UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
----------------------------------------------
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 50303
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 April 30, 1998
- - ------------------ ---------------- ------------------------------------
MidAmerican Energy Common Stock 94,595,982
Holdings Company without par value
MidAmerican Energy Common Stock 70,980,203 (all of which were held by
Company without par value MidAmerican Energy Holdings Company)
MIDAMERICAN ENERGY HOLDINGS COMPANY
AND
MIDAMERICAN ENERGY COMPANY
This combined Form 10-Q is separately filed by MidAmerican Energy Holdings
Company (Company or Holdings) and MidAmerican Energy Company (MidAmerican).
Information herein relating to each individual registrant is filed by such
registrant on its own behalf. Accordingly, except for its subsidiaries,
MidAmerican makes no representation as to information relating to any other
subsidiary of Holdings.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
MidAmerican Energy Holdings Company
Consolidated Statements of Income............................... 3
Consolidated Statements of Comprehensive Income................. 4
Consolidated Balance Sheets..................................... 5
Consolidated Statements of Cash Flows........................... 6
Notes to Consolidated Financial Statements...................... 7
MidAmerican Energy Company
Consolidated Statements of Income...............................12
Consolidated Balance Sheets.....................................13
Consolidated Statements of Cash Flows...........................14
Notes to Consolidated Financial Statements......................15
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......37
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...............................................38
ITEM 6. Exhibits and Reports on Form 8-K................................39
Signatures...............................................................40
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, except per share amounts)
Three Months Twelve Months
Ended March 31 Ended March 31
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
OPERATING REVENUES
Electric utility ........................... $ 256,354 $ 254,316 $ 1,128,338 $ 1,091,050
Gas utility ................................ 173,200 211,565 497,941 552,332
Nonregulated ............................... 41,974 114,278 187,371 301,793
----------- ----------- ----------- -----------
471,528 580,159 1,813,650 1,945,175
----------- ----------- ----------- -----------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity ........ 45,199 59,283 221,676 232,225
Cost of gas sold ......................... 105,321 141,833 309,504 364,111
Other operating expenses ................. 106,777 93,607 442,964 356,180
Maintenance .............................. 22,583 23,749 96,924 93,634
Depreciation and amortization ............ 44,191 42,008 172,723 165,656
Property and other taxes ................. 25,470 25,490 101,297 92,943
----------- ----------- ----------- -----------
349,541 385,970 1,345,088 1,304,749
----------- ----------- ----------- -----------
Nonregulated:
Cost of sales ............................ 39,036 108,970 170,248 284,479
Other .................................... 6,309 7,986 28,399 35,217
----------- ----------- ----------- -----------
45,345 116,956 198,647 319,696
----------- ----------- ----------- -----------
Total operating expenses.................. 394,886 502,926 1,543,735 1,624,445
----------- ----------- ----------- -----------
OPERATING INCOME ........................... 76,642 77,233 269,915 320,730
----------- ----------- ----------- -----------
NON-OPERATING INCOME
Interest income ............................ 2,452 1,553 6,217 4,060
Dividend income ............................ 2,714 3,548 12,958 16,027
Realized gains and losses on securities, net 1,065 518 8,345 (312)
Other, net ................................. 5,657 3,985 23,783 (1,707)
----------- ----------- ----------- -----------
11,888 9,604 51,303 18,068
----------- ----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ................. 20,284 23,463 86,719 100,267
Other interest expense ..................... 3,212 1,329 11,917 9,234
Preferred dividends of subsidiaries ........ 3,232 4,769 12,931 12,981
Allowance for borrowed funds ............... (754) (709) (2,642) (3,485)
----------- ----------- ----------- -----------
25,974 28,852 108,925 118,997
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ...................... 62,556 57,985 212,293 219,801
INCOME TAXES ............................... 23,823 23,811 68,402 90,271
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS .......... 38,733 34,174 143,891 129,530
DISCONTINUED OPERATIONS
Income from operations (net of income taxes) -- 290 (408) (235)
Loss on disposal (net of income taxes) ..... -- (524) (3,586) (15,356)
----------- ----------- ----------- -----------
-- (234) (3,994) (15,591)
----------- ----------- ----------- -----------
NET INCOME ................................. $ 38,733 $ 33,940 $ 139,897 $ 113,939
=========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING .......... 94,857 100,458 96,663 100,661
EARNINGS PER COMMON SHARE: BASIC AND DILUTED
Continuing operations ...................... $ 0.41 $ 0.34 $ 1.49 $ 1.29
Discontinued operations .................... -- -- (0.04) (0.16)
----------- ----------- ----------- -----------
Earnings per average common share .......... $ 0.41 $ 0.34 $ 1.45 $ 1.13
=========== =========== =========== ===========
DIVIDENDS DECLARED PER SHARE ............... $ 0.30 $ 0.30 $ 1.20 $ 1.20
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-3-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS TWELVE MONTHS
ENDED MARCH 31 ENDED MARCH 31
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
NET INCOME ............................................ $ 38,733 $ 33,940 $ 139,897 $ 113,939
--------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on securities:
Unrealized holding gains during period .............. 82,856 4,126 302,657 6,961
Less reclassification adjustment for realized gains
(losses) reflected in net income during period .... 1,065 518 8,334 (312)
--------- --------- --------- ---------
81,791 3,608 294,323 7,273
Income tax expense .................................. 28,548 1,218 102,898 2,500
--------- --------- --------- ---------
Other comprehensive income, net ................... 53,243 2,390 191,425 4,773
--------- --------- --------- ---------
COMPREHENSIVE INCOME .................................. $ 91,976 $ 36,330 $ 331,322 $ 118,712
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
-------------------------------------
MARCH 31 DECEMBER 31
------------------------ -----------
1998 1997 1997
----------- ----------- -----------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ................................................... $ 4,095,470 $ 4,033,782 $ 4,084,920
Gas ........................................................ 759,847 726,906 756,874
----------- ----------- -----------
4,855,317 4,760,688 4,841,794
Less accumulated depreciation and amortization ............. 2,312,812 2,188,624 2,275,099
----------- ----------- -----------
2,542,505 2,572,064 2,566,695
Construction work in progress .............................. 62,034 39,104 55,418
----------- ----------- -----------
2,604,539 2,611,168 2,622,113
----------- ----------- -----------
POWER PURCHASE CONTRACT .................................... 170,771 190,326 173,107
----------- ----------- -----------
INVESTMENT IN DISCONTINUED OPERATIONS ...................... -- 6,334 --
----------- ----------- -----------
CURRENT ASSETS
Cash and cash equivalents .................................. 34,637 93,010 10,468
Receivables ................................................ 158,502 233,407 207,471
Inventories ................................................ 40,890 59,704 86,091
Other ...................................................... 16,324 14,932 18,452
----------- ----------- -----------
250,353 401,053 322,482
----------- ----------- -----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ................. 907,528 615,638 799,524
----------- ----------- -----------
OTHER ASSETS ............................................... 343,161 395,862 360,865
----------- ----------- -----------
TOTAL ASSETS ............................................... $ 4,276,352 $ 4,220,381 $ 4,278,091
=========== =========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity ................................ $ 1,349,011 $ 1,225,953 $ 1,301,286
MidAmerican preferred securities, not subject to
mandatory redemption ..................................... 31,761 31,766 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ......................... 50,000 50,000 50,000
MidAmerican-obligated preferred securities of
subsidiary trust holding solely MidAmerican
junior subordinated debentures ......................... 100,000 100,000 100,000
Long-term debt (excluding current portion) ................. 1,037,598 1,118,723 1,034,211
----------- ----------- -----------
2,568,370 2,526,442 2,517,260
----------- ----------- -----------
CURRENT LIABILITIES
Notes payable .............................................. 141,063 40,209 138,054
Current portion of long-term debt .......................... 69,651 155,202 144,558
Current portion of power purchase contract ................. 14,361 13,718 14,361
Accounts payable ........................................... 140,198 147,352 145,855
Taxes accrued .............................................. 105,720 123,650 92,629
Interest accrued ........................................... 18,807 23,578 22,355
Other ...................................................... 33,515 52,445 38,766
----------- ----------- -----------
523,315 556,154 596,578
----------- ----------- -----------
OTHER LIABILITIES
Power purchase contract .................................... 83,143 97,504 83,143
Deferred income taxes ...................................... 785,610 716,062 761,795
Investment tax credit ...................................... 81,700 87,414 83,127
Other ...................................................... 234,214 236,805 236,188
----------- ----------- -----------
1,184,667 1,137,785 1,164,253
----------- ----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES ....................... $ 4,276,352 $ 4,220,381 $ 4,278,091
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-5-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 38,733 $ 33,940
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ............................. 48,437 48,409
Net decrease in deferred income taxes and
investment tax credit, net .............................. (5,373) (4,823)
Amortization of other assets .............................. 9,212 6,878
Loss from discontinued operations ......................... -- 234
Gain on sale of securities, assets and other investments .. (7,532) (1,465)
Other-than-temporary decline in value of investments ...... 39 160
Impact of changes in working capital, net of effects
from discontinued operations ............................ 94,933 144,109
Other ..................................................... 2,225 (4,045)
--------- ---------
Net cash provided ....................................... 180,674 223,397
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................... (24,686) (26,603)
Quad Cities Nuclear Power Station decommissioning trust fund (2,813) (2,140)
Deferred energy efficiency expenditures ..................... -- (3,723)
Nonregulated capital expenditures ........................... (21,198) (2,625)
Purchase of securities ...................................... (53,230) (63,343)
Proceeds from sale of securities ............................ 52,045 78,652
Proceeds from sale of assets and other investments .......... 8,199 13,144
Investment in discontinued operations ....................... -- 152,713
Other investing activities, net ............................. (2,778) 1,600
--------- ---------
Net cash (used) provided .................................. (44,461) 147,675
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ....................................... (28,376) (30,179)
Retirement of long-term debt, including reacquisition cost .. (75,031) (29,025)
Reacquisition of preferred shares ........................... (3) (3)
Reacquisition of common shares .............................. (14,843) (20,329)
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility ....................... 3,200 (174,500)
Net increase(decrease) in notes payable ..................... 3,009 (121,780)
--------- ---------
Net cash used ............................................. (112,044) (375,816)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 24,169 (4,744)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 10,468 97,749
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 34,637 $ 93,005
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ................... $ 25,134 $ 30,270
========= =========
Income taxes paid ........................................... $ 724 $ 63
========= =========
The accompanying notes are an integral part of these statements.
