.114
Natural Gas Swaps (Variable to Fixed) ......... 6,806,952
Weighted average variable price .............. $2.536
Weighted average fixed price ................. $2.473
(2) LONG-TERM DEBT:
The Company's sinking fund requirements and maturities of long-term debt
for 1998 through 2002 are $145 million, $106 million, $134 million, $125
million and $25 million, respectively.
The interest rate on the Company's Adjustable Rate Series Mortgage Bonds
is reset every two years at 160 basis points over the average yield to maturity
of 10-year Treasury securities. The rate was reset in 1997.
The Company's Variable Rate Pollution Control Revenue Obligations bear
interest at rates that are periodically established through remarketing of the
bonds in the short-term tax-exempt market. The Company, at its option, may
change the mode of interest calculation for these bonds by selecting from among
several alternative floating or fixed rate modes. The interest rates shown in
the Consolidated Statements of Capitalization are the weighted average interest
rates as of December 31, 1997 and 1996. The Company maintains dedicated
revolving credit facility agreements or renewable lines of credit to provide
liquidity for holders of these issues.
Substantially all the former Iowa-Illinois utility property and
franchises, and substantially all of the former Midwest Power electric utility
property in Iowa, or approximately 82% of gross utility plant, is pledged to
secure mortgage bonds.
MidAmerican Capital has $64 million and $50 million unsecured revolving
credit facility agreements which mature in 1998. Borrowings under these
agreements may be on a fixed rate, floating rate or competitive bid rate basis.
All subsidiary long-term borrowings outstanding at December 31, 1997, are
without recourse to Holdings.
F-13
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
had undivided interests at December 31, 1997, in jointly owned generating
plants as shown in the table below.
The dollar amounts below represent MidAmerican's share in each jointly
owned unit. Each participant has provided financing for its share of each unit.
Operating Expenses on the Consolidated Statements of Income include
MidAmerican's share of the expenses of these units (dollars in millions).
NUCLEAR COAL FIRED
------------- -------------------------------------------------------------
COUNCIL
QUAD CITIES NEAL BLUFFS NEAL OTTUMWA LOUISA
UNITS UNIT UNIT UNIT UNIT UNITS
NO. 1 & 2 NO. 3 NO. 3 NO. 4 NO. 1 NO. 1
------------- ---------- ---------- ---------- --------- ----------
IN SERVICE DATE 1972 1975 1978 1979 1981 1983
Utility plant in service ......... $ 240 $ 128 $ 298 $ 159 $ 210 $ 531
Accumulated depreciation ......... $ 87 $ 78 $ 164 $ 87 $ 103 $ 235
Unit capacity-MW ................. 1,529 515 675 624 716 700
Percent ownership ................ 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
(4) COMMITMENTS AND CONTINGENCIES:
(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 1998 are estimated to be $201
million, including $13 million for Quad Cities nuclear fuel. Nonregulated
capital expenditures depend upon the availability of investment opportunities
and other factors. During 1998, such expenditures are estimated to be
approximately $10 million.
(B) MANUFACTURED GAS PLANT FACILITIES:
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant facilities may pose a threat to
the public health or the environment if such contaminants are in sufficient
quantities and at such concentrations as to warrant remedial action.
MidAmerican is evaluating 26 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 MidAmerican has any responsibility for remedial action. MidAmerican
is currently conducting field investigations at seventeen of the sites and has
completed investigations at one of the sites. In addition, MidAmerican has
completed removals at three of the sites. MidAmerican is continuing to evaluate
several of the sites to determine the future liability, if any, for conducting
site investigations or other site activity.
MidAmerican's present estimate of probable remediation costs for the sites
discussed above as of December 31, 1997 is $21 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The 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.
MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP
costs. MidAmerican intends to pursue recovery of the remediation costs from
other PRPs and its insurance carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has
F-14
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
potential legal liability for the site and whether information exists to
indicate that contaminated wastes remain at the site. If so, the costs of
performing a preliminary investigation and the costs of removing known
contaminated soil are accrued. As the investigation is performed and if it is
determined remedial action is required, the best estimate of remediation costs
is accrued. If necessary, the estimate is revised when a consent order is
issued. The estimated recorded liabilities for these properties include
incremental direct costs of the remediation effort, costs for future monitoring
at sites and costs of compensation to employees for time expected to be spent
directly on the remediation effort. The estimated recorded liabilities for
these properties are based upon preliminary data. Thus, actual costs could vary
significantly from the estimates. The estimate could change materially based on
facts and circumstances derived from site investigations, changes in required
remedial action and changes in technology relating to remedial alternatives. 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.
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican's financial position or results of operations.
(C) CLEAN AIR ACT:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter.
Based on data to be obtained from monitors located throughout the states, the
EPA will make a determination of whether the states have any areas that do not
meet the air quality standards (i.e., areas that are classified as
nonattainment). If a state has area(s) classified as nonattainment area(s), the
state is required to submit a State Implementation Plan specifying how it will
reach attainment of the standards through emission reductions or other means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. If
MidAmerican's operations contribute to nonattainment and modifications to
MidAmerican's operations or facilities are necessary, the cost of making
emissions reductions to meet the air quality standards will be dependent upon
the level of emissions reductions required and the available technology.
MidAmerican will continue to evaluate the potential impact of the new
regulations.
Following recommendations provided by the Ozone Transport Assessment
Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these
emissions reduction requirements as EPA's rule is currently drafted, and, as
such, MidAmerican does not anticipate that its facilities will be subject to
additional emissions reductions as a result of this initiative. The EPA
anticipates issuing its final rules in September 1998. MidAmerican will
continue to closely monitor this rulemaking proceeding.
(D) LONG-TERM POWER PURCHASE CONTRACT:
Payments to NPPD cover one-half of the fixed and operating costs of Cooper
(excluding depreciation but including debt service) and MidAmerican's share of
nuclear fuel cost (including nuclear fuel disposal) based on energy delivered.
The debt service portion is approximately $1.5 million per month for 1998 and
is not contingent upon the plant being in service. In addition, MidAmerican
pays one-half of NPPD's decommissioning funding related to Cooper.
The debt amortization and Department of Energy (DOE) enrichment plant
decontamination and decommissioning component of MidAmerican's payments to NPPD
were $13.8 million, $14.5 million and $12.0 million and the net interest
component was $3.8 million, $3.6 million and $4.6 million each for the years
1997, 1996 and 1995, respectively.
F-15
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MidAmerican's payments for the debt principal portion of the power
purchase contract obligation and the DOE enrichment plant decontamination and
decommissioning payments are $14.4 million, $15.0 million, $15.8 million, $16.6
million, $17.4 million and $18.3 million for 1998 through 2003, respectively.
(E) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican's share of expected decommissioning costs for Cooper and Quad
Cities, in 1997 dollars, is $247 million and $230 million, respectively. In
Illinois, nuclear decommissioning costs are included in customer billings
through a mechanism that permits annual adjustments. Such costs are reflected
as base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, NPPD
assumes that decommissioning costs will escalate at an annual rate of 4.0%.
Although Cooper's operating license expires in 2014, the funding plan assumes
decommissioning will start in 2004, the anticipated plant shutdown date.
As of December 31, 1997, MidAmerican's share of funds set aside by NPPD in
internal and external accounts for decommissioning was $78.2 million. In
addition, the funding plan also assumes various funds and reserves currently
held to satisfy NPPD bond resolution requirements will be available for plant
decommissioning costs after the bonds are retired in early 2004. The funding
schedule assumes a long-term return on funds in the trust of 6.75% annually.
Certain funds will be required to be invested on a short-term basis when
decommissioning begins and are assumed to earn at a rate of 4.0% annually. NPPD
is recognizing decommissioning costs over the life of the power sales contract.
MidAmerican makes payments to NPPD related to decommissioning Cooper. These
payments are included in MidAmerican's power purchase costs. The Cooper
decommissioning component of MidAmerican's payments to NPPD was $11.3 million,
$9.9 million and $8.9 million for the years 1997, 1996, and 1995, respectively,
and is included in Other Operating Expenses in the Consolidated Statements of
Income. Earnings from the internal and external trust funds, which are
recognized by NPPD as the owner of the plant, are tax exempt and serve to
reduce future funding requirements.
External trusts have been established for the investment of funds for
decommissioning the Quad Cities units. The total accrued balance as of December
31, 1997, was $93.3 million and is included in Other Liabilities and a like
amount is reflected in Investments and represents the value of the assets held
in the trusts.
MidAmerican's provision for depreciation included costs for Quad Cities
nuclear decommissioning of $9.8 million, $8.6 million and $8.6 million for
1997, 1996 and 1995, respectively. The provision charged to expense is equal to
the funding that is being collected in rates. The decommissioning funding
component of MidAmerican's Illinois tariffs assumes decommissioning costs,
related to the Quad Cities unit, will escalate at an annual rate of 5.3% and
the assumed annual return on funds in the trust is 6.5%. The Quad Cities
decommissioning funding component of MidAmerican's Iowa tariffs assumes
decommissioning costs will escalate at an annual rate of 6.3% and the assumed
annual return on funds in the trust is 6.5%. Earnings on the assets in the
trust fund were $5.0 million, $3.5 million and $2.5 million for 1997, 1996 and
1995, respectively.
(F) NUCLEAR INSURANCE:
MidAmerican maintains financial protection against catastrophic loss
associated with its interest in Quad Cites and Cooper through a combination of
insurance purchased by NPPD (the owner and operator of Cooper) and Commonwealth
Edison (the joint owner and operator of Quad Cities), insurance
F-16
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchased directly by MidAmerican, and the mandatory industry-wide loss funding
mechanism afforded under the Price-Anderson Amendments Act of 1988. The
coverage falls into three categories: nuclear liability, property coverage and
nuclear worker liability.
NPPD and Commonwealth Edison each purchase nuclear liability insurance in
the maximum available amount of $200 million. In accordance with the
Price-Anderson Amendments Act of 1988, excess liability protection above that
amount is provided by a mandatory industry-wide program under which the owners
of nuclear generating facilities could be assessed for liability incurred due
to a serious nuclear incident at any commercial nuclear reactor in the United
States. Currently, MidAmerican's maximum potential share of such an assessment
is $79.3 million per incident, payable in installments not to exceed $10
million annually.
The property coverage provides for property damage, stabilization and
decontamination of the facility, disposal of the decontaminated material and
premature decommissioning. For Quad Cities, Commonwealth Edison purchases
primary and excess property insurance protection for the combined interest in
Quad Cities totalling $2.1 billion. For Cooper, NPPD purchases primary property
insurance in the amount of $500 million. Additionally, MidAmerican and NPPD
separately purchase coverage for their respective obligation of $1.125 billion
each in excess of the $500 million primary layer purchased by NPPD. This
structure provides that both MidAmerican and NPPD are covered for their
respective 50% obligation in the event of a loss totalling $2.75 billion.
MidAmerican also directly purchases extra expense/business interruption
coverage to cover the cost of replacement power and/or other continuing costs
in the event of a covered accidental outage at Cooper or Quad Cities. The
coverages purchased directly by MidAmerican, and the primary and excess
property coverages purchased by Commonwealth Edison, contain provisions for
retrospective premium assessments should two or more full policy-limit losses
occur in one policy year. Currently, the maximum retrospective amounts that
could be assessed against MidAmerican from industry mutual insurance companies
for its obligations associated with Cooper and Quad Cities combined total $11.6
million.
