UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-----------------------------------------------
Commission Registrant, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- - ----------- ----------------------------------- --------------------
1-12459 MIDAMERICAN ENERGY HOLDINGS COMPANY 42-1451822
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA
515-242-4300
1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X * No
---- ----
Indicate the number of shares outstanding of each of the issuers'
classes of common stock as of the latest practicable date.
Registrant Class Shares Outstanding at July 31, 1997
- - ------------------ ----------------- -----------------------------------
MidAmerican Energy Common Stock 97,370,213
Holdings Company without par value
MidAmerican Energy Common Stock 100,751,713 (all of which were held by
Company without par value MidAmerican Energy Holdings Company)
* MidAmerican Energy Holdings Company (Holdings) became the parent holding
company for MidAmerican Energy Company (MidAmerican) pursuant to a
statutory share exchange. The effective date of the share exchange was
December 1, 1996, and prior to such effective date, Holdings had no assets
or operations. Prior to such effective date, MidAmerican was subject to the
requirements of Section 13 or 15(d) of the Securities Exchange act of 1934,
as amended (Exchange Act), and accordingly filed in a timely manner all
reports required to be filed pursuant to Sections 13 or 15(d) of the
Exchange act during the preceding 12 months.
This combined Form 10-Q represents separate filings by MidAmerican Energy
Holdings Company (Company or Holdings) and MidAmerican Energy Company
(MidAmerican). MidAmerican makes no representations as to the information
relating to Holdings' nonregulated operations.
MIDAMERICAN ENERGY HOLDINGS COMPANY
AND
MIDAMERICAN ENERGY COMPANY
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MidAmerican Energy Holdings Company
Consolidated Statements of Income....................... 3
Consolidated Balance Sheets............................. 4
Consolidated Statements of Cash Flows................... 5
Notes to Consolidated Financial Statements.............. 6
MidAmerican Energy Company
Consolidated Statements of Income....................... 10
Consolidated Balance Sheets............................. 11
Consolidated Statements of Cash Flows................... 12
Notes to Consolidated Financial Statements.............. 13
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................... 33
ITEM 4. Submission of Matters to a Vote of Security Holders..... 34
ITEM 6. Exhibits and Reports on Form 8-K........................ 35
Signatures............................................................ 36
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
-------------------- -------------------- ----------------------
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- ---------- ----------
OPERATING REVENUES
Electric utility................................ $ 261,801 $ 266,580 $ 516,117 $ 528,854 $1,086,271 $1,114,138
Gas utility..................................... 80,913 85,618 292,478 281,604 547,627 493,365
Nonregulated.................................... 47,901 39,268 166,415 88,604 314,662 135,925
--------- --------- --------- --------- ---------- ----------
390,615 391,466 975,010 899,062 1,948,560 1,743,428
--------- --------- --------- --------- ---------- ----------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity............ 52,141 55,123 111,424 116,498 229,243 234,690
Cost of gas sold............................. 45,099 48,689 186,932 171,425 360,521 299,519
Other operating expenses..................... 98,691 90,168 192,298 177,769 364,703 392,662
Maintenance.................................. 22,349 25,139 46,098 43,875 90,844 86,043
Depreciation and amortization................ 42,060 41,062 84,068 82,006 166,654 162,746
Property and other taxes..................... 24,853 23,925 50,343 49,102 93,871 93,216
--------- --------- --------- --------- ---------- ----------
285,193 284,106 671,163 640,675 1,305,836 1,268,876
--------- --------- --------- --------- ---------- ----------
Nonregulated:
Cost of sales................................ 42,595 34,503 155,801 77,250 296,807 112,978
Other........................................ 7,432 7,853 15,418 15,992 34,796 35,069
--------- --------- --------- --------- ---------- ----------
50,027 42,356 171,219 93,242 331,603 148,047
--------- --------- --------- --------- ---------- ----------
Total operating expenses..................... 335,220 326,462 842,382 733,917 1,637,439 1,416,923
--------- --------- --------- --------- ---------- ----------
OPERATING INCOME................................ 55,395 65,004 132,628 165,145 311,121 326,505
--------- --------- --------- --------- ---------- ----------
NON-OPERATING INCOME
Interest income................................. 1,562 1,019 3,115 2,524 4,603 4,965
Dividend income................................. 3,707 4,396 7,255 8,902 15,338 18,067
Realized gains and losses on securities, net.... 98 509 616 3,234 (723) 3,568
Other, net...................................... 3,279 3,056 7,264 4,728 (1,484) (16,177)
--------- --------- --------- --------- ---------- ----------
8,646 8,980 18,250 19,388 17,734 10,423
--------- --------- --------- --------- ---------- ----------
INTEREST CHARGES
Interest on long-term debt...................... 22,829 25,600 46,292 51,705 97,496 104,146
Other interest expense.......................... 4,119 2,687 5,448 5,723 10,666 9,542
Preferred dividends of subsidiaries............. 3,231 2,184 8,000 4,661 14,028 8,157
Allowance for borrowed funds.................... (603) (1,020) (1,312) (2,456) (3,068) (5,421)
--------- --------- --------- --------- ---------- ----------
29,576 29,451 58,428 59,633 119,122 116,424
--------- --------- --------- --------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................... 34,465 44,533 92,450 124,900 209,733 220,504
INCOME TAXES.................................... 10,289 19,434 34,100 51,396 81,126 85,876
--------- --------- --------- --------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS............... 24,176 25,099 58,350 73,504 128,607 134,628
DISCONTINUED OPERATIONS
Income from operations (net of income taxes).... 408 3,896 698 6,538 (3,723) 7,974
Loss on disposal (net of income taxes).......... - - (524) - (15,356) -
--------- --------- --------- --------- ---------- ----------
408 3,896 174 6,538 (19,079) 7,974
--------- --------- --------- --------- ---------- ----------
NET INCOME...................................... $ 24,584 $ 28,995 $ 58,524 $ 80,042 $ 109,528 $ 142,602
========= ========= ========= ========= ========== ==========
AVERAGE COMMON SHARES OUTSTANDING............... 98,621 100,752 99,534 100,752 100,096 100,752
EARNINGS PER COMMON SHARE
Continuing operations........................... $ 0.24 $ 0.25 $ 0.59 $ 0.73 $ 1.28 $ 1.34
Discontinued operations......................... 0.01 0.04 - 0.06 (0.19) .08
--------- --------- --------- --------- ---------- ----------
Earnings per average common share............... $ 0.25 $ 0.29 $ 0.59 $ 0.79 $ 1.09 $ 1.42
========= ========= ========= ========= ========== ==========
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.
