UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended
June 30, 2000
Commission File No. 0-25551
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Iowa 94-2213782
--------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, IA 50309
---------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 242-4300
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-------
As of August 11, 2000 all 9,281,087 shares of common stock of MidAmerican Energy
Holdings Company were held by a limited group of investors.
MIDAMERICAN ENERGY HOLDINGS COMPANY
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Page No.
ITEM 1. Financial Statements
Independent Accountants' Report....................... 1
Consolidated Balance Sheets........................... 2
Consolidated Statements of Operations................. 3
Consolidated Statements of Cash Flows................. 4
Notes to Consolidated Financial Statements............ 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 9
Part II: Other Information
ITEM 1. Legal Proceedings..................................... 22
ITEM 2. Changes in Securities................................. 22
ITEM 3. Defaults on Senior Securities......................... 22
ITEM 4. Submission of Matters to a Vote of Security Holders... 22
ITEM 5. Other Information..................................... 22
ITEM 6. Exhibits and Reports on Form 8-K...................... 22
Signatures ...................................................... 23
Exhibit Index ...................................................... 24
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Holdings Company (successor to MidAmerican Energy Holdings Company
(Predecessor), referred to as "MEHC (Predecessor)") and subsidiaries (the
"Company") as of June 30, 2000, and the related consolidated statements of
operations for the three-month period ended June 30, 2000 and for the period
March 14, 2000 to June 30, 2000 for the Company and for the period January 1,
2000 to March 13, 2000 and for the three-month and six-month periods ended June
30, 1999 for MEHC (Predecessor) and the related consolidated statements of cash
flows for the period March 14, 2000 to June 30, 2000 for the Company and for the
period January 1, 2000 to March 13, 2000 and for the six-month period ended June
30, 1999 for MEHC (Predecessor). These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of MEHC
(Predecessor) and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 25,
2000 (March 14, 2000 as to Note 3), we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1999 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
July 21, 2000
-1-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
MEHC
(Predecessor)
As of
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents .................... $ 38,343 $ 316,327
Restricted cash and short term investments.... 12,130 36,294
Accounts receivable........................... 488,113 600,564
Other current assets.......................... 150,141 185,128
----------- -----------
Total Current Assets....................... 688,727 1,138,313
----------- -----------
Property, plant, contracts and equipment, net ... 5,558,831 5,463,329
Excess of cost over fair value of net assets
acquired, net................................... 3,441,634 2,712,677
Regulatory assets................................ 245,926 278,757
Long-term restricted cash........................ 62,566 133,265
Long-term restricted investments................. 111,946 122,175
Nuclear decommissioning trust fund and other
marketable securities........................... 228,783 226,298
Equity investments............................... 223,071 208,023
Deferred charges, other investments and other
assets.......................................... 772,601 483,515
----------- -----------
Total Assets.................................. $11,334,085 $10,766,352
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable..............................$ 319,435 $ 449,203
Other accrued liabilities..................... 455,981 458,667
Current portion of long-term debt............. 628,230 614,725
----------- ------------
Total Current Liabilities.................. 1,403,646 1,522,595
------------ ------------
Other long-term accrued liabilities.............. 948,481 1,054,440
Parent company debt.............................. 1,828,123 1,856,318
Subsidiary and project debt...................... 3,421,276 3,642,703
Deferred income taxes............................ 1,077,044 902,868
------------ ------------
Total Liabilities............................. 8,678,570 8,978,924
------------ ------------
Deferred income.................................. 73,950 65,509
Minority interest................................ 26,316 29,127
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trusts..... 330,869 450,000
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts............... 454,772 -
Subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts..... 100,000 101,598
Preferred securities of subsidiary............... 146,303 146,606
Shareholders' Equity:
Zero coupon convertible preferred stock -
authorized 50,000 shares, no par value, 34,563
share outstanding.............................. - -
Common stock - authorized 60,000 and 180,000 shares,
no par value; 9,281 and 82,980 shares issued,
9,281 and 59,944 shares outstanding, at June 30
2000 and December 31, 1999, respectively....... - -
Additional paid in capital........................ 1,553,073 1,249,079
Retained earnings................................. 14,485 507,726
Accumulated other comprehensive loss.............. (44,253) (12,029)
Treasury stock - 23,036 common shares at
December 31, 1999, at cost..................... - (750,188)
---------- -----------
Total Shareholders' Equity..................... 1,523,305 994,588
---------- -----------
Total Liabilities and Shareholders' Equity........$11,334,085 $10,766,352
=========== ===========
The accompanying notes are an integral part of these financial statements.
-2-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
MEHC
(Predecessor) MEHC (Predecessor)
------------- -----------------------------------
Three Months March 14, 2000 January 1, 2000 Six Months
Ended June 30, through through Ended June 30,
-------------- June 30, 2000 March 13, 2000 1999
2000 1999 -------------- ---------------- --------------
Revenues: -----------------
Operating revenue................. $1,123,233 $ 1,003,602 $1,339,157 $1,043,072 $1,801,487
Interest and other income......... 29,441 36,548 27,356 19,484 77,794
Gain on non-recurring items....... - 78,223 - - 98,396
---------- ----------- ----------- ---------- ----------
Total revenues.................... 1,152,674 1,118,373 1,366,513 1,062,556 1,977,677
---------- ----------- ----------- ---------- ----------
Costs and expenses:
Cost of sales..................... 612,280 499,868 722,294 561,386 947,066
Operating expense................. 273,087 281,636 324,193 219,303 436,792
Depreciation and amortization..... 120,129 111,395 142,439 97,278 190,746
Interest expense.................. 124,726 131,414 148,024 101,330 248,295
Less interest capitalized......... (27,048) (16,669) (30,694) (15,516) (32,710)
Loss on non-recurring item........ - - - 7,605 -
---------- ---------- ----------- ---------- ----------
Total costs and expenses............ 1,103,174 1,007,644 1,306,256 971,386 1,790,189
---------- ---------- ----------- ---------- ----------
Income before provision for income
taxes............................. 49,500 110,729 60,257 91,170 187,488
Provision for income taxes.......... 11,516 37,227 13,817 31,008 63,292
---------- ---------- ----------- ---------- ----------
Income before minority interest..... 37,984 73,502 46,440 60,162 124,196
Minority interest................... 26,935 12,441 31,955 8,850 23,344
---------- ---------- ----------- ---------- ----------
Income before extraordinary item.... 11,049 61,061 14,485 51,312 100,852
Extraordinary item, net of tax...... - (5,366) - - (36,886)
---------- ---------- ----------- ---------- ----------
Net income available to common
shareholders...................... $ 11,049 $ 55,695 $ 14,485 $ 51,312 $ 63,966
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
-3-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
MEHC (Predecessor)
---------------------------------
March 14, 2000 January 1, 2000 Six
through through Months Ended
June 30, 2000 March 13, 2000 June 30, 1999
-------------- --------------- -------------
Cash flows from operating activities:
Net income.................................................... $ 14,485 $ 51,312 $ 63,966
Adjustments to reconcile to net cash flows from
operating activities:
Gain on non-recurring items................................... - - (98,396)
Extraordinary item, net of tax................................ - - 36,886
Depreciation and amortization................................. 113,719 83,194 162,206
Amortization of excess of cost over fair value of
net assets acquired...................................... 28,720 14,084 28,540
Amortization of deferred financing costs and other costs...... 8,053 4,334 10,907
Provision for deferred income taxes........................... 19,434 (9,342) (165,527)
Undistributed earnings on equity investments.................. (11,218) (3,459) (5,939)
Changes in other items:
Accounts receivable and other current assets.............. 88,195 46,436 198,064
Accounts payable, accrued liabilities, deferred income
and other................................................. (211,010) 80,524 29,083
---------- ---------- -----------
Net cash flows from operating activities...................... 50,378 267,083 259,790
---------- ---------- -----------
Cash flows from investing activities:
Purchase of MEHC (Predecessor) and MidAmerican, net of
cash acquired.............................................. (2,048,266) - (2,501,425)
Proceeds from sale of qualified facilities, net of cash
disposed................................................... - - 365,074
Purchase of marketable securities............................. (15,326) (8,251) (22,366)
Proceeds from sale of marketable securities................... 23,994 10,665 382,374
Capital expenditures relating to operating projects........... (17,403) (21,685) (64,909)
Construction and other development costs...................... (72,977) (56,720) (53,092)
Philippine-construction in progress........................... (15,284) (22,736) (30,319)
Decrease (increase) in restricted cash and investments........ 62,283 42,809 113,847
Decrease (increase) in other assets........................... (14,841) (88,096) (3,573)
---------- ---------- ----------
Net cash flows from investing activities...................... (2,097,820) (144,014) (1,814,389)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuances of common and preferred stock ....... 1,428,024 - -
Proceeds from issuance of trust preferred securities.......... 454,772 - -
Proceeds from subsidiary and project debt..................... 81,378 6,043 1,100,000
Proceeds from parent company debt............................. 25,000 - -
Repayment of subsidiary and project debt...................... (135,545) (133,060) (148,018)
Repayment of parent company debt.............................. (4,225) - (676,971)
Purchase of treasury stock.................................... - - (64,730)
Redemption of preferred trust securities of subsidiaries...... (19,686) - (588)
Other......................................................... (3,317) (149) 10,293
----------- ---------- -----------
Net cash flows from financing activities...................... 1,826,401 (127,166) 219,986
----------- ---------- -----------
Effect of exchange rate changes on cash....................... (44,227) (8,619) (24,127)
----------- ---------- -----------
Net decrease in cash and cash equivalents..................... (265,268) (12,716) (1,358,740)
Cash and cash equivalents at beginning of period.............. 303,611 316,327 1,606,148
----------- ---------- -----------
Cash and cash equivalents at end of period.................... $ 38,343 $ 303,611 $ 247,408
=========== ========== ===========
Interest paid, net of amount capitalized...................... $ 155,437 $ 35,057 $ 178,961
=========== ========== ===========
Income taxes paid............................................. $ 61,495 $ - $ 47,192
=========== ========== ============
The accompanying notes are an integral part of these financial statements.
-4-
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management of MidAmerican Energy Holdings Company (successor
to MidAmerican Energy Holdings Company (Predecessor), referred to as "MEHC
(Predecessor)") and subsidiaries (collectively referred to as the "Company"),
the accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position as of June 30, 2000 and the results of operations
for the period March 14, 2000 to June 30, 2000 and for the three months ended
June 30, 2000, for the Company and for the period January 1, 2000 to March 13,
2000 for the three and six months ended June 30, 1999 for MEHC (Predecessor) and
the related consolidated statements of cash flows for the period March 14, 2000
to June 30, 2000 for the Company and for the period January 1, 2000 to March 13,
2000 and for the six month period ended June 30, 1999 for MEHC (Predecessor).
The results of operations for the three months ended June 30, 2000, and the
period March 14, 2000 to June 30, 2000 for the Company and for the period
January 1, 2000 to March 13, 2000 and for the three and six months ended June
30, 1999 for MEHC (Predecessor) are not necessarily indicative of the results to
be expected for the full year.
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries. Other investments and corporate
joint ventures, where the Company has the ability to exercise significant
influence are accounted for under the equity method. Investments, where the
Company's ability to influence is limited, are accounted for under the cost
method of accounting.
Certain amounts in the 1999 financial statements and supporting footnote
disclosures have been reclassified to conform to the 2000 presentation. Such
reclassification did not impact previously reported net income or retained
earnings.
Reference is made to the Company's most recently issued annual report that
included information necessary or useful to the understanding of the Company's
business and financial statement presentations.
2. Teton Transaction
On October 24, 1999, the Company and entities representing an investor group
comprised of Berkshire Hathaway Inc. ("Berkshire Hathaway"), Walter Scott, Jr.,
a director of the Company, and David L. Sokol, Chairman and Chief Executive
Officer of the Company, executed a definitive agreement and plan of merger
whereby the investor group would acquire all of the outstanding common stock of
the Company for $35.05 per share in cash, representing a total purchase price of
approximately $2.2 billion, including transaction costs (the "Teton
Transaction"). The Teton Transaction closed on March 14, 2000 and Berkshire
Hathaway invested approximately $1.24 billion in common stock and non-dividend
paying convertible preferred stock and approximately $455 million in 11%
non-transferable trust preferred securities due March 14, 2010. The 11% trust
preferred securities have a liquidation preference of $25 each and are subject
to mandatory redemption in ten equal semi-annual installments, commencing
December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief Operating
Officer of the Company, contributed cash and current securities of the Company
having a value of approximately $310 million. The remaining purchase price was
funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of
the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr.
Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately
1% of the voting stock.
The merger has been accounted for as a purchase business combination. The
purchase price has been allocated to assets acquired and liabilities assumed
based on preliminary valuations. The final purchase price allocation has not
been completed; however, the Company does not anticipate any material changes
based on currently available information. The Company recorded the estimated
excess of cost over fair value of net assets acquired of approximately $945
million that is being amortized using the straight-line method over a 40-year
period.
-5-
Unaudited pro forma combined revenue, income before extraordinary items and net
income of the Company and MEHC (Predecessor) for the six months ended June 30,
2000 and 1999, as if the Teton Transaction and the MidAmerican merger had
occurred at the beginning of each year after giving effect to pro forma
adjustments related to the acquisitions, including the sales of the qualified
facilities, the redemption of limited recourse notes, the redemption of the
senior discount notes, and the issuance of the 11% trust preferred securities,
were $2,429.1 million, $56.4 million and $56.4 million, respectively, compared
to $2,375.8 million, $89.3 million and $52.4 million, respectively.