The master nuclear worker liability coverage is an industry-wide policy
with an aggregate limit of $200 million for the nuclear industry as a whole,
which is in effect to cover tort claims of workers as a result of radiation
exposure on or after January 1, 1988. MidAmerican's share, based on its
interest in Cooper and Quad Cities, of a maximum potential share of a
retrospective assessment under this program is $3.0 million.
(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican has entered into supply and related transportation contracts
for its fossil fueled generating stations. The contracts, with expiration dates
ranging from 1998 to 2003, require minimum payments of $132.2 million, $88.8
million, $57.8 million, $26.3 million and $3.1 million and $3.1 million for the
years 1998 through 2003, respectively. The Company expects to supplement these
coal contracts with spot market purchases to fulfill its future fossil fuel
needs.
The Company has entered into various natural gas supply and transportation
contracts for its utility operations. The minimum commitments under these
contracts are $88 million, $63 million, $37 million, $32 million and $16
million for the years 1998 through 2002, respectively, and $76 million for the
total of the years thereafter. During 1993 FERC Order 636 became effective,
requiring interstate pipelines to restructure their services. The pipeline will
recover the transition costs related to Order 636 from the local distribution
companies. The Company has recorded a liability and regulatory asset for the
transition costs which are being recovered by the Company through the purchased
gas adjustment clause. The unrecovered balance recorded by the Company as of
December 31, 1997, was $9.3 million.
F-17
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) COMMON SHAREHOLDERS' EQUITY:
Common shares outstanding changed during the years ended December 31 as
shown in the table below (in thousands):
1997 1996 1995
------------------------- ----------------------- -----------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- --------- ----------- ---------
Balance, beginning of
year ..................... $ 801,431 100,752 $801,227 100,752 $786,420 99,687
Changes due to:
Repurchase of
common shares .......... (47,444) (5,451) -- -- -- --
Issuance of common
shares ................. -- -- -- -- 15,083 1,065
Stock options ............ 210 -- 623 -- -- --
Capital stock expense (289) -- (419) -- (276) --
Other .................... (35) -- -- -- -- --
--------- ------- -------- ------- -------- ------
Balance, end of year ..... $ 753,873 95,301 $801,431 100,752 $801,227 100,752
========= ======= ======== ======= ======== =======
(6) RETIREMENT PLANS:
The Company has noncontributory defined benefit pension plans covering
substantially all employees. Benefits under the plans are based on
participants' compensation, years of service and age at retirement.
Funding is based upon the actuarially determined costs of the plans and
the requirements of the Internal Revenue Code and the Employee Retirement
Income Security Act. MidAmerican has been allowed to recover funding
contributions in rates.
Net periodic pension cost includes the following components for the years
ended December 31 (in thousands):
1997 1996 1995
------------ ------------ ------------
Service cost-benefit earned during the period ................... $ 10,092 $ 12,323 $ 9,817
Interest cost on projected benefit obligation ................... 29,623 31,109 27,934
Decrease in pension costs from actual return on assets .......... (79,580) (58,460) (63,593)
Net amortization and deferral ................................... 39,446 26,223 32,126
One-time charge ................................................. -- -- 15,683
Regulatory deferral of incurred cost ............................ 5,423 568 (10,470)
--------- --------- ---------
Net periodic pension cost ....................................... $ 5,004 $ 11,763 $ 11,497
========= ========= =========
During 1995, the Company incurred a one-time charge of $15.7 million
related to the early retirement portion of its restructuring plan. Of such
cost, $3.0 million was charged to expense and the remaining amount was deferred
for future recovery through the regulatory process.
The plan assets are stated at fair market value and are primarily
comprised of insurance contracts, United States government debt and corporate
equity securities. The plans in which accumulated benefits exceed assets
consist entirely of nonqualified defined benefit plans. Although the plans have
no assets, the Company purchases corporate owned life insurance to provide
funding for the future cash requirements. The cash value of such insurance was
$21.5 million and $17.3 million at December 31, 1997 and 1996,
F-18
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively. The following table presents the funding status of the plans and
amounts recognized in the Consolidated Balance Sheets as of December 31
(dollars in thousands):
PLANS IN WHICH:
---------------------------------------------------------------
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
------------------------------- -----------------------------
1997 1996 1997 1996
-------------- -------------- ------------- -------------
Actuarial present value of benefit obligations:
Vested benefit obligation ..................... $ (325,770) $ (298,237) $ (40,080) $ (36,574)
Nonvested benefit obligation .................. (3,623) (3,454) (242) (1,925)
---------- ---------- --------- ---------
Accumulated benefit obligation ................ (329,393) (301,691) (40,322) (38,499)
Provision for future pay increases ............ (52,027) (79,790) (8,301) (8,733)
---------- ---------- --------- ---------
Projected benefit obligation .................. (381,420) (381,481) (48,623) (47,232)
Plan assets at fair value ...................... 483,668 427,828 -- --
---------- ---------- --------- ---------
Projected benefit obligation (greater) less than
plan assets ................................... 102,248 46,347 (48,623) (47,232)
Unrecognized prior service cost ................ 592 18,636 21,147 21,544
Unrecognized net loss (gain) ................... (93,770) (63,173) (1,281) --
Unrecognized net transition asset .............. (16,339) (18,929) -- --
Other ......................................... -- -- (11,565) (12,811)
---------- ---------- --------- ---------
Pension liability recognized in the Consolidated
Balance Sheets ................................ $ (7,269) $ (17,119) $ (40,322) $ (38,499)
========== ========== ========= =========
1997 1996
------ -----
Assumptions used were:
Discount rate ................................................... 7.0% 7.5%
Rate of increase in compensation levels ......................... 5.0% 5.0%
Weighted average expected long-term rate of return on assets..... 9.0% 9.0%
The Company currently provides certain health care and life insurance
benefits for retired employees. Under the plans, substantially all of the
Company's employees may become eligible for these benefits if they reach
retirement age while working for the Company. However, the Company retains the
right to change these benefits anytime at its discretion.
In January 1993, the Company adopted SFAS No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions. The Company began expensing
these costs on an accrual basis for its Illinois customers and certain of its
Iowa customers in 1993 and including provisions for such costs in rates for
these customers. For its remaining Iowa customers, the Company deferred the
portion of these costs above the "pay-as-you-go" amount already included in
rates until recovery on an accrual basis was established in 1995. The Company
is currently amortizing the deferral, expensing the SFAS No. 106 accrual and
including provisions for these costs in rates.
F-19
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost includes the following components
for the year ended December 31 (in thousands):
1997 1996 1995
----------- ----------- -----------
Service cost-benefit earned during the period ............... $ 2,680 $ 2,118 $ 1,583
Interest cost ............................................... 8,822 8,341 7,185
Increase (decrease) in benefit cost from actual return on
assets ..................................................... (2,285) (1,598) (2,090)
Amortization of unrecognized transition obligation .......... 5,291 5,291 5,291
Amortization of unrecognized service cost ................... 650 -- --
Amortization of unrecognized prior year (loss) .............. (298) -- --
Other ....................................................... (288) (297) (262)
One-time charge for early retirement ........................ -- -- 4,353
Regulatory recognition of incurred cost ..................... 4,888 5,112 5,140
-------- -------- --------
Net periodic postretirement benefit cost .................... $ 19,460 $ 18,967 $ 21,200
======== ======== ========
During 1995, the Company recorded a one-time expense of $4.4 million
related to the early retirement portion of its restructuring plan.
The Company has established external trust funds to meet its expected
postretirement benefit obligations. The trust funds are comprised primarily of
guaranteed rate investment accounts and money market investment accounts. A
reconciliation of the funded status of the plan to the amounts realized as of
December 31 is presented below (dollars in thousands):
1997 1996
------------- -------------
Accumulated present value of benefit obligations:
Retiree benefit obligation ........................... $ (74,534) $ (78,935)
Active employees fully eligible for benefits ......... (6,466) (2,798)
Other active employees ............................... (46,347) (34,772)
---------- ----------
Accumulated benefit obligation ....................... (127,347) (116,505)
Plan assets at fair value ............................. 52,174 36,783
---------- ----------
Accumulated benefit obligation greater than plan assets (75,173) (79,722)
Unrecognized net gain ................................. (11,248) (8,810)
Prior service cost .................................... 8,277 --
Unrecognized transition obligation .................... 79,370 84,662
---------- ----------
Postretirement benefit liability recognized in the
Consolidated Balance Sheets ........................... $ 1,226 $ (3,870)
========== ==========
Assumptions used were:
Discount rate ........................................ 7.0% 7.5%
Weighted average expected long-term rate of return
on assets (after taxes) ............................ 6.5% 6.7%
For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals prior to age 65 will increase
by 10.0% in 1998, and that the rate of increase thereafter will decline by 1.0%
annually to an ultimate rate of 5.5% by the year 2003. For covered individuals
age 65 and older, it is assumed health care costs will increase by 7.0% in
1998, and that the rate of increase thereafter will decline by 1.0% annually to
an ultimate rate of 5.5% by the year 2000.
If the assumed health care trend rates used to measure the expected cost
of benefits covered by the plans were increased by 1%, the total service and
interest cost would increase by $1.8 million and the accumulated postretirement
benefit obligation would increase by $15.4 million.
F-20
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company sponsors defined contribution pension plans (401(k) plans)
covering substantially all employees. The Company's contributions to the plans,
which are based on the participants' level of contribution and cannot exceed
four percent of the participants' salaries or wages, were $4.6 million, $4.4
million and $3.7 million for 1997, 1996 and 1995, respectively.
(7) STOCK-BASED COMPENSATION PLANS:
The company has stock-based compensation arrangements as described below.
The company accounts for these plans under Accounting Principles Board Opinion
No. 25 and the related interpretations. The total compensation cost recognized
in income for stock-based compensation awards was $1.3 million, $0.6 million,
and $1.8 million for 1997, 1996, and 1995 respectively. Had the company used
Statement of Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), pro-forma net income for common stock would be $135.3
million, $130.9 million, and $122.6 million, while earnings per share would be
$1.38, $1.30, and $1.22 for the years ended 1997, 1996, and 1995 respectively.
Stock options and performance share awards have been granted pursuant to
the MidAmerican Energy Company 1995 Long-Term Incentive Plan (the "Plan"). Up
to four million shares are authorized to be granted under the Plan.
Stock Options -- Under the Plan, the Board of Directors have granted options to
purchase shares of MidAmerican Holdings common stock (the "Options") at the
fair market value of the shares on the date of the grant. The options vest over
a 4-year period at a rate of 25% per year and expire ten years after the date
of grant. Stock option activity for 1997, 1996, and 1995 is summarized as
follows:
1997 1996 1995
--------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXEERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- ---------- --------- ----------- ---------- ---------
Outstanding, beginning of year ........... 800,000 $14.66 700,000 $14.50 -- --
Granted .................................. 46,666 $17.36 100,000 $15.75 700,000 $14.50
Exercised ................................ 165,000 $14.58 -- -- -- --
Forfeited ................................ 115,000 $14.93 -- -- -- --
Expired .................................. -- -- -- -- -- --
Outstanding, end of year ................. 566,666 $15.12 800,000 $14.66 700,000 $14.50
Exercisable, end of year ................. 315,000 $14.54 175,000 $14.50 -- --
Weighted average fair value of options
granted during year ..................... $ 1.66 $ 1.48 $ 1.58
The fair value of the options granted were estimated as of the date of the
grant using the Black-Scholes option pricing model. The model assumed:
1997 1996 1995
----------- ----------- ------------
Dividend rate per share .......... $1.20 $1.20 $1.20
Expected volatility .............. 16.55% 17.62% 23%
Expected life .................... 10 Years 10 Years 10 Years
Risk free interest rate .......... 6.14% 6.53% 6.28%
The options outstanding at December 31, 1997 have an exercise price range
of $14.50 to $17.785, with a weighted average contractual life of 8.25 years.