-3-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
------------------------------------------
JUNE 30 DECEMBER 31
------------------------ -----------
1997 1996 1996
---------- ---------- ----------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric............................................... $4,050,767 $3,973,331 $4,010,847
Gas.................................................... 731,978 693,564 723,491
---------- ---------- ----------
4,782,745 4,666,895 4,734,338
Less accumulated depreciation and amortization......... 2,215,077 2,103,783 2,153,058
---------- ---------- ----------
2,567,668 2,563,112 2,581,280
Construction work in progress.......................... 37,880 68,393 49,305
---------- ---------- ----------
2,605,548 2,631,505 2,630,585
---------- ---------- ----------
POWER PURCHASE CONTRACT................................ 190,504 209,178 190,897
---------- ---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS.................. 14,130 219,979 196,356
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents.............................. 57,297 24,140 97,749
Receivables............................................ 207,198 164,987 312,930
Inventories............................................ 69,796 78,190 90,864
Other.................................................. 10,227 10,122 11,696
---------- ---------- ----------
344,518 277,439 513,239
---------- ---------- ----------
INVESTMENTS............................................ 598,345 634,346 628,791
---------- ---------- ----------
OTHER ASSETS........................................... 386,543 407,259 399,415
---------- ---------- ----------
TOTAL ASSETS........................................... $4,139,588 $4,379,706 $4,559,283
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity............................ $1,186,313 $1,242,588 $1,239,946
MidAmerican preferred securities, not subject to
mandatory redemption................................ 31,765 78,577 31,769
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
Long-term debt (excluding current portion)............. 1,109,531 1,405,350 1,395,103
---------- ---------- ----------
2,477,609 2,776,515 2,816,818
---------- ---------- ----------
CURRENT LIABILITIES
Notes payable.......................................... 146,185 164,490 161,990
Current portion of long-term debt ..................... 129,756 64,461 79,598
Current portion of power purchase contract............. 13,717 13,029 13,718
Accounts payable....................................... 89,947 83,862 169,806
Taxes accrued.......................................... 81,795 78,733 82,254
Interest accrued....................................... 26,457 29,643 28,513
Other.................................................. 50,830 19,087 30,229
---------- ---------- ----------
538,687 453,305 566,108
---------- ---------- ----------
OTHER LIABILITIES
Power purchase contract................................ 97,504 112,700 97,504
Deferred income taxes.................................. 710,021 725,081 752,336
Investment tax credit.................................. 85,985 92,141 88,842
Other ................................................. 229,782 219,964 237,675
---------- ---------- ----------
1,123,292 1,149,886 1,176,357
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES................... $4,139,588 $4,379,706 $4,559,283
========== ========== ==========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
ENDED JUNE 30 ENDED JUNE 30
-------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net Income..................................................... $ 24,584 $ 28,995 $ 58,524 $ 80,042
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization............................. 47,573 49,108 95,982 94,073
Net decrease in deferred income taxes and
investment tax credit, net............................ (6,715) (338) (41,574) (1,573)
Amortization of other assets.............................. 5,596 4,650 12,474 10,684
Capitalized cost of real estate sold...................... 506 2,231 796 2,498
Income from discontinued operations....................... (408) (3,896) (174) (6,538)
Gain on sale of securities, assets and other investments.. (362) (503) (1,827) (3,573)
Other-than-temporary decline in value of investments...... 92 336 252 2,566
Impact of changes in working capital, net of effects
from discontinued operations.......................... (77,613) (56,815) 66,496 8,961
Other..................................................... 3,584 (908) (751) 1,900
-------- -------- -------- --------
Net cash provided (used).............................. (3,163) 22,860 190,198 189,040
-------- -------- -------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures.............................. (37,426) (37,075) (64,029) (65,593)
Quad Cities Nuclear Power Station decommissioning trust fund... (2,140) (2,159) (4,280) (4,318)
Deferred energy efficiency expenditures........................ (2,626) (5,497) (6,349) (7,448)
Nonregulated capital expenditures.............................. (4,377) (23,837) (7,002) (25,129)
Purchase of securities......................................... (53,064) (52,098) (116,407) (134,294)
Proceeds from sale of securities............................... 53,397 82,409 132,049 164,090
Proceeds from sale of assets and other investments............. 526 1,125 13,670 1,308
Investment in discontinued operations.......................... - (45,435) 182,749 (39,243)
Other investing activities, net................................ (4,265) 4,897 (2,665) 4,334
-------- -------- -------- --------
Net cash provided (used).................................. (49,975) (77,670) 127,736 (106,293)
-------- -------- -------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid.......................................... (29,544) (30,218) (59,723) (60,440)
Retirement of long-term debt, including reacquisition cost..... (32,765) (409) (61,790) (1,047)
Reacquisition of preferred shares.............................. (1) (2,975) (4) (11,725)
Reacquisition of common shares................................. (26,235) - (46,564) -
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility....................... - 24,000 (174,500) 2,000
Net increase (decrease) in notes payable....................... 105,975 64,690 (15,805) (20,310)
-------- -------- -------- --------
Net cash provided (used).................................. 17,430 55,088 (358,386) (91,522)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (35,708) 278 (40,452) (8,775)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 93,005 23,862 97,749 32,915
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 57,297 $ 24,140 $ 57,297 $ 24,140
======== ======== ======== ========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized...................... $ 19,708 $ 19,857 $ 49,978 $ 55,428
======== ======== ======== ========
Income taxes paid.............................................. $ 76,690 $ 50,794 $ 76,753 $ 53,884
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
-5-
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 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 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 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 estimate of probable remediation costs for the sites
discussed above as of June 30, 1997, is $23 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 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.
-6-
2) Clean Air Act:
The EPA has recently promulgated revisions to the ambient air quality
standards for ozone and particulate matter. The impact of the new standards on
MidAmerican will depend on implementation of the applicable regulations and,
ultimately, the attainment status of the areas surrounding MidAmerican's
operations. MidAmerican will continue to evaluate the potential impact of the
new regulations which is currently unknown.
C) RATE MATTERS:
On June 4, 1996, MidAmerican filed an electric pricing proposal in Iowa and
Illinois. The proposal was later withdrawn in Illinois following negotiation of
a settlement in a related Illinois proceeding. The settlement resulted in annual
reductions of $13.1 million and $2.4 million, effective November 3, 1996, and
June 1, 1997, respectively.
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 accepts 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 flowed
the cost of fuel to customers on a current basis, and thus, fuel costs have
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 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 begins; if it exceeds 14%, then two-thirds of
MidAmerican's share 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, 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 but may not be
recovered from other customer classes. The program is expected to be filed by
the fall of 1997.
-7-
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 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 that SFAS 71 may
no longer apply. MidAmerican's electric and gas utility operations are currently
subject to the provisions of SFAS 71, but its applicability is periodically
reexamined. If a portion of MidAmerican's utility operations no longer meets the
criteria of SFAS 71, MidAmerican would be required to eliminate from its balance
sheet the regulatory assets and liabilities related to those operations that
resulted from actions of its regulators. Although the amount of such an
elimination would depend on the specific circumstances, a material adjustment to
earnings in the appropriate period could result from discontinuing SFAS 71. As
of June 30, 1997, MidAmerican had approximately $363 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, with the intent of completing the
entire repurchase program by December 31, 1998. As of June 30, 1997, the Company
had repurchased approximately 2.7 million shares for $46.6 million.
G) 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 separate component
of 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 June 30, 1997 and 1996 and December 31, 1996 was $2.7 million,
$3.4 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.
-8-
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 were not material during the
periods presented, 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. 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 zero, $(1.0) million and $0.8 million as of June 30, 1997 and 1996
and December 31, 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.
-9-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30
------------------- ------------------- ----------------------
1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- ---------- ----------
OPERATING REVENUES
Electric utility.................................. $261,801 $266,580 $516,117 $528,854 $1,086,271 $1,114,137
Gas utility....................................... 80,913 85,618 292,478 281,604 547,627 493,365
-------- -------- -------- -------- ---------- ----------
342,714 352,198 808,595 810,458 1,633,898 1,607,502
-------- -------- -------- -------- ---------- ----------
OPERATING EXPENSES
Cost of fuel, energy and capacity................. 52,141 55,123 111,424 116,498 229,243 234,690
Cost of gas sold.................................. 45,099 48,689 186,932 171,425 360,521 299,519
Other operating expenses.......................... 98,691 90,168 192,298 177,769 364,703 392,662
Maintenance....................................... 22,349 25,139 46,098 43,875 90,844 86,043
Depreciation and amortization..................... 42,060 41,062 84,068 82,006 166,654 162,746
Property and other taxes.......................... 24,853 23,925 50,343 49,102 93,871 93,216
Income taxes...................................... 12,917 21,034 36,421 53,364 94,263 104,050
-------- -------- -------- -------- ---------- ----------
298,110 305,140 707,584 694,039 1,400,099 1,372,926
-------- -------- -------- -------- ---------- ----------
OPERATING INCOME.................................. 44,604 47,058 101,011 116,419 233,799 234,576
-------- -------- -------- -------- ---------- ----------
NON-OPERATING INCOME
Interest and dividend income...................... 421 306 1,327 818 2,107 1,445
Non-operating income taxes........................ (1,374) (641) (2,293) (434) (3,580) 369
Other, net........................................ 3,008 1,352 4,339 404 6,335 (3,865)
-------- -------- -------- -------- ---------- ----------
2,055 1,017 3,373 788 4,862 (2,051)
-------- -------- -------- -------- ---------- ----------
INTEREST CHARGES
Interest on long-term debt........................ 19,332 19,942 39,218 39,768 78,884 79,790
Other interest expense............................ 4,113 2,307 5,442 5,630 10,654 9,814
Preferred dividends of subsidiary trust........... 1,995 - 3,990 - 4,278 -
Allowance for borrowed funds...................... (603) (1,020) (1,312) (2,456) (3,068) (5,421)
-------- -------- -------- -------- ---------- ----------
24,837 21,229 47,338 42,942 90,748 84,183
-------- -------- -------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS................. 21,822 26,846 57,046 74,265 147,913 148,342
INCOME (LOSS) FROM DISCONTINUED OPERATIONS........ - 4,333 - 10,438 (20,599) 2,417
-------- -------- -------- -------- ---------- ----------
NET INCOME........................................ 21,822 31,179 57,046 84,703 127,314 150,759
PREFERRED DIVIDENDS............................... 1,236 2,184 4,010 4,661 9,750 8,157
-------- -------- -------- -------- ---------- ----------
EARNINGS ON COMMON STOCK.......................... $ 20,586 $ 28,995 $ 53,036 $ 80,042 $ 117,564 $ 142,602
======== ======== ======== ======== ========== ==========
The accompanying notes are an integral part of these statements.
