UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to___________.
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 require-
ments for the past 90 days.
Yes X No
------- -------
All of the shares of MidAmerican Energy Holdings Company are held by a limited
group of private investors. As of November 14, 2001, 9,281,087 shares of
common stock were outstanding.
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......... 15
Part II: Other Information
ITEM 1. Legal Proceedings........................................ 30
ITEM 2. Changes in Securities and Use of Proceeds................ 31
ITEM 3. Defaults on Senior Securities............................ 31
ITEM 4. Submission of Matters to a Vote of Security Holders...... 31
ITEM 5. Other Information........................................ 31
ITEM 6. Exhibits and Reports on Form 8-K......................... 32
Signatures ......................................................... 33
Exhibit Index ......................................................... 34
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 September 30, 2001, and the related consolidated statements of
operations for the three-month and nine-month periods ended September 30, 2001
for the Company; for the period January 1, 2000 to March 13, 2000 for MEHC
(Predecessor); for the period March 14, 2000 to September 30, 2000 for the
Company; and for the three-month period ended September 30, 2000 for the
Company; and the related consolidated statements of cash flows for the
nine-month period ended September 30, 2001 for the Company; for the period
January 1, 2000 to March 13, 2000 for MEHC (Predecessor); and for the period
March 14, 2000 to September 30, 2000 for the Company. 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 the
Company as of December 31, 2000, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the period January 1, 2000
to March 13, 2000 for MEHC (Predecessor) and for the period March 14, 2000 to
December 31, 2000 for the Company (not presented herein); and in our report
dated January 18, 2001 (March 27, 2001 as to Notes 17 and 19.A.), 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, 2000 is fairly stated, in all material respects, in
relation to the consolidated financial statements from which it has been
derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
October 26, 2001
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of
-------------------------------------
September 30, December 31,
2001 2000
---------------- -----------------
---------------- -----------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents........................................... $ 584,173 $ 38,152
Restricted cash and short-term investments.......................... 48,714 42,129
Marketable securities.............................................. 31,614 5,419
Accounts receivable................................................. 335,607 903,469
Inventory.......................................................... 71,265 81,943
Other current assets................................................ 99,026 91,365
------------ -------------
Total Current Assets.............................................. 1,170,399 1,162,477
Property, plant, contracts and equipment, net.......................... 6,492,764 5,348,647
Excess of cost over fair value of net assets acquired, net............. 3,628,766 3,673,150
Regulatory assets...................................................... 218,072 240,934
Long-term restricted cash and investments.............................. 30,823 48,747
Nuclear decommissioning trust fund and other marketable securities..... 158,056 202,227
Equity investments..................................................... 256,047 246,466
Deferred charges, other investments and other assets................... 879,850 758,003
------------ -------------
Total Assets........................................................... $ 12,834,777 $ 11,680,651
============ =============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable.................................................... $ 241,383 $ 656,356
Accrued interest................................................... 186,863 107,726
Accrued taxes...................................................... 98,214 125,645
Other accrued liabilities........................................... 305,133 250,975
Short-term debt.................................................... 153,636 251,656
Current portion of long-term debt................................... 398,562 438,978
------------ -------------
Total Current Liabilities......................................... 1,383,791 1,831,336
Other long-term accrued liabilities.................................... 523,631 976,030
Parent company debt.................................................... 1,833,349 1,829,971
Subsidiary and project debt............................................ 4,864,793 3,398,696
Deferred income taxes.................................................. 1,369,297 945,028
------------ -------------
Total Liabilities................................................... 9,974,861 8,981,061
------------ -------------
Deferred income........................................................ 85,193 79,489
Minority interest...................................................... 42,584 11,491
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts..................................... 787,598 786,523
Subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts........................... 100,000 100,000
Preferred securities of subsidiary..................................... 131,477 145,686
Commitments and contingencies (Note 8)
Shareholders' Equity:
Zero coupon convertible preferred stock - authorized 50,000 shares,
no par value, 34,563 shares issued and outstanding.................. - -
Common stock - authorized 60,000 shares, no par value;
9,281 shares issued and outstanding................................. - -
Additional paid in capital............................................. 1,553,073 1,553,073
Retained earnings...................................................... 203,342 81,257
Accumulated other comprehensive loss, net.............................. (43,351) (57,929)
------------ -------------
Total Shareholders' Equity.......................................... 1,713,064 1,576,401
------------ -------------
Total Liabilities and Shareholders' Equity............................. $ 12,834,777 $ 11,680,651
============ =============
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
MEHC
(Predecessor)
------------------
Three Months Nine Months March 14, 2000 January 1, 2000
Ended September 30, Ended Through Through
2001 2000 September 30, 2001 September 30, 2000 March 13,2000
----- ---- ------------------ ------------------ -------------
Revenues:
Operating revenue...................... $1,136,233 $ 1,153,915 $3,916,185 $2,486,621 $1,049,523
Interest and other income.............. 19,566 32,977 65,036 66,784 13,033
Gain on non-recurring items........... 210,707 - 221,108 - -
---------- ----------- ---------- ----------- ----------
Total revenues............................ 1,366,506 1,186,892 4,202,329 2,553,405 1,062,556
---------- ----------- ---------- ----------- ----------
Costs and expenses:
Cost of sales.......................... 536,011 611,232 2,207,818 1,333,526 561,386
Operating expense...................... 293,867 270,211 844,776 594,404 219,303
Depreciation and amortization.......... 119,086 117,648 356,853 260,087 97,278
Interest expense....................... 119,809 124,226 362,163 272,250 101,330
Less interest capitalized.............. (19,877) (27,220) (72,010) (57,914) (15,516)
Loss on non-recurring item............... - - - - 7,605
----------- ----------- ----------- ----------- ----------
Total costs and expenses.................. 1,048,896 1,096,097 3,699,600 2,402,353 971,386
----------- ----------- ----------- ----------- ----------
Income before provision for income taxes.. 317,610 90,795 502,729 151,052 91,170
Provision for income taxes................ 241,873 28,829 296,088 42,646 31,008
----------- ----------- ----------- ----------- ----------
Income before minority interest........... 75,737 61,966 206,641 108,406 60,162
Minority interest......................... 27,796 27,071 79,952 59,026 8,850
----------- ----------- ----------- ----------- ----------
Income before cumulative effect of change in
accounting principle.................. 47,941 34,895 126,689 49,380 51,312
Cumulative effect of change in accounting
principle, net of tax................. - - (4,604) - -
----------- ----------- ------------ ----------- ----------
Net income available to common
shareholders........................... $ 47,941 $ 34,895 $ 122,085 $ 49,380 $ 51,312
=========== =========== =========== =========== ==========
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
MEHC
(Predecessor)
-------------
Nine January 1,
Months March 14, 2000 2000
Ended Through Through
September 30, September 30, March 13,
2001 2000 2000
------------------ ------------------ -------------
Cash flows from operating activities:
Net income........................................................ $ 122,085 $ 49,380 $ 51,312
Adjustments to reconcile to net cash flows from
operating activities:
Cumulative effect of change in accounting principle, net of tax... 4,604 - -
Gain on non-recurring items....................................... (221,108) - -
Depreciation and amortization..................................... 282,125 207,801 83,097
Amortization of excess of cost over fair value of
net assets acquired............................................ 74,728 52,286 14,181
Amortization of deferred financing costs and other costs.......... 15,542 12,788 4,075
Provision for deferred income taxes............................... 236,901 (229) 7,735
Undistributed earnings on equity investments...................... (23,622) (29,519) (3,459)
Changes in other items:
Accounts receivable and other current assets................... 630,668 4,703 440
Accounts payable, accrued liabilities, deferred income
and other...................................................... (330,933) (34,665) 13,702
------------ ----------- -----------
Net cash flows from operating activities.......................... 790,990 262,545 171,083
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of Yorkshire Electric Distribution, net
of cash acquired.............................................. (36,860) - -
Proceeds from sale of Northern Supply............................. 377,396 - -
Purchase of HomeServices' minority interest....................... (29,276) - -
Receipt of liquidated damages on construction project............. 29,648 - -
Purchase of MEHC (Predecessor), net of cash acquired.............. - (2,048,266) -
Purchase of marketable securities................................. - (29,581) (8,251)
Proceeds from sale of marketable securities....................... - 47,747 12,562
Acquisition of realty companies................................... (32,565) - -
Capital expenditures relating to operating projects............... (242,337)
(171,788) (44,355)
Construction and other development costs.......................... (72,147) (142,882) (56,450)
Philippine-construction in progress............................... (62,478) (35,571) (22,736)
Change in restricted investments.................................. 17,924 79,444 48,788
Change in other assets............................................ 1,998 (541) 15,568
------------ -------------- -----------
Net cash flows from investing activities.......................... (48,697) (2,301,438) (54,874)
------------ -------------- -----------
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 -
Net repayment of short-term debt.................................. (106,654) (249,266) (118,718)
Repayment of subsidiary and project debt.......................... (268,001) (62,492) (3,135)
Repayment of parent company debt.................................. (32) (4,225) -
Redemption of preferred trust securities of subsidiaries.......... (14,616) (20,058) -
Proceeds from subsidiary and project debt......................... 200,000 262,176 -
Change in restricted investments-debt service..................... (6,585) 7,954 (6,033)
Other............................................................. (2,073) (3,703) (615)
------------ -------------- -----------
Net cash flows from financing activities.......................... (197,961) 1,813,182 (128,501)
------------ ------------- -----------
Effect of exchange rate changes on cash........................... 1,689 (656) (424)
------------ ------------- -----------
Net increase (decrease) in cash and cash equivalents.............. 546,021 (226,367) (12,716)
Cash and cash equivalents at beginning of period.................. 38,152 303,611 316,327
------------ ------------- -----------
Cash and cash equivalents at end of period........................ $ 584,173 $ 77,244 $ 303,611
============ ============= ===========
Interest paid, net of amount capitalized.......................... $ 222,991 $ 224,521 $ 35,057
============ ============== ===========
Income taxes paid................................................. $ 43,632 $ 65,612 $ -
============ ============== ===========
The accompanying notes are an integral part of these financial statements.