Performance Shares -- Under the Plan, participants are granted contingent
shares of common stock. The shares are contingent upon the attainment of
specified performance measures within a 3-year performance period. During the
performance period, the participant is entitled to receive dividends and vote
the stock. The stock is vested upon achievement of the performance measures. If
the specified
F-21
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
criteria is not met within the 3-year performance period, the shares are
forfeited. The following table provides certain information regarding
contingent performance incentive shares granted under the Plan:
1997 1996 1995
------------ ----------- -----------
Number of performance shares granted ................ 77,105 68,189 86,277
Fair value at date of grant (in thousands) .......... $ 1,335 $ 1,176 $ 1,251
Weighted average per share amounts .................. $ 17.3125 $17.2500 $14.5000
End of performance period ........................... 6/30/2000 6/30/99 6/30/98
In addition, the company has granted 800 restricted shares to each
non-employee director in 1997, 1996 and 1995. Non-employee directors are
restricted from disposing of granted shares until such time as they cease to be
a director of the company. The following table provides certain information
regarding the directors restricted shares granted under the Plan.
1997 1996 1995
----------- ----------- -----------
Number of shares granted ............................ 11,200 12,000 13,600
Fair value at date of grant (in thousands) .......... $ 194 $ 207 $ 197
Weighted average price per share amounts ............ $17.3125 $17.2500 $14.5000
Employee Stock Ownership Plan -- Employees of the Company are allowed to
purchase company stock up to the lesser of 15% or $25,000 of their annual
compensation at a 15% discount. The number of shares acquired by employees
under the plan were 140,943, 150,899, and 182,707 in 1997, 1996 and 1995,
respectively. The Company currently acquires shares in the open market for this
plan. Participants who purchase shares under the Plan are required to hold
purchased shares for 180 days.
(8) SHORT-TERM BORROWING:
Interim financing of working capital needs and the construction program
may be obtained from the sale of commercial paper or short-term borrowing from
banks. Information regarding short-term debt follows (dollars in thousands):
1997 1996 1995
------------- ------------- -------------
Balance at year-end ...................... $ 138,054 $ 161,990 $ 184,800
Weighted average interest rate on year-end
balance ................................ 5.9% 5.4% 5.7%
Average daily amount outstanding during
the year ............................... $ 117,482 $ 151,318 $ 114,036
Weighted average interest rate on average
daily amount outstanding during the
year ................................... 5.7% 5.5% 6.0%
MidAmerican has authority from FERC to issue short-term debt in the form
of commercial paper and bank notes aggregating $400 million. As of December 31,
1997, MidAmerican had a $250 million revolving credit facility agreement and a
$10 million line of credit and Holdings had lines of credit totaling $120
million. MidAmerican's commercial paper borrowings are supported by the
revolving credit facility and the line of credit.
(9) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced
its Illinois electric service rates by annual amounts of $13.1 million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively.
F-22
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 27, 1997, the Iowa Utilities Board (IUB) issued an order in a
consolidated rate proceeding involving MidAmerican's pricing proposal and a
filing by the Iowa Office of Consumer Advocate (OCA). The order approved a
March 1997 settlement agreement between MidAmerican, the OCA and other parties
to the proceeding. The agreement includes a number of characteristics of
MidAmerican's pricing proposal. Prices for residential customers were reduced
$8.5 million annually and $10.0 million annually, effective November 1, 1996,
and July 11, 1997, respectively, and will be reduced an additional $5.0 million
annually on June 1, 1998, for a total annual decrease of $23.5 million. Rates
for commercial and industrial customers will be reduced a total of $10 million
annually by June 1, 1998, through pilot projects, negotiated rates with
individual customers and, if needed, a base rate reduction effective June 1,
1998. The agreement includes a tracking mechanism to currently recover the cost
of capital improvements required by the Cooper Nuclear Station Power Purchase
Contract. The tracking mechanism will offset approximately $9 million of these
reductions.
In addition, the agreement accepted MidAmerican's proposal to eliminate
the Iowa energy adjustment clause (EAC) which was the mechanism through which
fuel costs were collected from Iowa customers prior to July 11, 1997. The EAC
flows the cost of fuel to customers on a current basis, and thus, fuel costs
had little impact on net income. Prospectively, base rates for Iowa customers
will include a factor for recovery of a representative level of fuel costs. To
the extent actual fuel costs vary from that factor, pre-tax earnings will be
impacted. The fuel cost factor will be reviewed in February 1999 and adjusted
prospectively if actual 1998 fuel costs vary 15% above or below the factor
included in base rates.
Under the agreement, if MidAmerican's annual Iowa electric jurisdictional
return on common equity exceeds 12%, then an equal sharing between customers
and shareholders of earnings above the 12% level begins; if it exceeds 14%,
then two-thirds of MidAmerican's share of those earnings will be used for
accelerated recovery of certain regulatory assets. The agreement permits
MidAmerican to file for increased rates if the return falls below 9%. Other
parties signing the agreement are prohibited from filing for reduced rates
prior to 2001 unless the return, after reflecting credits to customers, exceeds
14%.
The agreement also provides that MidAmerican will develop a pilot program
for a market access service which allows customers with at least 4 MW of load
to choose energy suppliers. The pilot program, which is subject to approval by
the IUB and the Federal Energy Regulatory Commission (FERC), is limited to 60
MW of participation the first year and can be expanded by 15 MW annually until
the conclusion of the program. Any loss of revenues associated with the pilot
program will be considered part of the $10 million annual reduction for
commercial and industrial customers as described above, but may not be
recovered from other customer classes. The program was filed with the IUB and
the FERC in September 1997. The Company anticipates that the necessary
approvals will be received before the end of the second quarter of 1998.
(10) DISCONTINUED OPERATIONS:
In the third quarter of 1996, the Company announced the discontinuation of
certain nonstrategic businesses in support of its strategy of becoming the
leading regional energy and complementary services provider. In November of
1996, the Company signed a definitive agreement with KCS Energy, Inc. (KCS) to
sell an oil and gas exploration and development subsidiary and completed the
sale on January 3, 1997. The Company recorded an after-tax loss of $7.1 million
for the disposition in 1996 and an additional $0.9 million in 1997. In October
1997, the company sold its subsidiary that developed and continues to operate a
computerized information system facilitating the real-time exchange of power in
the electric industry. The Company recorded a $4.0 million estimated after-tax
loss on disposal in the third quarter of 1996 and an additional $3.2 million in
September 1997. 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.
F-23
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds received from the disposition of the oil and gas subsidiary
included $210 million in cash and 870,000 warrants, after a stock split in
1997, to purchase KCS common stock. The warrants were valued at $6 million.
Proceeds received from the disposition of the subsidiary that operates a
computerized information system for the exchange of power in the electric
industry included an unsecured note receivable for $0.7 million and warrants to
purchase twenty percent of the acquirer which have been valued at zero.
Proceeds received from the disposition of the coal mining subsidiary settlement
were $15 million. 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 years ended December 31 are as follows (in thousands):
1997 1996 1995
------------- ------------- -----------
OPERATING REVENUES ......................... $ -- $ 233,952 $ 81,637
========= ========= ========
INCOME FROM OPERATIONS
Income (loss) before income taxes .......... $ (200) $ 1,638 $ 4,704
Income tax benefit (expense) ............... 82 479 (1,645)
--------- --------- --------
Income (loss) from Operations .............. $ (118) $ 2,117 $ 3,059
========= ========= ========
LOSS ON DISPOSAL
Income (loss) before income taxes .......... $ (10,106) $ 9,047 $ --
Income tax benefit (expense) ............... 5,996 (23,879) --
--------- --------- --------
Loss on disposal ........................... $ (4,110) $ (14,832) $ --
========= ========= ========
(11) CONCENTRATION OF CREDIT RISK:
The Company's electric utility operations serve 560,000 customers in Iowa,
85,000 customers in western Illinois and 3,000 customers in southeastern South
Dakota. The Company's gas utility operations serve 486,000 customers in Iowa,
65,000 customers in western Illinois, 63,000 customers in southeastern South
Dakota and 4,000 customers in northeastern Nebraska. The largest communities
served by the Company are the Iowa and Illinois Quad-Cities; Des Moines, Sioux
City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs, Iowa; and Sioux
Falls, South Dakota. The Company's utility operations grant unsecured credit to
customers, substantially all of whom are local businesses and residents. As of
December 31, 1997, billed receivables from the Company's utility customers
totalled $14.8 million. As described in Note 18, billed receivables related to
utility services have been sold to a wholly owned unconsolidated subsidiary.
MidAmerican Capital has investments in preferred stocks of companies in
the utility industry. As of December 31, 1997, the total cost of these
investments was $96 million.
MidAmerican Capital has entered into leveraged lease agreements with
companies in the airline industry. As of December 31, 1997, the receivables
under these agreements totalled $35 million.
(12) PREFERRED SHARES:
During 1996, MidAmerican redeemed all shares of the $1.7375 Series of
preferred stock. The redemptions were made at a premium, which resulted in a
charge to net income of $1.6 million.
The $5.25 Series Preferred Shares, which are not redeemable prior to
November 1, 1998 for any purpose, are subject to mandatory redemption on
November 1, 2003 at $100 per share. The $7.80 Series Preferred Shares have
sinking fund requirements under which 66,600 shares will be redeemed at $100
per share each May 1, beginning in 2001 through May 1, 2006.
F-24
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total outstanding cumulative preferred stock of MidAmerican not
subject to mandatory redemption requirements may be redeemed at the option of
the Company at prices which, in the aggregate, total $31.8 million. The
aggregate total the holders of all preferred stock outstanding at December 31,
1997, are entitled to upon involuntary bankruptcy is $181.8 million plus
accrued dividends. Annual dividend requirements for all preferred stock
outstanding at December 31, 1997, total $12.9 million.