3. Property, Plant, Contracts and Equipment:
Properties, plant, contracts and equipment comprise the following (in
thousands):
MEHC
(Predecessor)
-------------
June 30, December 31,
2000 1999
------------ -------------
Operating assets:
Utility generation and distribution system..... $6,478,297 $6,362,975
Independent power plants....................... 732,867 705,346
Wells and resource development................. 35,210 123,845
Other assets................................... 471,776 377,897
---------- -----------
Total operating assets......................... 7,718,150 7,570,063
Less accumulated depreciation and amortization. (3,185,541) (3,062,387)
----------- -----------
Net operating assets........................... 4,532,609 4,507,676
Mineral and gas reserves and exploration
assets, net.................................. 386,553 476,416
Construction in process:
Casecnan................................. 344,027 306,007
Zinc recovery project.................... 142,937 92,794
Cordova.................................. 152,705 79,982
Other.................................... - 454
---------- ----------
Total......................................... $5,558,831 $5,463,329
========== ==========
4. Comprehensive Income:
Comprehensive income (loss) for the three months ended June 30, 2000, and 1999
was $(33.2) million and $45.0 million, respectively. Comprehensive income (loss)
for the period March 14, 2000 to June 30, 2000 was $(29.8) million.
Comprehensive income (loss) of MEHC (Predecessor) for the period January 1, 2000
to March 13, 2000, and six months ended June 30, 1999 was $26.0 million and
$40.2 million, respectively. Comprehensive income differs from net income due
primarily to foreign currency translation adjustments.
5. Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was delayed by SFAS No. 137 and
amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for the Company beginning January 1, 2001. The
Company is in the process of evaluating the impact of this accounting
pronouncement.
-6-
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition". SAB 101 provides additional
guidance on revenue recognition criteria and related disclosure requirements.
This SAB is effective beginning in the fourth quarter of 2000. Management does
not anticipate that the final adoption of SAB 101 will have a material impact on
the Company's consolidated financial statements.
6. Segment Information:
The Company has identified five reportable business segments principally based
on management structure: CalEnergy Generation-Domestic, CalEnergy
Generation-Foreign (primarily the Philippines), MidAmerican (domestic utility
operations), Northern (foreign utility operations), and HomeServices (real
estate operations). Information related to the Company's reportable operating
segments is shown below (in thousands).
MEHC
(Predecessor) MEHC (Predecessor)
------------- --------------------------------------
Three Months March 14, 2000 January 1, 2000 Six
Ended June 30, through through Months Ended
-------------- June 30, 2000 March 13, 2000 June 30, 1999
2000 1999 ------------- -------------- -------------
---- ----
Revenue: (1)
CalEnergy Generation -
Domestic....................... $ 9,954 $ 7,634 $ 9,943 $ 4,520 $ 85,307
CalEnergy Generation -
Foreign........................ 47,492 50,688 57,551 42,726 103,021
MidAmerican.................... 481,477 400,870 564,696 447,583 496,718
Northern....................... 477,174 475,924 577,058 499,017 1,038,113
HomeServices................... 139,175 106,668 160,194 66,880 131,830
---------- ---------- ---------- ---------- ----------
Segment revenue................ 1,155,272 1,041,784 1,369,442 1,060,726 1,854,989
Corporate...................... (2,598) (1,634) (2,929) 1,830 24,292
---------- ---------- ---------- ---------- ----------
$1,152,674 $1,040,150 $1,366,513 $1,062,556 $1,879,281
========== ========== ========== ========== ==========
Operating Income: (1) (2)
CalEnergy Generation -
Domestic...................... $ 8,013 $ 7,270 $ 7,787 $ 3,670 $ 47,401
CalEnergy Generation -
Foreign........................ 25,852 29,758 32,217 25,689 61,407
MidAmerican.................... 64,426 58,921 77,919 87,894 68,913
Northern....................... 52,746 56,164 66,958 79,862 117,134
HomeServices................... 13,270 9,517 13,955 (4,144) 11,612
-------- -------- -------- -------- --------
Segment operating income....... 164,307 161,630 198,836 192,971 306,467
Corporate...................... (17,129) (14,379) (21,249) (8,382) (1,790)
-------- -------- -------- -------- --------
$147,178 $147,251 $177,587 $184,589 $304,677
======== ======== ======== ======== ========
(1) Before non-recurring items.
(2) Operating income excludes interest expense, net of capitalized interest.
-7-
MEHC
(Predecessor)
-------------
June 30, December 31,
2000 1999
------------ -------------
Identifiable assets:
CalEnergy Generation -
Domestic.............................. $ 923,586 $ 858,812
CalEnergy Generation -
Foreign............................... 1,194,469 1,263,026
MidAmerican............................. 5,050,062 5,052,466
Northern................................ 2,991,414 2,972,705
HomeServices............................ 179,269 162,714
----------- -----------
Segment identifiable assets............. 10,338,800 10,309,723
Corporate............................... 995,285 456,629
----------- -----------
$11,334,085 $10,766,352
=========== ===========
Long-lived assets:
CalEnergy Generation -
Domestic.............................. $ 629,695 $ 595,607
CalEnergy Generation -
Foreign............................... 946,986 952,415
MidAmerican............................. 4,049,827 3,995,763
Northern................................ 2,200,140 2,438,877
HomeServices............................ 126,987 128,024
----------- -----------
Segment long-lived assets............... 7,953,635 8,110,686
Corporate............................... 1,046,830 65,320
----------- -----------
$ 9,000,465 $ 8,176,006
=========== ===========
The remaining differences from the segment amounts to the consolidated amounts
described as "Corporate" relate principally to the corporate functions including
administrative costs, corporate cash and related interest income, unallocated
goodwill and related goodwill amortization, and intersegment eliminations.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and results of
operations during the periods included in the accompanying statements of
operations.
Teton Transaction:
On October 24, 1999, the Company and entities representing an investor group
comprised of Berkshire Hathaway Inc. ("Berkshire Hathaway"), Walter Scott, Jr.,
a director of the Company, and David L. Sokol, Chairman and Chief Executive
Officer of the Company, executed a definitive agreement and plan of merger
whereby the investor group would acquire all of the outstanding common stock of
the Company for $35.05 per share in cash, representing a total purchase price of
approximately $2.2 billion, including transaction costs (the "Teton
Transaction"). The Teton Transaction closed on March 14, 2000 and Berkshire
Hathaway invested approximately $1.24 billion in common stock and non-dividend
paying convertible preferred stock and approximately $455 million in 11%
non-transferable trust preferred securities due March 14, 2010. The 11% trust
preferred securities have a liquidation preference of $25 each and are subject
to mandatory redemption in ten equal semi-annual installments, commencing
December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief Operating
Officer of the Company, contributed cash and current securities of the Company
having a value of approximately $310 million. The remaining purchase price was
funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of
the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr.
Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately
1% of the voting stock.
Business of MEHC:
MidAmerican Energy Holdings Company (the "Company" or "MEHC"), is a United
States-based privately owned global energy company with publicly traded fixed
income securities that generates, distributes and supplies energy to utilities,
government entities, retail customers and other customers located throughout the
world. Through its subsidiaries the Company is organized and managed on three
separate platforms:
MidAmerican:
MidAmerican Energy Company ("MEC") is the largest energy company headquartered
in Iowa and is a regulated public utility principally engaged in the business of
generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MEC distributes electricity
at the retail level in Iowa, Illinois and South Dakota. It also distributes
natural gas at the retail level in Iowa, Illinois, South Dakota and Nebraska. As
of June 30, 2000, MEC had 665,000 retail electric customers and 639,000 retail
natural gas customers.