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 September 30, 2001 and the results of
operations for the three and nine months ended September 30, 2001 and for the
three months ended September 30, 2000 and for the period March 14, 2000 to
September 30, 2000 for the Company and for the period January 1, 2000 to March
13, 2000 for MEHC (Predecessor) and the related consolidated statements of cash
flows for the nine months ended September 30, 2001 and for the period March 14,
2000 to September 30, 2000 for the Company and for the period January 1, 2000 to
March 13, 2000 for MEHC (Predecessor). The results of operations for the three
and nine months ended September 30, 2001, and for the three months ended
September 30, 2000 and the period March 14, 2000 to September 30, 2000 for the
Company and for the period January 1, 2000 to March 13, 2000 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 2000 financial statements and supporting note disclosures
have been reclassified to conform to the 2001 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 on Form
10-K that included information necessary or useful to the understanding of the
Company's business and financial statement presentations.
2. Property, Plant, Contracts and Equipment
Property, plant, contracts and equipment comprise the following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Operating assets:
Utility generation and distribution system............. $7,447,364 $6,157,482
Independent power plants............................... 940,087 698,069
Power sales agreement.................................. 76,516 82,231
Other assets........................................... 436,575 421,231
---------- ----------
Total operating assets................................. 8,900,542 7,359,013
Less accumulated depreciation and amortization......... (3,551,642) (3,312,019)
---------- ----------
Net operating assets................................... 5,348,900 4,046,994
Mineral and gas reserves and exploration assets, net... 389,309 373,742
Construction in process:
Casecnan............................................ 450,876 388,398
Zinc recovery project............................... 153,159 166,406
Utility generation and distribution system.......... 146,589 141,160
Cordova............................................. - 224,514
Other development................................... 3,931 7,433
---------- ----------
Total.................................................. $6,492,764 $5,348,647
========== ==========
3. Equity Investments
CE Generation, the Company's 50% owned subsidiary, has interests in ten
operating geothermal plants in Imperial Valley, California and three operating
natural gas-fired cogeneration plants in New York, Texas and Arizona. The
following is summarized financial information for CE Generation (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues $123,649 $149,758 $402,741 $356,733
Income before cumulative
effect of change in
accounting principle $ 10,907 $ 31,409 $ 48,453 $ 50,314
Net income $ 10,907 $ 31,409 $ 33,067 $ 50,314
4. Accounting Policy Change
Effective January 1, 2001, the Company has changed its accounting policy
regarding major maintenance and repairs for nonregulated gas projects,
nonregulated plant overhaul costs and geothermal well rework costs to the direct
expense method from the former policy of monthly accruals based on long-term
scheduled maintenance plans for the gas projects and deferral and amortization
of plant overhaul costs and geothermal well rework costs over the estimated
useful lives. The cumulative effect of the change in accounting principle was
$4.6 million, net of taxes of $.7 million.
5. Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets" which establish accounting and
reporting for business combinations. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001, to be accounted for using
the purchase method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized but will be tested
for impairment on an annual basis. These standards are effective for the Company
beginning on January 1, 2002. The Company is evaluating the impact resulting
from the adoption of these standards.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses the accounting for legal obligations associated
with the retirement of tangible, long-lived assets, and the associated asset
retirement costs. This pronouncement is effective for years beginning after June
15, 2002. The Company is evaluating the impact that adoption of this standard
will have on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. This
pronouncement is effective for years beginning after December 15, 2001. The
Company is evaluating the impact that adoption of this standard will have on its
financial statements.
6. Comprehensive Income (Loss)
Comprehensive income for the three months ended September 30, 2001 and 2000 was
$69.7 million and $13.5 million, respectively. Comprehensive income for the nine
months ended September 30, 2001 was $136.7 million, which includes the
transition loss of $3.3 million related to the initial adoption of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." Comprehensive
loss for the period March 14, 2000 to September 30, 2000 was $16.2 million.
Comprehensive income of MEHC (Predecessor) for the period January 1, 2000 to
March 13, 2000 was $26.0 million. Comprehensive income differs from net income
due primarily to foreign currency translation adjustments, unrealized gains and
losses from marketable securities and fair value adjustments of cash flow
hedges.
7. Accounting for Derivatives
Unrealized gains and losses on cash flow hedges of future transactions are
recorded in other comprehensive income. Only hedges that are highly effective in
offsetting the risk of variability in future cash flows are accounted for in
this manner. Future transactions include purchases of gas for resale to
regulated and nonregulated customers, purchases of gas for storage, purchases
and sales of wholesale electric energy and currency rate swap agreements. When
the associated hedged future transaction occurs or if a hedging relationship is
no longer appropriate, the unrealized gains and losses are reversed from other
comprehensive income and recognized in net income. Realized gains on cash flow
hedges are recorded in operating revenues or cost of sales, depending upon the
nature of the physical transaction being hedged.
MidAmerican Energy
- ------------------
MidAmerican Energy enters into derivative financial instruments, including
futures, swaps, options and forward contracts, to hedge the effect of price
changes on cash flows from expected future physical transactions (cash flow
hedges) and the fair value of physical purchase and sale commitments (fair value
hedges) and to reduce natural gas price volatility for regulated gas customers.
The objective of MidAmerican Energy's hedging program is to minimize the impact
of changing prices for natural gas and electricity on its cash flows. From time
to time, MidAmerican Energy also enters into derivative financial instruments
for trading purposes to profit from changing prices for natural gas and
electricity or to take advantage of price arbitrage opportunities.
For the nine months ended September 30, 2001, the net income effect,
representing the ineffectiveness of cash flow hedges, was immaterial. During the
twelve months beginning October 1, 2001, it is anticipated that all of net
unrealized gains (losses) on cash flow hedges presently recorded as accumulated
other comprehensive income will be realized and recorded in earnings.
MidAmerican Energy has hedged a portion of its exposure to the variability of
cash flows for future transactions through December 2002.
Unrealized gains and losses on fair value hedges are recognized in income as
either operating revenues or cost of sales, depending upon the nature of the
item being hedged. Purchase and sales commitments hedged by fair value hedges
are recorded at fair value, with the changes in values also recognized in income
and substantially offsetting the impact of the hedges on earnings. For the nine
months ended September 30, 2001, the net income statement impact realized from
the ineffectiveness of fair value hedges was immaterial.
Unrealized gains and losses on derivatives held for trading purposes are
recognized in income each reporting period as operating revenues.
MidAmerican Energy is exposed to fair value risk from changes in interest rates
for fixed rate sinking fund preferred and perpetual preferred stocks (fixed rate
preferred stocks). MidAmerican Energy reviews the interest rate sensitivity of
these securities and purchases put options on U.S. Treasury securities.
MidAmerican Energy's intent is to substantially offset any change in market
value of the fixed rate preferred stocks due to a change in interest rates with
a change in market value of the put options.
On January 1, 2001, as permitted by SFAS 133, MidAmerican Energy
re-characterized its portfolio of preferred stock investments as "trading"
securities. Accordingly, any changes in value in the portfolio, or in the
derivatives used to hedge their exposure to changes in interest rates, are
recognized in other income beginning January 1, 2001. This change in
classification resulted in an initial pre-tax loss of $2.4 million. For the nine
months ended September 30, 2001, excluding the initial pre-tax loss, a net
pre-tax gain of $0.3 million, representing the ineffectiveness of the related
fair value hedges, is included in other income.
CE UK Funding
- -------------
At September 30, 2001, CE Electric UK Funding Company had a fixed-rate
obligation denominated in U.S. dollars that exposed CE Electric UK Funding
Company to losses in the event of increases in the exchange rate of U.S. dollars
to Sterling pounds. When this obligation was issued, CE Electric UK Funding
Company entered into certain currency rate swap agreements that effectively
convert the U.S. dollar fixed interest rate to a fixed rate in Sterling pounds.
At September 30, 2001, these currency rate swap agreements had an aggregate
notional amount of $362 million, from which the Company would receive
approximately $47.9 million if terminated.
At September 30, 2001, Yorkshire Electricity Group plc ("Yorkshire") had a
fixed-rate obligation denominated in U.S. dollars that exposed Yorkshire to
losses in the event of increases in the exchange rate of U.S. dollars to
Sterling pounds. When this obligation was issued, Yorkshire entered into certain
currency rate swap agreements that effectively convert the U.S. dollar fixed
interest rate to a fixed rate in Sterling pounds. At September 30, 2001, these
currency rate swap agreements had an aggregate notional amount of $255 million,
from which the Company would receive approximately $23.0 million if terminated.
8. Commitments and Contingencies
Financial Condition of Edison
- -----------------------------
Southern California Edison ("Edison"), a wholly-owned subsidiary of Edison
International, is a public utility primarily engaged in the business of
supplying electric energy to retail customers in Central and Southern
California, excluding the city of Los Angeles. The Company is aware that there
have been public announcements that Edison's financial condition has
deteriorated as a result of reduced liquidity. Edison's senior unsecured debt
obligations are currently rated Caa2 by Moody's and D by S&P.
Edison failed to pay approximately $119 million due under the Power Purchase
Agreements of indirect subsidiaries of the Company's 50% owned subsidiary, CE
Generation, for power delivered in November and December 2000 and January,
February and March 2001, although the Power Purchase Agreements provide for
billing and payment on a schedule where payments would have normally been
received in early January, February, March, April and May 2001.
On February 21, 2001, the Imperial Valley Projects (excluding Salton Sea Unit V
and CE Turbo), subsidiaries of CE Generation, filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required payments under the Power Purchase Agreements. The
lawsuit also requested, among other things, that the court order permit the
Imperial Valley Projects to suspend deliveries of power to Edison and to permit
the Imperial Valley Projects to sell such power to other purchasers in
California.
On March 22, 2001, the Superior Court granted the Imperial Valley Projects'
Motion for Summary Adjudication and a Declaratory Judgment ordering that: 1)
under the Power Purchase Agreements, the Imperial Valley Projects have the right
to temporarily suspend deliveries of capacity and energy to Edison, 2) the
Imperial Valley Projects are entitled to resell the energy and capacity to other
purchasers and 3) the interim suspension of deliveries to Edison shall not in
any respect result in the modifications or termination of the Power Purchase
Agreements and the Power Purchase Agreements shall in all respects continue in
full force and effect other than the temporary suspension of deliveries to
Edison.