-10-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
------------------------------------------
JUNE 30 DECEMBER 31
------------------------ -----------
1997 1996 1996
---------- ---------- ----------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric............................................... $4,053,770 $3,976,334 $4,013,851
Gas.................................................... 731,978 693,564 723,491
---------- ---------- ----------
4,785,748 4,669,898 4,737,342
Less accumulated depreciation and amortization......... 2,216,806 2,104,975 2,154,505
---------- ---------- ----------
2,568,942 2,564,923 2,582,837
Construction work in progress.......................... 37,880 68,393 49,305
---------- ---------- ----------
2,606,822 2,633,316 2,632,142
---------- ---------- ----------
POWER PURCHASE CONTRACT................................ 190,504 209,178 190,897
---------- ---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS.................. - 293,315 -
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents.............................. 15,515 9,266 84,215
Receivables............................................ 180,386 146,594 253,944
Inventories............................................ 68,158 78,190 90,864
Other.................................................. 4,243 4,906 7,776
---------- ---------- ----------
268,302 238,956 436,799
---------- ---------- ----------
INVESTMENTS............................................ 98,808 104,809 118,344
---------- ---------- ----------
OTHER ASSETS........................................... 371,253 404,677 396,471
---------- ---------- ----------
TOTAL ASSETS........................................... $3,535,689 $3,884,251 $3,774,653
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity............................ $ 968,569 $1,242,588 $ 986,825
MidAmerican preferred securities, not subject to
mandatory redemption................................ 31,765 78,577 31,769
Preferred shares, 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
Long-term debt (excluding current portion)............. 975,047 1,109,683 1,086,955
---------- ---------- ----------
2,125,381 2,480,848 2,255,549
---------- ---------- ----------
CURRENT LIABILITIES
Notes payable.......................................... 144,300 166,317 161,700
Current portion of long-term debt...................... 99,900 392 49,560
Current portion of power purchased contract............ 13,717 13,029 13,718
Accounts payable....................................... 73,677 78,907 122,974
Taxes accrued.......................................... 62,435 73,730 82,338
Interest accrued....................................... 22,424 24,137 24,245
Other.................................................. 24,153 8,718 24,452
---------- ---------- ----------
440,606 365,230 478,987
---------- ---------- ----------
OTHER LIABILITIES
Power purchase contract................................ 97,504 112,700 97,504
Deferred income taxes.................................. 615,846 619,731 616,567
Investment tax credit.................................. 85,985 92,141 88,842
Other ................................................. 170,367 213,601 237,204
---------- ---------- ----------
969,702 1,038,173 1,040,117
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES................... $3,535,689 $3,884,251 $3,774,653
========== ========== ==========
The accompanying notes are an integral part of these statements.
-11-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................... $ 21,822 $ 31,179 $ 57,046 $ 84,703
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization................................... 46,784 45,298 94,428 91,935
Net decrease in deferred income taxes and
investment tax credit, net................................... (1,789) (1,298) (3,578) (1,794)
Amortization of other assets.................................... 5,472 5,074 12,092 10,332
Income from discontinued operations............................. - (4,333) - (10,438)
Other-than-temporary decline in value of investments............ - - - 2,230
Impact of changes in working capital, net of effects
from discontinued operations................................. (59,177) (64,053) 28,477 (3,994)
Other........................................................... (7,694) 9,252 (25,162) (324)
-------- -------- -------- --------
Net cash provided............................................ 5,418 21,119 163,303 172,650
-------- -------- -------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures.................................. (37,426) (37,075) (64,029) (65,593)
Quad Cities Nuclear Power Station decommissioning trust fund....... (2,140) (2,159) (4,280) (4,318)
Deferred energy efficiency expenditures............................ (2,626) (5,497) (6,349) (7,448)
Nonregulated capital expenditures.................................. (1,602) (948) (3,306) (1,273)
Investment in discontinued operations.............................. - (4,549) - 5,269
Other investing activities, net.................................... 829 (3,428) 927 (3,079)
-------- -------- -------- --------
Net cash used................................................... (42,965) (53,656) (77,037) (76,442)
-------- -------- -------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid..................................................... (41,236) (32,402) (75,510) (65,101)
Retirement of long-term debt, including reacquisition cost......... (32,896) (525) (62,052) (691)
Reacquisition of preferred shares.................................. (1) (2,618) (4) (11,368)
Net increase (decrease) in notes payable........................... 104,275 66,517 (17,400) (18,483)
-------- -------- -------- --------
Net cash provided (used)........................................ 30,142 30,972 (154,966) (95,643)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (7,405) (1,565) (68,700) 565
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 22,920 10,831 84,215 8,701
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 15,515 $ 9,266 $ 15,515 $ 9,266
======== ======== ========= ========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized.......................... $ 12,215 $ 11,966 $ 42,663 $ 40,016
======== ======== ======== ========
Income taxes paid ................................................. $ 54,247 $ 56,858 $ 67,465 $ 61,270
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
-12-
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A) GENERAL:
The consolidated financial statements included herein have been prepared by
MidAmerican, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of MidAmerican, all adjustments have been made to
present fairly the financial position, the results of operations and the changes
in cash flows for the periods presented. Although MidAmerican 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
MidAmerican's latest Annual Report on Form 10-K.
B) ENVIRONMENTAL MATTERS:
Refer to Note B of Holdings' Notes to Consolidated Financial Statements for
information regarding MidAmerican's environmental matters.
C) RATE MATTERS:
Refer to Note C of Holdings' Notes to Consolidated Financial Statements for
information regarding MidAmerican's rate matters.
D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
Refer to Note D of Holdings' Notes to Consolidated Financial Statements for
information regarding MidAmerican's accounting for the effects of certain types
of regulation.
E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES:
Refer to Note E of Holdings' Notes to Consolidated Financial Statements for
information regarding the MidAmerican-Obligated Mandatorily Redeemable Preferred
Securities.
F) ACCOUNTING FOR DERIVATIVES:
1) Gas Futures Contracts and Swaps:
MidAmerican 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 were not material during the
periods presented, 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
-13-
physical delivery of the natural gas. 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 or Other Net consistent with the
expense for the physical commodity. Deferred net gains (losses) related to the
Company's gas futures contracts are zero, $(0.7) million and $0.1 million as of
June 30, 1997 and 1996 and December 31, 1996, respectively
MidAmerican periodically evaluates the effectiveness of its natural gas
hedging programs. If the correlation between prices for the hedging instruments
and prices for the physical delivery is less than 80 percent, the contracts are
recorded at fair value and the gains or losses are included in the determination
of income.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
------------
COMPANY STRUCTURE
MidAmerican Energy Holdings Company (Holdings or the Company), is an exempt
public utility holding company headquartered in Des Moines, Iowa. Effective
December 1, 1996, Holdings became the parent company of MidAmerican Energy
Company (MidAmerican), MidAmerican Capital Company (MidAmerican Capital) and
Midwest Capital Group, Inc. (Midwest Capital). Prior to December 1, 1996,
MidAmerican Capital and Midwest Capital were subsidiaries of MidAmerican.
MidAmerican was formed on July 1, 1995, as a result of the merger (the
merger) of Iowa-Illinois Gas and Electric Company, Midwest Resources Inc.
(Resources) and Midwest Power Systems Inc., the utility subsidiary of Resources.
MidAmerican is a public utility with electric and natural gas operations
and is the principal subsidiary of Holdings. MidAmerican Capital and Midwest
Capital are Holdings' nonregulated subsidiaries. Midwest Capital functions as a
regional business development company in MidAmerican's utility service
territory. MidAmerican Capital manages rail service businesses, marketable
securities and passive investment activities, nonregulated wholesale and retail
natural gas businesses and other energy related, nonregulated activities. The
Company completed the sale of MidAmerican Capital's oil and gas exploration and
development operations in January 1997.
DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS
The MidAmerican merger is accounted for as a pooling-of-interests. The
consolidated financial statements of MidAmerican present amounts related to
MidAmerican Capital and Midwest Capital as discontinued operations for all
periods that include months prior to December 1, 1996, in order to reflect their
transfer to Holdings in December 1996.
This management's discussion and analysis addresses the financial
statements of Holdings and MidAmerican as presented in this joint filing.
Information related to MidAmerican also relates to Holdings. Information related
to MidAmerican Capital and Midwest Capital pertains only to the discussion of
the financial condition and results of operations of Holdings. To the extent
necessary, certain discussions have been segregated to allow the reader to
identify information applicable only to Holdings.
-15-
FORWARD-LOOKING STATEMENTS
From time to time, the Company or one of its subsidiaries individually may
make forward-looking statements within the meaning of the federal securities
laws that involve judgments, assumptions and other uncertainties beyond the
control of the Company or any of its subsidiaries individually. These
forward-looking statements may include, among others, statements concerning
revenue and cost trends, cost recovery, cost reduction strategies and
anticipated outcomes, pricing strategies, changes in the utility industry,
planned capital expenditures, financing needs and availability, statements of
the Company's expectations, beliefs, future plans and strategies, anticipated
events or trends and similar comments concerning matters that are not historical
facts. Investors and other users of the forward-looking statements are cautioned
that such statements are not a guarantee of future performance of the Company
and that such forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed in, or
implied by, such statements. Some, but not all, of the risks and uncertainties
include weather effects on sales and revenues, fuel prices, competitive factors,
general economic conditions in the Company's service territory, interest rates,
inflation and federal and state regulatory actions.