(13) SEGMENT INFORMATION:
Information related to segments of the Company's business is as follows
for the years ended December 31 (in thousands):
1997 1996 1995
------------- ------------- -------------
UTILITY
Electric:
Operating revenues ........................ $1,126,300 $1,099,008 $1,094,647
Cost of fuel, energy and capacity ......... 235,760 234,317 230,261
Depreciation and amortization expense ..... 145,931 140,939 136,324
Other operating expenses .................. 502,109 424,594 459,344
---------- ---------- ----------
Operating income .......................... $ 242,500 $ 299,158 $ 268,718
========== ========== ==========
Gas:
Operating revenues ........................ $ 536,306 $ 536,753 $ 459,588
Cost of gas sold .......................... 346,016 345,014 279,025
Depreciation and amortization expense ..... 24,609 23,653 22,626
Other operating expenses .................. 127,092 106,831 122,017
---------- ---------- ----------
Operating income .......................... $ 38,589 $ 61,255 $ 35,920
========== ========== ==========
Operating income ........................... $ 281,089 $ 360,413 $ 304,638
Other income (expense) ..................... 14,699 3,998 (4,074)
Fixed charges ............................. 100,018 96,753 92,036
---------- ---------- ----------
Income from continuing operations before
income taxes .............................. 195,770 267,658 208,528
Income taxes ............................... 76,317 112,927 84,098
---------- ---------- ----------
Income from continuing operations .......... $ 119,453 $ 154,731 $ 124,430
========== ========== ==========
Capital Expenditures--
Electric .................................. $ 128,544 $ 116,243 $ 133,490
Gas ....................................... $ 38,388 $ 37,955 $ 57,281
F-25
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 1996 1995
----------- ------------- ------------
NONREGULATED
Revenues ................................. $ 259,675 $ 236,851 $ 95,106
Cost of sales ............................ 240,182 218,256 70,351
Depreciation and amortization ............ 3,436 4,854 6,010
Other operating expenses ................. 26,640 30,516 31,029
--------- --------- ---------
Operating income (loss) .................. (10,583) (16,775) (12,284)
Other income ............................. 34,320 14,874 15,734
Fixed charges ............................. 11,785 23,574 25,470
--------- --------- ---------
Income (loss) from continuing
operations before income taxes ......... 11,952 (25,475) (22,020)
Income taxes ............................. (7,927) (14,505) (17,295)
--------- --------- ---------
Income (loss) from continuing
operations ............................. $ 19,879 $ (10,970) $ (4,725)
========= ========= =========
Capital expenditures ..................... $ 14,066 $ 55,788 $ 12,881
1997 1996 1995
------------- ------------- -------------
ASSET INFORMATION
Identifiable utility assets:
Electric (a) ............................. $2,825,573 $2,954,324 $2,947,832
Gas (a) .................................. 677,991 692,993 699,539
Used in overall utility operations ....... 11,341 114,545 30,084
Nonregulated ............................. 763,186 593,666 615,342
Investment in discontinued operations .... -- 166,320 177,300
---------- ---------- ----------
Total assets ........................... $4,278,091 $4,521,848 $4,470,097
========== ========== ==========
- ----------
(a) Utility plant less accumulated provision for depreciation,
receivables, inventories, nuclear decommissioning trust fund and
regulatory assets.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. Tariffs for the Company's utility
services are established based on historical cost ratemaking. Therefore, the
impact of any realized gains or losses related to financial instruments
applicable to the Company's utility operations is dependent on the treatment
authorized under future ratemaking proceedings.
Cash and cash equivalents -- The carrying amount approximates fair value
due to the short maturity of these instruments.
Quad Cities nuclear decommissioning trust fund -- Fair value is based on
quoted market prices of the investments held by the fund.
Marketable securities -- Fair value is based on quoted market prices.
Debt securities -- Fair value is based on the discounted value of the
future cash flows expected to be received from such investments.
Equity investments carried at cost -- Fair value is based on an estimate
of the Company's share of partnership equity, offers from unrelated third
parties or the discounted value of the future cash flows expected to be
received from such investments.
F-26
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable -- Fair value is estimated to be the carrying amount due to
the short maturity of these issues.
Preferred shares -- Fair value of preferred shares with mandatory
redemption provisions is estimated based on the quoted market prices for
similar issues.
Long-term debt -- Fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
The following table presents the carrying amount and estimated fair value
of certain financial instruments as of December 31 (in thousands):
1997 1996
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
Financial Instruments Owned by the Company:
Equity investments carried at cost ................... $ 33,979 $ 36,491 $ 95,339 $ 273,311
Financial Instruments Issued by the Company:
MidAmerican preferred securities; subject to
mandatory redemption ............................... $ 50,000 $ 53,650 $ 50,000 $ 52,920
MidAmerican-obligated preferred securities; subject
to mandatory redemption .............................. $ 100,000 $ 104,250 $ 100,000 $ 100,490
Long-term debt, including current portion ............. $1,178,769 $1,214,951 $1,474,701 $1,522,500
Included in investments on the Consolidated Balance Sheets is the
Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA).
McLeodUSA common stock has been publicly traded since June 14, 1996. Investor
agreements related to McLeodUSA's initial public offering and subsequent merger
with Consolidated Communications Inc. prohibit the Company from selling or
otherwise disposing of any of the common stock of McLeodUSA prior to September
24, 1998, without approval of McLeodUSA's board of directors. As a result of
the agreements, the Company's investment was considered restricted stock and as
such, was recorded at cost in all periods prior to September 1997. Beginning in
September 1997, the investment is no longer considered restricted for
accounting purposes and is recorded at fair value. At December 31, 1997 the
cost and fair value of the McLeodUSA investment were $45.2 million and $257.9
million, respectively. The unrealized gain is recorded, net of income taxes, as
a valuation allowance in common shareholders' equity. At December 31, 1997, the
net unrealized gain and deferred income taxes for this investment were $212.7
million and $74.4 million, respectively.
F-27
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost, gross unrealized gain and losses and estimated fair
value of investments in debt and equity securities at December 31 are as
follows (in thousands):
1997
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ --------------- -----------
Available-for-sale:
Equity securities ................... $257,316 $226,747 $(10,522) $473,541
Municipal bonds ..................... 35,217 2,116 (1) 37,332
U. S. Government securities ......... 18,753 800 (4) 19,549
Corporate securities ................ 13,579 222 (3) 13,798
Cash equivalents .................... 9,862 -- -- 9,862
-------- -------- -------- --------
$334,727 $229,885 $(10,530) $554,082
======== ======== ======== ========
Held-to-maturity:
Equity securities ................... $ 6,376 $ -- $ -- $ 6,376
Debt securities ..................... 4,567 345 -- 4,912
-------- -------- -------- --------
$ 10,943 $ 345 $ -- $ 11,288
======== ======== ======== ========
1996
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ -----------
Available-for-sale:
Equity securities .................. $208,226 $4,883 $ (8,325) $204,784
Municipal bonds .................... 41,800 3,041 (356) 44,485
U.S. Government securities ......... 26,814 137 (157) 26,794
Cash equivalents ................... 11,152 -- -- 11,152
-------- ------ -------- --------
$287,992 $8,061 $ (8,838) $287,215
======== ====== ======== ========
Held-to-maturity:
Equity securities .................. $ 6,435 $ -- $ (196) $ 6,239
Debt securities .................... 15,445 252 -- 15,697
-------- ------ -------- --------
$ 21,880 $ 252 $ (196) $ 21,936
======== ====== ======== ========
At December 31, 1997, the debt securities held by the Company had the
following maturities (in thousands):
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ---------- ----------- ---------
Within 1 year .............. $ 2,971 $ 2,987 $1,718 $2,014
1 through 5 years .......... 14,057 14,377 2,137 2,143
5 through 10 years ......... 26,821 28,119 139 147
Over 10 years .............. 23,700 25,196 573 608
During 1996, the Company sold a portion of its held-to-maturity securities
due to a significant deterioration in the issuer's credit worthiness. Such
securities had a carrying value of $4.8 million and proceeds from the sale were
$4.3 million.
F-28
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds and the gross realized gains and losses on the disposition of
investments held by the Company for the years ended December 31, are as follows
(in thousands):
1997 1996 1995
----------- ----------- -----------
Proceeds from sales ............ $211,691 $250,772 $106,910
Gross realized gains ........... 14,320 9,920 3,923
Gross realized losses .......... (6,480) (7,950) (3,082)
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for
the years ended December 31 (in thousands):
1997 1996 1995
------------ ---------- ----------
Current
Federal ........................... $ 91,627 $ 80,165 $ 54,430
State ............................. 21,619 22,100 13,330
--------- -------- --------
113,246 102,265 67,760
--------- -------- --------
Deferred
Federal ........................... (29,257) 2,627 5,750
State ............................. (8,242) (264) 1,470
--------- -------- --------
(37,499) 2,363 7,220
Investment tax credit, net ......... (7,357) (6,206) (8,177)
--------- -------- --------
Total ............................. $ 68,390 $ 98,422 $ 66,803
========= ======== ========
Included in Deferred Income Taxes in the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
1997 1996
---------- ----------
Deferred tax assets
Related to:
Investment tax credits ................................ $ 55,998 $ 61,349
Unrealized losses ..................................... 7,880 12,034
Pensions .............................................. 17,339 17,648
AMT credit carry forward .............................. -- 10,188
Nuclear reserves and decommissioning .................. 15,287 8,233
Other ................................................. 1,589 5,839
-------- --------
Total ................................................ $ 98,093 $115,291
======== ========
1997 1996
--------- ---------
Deferred tax liabilities
Related to:
Depreciable property .................................. $504,594 $545,459
Income taxes recoverable through future rates ......... 197,877 201,998
Unrealized gains ...................................... 81,501 --
Energy efficiency ..................................... 40,902 44,734
Reacquired debt ....................................... 15,346 14,265
FERC Order 636 ........................................ 2,857 9,023
Other ................................................. 16,811 22,112
--------- ---------
Total ................................................ $859,888 $837,591
========= =========
F-29
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table is a reconciliation between the effective income tax
rate, before preferred stock dividends of subsidiary, indicated by the
Consolidated Statements of Income and the statutory federal income tax rate for
the years ended December 31:
1997 1996 1995
--------- --------- ---------
Effective federal and state income tax rate .................. 31% 39% 34%
Amortization of investment tax credit ........................ 3 2 4
State income tax, net of federal income tax benefit .......... (4) (6) (5)
Dividends received deduction ................................. 2 2 2
Other ........................................................ 3 (2) --
---- ---- ----
Statutory federal income tax rate ............................ 35% 35% 35%
==== ==== ====
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in
thousands):
1997 1996
---------- -----------
Materials and supplies, at average cost .......... $31,425 $ 32,222
Coal stocks, at average cost ..................... 14,225 32,293
Gas in storage, at LIFO cost ..................... 35,430 23,915
Fuel oil, at average cost ........................ 2,344 1,264
Other ............................................ 2,667 1,170
------- --------
Total ........................................... $86,091 $ 90,864
======= ========
At December 31, 1997 prices, the current cost of gas in storage was $50.3
million.
(17) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF MIDAMERICAN ENERGY FINANCING I:
In December 1996, MidAmerican Energy Financing I (the Trust), a
wholly-owned statutory business trust of MidAmerican, issued 4,000,000 shares
of 7.98% Series MidAmerican-obligated mandatorily redeemable preferred
securities (the Preferred Securities). The sole assets of the Trust are $103.1
million of MidAmerican 7.98% Series A Debentures due 2045 (the Debentures).
There is a full and unconditional guarantee by MidAmerican of the Trust's
obligations under the Preferred Securities. MidAmerican has the right to defer
payments of interest on the Debentures by extending the interest payment period
for up to 20 consecutive quarters. If interest payments on the Debentures are
deferred, distributions on the Preferred Securities will also be deferred.
During any deferral, distributions will continue to accrue with interest
thereon and MidAmerican may not declare or pay any dividend or other
distribution on, or redeem or purchase, any of its capital stock.
The Debentures may be redeemed by MidAmerican on or after December 18,
2001, or at an earlier time if there is more than an insubstantial risk that
interest paid on the Debentures will not be deductible for federal income tax
purposes. If the Debentures, or a portion thereof, are redeemed, the Trust must
redeem a like amount of the Preferred Securities. If a termination of the Trust
occurs, the Trust will distribute to the holders of the Preferred Securities a
like amount of the Debentures unless such a distribution is determined not to
be practicable. If such determination is made, the holders of the Preferred
Securities will be entitled to receive, out of the assets of the trust after
satisfaction of its liabilities, a liquidation amount of $25 for each Preferred
Security held plus accrued and unpaid distributions.
F-30
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SALE OF ACCOUNTS RECEIVABLE:
In 1997 MidAmerican entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the majority of its
billed accounts receivable to MidAmerican Energy Funding Corporation (Funding
Corp.), a special purpose entity established to purchase accounts receivable
from MidAmerican. Funding Corp. in turn has sold receivable interests to
outside investors. In consideration of the sale, MidAmerican received $70
million in cash and the remaining balance in the form of a subordinated note
from Funding Corp. The agreement is structured as a true sale under which the
creditors of Funding Corp. will be entitled to be satisfied out of the assets
of Funding Corp. prior to any value being returned to MidAmerican or its
creditors and, as such, the accounts receivable sold are not reflected on
Holdings' or MidAmerican's Consolidated Balance Sheets. At December 31, 1997,
$130.0 million, net of reserves, was sold under the agreement.