In addition to retail sales, MEC delivers electric energy to other utilities,
marketers and municipalities who distribute it to end-use customers. These sales
are referred to as sales for resale or off-system sales. It also transports
natural gas through its distribution system for a number of end-use customers
who have independently secured their supply of natural gas.
MEC's operations are seasonal in nature with a disproportionate percentage of
revenues and earnings historically being earned in the Company's first and third
quarters.
-9-
Northern:
The operations of Northern Electric plc ("Northern"), an indirect wholly owned
subsidiary of the Company, consist primarily of the distribution and supply of
electricity, supply of natural gas and other auxiliary businesses in the United
Kingdom. Northern's operations are seasonal in nature with a disproportionate
percentage of revenues and earnings historically being earned in the Company's
first and fourth quarters.
Northern receives electricity from the national grid transmission system and
distributes it to customers' premises using its network of transformers,
switchgear and cables. Substantially all of the customers in Northern's
authorized area are connected to Northern's network and can only be delivered
electricity through Northern's distribution system, regardless of whether it is
supplied by Northern's own supply business or by other suppliers, thus providing
Northern with distribution volume that is stable from year to year. Northern
charges access fees for the use of the distribution system. The prices for
distribution are controlled by a prescribed formula that limits increases (and
may require decreases) based upon the rate of inflation in the United Kingdom
and other regulatory action.
Northern's supply business primarily involves the bulk purchase of electricity,
through a central pool, and subsequent resale to individual customers throughout
the U.K. The supply business generally is a high volume business that tends to
operate at lower profitability levels than the distribution business. As of June
30, 2000, Northern supplied electricity to approximately 1.2 million customers.
Northern also competes to supply gas throughout the U.K. As of June 30, 2000,
Northern supplied gas to approximately 521,000 customers.
CalEnergy:
The Company indirectly owns the Upper Mahiao, Malitbog and Mahanagdong Projects
(collectively, the "Philippine Projects"), which are geothermal power plants
located on the island of Leyte in the Philippines. For purposes of consistent
presentation, capacity amounts for Upper Mahiao, Malitbog and Mahanagdong are
119, 216 and 165 net MW, respectively.
On February 8, 1999, the Company created a new subsidiary, CE Generation LLC
("CE Generation") and subsequently transferred its interest in the Imperial
Valley Projects and Gas Plants to CE Generation. For purposes of consistent
presentation, plant capacity factors for Vulcan, Hoch (Del Ranch), Elmore and
Leathers (collectively the "Partnership Projects") are based on capacity amounts
of 34, 38, 38, and 38 net MW, respectively, and for Salton Sea I, Salton Sea II,
Salton Sea III and Salton Sea IV plants (collectively the "Salton Sea Projects")
are based on capacity amounts of 10, 20, 49.8 and 39.6 net MW, respectively (the
Partnership Projects and the Salton Sea Projects are collectively referred to as
the "Imperial Valley Projects"). Plant capacity factors for Saranac, Power
Resources and Yuma are based on capacity amounts of 240, 200, and 50 net MW,
respectively. Each plant possesses an operating margin that allows for
production in excess of the amount listed above. Utilization of this operating
margin is based upon a variety of factors and can be expected to vary between
calendar quarters, under normal operating conditions.
Due to the sale of 50% of its interests in CE Generation, the Company has
accounted for CE Generation as an equity investment beginning March 3, 1999.
Prior to that date, CE Generation results were fully consolidated.
On February 26, 1999, the Company closed the sale of all of its ownership
interests in the Navy I, Navy II and BLM, (collectively "Coso"), to Caithness
Energy, LLC for $205 million in cash.
-10-
Results of Operations for the Quarters Ended June 30, 2000 and 1999:
Operating revenue increased in the second quarter of 2000 to $1,123.2 million
from $1,003.6 million for the same period in 1999, an 11.9% increase. Northern's
operating revenue increased in the second quarter of 2000 to $470.2 million from
$463.5 million for the same period in 1999, primarily due to higher volumes of
electricity supplied outside of its authorized area partially offset by lower
volumes supplied within its authorized area. MidAmerican operating revenue
increased in the second quarter of 2000 to $470.1 million from $386.1 million
for the same period in 1999, primarily due to increase in volumes of
non-regulated gas and higher rates in regulated gas. Operating revenue of
HomeServices, a majority owned subsidiary of the Company, increased in the
second quarter of 2000 to $137.8 million from $106.3 million for the same period
in 1999, primarily due to acquisitions.
The following data represents the supply and distribution operations in the
U.K.:
Three Months
Ended June 30,
---------------------------
2000 1999
---- ----
Electricity Supplied (GWh).............. 4,691 4,077
Electricity Distributed (GWh)........... 3,790 3,635
Gas Supplied (Thousands of MMBtus)...... 8,721 9,349
The increase in electricity supplied for the three months ended June 30, 2000
from the same periods in 1999 is due primarily to the increase in supply volumes
for customers outside the authorized area. The increase in electricity
distributed for the three months ended June 30, 2000 from the same period in
1999 is due to changes in demand in the authorized area. The decrease in gas
supplied in 2000 from 1999 reflects lower volume in the U.K. industrial and
commercial markets.
The following data represents sales from MEC:
Three Months
Ended June 30,
-----------------------------
2000 1999
---- ----
Electric Retail Sales (GWh)............. 3,940 3,868
Electric Sales for Resale (GWh)......... 1,361 1,572
Regulated and Non-regulated Gas
Supplied (Thousands of MMBtus)........ 31,584 21,387
MEC retail electric sales increased in the second quarter 2000 from the second
quarter 1999 due to increased customers and non-weather related sales increases,
partially offset by more moderate temperatures. MEC electric sales for resale
decreased in the second quarter as lower production at the Cooper nuclear
facility reduced available sales volumes. MEC regulated and non-regulated gas
supplied decreased in the second quarter due to growth in the non-regulated
markets.
Interest and other income decreased in the second quarter of 2000 to $29.4
million from $36.5 million for the same period in 1999, a 19.5% decrease. The
decrease is due to a reduction in interest income as a result of lower cash and
lower dividend income.
-11-
The gain on non recurring items resulted from the sale of approximately 6.74
million shares of McLeod USA ("McLeod") Class A common stock, through a
secondary offering by McLeod, at $55.625 per share. Proceeds from the sale
exceeded $375 million, with a resulting after-tax gain to the Company of
approximately $47.1 million.
Cost of sales increased in the second quarter of 2000 to $612.3 million from
$499.9 million for the same period in 1999, a 22.5% increase. The increase is
primarily due to higher volumes of electricity supplied at Northern and higher
volumes of non-regulated gas supplied at MEC.