RESULTS OF OPERATIONS
---------------------
Holdings:
- - ---------
The following table provides a summary of the earnings contributions of
the Company's operations for each of the periods presented:
Periods Ended June 30
---------------------------------------------------------
Three Months Six Months Twelve Months
--------------- ---------------- ---------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
Net Income (in millions)
Continuing operations
Electric utility $ 20.8 $ 25.3 $ 34.4 $ 47.4 $109.8 $117.8
Gas utility (0.2) (0.6) 18.6 22.2 28.4 22.4
------ ------ ------ ------ ------ ------
Total 20.6 24.7 53.0 69.6 138.2 140.2
Nonregulated operations 3.6 0.4 5.3 3.9 (9.6) (5.6)
Discontinued operations 0.4 3.9 0.2 6.5 (19.1) 8.0
------ ------ ------ ------ ------ ------
Consolidated earnings $ 24.6 $ 29.0 $ 58.5 $ 80.0 $109.5 $142.6
====== ====== ====== ====== ====== ======
Earnings Per Common Share
Continuing operations
Electric utility $ 0.21 $ 0.25 $ 0.34 $ 0.47 $ 1.10 $ 1.17
Gas utility - - 0.19 0.22 0.28 0.22
------ ------ ------ ------ ------ ------
Total 0.21 0.25 0.53 0.69 1.38 1.39
Nonregulated operations 0.03 - 0.06 0.04 (0.10) (0.05)
Discontinued operations 0.01 0.04 - 0.06 (0.19) 0.08
------ ------ ------ ------ ------ ------
Consolidated earnings $ 0.25 $ 0.29 $ 0.59 $ 0.79 $ 1.09 $ 1.42
====== ====== ====== ====== ====== ======
-16-
MidAmerican:
- - ------------
The following table provides a summary of the earnings contributions of
MidAmerican's operations for each of the periods presented:
Periods Ended June 30
-------------------------------------------------
Three Months Six Months Twelve Months
--------------- --------------- --------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
(in millions)
Earnings on Common Stock
Continuing operations
Electric utility $ 20.8 $ 25.3 $ 34.4 $ 47.4 $109.8 $117.8
Gas utility (0.2) (0.6) 18.6 22.2 28.4 22.4
------ ------ ------ ------ ------ ------
Total 20.6 24.7 53.0 69.6 138.2 140.2
Discontinued operations* - 4.3 - 10.4 (20.6) 2.4
------ ------ ------ ------ ------ ------
Consolidated earnings $ 20.6 $ 29.0 $ 53.0 $ 80.0 $117.6 $142.6
====== ====== ====== ====== ====== ======
* Includes the income (loss) of MidAmerican Capital and Midwest Capital
prior to their transfer to Holdings on December 1, 1996.
EARNINGS DISCUSSION
The Company's earnings per share for the 1997 three-month and six-month
periods decreased 4 cents and 20 cents, respectively, compared to the 1996
periods. Some of the significant variances which resulted in the decrease are as
follows, on a Holdings per share basis:
Three Months Six Months
------------ ----------
MidAmerican
Net reduction in electric and gas
gross margin due to -
Variation in the effect of weather $ (0.02) $(0.07)
Electric retail rate reductions (0.03) (0.06)
Improvements due to other factors 0.03 0.05
Increase in nuclear O&M expenses (0.01) (0.04)
Increase in other O&M expenses (0.02) (0.05)
Losses on reacquired preferred stock
and reacquired long-term debt - (0.02)
Nonregulated subsidiaries continuing operations 0.03 0.02
Discontinued operations (0.03) (0.06)
Earnings for the twelve months ended June 30, 1997, decreased 33 cents per
share compared to twelve months ended June 30, 1996. The impact of discontinued
operations resulted in a 27 cents per share decrease. Utility electric and gas
margins decreased 17 cents per share due to a less favorable impact of weather
and rate reductions. Losses on reacquired preferred stock reduced earnings by 2
cents per share for the 1997 twelve-month-period. For the Company's nonregulated
subsidiaries, earnings from continuing operations for the twelve months ended
June 30, 1997, decreased 6 cents per share, excluding items discussed later in
this
-17-
section. Following is a discussion of several other significant factors
affecting the twelve months ended comparison.
In August 1996, the Company announced a proposal to merge with IES
Industries Inc. (IES), a holding company headquartered in Cedar Rapids, Iowa.
The IES board of directors rejected the Company's proposal in favor of a pending
merger with WPL Holdings and Interstate Power Co. (the Wisconsin Transaction).
At their September 5, 1996, annual meeting, the holders of a majority of IES
common stock voted in favor of the Wisconsin Transaction, and the Company
discontinued its attempt to merge with IES. In the effort, MidAmerican incurred
tax deductible costs of $8.7 million in 1996 which reduced earnings by 5 cents
per share for the 1997 twelve-month period.
The Company's and MidAmerican's earnings for twelve months ended June 30,
1996, were reduced by costs related to the MidAmerican merger. As part of the
process of combining the operations of MidAmerican's predecessors, the Company
developed a restructuring plan which included employee incentive early
retirement, relocation and separation programs. The Company recorded $27.4
million of restructuring costs during the twelve months ended June 30, 1996, of
which $25.9 million is included in utility operations. These costs are reflected
in Other Operating Expenses in the Consolidated Statements of Income.
In addition, MidAmerican incurred transaction costs to complete the merger.
MidAmerican expensed $3.9 million of merger transaction costs in the twelve
months ended June 30, 1996. These costs are included in Other, Net in the
Consolidated Statements of Income.
In total, restructuring and transaction costs reduced the Company's
earnings for the 1996 twelve-month period by 20 cents per share.
Write-downs of certain assets, primarily alternative energy projects, of
the Company's nonregulated subsidiaries reduced earnings for each of the twelve
months ended June 30. The write-downs, which reflect declines in the value of
those nonregulated investments, reduced earnings by approximately $9.4 million,
or 9 cents per share, and $10.2 million, or 10 cents per share, in the 1997 and
1996 twelve-month periods, respectively. The pre-tax amounts of the write-downs,
which are included in Other, Net in the Consolidated Statements of Income,
totaled $15.6 million and $18.0 million for the 1997 and 1996 periods,
respectively.
Discontinued Operations -
Holdings:
- - ---------
The Company is redeploying certain of its nonregulated investments as part
of its strategy of becoming the leading regional provider of energy and
complementary services. As discussed below, the Company discontinued some of its
nonregulated operations during the second half of 1996. The related income or
loss from operations and the anticipated losses on disposal are reflected as
discontinued operations in each of the periods presented in the Consolidated
Statements of Income. Net assets of the discontinued operations are separately
presented in the Consolidated Balance Sheets as Investment in Discontinued
Operations.
In the fourth quarter of 1996, the Company and KCS Energy, Inc. (KCS) of
Edison, New Jersey, signed a definitive agreement to sell a portion of the
Company's nonregulated operations to KCS for $210 million in cash and 435,000
warrants to purchase KCS common stock. The sale, which included the Company's
oil and gas exploration and development operations, was completed in January
1997. The
-18-
Company recorded an after-tax loss of $7.1 million for the transaction in 1996
and an additional $0.5 million in the first quarter of 1997.
The Company also intends to divest a subsidiary that developed and
continues to operate a computerized information system facilitating real-time
exchange of power in the electric industry. The Company expects the disposition
to occur during 1997 and, accordingly, recorded a $4.0 million anticipated
after-tax loss on disposal of those operations in September 1996.
MidAmerican:
- - ------------
MidAmerican received $15.3 million in cash in 1996 as final settlement for
the sale of a former coal mining subsidiary which was reflected as discontinued
operations in 1982 by one of MidAmerican's predecessors. The final settlement
included reacquisition by the buyer of preferred equity issued to MidAmerican
and the settlement of reclamation reserves. MidAmerican recorded an after-tax
loss on disposal of $3.3 million for the transaction in September 1996. This
transaction is included in discontinued operations in the consolidated financial
statements of MidAmerican as well as Holdings. Discontinued operations of
MidAmerican also includes the net earnings/loss of MidAmerican Capital and
Midwest Capital for periods prior to the December 1, 1996, transfer to Holdings.
UTILITY GROSS MARGIN
Electric Gross Margin:
----------------------
Periods Ended June 30
-----------------------------------------
Three Months Six Months Twelve Months
------------ ----------- -------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ------ ------
(In millions)
Operating revenues $262 $267 $516 $529 $1,086 $1,114
Cost of fuel,
energy and capacity 52 55 111 116 229 235
---- ---- ---- ---- ------ ------
Electric gross margin $210 $212 $405 $413 $ 857 $ 879
==== ==== ==== ==== ====== ======
Variations in gross margin are the result of changes in revenues due to
price and sales volume variances. Changes in the cost of electric fuel, energy
and capacity (collectively, Energy Costs) reflect fluctuations in generation
levels and mix, fuel cost, and energy and capacity purchases. MidAmerican has
been allowed to recover Energy Costs from most of its electric utility customers
through energy adjustment clauses (EACs) in revenues. Variations in revenues
collected through the EACs, reflecting changes in Energy Costs per unit sold and
volumes sold, have not affected gross margin or net income. Effective July 11,
1997, the EAC was eliminated for Iowa customers as part of a recently approved
settlement agreement in Iowa. As a result, fluctuations in fuel costs will have
an impact on future gross margin and net income. Refer to "Rate Matters" under
the Operating Activities and Other Matters section of Liquidity and Capital
Resources for further discussion of the settlement agreement.
Electric gross margin for three months ended June 30, 1997, decreased
compared to the 1996 three-month period due to rate reductions and milder 1997
temperatures. Reductions in electric retail rates decreased revenues and gross
margin by $4.2 million compared to the second quarter of 1996. Weather in the
second quarter of 1997 was milder than normal resulting in a $2 million
reduction in electric gross margin while
-19-
weather in the 1996 second quarter was slightly warmer than normal. In total,
electric retail sales increased 3% due to modest customer growth and an
improvement in sales not dependent upon weather.