(19) EARNINGS PER SHARE
Reconciliation for the Income and Shares of the Basic and Diluted per
share computations for income from continuing operations for the years ended
December 31 are as follows (in thousands, except per share amounts):
1997 1996
--------------------------------- -----------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- -------- -------- ----------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ......... $139,332 $143,761
BASIC EPS
Income Available to Common
Shareholders ............................. $139,332 98,058 $1.42 $143,761 100,752 $ 1.43
===== ======
EFFECT OF DILUTIVE SECURITIES
Stock Options ............................. -- 107 -- 89
-------- ------ -------- -------
DILUTED EPS
Income Available to Common
Shareholders ............................. $139,332 98,165 $1.42 $143,761 100,841 $ 1.43
======== ====== ===== ======== ======= ======
1995
---------------------------------
PER
SHARE
INCOME SHARES AMOUNT
----------- --------- -------
INCOME FROM CONTINUING OPERATIONS ............... $119,705
BASIC EPS
Income Available to Common Shareholders ......... $119,705 100,401 $1.19
=====
EFFECT OF DILUTIVE SECURITIES
Stock Options ................................... -- 20
-------- -------
DILUTED EPS
Income Available to Common Shareholders ......... $119,705 100,421 $1.19
======== ======= =====
F-31
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
1997
------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues ................................. $584,395 $390,615 $440,698 $506,573
Operating income ................................... 77,233 55,395 97,948 39,930
Income from continuing operations .................. 34,174 24,176 49,705 31,277
Income (loss)from discontinued operations .......... (234) 408 (2,793) (1,609)
Earnings on common stock ........................... 33,940 24,584 46,912 29,668
Earnings per average common share and Earnings
per average common share assuming dilution:
Income from continuing operations .................. $ 0.34 $ 0.24 $ 0.51 $ 0.33
Income (loss) from discontinued operations ......... -- 0.01 (0.03) (0.02)
-------- -------- -------- --------
$ 0.34 $ 0.25 $ 0.48 $ 0.31
======== ======== ======== ========
1996
------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues ................................. $ 507,596 $ 391,466 $ 434,678 $ 538,872
Operating income ................................... 100,141 65,004 97,919 80,574
Income from continuing operations .................. 48,405 25,099 40,548 29,709
Income (loss) from discontinued operations ......... 2,642 3,896 (17,992) (1,261)
Earnings on common stock ........................... 51,047 28,995 22,556 28,448
Earnings per average common share and Earnings
per average common share assuming dilution:
Income from continuing operations .................. $ 0.48 $ 0.25 $ 0.40 $ 0.29
Income (loss) from discontinued operations ......... 0.03 0.04 (0.18) (0.01)
--------- --------- --------- ---------
$ 0.51 $ 0.29 $ 0.22 $ 0.28
========= ========= ========= =========
The quarterly data reflect seasonal variations common in the utility
industry.
F-32
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) OTHER INFORMATION:
The Company completed a merger-related restructuring plan during 1995.
Other operating expenses in the Consolidated Statements of Income for 1995
includes $33.4 million related to the restructuring plan.
Non-Operating -- Other, Net, as shown on the Consolidated Statements of
Income includes the following for the years ended December 31 (in thousands):
1997 1996 1995
------------ ------------- -------------
Other-than-temporary declines in value of investments and
other assets ............................................... $ (3,443) $ (15,566) $ (17,971)
IES merger costs ............................................ -- (8,689) --
Special purpose fund income ................................. 1,989 3,301 1,863
Energy efficiency carrying charges .......................... 4,993 3,255 3,092
Gain on sale of cushion gas ................................. 855 3,182 --
Incentive gas purchase plan award ........................... 4,914 2,677 --
Agency gas sales, net ....................................... 1,184 1,840 228
Gain (loss) on reacquisition of long-term debt .............. (556) 1,105 --
Gain on sale of assets, net ................................. 10,213 974 8,570
MidAmerican merger costs .................................... -- -- (4,624)
Allowance for equity funds used during construction ......... -- -- 481
Income (loss) from equity method investments ................ 1,273 2,510 (312)
NPPD settlement ............................................. 2,248 -- --
Other ....................................................... (1,559) 1,391 (1,794)
-------- --------- ---------
Total ...................................................... $ 22,111 $ (4,020) $ (10,467)
======== ========= =========
F-33
MIDAMERICAN ENERGY HOLDINGS 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
------------------------ ----------------------- ---------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ------------- -------------
OPERATING REVENUES
Electric utility ................................. $287,094 $261,801 $543,448 $516,117 $1,153,631 $1,086,271
Gas utility ...................................... 67,288 80,913 240,488 292,478 484,316 547,627
Nonregulated ..................................... 39,041 42,549 81,015 156,827 183,863 305,074
-------- -------- -------- -------- ---------- ----------
393,423 385,263 864,951 965,422 1,821,810 1,938,972
-------- -------- -------- -------- ---------- ----------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity ............... 57,085 52,141 102,284 111,424 226,620 229,243
Cost of gas sold ................................ 32,648 45,099 137,969 186,932 297,053 360,521
Other operating expenses ........................ 111,746 98,691 218,523 192,298 456,019 364,703
Maintenance ..................................... 30,740 22,349 53,323 46,098 105,315 90,844
Depreciation and amortization ................... 44,191 42,060 88,382 84,068 174,854 166,654
Property and other taxes ........................ 24,295 24,853 49,765 50,343 100,739 93,871
-------- -------- -------- -------- ---------- ----------
300,705 285,193 650,246 671,163 1,360,600 1,305,836
-------- -------- -------- -------- ---------- ----------
Nonregulated:
Cost of sales ................................... 24,197 37,243 63,233 146,213 157,202 287,219
Other ........................................... 14,180 7,432 20,489 15,418 35,147 34,796
-------- -------- -------- -------- ---------- ----------
38,377 44,675 83,722 161,631 192,349 322,015
-------- -------- -------- -------- ---------- ----------
Total operating expenses ........................ 339,082 329,868 733,968 832,794 1,552,949 1,627,851
-------- -------- -------- -------- ---------- ----------
OPERATING INCOME ................................. 54,341 55,395 130,983 132,628 268,861 311,121
-------- -------- -------- -------- ---------- ----------
NON-OPERATING INCOME
Interest income .................................. 2,178 1,562 4,630 3,115 6,833 4,603
Dividend income .................................. 2,738 3,707 5,452 7,255 11,989 15,338
Realized gains and losses on securities, net ..... 954 98 2,019 616 9,201 (723)
Other, net ....................................... 778 3,279 6,435 7,264 21,282 (1,484)
-------- -------- -------- -------- ---------- ----------
6,648 8,646 18,536 18,250 49,305 17,734
-------- -------- -------- -------- ---------- ----------
FIXED CHARGES
Interest on long-term debt ....................... 20,324 22,829 40,608 46,292 84,214 97,496
Other interest expense ........................... 3,416 4,119 6,628 5,448 11,214 10,666
Preferred dividends of subsidiaries .............. 3,233 3,231 6,465 8,000 12,933 14,028
Allowance for borrowed funds ..................... (921) (603) (1,675) (1,312) (2,960) (3,068)
-------- -------- -------- -------- ---------- ----------
26,052 29,576 52,026 58,428 105,401 119,122
-------- -------- -------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES .................................... 34,937 34,465 97,493 92,450 212,765 209,733
INCOME TAXES ..................................... 13,937 10,289 37,760 34,100 72,050 81,126
-------- -------- -------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ................ 21,000 24,176 59,733 58,350 140,715 128,607
-------- -------- -------- -------- ---------- ----------
DISCONTINUED OPERATIONS
Income (loss) from operations (net of
income taxes) ................................... -- 408 -- 698 (816) (3,723)
Loss on disposal (net of income taxes) ........... -- -- -- (524) (3,586) (15,356)
-------- -------- -------- -------- ---------- ----------
-- 408 -- 174 (4,402) (19,079)
-------- -------- -------- -------- ---------- ----------
NET INCOME ....................................... $ 21,000 $ 24,584 $ 59,733 $ 58,524 $ 136,313 $ 109,528
======== ======== ======== ======== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING ................ 94,473 98,621 94,675 99,534 95,619 100,096
EARNINGS PER COMMON SHARE
--BASIC AND DILUTED:
Continuing operations ............................ $ 0.22 $ 0.24 $ 0.63 $ 0.59 $ 1.47 $ 1.28
Discontinued operations .......................... -- 0.01 -- -- (0.04) (0.19)
-------- -------- -------- -------- ---------- ----------
Earnings per average common share ................ $ 0.22 $ 0.25 $ 0.63 $ 0.59 $ 1.43 $ 1.09
======== ======== ======== ======== ========== ==========
DIVIDENDS DECLARED PER SHARE ..................... $ 0.30 $ 0.30 $ 0.60 $ 0.60 $ 1.20 $ 1.20
======== ======== ======== ======== ========== ==========
The accompanying notes are an integral part of these statements.
F-34
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30
------------------------- ----------------------- -------------------------
1998 1997 1998 1997 1998 1997
------------ ---------- ---------- ---------- ----------- -----------
NET INCOME ................................ $ 21,000 $ 24,584 $59,733 $58,524 $136,313 $109,528
--------- -------- ------- ------- -------- --------
OTHER COMPREHENSIVE INCOME
Unrealized (losses) gains on securities:
Unrealized holding gains (losses) during
period ................................... (29,603) (1,104) 53,253 3,022 274,158 5,810
Less reclassification adjustment for
realized gains (losses) reflected in net
income during period ................... 954 95 2,019 613 9,193 (729)
--------- -------- ------- ------- -------- --------
(30,557) (1,199) 51,234 2,409 264,965 6,539
Income tax (benefit) expense .............. (10,535) (429) 18,014 789 92,792 2,234
--------- -------- ------- ------- -------- --------
Other comprehensive income, net .......... (20,022) (770) 33,220 1,620 172,173 4,305
--------- -------- ------- ------- -------- --------
COMPREHENSIVE INCOME ...................... $ 978 $ 23,814 $92,953 $60,144 $308,486 $113,833
========= ======== ======= ======= ======== ========
The accompanying notes are an integral part of these statements.