As a result of the March 22, 2001 Declaratory Judgment, the Imperial Valley
Projects suspended deliveries of energy to Edison and entered into a transaction
agreement with El Paso Merchant Energy, L.P. ("EPME") in which the Imperial
Valley Projects' available power was sold to EPME based on percentages of the
Dow Jones SP-15 Index. On June 18, 2001 the Superior Court terminated the
Imperial Valley Projects' right to resell power pursuant to the Declaratory
Judgment.
On June 20, 2001, the Imperial Valley Projects (excluding Salton Sea Unit V and
CE Turbo) entered into Agreements Addressing Renewable Energy Pricing and
Payment Issues with Edison ("Settlement Agreements"). The Settlement Agreements
require that Edison make a series of payments to repay the past due balances
under the Power Purchase Agreements (the "stipulated amounts"). The first
payment of approximately $11.6 million, which represented 10% of the stipulated
amounts, was received June 22, 2001. A second partial payment of 10% is payable
within 5 days following occurrence of Events to restore Edison to creditworthi-
ness (the "Effective Date"). The final payment, representing the remaining
stipulated amounts, shall be paid on the 5th business day after Edison receives
proceeds from the financing resulting from the occurrence of Events to restore
Edison to creditworthiness. In addition to these payments, Edison is required to
make monthly interest payments calculated at a rate of 7% per annum on the
outstanding stipulated amounts. The Settlement Agreements also provide a revised
energy pricing structure, whereby Edison elects to pay the Imperial Valley
Projects a fixed energy price of 5.37 cents/kilowatt hour in lieu of the
Commission-approved SRAC Methodology under the Power Purchase Agreements,
commencing on the first day of the month following the Effective Date and
expiring five years from such date. All other contract terms remain unchanged.
As a result of the aforementioned Settlement Agreements, the Imperial Valley
Projects resumed power sales to Edison on June 22, 2001. Energy payments are
currently calculated using the SRAC formulas set forth in the Power Purchase
Agreements until the fixed rate period begins.
On October 2, 2001 the Commission and Edison reached a settlement in the Filed
Rate Doctrine lawsuit Edison filed in Federal Court against the Commission. By
its own terms, the settlement is intended to restore Edison to creditworthiness
so that it is able to resume procuring the electricity needed by its customers;
limit ratepayers' costs of paying off the debt; and maintain the state's role in
regulating the investor owned utility by enabling Edison to pay down its back
debts over a reasonable period of time. As a result of such settlement, the
Imperial Valley Projects believe the conditions to the Effective Date under the
Settlement Agreements have been satisfied. Edison disputes such conditions have
been satisfied. The Imperial Valley Projects are vigorously pursuing
enforcement of their rights under the Settlement Agreements.
As a result of Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of Edison's credit ratings,
Moody's downgraded the ratings for the Salton Sea Funding Corporation (the
"Funding Corporation") Securities to Caa2 (negative outlook) and S&P downgraded
the ratings for the Funding Corporation Securities to BBB- and placed the
Securities on "credit watch negative". Moody's downgraded the ratings for the CE
Generation Securities to B1 from Baa3 (review for possible downgrade). Following
the execution of the Settlement Agreements, Moody's placed the Salton Sea
Funding and CE Generation securities on "credit watch positive".
The Imperial Valley Projects are contractually entitled to receive payments
under the Power Purchase Agreements and Settlement Agreements. However, due to
the uncertainties associated with Edison's financial condition and failure to
pay contractual obligations, CE Generation has established an allowance for
doubtful accounts of approximately $90 million at September 30, 2001.
Minerals Extraction
- -------------------
The Company owns the rights to proprietary processes for the extraction of
minerals from elements in solution in the geothermal brine and fluids utilized
at its Imperial Valley plants. A pilot plant has successfully produced
commercial quality zinc at the Company's Imperial Valley Projects. The Company
intends to sequentially develop facilities for the extraction of manganese,
silver, gold, lead, boron, lithium and other products as it further develops the
extraction technology.
CalEnergy Minerals LLC, an indirect wholly owned subsidiary of the Company, is
constructing the Zinc Recovery Project which will recover zinc from the
geothermal brine (the "Zinc Recovery Project"). Facilities are being installed
near the Imperial Valley Project's 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 operations in late 2002.
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 was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, CalEnergy Minerals, LLC issued notices of default,
termination and demand for payment of damages to Kvaerner under the Zinc
Recovery Project EPC Contract due to failure to meet performance obligations. As
a result of Kvaerner's failure to pay monetary obligations under the Zinc
Recovery Project EPC Contract, CalEnergy Minerals, LLC drew $29.7 million under
the EPC Contract Letter of Credit on July 20, 2001. CalEnergy Minerals, LLC has
entered into a time and materials reimbursable engineer, procure and
construction management contract with AMEC E&C Services, Inc. to complete the
Zinc Recovery Project.
On July 11, 2001, Kvaerner filed an Amended Demand For Arbitration against
CalEnergy Minerals LLC characterizing the nature of the dispute as concerns
regarding change orders and performance penalties. Kvaerner did not state the
amount of its claim.
On August 7, 2001, CalEnergy Minerals LLC filed an Answering Statement and
Counterclaim against Kvaerner. CalEnergy Minerals LLC denied all material
allegations in Kvaerner's Amended Demand for Arbitration, and asserted a
counterclaim against Kvaerner for breach of contract and specific performance.
CalEnergy Minerals LLC alleged that its total estimated damage for Kvaerner's
breach of contract are in excess of approximately $60.0 million; however,
CalEnergy Minerals LLC has offset approximately $42.5 million of these damages
by exercising its rights under the EPC Contract to claim the retainage and by
drawing on a letter of credit. Therefore, CalEnergy Minerals LLC asked for a
judgment in excess of approximatley $20.0 million. The arbitration is scheduled
for June 2002.
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. (collectively, the "Contractor").
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. This amendment was approved by the lender's independent engineer under the
Casecnan Indenture. In January 2001, CE Casecnan received a working schedule
from the Contractor that showed a completion date of August 31, 2001. In July
2001, CE Casecnan received new schedule information from the Contractor that
extended the expected Substantial Completion Date for the Casecnan Project from
August 31, 2001 to September 30, 2001. As a result of further delays in commis-
sioning, the Contractor currently expects to reach Substantial Completion in
late December 2001.
The Contractor is still contractually obligated either to complete the Casecnan
Project by March 31, 2001 or to pay delay liquidated damages. As a result of the
current expected Substantial Completion Date in late December, however, CE
Casecnan has sought and obtained from the lender's independent engineer approval
for a revised construction schedule under the Casecnan Indenture. In connection
with the current schedule, the Company previously agreed to make available up to
$11.6 million of additional funds under certain conditions pursuant to a
Shareholder Support Letter dated February 8, 2001 (the "Shareholder Support
Letter") to cover additional costs resulting from the Contractor's delay. Due to
the additional delay in completion of the project, CE Casecnan will not receive
expected operating revenues from the Casecnan Project prior to November 15,
2001. As a result, CE Casecnan will not have sufficient funds available to it
for purposes of making the principal and interest payments which will become due
on November 15, 2001 on the debt securities issued by CE Casecnan in November
1995 (the "Debt Securities"), unless the Company, or its affiliates, agree to
fund the expected shortfall amount which is currently estimated to be approxi-
mately $33.0 million.
The Company, or its affiliates, intends to make the necessary funds available to
CE Casecnan to meet the principal and interest payments due on November 15,
2001. Assuming such funding is made, CE Casecnan believes that the funds
available to it are reasonably expected to be sufficient to fund the costs of
reaching completion of the Casecnan Project.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking an extension of the Guaranteed
Substantial Completion Date by up to 153 days through August 31, 2001 resulting
from various alleged force majeure events, including the collapse of the surge
shaft. In a March 20, 2001 Supplement to Request for Arbitration, the Contractor
also seeks compensation for alleged additional costs of approximately $4 million
it incurred from the claimed force majeure events to the extent it is unable to
recover from its insurer. On April 20, 2001, the Contractor filed a further
supplement seeking an additional approximately $62 million in damages for the
alleged force majeure event (and geologic conditions) related to the collapse of
the surge shaft. CE Casecnan believes such allegations and claims are without
merit and is vigorously defending the Contractor's claims. The arbitration is
being conducted applying New York law and pursuant to the rules of the
International Chamber of Commerce with venue in London, England.
On June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from
making calls on the demand guaranty posted by Banca di Roma in support of the
Contractor's obligations to CE Casecnan for delay liquidated damages. Hearings
on the force majeure claims were held in London from July 2 to 14, 2001, and
hearings on the Contractor's April 20, 2001 supplement were held in London from
September 24 to October 3, 2001. The tribunal is currently deliberating on the
matters and reviewing the injunction. The tribunal is currently required to rule
by February 28, 2002.
Under the Project Agreement, CE Casecnan is liable to pay the National
Irrigation Administration ("NIA") $13,500 per day for each day of delay in
completion of the Casecnan Project beyond the date NIA is able to accept
delivery of water and electrical energy from the Project. The transmission line
has been completed and NIA has recently completed installation and testing of
the Project's metering equipment. Accordingly, NIA may assert liquidated damages
accrue from the date such testing was completed.
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' ("RP")
performance of their obligations under the Project Agreement and the Performance
Undertaking, respectively. Except to the extent expressly provided for in the
Shareholder Support Letter, 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 will be 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 RP to fulfill its obligations under the
Performance Undertaking would significantly impair the ability of CE Casecnan to
meet its existing and future obligations.
The Philippine Congress recently passed the Electric Power Industry Reform Act
that is aimed at restructuring the electric industry, privatizing of the
National Power Corporation and introducing a competitive electricity market,
among others. The passage of the bill may have an impact on the Company's future
operations and the industry as a whole, the effect of which is not yet
determinable and estimable.