Reductions in electric retail service rates affected customers in Iowa and
Illinois. In October 1996, the Illinois Commerce Commission (ICC) ordered
MidAmerican to reduce rates for its Illinois customers by 10%, or $13.1 million
in annual revenues, effective November 3, 1996. A negotiated termination of the
rate reduction proceeding left in place the initial $13.1 million annual
reduction and included a second price reduction of $2.4 million annually to be
effective on June 1, 1997. In Iowa, MidAmerican reduced its electric retail
rates by $8.7 million effective November 1, 1996. The reduction lowered rates to
levels in MidAmerican's pricing proposal filed in June 1996. Refer to "Rate
Matters" in Liquidity and Capital Resources later in this discussion for further
information regarding the Iowa proceeding.
Rate reductions reduced revenues and gross margin by $9.3 million for the
six months ended June 30, 1997, relative to the 1996 period. Weather variation
from normal reduced gross margin for the 1997 period by $5 million compared to
an increase in margin of $3 million for the 1996 period. These decreases in 1997
gross margin were partially offset by increases due to other factors such as
customer growth and increases in sales not dependent on weather. In total,
electric retail sales increased 2% in the 1997 six-month period compared to the
six months ended June 30, 1996.
Electric gross margin decreased $22 million for the twelve months ended
June 30, 1997, compared to the 1996 period. In addition to the impact of weather
discussed above, cooler weather conditions in the 1996 third quarter compared to
the 1995 third quarter caused a decrease in weather-related sales in the 1997
twelve-month period relative to the comparable 1996 period. In total, electric
retail sales increased 1% due to modest customer growth and an improvement in
sales not dependent upon weather. Sales to the more weather-sensitive customers
have a higher margin per unit than sales to other customers. As a result, the
decrease in sales to those customers had a greater impact on margin than
increases in sales to other customers. The rate reductions discussed above
reduced electric gross margin by $13.0 million for the twelve months ended
comparison. In addition, electric revenues and gross margin were reduced by $3.7
million in the twelve months ended June 30, 1997, for a rate refund reserve for
revenues between August 1 and October 31, 1996, in connection with the Iowa
proceeding.
Gas Gross Margin:
-----------------
Periods Ended June 30
------------------------------------------------
Three Months Six Months Twelve Months
------------ ------------ --------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
(In millions)
Operating revenues $ 81 $ 86 $292 $282 $548 $493
Cost of gas sold 45 49 187 172 361 300
---- ---- ---- ---- ---- ----
Gas gross margin $ 36 $ 37 $105 $110 $187 $193
==== ==== ==== ==== ==== ====
Variations in gas gross margin are the result of changes in revenues due to
price and sales volume variances. MidAmerican has been allowed to recover in
revenues the cost of gas sold from most of its gas utility customers through
purchase gas adjustment clauses (PGAs). Variations in revenues collected through
the PGAs, reflecting changes in the cost of gas per unit and volumes sold, do
not affect gross margin or net income.
-20-
Gas gross margin for the six months ended June 30, 1997, decreased $5
million compared to the 1996 six-month period due primarily to warmer 1997
weather. Weather in the first quarter of 1997 was milder than normal resulting
in a $1 million decrease in gas gross margin while weather in the 1996 first
quarter was colder than normal, contributing $2 million to the gas margin for
that period. Retail sales of natural gas decreased 8% compared to the six months
ended June 30, 1996.
Gas gross margin decreased $6 million for the twelve months ended June 30,
1997, compared to the 1996 period. Retail sales of natural gas decreased 8%
compared to twelve months ended June 30, 1996. The decrease is due primarily to
the impact of weather. In addition, revenues decreased due to a reduction of
non-sales related revenues.
UTILITY OPERATING EXPENSES
Utility other operating expenses increased for three months and six months
ended June 30, 1997, compared to the 1996 periods due in part to increases of
$2.0 million and $4.7 million, respectively, in operating costs at the Quad
Cities Nuclear Station (Quad Cities Station). In addition, the 1997 periods
reflect increases in legal and consulting services fees, uncollectible accounts
expense, marketing expenses, employee incentive compensation and various
operations expenses. The decrease in utility other operating expenses for the
1997 twelve months ended period was due primarily to costs in the 1996 twelve
months ended period of the restructuring plan discussed under "Earnings" in the
Results of Operations section. In addition, the 1997 twelve-month period
includes a full year of cost savings resulting from the merger. The decreases
were partially offset by increases in legal and consulting services fees,
uncollectible accounts expense, marketing expenses and amortization of
previously deferred energy efficiency costs.
Maintenance expenses decreased for three months ended June 30, 1997,
compared to the 1996 three-month period due to the timing of power plant
maintenance. Maintenance expenses increased for the six-month and twelve-month
1997 periods compared to the respective 1996 periods. The timing of power plant
maintenance and increased nuclear maintenance costs accounted for much of the
variation between the periods. For the 1997 six-month period, maintenance costs
at the Quad Cities Station increased $2.5 million compared to the 1996 period.
For the twelve months ended June 30 comparison, maintenance expenses for the
Quad Cities Station increased $4.9 million. Steam power maintenance increased
$6.1 million for the twelve-month comparison, but was offset by a $6.2 million
reduction from an adjustment in the 1996 fourth quarter to align inventory
accounting of predecessor companies.
Based on information currently available, MidAmerican expects 1997 nuclear
operations and maintenance expenses to be $11-15 million above the 1996 level
due in part to scheduled outage costs and other activities at the Quad Cities
Station and Cooper Nuclear Station (Cooper). MidAmerican is a 25% owner of the
Quad Cities Station and purchases 50% of the output of Cooper under a power
sales contract. MidAmerican does not operate either of the facilities. Actual
nuclear operations and maintenance expenses could differ significantly from the
expected level due to, but not limited to, unplanned outages, additional
maintenance needs or regulatory intervention.
-21-
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Holdings:
- - ---------
Revenues of MidAmerican Capital and Midwest Capital increased a total of
$8.6 million, $77.8 million and $178.7 million for the three-month, six-month
and twelve-month periods ended June 30, 1997, relative to the comparable 1996
periods. The increase was due primarily to respective increases of $10.4
million, $77.7 million, and $175.2 million in revenues from natural gas
marketing subsidiaries, one of which did not exist in 1995. Sales volumes for
the natural gas marketing firms increased 5 million MMBtu's (43%), 27 million
MMBtu's (100%) and 68 million MMBtu's (157%) for the 1997 three, six and twelve
months ended periods compared to the 1996 periods. In addition, the average
price of natural gas increased for the 1997 six-month and twelve-month periods
compared to the 1996 levels.
Cost of sales includes expenses directly related to sales of natural gas.
Increases in gas sales volumes was the primary cause of the increase in the cost
of sales for each 1997 period compared to the 1996 periods.
While sales volumes for the nonregulated natural gas businesses have been
increasing, average margins per unit (total price less cost of gas) on sales of
natural gas decreased in the 1997 six-month and twelve-month periods compared to
the 1996 periods due in part to increased competition in the industry. Compared
to the 1996 periods, total gross margin on nonregulated natural gas sales
increased $1.6 million for the three-months ended June 30, 1997, and decreased
$2.7 million for the twelve-month period. Total gross margin was unchanged for
the comparable six-month periods.
NON-OPERATING INCOME AND INTEREST EXPENSE
MidAmerican:
- - ------------
Other, Net -
The three-month period ended June 30, 1997, reflects a 1997 award of $1.7
million in pre-tax income for successful performance under MidAmerican's
incentive gas procurement plan during the May to October 1996 period.
In the first quarter of 1996, MidAmerican recorded a $2.2 million reserve
for a dispute with a vendor. Following successful resolution of the dispute in
the fourth quarter of 1996, MidAmerican reversed the reserve and recorded an
initial pre-tax gain of $3.2 million on its sale of the related storage gas
supplies. MidAmerican reflected an additional $0.8 million gain in the second
quarter of 1997 after receiving favorable treatment on the transaction from the
Iowa Utilities Board (IUB). The impact of these transactions on the comparison
of Other, Net between the three, six and twelve months ended June 30 periods was
an increase to the 1997 periods over the 1996 periods of $0.8 million, $3.0
million and $8.4 million, respectively.
The twelve-month comparison is also affected by $2.7 million of pre-tax
income recorded in the fourth quarter of 1996 as a result of successful
performance under the incentive gas procurement program during the 1995-1996
heating season. Other, Net for the 1997 twelve-month period was reduced by $8.7
million for costs incurred by MidAmerican for its merger proposal to IES
Industries Inc. Merger transaction costs related to MidAmerican's 1995 merger
reduced Other, Net by $3.9 million for the twelve months ended June 30, 1996.
-22-
Interest Charges -
A decrease in the average amount of commercial paper outstanding compared
to the 1996 periods resulted in a decrease in related other interest expense for
the 1997 periods. Interest expense related to IRS settlements in the second
quarter of 1997 resulted in higher expense for that period and offset the
decreases in commercial paper interest expense for the six-month and
twelve-month periods.
Holdings:
- - ---------
Realized Gains and Losses on Securities, Net -
Net realized gains on securities decreased for the 1997 six-month and
twelve-month periods compared to the 1996 periods. During the first quarter of
1996, MidAmerican Capital began liquidation of certain common equity fund
holdings, realizing gains on such sales. Losses on continued liquidation of
common equity fund holdings and managed preferred stock portfolios in the last
six months of 1996 resulted in a net loss on securities for the twelve months
ended June 30, 1997.