F-35
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
--------------------------------------------
JUNE 30 DECEMBER 31
----------------------------- ------------
1998 1997 1997
------------- ------------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ........................................................ $4,106,986 $4,050,767 $4,084,920
Gas ............................................................. 766,127 731,978 756,874
---------- ---------- ----------
4,873,113 4,782,745 4,841,794
Less accumulated depreciation and amortization .................. 2,350,265 2,215,077 2,275,099
---------- ---------- ----------
2,522,848 2,567,668 2,566,695
Construction work in progress ................................... 82,671 37,880 55,418
---------- ---------- ----------
2,605,519 2,605,548 2,622,113
---------- ---------- ----------
POWER PURCHASE CONTRACT ......................................... 168,430 190,504 173,107
---------- ---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS ........................... -- 6,610 --
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents ....................................... 121,720 57,297 10,468
Receivables ..................................................... 160,212 203,511 207,471
Inventories ..................................................... 64,471 69,796 86,091
Other ........................................................... 14,970 10,227 18,452
---------- ---------- ----------
361,373 340,831 322,482
---------- ---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ...................... 883,797 605,669 799,524
---------- ---------- ----------
OTHER ASSETS .................................................... 388,378 386,543 360,865
---------- ---------- ----------
TOTAL ASSETS .................................................... $4,407,497 $4,135,705 $4,278,091
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity ..................................... $1,311,583 $1,186,313 $1,301,286
MidAmerican preferred securities, not subject to mandatory
redemption ..................................................... 31,760 31,765 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ............................... 50,000 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary trust
holding solely MidAmerican junior subordinated debentures..... 100,000 100,000 100,000
Long-term debt (excluding current portion) ...................... 1,043,909 1,109,531 1,034,211
---------- ---------- ----------
2,537,252 2,477,609 2,517,260
---------- ---------- ----------
CURRENT LIABILITIES
Notes payable ................................................... 167,429 146,185 138,054
Current portion of long-term debt ............................... 219,260 129,756 144,558
Current portion of power purchase contract ...................... 14,361 13,717 14,361
Accounts payable ................................................ 90,593 87,515 145,855
Taxes accrued ................................................... 108,916 81,795 92,629
Interest accrued ................................................ 21,637 26,457 22,355
Other ........................................................... 69,475 48,969 38,766
---------- ---------- ----------
691,671 534,394 596,578
---------- ---------- ----------
OTHER LIABILITIES
Power purchase contract ......................................... 83,143 97,504 83,143
Deferred income taxes ........................................... 772,609 710,431 761,795
Investment tax credit ........................................... 80,274 85,985 83,127
Other ........................................................... 242,548 229,782 236,188
---------- ---------- ----------
1,178,574 1,123,702 1,164,253
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ............................ $4,407,497 $4,135,705 $4,278,091
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-36
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------ -------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ---------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................... $ 21,000 $ 24,584 $ 59,733 $ 58,524
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ................................... 49,624 47,573 98,060 95,982
Net decrease in deferred income taxes and investment tax
credit, net ................................................... (4,748) (6,795) (10,121) (11,948)
Amortization of other assets .................................... 10,133 5,596 19,345 12,474
Capitalized cost of real estate sold ............................ 308 506 458 796
Loss from discontinued operations ............................... -- (408) -- (174)
Gain on sale of securities, assets and other investments ........ (1,063) (362) (8,595) (1,827)
Other-than-temporary decline in value of investments ............ 72 92 110 252
Impact of changes in working capital, net of effects from
discontinued operations ....................................... (31,556) (77,780) 63,377 71,709
Other ........................................................... 13,826 3,584 15,902 (751)
--------- -------- --------- ---------
Net cash provided (used) ......................................... 57,596 (3,410) 238,269 225,037
--------- -------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ................................ (43,906) (37,426) (68,592) (64,029)
Quad Cities Nuclear Power Station decommissioning trust fund ..... (2,844) (2,140) (5,658) (4,280)
Deferred energy efficiency expenditures .......................... -- (2,626) -- (6,349)
Nonregulated capital expenditures ................................ (17,485) (4,377) (38,683) (7,002)
Purchase of real estate brokerage company ........................ (78,985) -- (78,985) --
Purchase of securities ........................................... (45,125) (53,064) (98,354) (116,407)
Proceeds from sale of securities ................................. 52,772 53,397 104,817 132,049
Proceeds from sale of assets and other investments ............... 20,145 526 28,344 13,670
Investment in discontinued operations ............................ -- (1,822) -- 145,193
Other investing activities, net .................................. 2,765 (289) (13) 52
--------- -------- --------- ---------
Net cash (used) provided ......................................... (112,663) (47,821) (157,124) 92,897
--------- -------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ............................................ (28,310) (29,544) (56,686) (59,723)
Issuance of long-term debt, net of issuance cost ................. 158,440 -- 158,440 --
Retirement of long-term debt, including reacquisition cost ....... (391) (34,672) (75,422) (61,790)
Reacquisition of preferred shares ................................ (1) (1) (3) (4)
Reacquisition of common shares ................................... (10,754) (26,235) (25,597) (46,564)
Decrease in MidAmerican Capital Company unsecured revolving
credit facility ................................................. (3,200) -- -- (174,500)
Net increase (decrease) in notes payable ......................... 26,366 105,975 29,375 (15,805)
--------- -------- --------- ---------
Net cash provided (used) ........................................ 142,150 15,523 30,107 (358,386)
--------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............. 87,083 (35,708) 111,252 (40,452)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 34,637 93,005 10,468 97,749
--------- -------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 121,720 $ 57,297 $ 121,720 $ 57,297
========= ======== ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ........................ $ 18,865 $ 19,708 $ 43,999 $ 49,978
========= ======== ========= =========
Income taxes paid ................................................ $ 33,927 $ 76,690 $ 34,651 $ 76,753
========= ======== ========= =========
The accompanying notes are an integral part of these statements.
F-37
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A) GENERAL:
The consolidated financial statements included herein have been prepared
by Holdings, 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,
comprehensive income 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 included in the Company's latest Annual Report on Form
10-K.
B) ENVIRONMENTAL MATTERS:
1) Manufactured Gas Plant Facilities:
The United States Environmental Protection Agency (EPA) and the 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.
MidAmerican 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 MidAmerican has any responsibility for remedial action. MidAmerican
is currently conducting field investigations at seventeen of the sites and has
completed investigations at one of the sites. In addition, MidAmerican has
completed removals at three of the sites. MidAmerican is continuing to evaluate
several of the sites to determine its responsibility, if any, for conducting
site investigations or other site activity.
MidAmerican's present estimate of probable remediation costs for the sites
discussed above as of June 30, 1998 is $25 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. MidAmerican's present rates in Iowa
provide for a fixed annual recovery of MGP costs. MidAmerican intends to pursue
recovery of the remediation costs from other PRPs and its insurance carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has potential legal liability
for the site and whether information exists to indicate that contaminated
wastes remain at the site. Second, if potential legal liability exists, the
costs of performing a preliminary investigation and the costs of removing known
contaminated soil are accrued. Finally, as the investigation is performed and
if it is determined remedial action is required, the best estimate of
remediation costs is accrued. If necessary, the estimate is revised when a
consent order is issued. The estimated recorded liabilities for these
properties include incremental direct costs of the remediation effort, costs
for future monitoring at sites and costs of compensation to employees for time
expected to be spent directly on the remediation effort. The estimated recorded
liabilities for these properties are based upon preliminary data. Thus, actual
costs could vary significantly from the estimates. The estimate could change
materially based on facts and circumstances derived from site investigations,
changes in required remedial action and changes in technology relating to
remedial alternatives. 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.
F-38
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B) ENVIRONMENTAL MATTERS: (CONTINUED)
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican's financial position or results of operations.
2) Clean Air Act:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards (NAAQS) for ozone and a new standard for fine particulate
matter. Based on data to be obtained from monitors located throughout each
state, the EPA will determine which states have areas that do not meet the air
quality standards (i.e., areas that are classified as nonattainment). If a
state has area(s) classified as nonattainment area(s), the state is required to
submit a State Implementation Plan specifying how it will reach attainment of
the standards through emission reductions or other means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. The attainment
status of areas in the state of Iowa will not be known for two to three years.
However, if MidAmerican's operations are determined to contribute to
nonattainment, the installation of additional control equipment, such as
scrubbers and/or selective catalytic reduction, on MidAmerican's units could be
required. The cost to install such equipment could be significant. MidAmerican
will continue to follow the attainment status of the areas in which it operates
and evaluate the potential impact of the status of these areas on MidAmerican
under the new regulations.
Following recommendations provided by the Ozone Transport Assessment
Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these
emissions reduction requirements as EPA's rule is currently drafted, and, as
such, MidAmerican does not anticipate that its facilities will be subject to
additional emissions reductions as a result of this initiative. The EPA
anticipates issuing its final rules in September 1998. MidAmerican will
continue to closely monitor this rulemaking proceeding.
C) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced
its Illinois electric service rates by annual amounts of $13.1 million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively.
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other
parties in a consolidated rate proceeding involving MidAmerican's electric
pricing proposal and a filing by the OCA. The agreement includes a number of
components of MidAmerican's pricing proposal. Six major components of the
settlement and their status are as follows:
1) On an annualized basis, prices for residential customers were reduced
$8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July
11, 1997, and June 1, 1998 respectively, for a total annual decrease of $23.5
million.
2) Rates for industrial customers will be reduced by $6 million annually
and rates for commercial customers will be reduced by $4 million annually.
MidAmerican has been given permission to implement these reductions through a
retail access pilot project and through negotiated individual contracts. In the
event that these contracts in the aggregate do not reduce rates by $6 million
and $4 million, respectively, MidAmerican is required to apply any remaining
amount to across-the-board rate reductions to customers who do not enter into
contracts.
F-39
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C) RATE MATTERS: (CONTINUED)
The effective date for these rate reductions was set for June 1, 1998 in
the IUB Order approving the settlement. However, MidAmerican has pending before
the IUB a request to extend the deadlines until September 1, 1998 for
industrial customers, and December 31, 1998 for commercial customers. That
request would involve an obligation to increase the amount of the reduction on
a one-time basis to reflect the time value of money between June 1, 1998 and
the new requested deadlines. MidAmerican estimates it will not have any
interest obligation with respect to the industrial contracts, and will not
incur any material interest obligation with respect to its commercial
contracts.
The negotiated contracts have differing terms and conditions as well as
prices. The contracts range in length from five to ten years, and some have
price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 10-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose
programs, tax changes, and transition costs. While the contract prices are
fixed (except for the potential adjustment elements), the costs MidAmerican
incurs to fulfill these contracts will vary. On an aggregate basis the annual
revenues under contract are approximately $125 million.
The IUB is currently considering the contracting process in two
proceedings. The outcome of those proceedings could impact further contracting
efforts, as well as determine whether any of the contracts will need to be
renegotiated, and the extent to which the annualized rate reduction will take
the form of negotiated contracts versus across-the-board rate reductions.
3) A tracking mechanism (Cooper Tracker) is being used to currently
recover costs for capital improvements required by the Cooper Nuclear Station
Power Purchase Contract which will offset approximately $6 million of the rate
reductions in 1998. Other operating expenses will correspondingly increase due
to currently expensing the related costs.
4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July
11, 1997, MidAmerican collected fuel costs from Iowa customers on a current
basis through the EAC, and thus, fuel costs had little impact on net income.
Since then, base rates for Iowa customers include a factor for recovery of a
representative level of fuel costs. To the extent actual fuel costs vary from
that factor, pre-tax earnings are impacted. The fuel cost factor will be
reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs
vary 15% above or below the factor included in base rates.
5) If MidAmerican's annual Iowa electric jurisdictional return on common
equity exceeds 12%, then an equal sharing between customers and shareholders of
earnings above the 12% level begins; if it exceeds 14%, then two-thirds of
MidAmerican's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The agreement permits MidAmerican to file for
increased rates if the return falls below 9%. Other parties signing the
agreement are prohibited from filing for reduced rates prior to 2001 unless the
return, after reflecting credits to customers, exceeds 14%.
6) MidAmerican will develop a pilot program for a market access service
which allows customers with at least 4 MW of load to choose energy suppliers.
The pilot program, which is subject to approval by the IUB and the Federal
Energy Regulatory Commission (FERC), is limited to 60 MW of participation the
first year and can be expanded by 15 MW annually until the conclusion of the
program. Any loss of revenues associated with the pilot program will be
considered part of the $10 million annual reduction for commercial and
industrial customers as described above, but may not be recovered from other
customer classes. The program was filed with the IUB and the FERC in September
1997. The Company anticipates that the necessary approvals will be received by
the fourth quarter of 1998.