-6-
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 the state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant (MGP) facilities may pose a threat
to the public health or the environment if such contaminants are in sufficient
quantities and at such concentrations as to warrant remedial action.
MidAmerican is evaluating 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 its responsibility, if any, for conducting
site investigations or other site activity.
MidAmerican's present estimate of probable remediation costs for the sites
discussed above as of March 31, 1998 is $21 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The Illinois
Commerce Commission (ICC) has approved the use of a tariff rider which permits
recovery of the actual costs of litigation, investigation and remediation
relating to former MGP sites. MidAmerican's present rates in Iowa provide for a
fixed annual recovery of MGP costs. MidAmerican intends to pursue recovery of
the remediation costs from other PRPs and its insurance carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has potential legal liability
for the site and whether information exists to indicate that contaminated wastes
remain at the site. If so, the costs of performing a preliminary investigation
and the costs of removing known contaminated soil are accrued. As the
investigation is performed and if it is determined remedial action is required,
the best estimate of remediation costs is accrued. If necessary, the estimate is
revised when a consent order is issued. The estimated recorded liabilities for
these properties include incremental direct costs of the remediation effort,
costs for future monitoring at sites and costs of compensation to employees for
time expected to be spent directly on the remediation effort. The estimated
recorded liabilities for these properties are based upon
-7-
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.
2) Clean Air Act:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter.
Based on data to be obtained from monitors located throughout the states, the
EPA will make a determination of whether the states have any areas that do not
meet the air quality standards (i.e., areas that are classified as
nonattainment). If a state has area(s) classified as nonattainment area(s), the
state is required to submit a State Implementation Plan specifying how it will
reach attainment of the standards through emission reductions or other means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. If
MidAmerican's operations contribute to nonattainment and modifications to
MidAmerican's operations or facilities are necessary, the cost of making
emissions reductions to meet the air quality standards will be dependent upon
the level of emissions reductions required and the available technology.
MidAmerican will continue to evaluate the potential impact of the new
regulations.
Following recommendations provided by the Ozone Transport Assessment Group,
the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these
emissions reduction requirements as EPA's rule is currently drafted, and, as
such, MidAmerican does not anticipate that its facilities will be subject to
additional emissions reductions as a result of this initiative. The EPA
anticipates issuing its final rules in September 1998. MidAmerican will continue
to closely monitor this rulemaking proceeding.
C) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced its
Illinois electric service rates by annual amounts of $13.1 million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively.
On June 27, 1997, the Iowa Utilities Board (IUB) approved a March 1997
settlement agreement between MidAmerican, the Iowa Office of Consumer Advocate
(OCA) and other parties in a consolidated rate proceeding involving
MidAmerican's electric pricing proposal and a filing by the OCA. The agreement
includes a number of components of MidAmerican's pricing proposal as follows:
* 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.
-8-
* 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 currently
scheduled to be effective June 1, 1998.
* A tracking mechanism to currently recover the cost of capital
improvements required by the Cooper Nuclear Station Power Purchase Contract
which will offset approximately $6 million of the rate reductions in 1998.
* Elimination of the Iowa energy adjustment clause (EAC). Prior to July 11,
1997, MidAmerican collected fuel costs from Iowa customers on a current basis
through the EAC, and thus, fuel costs had little impact on net income. Since
then, base rates for Iowa customers include a factor for recovery of a
representative level of fuel costs. To the extent actual fuel costs vary from
that factor, pre-tax earnings are impacted. The fuel cost factor will be
reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs
vary 15% above or below the factor included in base rates.
* If MidAmerican's annual Iowa electric jurisdictional return on common
equity exceeds 12%, then an equal sharing between customers and shareholders of
earnings above the 12% level begins; if it exceeds 14%, then two-thirds of
MidAmerican's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The agreement permits MidAmerican to file for
increased rates if the return falls below 9%. Other parties signing the
agreement are prohibited from filing for reduced rates prior to 2001 unless the
return, after reflecting credits to customers, exceeds 14%.
* MidAmerican will develop a pilot program for a market access service
which allows customers with at least 4 MW of load to choose energy suppliers.
The pilot program, which is subject to approval by the IUB and the Federal
Energy Regulatory Commission (FERC), is limited to 60 MW of participation the
first year and can be expanded by 15 MW annually until the conclusion of the
program. Any loss of revenues associated with the pilot program will be
considered part of the $10 million annual reduction for commercial and
industrial customers as described above, but may not be recovered from other
customer classes. The program was filed with the IUB and the FERC in September
1997. The Company anticipates that the necessary approvals will be received by
the fourth quarter of 1998.
D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71 allows, among other
things, the deferral of costs that would otherwise be expensed when incurred. A
possible consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71. The majority of MidAmerican's electric and gas utility
operations currently meet the criteria of SFAS 71, but its applicability is
periodically reexamined. On December 16, 1997, MidAmerican's generation
operations serving Illinois were no longer subject to the provisions of SFAS 71
due to passage of restructuring legislation in Illinois. Thus, MidAmerican was
required to write off regulatory assets and liabilities from its balance sheet
related to its Illinois generation operations. The net amount of such write-offs
were immaterial. If other utility operations no longer meet the criteria of SFAS
71, MidAmerican would be required to write off the related regulatory assets and
liabilities from its balance sheet and thus, a material adjustment to earnings
in that period could result. As of March 31, 1998, MidAmerican had approximately
$325 million of regulatory assets in its Consolidated Balance Sheet because
these costs are expected to be recovered in future charges to utility customers.
-9-
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 March 31, 1998, the
Company had repurchased approximately 5.7 million shares for $104.1 million
under the plan. In addition, a subsidiary has acquired 437,131 shares of
Holdings common stock which are also excluded from shares outstanding.
G) DETAIL OF OTHER COMPREHENSIVE INCOME - INCOME TAXES
For fiscal years beginning after December 15, 1997, full sets of
general-purpose financial statements are required to display comprehensive
income and its components in a financial statement that is displayed with the
same prominence as the other financial statements. Comprehensive income refers,
in general, to changes in the Company's equity, except those resulting from
transactions with shareholders. "Unrealized holding gains (losses)" reflects the
overall increase (decrease) in the market value of marketable securities held by
the Company as available-for-sale. The "reclassification adjustment" removes any
gains (losses) that have been realized from sales of those securities and
reflected in the Company's Net Income. The following table shows the income tax
expense or benefit related to each component (in thousands):
Three Months Twelve Months
Ended March 31 Ended March 31
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- --------- --------
Unrealized holding gains
(losses) during period
Before income taxes $ 82,856 $ 4,126 $ 302,657 $ 6,961
Income tax expense (28,921) (1,399) (105,815) (2,391)
-------- ------- --------- --------
53,935 2,727 196,842 4,570
-------- ------- --------- --------
Less reclassification
adjustment for realized
gains (losses) reflected in
net income during period
Before income taxes 1,065 518 8,334 (312)
Income tax expense (373) (181) (2,917) 109
-------- ------- --------- --------
692 337 5,417 (203)
-------- ------- --------- --------
Other Comprehensive Income $ 53,243 $ 2,390 $ 191,425 $ 4,773
======== ======= ========= ========
-10-
H) MCLEODUSA INCORPORATED INVESTMENT:
Included in investments on the Consolidated Balance Sheets is the Company's
investment in common stock of McLeodUSA Incorporated (McLeodUSA). McLeodUSA
common stock has been publicly traded since June 14, 1996. Investor agreements
related to McLeodUSA's initial public offering and subsequent merger with
Consolidated Communications Inc. prohibit the Company from selling or otherwise
disposing of any of the common stock of McLeodUSA prior to September 24, 1998,
without approval of McLeodUSA's board of directors. As a result of the
agreements, the Company's investment was considered restricted stock and, as
such, was recorded at cost in all periods prior to September 1997. Beginning in
September 1997, the investment is no longer considered restricted for accounting
purposes and is recorded at fair value. At March 31, 1998, the cost and fair
value of the McLeodUSA investment were $45.2 million and $340.5 million,
respectively. The unrealized gain is recorded, net of income taxes, as
accumulated comprehensive income in common shareholders' equity. At March 31,
1998, the unrealized gain and deferred income taxes for this investment were
$295.3 million and $103.4 million, respectively.