Other, Net -
As discussed in the "Earnings" section at the beginning of Results of
Operations, write-downs of nonregulated investments decreased Other, Net by
$15.6 million and $18.0 million for the 1997 and 1996 twelve months ended June
30 periods, respectively. The $18.0 million includes a $3.0 million write-down
in December 1995 of a Des Moines office building. The carrying value of the
property was previously written down by $5.8 million in 1992 to reflect then
anticipated market values. In the third quarter of 1996, Midwest Capital
recorded a $1.8 million pre-tax gain on the sale of the building. Each of the
period comparisons was also affected by reductions in the 1997 periods of income
from equity investments due to liquidation activity discussed above.
INCOME TAXES
Holdings:
- - ---------
During the second quarter of 1997, the Company contributed part of an
appreciated common stock investment to its tax exempt foundation and realized
$2.9 million of tax benefit.
-23-
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has available a variety of sources of liquidity and capital
resources, both internal and external. These resources provide funds required
for current operations, construction expenditures, dividends, debt retirement
and other capital requirements.
For the first six months of 1997, Holdings had net cash provided from
operating activities of $190 million compared to $189 million for the same
period in 1996. MidAmerican's net cash provided from operating activities was
$163 million for the first six months of 1997 and $173 million for the first six
months of 1996.
INVESTING ACTIVITIES AND PLANS
MidAmerican:
- - ------------
MidAmerican's primary need for capital is utility construction
expenditures. Utility construction expenditures, including allowance for funds
used during construction (AFUDC), Quad Cities Station nuclear fuel purchases and
Cooper capital improvements, were $64 million for the first half of 1997. All
such expenditures were met with cash generated from utility operations, net of
dividends.
Forecasted utility construction expenditures for 1997 are $200 million
including AFUDC. Capital expenditures needs are reviewed regularly by
MidAmerican's management and may change significantly as a result of such
reviews. For the years 1997 through 2001, MidAmerican forecasts $840 million for
utility construction expenditures. MidAmerican presently expects that all
utility construction expenditures for 1997 through 2001 will be met with cash
generated from utility operations, net of dividends. The actual level of cash
generated from utility operations is affected by, among other things, economic
conditions in the utility service territory, weather and federal and state
regulatory actions.
Operators of a nuclear facility are required to set aside funds to provide
for costs of future decommissioning of their nuclear facility. In general,
decommissioning of a nuclear facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator. Based on information presently available, MidAmerican expects to
contribute approximately $47 million during the period 1997 through 2001 to an
external trust established for the investment of funds for decommissioning the
Quad Cities Station. Currently, the funds are invested predominately in
investment grade municipal and U.S. Treasury bonds. In 1997, MidAmerican
directed the trust to begin investing a portion of the funds in domestic
corporate debt and common equity securities. In addition, a portion of the
payments made under a power purchase contract with Nebraska Public Power
District (NPPD) are for decommissioning funding related to Cooper. The Cooper
costs are reflected in Other Operating Expenses in the Consolidated Statements
of Income. Based on NPPD estimates, MidAmerican expects to pay approximately $57
million to NPPD for Cooper decommissioning during the period 1997 through 2001.
NPPD invests the funds predominantly in U.S. Treasury Bonds. MidAmerican's
obligation for Cooper decommissioning may be affected by the actual plant
shutdown date and the status of the power purchase contract at that time. See
Part II, Item 1 - Legal Proceedings for a discussion of a lawsuit filed by NPPD
seeking a declaration of MidAmerican's rights and obligations in connection with
Cooper nuclear decommissioning funding. MidAmerican currently recovers Quad
Cities Station decommissioning costs charged to Illinois customers
-24-
through a rate rider on customer billings. Cooper and Quad Cities Station
decommissioning costs charged to Iowa customers are included in base rates, and
increases in those amounts must be sought through the normal ratemaking process.
Holdings:
- - ---------
Capital expenditures of nonregulated subsidiaries were $7 million for the
first six months of 1997. Capital expenditures of nonregulated subsidiaries
depend primarily upon the availability of suitable investment opportunities
which meet the Company's objectives. The Company continues to evaluate
nonstrategic, nonregulated investments and may redeploy certain assets in 1997.
External financing may also be used to provide for nonregulated capital
expenditures.
MidAmerican Capital invests in a variety of marketable securities which it
holds for indefinite periods of time. In the Consolidated Statements of Cash
Flows, the lines Purchase of Securities and Proceeds from Sale of Securities
consist primarily of the gross amounts of these activities, including realized
gains and losses on investments in marketable securities.
MidAmerican Capital has received approximately $28 million from sales of
its venture capital funds. Most of the proceeds of these sales have been
transferred to Holdings by way of a dividend for use in the repurchase of the
Company's common stock.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
MidAmerican:
- - ------------
MidAmerican currently has authority from the Federal Energy Regulatory
Commission (FERC) to issue short-term debt in the form of commercial paper and
bank notes aggregating $400 million. As of June 30, 1997, MidAmerican had a $250
million revolving credit facility agreement and a $10 million line of credit to
provide short-term financing for utility operations. MidAmerican's commercial
paper borrowings, which totaled $144 million at June 30, 1997, are supported by
the revolving credit facility and the line of credit. MidAmerican also has a
revolving credit facility which is dedicated to provide liquidity for its
obligations under outstanding pollution control revenue bonds that are
periodically remarketed.
During 1996, MidAmerican redeemed all shares of its $1.7375 Series of
preferred securities. In October 1996, MidAmerican reacquired $28 million of its
6.95% Series first mortgage bonds due 2025 and $3.5 million of its 7.45% Series
first mortgage bonds due 2023. In December 1996, MidAmerican issued $103 million
of 7.98% Series subordinated debt debentures to a subsidiary statutory business
trust which in turn issued $100 million of 7.98% Series A redeemable preferred
securities. MidAmerican also issued in December 1996 $100 million of 6 1/2%
Medium-Term Notes due 2001. Proceeds from these financings were used to redeem
all $40 million of MidAmerican's 8.15% Series first mortgage bonds due 2001 and
the remaining $45.8 million of $1.7375 Series preferred securities mentioned
above. The balance of the proceeds was used to reduce commercial paper
outstanding.
During the first half of 1997, MidAmerican repurchased $36.4 million of
first mortgage bonds with annual interest rates from 6.95% to 7.70%.
-25-
MidAmerican currently has regulatory authority to issue an additional $300
million of preferred securities and long-term debt, including issues under its
medium-term note program. It is management's intent to refinance certain
MidAmerican debt securities with additional issuances of unsecured debt and
preferred securities of a subsidiary trust as market conditions allow.
As of June 30, 1997, MidAmerican had $423 million of long-term debt
maturities and sinking fund requirements for 1997 through 2001.
Credit Ratings -
MidAmerican's access to external capital and its cost of capital are
influenced by the credit ratings of its securities. MidAmerican's credit ratings
as of August 1, 1997, are shown in the table below. The ratings reflect only the
views of such rating agencies, and each rating should be evaluated independently
of any other rating. Generally, rating agencies base their ratings on
information furnished to them by the issuing company and on investigation,
studies and assumptions by the rating agencies. There is no assurance that any
particular rating will continue for any given period of time or that it will not
be changed or withdrawn entirely if in the judgment of the rating agency
circumstances so warrant. Such ratings are not a recommendation to buy, sell or
hold securities.
Moody's
Investors Standard
Service & Poor's
--------- --------
Mortgage Bonds A2 A+
Unsecured Medium-Term Notes A3 A
Preferred Stocks a3 A
Commercial Paper P-1 A-1
The following is a summary of the meanings of the ratings shown above and
the relative rank of MidAmerican's rating within each agency's classification
system.
Moody's top four bond ratings (Aaa, Aa, A and Baa) are generally considered
"investment grade." Obligations which are rated "A" possess many favorable
investment attributes and are considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment sometime in
the future. A numerical modifier ranks the security within the category with a
"1" indicating the high end, a "2" indicating the mid-range and a "3" indicating
the low end of the category. Standard & Poor's top four bond ratings (AAA, AA, A
and BBB) are considered "investment grade". Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in economic conditions than debt in higher rated
categories. Standard & Poor's may use a plus (+) or minus (-) sign after ratings
to designate the relative position of a credit within the rating category.
Ratings of preferred stocks are an indication of a company's ability to pay
the preferred dividend and any sinking fund obligations on a timely basis.
Moody's top four preferred stock ratings (aaa, aa, a and baa) are generally
considered "investment grade". Moody's "a" rating is considered to be an upper
medium grade preferred stock. Earnings and asset protection are expected to be
maintained at adequate levels in the
-26-
foreseeable future. Standard & Poor's top four preferred stock ratings (AAA, AA,
A and BBB) are considered "investment grade". Standard & Poor's "A" rating
indicates adequate earnings and asset protection.