D) 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
F-40
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: (CONTINUED)
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 majority of
MidAmerican's electric and gas utility operations currently meet the criteria
of SFAS 71, but its applicability is periodically reexamined. On December 16,
1997, MidAmerican's generation operations serving Illinois were no longer
subject to the provisions of SFAS 71 due to passage of restructuring
legislation in Illinois. Thus, MidAmerican was required to write off regulatory
assets and liabilities from its balance sheet related to its Illinois
generation operations. The net amount of such write-offs were immaterial. If
other utility operations no longer meet the criteria of SFAS 71, MidAmerican
would be required to write off the related regulatory assets and liabilities
from its balance sheet and thus, a material adjustment to earnings in that
period could result. As of June 30, 1998, MidAmerican had approximately $312
million of regulatory assets in its Consolidated Balance Sheet because these
costs are expected to be recovered in future charges to utility customers.
E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES:
The MidAmerican Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely MidAmerican Junior Subordinated Debentures
included in the Consolidated Balance Sheets were issued by MidAmerican Energy
Financing I (the Trust), a wholly-owned statutory business trust of
MidAmerican. The sole assets of the Trust are $103.1 million of MidAmerican
7.98% Series A Debentures due 2045.
F) COMMON SHAREHOLDERS' EQUITY:
In March 1997, Holdings announced its plan to repurchase up to $200
million of the Company's common stock. The Company plans to purchase the shares
from time to time as market conditions warrant. As of June 30, 1998, the
Company had repurchased approximately 6.2 million shares for $114.8 million
under the plan. In addition, a subsidiary has acquired 437,131 shares of
Holdings common stock which are also excluded from shares outstanding.
G) DETAIL OF OTHER COMPREHENSIVE INCOME -- INCOME TAXES:
For fiscal years beginning after December 15, 1997, full sets of
general-purpose financial statements are required to display comprehensive
income and its components in a financial statement that is displayed with the
same prominence as the other financial statements. Comprehensive income refers,
in general, to changes in the Company's equity, except those resulting from
transactions with shareholders. "Unrealized holding gains (losses)" reflects
the overall increase (decrease) in the market value of marketable securities
held by the Company as available-for-sale. The "reclassification adjustment"
removes any gains (losses) that have been realized from sales of those
securities and reflected in the Company's Net Income.
F-41
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G) DETAIL OF OTHER COMPREHENSIVE INCOME -- INCOME TAXES: (CONTINUED)
The following table shows the income tax expense or benefit related to
each component (in thousands):
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30
---------------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
------------- ------------ ------------ --------- ----------- -----------
Unrealized holding (losses)/gains
during period
Before income taxes .................. $ (29,603) $ (1,104) $ 53,253 $3,022 $ 274,158 $ 5,810
Income tax benefit/(expense) ......... 10,195 392 (18,697) (949) (95,903) (1,954)
--------- -------- --------- ------ --------- --------
(19,408) (712) 34,556 2,073 178,255 3,856
--------- -------- --------- ------ --------- --------
Less reclassification adjustment for
realized gains/(losses) reflected in
net income during period
Before income taxes .................. 954 95 2,019 613 9,193 (729)
Income tax (expense)/benefit ......... (340) (37) (683) (160) (3,111) 280
--------- -------- --------- ------ --------- --------
614 58 1,336 453 6,082 (449)
--------- -------- --------- ------ --------- --------
Other Comprehensive Income,
Net ................................. $ (20,022) $ (770) $ 33,220 $1,620 $ 172,173 $ 4,305
========= ======== ========= ====== ========= ========
H) MCLEODUSA INCORPORATED INVESTMENT:
Included in investments on the Consolidated Balance Sheets is the
Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA).
McLeodUSA common stock has been publicly traded since June 14, 1996. Investor
agreements related to McLeodUSA's initial public offering and subsequent merger
with Consolidated Communications Inc. prohibit the Company from selling or
otherwise disposing of any of the common stock of McLeodUSA prior to September
24, 1998, without approval of McLeodUSA's board of directors. As a result of
the agreements, the Company's investment was considered restricted stock and,
as such, was recorded at cost in all periods prior to September 1997. Beginning
in September 1997, the investment is no longer considered restricted for
accounting purposes and is recorded at fair value. At June 30, 1998, the cost
and fair value of the McLeodUSA investment were $45.2 million and $313.3
million, respectively. The unrealized gain is recorded, net of income taxes, as
accumulated comprehensive income in common shareholders' equity. At June 30,
1998, the unrealized gain and deferred income taxes for this investment were
$268.1 million and $93.8 million, respectively.
I) SUBSEQUENT EVENT:
On August 11, 1998, a definitive merger agreement was entered into between
the Company and CalEnergy, a global provider of energy services. Under the
terms of the agreement, the shareholders of the Company will receive $27.15
cash for each share of their common stock reflecting a 36 percent premium over
the August 11, 1998 closing price. The merger will need to be approved by the
shareholders of both companies, the Federal Energy Regulatory Commission, and
the Nuclear Energy Regulatory Commission. Filings will also be made with the
Iowa Utilities Board, which has the right to review the merger and to
disapprove it only if found not in the public interest, the Federal Trade
Commission and the Department of Justice. State regulators in Illinois will be
notified of the merger. Management believes completion of the merger could
occur by the first quarter of 1999.
F-42
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30, 1998 .......... P-3
Unaudited Pro Forma Combined Condensed Statement of Operations for the Six Months
Ended June 30, 1998 ............................................................... P-4
Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1997 ...................................................... P-5
Notes to Unaudited Pro Forma Combined Condensed Financial Data ..................... P-6
P-1
The following unaudited pro forma combined condensed financial statements
are based on the historical consolidated financial statements of CalEnergy
Company, Inc. ("CalEnergy") and MidAmerican Energy Holdings Company
("MidAmerican"), combined and adjusted to give effect on a pro forma basis to
the proposed offering of senior debt securities of CalEnergy (the "Securities
Offering") and refinancing of CalEnergy's 10 1/4% Senior Discount Notes, and on
a pro forma as adjusted basis, to those transactions and the proposed merger of
a subsidiary of CalEnergy with and into MidAmerican (the "MidAmerican Merger")
and the transactions contemplated thereby (including the related financing), as
described in the notes thereto. Certain amounts in the MidAmerican financial
statements have been reclassified to conform to CalEnergy's presentation. These
statements should be read in conjunction with the historical financial
statements and notes thereto of MidAmerican (which are included in this Current
Report on Form 8-K) and of CalEnergy.
The unaudited pro forma combined condensed statements of earnings for the
year ended December 31, 1997 and for the six months ended June 30, 1998 present
the results for CalEnergy and MidAmerican as if the MidAmerican Merger had
occurred at the beginning of each period presented. The accompanying unaudited
pro forma combined condensed balance sheet as of June 30, 1998 gives effect to
the MidAmerican Merger as of that date.
The pro forma adjustments are based upon preliminary estimates,
information currently available and certain assumptions that management
believes are reasonable under the circumstances. CalEnergy's actual
consolidated financial statements will reflect the effects of the MidAmerican
Merger on and after the effective time of the MidAmerican Merger rather than
the dates indicated above. The unaudited pro forma combined condensed financial
statements neither purport to represent what the combined results of operations
or financial condition actually would have been had the MidAmerican Merger and
related transactions in fact occurred on the assumed dates, nor to project the
combined results of operations and financial position for any future period.
The MidAmerican Merger will be accounted for by the purchase method and,
therefore, assets and liabilities of MidAmerican will be recorded at their fair
values. The excess of the purchase cost over the fair value of net assets
acquired at the effective time of the MidAmerican Merger will be recorded as
goodwill. Allocations included in the pro forma statements are based on
analysis which is not yet completed. Accordingly, the final value of the
purchase price and its allocation may differ, perhaps significantly, from the
amounts included in these pro forma statements.
At the effective time of the MidAmerican Merger, the MidAmerican
shareholders will receive $27.15 in cash for each issued and outstanding share
of MidAmerican common stock. The pro forma combined condensed financial
statements assume that all MidAmerican shares were tendered for the cash
consideration of $27.15 per share. The total consideration for the transaction
using this value was approximately $2.6 billion.