-11-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS TWELVE MONTHS
ENDED MARCH 31 ENDED MARCH 31
------------------------ --------------------------
1998 1997 1998 1997
----------- --------- ----------- -----------
OPERATING REVENUES
Electric utility .............................. $ 256,354 $ 254,316 $ 1,128,338 $ 1,091,050
Gas utility ................................... 173,200 211,565 497,941 552,332
----------- --------- ----------- -----------
429,554 465,881 1,626,279 1,643,382
----------- --------- ----------- -----------
OPERATING EXPENSES
Cost of fuel, energy and capacity ............. 45,757 59,283 222,234 232,225
Cost of gas sold .............................. 105,321 141,833 309,504 364,111
Other operating expenses ...................... 106,777 93,607 442,964 356,180
Maintenance ................................... 22,583 23,749 96,924 93,634
Depreciation and amortization ................. 44,191 42,008 172,723 165,656
Property and other taxes ...................... 25,470 25,490 101,297 92,943
Income taxes .................................. 28,953 23,504 80,011 102,380
----------- --------- ----------- -----------
379,052 409,474 1,425,657 1,407,129
----------- --------- ----------- -----------
OPERATING INCOME .............................. 50,502 56,407 200,622 236,253
----------- --------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .................. 1,947 906 3,373 1,992
Non-operating income taxes .................... 4,926 (919) 4,090 (2,847)
Other, net .................................... (2,234) 1,331 8,802 4,679
----------- --------- ----------- -----------
4,639 1,318 16,265 3,824
----------- --------- ----------- -----------
FIXED CHARGES
Interest on long-term debt .................... 17,553 19,886 75,787 79,494
Other interest expense ........................ 3,168 1,329 11,866 8,848
Preferred dividends of subsidiary trust ....... 1,995 1,995 7,980 2,283
Allowance for borrowed funds .................. (754) (709) (2,642) (3,485)
----------- --------- ----------- -----------
21,962 22,501 92,991 87,140
----------- --------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ............. 33,179 35,224 123,896 152,937
INCOME (LOSS) FROM DISCONTINUED OPERATIONS .... -- -- -- (16,266)
----------- --------- ----------- -----------
NET INCOME .................................... 33,179 35,224 123,896 136,671
PREFERRED DIVIDENDS ........................... 1,237 2,774 4,951 10,698
----------- --------- ----------- -----------
EARNINGS ON COMMON STOCK ...................... $ 31,942 $ 32,450 $ 118,945 $ 125,973
=========== ========= =========== ===========
The accompanying notes are an integral part of these statements.
-12-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
------------------------------------
MARCH 31 DECEMBER 31
----------------------- -----------
1998 1997 1997
---------- ---------- ----------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ............................................. $4,098,474 $4,036,785 $4,087,924
Gas .................................................. 759,847 726,906 756,874
---------- ---------- ----------
4,858,321 4,763,691 4,844,798
Less accumulated depreciation and amortization ....... 2,314,918 2,190,212 2,277,110
---------- ---------- ----------
2,543,403 2,573,479 2,567,688
Construction work in progress ........................ 62,034 39,104 55,418
---------- ---------- ----------
2,605,437 2,612,583 2,623,106
---------- ---------- ----------
POWER PURCHASE CONTRACT .............................. 170,771 190,326 173,107
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................ 29,650 22,920 9,318
Receivables .......................................... 140,476 194,823 184,153
Inventories .......................................... 39,039 59,704 84,298
Other ................................................ 4,322 5,018 6,174
---------- ---------- ----------
213,487 282,465 283,943
---------- ---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ........... 141,479 94,513 115,029
---------- ---------- ----------
OTHER ASSETS ......................................... 330,357 380,528 347,122
---------- ---------- ----------
TOTAL ASSETS ......................................... $3,461,531 $3,560,415 $3,542,307
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .......................... $ 989,085 $ 987,880 $ 985,744
MidAmerican preferred securities, not subject to
mandatory redemption ............................... 31,761 31,766 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ................... 50,000 50,000 50,000
MidAmerican-obligated preferred securities of
subsidiary trust holding solely MidAmerican
junior subordinated debentures .................. 100,000 100,000 100,000
Long-term debt (excluding current portion) ........... 919,815 982,623 920,203
---------- ---------- ----------
2,090,661 2,152,269 2,087,710
---------- ---------- ----------
CURRENT LIABILITIES
Notes payable ........................................ 115,102 40,025 122,500
Current portion of long-term debt .................... 49,837 125,068 124,460
Current portion of power purchase contract ........... 14,361 13,718 14,361
Accounts payable ..................................... 129,198 121,125 128,390
Taxes accrued ........................................ 101,818 86,570 91,449
Interest accrued ..................................... 14,181 17,611 20,616
Other ................................................ 20,298 23,318 22,598
---------- ---------- ----------
444,795 427,435 524,374
---------- ---------- ----------
OTHER LIABILITIES
Power purchase contract .............................. 83,143 97,504 83,143
Deferred income taxes ................................ 591,341 616,207 592,840
Investment tax credit ................................ 81,700 87,414 83,127
Other ................................................ 169,891 179,586 171,113
---------- ---------- ----------
926,075 980,711 930,223
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ................. $3,461,531 $3,560,415 $3,542,307
========== ========== ==========
The accompanying notes are an integral part of these statements.
-13-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
---------------------------
1998 997
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ................................................. $ 33,179 $ 35,224
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ............................ 47,774 47,644
Net decrease in deferred income taxes and
investment tax credit, net ............................. (2,925) (1,789)
Amortization of other assets ............................. 9,165 6,620
Impact of changes in working capital ..................... 93,230 87,654
Other .................................................... (928) (17,468)
--------- ---------
Net cash provided ...................................... 179,495 157,885
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures .......................... (24,686) (26,603)
Quad Cities Nuclear Power Station decommissioning trust fund (2,813) (2,140)
Deferred energy efficiency expenditures .................... -- (3,723)
Nonregulated capital expenditures .......................... (19,966) (1,704)
Other investing activities, net ............................ 667 98
--------- ---------
Net cash used .......................................... (46,798) (34,072)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ............................................. (29,838) (34,274)
Retirement of long-term debt, including reacquisition cost . (75,126) (29,156)
Reacquisition of preferred shares .......................... (3) (3)
Net decrease in notes payable .............................. (7,398) (121,675)
--------- ---------
Net cash used .......................................... (112,365) (185,108)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 20,332 (61,295)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 9,318 84,215
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 29,650 $ 22,920
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized .................. $ 27,303 $ 30,448
========= =========
Income taxes paid .......................................... $ 84 $ 13,218
========= =========
The accompanying notes are an integral part of these statements.
-14-
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) STATEMENT OF COMPREHENSIVE INCOME:
MidAmerican did not have other comprehensive income for the periods
presented, and accordingly, a statement of comprehensive income has been
omitted. MidAmerican's total comprehensive income is equal to its earnings on
common stock for each period presented.
-15-
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 is a public utility with electric and natural gas operations
and is the principal subsidiary of Holdings. MidAmerican Capital, Midwest
Capital and MidAmerican Realty Services Company (MidAmerican Realty) are
Holdings' nonregulated subsidiaries. MidAmerican Capital manages marketable
securities and passive investment activities, nonregulated wholesale and retail
natural gas businesses, security services and other energy-related, nonregulated
activities. Midwest Capital functions as a regional business development company
in MidAmerican's utility service territory. MidAmerican Realty was recently
established and will include the Company's real estate operations.
On April 6, 1998, the Company announced its intent to purchase AmerUs Home
Services Inc. (Home Services). Home Services includes real estate operations in
five states: Iowa Realty, the state's largest, and First Realty/Better Homes and
Gardens in Iowa; Edina Realty in Minnesota, North Dakota and Wisconsin; and
Carol Jones, Realtors, in Missouri. It has more than 800 employees and 3,400
sales agents and is the nation's third largest real estate brokerage
organization based on over 46,000 residential buyer/seller transactions in 1997.
In addition to residential brokerage, Home Services offers relocation, title and
abstract services. The Company expects the transaction to be completed in the
second quarter of 1998.
DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS
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.
Management's Discussion and Analysis (MD&A) 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.
-16-
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 tables provide a summary of the earnings contributions of
the Company's operations for each of the periods presented:
Periods Ended March 31
-----------------------------------
Three Months Twelve Months
---------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
Net Income (in millions)
Continuing operations
Utility $ 31.9 $ 32.4 $118.9 $142.2
Nonregulated operations 6.8 1.7 25.0 (12.7)
Discontinued operations - (0.2) (4.0) (15.6)
------ ------ ------ ------
Consolidated earnings $ 38.7 $ 33.9 $139.9 $113.9
====== ====== ====== ======
Earnings Per Common Share -
Basic and Diluted
Continuing operations
Utility $ 0.34 $ 0.32 $ 1.23 $ 1.41
Nonregulated operations 0.07 0.02 0.26 (0.12)
Discontinued operations - - (0.04) (0.16)
------ ------ ------ ------
Consolidated earnings $ 0.41 $ 0.34 $ 1.45 $ 1.13
====== ====== ====== ======
-17-
MidAmerican:
- - ------------
The following table provides a summary of the earnings contributions of
MidAmerican's operations for each of the periods presented:
Periods Ended March 31
--------------------------------
Three Months Twelve Months
-------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
(in millions)
Earnings on Common Stock
Continuing operations $ 31.9 $ 32.4 $118.9 $142.2
Discontinued operations* - - - (16.2)
------ ------ ------ ------
Consolidated earnings $ 31.9 $ 32.4 $118.9 $126.0
====== ====== ====== ======
* Twelve months ended March 31, 1997, includes the loss of MidAmerican
Capital and Midwest Capital prior to their transfer to Holdings on December 1,
1996.