MidAmerican
- -----------
On July 10, 2001, MidAmerican Energy announced plans to develop and construct
two electric generating plants in Iowa, requiring an investment of approximately
$1.5 billion. Participation by others in a portion of the second plant is being
discussed. The two plants will provide approximately 1,400 megawatts of
generating capacity. MidAmerican Energy expects to begin construction in Spring
2002 on the first project, a 540-megawatt natural gas-fired combined cycle unit
that has an estimated cost of $368 million. It is anticipated that the first
phase of the project will be completed in 2003 with the remainder being
completed in 2005. MidAmerican Energy presently expects that all utility
construction expenditures for the next five years will be met with the issuance
of long-term debt and 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.
9. 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),
CE UK Funding (foreign utility operations), and HomeServices (real estate
operations). Information related to the Company's reportable operating segments
is shown below (in thousands).
MEHC
(Predecessor)
-------------
Three Months Nine Months March 14, 2000 January 1, 2000
Ended September 30, Ended Through Through
2001 2000 September 30, 2001 September 30, 2000 March 13, 2000
---- ---- ------------------ ------------------ --------------
Revenue: (1)
CalEnergy Generation - Domestic
$ 31,535 $ 18,934 $ 55,691 $ 28,878 $ 4,520
CalEnergy Generation - Foreign. 50,051 47,237 151,797 104,788 42,726
MidAmerican.................... 576,968 563,768 2,087,586 1,128,464 447,583
CE UK Funding.................. 320,830 423,289 1,233,432 1,000,347 499,017
HomeServices................... 193,484 134,457 474,389 294,651 66,880
---------- ----------- ---------- ---------- ------------
Segment revenue................ 1,172,868 1,187,685 4,002,895 2,557,128 1,060,726
Corporate...................... (17,069) (793) (21,674) (3,723) 1,830
---------- ----------- ---------- ---------- ------------
$1,155,799 $ 1,186,892 $3,981,221 $2,553,405 $ 1,062,556
========== =========== ========== ========== ============
Income before provision for income
taxes: (1)
CalEnergy Generation - Domestic
$ 22,921 $ 15,633 $ 34,953 $ 22,487 $ 2,877
CalEnergy Generation - Foreign. 20,757 13,639 66,330 33,592 15,976
MidAmerican.................... 80,453 97,106 203,781 139,718 63,315
CE UK Funding.................. 18,371 3,913 115,134 42,106 58,673
HomeServices................... 19,077 13,307 31,689 26,310 (4,929)
---------- ----------- ----------- ---------- -----------
Segment income before provision
for taxes...................... 161,579 143,598 451,887 264,213 135,912
Corporate...................... (54,676) (52,803) (170,266) (113,161) (37,137)
---------- ----------- ----------- ---------- -----------
$ 106,903 $ 90,795 $ 281,621 $ 151,052 $ 98,775
========== =========== =========== ========== ===========
(1) Before non-recurring items
September 30, December 31,
2001 2000
------------- ------------
Identifiable assets:
CalEnergy Generation - Domestic....... $ 1,050,199 $ 968,444
CalEnergy Generation - Foreign........ 1,134,745 1,188,445
MidAmerican........................... 5,078,882 5,392,273
CE UK Funding......................... 4,234,650 2,929,665
HomeServices.......................... 219,363 163,101
----------- -----------
Segment identifiable assets........... 11,717,839 10,641,928
Corporate............................. 1,116,938 1,038,723
----------- -----------
$12,834,777 $11,680,651
=========== ===========
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, intersegment eliminations and fair
value adjustments relating to acquisitions.
10. Yorkshire Swap
On September 21, 2001, CE Electric UK plc, an indirect wholly owned subsidiary
of the Company, and Innogy Holdings, plc executed an agreement to exchange
Northern's electricity and gas supply and metering assets for 94.75% of Innogy's
Yorkshire electricity distribution business. Northern's supply business was
initially valued at approximately $430 million ((pound)295 million), including
working capital of approximately $53 million ((pound)37 million). 94.75% of
Yorkshire's distribution business was initially valued at approximately $395
million ((pound)271 million), including working capital of approximately $48
million ((pound)33 million). The net cash received by Northern for the exchange
was approximately $35 million ((pound)24 million). Working capital is subject to
adjustment and is currently under review.
The disposition of Northern supply created a pre-tax gain of $200.3 million and
an after-tax gain of $0.4 million. Included in the carrying value of the
Northern supply business was $504.4 million of goodwill allocated based on the
relative fair values of the Northern supply business. In connection with the
sale of the Northern supply business, management intends to sell the associated
Northern retail business.
The Company paid $36.9 million, net of cash acquired of $362.8 million and
transaction costs, for 94.75% of the Yorkshire electricity distribution
business and related indebtness. The results of operations for Yorkshire are
included in the Company's results beginning September 21, 2001. This transaction
provides the opportunity to build on Northern and Yorkshire's strong reputations
for customer satisfaction by bringing together the skills and resources of two
neighboring distribution businesses to create one of the largest distribution
companies in the U.K., serving more than 3.6 million customers in an area of
approximately 10,000 square miles.
11. Non-recurring Items
On September 13, 2001, the Company transferred shares of Bali Energy Ltd., an
indirect wholly owned subsidiary of the Company to PT Tenaga Burni Bali. The
Company recorded a pre-tax gain of $10.4 million and an after-tax gain of $6.5
million on the transfer of the shares.
On June 30, 2001, the Company closed on a transaction in which the Company sold
Western States Geothermal, an indirect wholly owned subsidiary of the Company to
Ormat. The Company recorded a pre-tax gain of $9.8 million and an after-tax gain
of $6.4 million on the sale of Western States Geothermal.
12. Purchase of HomeServices Minority Interest
On August 27, 2001, the Company commenced a tender offer to purchase the
remaining outstanding shares of common stock of HomeServices.Com Inc.
("HomeServices"), an indirect majority owned subsidiary of the Company, for a
cash purchase price of $17 per share. On September 25, 2001, the Company
announced that it had successfully completed the tender offer for all
outstanding shares of the common stock of HomeServices for $29.3 million. As a
result, the Company owns 100% of the outstanding HomeServices common stock,
although options entitling employees to purchase HomeServices common stock
remain outstanding.
13. Subsequent Event
On October 16, 2001, the Company closed on a transaction that transferred all
properties and rights of the Telephone Flat Project, a geothermal development
project in northern California to Calpine Corp. The Company received cash
proceeds of $22.0 million and will recognize recorded an after-tax gain of $12.2
million.
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 March 14, 2000, the Company and entities representing an investor group
comprised of Berkshire Hathaway Inc., Walter Scott, Jr., a director of the
Company, David L. Sokol, Chairman and Chief Executive Officer of the Company,
and Gregory E. Abel, Chief Operating Officer of the Company closed on a
definitive agreement and plan of merger whereby the investor group acquired all
of the outstanding common stock of the Company (the "Teton Transaction"). As a
result of the Teton Transaction, Berkshire Hathaway, Mr. Scott, Mr. Sokol and
Mr. Abel own approximately 9.7%, 86%, 3% and 1% of the voting stock
respectively.
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 five
separate platforms: MidAmerican, CE UK Funding, CalEnergy Generation-Domestic,
CalEnergy Generation-Foreign and HomeServices.
MidAmerican
MidAmerican Energy Company ("MidAmerican Energy") 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. MidAmerican Energy 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 September 30, 2001,
MidAmerican Energy had approximately 669,000 retail electric customers and
646,000 retail natural gas customers.
In addition to retail sales, MidAmerican Energy 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.
Most of MidAmerican Energy's business is conducted in a rate-regulated
environment and accordingly, many of its decisions as to the source and use of
resources and other strategic matters are evaluated from a utility business
perspective. MidAmerican Energy'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.
CE UK Funding
The operations of Northern Electric plc ("Northern"), an indirect wholly owned
subsidiary of the Company, and Yorkshire Power Group plc ("Yorkshire"), an
indirect majority owned subsidiary of the Company, consist primarily of the
distribution of electricity and other auxiliary businesses in the United
Kingdom. Through September 21, 2001, Northern's operations also included the
supply of electricity and natural gas, and the related metering business.
Northern's and Yorkshire'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 and Yorkshire receive electricity from the national grid transmission
system and distribute it to customers' premises using their network of
transformers, switchgear and cables. Substantially all of the customers in their
authorized areas are connected to their network and can only be delivered
through their distribution system, thus providing Northern and Yorkshire with
distribution volume that is stable from year to year. Northern and Yorkshire
charge 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 involved the bulk purchase of electricity,
previously through a central pool and from March 27, 2001 on through the New
Electricity Trading Agreements ("NETA"), 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. Northern also competed to supply gas inside and outside
its authorized area.
On September 21, 2001, CE Electric UK plc, an indirect wholly owned subsidiary
of the Company, and Innogy Holdings, plc executed an agreement to exchange
Northern's electricity and gas supply and metering assets for 94.75% of Innogy's
Yorkshire Electricity distribution business. This transaction provides the
opportunity to build on Northern and Yorkshire's strong reputations for customer
satisfaction by bringing together the skills and resources of two neighboring
distribution businesses to create one of the largest distribution companies in
the U.K., serving more than 3.6 million customers in an area of approximately
10,000 square miles. In connection with the sale of the Northern supply
business, management intends to sell the associated Northern retail business.
CalEnergy Generation-Foreign
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. 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.
CalEnergy Generation-Domestic
Cordova Energy Company LLC ("Cordova Energy"), an indirect wholly owned
subsidiary of the Company, operates a 537 MW gas-fired power plant in the Quad
Cities, Illinois area (the "Cordova Project"). Cordova Energy has entered into a
power purchase agreement with a unit of El Paso Energy Corporation ("El Paso")
in which El Paso will purchase all of the capacity and energy from the project
until December 31, 2019. Cordova Energy has exercised an option under the El
Paso Power Purchase Agreement to callback 50% of the project output for sales to
others for the contract years ending on or prior to May 14, 2004. Cordova Energy
subsequently entered into a power purchase agreement with MidAmerican Energy
whereby MidAmerican Energy will purchase 50% of the capacity and energy from the
Cordova Project until May 14, 2004.