Operating expense decreased in the second quarter of 2000 to $273.1 million from
$281.6 million for the same period in 1999, a 3.0% decrease. The decrease is
primarily due to lower marketing costs at Northern, and lower nuclear costs,
maintenance, IT and property tax expenses at MEC, partially offset by increased
costs at HomeServices for acquisition and increased activity.
Depreciation and amortization increased in the second quarter of 2000 to $120.1
million from $111.4 million for the same period in 1999, a 7.8% increase. The
increase is due to higher production at CE Gas and goodwill amortization from
the Teton Transaction.
Interest expense, less amounts capitalized, decreased in the second quarter of
2000 to $97.7 million from $114.7 million for the same period in 1999, a 14.8%
decrease. The decreases are due to the lower average outstanding debt balances
and increased capitalized interest at Casecnan, Cordova and Zinc.
The provision for income taxes decreased in the second quarter of 2000 to $11.5
million from $37.2 million for the same period in 1999, a 69.1% decrease. The
decrease is due to lower pretax income which resulted from the gain on the sale
of McLeod in 1999.
Minority interest increased in the second quarter of 2000 to $26.9 million from
$12.4 million for the same period in 1999, a 116.9% increase. The increase is
primarily due to the issuance of 11% Company-obligated mandatorily redeemable
preferred securities of subsidiary trust associated with the Teton Transaction.
Income before extraordinary items decreased in the second quarter of 2000 to
$11.0 million from $61.1 million for the same period in 1999.
The Company redeemed $64.3 million in principal value of the 9.5% Senior Notes
at an aggregate price of $71.1 million throughout the second quarter of 1999.
Due to the early extinguishment of this debt, the Company recorded an
extraordinary loss, net of tax, of $5.4 million, in the three months ended June
30, 1999.
Results of Operations for the Periods March 14, 2000 through June 30, 2000,
January 1, 2000 through March 13, 2000 and for the Six Months Ended June 30,
1999:
The following is a discussion of the historical results of the Company for the
period March 14, 2000 through June 30 2000, and of its predecessor (referred to
as "MEHC (Predecessor)") for the period January 1, 2000, through March 13, 2000,
and for the six months ended June 30, 1999. Results for the Company include the
results of MEHC (Predecessor) beginning March 14, 2000, in conjunction with the
Teton Transaction. The impact of the transaction is reflected in the Company's
results of operations, predominately minority interest costs on issuance of
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts and the effects of purchase accounting, including goodwill amortization
and fair value adjustments to the carrying value of assets and liabilities. In
order to provide comparability between periods, the Company has prepared pro
forma results as if the Teton Transaction and the MidAmerican Merger had
occurred at the beginning of each year after giving effect to pro forma
adjustments related to the acquisitions, including the sales of the qualified
facilities, the redemption of limited recourse notes, the redemption of the
senior discount notes and the issuance of the 11% trust preferred securities.
The discussion therefore will highlight any significant variances on a pro forma
basis from the six months ended June 30, 1999 to the six months ended June 30,
2000.
-12-
Pro forma operating revenue for the six months ended June 30, 2000 was $2,382.2
million compared with $2,189.8 million for the same period in 1999, an increase
of 8.8%. Northern Electric revenue increased for the six months ended June 30,
2000 to $1,068.1 million from $1,025.0 million for the same period in 1999,
primarily due to higher volumes of electricity supplied and distribution revenue
from access charges. MEC revenue increased for the six months ended June 30,
2000 to $992.7 million from $862.8 million for the same period in 1999,
primarily due to increases in non-regulated gas and higher rates in regulated
gas. The remaining increase primarily relates to the increase of revenue at
HomeServices, a majority owned subsidiary of the Company, due to acquisitions in
1999.
The following data represents the supply and distribution operations in the
U.K.:
Six Months
Ended June 30,
-----------------------
2000 1999
---- ----
Electricity Supplied (GWh)..................... 9,915 8,641
Electricity Distributed (GWh).................. 8,210 7,859
Gas Supplied (Thousands of MMBtus)............. 25,444 27,717
The increase in electricity supplied for the six months ended June 30, 2000 is
due primarily to the increase in volumes for customers outside of the authorized
area. The increase in electricity distributed for the six months ended June 30,
2000 is due to changes in demand in the authorized area. The reduction in gas
supplied in 2000 from 1999 reflects lower volume in the U.K. industrial and
commercial markets.
The following data represents sales from MEC.
Six Months
Ended June 30,
-------------------------
2000 1999
---- ----
Electric Retail Sales (GWh).................... 7,884 7,706
Electric Sales for Resale (GWh)................ 3,443 3,368
Regulated and Non-regulated Gas Supplied
(Thousands of MMBtus)........................ 82,571 68,240
MEC retail electric sales increased for the six months ended June 30, 2000 from
the same period in 1999 due to increased customers and non-weather related sales
increases partially offset by more moderate temperatures. Electric sales for
resale increased for the six months ended June 30, 2000 from the same period in
1999 due to improved availability in 2000 of MEC's baseload coal plants and
favorable market conditions. Retail gas supplied decreased due to milder
temperatures for the six months ended June 30, 2000 compared to the same period
in 1999, resulting in less heating load.
Pro forma interest and other income for the six months ended June 30, 2000 was
$46.8 million compared with $87.6 million for the same period in 1999. The
decrease was due primarily to the reduced interest income resulting from lower
corporate cash balances.
The gain on non-recurring items resulted from the sale of approximately 6.74
million shares of McLeod Class A common stock, through a secondary offering by
McLeod, at $55.625 per share. Proceeds from the sale exceeded $375 million, with
a resulting after-tax gain to the Company of approximately $47.1 million.
-13-
As a result of the sales of Coso and an interest in CE Generation, the Company
recorded a gain of $20.2 million in the first quarter of 1999.
Pro forma cost of sales for the six months ended June 30, 2000 was $1,283.7
million compared with $1,146.0 million for the same period in 1999, an increase
of 12.0%. The increase is due to increased revenue at Northern, MEC and
HomeServices.
Pro forma operating expenses for the six months ended June 30, 2000 was $542.8
million compared with $558.8 million for the same period in 1999. The decrease
was due to lower costs at both Northern and MEC.
Pro forma depreciation and amortization for the six months ended June 30, 2000
was $242.5 million compared with $233.9 million for the same period in 1999.
Pro forma interest expense, less amounts capitalized, for the six months ended
June 30, 2000 was $204.0 million compared with $231.7 million for the same
period in 1999, a decrease of 12.0%. This decrease was due to the repayment of
the 9.5% Senior Notes in 1999 and other reduced indebtedness and an increase in
capitalized interest on Casecnan, Cordova and Zinc.
The loss on non-recurring items of $7.6 million in the period from January 1,
2000 through March 13, 2000 represents the costs related to the Teton
Transaction.
Pro forma tax expense for the six months ended June 30, 2000 was $40.7 million
compared with $63.7 million for the same period in 1999. The decrease is due
primarily to lower pretax income in 2000.
Pro forma minority interest for the six months ended June 30, 2000 was $51.5
million compared with $52.3 million for the same period in 1999. Minority
interest includes the dividends on the $455 million of Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts. This decrease
was due to the conversion of TIDES I to common stock in May 1999.