Moody's top three commercial paper ratings (P-1, P-2 and P-3) are generally
considered "investment grade". Issuers rated "P-1" have a superior ability for
repayment of senior short-term debt obligations and repayment ability is often
evidenced by a conservative structure, broad margins in earnings coverage of
fixed financial charges and well established access to a range of financial
markets and assured sources of alternate liquidity. Standard & Poor's commercial
paper ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity less than 365 days. The top three Standard &
Poor's commercial paper ratings (A-1, A-2 and A-3) are considered "investment
grade". Issues rated "A-1" indicate that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety are denoted with a plus (+) sign designation.
Preferred Dividends -
Preferred dividends include net gains or losses on the reacquisition of
MidAmerican preferred shares. Net losses on reacquisitions totaled zero, $1.4
million and $2.8 million for the 1997 three-month, six-month and twelve-month
periods, respectively, and $0.1 million, $0.3 million and $0.2 million for the
comparable 1996 periods. Excluding these losses, preferred dividends increased
for the 1997 periods compared to the 1996 periods due primarily to the increase
in preferred stock outstanding.
Holdings:
- - ---------
As of June 30, 1997, Holdings had lines of credit totaling $50 million
available to provide for short-term financing needs.
In addition, Holdings has the necessary authority to issue shares of its
common stock through its Shareholder Options Plan (a dividend reinvestment and
stock purchase plan). Since July 1, 1995, the Company has used open market
purchases of its common stock rather than original issue shares to meet share
obligations under its Employee Stock Purchase Plan and the Shareholder Options
Plan. Holdings currently plans to continue using open market purchases to meet
share obligations under these plans.
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, with the intent of completing the
entire repurchase program by December 31, 1998. As of June 30, 1997, the Company
had repurchased approximately 2.7 million shares for $46.6 million.
On July 21, 1997, Holdings' board of directors declared a quarterly
dividend on common shares of $0.30 per share payable September 1, 1997. The
dividend represents an annual rate of $1.20 per share.
As of June 30, 1997, MidAmerican Capital had unsecured revolving credit
facilities in the amount of $114 million. Currently MidAmerican Capital has a
zero balance outstanding under these facilities. MidAmerican Capital has $142
million of long-term debt maturities and sinking fund requirements for 1997
through 2001, of which $30 million is in 1997.
Midwest Capital currently has a $25 million line of credit with
MidAmerican, of which $5 million was outstanding at June 30, 1997.
-27-
OPERATING ACTIVITIES AND OTHER MATTERS
The Company continues to adjust its strategies and operations for
changes it expects in the electric utility industry. The merger that resulted in
MidAmerican and the subsequent reorganization of utility operations were some of
the first steps taken to better position the Company for competition. The
following discussion addresses some of the changes affecting the industry and
actions the Company is taking to better position itself as the industry evolves.
Holdings:
- - ---------
During 1996, the Company began to reevaluate its nonregulated investments.
Through the evaluation process, management will determine which investments fit
the Company's objectives and which should be divested. The method of divestiture
could include alternatives from finding an immediate buyer to holding the
investment until maturity. In the twelve months ended June 30, 1997, the
evaluation of nonregulated investments resulted in a net reduction in earnings
of approximately $21 million due primarily to the loss on disposal of
discontinued nonregulated operations and the writedowns discussed in the
"Earnings" section of this discussion. The process will continue for the next 12
to 18 months and could result in additional losses if the Company decides to
divest of investments for less than carrying value.
MidAmerican:
- - ------------
Regulatory Evolution and Competition -
MidAmerican is subject to regulation by several utility regulatory
agencies. The operating environment and the recoverability of costs from utility
customers are significantly influenced by the regulation of those agencies.
MidAmerican supports changes in the electric utility industry that will create a
more competitive environment for the entire electric industry, as long as
appropriate transitional steps are in place to accommodate moving from a
regulated cost-of-service industry to a competitive industry. Although these
anticipated changes may create opportunities, they will also create additional
challenges and risks for utilities.
MidAmerican is taking steps to address the future introduction of retail
competition in the electric utility industry. MidAmerican is, and will be,
negotiating long-term contracts with its industrial and commercial customers,
the customer classes currently mostly likely to have alternate supplier choices.
In March 1997, MidAmerican initiated an advertising campaign designed to
establish MidAmerican's brand identity within MidAmerican's service territory. A
distinctive brand identity will become increasingly important as the electric
industry is restructured to allow customer choice.
In December 1996, MidAmerican was selected from among 20 potential
suppliers to provide electric service for the Resale Power Group of Iowa (RPGI).
The RPGI includes 27 municipal utilities, a rural electric cooperative and an
investor-owned utility. Members of the RPGI serve nearly 27,000 retail customers
and purchase approximately 500,000 megawatt hours annually. The five-year
contract with RPGI is effective January 1, 1999. MidAmerican expects to offer
electric system maintenance services, energy efficiency services and economic
development assistance to the RPGI utilities. None of the RPGI utilities are
presently customers of MidAmerican. This opportunity provided MidAmerican
valuable experience in the evolving competitive electric market.
-28-
MidAmerican is a member of the Illinois Coalition for Responsible
Electricity Choice (the Coalition). The Coalition has produced draft legislation
(the Proposal) that would restructure Illinois' electric industry and allow
Illinois customers to choose their electric service provider. The Proposal is
designed to, among other things, balance tax and regulatory burdens; transition
the industry to a competitive electric marketplace in phases between the years
2000 and 2005; stabilize or reduce tariffed electric rates; provide for recovery
of prior mandated investments of the utilities; and increase flexibility for
utilities while providing for oversight of reliability and safety by the ICC.
The Proposal and others are being addressed by the Illinois legislature in 1997,
and MidAmerican is an active participant in the legislative subcommittee that is
developing a single bill. The Illinois legislature previously passed laws
allowing the filing of alternative pricing plans by utilities and increased
flexibility for agreements with industrial customers.
In Iowa, no legislation has yet been introduced to allow generation or
retail service competition. MidAmerican expects legislation on competition and
utility industry restructuring may be introduced in the 1998 Iowa legislative
session. MidAmerican is preparing its own legislative proposal regarding
electric industry restructuring to be offered at the appropriate time.
In 1996, the IUB directed MidAmerican and another Iowa investor-owned
utility to sign alternative energy contracts by March 11, 1997. MidAmerican
reached agreement with Zond Development Corporation to supply MidAmerican with
wind-generated energy. The agreement received FERC and IUB acceptance in July
1997. Zond is required to begin supplying energy to MidAmerican within three
years after the IUB and FERC accepted the agreement. Energy received under the
20-year contract with Zond, together with 10 MW of electricity already received
from other alternate energy producers, will fulfill MidAmerican's requirement
under Iowa law to purchase 55 MW of electricity generated by alternate energy
sources in Iowa. The cost of energy for this purchase will be flowed directly
through to retail customers on a monthly basis. Due to the declining per-unit
cost over the life of the contract, the impact on the Company's financial
position or results of operations will be minimal.
In April 1996, the FERC issued Order Nos. 888 and 889 which require public
utilities and other transmission providers and users to provide other companies
the same transmission access, service and pricing that they provide themselves.
In compliance with Order 888, which was effective July 9, 1996, MidAmerican has
filed a pro forma open access transmission tariff and is currently operating
under it. In May 1997, MidAmerican filed revisions to the tariff in accordance
with Order No. 888-A which was issued in March 1997. In accordance with Order
889, which was effective January 3, 1997, MidAmerican has separated its electric
wholesale marketing and transmission operation functions. Order 889 establishes
standards of conduct for this functional separation and further requires
transmission providers such as MidAmerican to either create or participate in an
Open Access Same Time Information System (OASIS). MidAmerican is a long-time
member of the Mid-Continent Area Power Pool (MAPP) and has elected to
participate in the MAPP OASIS. These developments assure that all transmission
customers of MidAmerican, including MidAmerican's own wholesale marketing
function, can obtain transmission information at the same time and can request
service on the same basis.
A possible consequence of competition in the utility industry is that
Statement of Financial Accounting Standards (SFAS) No. 71 may no longer apply.
SFAS 71 sets forth accounting principles for operations that are regulated and
meet certain criteria. For operations that meet the criteria, SFAS 71 allows,
among other things, the deferral of costs that would otherwise be expensed when
incurred. MidAmerican's electric and gas utility operations are currently
subject to the provisions of SFAS 71, but its applicability is periodically
reexamined. If a portion of MidAmerican's utility operations no longer meets the
criteria of SFAS 71,
-29-
MidAmerican would be required to eliminate from its balance sheet the assets and
liabilities related to those operations that resulted from actions of its
regulators. Although the amount of such an elimination would depend on the
specific circumstances, a material adjustment to earnings in the appropriate
period could result from the discontinuance of SFAS 71. As of June 30, 1997,
MidAmerican had $363 million of regulatory assets in its Consolidated Balance
Sheet.
Energy Efficiency -
On July 1, 1996, new legislation in Iowa became effective enhancing energy
efficiency program flexibility, eliminating mandatory spending levels for energy
efficiency programs and allowing more timely recovery of energy efficiency
expenditures as determined by the IUB. Previously, electric and gas utilities in
Iowa were required to spend approximately 2% and 1.5%, respectively, of their
annual Iowa jurisdictional revenues on energy efficiency activities. On April
24, 1997, the IUB issued an order adopting final rules, effective June 25, 1997,
for energy efficiency cost recovery and prudence review under the new
legislation. MidAmerican plans to file in the third quarter of 1997 for approval
to accelerate recovery of deferred and current energy efficiency costs. The
Consolidated Balance Sheet as of June 30, 1997, included $113 million of
deferred energy efficiency costs. Of that total, approximately $19 million has
been approved for collection from customers. Currently, MidAmerican is
collecting approximately $14.3 million annually related to those costs. The
remaining $94 million of deferred energy efficiency costs will be included in
future energy efficiency cost recovery filings.