The Company has a 50% ownership interest in CE Generation LLC ("CE Generation")
which has interests in ten geothermal plants in the Imperial Valley, California
and three natural gas-fired cogeneration plants. For purposes of consistent
presentation, plant capacity factors for Vulcan, Hoch (Del Ranch), Turbo, Elmore
and Leathers (collectively the "Partnership Projects") are based on capacity
amounts of 34, 38, 10, 38, and 38 net MW, respectively, and for Salton Sea I,
Salton Sea II, Salton Sea III, Salton Sea IV and Salton Sea V plants
(collectively the "Salton Sea Projects") are based on capacity amounts of 10,
20, 50, 40 and 49 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 (collectively the
"Gas Plants") 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 its 50% ownership interest in CE Generation, the Company accounts for CE
Generation as an equity investment.
HomeServices
HomeServices.Com, Inc. ("HomeServices"), a wholly-owned subsidiary of the
Company, is the second largest residential real estate brokerage firm in the
United States based on aggregate closed transaction sides in 2000 for its
various brokerage firm operating subsidiaries. Closed transaction sides mean
either the buy side or sell side of any closed home purchase and is the standard
term used by industry participants and publications to rank real estate
brokerage firms. In addition to providing traditional residential real estate
brokerage services, HomeServices cross sells to its existing real estate
customers preclosing services, such as mortgage origination and title services,
including title insurance, title search, escrow and other closing administrative
services, assists in securing other preclosing and postclosing services provided
by third parties, such as home warranty, home inspection, home security,
property and casualty insurance, home maintenance, repair and remodeling and is
developing various related e-commerce services. HomeServices currently operates
in the following thirteen states: Minnesota, Iowa, Arizona, Kansas, Missouri,
Kentucky, Nebraska, Wisconsin, Indiana, Maryland, North Dakota, South Dakota and
Georgia. HomeServices occupies the number one or number two market share
position in each of its major markets based on aggregate closed transaction
sides for the year ended December 31, 2000. HomeServices' major markets consist
of the following metropolitan areas: Minneapolis and St. Paul, Minnesota; Des
Moines, Iowa; Omaha, Nebraska; Kansas City, Kansas; Louisville, Kentucky;
Springfield, Missouri; Tucson, Arizona; Annapolis, Maryland and Atlanta,
Georgia.
Results of Operations for the Quarters Ended September 30, 2001 and 2000:
Operating revenue decreased in the third quarter of 2001 to $1,136.2 million
from $1,153.9 million for the same period in 2000, a 1.5% decrease. MidAmerican
operating revenue increased in the third quarter of 2001 to $567.1 million from
$553.5 million for the same period in 2000, primarily due to increases in prices
on off-system electricity sales, partially offset by a decrease of natural gas
prices. Northern and Yorkshire's operating revenue decreased in the third
quarter of 2001 to $316.3 million from $421.4 million for the same period in
2000, primarily due to lower volumes of electricity supplied inside and outside
its authorized area and the sale of the Northern supply business in September
2001, partially offset by Yorkshire distribution revenue beginning September 21,
2001. Operating revenue of HomeServices increased in the third quarter of 2001
to $193.1 million from $133.5 million for the same period in 2000, primarily due
to acquisitions and the inclusion of a joint venture that was previously
accounted for as an equity investment. CalEnergy Generation operating revenue
increased in the third quarter of 2001 to $74.4 million from $45.5 million from
the same period in 2000, primarily due to the commencement of operations of the
Cordova Project in June 2001.
The following data represents sales from MidAmerican Energy:
Three Months
Ended September 30,
2001 2000
---- ----
Electric Retail Sales (GWh)..................... 4,814 4,713
Electric Sales for Resale (GWh)................. 1,609 1,541
Regulated and Non-regulated Gas Supplied
(Thousands of MMBtus)........................ 43,028 31,169
MidAmerican Energy retail electric sales increased in the third quarter 2001
from the third quarter 2000 due to non-weather related sales increases.
MidAmerican Energy electric sales for resale increased in the third quarter due
to favorable market conditions. MidAmerican Energy regulated and non-regulated
gas supplied increased in the third quarter due to growth in the non-regulated
markets.
The following data represents the supply and distribution operations in the
U.K.:
Three Months
Ended September 30,
2001 2000
---- ----
Electricity Supplied (GWh)...................... 3,569 4,633
Electricity Distributed (GWh)................... 4,457 3,701
Gas Supplied (Thousands of MMBtus).............. 6,050 5,403
The decrease in electricity supplied for the three months ended September 30,
2001 from the same periods in 2000 is due to the decrease in supply volumes both
inside and outside the authorized area and the sale of the Northern supply
business in September 2001. The increase in electricity distributed for the
three months ended September 30, 2001 from the same period in 2000 is due to the
addition of Yorkshire and changes in demand in the authorized area. The increase
in gas supplied in 2001 from 2000 reflects higher volume in the U.K. industrial
and commercial markets, partially offset by the sale of the Northern supply
business in September 2001.
Interest and other income decreased in the third quarter of 2001 to $19.6
million from $33.0 million for the same period in 2000, a 40.6% decrease. The
decrease is primarily due to lower income from equity investments and lower
interest income due to lower overall cash balances.
Non-recurring gains in 2001 are comprised of the pre-tax gains on the sale of
the Northern supply business of $200.3 million and the transfer of Bali shares
of $10.4 million. The after-tax gains for the Northern supply sale and the
transfer of the Bali shares were $.4 million and $6.5 million, respectively.
Cost of sales decreased to $536.0 million in the three months ended September
30, 2001 from $611.2 million in the same period of 2000. Northern's cost of
sales decreased $104.3 million due to a decrease in electricity volumes and the
sale of the Northern supply business in September 2001. HomeServices' cost of
sales increased $35.7 million due primarily to inclusion of a joint venture that
was previously accounted for as an equity investment and the 2001 acquisitions.
Operating expenses increased to $293.9 million in the three months ended
September 30, 2001 from $270.2 million in the same period in 2000. MidAmerican's
operating expenses increased $20.4 million primarily due to higher utility
maintenance, bad debt and pension costs. Northern's operating expenses decreased
$9.1 million due primarily to lower Northern supply operating costs and lower
pension costs, partially offset by Yorkshire distribution costs. HomeServices'
operating expenses increased $15.8 million due primarily to acquisitions and the
inclusion of a joint venture that was previously accounted for as an equity
investment.
Depreciation and amortization increased to $119.1 million in the three months
ended September 30, 2001 from $117.6 million in the same period in 2000. The
increase is primarily due to the commencement of commercial operation of the
Cordova Project and higher goodwill and intangible asset amortization related to
HomeServices' acquisitions.
Interest expense, less amounts capitalized, increased to $99.9 million in the
third quarter of 2001 from $97.0 million for the same period in 2000. The
increase is due to decreased capitalized interest on the mineral extraction
process and Cordova and increased interest expense from the Yorkshire purchase,
partially offset by increased capitalized interest at the Casecnan Project and
lower average outstanding debt balances.
The provision for income taxes increased in the third quarter of 2001 to $241.9
million from $28.8 million for the same period in 2000. The increase is due
primarily to tax expense related to the sale of the Northern supply business and
higher pre-tax income.
Minority interest increased marginally in the third quarter of 2001 to $27.8
million from $27.1 million for the same period in 2000. The increase is
primarily due to the increase in minority interest at HomeServices.
Net income increased in the third quarter of 2001 to $47.9 million from $34.9
million for the same period in 2000.
Results of Operations for the Nine Months Ended September 30, 2001 and the
Periods March 14, 2000 through September 30, 2000, and January 1, 2000 through
March 13, 2000:
The following is a discussion of the historical results of the Company for the
nine months ended September 30, 2001 and the period March 14, 2000 through
September 30, 2000, and of its predecessor (referred to as "MEHC (Predecessor)")
for the period January 1, 2000 through March 13, 2000. Results for the Company
include the impact of the Teton Transaction beginning March 14, 2000 which are
predominately the minority interest costs on issuance of Company-obligated
mandatorily redeemable preferred securities of subsidiary trust 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 had occurred at the beginning of each year after giving
effect to pro forma adjustments related to the acquisition, including the
issuance of the 11% trust preferred securities. The discussion therefore will
highlight any significant variances on a pro forma basis from the nine months
ended September 30, 2000 to the nine months ended September 30, 2001.
Pro forma operating revenue for the nine months ended September 30, 2001 was
$3,916.2 million compared with $3,536.1 million for the same period in 2000, an
increase of 10.7%. MidAmerican Energy operating revenue increased for the nine
months ended September 30, 2001 to $2,057.0 million from $1,546.2 million for
the same period in 2000, primarily due to increases in volumes and prices of
regulated and non-regulated gas sold and increases in volumes and prices on
off-system electricity sales. Northern operating revenue decreased for the nine
months ended September 30, 2001 to $1,222.3 million from $1,489.5 million for
the same period in 2000, primarily due to changes in foreign exchange rates and
lower volumes and rates of electricity supplied. The remaining increase
primarily relates to the increase of revenue at HomeServices due to acquisitions
and the inclusion of a joint venture which was previously accounted for as an
equity investment and the commencement of operations of the Cordova Project in
June 2001.
The following data represents sales from MidAmerican Energy:
Nine Months
Ended September 30,
------------------------
2001 2000
---- ----
Electricity Retail Sales (GWh)............... 12,843 12,618
Electricity Sales for Resale (GWh)......... 6,000 4,984
Regulated and Non-Regulated Gas Supplied
(Thousands of MMBtus)........................ 166,296 113,740
MidAmerican Energy electric retail sales increased for the nine months ended
September 30, 2001 from the same period in 2000 due to more extreme temperatures
substantially offset by a decrease in non-weather related sales. Electric sales
for resale increased for the nine months ended September 30, 2001 from the same
period in 2000 due to higher production at the Cooper and Neal power plants and
favorable market conditions. Regulated and non-regulated gas supplied increased
due principally to growth in the non-regulated markets for the nine months ended
September 30, 2001 compared to the same period in 2000. Regulated gas supplied
increased due to colder temperatures during the first quarter of 2001.