EARNINGS DISCUSSION
Earnings per share for the first quarter of 1998 increased 7 cents compared
to the first quarter of 1997. For the twelve months ended period comparison,
earnings per share increased 32 cents in the 1998 period. Some of the
significant factors resulting in the variances are listed below, on a Holdings
per-share basis. The per-share amounts are comparative amounts; therefore, a
factor that had a negative impact on earnings in both periods, but which had
less of a negative impact in the 1998 period than in the 1997 period, would be
displayed as a positive factor for comparison purposes. The discussion that
follows addresses these factors as well as other items affecting the Company's
results of operations.
For purposes of this list, the amortization of deferred energy efficiency
costs, ongoing energy efficiency costs and costs recovered through a mechanism
(Cooper Tracker) to recover capital improvements costs at the Cooper Nuclear
Station, (all of which are included in Other Operating Expenses on the income
statement), have been netted against their recovery in revenues for portraying
the impact on earnings from variances in gross margin and operating expenses.
-18-
Three Months Ended Twelve Months Ended
March 31, March 31,
1998 vs 1997 1998 vs 1997
------------------ -------------------
MidAmerican
Net reduction in electric and
gas gross margin due to -
Variation in the effect of
weather $(0.08) $(0.06)
Customer growth 0.02 0.08
Electric retail rate changes - (0.04)
Improvements due to other
factors 0.08 0.15
Nuclear O&M expenses 0.03 0.01
1996 inventory adjustment - (0.04)
Other O&M expenses (0.04) (0.36)
1996 merger proposal costs - 0.05
Nonregulated subsidiaries
Write-downs of certain assets - 0.07
Realized gain on sale of McLeodUSA
Incorporated common stock - 0.05
Gains on sales of certain assets 0.03 0.09
Income from a venture capital
investment 0.01 0.01
Reduction of interest on long-term
debt - 0.06
Discontinued operations - 0.12
The Company continued its strategic realignment of utility and nonregulated
operations which began in 1996. Earnings of nonregulated subsidiaries have been
significantly affected by the realignment. During 1997 and the first quarter of
1998, the Company divested a number of its interests in nonregulated assets
which did not align with the corporate vision of becoming the leading regional
provider of energy and complementary services. Earnings for the twelve months
ended March 31, 1998, include 6 cents per share from the sale of assets of
railcar leasing and repair businesses in the fourth quarter of 1997. First
quarter 1998 earnings reflect 3 cents per share for the sale of the Company's
interest in a financial management company and the liquidation of a partnership
that owned commercial office buildings. Losses from discontinued operations
reduced earnings in each twelve-month period shown above, though to a lesser
degree in the 1997 period. Cash proceeds from the sale of discontinued
operations in early 1997 allowed the Company to pay off long-term debt,
significantly reducing its interest expense compared to the twelve months ended
March 31, 1997.
In December 1997, the Company sold a portion of its investment in the
common stock of McLeodUSA Incorporated (McLeodUSA). Earnings for the twelve
months ended March 31, 1998, reflect the related gain of 5 cents per share.
Although utility earnings for the current twelve-month period were lower
than in the prior year, a reduction was anticipated because of the electric
pricing settlements achieved in 1996 and 1997 in Iowa and Illinois.
Additionally, utility operating expenses increased as the Company continued its
strategic realignment which included strengthening its marketing and customer
service capabilities and adding to its information technology resources.
-19-
The Company's evaluation of its nonregulated investments has resulted in
write-downs of certain assets, primarily investments in alternative energy
projects, in the past two years. The write-downs, which reflect declines in the
value of those nonregulated investments, reduced earnings by approximately $2.0
million, or 2 cents per share, and $9.4 million, or 9 cents per share, in the
twelve months ended March 31, 1998 and 1997, respectively.
Discontinued Operations -
Holdings:
- - ---------
During 1996, the Company discontinued some of its nonregulated operations.
The income or loss from those operations and the 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)
signed a definitive agreement to sell a portion of the Company's nonregulated
operations to KCS for $210 million in cash plus 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 twelve months ended
March 31, 1997, reflects a $7.6 million after-tax loss for the transaction. An
additional $0.4 million after-tax loss is included in the twelve months ended
March 31, 1998.
In October 1997, the Company also divested a subsidiary that developed and
operated a computerized information system which facilitated real-time exchange
of power in the electric industry. The Company recorded a $4.0 million
anticipated after-tax loss on disposal of those operations in September 1996 and
an additional $3.2 million after-tax loss on disposal in September 1997.
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 includes the net earnings/loss of MidAmerican Capital and Midwest
Capital for periods prior to their December 1, 1996, transfer to Holdings.
-20-
UTILITY GROSS MARGIN
Electric Gross Margin:
----------------------
Periods Ended March 31
-----------------------------------
Three Months Twelve Months
------------- -----------------
1998 1997 1998 1997
---- ---- ------ ------
(In millions)
Operating revenues $256 $254 $1,128 $1,091
Cost of fuel, energy and capacity 45 59 222 232
---- ---- ------ ------
Electric gross margin $211 $195 $ 906 $ 859
==== ==== ====== ======
A variety of factors contributed to the increase in MidAmerican's electric
gross margin for the 1998 periods shown above compared to the 1997 periods.
Although mild temperatures had a negative impact on the 1998 quarter compared to
the 1997 quarter, the impact was more than offset by other factors. Temperatures
had a small positive impact on the twelve-month comparison. An increase in
electric retail sales volumes that are not dependent on weather, customer
growth, additional recovery of energy efficiency costs and the elimination of
Iowa's energy adjustment clause (EAC) all contributed to the improvement in
gross margin for the quarter and the twelve-month period. Electric service rate
reductions also reduced gross margin for the twelve months ended March 31, 1998,
relative to the 1997 period.
The increase in recovery of electric energy efficiency costs in Iowa
accounted for more than half of the increase in electric margin for the quarter
comparison. On September 29, 1997, MidAmerican began collection of its remaining
deferred energy efficiency costs and current, ongoing energy efficiency costs.
Including an allowed return on the deferred costs, the annual increase in
electric revenues is $36.1 million. The effect on earnings of this increase in
revenues and gross margin is partially offset by a corresponding increase in
other operating expenses of $31.1 million annually for currently incurred
electric energy efficiency costs and amortization of previously incurred costs.
Although temperatures were milder than normal in both of the three-month
periods above, comparatively, gross margin for the first quarter 1998 was
reduced $5 million more from the effect of temperatures than gross margin for
the first quarter 1997. When compared to normal, the impact of temperatures
resulted in an $8 million reduction in electric gross margin in the first
quarter of 1998 compared to a $3 million reduction in the margin for the first
quarter of 1997. A moderate but steady growth in the number of customers and an
increase in sales that are not dependent on weather offset a portion of the
decrease due to milder temperatures. In total, retail sales of electricity for
the first quarter of 1998 were unchanged from the level in the first quarter of
1997.
Revenues from sales of electricity to other utilities decreased $7.5
million for the 1998 quarter compared to the first quarter of 1997 due to a 24%
decrease in sales volumes.
Prior to July 11, 1997, MidAmerican was allowed to recover its energy costs
from most of its electric utility customers through EACs included in revenues.
Effective July 11, 1997, the EAC was eliminated for Iowa customers as part of a
new Iowa pricing plan. Previously, variations in revenues collected through the
EACs did not affect gross margin or net income due to corresponding changes in
energy costs. With the elimination of the Iowa EAC, fluctuations in energy costs
now have an impact on gross margin and net income.
-21-
Energy costs per unit in the first quarter of 1998 were below the per-unit
amount recovered in rates under the new Iowa pricing plan and resulted in an
increase to gross margin compared to the first quarter of 1997.
For the twelve months ended March 31 comparison, temperatures reduced
revenues and gross margin less in the 1998 period than in the 1997 period. When
compared to normal, the impact of temperatures resulted in an $18 million
reduction in electric gross margin in the 1998 twelve-month period compared to a
$20 million reduction in the gross margin for the twelve months ended March 31,
1997. As with the quarter comparison, a moderate but steady growth in the number
of customers and an increase in sales that are not dependent on weather
contributed to the increase in revenues and margin. Electric retail sales
increased 2.3% for the 1998 twelve month period compared to the twelve months
ended March 31, 1997.
Increased recovery of electric energy efficiency costs and the Cooper
Tracker accounted for approximately one half of the increase. Energy costs per
unit in the twelve months ended March 31, 1998 were below the per-unit amount
recovered in rates under the new Iowa pricing plan and resulted in an increase
to gross margin.