On January 15, 1999, the Company redeemed its remaining outstanding Senior
Discount Notes at a redemption price of 105.125% plus accrued interest. On
January 29, 1999, the Company commenced a cash offer for all of its outstanding
Limited Recourse Notes. The Company received tenders from holders of an
aggregate of approximately $195.8 million principal that were paid on March 3,
1999 at a redemption price of 110.025% plus accrued interest. The Company
redeemed $64.3 million in principal value of the 9.5% Senior Notes at an
aggregate price of $71.1 million throughout the second quarter of 1999. Due to
the early extinguishment of this debt, the Company recorded an extraordinary
loss, net of tax, of $5.4 million, in the three months ended June 30, 1999. Due
to the early retirement of the Senior Discount Notes, the Limited Recourse
Notes, and the 9.5% Senior Notes, the Company recorded an extraordinary item of
approximately $36.9 million, net of tax.
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, debt retirement and other
capital requirements.
The Company's cash and cash equivalents were $38.3 million at June 30, 2000 as
compared to $316.3 million at December 31, 1999. The majority of this decrease
was due to the cash used in the Teton Transaction. In addition, the Company
recorded separately restricted cash and investments of $186.6 million and $291.7
million at June 30, 2000 and December 31, 1999, respectively. The restricted
cash balance as of June 30, 2000 is comprised primarily of amounts deposited in
restricted accounts from which the Company will fund the various projects under
construction. Additionally, the Philippine Projects' restricted cash is reserved
for the service of debt obligations.
-14-
Teton Transaction
On October 24, 1999, the Company and entities representing an investor group
comprised of Berkshire Hathaway Inc., Walter Scott, Jr., a director of the
Company, and David L. Sokol, Chairman and Chief Executive Officer of the
Company, executed a definitive agreement and plan of merger whereby the investor
group would acquire all of the outstanding common stock of the Company for
$35.05 per share in cash, representing a total purchase price of approximately
$2.2 billion, including transaction costs. The Teton Transaction closed on March
14, 2000 and Berkshire Hathaway invested approximately $1.24 billion in common
stock and non-dividend paying convertible preferred stock and approximately $455
million in 11% non-transferable trust preferred securities due March 14, 2010.
The 11% trust preferred securities have a liquidation preference of $25 each and
are subject to mandatory redemption in ten equal semi-annual installments,
commencing December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief
Operating Officer of the Company, contributed cash and current securities of the
Company having a value of approximately $310 million. The remaining purchase
price was funded with the Company's cash. Berkshire Hathaway owns approximately
9.7% of the voting stock, Mr. Scott owns approximately 86% of the voting stock,
Mr. Sokol owns approximately 3% of the voting stock and Mr. Abel owns
approximately 1% of the voting stock.
Construction
Minerals Extraction
CalEnergy Minerals LLC, an indirect wholly owned subsidiary of the Company, is
constructing the Zinc Recovery Project that will recover zinc from the
geothermal brine. Facilities are being installed near the Imperial Valley
Projects sites to extract a zinc chloride solution from the geothermal brine
through an ion exchange process. This solution will be transported to a central
processing plant where zinc ingots will be produced through solvent extraction,
electrowinning and casting processes. The Zinc Recovery Project is designed to
have a capacity of approximately 30,000 metric tons per year and is scheduled to
commence commercial operation in the third quarter of 2000. In September 1999,
CalEnergy Minerals LLC entered into a sales agreement whereby all zinc produced
by the Zinc Recovery Project will be sold to Cominco, LTD. The initial term of
the agreement expires in December 2005.
The Zinc Recovery Project is being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procurement and construction contract. Kvaerner is a wholly owned indirect
subsidiary of Kvaerner ASA, an international engineering and construction firm
experienced in the metals, mining and processing industries. Total project
costs, including financing costs, of the Zinc Recovery Project are expected to
be approximately $200.9 million. The Company has incurred $152.7 million of
construction costs through June 30, 2000.
Casecnan
CE Casecnan Water and Energy Company, Inc., a Philippine corporation ("CE
Casecnan") which at completion of the Casecnan Project is expected to be at
least 70% indirectly owned by the Company, is constructing the Casecnan Project,
a combined irrigation and 150 net MW hydroelectric power generation project (the
"Casecnan Project") located in the central part of the island of Luzon in the
Republic of the Philippines.
CE Casecnan has entered into a fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Casecnan Construction Contract"). The work under the
Casecnan Construction Contract is being conducted by a consortium consisting of
Cooperative Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa
working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and
Colenco Power Engineering Ltd.
-15-
On November 20, 1999, the Casecnan Construction Contract was amended to extend
the Guaranteed Substantial Completion Date for the Casecnan Project to March 31,
2001. Accordingly, the Casecnan Project is now expected to become operational by
the second quarter of 2001.
Under the Project Agreement, if the National Irrigation Administration ("NIA")
has completed certain work on its irrigation system, CE Casecnan is liable to
pay NIA $5,000 per day for each day of delay in completion of the Casecnan
Project beyond July 27, 2000, increasing to $13,500 per day for each day of
delay in completion beyond November 27, 2000. NIA has not completed such work,
and therefore CE Casecnan is not currently making such payments.
CE Casecnan's ability to make payments on any of its existing and future
obligations is dependent on NIA's and the Republic of the Philippines'
performance of their obligations under the Project Agreement and the Performance
Undertaking, respectively. No shareholders, partners or affiliates of CE
Casecnan, including the Company, and no directors, officers or employees of the
Company will guarantee or be in any way liable for payment of CE Casecnan's
obligations. As a result, payment of CE Casecnan's obligations depends upon the
availability of sufficient revenues from CE Casecnan's business after the
payment of operating expenses.
NIA's payments of obligations under the Project Agreement are substantially
denominated in United States dollars and are expected to be CE Casecnan's sole
source of operating revenues. Because of CE Casecnan's dependence on NIA, any
material failure of NIA to fulfill its obligations under the Project Agreement
and any material failure of the Republic of the Philippines to fulfill its
obligations under the Performance Undertaking would significantly impair the
ability of CE Casecnan to meet its existing and future obligations.
Cordova
Cordova Energy Company LLC ("Cordova Energy"), an indirect wholly owned
subsidiary of the Company, has commenced construction of a 537 MW gas-fired
power plant in the Quad Cities, Illinois area (the "Cordova Project"). Cordova
Energy has entered into an engineering, procurement and construction ("EPC")
contract with Stone & Webster Engineering Corporation to build the project.
Total project costs are estimated to be approximately $288.9 million. The
Company has also entered into a power sales agreement with a unit of El Paso
Energy Corporation ("El Paso"). Under the power sales agreement, El Paso will
purchase all the capacity and energy from the project until December 31, 2019.
However, Cordova Energy has the option to elect on an annual basis to retain up
to 50% of the project output for sales to others. The construction of the
Cordova Project is expected to be completed in mid-2001.