The following data represents the supply and distribution operations in the
U.K.:
Nine Months
Ended September 30,
------------------------
2001 2000
---- ----
Electricity Supplied (GWh)..................... 12,745 14,548
Electricity Distributed (GWh).................. 13,016 11,911
Gas Supplied (Thousands of MMBtus)............. 40,738 30,846
The decrease in electricity supplied for the nine months ended September 30,
2001 is due to the decreases in volumes both inside and outside the authorized
area and the sale of the Northern Supply business in September 2001. The
increase in electricity distributed for the nine months ended September 30, 2001
is due to the addition of Yorkshire and changes in demand in the distribution
area. The increase in gas supplied in 2001 from 2000 reflects higher volume in
the U.K. industrial and commercial markets.
Pro forma interest and other income for the nine months ended September 30, 2001
was $65.0 million compared with $79.8 million for the same period in 2000. The
decrease was due primarily to reduced interest income and lower income from
equity investments.
The non-recurring gains in 2001 are comprised mainly of the pre-tax gains on the
sale of the Northern Supply business of $200.3 million, the transfer of shares
of Bali, an indirect wholly owned subsidiary of the Company of $10.4 million,
and the sale of Western States Geothermal Company, an indirect wholly owned
subsidiary of the Company of $9.8 million. The after-tax gains for the Northern
Supply sale, the transfer of the Bali shares, and the Western States Geothermal
sale were $.4 million, $6.5 million and $6.4 million, respectively.
Pro forma cost of sales for the nine months ended September 30, 2001 was
$2,207.8 million compared with $1,894.9 million for the same period in 2000, an
increase of 16.5%. The increase relates primarily to increased volumes and
prices for both regulated and non-regulated gas at MidAmerican Energy, and
acquisitions at HomeServices, partially offset by decreased cost of sales at
Northern due to a lower foreign exchange rate and lower electricity volumes and
prices.
Pro forma operating expenses for the nine months ended September 30, 2001 were
$844.8 million compared with $813.5 million for the same period in 2000. The
increase was primarily due to higher costs at HomeServices due to acquisitions
and the inclusion of a joint venture which was previously accounted for as an
equity investment and higher costs at MidAmerican due to costs related to
Cooper, accounts receivable discounts and bad debts, partially offset by lower
costs at Northern due to a lower exchange rate and lower costs related to bad
debt, marketing and pensions.
Pro forma depreciation and amortization for the nine months ended September 30,
2001 was $356.9 million compared with $360.3 million for the same period in
2000. This decrease was due to lower depreciation at Northern primarily due to
lower foreign exchange rates, partially offset by higher depreciation at
MidAmerican Energy due to an increase in depreciation rates implemented in 2001
and amortization of intangible assets related to the HomeServices acquisitions.
Pro forma interest expense, less amounts capitalized, for the nine months ended
September 30, 2001 was $290.2 million compared with $300.9 million for the same
period in 2000, a decrease of 3.8%. This decrease is due to lower average
outstanding debt balances, an increase in capitalized interest related to the
construction of the Casecnan Project and lower foreign exchange rates at
Northern, partially offset by lower capitalized interest on the mineral
extraction process.
The loss on non-recurring item of $7.6 million in the period from January 1,
2000 through March 13, 2000 represents the costs incurred related to the Teton
Transaction.
Pro forma tax expense for the nine months ended September 30, 2001 was $296.1
million compared with $69.4 million for the same period in 2000. The increase is
due primarily to the gain related to the sale of Northern Supply business and
higher pre-tax income.
Pro forma minority interest for the nine months ended September 30, 2001 was
$80.0 million compared with $78.6 million for the same period in 2000. The
increase is primarily due to increased minority interest at HomeServices.
The cumulative effect of change in accounting principle of $4.6 million
represents the change in accounting for major maintenance and overhauls.
Pro forma net income for the nine months ended September 30, 2001 was $122.1
million compared with $90.8 million for the same period in 2000.
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 may from time to time seek to retire its
outstanding debt through cash purchases in the open market, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if any, will depend on
prevailing market conditions, the Company's liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material.
The Company's cash and cash equivalents were $584.2 million at September 30,
2001 compared to $38.2 million at December 31, 2000. The increase is primarily
due to the addition of Yorkshire and the timing of cash receipts and
disbursements at MidAmerican Energy. In addition, the Company recorded
separately restricted cash and investments of $79.5 million and $90.9 million at
September 30, 2001 and December 31, 2000, respectively. The restricted cash
balance as of September 30, 2001 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.
On March 1, 2001 MidAmerican Funding, LLC retired $200 million of 5.85% Senior
Secured Notes due 2001. On March 19, 2001 MidAmerican Funding, LLC issued $200
million of 6.75% Senior Secured Notes due March 1, 2011.
September 21, 2001, CE Electric UK plc, an indirect wholly owned subsidiary of
the Company, and Innogy Holdings, plc executed an agreement to exchange
Northern's electricity and gas supply and metering assets for 94.75% of Innogy's
Yorkshire electricity distribution business. Northern's supply business was
initially valued at approximately $430 million ((pound)295 million), including
working capital of approximately $53 million ((pound)37 million). 94.75% of
Yorkshire's distribution business was initially valued at approximately $395
million ((pound)271 million), including working capital of approximately $48
million ((pound)33 million). The net cash received by Northern for the exchange
was approximately $35 million ((pound)24 million). Working capital is subject to
adjustment and is currently under review.
The disposition of Northern supply created a pre-tax gain of $200.3 million and
an after-tax gain of $0.4 million. Included in the carrying value of the
Northern supply business was $504.4 million of goodwill allocated based on the
relative fair values of the Northern supply business. In connection with the
sale of the Northern supply business, management has decided to sell the
associated the Northern retail business.
The Company paid $36.9 million, net of cash acquired of $362.8 million and
transaction costs, for 94.75% of the Yorkshire electricity distribution
business and related indebtedness. The results of operations for Yorkshire are
included in the Company's results beginning September 21, 2001. This transaction
provides the opportunity to build on Northern and Yorkshire's strong reputations
for customer satisfaction by bringing together the skills and resources of two
neighboring distribution businesses to create one of the largest distribution
companies in the U.K., serving more than 3.6 million customers in an area of
approximately 10,000 square miles.
Construction
Minerals Extraction
- -------------------
The Company owns the rights to proprietary processes for the extraction of
minerals from elements in solution in the geothermal brine and fluids utilized
at its Imperial Valley plants. A pilot plant has successfully produced
commercial quality zinc at the Company's Imperial Valley Projects. The Company
intends to sequentially develop facilities for the extraction of manganese,
silver, gold, lead, boron, lithium and other products as it further develops the
extraction technology.
CalEnergy Minerals LLC, an indirect wholly owned subsidiary of the Company, is
constructing the Zinc Recovery Project, which will recover zinc from the
geothermal brine (the "Zinc Recovery Project"). Facilities are being installed
near the Imperial Valley Project's 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 operations in late 2002.
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 was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, CalEnergy Minerals, LLC issued notices of default,
termination and demand for payment of damages to Kvaerner under the Zinc
Recovery Project EPC Contract due to failure to meet performance obligations. As
a result of Kvaerner's failure to pay monetary obligations under the Zinc
Recovery Project EPC Contract, CalEnergy Minerals, LLC drew $29.7 million under
the EPC Contract Letter of Credit on July 20, 2001. CalEnergy Minerals, LLC has
entered into a time and materials reimbursable engineer, procure and
construction management contract with AMEC E&C Services, Inc. to complete the
Zinc Recovery Project.
On July 11, 2001, Kvaerner filed an Amended Demand For Arbitration against
CalEnergy Minerals LLC characterizing the nature of the dispute as concerns
regarding change orders and performance penalties. Kvaerner did not state the
amount of its claim.
On August 7, 2001, CalEnergy Minerals LLC filed an Answering Statement and
Counterclaim against Kvaerner. CalEnergy Minerals LLC denied all material
allegations in Kvaerner's Amended Demand for Arbitration, and asserted a
counterclaim against Kvaerner for breach of contract and specific performance.
CalEnergy Minerals LLC alleged that its total estimated damage for Kvaerner's
breach of contract are in excess of approximately $60.0 million; however,
CalEnergy Minerals LLC has offset approximately $42.5 million of these damages
by exercising its rights under the EPC Contract to claim the retainage and by
drawing on a letter of credit. Therefore, CalEnergy Minerals LLC asked for a
judgment in excess of approximatley $20.0 million. The arbitration is scheduled
for June 2002.
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. (collectively, the "Contractor").
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. This amendment was approved by the lender's independent engineer under the
Casecnan Indenture. In January 2001, CE Casecnan received a working schedule
from the Contractor that showed a completion date of August 31, 2001. In July
2001, CE Casecnan received new schedule information from the Contractor that
extended the expected Substantial Completion Date for the Casecnan Project from
August 31, 2001 to September 30, 2001. As a result of further delays in commis-
sioning, the Contractor currently expects to reach Substantial Completion in
late December 2001.
The Contractor is still contractually obligated either to complete the Casecnan
Project by March 31, 2001 or to pay delay liquidated damages. As a result of the
current expected Substantial Completion Date in late December, however, CE
Casecnan has sought and obtained from the lender's independent engineer approval
for a revised construction schedule under the Casecnan Indenture. In connection
with the current schedule, the Company previously agreed to make available up to
$11.6 million of additional funds under certain conditions pursuant to a
Shareholder Support Letter dated February 8, 2001 (the "Shareholder Support
Letter") to cover additional costs resulting from the Contractor's delay. Due to
the additional delay in completion of the project, CE Casecnan will not receive
expected operating revenues from the Casecnan Project prior to November 15,
2001. As a result, CE Casecnan will not have sufficient funds available to it
for purposes of making the principal and interest payments which will become due
on November 15, 2001 on the debt securities issued by CE Casecnan in November
1995 (the "Debt Securities"), unless the Company, or its affiliates, agree to
fund the expected shortfall amount which is currently estimated to be approxi-
mately $33.0 million.