In October 1996, the Illinois Commerce Commission (ICC) ordered MidAmerican
to reduce electric retail 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
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 proposed by MidAmerican in its pricing plan filed in June 1996. With
implementation of the approved settlement in July 1997, rates for Iowa
residential customers were reduced an additional $10.0 million annually. Net of
the effect of the Cooper Tracker, rate reductions reduced electric gross margin
by $12.2 million compared to the twelve months ended March 31, 1997. Refer to
"Rate Matters" in Liquidity and Capital Resources later in this discussion for
further information regarding the Iowa proceeding.
Gas Gross Margin:
-----------------
Periods Ended March 31
--------------------------------
Three Months Twelve Months
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
(In millions)
Operating revenues $ 173 $ 212 $ 498 $ 552
Cost of gas sold 105 142 310 364
----- ------ ----- -----
Gas gross margin $ 68 $ 70 $ 188 $ 188
===== ====== ===== =====
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.
Temperatures in the first quarter of 1998 were 15% warmer than normal,
resulting in an $8 million decrease in gas gross margin for the period, while
temperatures in the first quarter of 1997 were close to normal, with little
effect on margin. Although moderate customer growth helped to offset some of the
effect of milder temperatures, total retail sales of natural gas decreased 12.6%
compared to the first quarter of 1997.
-22-
Increased recovery of gas energy efficiency costs resulted in a $3 million
positive impact on the comparison of gross margin for the quarters. As discussed
in the electric margin discussion, on September 29, 1997, MidAmerican began
recovery of its energy efficiency costs which had not previously been approved
for recovery. Including an allowed return on deferred costs, the annual increase
in gas revenues is $12.8 million. The effect on earnings of this increase in
revenues and gross margin is partially offset by a corresponding increase in
other operating expenses of approximately $11.1 million annually for deferred
and ongoing gas energy efficiency costs.
The average cost of gas per unit decreased in the 1998 compared to the 1997
quarter and is reflected in revenues and cost of gas sold.
Mild temperatures resulted in an $11 million decrease in gas gross margin
for the twelve months ended March 31, 1998, compared to the twelve months ended
March 31, 1997. When compared to normal, the impact of temperatures resulted in
a $7 million reduction in gas gross margin in the 1998 twelve-month period
compared to a $4 million increase in gas gross margin for the twelve months
ended March 31, 1997.
The increase in recovery of gas energy efficiency costs recovered most of
the loss in margin resulting from milder temperatures. Moderate customer growth
also contributed to gross margin in the 1998 period.
UTILITY OPERATING EXPENSES
Utility other operating expenses increased $13.2 million for the first
quarter of 1998 compared to the first quarter of 1997 and $86.8 million for the
comparable twelve-month periods ended March 31, 1998 and 1997.
As mentioned in the gross margin discussions, on September 29, 1997,
MidAmerican began additional recovery of deferred energy efficiency costs and
current recovery of ongoing costs. As the deferred costs are recovered, they are
amortized to expense. Ongoing energy efficiency costs, which historically were
deferred until future periods, are now charged to expense. The increase in
energy efficiency costs accounted for $10.8 million of the increase in other
operating expenses for the 1998 quarter and $22.4 million of the increase for
the twelve-month comparison.
In addition to the energy efficiency expense increase, operating expenses
related to Cooper increased due to the ratemaking treatment for Cooper capital
improvements. As a result of 1996 and 1997 rate settlements, Cooper capital
improvements are now expensed when incurred, instead of being capitalized. As
mentioned previously in the Electric Gross Margin section, MidAmerican is
recovering on a current basis the Iowa portion of these costs from its Iowa
electric customers. Recovery in Illinois is included in base rates. This change
accounted for increases of $1.3 million and $5.5 million for the three-month and
twelve-month comparisons, respectively. An additional increase of $4.9 million
in other Cooper costs also contributed to the twelve-month increase.
Continued restructuring of the Company in preparation for a competitive
industry has required additional expenses. MidAmerican has increased its
emphasis on marketing-related efforts, as well as customer service operations,
resulting in increases in consulting costs, advertising, employee incentive
compensation and other related expenses. Increases in such expenses accounted
for more than $30 million of the increase in other operating expenses for the
twelve months ended March 31, 1998. In addition, the 1998 twelve-month period
reflects increases in certain employee benefits expenses, customer assistance
and energy
-23-
efficiency administrative costs, manufactured gas plant site clean-up costs,
transmission wheeling expense due in part to changes required by FERC Order Nos.
888 and 889, and other general operations costs.
A decrease in maintenance costs at the Quad Cities Station was the reason
for the decrease in total maintenance expenses for the current quarter compared
to the first quarter of 1997. The decrease was due mostly to higher costs in the
1997 quarter for activities at the plant at that time.
Maintenance expenses for the twelve months ended March 31, 1998, were $3.3
million greater than in the comparable 1997 period. The main cause of the
increase was an adjustment in the fourth quarter of 1996 to align power plant
inventory accounting of predecessor companies. That adjustment reduced expenses
by $6.2 million for the twelve-month period ended March 31, 1997. In addition,
the Company incurred $2.0 million in maintenance expenses for restoration
following a snow storm in October 1997. Maintenance expenses at the Quad Cities
Station decreased $7.0 million in the twelve-month period ended March 31, 1998,
compared to the twelve months ended March 31, 1997. Refer to the discussion of
Quad Cities Nuclear Station in the Liquidity and Capital Resources section of
MD&A for information regarding the status of the plant.
Property taxes increased for the twelve months ended March 31, 1998,
relative to the comparable 1997 period due primarily to an increase in the
assessed value for Iowa property taxes.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Holdings:
- - ---------
Revenues of MidAmerican Capital and Midwest Capital decreased a total of
$72.3 million and $114.4 million for the three-month and twelve-month periods
ended March 31, 1998, compared to their respective 1997 periods. Revenues from
the natural gas marketing subsidiaries decreased $69.0 million and $109.5
million, respectively, for the 1998 three-month and twelve-month periods.
Related sales volumes decreased 18 million MMBtu's (51%) and 41 million MMBtu's
(39%) compared to the sales volumes in the 1997 periods. The decrease in sales
volumes is due to the expiration of contracts which have not been replaced. A
decrease in the average price per unit, reflective of a decrease in the cost of
gas sold, also reduced revenues for the natural gas marketing subsidiaries.
Cost of sales includes expenses directly related to sales of natural gas.
The decrease in cost of sales for the first quarter of 1998 reflects a 29%
decrease in the average cost of gas per unit. Total gross margin (total price
less cost of gas) on nonregulated natural gas sales was unchanged for the
quarter and increased $2.5 million for the 1998 twelve-month period compared to
the 1997 twelve-month period.
NON-OPERATING INCOME AND INTEREST EXPENSE
MidAmerican:
- - ------------
Interest and Dividend Income -
Interest income increased in each 1998 comparative period due to an
increase in temporary cash investments.
-24-
Other, Net -
Other, net for the first quarter of 1998 includes a deduction of $2.2
million for discounts on receivables sold. Refer to the Financing Activities
section of Liquidity and Capital Resources later in MD&A for a discussion of the
receivables sale in 1997. Other, Net for the first quarter of 1997 reflects
income of $2.0 million for recognition of deferred income from energy efficiency
programs and a reduction for a $0.9 million loss on reacquired long-term debt.
In addition to the items discussed above, Other, Net for the twelve months
ended March 31, 1998 and 1997, includes the items discussed in the following
paragraphs.
In September 1997, MidAmerican received a $15 million cash payment from
Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by
MidAmerican against NPPD. Approximately $12 million was refunded to
MidAmerican's customers. The remaining amount was retained by MidAmerican for
recovery of litigation costs in the lawsuit. Other, Net for the 1998
twelve-month period reflects $2.2 million of pre-tax income for recovery of
litigation costs incurred in pre-1997 years.
MidAmerican was awarded $4.9 million of pre-tax income in the twelve months
ended March 31, 1998, for performance under its incentive gas procurement
program during the May 1996 to April 1997 period. In the comparable 1997
twelve-month period, MidAmerican recorded an award of $2.7 million of pre-tax
income as a result of successful performance under its incentive gas procurement
program during the 1995- 1996 heating season.
Other, Net for the 1997 twelve-month period includes approximately $8.7
million of expenses for costs incurred by MidAmerican for its merger proposal to
IES Industries Inc. in 1996.
In the fourth quarter of 1996, MidAmerican recorded an initial pre-tax gain
of $3.2 million on its sale of certain storage gas supplies which is reflected
in the twelve months ended March 31, 1997. MidAmerican recorded an additional
$0.8 million gain in the second quarter of 1997, which is reflected in the
twelve months ended March 31, 1998, after receiving favorable treatment on the
transaction from the Iowa Utilities Board (IUB).
The twelve months ended March 31, 1997, also includes $2.2 million of
income from reversal of a reserve after successful resolution of a dispute with
a vendor.
Recognition of deferred income from energy efficiency programs totaled $3.1
million in the 1998 twelve-month period compared to $4.6 million for 1997
period.
Fixed Charges -
Interest on long-term debt decreased due to long-term debt reduction and
refinancing activities in 1996 and 1997. Other interest expense increased for
the quarter comparison due to an increase in the average amount of commercial
paper outstanding. For the twelve months ended comparison, the increase in the
1998 period is due primarily to interest expense related to IRS settlements in
1997.
Preferred securities of subsidiary trust were issued in December 1996
resulting in the twelve months ended March 31, 1997, including only a partial
year of dividends. MidAmerican preferred shares were reacquired at the same
time, resulting in a decrease in preferred dividends deducted after net income.