Rate Matters -
On June 4, 1996, MidAmerican filed an electric pricing proposal in Iowa and
Illinois. The proposal was later withdrawn in Illinois following negotiation of
a settlement in a related Illinois proceeding. The settlement resulted in annual
reductions of $13.1 million and $2.4 million, effective November 3, 1996, and
June 1, 1997, respectively.
On June 27, 1997, the 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 accepts MidAmerican's proposal to eliminate the
energy adjustment clause (EAC) which was the mechanism through which fuel costs
were collected from Iowa customers prior to July 11, 1997. The EAC flowed 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 fuel costs vary 15% above or below the factor included in base rates.
-30-
Under the agreement, if MidAmerican's annual return on common equity
exceeds 12%, then an equal sharing between customers and shareholders begins; if
it exceeds 14%, then two-thirds of MidAmerican's share 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 IUB approval, 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 but may not be recovered from
other customer classes. The program is expected to be filed by the fall of 1997.
In April 1997, MidAmerican refunded approximately $2.4 million, including
interest, to Iowa customers for revenues between August 1, 1996, and October 31,
1996, that were in excess of the levels provided for in the settlement.
Environmental Matters -
The United States Environmental Protection Agency (EPA) and state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant facilities may pose a threat to
the public health or the environment if such contaminants are in sufficient
quantities and at such concentrations as to warrant remedial action.
The Company is evaluating 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 the Company has any responsibility for remedial action. The
Company's present estimate of probable remediation costs for these sites is $23
million. This estimate has been recorded as a liability and a regulatory asset
for future recovery through the regulatory process. Refer to Note (B) of Notes
for further discussion of the Company's environmental activities related to
manufactured gas plant sites and cost recovery.
Although the timing of potential incurred costs and recovery of such cost
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on the Company's financial position or results of operations.
The U.S. EPA has recently promulgated revisions to the ambient air quality
standards for ozone and particulate matter. The impact of the new standards on
MidAmerican will depend on implementation of the applicable regulations and,
ultimately, the attainment status of the areas surrounding MidAmerican's
operations. MidAmerican will continue to evaluate the potential impact of the
new regulations, which is currently unknown.
Other Matters -
MidAmerican has initiated an incentive compensation plan which covers all
of its salaried employees. One goal in the plan is achievement of a designated
threshold earnings target. The 1997 earnings target, which was established by
management, results in a 12.9% return on average common equity for MidAmerican.
-31-
ACCOUNTING ISSUES
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry regarding
the recognition, measurement and classification of nuclear decommissioning costs
in the financial statements. In response to these questions, the FASB has issued
an Exposure Draft, "Accounting for Certain Liabilities Related to Closure or
Removal of Long-Lived Assets," which addresses the accounting for closure and
removal costs, including decommissioning of nuclear power plants. If current
electric utility industry accounting practices for such decommissioning are
changed, the annual provision for decommissioning could increase relative to the
current level, and the total estimated cost for decommissioning could be
recorded as a liability with recognition of an increase in the cost of related
nuclear power plant. Due to the continuing evolution of the exposure draft, the
Company is uncertain as to the impact on its results of operations and financial
position.
The Financial Accounting Standards Board has issued SFAS No. 128 and SFAS
No. 130. SFAS 128, which addresses the calculation of earnings per share, is
effective for periods ending after December 15, 1997. The standard is not
expected to have a material effect on the Company's calculation of earnings per
share. SFAS 130, which is effective for fiscal years beginning after December
15, 1997, requires that all items required to be recognized under accounting
standards as changes in equity during a period, except those resulting from
investments by owners and distributions to owners, be reported in a financial
statement that is displayed with the same prominence as the other financial
statements. The display can be a separate statement or an addition to an
existing statement. The material components of the Company's comprehensive
income will include net income and the aftertax effect of changes in the fair
value of investments classified as available for resale.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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The Company and its subsidiaries have no material legal proceedings except
for the following:
Environmental Matters
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For information relating to the Company's Environmental Matters, reference
is made to Part I, Note (B) of Notes to Consolidated Financial Statements.
Cooper Litigation I
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On May 26, 1995, the Company filed a lawsuit naming Nebraska Public Power
District (NPPD) as defendant. The action is filed in the U.S. District Court for
the Southern District of Iowa and is identified as No. 4-95-CV-80356. The legal
proceeding is based upon a long-term power purchase agreement between the
Company and NPPD, pursuant to which the Company purchases one-half the output of
NPPD's Cooper Nuclear Station (Cooper) and pays one-half the cost of operating
Cooper. NPPD, in turn, is obligated to operate the plant in an efficient and
economical manner consistent with good business and utility practices and in
compliance with the terms of its operating license issued to it by the Nuclear
Regulatory Commission (NRC). In 1993 and 1994, as a response to NPPD actions,
the NRC issued numerous notices of violations to NPPD; as a result of these
violations and other safety issues identified by the NRC and NPPD, Cooper
experienced unplanned outages and outages were unduly extended. NPPD's failure
to meet its obligations with respect to the operation of Cooper deprived the
Company of the benefits it was entitled to under the power purchase contract,
causing the Company to lose profits and incur increased costs of operation,
which damages the Company seeks to collect from NPPD. Similar litigation has
been filed against NPPD by the Lincoln Electric System (LES), a municipal
utility serving the City of Lincoln, Nebraska, and purchasing one-eighth of the
output of Cooper pursuant to a similar power purchase contract. The LES legal
proceeding is pending in Nebraska state court.
MidAmerican and NPPD have now reached an agreement which will settle the
parties' disputes and resolve MidAmerican's claims without the need for a trial.
Under the settlement, MidAmerican and NPPD will attempt to negotiate a new power
purchase contract. If these discussions do not result in a new agreement between
the parties, NPPD will make a cash payment to MidAmerican and the parties will
amend the existing power purchase contract. The amendments would concern
operating standards and dispute resolution procedures. Either of these options
would cause the lawsuit to be dismissed.
Cooper Litigation II
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On July 23, 1997, NPPD filed a Complaint, in the United States District
Court for the District of Nebraska, naming MidAmerican as the defendant and
seeking declaratory judgment as to three issues under the parties' long-term
power purchase agreement for Cooper capacity and energy. More specifically, NPPD
seeks a declaratory judgment in the following respects: (1) that MidAmerican is
obligated to pay 50% of all costs and expenses associated with decommissioning
Cooper, and that in the event NPPD continues to operate Cooper after expiration
of the power purchase agreement (September, 2004), MidAmerican is not entitled
to reimbursement of any decommissioning funds it has paid to date or will pay in
the future; (2) that the current method of allocating transition costs as a part
of the decommissioning cost is proper under the power purchase agreement; and
(3) that the current method of investing decommissioning funds is proper under
the power purchase agreement.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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The Company held its 1997 Annual Meeting of Shareholders on April 23, 1997.
At the annual meeting, shareholders elected the fifteen persons nominated. The
results of the votes are as follows:
For Against
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Election of Directors:
Name -
John W. Aalfs 78,590,416 1,827,813
S. J. Bright 78,493,243 1,924,986
R. D. Christensen 78,502,387 1,915,842
R. E. Christiansen 78,477,618 1,940,611
J. W. Colloton 78,350,627 2,067,602
F. S. Cottrell 78,557,711 1,860,518
J. W. Eugster 78,550,740 1,867,489
M. Foster, Jr. 78,406,202 2,012,027
N. Gentry 78,575,000 1,843,229
J. M. Hoak, Jr. 78,558,733 1,859,496
R. L. Lawson 78,489,010 1,929,219
R. L. Peterson 78,281,195 2,137,034
N. L. Seifert 78,510,332 1,907,897
W. S. Tinsman 78,608,931 1,809,298
L. L. Woodruff 78,518,744 1,899,485
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
Exhibits Filed Herewith
-----------------------
Holdings
Exhibit 12.1 - Computation of ratios of earnings to fixed
charges and computation of ratios of earnings to fixed charges
plus preferred dividend requirements.
MidAmerican
Exhibit 12.2 - Computation of ratios of earnings to fixed
charges and computations of ratios of earnings to fixed
charges plus preferred dividend requirements.
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
On April 4, 1997, the Company filed a report on Form 8-K,
dated April 4, 1997, regarding the announcement that it had purchased
more than 1.1 million shares of common stock as part of its previously
announced stock repurchase program. The press release issued in
conjunction with the announcement was filed as an Exhibit to the
report.
On April 25, 1997, Holdings and MidAmerican filed a joint
report on Form 8-K, dated April 23, 1997. The report included
information regarding a change in the registrants' certifying
accountant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY
MIDAMERICAN ENERGY COMPANY
(Registrants)
Date August 8, 1997 P. G. Lindner
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P. G. Lindner
Senior Vice President and Chief Financial Officer
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