On September 10, 1999 Cordova Funding Corporation ("Cordova Funding"), a wholly
owned subsidiary of the Company, closed the $225 million aggregate principal
amount financing for the construction of the Cordova Project. As part of the
financing, approximately $93.5 million of 8.64% Series A-1 Senior Secured Bonds
due in 2019 were issued. An additional $31.3 million of 8.79% Series A-2 Senior
Secured Bonds were issued on December 15, 1999, $29.3 million of 9.07% Series
A-3 Senior Secured Bonds were issued on March 15, 2000, and $58.1 million of
8.82% Series A-4 Senior Secured Bonds were issued on June 15, 2000. Additional
Series A Senior Secured Bonds will be issued as required to fund construction.
Cordova Funding has loaned the proceeds to Cordova Energy. The Company has
incurred $152.7 million of construction costs through June 30, 2000. Total
equity funding is expected to be approximately $63.9 million.
The EPC contractor's parent, Stone & Webster, Incorporated, voluntarily filed
Chapter 11 bankruptcy on June 2, 2000 and has sold substantially all of its
assets to Shaw Group, Inc. Shaw Group, Inc. has agreed to complete substantially
all of Stone & Webster's contracts for current and future projects. The Company
does not believe this situation will cause any material adverse effect on the
final completion of the Cordova Project or the Company.
-16-
Accounting Effects of Industry Restructuring
A possible consequence of deregulation 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. With the exception of the generation operations serving the Illinois
jurisdiction, MEC's electric and gas utility operations currently meet the
criteria required by SFAS 71, but its applicability is periodically reexamined.
If portions of its utility operations no longer meet the criteria of SFAS 71,
MEC could 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 if regulatory assets are not recovered in transition
provisions of any resulting legislation. As of June 30, 2000, the Company had
$245.9 million of net regulatory assets on its consolidated balance sheet.
U.K. Rate Matters
Distribution
Northern charges access fees for the use of the distribution system. Most
revenue of the distribution business is controlled by a distribution price
control formula. The current formula requires that regulated distribution income
per unit is increased or decreased each year by RPI-Xd where RPI reflects the
average of the twelve months' inflation rates recorded for the previous July to
December period and Xd is set at 3%. The formula also takes account of the
changes in system electrical losses, the number of customers connected and the
voltage at which customers receive the units of electric distributed. The
formula determines the maximum average price per unit of electric distributed
(in pence per kilowatt hour) which a Regional Electricity Company ("REC") is
entitled to charge. The price control does not seek to constrain the profits of
a REC from year to year. It is a control on revenue that operates independently
of the REC's costs. During the lifetime of the price control additional cost
savings therefore contribute directly to profit.
The previous distribution price control period expired on March 31, 2000.
Changes to the formula took effect from April 1, 2000 resulting in a one-off
reduction in allowed income per unit distributed of 23%. As part of the review,
the Xd factor remains at 3%. The distribution prices allowable under the current
distribution price control formula are expected to be reviewed by the Office of
Gas and Electricity Markets ("Ofgem") at the expiration of the formula's
scheduled five-year duration in 2005. The formula may be reviewed at other times
at the discretion of Ofgem, including in connection with certain proposed
regulatory incentive initiatives.
As a result of the new distribution price control, Northern implemented a review
of expenditure and staffing requirements primarily in its distribution business.
Subsequently Northern implemented a series of cost reduction initiatives
including a redundancy program, following discussions with the trade unions,
which has resulted in 461 employees leaving Northern prior to June 30, 2000.
This is on target for the overall reduction of 500 expected by the end of the
year.
Supply
In December 1999, Ofgem announced revised electric price controls. From April
2000, these have applied to most domestic and small commercial customers in the
below 100kW market of Northern's designated area, and result in a further
lowering of price caps. The new price control applies for two years to March
2002.
While the impact of the latest regulatory review varied across companies, the
anticipated impact on a standard Northern customer was a real price reduction of
approximately 11%. The impact on customers utilizing a tariff with varying
day/night rates was considerably lower at approximately 1%.
-17-
The supply companies are able to propose and amend the detailed structure of
tariffs, but these must be submitted to Ofgem to ensure their consistency with
the prescribed price caps. Prices are then monitored on an ongoing basis, and
any proposed further amendments must be submitted to Ofgem for review.
In addition to the constraint of regulatory price caps, competitive pressures
from other suppliers are exerted against Northern's tariffs and contracts. The
costs of fulfilling customer requirements are also subject to market pressures,
energy prices varying on a half hourly basis. At present, electric prices are
established on a national half hourly basis through the electric pool. Northern
principally employs contracts for difference to hedge the risk contingent on
movements in pool price.
From November 2000, New Electricity Trading Arrangements ("NETA") are being
introduced to replace the Pool with market arrangements more reflective of other
commodities. The bulk of energy settlement under this system will occur either
bilaterally or through power exchanges. Risk mitigation will be dependent on the
establishment of effective load forecasting tools, addressing short and
longer-term requirements. In addition, it is expected that new hedging
facilities will be established, although the form of these has yet to be
defined.
Domestic Rate Matters: Electric
Under a 1997 pricing plan settlement agreement resulting from an Iowa Utilities
Board rate proceeding, electric prices for MEC's Iowa industrial and commercial
customers were reduced through a retail access pilot project, negotiated
individual electric contracts and a tariffed rate reduction for some
non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as well as
prices. The contracts range in length from five to ten years, and some have
price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to ten-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes, and transition costs. While the contract prices are fixed (except
for the potential adjustment elements), the costs MEC incurs to fulfill these
contracts will vary. MEC presently intends to manage this risk through hedging
and other similar arrangements. On an aggregate basis, the annual revenues under
contract are approximately $180 million.
Under the 1997 pricing plan settlement agreement, if MEC's annual Iowa electric
jurisdictional return on common equity exceeds 12%, then earnings above the 12%
level will be shared equally between customers and MEC. If the return exceeds
14%, then two-thirds of MEC's share of those earnings above the 14% level will
be used for accelerated recovery of certain regulatory assets. The pricing plan
settlement agreement precludes MEC from filing for increased rates prior to 2001
unless 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%.
In December 1997, the Governor of Illinois signed into law a bill to restructure
Illinois' electric utility industry and transition it to a competitive market.
Under the law, beginning October 1, 1999, larger non-residential customers in
Illinois and 33% of the remaining non-residential Illinois customers are 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.
Environmental Matters - Domestic
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.
-18-
MEC has evaluated or is evaluating 27 properties which were, at one time, sites
of gas manufacturing plants in which it may be a potentially responsible party.
The purpose of these evaluations is to determine whether waste materials are
present, whether the materials constitute an environmental or health risk, and
whether MEC has any responsibility for remedial action. MEC's estimate of the
probable costs for these sites as of June 30, 2000, was $27 million. This
estimate has been recorded as a liability and a regulatory asset for future
recovery through the regulatory process.
Although the timing of potential incurred costs and recovery of costs in rates
may affect the results of operations in individual periods, management believes
that the outcome of these issues will not have a material adverse effect on the
Company's financial position or results of operations.