-25-
Holdings:
- - ---------
Dividend Income -
Dividend income decreased for the three months and twelve months ended
March 31, 1998, compared to the respective 1997 periods due to MidAmerican
Capital's reduced holdings of preferred stock portfolios, a portion of which
MidAmerican Capital liquidated in 1996.
Realized Gains and Losses on Securities, Net -
Net realized gains on securities for twelve months ended March 31, 1998,
includes an $8.0 million pre-tax gain on the sale of shares of McLeodUSA common
stock.
Other, Net -
Other, Net for the first quarter of 1998 includes $4.7 million from the
divestment of nonregulated assets, including the sale of the Company's interest
in a financial management company, the sale of a commercial office building and
liquidation of a partnership interest concurrent with the sale of its commercial
property. In addition, the Company recorded $2.1 million of income from an
equity investment in a venture capital fund.
In addition to the above items, the twelve months ended March 31 periods
were also affected by the factors discussed in the next paragraph.
During the twelve months ended March 31, 1998, the Company sold all of the
assets of its railcar repair services subsidiary and most of the assets of its
railcar leasing subsidiary and recorded pre-tax gains totaling $10.0 million.
Write-downs of nonregulated investments, as discussed in the Earnings Discussion
section at the beginning of Results of Operations, decreased Other, Net by $3.4
million and $15.6 million for the 1998 and 1997 twelve months ended March 31,
respectively. Excluding the investment mentioned above, income from equity
investments decreased for the 1998 twelve-month period due to the liquidation of
such investments during 1996 and early 1997.
Interest Charges -
MidAmerican Capital's interest on long-term debt decreased significantly
for the twelve-month comparison due to the reduction of its long-term debt in
early 1997.
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.
-26-
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.
As of March 31, 1998, common equity represented 52.5% of the Company's
total capitalization compared to 51.7% and 48.5% as of December 31, 1997, and
March 31, 1997, respectively. Several factors other than earnings, dividends and
scheduled maturities of debt affected the change. Recording accumulated
comprehensive income for an investment in McLeodUSA to reflect its market value,
and repurchases and retirement of debt prior to its scheduled maturity were
major contributors to the move to a higher percentage of common equity since
March 31, 1997. The Company's common stock repurchase program has reduced common
equity during that period.
MidAmerican's common equity as of March 31, 1998, represented 47.3% of its
capitalization compared to 45.9% as of March 31, 1997. A reduction of long-term
debt was the primary cause of the change.
As reflected on the Consolidated Statements of Cash Flows, Holdings had net
cash provided from operating activities of $181 million for the first quarter of
1998 compared to $223 million for the same period in 1997. The decrease in cash
from operating activities for the 1998 quarter is due to changes in the working
capital of nonregulated subsidiaries. MidAmerican's net cash provided from
operating activities was $179 million for the first quarter of 1998 and $158
million for the first quarter of 1997.
INVESTING ACTIVITIES AND PLANS
MidAmerican:
- - ------------
Utility Construction Expenditures -
MidAmerican's primary need for capital is utility construction
expenditures. For the first three months of 1998, utility construction
expenditures totaled $25 million, including allowance for funds used during
construction (AFUDC) and Quad Cities Station nuclear fuel purchases. In
addition, MidAmerican's nonregulated railway subsidiary had $20 million of
construction expenditures in the same period. All such expenditures were met
with cash generated from utility operations, net of dividends.
Beginning with July 1997 expenditures, advances for Cooper capital
improvements are no longer included in utility construction expenditures but are
expensed when incurred in Other Operating Expenses. Previously, these expenses
were capitalized in accordance with then applicable rate regulation. As part of
the 1997 settlement of MidAmerican's electric pricing proposal, MidAmerican is
recovering on a current basis the Iowa portion of expenses for Cooper capital
improvements advances from its Iowa electric customers through a tracking
mechanism.
Forecasted utility construction expenditures for 1998 are $201 million
including AFUDC. Capital expenditure needs are reviewed regularly by
MidAmerican's management and may change significantly as a result of such
reviews. MidAmerican presently expects that all utility construction
expenditures for the next five years 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.
-27-
Deferred Energy Efficiency Expenditures -
The Company stopped reflecting costs of its energy efficiency programs as
an investing activity on its Consolidated Statement of Cash Flows following the
IUB's approval in September 1997 of current recovery of ongoing energy
efficiency program costs. Under prior energy efficiency regulations, program
costs were deferred for several years prior to beginning their recovery over a
four-year period, and accordingly, the Company reflected them as an investing
activity.
Nuclear Decommissioning -
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 $51 million during the period 1998 through 2002 to an
external trust established for the investment of funds for decommissioning the
Quad Cities Station. Historically, the funds were invested in investment grade
municipal and U.S. Treasury bonds; however, in 1997 MidAmerican directed the
trust to begin investing a portion of the funds in domestic corporate debt and
common equity securities. Approximately 45% of the trust's funds are now
invested in domestic corporate debt and common equity securities.
In addition, MidAmerican makes payments to NPPD related to decommissioning
Cooper. These payments are reflected in Other Operating Expenses in the
Consolidated Statements of Income. NPPD estimates call for MidAmerican to pay
approximately $57 million to NPPD for Cooper decommissioning during the period
1998 through 2002. 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. In July 1997, NPPD filed a lawsuit in United States District Court for the
District of Nebraska naming MidAmerican as the defendant and 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 through a rate rider on customer billings. Cooper
and Quad Cities Station decommissioning costs charged to Iowa customers are
included in base rates, and recovery of increases in those amounts must be
sought through the normal ratemaking process.
Holdings:
- - ---------
Nonregulated Capital Expenditures -
Capital expenditures of MidAmerican Capital and Midwest Capital totaled $1
million for the first quarter of 1998. Capital expenditures of these
subsidiaries depend primarily upon the availability of suitable investment
opportunities which meet the Company's objectives. The Company continues to
evaluate nonregulated investments and may redeploy certain assets in the future.
External financing may also be used to provide for nonregulated capital
expenditures.
-28-
Investments -
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.
Included in investments on the Consolidated Balance Sheets is the Company's
investment in common stock of McLeodUSA. McLeodUSA common stock has been
publicly traded since June 14, 1996. Investor agreements related to McLeodUSA's
initial public offering and subsequent merger with Consolidated Communications
Inc. prohibit the Company from selling or otherwise disposing of any of the
common stock of McLeodUSA prior to September 24, 1998, without the approval of
McLeodUSA's board of directors. As a result of the agreements, the Company's
investment was considered restricted stock and, as such, was recorded at cost in
all periods prior to September 1997. Beginning in September 1997, the investment
is no longer considered restricted for accounting purposes and is recorded at
fair value. As of March 31, 1998, the cost and fair value of the McLeodUSA
investment were $45.2 million and $340.5 million, respectively. The unrealized
gain is recorded, net of income taxes, as accumulated comprehensive income in
common shareholders' equity. As of March 31, 1998, the unrealized gain and
deferred income taxes for this investment were $295.3 million and $103.4
million, respectively.
MidAmerican Capital received approximately $302 million in cash during 1997
from sales of investments primarily as part of its efforts to align them with
the Company's strategy. A portion of the proceeds from these sales was used for
retirement of $174 million of MidAmerican Capital long-term debt in the first
quarter of 1997 and for dividends to Holdings 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 March 31, 1998, 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 $95.3 million at March 31, 1998, 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.
In 1997, MidAmerican entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the majority of its billed
accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a
special purpose entity established to purchase accounts receivable from
MidAmerican. Funding Corp. in turn sold receivable interests to outside
investors. In consideration for the sale, MidAmerican received $70 million in
cash and the remaining balance in the form of a subordinated note from Funding
Corp. The agreement is structured as a true sale, as determined by SFAS 125,
under which the creditors of Funding Corp. will be entitled to be satisfied out
of the assets of Funding Corp. prior to any value being returned to MidAmerican
or its creditors. Therefore, the accounts receivable sold are not reflected on
Holdings' or MidAmerican's Consolidated Balance Sheets. As of March 31, 1998,
$135.6 million, net of reserves, was sold under the agreement.
-29-
As of March 31, 1998, MidAmerican had $326 million of long-term debt
maturities and sinking fund requirements for 1998 through 2002.
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.
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 April 30, 1998, 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 AA-
Unsecured Medium-Term Notes A3 A
Preferred Stocks a3 A
Commercial Paper P-1 A-1
Preferred Dividends -
Preferred dividends include net gains or losses on the reacquisition of
MidAmerican preferred shares. Net losses on reacquisitions totaled $1.4 million
and $2.8 million for the three-month and twelve-month periods ended March 31,
1997, respectively.
Holdings:
- - ---------
As of March 31, 1998, Holdings had lines of credit totaling $120 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.
-30-
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 March 31, 1998 the Company
had repurchased approximately 5.7 million shares for $104.1 million. The Company
believes repurchasing Holding's common stock is the best investment of Company
funds at this time. Repurchasing the common stock will reduce total common
dividend requirements and aid in improving the Company's dividend payout ratio.
In addition, a subsidiary of the Company holds approximately 437,000 shares of
Holdings common stock which are also excluded from shares outstanding.
On April 29, 1998, Holdings' board of directors declared a quarterly
dividend on common shares of $0.30 per share payable June 1, 1998. The dividend
represents an annual rate of $1.20 per share.