The Company, or its affiliates, intends to make the necessary funds available to
CE Casecnan to meet the principal and interest payments due on November 15,
2001. Assuming such funding is made, CE Casecnan believes that the funds
available to it are reasonably expected to be sufficient to fund the costs of
reaching completion of the Casecnan Project.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking an extension of the Guaranteed
Substantial Completion Date by up to 153 days through August 31, 2001 resulting
from various alleged force majeure events, including the collapse of the surge
shaft. In a March 20, 2001 Supplement to Request for Arbitration, the Contractor
also seeks compensation for alleged additional costs of approximately $4 million
it incurred from the claimed force majeure events to the extent it is unable to
recover from its insurer. On April 20, 2001, the Contractor filed a further
supplement seeking an additional approximately $62 million in damages for the
alleged force majeure event (and geologic conditions) related to the collapse of
the surge shaft. CE Casecnan believes such allegations and claims are without
merit and is vigorously defending the Contractor's claims. The arbitration is
being conducted applying New York law and pursuant to the rules of the
International Chamber of Commerce with venue in London, England.
On June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from
making calls on the demand guaranty posted by Banca di Roma in support of the
Contractor's obligations to CE Casecnan for delay liquidated damages. Hearings
on the force majeure claims were held in London from July 2 to 14, 2001, and
hearings on the Contractor's April 20, 2001 supplement were held in London from
September 24 to October 3, 2001. The tribunal is currently deliberating on the
matters and reviewing the injunction. The tribunal is currently required to rule
by February 28, 2002.
Under the Project Agreement, CE Casecnan is liable to pay the National
Irrigation Administration ("NIA") $13,500 per day for each day of delay in
completion of the Casecnan Project beyond the date NIA is able to accept
delivery of water and electrical energy from the Project. The transmission line
has been completed and NIA has recently completed installation and testing of
the Project's metering equipment. Accordingly, NIA may assert liquidated damages
accrue from the date such testing was completed.
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' ("RP")
performance of their obligations under the Project Agreement and the Performance
Undertaking, respectively. Except to the extent expressly provided for in the
Shareholder Support Letter, 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 will be 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 RP to fulfill its obligations under the
Performance Undertaking would significantly impair the ability of CE Casecnan to
meet its existing and future obligations.
The Philippine Congress recently passed the Electric Power Industry Reform Act
that is aimed at restructuring the electric industry, privatizing of the
National Power Corporation and introducing a competitive electricity market,
among others. The passage of the bill may have an impact on the Company's future
operations and the industry as a whole, the effect of which is not yet
determinable and estimable.
MidAmerican
- -----------
On July 10, 2001, MidAmerican Energy announced plans to develop and construct
two electric generating plants in Iowa, requiring an investment of approximately
$1.5 billion. Participation by others in a portion of the second plant is being
discussed. The two plants will provide approximately 1,400 megawatts of
generating capacity. MidAmerican Energy expects to begin construction in Spring
2002 on the first project, a 540-megawatt natural gas-fired combined cycle unit
that has an estimated cost of $368 million. It is anticipated that the first
phase of the project will be completed in 2003 with the remainder being
completed in 2005. MidAmerican Energy presently expects that all utility
construction expenditures for the next five years will be met with the issuance
of long-term debt and 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.
Domestic Rate Matters: Electric
In 1997, pursuant to a rate proceeding before the Iowa Utilities Board,
MidAmerican Energy, the Office of Consumer Advocate and other parties entered
into a pricing plan settlement agreement establishing MidAmerican Energy's Iowa
retail electric rates. That settlement agreement expired on December 31, 2000.
On March 14, 2001, the Office of the Consumer Advocate filed a petition with the
Iowa Utilities Board to reduce Iowa retail electric rates by approximately $77
million annually. On June 11, 2001, MidAmerican Energy responded to that
petition by filing a request with the Iowa Utilities Board to increase
MidAmerican Energy's Iowa retail electric rates by $51 million annually. On July
12, 2001, MidAmerican Energy, the Office of Consumer Advocate and other parties
jointly filed a settlement agreement with the Iowa Utilities Board that, if
approved, will freeze the rates in effect on December 31, 2000 through December
31, 2005, and, with modifications, will reinstate the revenue sharing provisions
of the 1997 pricing plan settlement agreement. Under the proposed settlement
agreement, 50% of revenues associated with returns on equity between 12% and
14%, and 83.33% of revenues associated with returns on equity above 14%, in each
year would be deferred as a regulatory liability to be used to offset a portion
of the cost of future generating plant investments. The Iowa Utilities Board's
decision on approving the proposed settlement is pending.
MidAmerican Energy has negotiated individual electric contracts with some of its
commercial and industrial customers in Iowa. The negotiated electric contracts
have differing terms and conditions as well as prices. The vast majority of the
contracts expire during the period 2003 through 2005, although some large
customers have contracts extending to 2008. Some of the contracts have price
renegotiation and early termination provisions exercisable by either party.
Prices are set as fixed prices; however, many contracts allow for potential
price adjustments with respect to environmental costs, government imposed public
purpose programs, tax changes, and transition costs. While the contract prices
are fixed (except for the potential adjustment elements), the costs MidAmerican
Energy incurs to fulfill these contracts will vary. On an aggregate basis the
annual revenues under contract are approximately $180 million.
UK Rate Matters
Northern and Yorkshire charge access fees for the use of their distribution
systems. 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 electricity
distributed. The formula determines the maximum average price per unit of
electricity distributed (in pence per kilowatt hour) which a Public Electricity
Supplier ("PES") is entitled to charge. The price control does not seek to
constrain the profits of a PES from year to year. It is a control on revenue
that operates independently of the PES's costs. During the lifetime of the price
control, additional cost savings therefore contribute directly to profit.
Changes to the formula took effect from April 1, 2000 resulting in a one-off
reduction in allowed income per unit distributed of around 24%. 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 at March 31, 2005. The formula may be
reviewed at other times at the discretion of Ofgem, including in connection with
the proposed Information and Incentive Project (IIP) under which it is proposed
that 2% of regulated income will depend upon the performance of the PES's
distribution system as measured by the number and duration of customer
interruptions and upon the level of customer satisfaction monitored by the
regulator.
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.
MidAmerican Energy 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 MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy's estimate of the probable costs for these
sites as of September 30, 2001, was $24 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. On February 27, 2001, the U.S. Supreme Court upheld the
standards, ruling that the EPA did not exceed its constitutional delegation of
authority in establishing the standard in 1997. The impact of any new standards
on the Company is currently unknown. MidAmerican Energy could incur increased
costs and a decrease in revenues if its generating stations are located in
nonattainment areas.
Environmental Matters: U.K.
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 were required to be de-contaminated by December 31, 2000. Northern has
registered 140 items above 50 PPM, de-contaminated 21 items above 500 PPM 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, the Company expects to
contribute approximately $41 million during the period 2001 through 2005 to an
external trust established for the investment of funds for decommissioning Quad
Cities Station. Approximately 55% of the trust's funds are now invested in
domestic corporate debt and common equity securities. The remainder is invested
in investment grade municipal and U.S. Treasury bonds.
Based on information presently available and assuming a September 2004 shutdown
of Cooper, MidAmerican Energy expects to accrue approximately $55 million for
Cooper decommissioning during the period 2001 through 2004. MidAmerican Energy's
obligation, if any, for Cooper decommissioning may be affected by the actual
plant shutdown date. In July 1997, the Nebraska Public Power District filed a
lawsuit in United States District of Nebraska naming MidAmerican Energy as the
defendant and seeking a declaration of MidAmerican Energy's rights and
obligations in connection with Cooper nuclear decommissioning funding. Refer to
Part II, Item 1. Legal Proceedings, for further discussion of the litigation.
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. Cooper decommissioning costs
charged to Illinois customers are recovered through a rate rider on customer
billings.
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, marketing 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 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.
Financial Condition of Edison
Southern California Edison ("Edison"), a wholly-owned subsidiary of Edison
International, is a public utility primarily engaged in the business of
supplying electric energy to retail customers in Central and Southern
California, excluding the city of Los Angeles. The Company is aware that there
have been public announcements that Edison's financial condition has
deteriorated as a result of reduced liquidity. Edison's senior unsecured debt
obligations are currently rated Caa2 by Moody's and D by S&P.
Edison failed to pay approximately $119 million due under the Power Purchase
Agreements of indirect subsidiaries of the Company's 50% owned subsidiary, CE
Generation for power delivered in November and December 2000 and January,
February and March 2001, although the Power Purchase Agreements provide for
billing and payment on a schedule where payments would have normally been
received in early January, February, March, April and May 2001.
On February 21, 2001, the Imperial Valley Projects (excluding Salton Sea Unit V
and CE Turbo), subsidiaries of CE Generation filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required payments under the Power Purchase Agreements. The
lawsuit also requested, among other things, that the court order permit the
Imperial Valley Projects to suspend deliveries of power to Edison and to permit
the Imperial Valley Projects to sell such power to other purchasers in
California.
On March 22, 2001, the Superior Court granted the Imperial Valley Projects'
Motion for Summary Adjudication and a Declaratory Judgment ordering that: 1)
under the Power Purchase Agreements, the Imperial Valley Projects have the right
to temporarily suspend deliveries of capacity and energy to Edison, 2) the
Imperial Valley Projects are entitled to resell the energy and capacity to other
purchasers and 3) the interim suspension of deliveries to Edison shall not in
any respect result in the modifications or termination of the Power Purchase
Agreements and the Power Purchase Agreements shall in all respects continue in
full force and effect other than the temporary suspension of deliveries to
Edison.
As a result of the March 22, 2001 Declaratory Judgment, the Imperial Valley
Projects suspended deliveries of energy to Edison and entered into a transaction
agreement with El Paso Merchant Energy, L.P. ("EPME") in which the Imperial
Valley Projects' available power was sold to EPME based on percentages of the
Dow Jones SP-15 Index. On June 18, 2001 the Superior Court terminated the
Imperial Valley Projects' right to resell power pursuant to the Declaratory
Judgment.