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. In May 1999,
the U.S. Court of Appeals for the District of Columbia Circuit remanded the
standards adopted in July 1997 back to the EPA indicating the EPA had not
expressed sufficient justification for the basis of establishing the standards
and ruling that the EPA has exceeded its constitutionally-delegated authority in
setting the standards. As a result of the court's initial decision and the
current status of the standards, the impact of any new standards on MEC is
currently unknown. If the EPA successfully appeals the court's decision,
however, and the new standards are implemented, then MEC would incur increased
costs and a decrease in revenues.
Environmental Matters - U.K.
Northern carries out its activities in such a manner as to minimize the impact
of its works and operations on the environment and in accordance with
environmental legislation and good practice. There have been no significant
environmental compliance issues.
The U.K. Government introduced new contaminated land legislation in April 2000
that requires companies to:
o Put in place a program for investigating the company's history to identify
problem sites for which it is responsible; o make a clear commitment to meeting
responsibilities for cleaning up those sites; o provide funding to make sure
that this can happen; and o make commitments public.
Northern is in the process of completing the evaluation work on the seven sites
which may be subject to the legislation. A compliance strategy will then be
developed. Exploratory work with an environmental remediation company is
expected to minimize any clean up costs.
The Environmental Protection Act (Disposal of PCB's and other Dangerous
Substances) Regulations 2000 were introduced on May 5, 2000. The Regulations
required that transformers containing over 50 parts per million (PPM) be
registered with the Environment Agency by July 31, 2000. Transformers containing
500 PPM must be de-contaminated by December 31, 2000. Northern has registered 62
items above 50 PPM, de-contaminated 4 items and informed the Environment Agency
that it is continuing with its sampling, labeling and registration program.
Nuclear Decommissioning
Each licensee of a nuclear facility is required to provide financial assurance
for the cost of decommissioning its licensed 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, MEC expects to contribute
approximately $42 million during the period 2000 through 2004 to an external
trust established for the investment of funds for decommissioning Quad Cities
Station. Approximately 65% of the trust's funds are invested in domestic
corporate debt and common equity securities. The remainder is invested in
investment grade municipal and U.S. Treasury bonds.
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In addition, MEC makes payments to the Nebraska Public Power District ("NPPD")
related to decommissioning the Cooper power station. These payments are
reflected as operating expense. NPPD estimates call for MEC to pay approximately
$57 million to NPPD for Cooper decommissioning during the period 2000 through
2004. NPPD invests the funds predominately in U.S. Treasury Bonds and other U.S.
Government securities. Approximately 20% was invested in domestic corporate
debt. MEC'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 MEC as the defendant and seeking a declaration of
MEC's rights and obligations in connection with Cooper nuclear decommissioning
funding.
Cooper and Quad Cities Station decommissioning costs charged to Iowa customers
are to a large extent included in base rates, and recovery of increases in those
amounts must be sought through the normal ratemaking process. Cooper
decommissioning costs charged to Illinois customers are recovered through a rate
rider on customer billings that is reviewed annually.
Development Activity
The Company is actively seeking to develop, construct, own and operate new
energy projects, both domestically and internationally, the completion of any of
which is subject to substantial risk. Development can require the Company to
expend significant sums for preliminary engineering, permitting, fuel supply,
resource exploration, legal and other expenses in preparation for competitive
bids which the Company may not win or before it can be determined whether a
project is feasible, economically attractive or capable of being financed.
Successful development and construction is contingent upon, among other things,
negotiation on terms satisfactory to the Company of engineering, construction,
fuel supply and power sales contracts with other project participants, receipt
of required governmental permits and consents and timely implementation of
construction. There can be no assurance that development efforts on any
particular project, or the Company's development efforts generally, will be
successful.
The financing, construction and development of projects outside the United
States entail significant political and financial risks (including, without
limitation, uncertainties associated with first time privatization efforts in
the countries involved, currency exchange rate fluctuations, currency
repatriation restrictions, political instability, civil unrest and
expropriation) and other structuring issues that have the potential to cause
substantial delays or material impairment of the value of the project being
developed, which the Company may not be fully capable of insuring against. The
uncertainty of the legal environment in certain foreign countries in which the
Company may develop or acquire projects could make it more difficult for the
Company to enforce its rights under agreements relating to such projects. In
addition, the laws and regulations of certain countries may limit the ability of
the Company to hold a majority interest in some of the projects that it may
develop or acquire. The Company's international projects may, in certain cases,
be terminated by a government. Projects in operation, construction and
development are subject to a number of uncertainties more specifically described
in the Company's Form 8-K, dated March 26, 1999, filed with the Securities and
Exchange Commission.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
delayed by SFAS No. 137 and amended by SFAS No. 138. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the Company beginning
January 1, 2001. The Company is in the process of evaluating the impact of this
accounting pronouncement.
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Forward-looking Statements
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such statements are based on current expectations and involve a number of
known and unknown risks and uncertainties that could cause the actual results
and performance of the Company to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development and construction
uncertainty, operating uncertainty, acquisition uncertainty, uncertainties
relating to doing business outside of the United States, uncertainties relating
to geothermal resources, uncertainties relating to domestic and international
economic and political conditions and uncertainties regarding the impact of
regulations, changes in government policy, industry deregulation and
competition. Reference is made to all of the Company's SEC filings, including
the Company's Report on Form 8-K dated March 26, 1999, incorporated herein by
reference, for a description of such factors. The Company assumes no
responsibility to update forward-looking information contained herein.
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PART II - OTHER INFORMATION
Item 1 Legal proceedings.
- ------ -----------------
As of June 30, 2000, there are no material outstanding lawsuits against
the Company; however as discussed in the Company's December 31, 1999
Form 10-K, several of the Company's projects and subsidiaries are
involved in ongoing litigation.
Item 2 Changes in Securities and Use of Proceeds.
- ------ -----------------------------------------
Not applicable.
Item 3 Defaults on Senior Securities.
- ------ -----------------------------
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not applicable.
Item 5 Other Information.
- ------ -----------------
Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Exhibits Filed Herewith
Exhibit 15 - Awareness Letter of Independent Accountants.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY
-----------------------------------
(Registrant)
Date: August 14, 2000 /s/ Patrick J. Goodman
---------------------------------
Patrick J. Goodman
Senior Vice President & Chief
Financial Officer
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EXHIBIT INDEX
Exhibit No. Page No.
- ----------- --------
15 Awareness Letter of Independent Accountants 25
27 Financial Data Schedule 26
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Exhibit 15
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited consolidated interim
financial information of MidAmerican Energy Holdings Company and subsidiaries
for the period March 14, 2000 to June 30, 2000 and for the three-month period
ended June 30, 2000 for MidAmerican Energy Holdings Company and for the period
January 1, 2000 to March 13, 2000 and for the three-month and six-month periods
ended June 30, 1999 for MidAmerican Energy Holdings Company (Predecessor), as
indicated in our report dated July 21, 2000; because we did not perform an
audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, is
incorporated by reference in Registration Statements No. 333-30537, No.
333-45615 and No. 333-62697 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of a Registration Statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
August 14, 2000
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