Nonregulated Subsidiaries -
As of March 31, 1998, MidAmerican Capital had unsecured revolving credit
facilities in the amount of $114 million with $3.2 million outstanding under
these facilities. MidAmerican Capital has $118 million of long-term debt
maturities and sinking fund requirements for 1998 through 2002 related to debt
outstanding at March 31, 1998.
Midwest Capital currently has a $25 million line of credit with
MidAmerican, of which $5 million was outstanding at March 31, 1998.
OPERATING ACTIVITIES AND OTHER MATTERS
Throughout the country, the utility industry continues to move towards a
competitive environment. Although the extent of deregulation varies between
states, increased competition is becoming a reality in virtually every region of
the country. Numerous states have passed restructuring legislation, some of
which initiated a phase-in of customer choice in 1998. Legislators and
regulators in many other states are addressing the issue.
As part of many restructuring legislation packages, electric utilities are
required to unbundle traditional services previously provided as a "packaged
product" under their rate tariffs. Unbundling allows customers to choose their
energy supplier and the level of energy delivery and retail services they
desire. Gas utilities are also experiencing separation of the merchant and
delivery functions for all classes of customers.
The generation segment of the electric industry will be significantly
impacted by competition. The introduction of competition in the wholesale market
has resulted in a proliferation of power marketers and a substantial increase in
market activity. As retail competition evolves, margins will be pressured by
competition from other utilities, power marketers, and self-generation.
MidAmerican has been active in promoting and monitoring legislative and
regulatory changes that affect the jurisdictions in which it operates. In order
to successfully compete in the new environment, the Company believes it must
become the leading regional provider of energy and complementary services. The
Company is evaluating all aspects of its business to determine what adjustments
are necessary to align them with this strategy. Aligning nonregulated businesses
with the Company's strategy has resulted, and may continue to result in the next
year, in negative impacts on Holdings' earnings in the form of write-downs for
the sale, revaluation or discontinuance of nonregulated operations and
investments. (Refer to the Results of
-31-
Operations section of MD&A for comments on the earnings impact of such actions.)
The following discussion further addresses changes affecting the industry and
actions the Company is taking to implement its strategy.
Competition -
MidAmerican is subject to regulation by several utility regulatory agencies
which significantly influences the operating environment and the recoverability
of costs from utility customers. That regulatory environment has, in general,
given MidAmerican an exclusive right to serve customers within its service
territory and, in turn, the obligation to provide electric service to those
customers.
Although the anticipated changes in the electric utility industry may
create opportunities, they will also create additional challenges and risks for
utilities. Competition will put pressure on margins for traditional electric
services. In order to lessen the impact of reduced margins, MidAmerican will
continue to focus on controlling the cost of traditional services. As part of an
electric pricing settlement approved by the IUB in 1997, MidAmerican reduced its
prices for most of its Iowa electric retail customers. In the IUB order
approving the settlement, MidAmerican was also authorized to enter into
long-term contracts with industrial and commercial electric customers. Refer to
"Rate Matters" later in this discussion for further information. In addition,
MidAmerican is positioning itself to offer complementary products and services
as expected opportunities become available in a competitive utility retail
market. Additional products and services may provide avenues to replace margins
lost on traditional electric services.
As discussed in the Introduction section of MD&A, the Company is in the
process of purchasing a real estate brokerage organization. The Company
anticipates benefits to its utility operations from the additional contact with
customers and potential customers at times when the Company can meet a variety
of their needs.
In December 1997, an Iowa industrial customer located within MidAmerican's
IUB-approved exclusive electric service territory, filed a lawsuit against
Holdings and MidAmerican in the United States District Court for the Southern
District of Iowa alleging various violations of federal antitrust laws. The
lawsuit stems from a claim that because the customer is not free to choose its
retail energy supplier, MidAmerican is engaging in illegal monopolistic
behavior. In addition to damages, the customer is seeking the right to choose
its electric retail supplier. MidAmerican maintains that its provision of retail
electric service is in accordance with Iowa laws and regulations governing
electric service territories, and all other applicable legal requirements. A
ruling in favor of the plaintiff could have the effect of accelerating retail
competition in MidAmerican's Iowa service territory.
Legislative and Regulatory Evolution -
On December 16, 1997, the Governor of Illinois signed into law a bill to
restructure Illinois' electric utility industry and transition it to a
competitive market beginning October 1, 1999. MidAmerican is presently
participating in proceedings which detail the new competitive environment and
continues to evaluate the impact of the law on its operations.
-32-
The law requires a 15% electric rate reduction for all Illinois residential
customers in 1998. To satisfy its obligation, the law specifically permitted
MidAmerican to receive credit for the $15.5 million, or approximately 13%, rate
reductions implemented in Illinois in 1996 and 1997. MidAmerican is also
exempted from the requirement to join an independent system operator (ISO) or to
form an in-state ISO.
In addition, the law provides for Illinois earnings above a certain level
of return on equity (ROE) to be shared equally between customers and MidAmerican
beginning in April 2000. The ROE level at which MidAmerican will be required to
share earnings is a multi-step calculation of average 30-year Treasury Bond
rates plus 5.50% for 1998 and 1999 and 6.50% for 2000 through 2004. If the
resulting average Treasury Bond rate approximated rates which existed in 1997,
the ROE level above which sharing must occur would be approximately 12%.
Beginning October 1, 1999, larger non-residential customers and 33% of the
remaining non-residential customers will be allowed to select their provider of
electric supply services. All other non-residential customers will have supplier
choice starting December 31, 2000. Residential customers all receive the
opportunity to select their electric supplier on May 1, 2002.
The law also addresses charges to customers for transition costs based on a
lost-revenue approach. These transition fees, designed to help utilities address
stranded costs, will end December 31, 2006, subject to possible extension.
MidAmerican's Iowa legislative priority for 1998 has been utility property
tax reform, a condition it considers precedent to utility industry
restructuring. A bill to replace the current utility property tax system, which
is supported by MidAmerican, was recently approved by the Iowa legislature and
signed into law by the Governor. The legislation becomes effective on
January 1, 1999.
Because energy costs are low in Iowa, industry restructuring has not been
an issue aggressively pursued in the state to date. During the 1998 Iowa
legislative session, a group of industrial customers introduced legislation to
allow retail service competition, but it did not develop further. With
resolution of the utility property tax issue, MidAmerican intends to pursue the
adoption of restructuring legislation in the 1999 Iowa legislative session.
In October 1997, the IUB adopted rules to encourage gas transportation
service for small volume customers starting in 1999. MidAmerican has until
November 15, 1998, to file its own plan to unbundle service for its small volume
customers. MidAmerican presently believes that these rules will not have a
material impact on its results of operations.
On May 4, 1998, MidAmerican filed a proposal with the IUB to allow at least
15,000 Iowa families and 2,000 small businesses to have the opportunity to
select among competing electricity providers. If approved, the two-year program
would allow participating retail customers in a selected test area to choose
among several electricity providers, including MidAmerican, and to have that
energy delivered by MidAmerican. MidAmerican would select a test market later
this year, and customers would begin choosing among electricity providers in
December 1998. Businesses in the test area would be eligible for the program if
their annual peak demand is less than four megawatts. New suppliers
participating in the program would have to be certified by the IUB and meet
specified requirements. Under the proposal, lost revenues during the program
would be recorded as a regulatory asset for future recovery.
-33-
Accounting Effects of Industry Restructuring -
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. A majority of MidAmerican's electric and gas utility operations
currently meet the criteria required by SFAS 71, but its applicability is
periodically reexamined. On December 16, 1997, MidAmerican's generation
operations serving Illinois were no longer subject to the provisions of SFAS 71
due to passage of restructuring legislation in Illinois. Thus, MidAmerican was
required to write off those amounts of regulatory assets and liabilities from
its balance sheet related to its Illinois generation operations. These
write-offs were not material. If other portions of its utility operations no
longer meet the criteria of SFAS 71, MidAmerican would be required to write off
the related regulatory assets and liabilities from its balance sheet and thus, a
material adjustment to earnings in that period could result. As of March 31,
1998, MidAmerican had $325 million of regulatory assets in its Consolidated
Balance Sheet.
Energy Efficiency -
MidAmerican's regulatory assets as of March 31, 1998, included $100.1
million of deferred energy efficiency costs. On September 29, 1997, MidAmerican
received approval from the IUB, effective immediately, to begin recovery of
deferred energy efficiency costs not previously approved for recovery. Based on
the current level of recovery, MidAmerican expects to recover approximately $35
million of the deferred energy efficiency costs in 1998. MidAmerican also
received approval to recover ongoing energy efficiency costs, which were
projected to be $18.5 million for the period May 1997 through April 1998. The
projected $18.5 million of ongoing costs, will be collected in the twelve-month
period ending in September 1998. Amortization of deferred energy efficiency
costs and current expenditures for energy efficiency costs will be reflected in
other operating expenses over the related periods of recovery.
Rate Matters -
As a result of a negotiated settlement in Illinois, MidAmerican reduced its
Illinois electric service rates by annual amounts of $13.1 million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively.