P-2
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
RETIREMENT
SECURITIES OF SENIOR
CALENERGY OFFERING DISCOUNT NOTES PRO FORMA
------------- ------------ ---------------- -------------
(NOTE 1) (NOTE 2)
ASSETS
Cash and cash equivalents ...................... $ 272,446 $1,373,000 $ (543,466) $1,101,980
Restricted cash and investments ................ 407,289 -- -- 407,289
Marketable securities .......................... -- -- -- --
Accounts receivable ............................ 479,704 -- -- 479,704
Property, plants, contracts and
equipment, net ................................ 4,358,649 -- -- 4,358,649
Excess of cost over fair value of net
assets acquired, net .......................... 1,449,972 -- -- 1,449,972
Equity investments ............................. 128,110 -- -- 128,110
Deferred charges and other assets .............. 385,711 27,000 (6,150) 406,561
---------- ---------- ---------- ----------
Total assets ................................. $7,481,881 $1,400,000 $ (549,616) $8,332,265
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ............................... $ 192,172 $ -- $ -- $ 192,172
Accrued interest and other liabilities ......... 1,134,383 -- -- 1,134,383
Parent company debt ............................ 1,303,875 1,400,000 (529,640) 2,174,235
Subsidiary and project debt .................... 2,850,240 -- -- 2,850,240
Deferred income taxes .......................... 550,644 -- 550,644
---------- ---------- ----------
Total liabilities ............................ 6,031,314 1,400,000 (529,640) 6,901,674
Deferred income ................................ 50,979 -- -- 50,979
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trusts ............... 553,930 -- -- 553,930
Preferred securities of subsidiary ............. 66,054 -- -- 66,054
Total stockholders' equity ..................... 779,604 -- (19,976) 759,628
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity ...................................... $7,481,881 $1,400,000 $ (549,616) $8,332,265
========== ========== ========== ==========
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
-------------- ---------- ------------- ----------------- --------------
(NOTE 3) (NOTE 4) (NOTES 5, 6 & 7)
ASSETS
Cash and cash equivalents ...................... $740,000 $600,000 $ 121,720 $ (2,563,075) $ 625
Restricted cash and investments ................ -- -- -- -- 407,289
Marketable securities .......................... -- -- 619,878 -- 619,878
Accounts receivable ............................ -- -- 160,212 -- 639,916
Property, plants, contracts and
equipment, net ................................ -- -- 2,773,949 -- 7,132,598
Excess of cost over fair value of net
assets acquired, net .......................... -- -- -- 1,373,226 2,823,198
Equity investments ............................. -- -- -- -- 128,110
Deferred charges and other assets .............. 10,000 -- 731,738 (38,765) 1,109,534
-------- -------- ---------- ------------ -----------
Total assets ................................. $750,000 $600,000 $4,407,497 $ (1,228,614) $12,861,148
======== ======== ========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ............................... $ -- $ -- $ 90,593 $ -- $ 282,765
Accrued interest and other liabilities ......... -- -- 620,354 142,405 1,897,142
Parent company debt ............................ -- -- -- -- 2,174,235
Subsidiary and project debt .................... 750,000 -- 1,430,598 2,422 5,033,260
Deferred income taxes .......................... -- -- 772,609 (62,485) 1,260,768
-------- -------- ---------- ------------ -----------
Total liabilities ............................ 750,000 -- 2,914,154 82,342 10,648,170
Deferred income ................................ -- -- -- -- 50,979
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trusts ............... -- -- -- -- 553,930
Preferred securities of subsidiary ............. -- 150,000 181,760 627 398,441
Total stockholders' equity ..................... -- 450,000 1,311,583 (1,311,583) 1,209,628
-------- -------- ---------- ------------ -----------
Total liabilities and stockholders'
equity ...................................... $750,000 $600,000 $4,407,497 $ (1,228,614) $12,861,148
======== ======== ========== ============ ===========
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data
P-3
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RETIREMENT
SECURITIES OF SENIOR
CALENERGY OFFERING DISCOUNT NOTES PRO FORMA
------------- ------------ ---------------- -------------
(NOTE 1) (NOTE 2)
REVENUES:
Operating revenue ....................... $1,212,440 $ -- $ -- $1,212,440
Interest and other income ............... 52,389 -- -- 52,389
---------- --------- ---------- ----------
Total revenues ........................ 1,264,829 -- -- 1,264,829
COSTS AND EXPENSES:
Cost of sales ........................... 582,413 -- -- 582,413
Operating expense ....................... 213,778 -- -- 213,778
Corporate administration ................ 22,858 -- -- 22,858
Depreciation and amortization ........... 165,584 -- -- 165,584
Interest expense ........................ 188,206 53,850 (27,768) 214,288
Less capitalized interest ............... (28,477) -- -- (28,477)
---------- --------- ---------- ----------
Total costs and expenses .............. 1,144,362 53,850 (27,768) 1,170,444
---------- --------- ---------- ----------
Income before tax ....................... 120,467 (53,850) 27,768 94,385
Provision for income taxes .............. 40,483 (21,540) 11,107 30,050
---------- --------- ---------- ----------
Income before minority interest ......... 79,984 (32,310) 16,661 64,335
Minority interest ....................... 20,223 -- -- 20,223
---------- --------- ---------- ----------
Net income .............................. 59,761 (32,310) 16,661 44,112
Preferred dividends ..................... -- -- -- --
---------- --------- ---------- ----------
Net income available for common
shareholders ........................... $ 59,761 $ (32,310) $ 16,661 $ 44,112
========== ========= ========== ==========
Net income per share .................... $ 0.99 $ 0.73
========== ==========
Net income per share--diluted ........... $ 0.95 $ 0.71
========== ==========
Basic shares outstanding ................ 60,658 60,658
========== ==========
Diluted shares outstanding .............. 74,641 (9,850) 64,791
========== ========= ==========
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
-------------- ------------ ------------- ----------------- --------------
(NOTE 3) (NOTE 4) (NOTES 5, 6 & 7)
REVENUES:
Operating revenue ....................... $ -- $ -- $864,951 $ -- $2,077,391
Interest and other income ............... -- -- 18,536 147 71,072
--------- -------- -------- --------- ----------
Total revenues ........................ -- -- 883,487 147 2,148,463
COSTS AND EXPENSES:
Cost of sales ........................... -- -- 303,486 (2,884) 883,015
Operating expense ....................... -- -- 335,104 (215) 548,667
Corporate administration ................ -- -- 6,996 167 30,021
Depreciation and amortization ........... -- -- 88,382 16,986 270,952
Interest expense ........................ 25,375 -- 47,236 -- 286,899
Less capitalized interest ............... -- -- (1,675) -- (30,152)
--------- -------- -------- --------- ----------
Total costs and expenses .............. 25,375 -- 779,529 14,054 1,989,402
--------- -------- -------- --------- ----------
Income before tax ....................... (25,375) -- 103,958 (13,907) 159,061
Provision for income taxes .............. (10,150) (2,625) 37,760 1,303 56,338
--------- -------- -------- --------- ----------
Income before minority interest ......... (15,225) 2,625 66,198 (15,210) 102,723
Minority interest ....................... -- -- 6,465 -- 26,688
--------- -------- -------- --------- ----------
Net income .............................. (15,225) 2,625 59,733 (15,210) 76,035
Preferred dividends ..................... -- 6,563 -- -- 6,563
--------- -------- -------- --------- ----------
Net income available for common
shareholders ........................... $ (15,225) $ (3,938) $ 59,733 $ (15,210) $ 69,472
========= ======== ======== ========= ==========
Net income per share .................... $ 0.90
==========
Net income per share--diluted ........... $ 0.88
==========
Basic shares outstanding ................ 16,570 77,228
======== ==========
Diluted shares outstanding .............. 16,570 4,196 85,557
======== ========= ==========
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data
P-4
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RETIREMENT
SECURITIES OF SENIOR
CALENERGY OFFERING DISCOUNT NOTES PRO FORMA
------------- ------------ ---------------- -------------
(NOTE 1) (NOTE 2)
REVENUES:
Operating revenue ......................... $2,166,338 $ -- $ -- $2,166,338
Interest and other income ................. 104,573 -- -- 104,573
---------- ---------- ---------- ----------
Total revenues .......................... 2,270,911 -- -- 2,270,911
COSTS AND EXPENSES:
Cost of sales ............................. 1,055,195 -- -- 1,055,195
Operating expense ......................... 345,833 -- -- 345,833
Corporate administration .................. 52,705 -- -- 52,705
Depreciation and amortization ............. 276,041 -- -- 276,041
Loss on equity investment in Casecnan ..... 5,972 -- -- 5,972
Interest expense .......................... 296,364 107,700 (55,536) 348,528
Less capitalized interest ................. (45,059) -- -- (45,059)
Non-recurring charge--asset valuation
impairment ............................... 87,000 -- -- 87,000
---------- ---------- ---------- ----------
Total costs and expenses ................ 2,074,051 107,700 (55,536) 2,126,215
---------- ---------- ---------- ----------
Income before tax ......................... 196,860 (107,700) 55,536 144,696
Provision for income taxes ................ 99,044 (43,080) 22,214 78,178
---------- ---------- ---------- ----------
Income before minority interest ........... 97,816 (64,620) 33,322 66,518
Minority interest ......................... 45,993 -- -- 45,993
---------- ---------- ---------- ----------
Net income ................................ 51,823 (64,620) 33,322 20,525
Preferred dividends ....................... -- -- -- --
---------- ---------- ---------- ----------
Net income available for common
shareholders ............................. $ 51,823 $ (64,620) $ 33,322 $ 20,525
========== ========== ========== ==========
Net income per share ...................... $ 0.77 $ 0.31
========== ==========
Net income per share--diluted ............. $ 0.75 $ 0.30
========== ==========
Basic shares outstanding .................. 67,268 67,268
========== ==========
Diluted shares outstanding ................ 68,686 68,686
========== ==========
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
-------------- ------------ ------------- ----------------- --------------
(NOTE 3) (NOTE 4) (NOTES 5, 6 & 7)
REVENUES:
Operating revenue ......................... $ -- $ -- $1,922,281 $ -- $4,088,619
Interest and other income ................. -- -- 49,019 293 153,885
--------- -------- ---------- --------- ----------
Total revenues .......................... -- -- 1,971,300 293 4,242,504
COSTS AND EXPENSES:
Cost of sales ............................. -- -- 821,958 (5,767) 1,871,386
Operating expense ......................... -- -- 645,083 (429) 990,487
Corporate administration .................. -- -- 14,194 333 67,232
Depreciation and amortization ............. -- -- 170,540 33,974 480,555
Loss on equity investment in Casecnan ..... -- -- -- -- 5,972
Interest expense .......................... 50,750 -- 99,932 -- 499,210
Less capitalized interest ................. -- -- (2,597) -- (47,656)
Non-recurring charge--asset valuation
impairment ............................... -- -- -- -- 87,000
--------- -------- ---------- --------- ----------
Total costs and expenses ................ 50,750 -- 1,749,110 28,111 3,954,186
--------- -------- ---------- --------- ----------
Income before tax ......................... (50,750) -- 222,190 (27,818) 288,318
Provision for income taxes ................ (20,300) (5,250) 68,390 2,605 123,623
--------- -------- ---------- --------- ----------
Income before minority interest ........... (30,450) 5,250 153,800 (30,423) 164,695
Minority interest ......................... -- -- 14,468 -- 60,461
--------- -------- ---------- --------- ----------
Net income ................................ (30,450) 5,250 139,332 (30,423) 104,234
Preferred dividends ....................... -- 13,125 -- -- 13,125
--------- -------- ---------- --------- ----------
Net income available for common
shareholders ............................. $ (30,450) $ (7,875) $ 139,332 $ (30,423) $ 91,109
========= ======== ========== ========= ==========
Net income per share ...................... $ 1.09
==========
Net income per share--diluted ............. $ 1.07
==========
Basic shares outstanding .................. 16,570 83,838
======== ==========
Diluted shares outstanding ................ 16,570 85,256
======== ==========
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data
P-5
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The Unaudited Pro Forma Combined Condensed Financial Data are based on the
following assumptions:
1. Issuance of $1,400 million 7.5% senior debt, net of $27 million debt issue
costs.
2. Retirement of the $529.6 million 10.25% Senior Discount Notes including a
call premium of $27.1 million and write off of deferred financing costs of
$6.1 million.
3. Issuance of $750 million 6.5% notes of a subsidiary, prior to the
MidAmerican Merger, net of $10 million debt issue costs.
4. Issuance of 16.57 million shares of Common Stock of CalEnergy for $450
million, net, and 8.75% preferred securities of CalEnergy for $150 million
net, prior to the MidAmerican Merger.
5. The use of the proceeds of the debt and equity offerings described above to
purchase MidAmerican for $2,587.1 million, including transaction costs.
6. The preliminary adjustments which have been made to the assets and
liabilities of MidAmerican to reflect the effect of the acquisition
accounted for as a purchase business combination follow (in thousands):
Goodwill ..................................... $1,373,226
Other assets ................................. (38,765)
Other liabilities ............................ (118,405)
Long-term debt ............................... (2,422)
Deferred taxes ............................... 62,485
Preferred securities of subsidiaries ......... (627)
----------
$1,275,492
==========
7. A. Included in other assets is primarily an adjustment to reflect the fair
value of MidAmerican's investments in real estate.
B. Included in other liabilities are adjustments to reflect MidAmerican's
compensation obligations and to reflect MidAmerican's long-term
contracts at fair value based on the estimated market prices for similar
purchases with similar remaining maturities.
C. Record amortization of the excess purchase price over the net assets
acquired using the straight line method over 40 years.
D. Record amortization of the purchase price accounting adjustments using
the straight line or other applicable method over the remaining
estimated lives.
E. Includes income tax expense for the effects of the pro forma adjustments
which affect taxable income at an effective rate of 40%. Preferred
dividends on the $150 million 8.75% preferred securities are deductible
for income tax purposes.
F. For the six months ended June 30, 1998, earning per share--diluted is
further adjusted for certain convertible securities which are
antidilutive on a pro forma and a pro forma as adjusted basis.
8. Excluding the $87.0 million Indonesian asset impairment charge from the year
ended December 31, 1997 actual, pro forma and pro forma as adjusted
amounts, basic earnings per share would have been $2.06, $1.60 and $2.12,
respectively.
P-6
SIGNATURE
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 hereunto duly authorized.
CALENERGY COMPANY, INC.
By: /s/ Steven A. McArthur
--------------------------
Steven A. McArthur
Executive Vice President, General
Counsel and Secretary
Dated: September 8, 1998
Exhibit Index
Exhibit No. Description
5.1 Opinion of Willkie Farr & Gallagher
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of IBJ Schroder Bank & Trust Company, as
Trustee under the Senior Debt Securities Indenture
99.1 Consent of PricewaterhouseCoopers LLP