On June 20, 2001, the Imperial Valley Projects (excluding Salton Sea Unit V and
CE Turbo) entered into Agreements Addressing Renewable Energy Pricing and
Payment Issues with Edison ("Settlement Agreements"). The Settlement Agreements
require that Edison make a series of payments to repay the past due balances
under the Power Purchase Agreements (the "stipulated amounts"). The first
payment of approximately $11.6 million, which represented 10% of the stipulated
amounts, was received June 22, 2001. A second partial payment of 10% is payable
within 5 days following the occurrence of Events to restore Edison to credit-
worthiness (the "Effective Date"). The final payment, representing the remaining
stipulated amounts, shall be paid on the 5th business day after Edison receives
proceeds from the financing resulting from the occurrence of Events to restore
Edison to creditworthiness. In addition to these payments, Edison is required to
make monthly interest payments calculated at a rate of 7% per annum on the
outstanding stipulated amounts. The Settlement Agreements also provide a revised
energy pricing structure, whereby Edison elects to pay the Imperial Valley
Projects a fixed energy price of 5.37 cents/kilowatt hour in lieu of the
Commission-approved SRAC Methodology under the Power Purchase Agreements,
commencing on the first day of the month following the Effective Date and
expiring five years from such date. All other contract terms remain unchanged.
As a result of the aforementioned Settlement Agreements, the Imperial Valley
Projects resumed power sales to Edison on June 22, 2001. Energy payments are
currently calculated using the SRAC formulas set forth in the Power Purchase
Agreements until the fixed rate period begins.
On October 2, 2001 the Commission and Edison reached a settlement in the Filed
Rate Doctrine lawsuit Edison filed in Federal Court against the Commission. By
its own terms, the settlement is intended to restore Edison to creditworthiness
so that it is able to resume procuring the electricity needed by its customers;
limit ratepayers' costs of paying off the debt; and maintain the state's role in
regulating the investor owned utility by enabling Edison to pay down its back
debts over a reasonable period of time. As a result of such settlement, the
Imperial Valley Projects believe the conditions to the Effective Date under the
Settlement Agreements have been satisfied. Edison disputes such conditions have
been satisfied. The Imperial Valley Projects are vigorously pursuing enforce-
ment of their rights under the Settlement Agreements.
As a result of Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of Edison's credit ratings,
Moody's downgraded the ratings for the Salton Sea Funding Corporation (the
"Funding Corporation") Securities to Caa2 (negative outlook) and S&P downgraded
the ratings for the Funding Corporation Securities to BBB- and placed the
Securities on "credit watch negative". Moody's had downgraded the ratings for
the CE Generation Securities to B1 from Baa3 (review for possible downgrade).
Following the execution of the Settlement Agreements, Moody's placed the Salton
Sea Funding and CE Generation securities on "credit watch positive".
The Imperial Valley Projects are contractually entitled to receive payments
under the Power Purchase Agreements and Settlement Agreements. However, due to
the uncertainties associated with Edison's financial condition and failure to
pay contractual obligations, CE Generation has established an allowance for
doubtful accounts of approximately $90 million at September 30, 2001.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets", which establish accounting and
reporting for business combinations. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001, to be accounted for using
the purchase method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized but will be tested
for impairment on an annual basis. These standards are effective for the Company
beginning on January 1, 2002. The Company is evaluating the impact resulting
from the adoption of these standards.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses the accounting for legal obligations associated
with the retirement of tangible, long-lived assets, and the associated asset
retirement costs. This pronouncement is effective for years beginning after June
15, 2002. The Company is evaluating the impact that adoption of this standard
will have on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. This
pronouncement is effective for years beginning after December 15, 2001. The
Company is evaluating the impact that adoption of this standard will have on its
financial statements.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk, including charges in the market price of
certain commodities and interest rates. To manage the price volatility relating
to these exposures, the Company enters into various financial derivative
instruments. Senior management provides the overall direction, structure,
conduct and control of the Company's risk management activities, including the
use of financial derivative instruments, authorization and communication of risk
management policies and procedures, strategic hedging program guidelines,
appropriate market and credit risk limits, and appropriate systems for
recording, monitoring and reporting the results of transactional and risk
management activities.
Refer to Note 7 in Notes to Consolidated Financial Statements for further
discussion of derivatives used to hedge price risk and currency exchange rate
risk.
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:
Southern California Edison
--------------------------
The Imperial Valley Projects had filed a lawsuit seeking a court order
requiring Edison to make the required payments under the Power Purchase
Agreements. See page 27.
Cooper Litigation
-----------------
On July 23, 1997, the Nebraska Public Power District ("NPPD") filed a
complaint, in the United States District Court for the District of
Nebraska, naming MidAmerican Energy 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 sought a declaratory judgment in the following
respects:
(1) that MidAmerican Energy is obligated to pay 50% of all costs and
expenses associated with decommissioning Cooper, and that in the event
that NPPD continues to operate Cooper after expiration of the power
purchase agreement (September 2004), MidAmerican Energy 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 Energy filed its answer and contingent counterclaims. The contingent
counterclaims filed by MidAmerican Energy are generally as follows:
(1) that MidAmerican Energy has no duty under the power purchase agreement
to reimburse or pay 50% of the decommissioning costs unless conditions
to reimbursement occur;
(2) that NPPD has the duty to repay all amounts that MidAmerican Energy has
prefunded for decommissioning in the event NPPD operates the plant
after the term of the power purchase agreement;
(3) that NPPD is equitably estopped from continuing to operate the plant
after the term of the power purchase agreement;
(4) that NPPD has granted MidAmerican Energy an option to continue taking
50% of the power from the plant;
(5) that the term "monthly power costs" as defined in the power purchase
agreement does not include costs and expenses associated with decommis-
sioning the plant;
(6) that MidAmerican Energy has no duty to pay for nuclear fuel, operations
and maintenance projects or capital improvements that have useful lives
after the term of the power purchase agreement;
(7) that transition costs are not included in any decommissioning costs and
expenses;
(8) that NPPD has breached its duty to MidAmerican Energy in making invest-
ments of decommissioning funds;
(9) that reserves in named accounts are excessive and should be refunded to
MidAmerican Energy; and
(10) that NPPD must credit MidAmerican Energy for payments by MidAmerican
Energy for low-level radioactive waste disposal.
On October 6, 1999, the court rendered summary judgment for NPPD on
the above-mentioned issue concerning liability for decommissioning
(issue one in the first paragraph above) and the related contingent
counterclaims filed by MidAmerican Energy (issues one, two, three and
five in the second paragraph above). The court referred all remaining
issues in the case to mediation, and cancelled the November 1999 trial
date.
MidAmerican Energy appealed the court's summary judgment ruling. On
December 12, 2000, the United States Court of Appeals for the Eighth
Circuit reversed the ruling of the district court and granted summary
judgment in favor of MidAmerican Energy issues one and five in the
second paragraph above. Additionally, it remanded the case for trial on
all other claims and counterclaims.
Since the remand to the District Court from the Eighth Circuit Court of
Appeals, NPPD has been granted permission, over MidAmerican Energy's
objections, to amend its complaint. The amended complaint asserts that
even though the Eighth Circuit Court of Appeals held that MidAmerican
Energy has no liability under the power purchase agreement to reimburse
or pay NPPD a 50% share of decommissioning costs unless certain
conditions occur, MidAmerican Energy has unconditional liability for a
50% share based on agreements other than the power purchase agreement
as originally written. NPPD's post-remand contentions -- all strongly
disputed by MidAmerican Energy -- are that MidAmerican Energy has
unconditional liability for a 50% share of decommissioning based on any
of the following alternative theories: (i) the parties without written
amendment either modified the power purchase agreement or made a
separate agreement that imposes unconditional liability on MidAmerican
Energy for decommissioning costs; (ii) absent unconditional liability
for a 50% share of decommissioning costs, MidAmerican Energy would be
unjustly enriched; (iii) MidAmerican Energy has unconditional liability
for a 50% share of decommissioning costs based on promissory estoppel;
or (iv) NPPD is entitled to have the power purchase agreement reformed
to provide that MidAmerican Energy has unconditional liability for a
50% share of decommissioning costs. MidAmerican Energy will strongly
dispute at trial these contentions and theories put forth by NPPD.
Trial in these matters is scheduled to begin on March 4, 2002.
Item 2 Changes in Securities and Use of Proceeds.
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Not applicable.
Item 3 Defaults on Senior Securities.
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Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders.
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Not applicable.
Item 5 Other Information.
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Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Exhibits Filed Herewith
-----------------------
Exhibit 15 - Awareness Letter of Independent Accountants.
(b) Reports on Form 8-K:
During the quarter ended September 30, 2001, the Company filed the
following:
(i) Current Report on Form 8-K dated August 6, 2001 announcing the
exchange of Northern's electricity and gas supply and metering
business for Innogy's Yorkshire Electricity distribution business.
(ii) Current Report on Form 8-K dated August 22, 2001 announcing a
Credit Agreement between the Company and Credit Suisse First
Boston.
(iii) Current Report on Form 8-K dated September 24, 2001 announcing the
completion of the exchange of Northern's electricity and gas
supply and metering business for Innogy's Yorkshire Electricity
distribution business.
(iv) Amendment to Current Report on Form 8K/A dated September 24, 2001
announcing the sale of Northern's electricity and gas supply and
metering business to Innogy and the simultaneous purchase of
Innogy's Yorkshire Electricity distribution business.
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: November 14, 2001 /s/ Patrick J. Goodman
-----------------------
Patrick J. Goodman
Senior Vice President & Chief
Financial Officer
EXHIBIT INDEX
Exhibit No. Page No.
15 Awareness Letter of Independent Accountants 35
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 ended September 30, 2001 and for the period March 14, 2000 to
September 30, 2000 for MidAmerican Energy Holdings Company and for the period
January 1, 2000 to March 13, 2000 for MidAmerican Energy Holdings Company
(Predecessor), as indicated in our report dated October 26, 2001; 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 September 30, 2001, 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
November 14, 2001