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican, the OCA and other parties in a consolidated rate proceeding
involving MidAmerican's electric pricing proposal and a filing by the Iowa
Office of Consumer Advocate (OCA). The agreement includes a number of components
of MidAmerican's pricing proposal as follows:
* 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 currently
scheduled to be effective June 1, 1998. MidAmerican has made significant
progress toward the $10 million reduction through long-term contracts with a
number of industrial and commercial customers.
-34-
* A tracking mechanism to currently recover the cost of capital
improvements required by the Cooper Nuclear Station Power Purchase Contract
which will offset approximately $6 million of the rate reductions in 1998.
* Elimination of the Iowa energy adjustment clause (EAC). Prior to July 11,
1997, MidAmerican collected fuel costs from Iowa customers on a current basis
through the EAC, and thus, fuel costs had little impact on net income. Since
then, base rates for Iowa customers include a factor for recovery of a
representative level of fuel costs. To the extent actual fuel costs vary from
that factor, pre-tax earnings are impacted. The fuel cost factor will be
reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs
vary 15% above or below the factor included in base rates.
* If MidAmerican's annual Iowa electric jurisdictional return on common
equity exceeds 12%, then an equal sharing between customers and shareholders of
earnings above the 12% level begins; if it exceeds 14%, then two-thirds of
MidAmerican's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The agreement permits MidAmerican to file for
increased rates if the return falls below 9%. Other parties signing the
agreement are prohibited from filing for reduced rates prior to 2001 unless the
return, after reflecting credits to customers, exceeds 14%.
* MidAmerican will develop a pilot program for a market access service
which allows customers with at least 4 MW of load to choose energy suppliers.
The pilot program, which is subject to approval by the IUB and the Federal
Energy Regulatory Commission (FERC), is limited to 60 MW of participation the
first year and can be expanded by 15 MW annually until the conclusion of the
program. Any loss of revenues associated with the pilot program will be
considered part of the $10 million annual reduction for commercial and
industrial customers as described above, but may not be recovered from other
customer classes. The program was filed with the IUB and the FERC in September
1997. The Company anticipates that the necessary approvals will be received by
the fourth quarter of 1998.
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 $21
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.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter.
Based on data to be obtained from monitors located throughout
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the states, the EPA will make a determination of whether the states have any
areas that do not meet the air quality standards (i.e., areas that are
classified as nonattainment). If a state has area(s) classified as nonattainment
area(s), the state is required to submit a State Implementation Plan specifying
how it will reach attainment of the standards through emission reductions or
other means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. If
MidAmerican's operations contribute to nonattainment and modifications to
MidAmerican's operations or facilities are necessary, the cost of making
emissions reductions to meet the air quality standards will be dependent upon
the level of emissions reductions required and the available technology.
MidAmerican will continue to evaluate the potential impact of the new
regulations.
Following recommendations provided by the Ozone Transport Assessment Group,
the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these
emissions reduction requirements as EPA's rule is currently drafted, and, as
such, MidAmerican does not anticipate that its facilities will be subject to
additional emissions reductions as a result of this initiative. The EPA
anticipates issuing its final rules in September 1998. MidAmerican will continue
to closely monitor this rulemaking proceeding.
Coal Inventories -
Coal inventory levels at MidAmerican's coal-fired generating stations have
declined since March 1997. Inventories of Powder River Basin coal, the
predominate type of coal burned at MidAmerican generating stations, declined
about 59% (in terms of tons of coal) in the twelve months ended March 31, 1998.
The decrease is due primarily to nationwide operational problems
experienced by a rail transportation provider of MidAmerican. Inadequate
delivery service to MidAmerican's Neal Energy Center (Neal Center) in the fourth
quarter of 1997 resulted in reduced coal inventory at that site. The Neal Center
represents approximately 37% of MidAmerican's coal-fired generating capacity.
Inventory levels at other MidAmerican coal-fired generating stations also
decreased in part due to higher-than-expected generation levels at those
stations caused in part by the effort to conserve coal at the Neal Center. An
extended outage at the Quad Cities Nuclear Station also affected the need for
additional generation at MidAmerican's coal-fired generating stations.
While deliveries to the Neal Center improved in the first quarter of 1998,
MidAmerican's total coal inventory remains below the desired level. MidAmerican
will be working throughout the year to build its coal inventory to the currently
desired level, which is approximately double the level as of March 31, 1998.
This effort to build MidAmerican's coal inventory may result in a reduction of
sales to other utilities, increased purchases of off-system energy and/or other
efforts to conserve coal.
Quad Cities Nuclear Station Outage -
In September 1997, Commonwealth Edison Company (ComEd), operator and 75%
owner of Quad Cities Station Units 1 and 2, shut down Unit 2 and entered early a
scheduled outage to address safety system concerns. In December 1997, Unit 1 was
also taken off-line for the same reason. In January 1998, ComEd received a
Confirmatory Action Letter (CAL) from the Nuclear Regulatory Commission (NRC).
The CAL
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details corrective actions required prior to restart of the units. Also in
January, ComEd was informed by the NRC that the performance of Quad Cities
Station is trending adversely. Preliminary results from the NRC Architectural
Engineering Inspection of design issues found no significant threats to
continued operation. ComEd addressed all issues facing Quad Cities Station, and
a recent meeting with the NRC substantially narrowed the list of open startup
issues. ComEd has informed MidAmerican that it expects successful inspection by
the NRC to close all CAL issues, allowing the startup of Unit 2 to commence
before the end of May and Unit 1 in June.
YEAR 2000
The Company has undertaken an extensive ongoing project to identify and
assess its critical business and operational systems potentially affected by the
year 2000 date change and to repair or replace those systems which are not year
2000 compliant. The Company, in addition to its internal resources, has engaged
independent contractors to assist with the conversion and replacement project.
The project timetable specifies completion of all conversion and replacement
work and testing sufficiently in advance of January 1, 2000 to identify any
residual concerns.
The Company's operations utilize systems and equipment provided by other
organizations. As a result, the Company's operations could be impacted by its
suppliers', vendors' or service providers' year 2000 efforts. The Company has
undertaken an initiative to assess the efforts of such constituent entities;
however, there is no assurance that the Company will not be affected by year
2000 problems of those organizations or their failure to repair or replace
systems or equipment which is incompatible with year 2000 dates.
The Company estimates the remaining cost to remediate year 2000 flaws in
its critical business systems to be approximately $3 million, although
additional unforeseen expenses for critical systems and embedded systems, as
discussed above, may be incurred. Although management believes the project will
be completed within the required time frame, unforeseen and other factors,
including failure of the contractors to perform, could cause delays in the
project, the results of which could be material to the Company.
PART I.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- - ------- ----------------------------------------------------------
As of March 31, 1998, the Company's and MidAmerican's financial positions
related to financial instruments and assets that are sensitive to changes in
interest rates or commodity price changes have not changed materially since
December 31, 1997. Refer to the Company's 1997 Annual Report on Form 10-K under
Item 7A for the applicable information as of December 31, 1997.
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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 Holdings' Notes to Consolidated Financial
Statements.
Cooper Litigation
- - -----------------
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. MidAmerican has filed a counterclaim for
declaratory relief and each party has made additional procedural filings.
Discovery is currently underway. MidAmerican is vigorously defending its
interests in this declaratory judgment action.
North Star Steel Company
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On December 8, 1997, North Star Steel Company (NSS), a retail MidAmerican
electric customer, filed a Complaint in the United States District Court for the
Southern District of Iowa naming Holdings and MidAmerican as defendants. The
Complaint alleges that MidAmerican's refusal to allow NSS to obtain retail
electric service from an unspecified alternative energy company amounts to a
violation of federal antitrust laws. NSS is seeking to recover an unspecified
level of damages, and to require MidAmerican to provide retail wheeling service
so that NSS can obtain electricity from an unnamed supplier. MidAmerican is
vigorously defending its conduct.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Filed Herewith
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The exhibits filed herewith are attached to this combined Form 10-Q in
numerical order. They are listed below under the heading of the registrant or
registrants to whom they apply.
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 3.3 - Restated Articles of Incorporation of MidAmerican Energy
Company, as amended April 27, 1998.
Exhibit 12.2 - Computation of ratios of earnings to fixed charges and
computation of ratios of earnings to fixed charges plus preferred dividend
requirements.
Holdings and MidAmerican
Exhibit 27 - Financial Data Schedules (for electronic filing only).
(b) Reports on Form 8-K
On February 6, 1998, Holdings and MidAmerican filed a joint report on Form
8-K, dated February 6, 1998. The report included the following information:
Holdings computation of ratios of earnings to fixed charges and computation
of ratios of earnings to fixed charges plus preferred dividend requirements.
MidAmerican computation of ratios of earnings to fixed charges and
computation of ratios of earnings to fixed charges plus preferred dividend
requirements.
Financial information of Holdings and MidAmerican including selected
financial data for the years ended and as of December 31, 1997, 1996, 1995, 1994
and 1993; management's discussion and analysis of financial condition and
results of operations; consolidated statements of income, cash flows and
retained earnings for the years ended December 31, 1997, 1996 and 1995;
consolidated balance sheets and consolidated statements of capitalization as of
December 31, 1997 and 1996; notes to the consolidated financial statements;
report of the independent public accountant; report of management; and
supplemental financial and statistical data.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY
MIDAMERICAN ENERGY COMPANY
-----------------------------------
(Registrants)
Date May 14, 1998
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/s/ A. L. Wells
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Senior Vice President and Chief Financial Officer
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