UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 13, 2002
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MidAmerican Energy Holdings Company
(Exact name of registrant as specified in its charter)
Iowa 0-25551 94-2213782
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
666 Grand Avenue, Des Moines, Iowa 50309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 242-4300
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N/A
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(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
Cautionary Statements. In connection with the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"),
MidAmerican Energy Holdings Company (the "Company") is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those expressed or implied by forward-looking
statements of the Company made by or on behalf of the Company, whether oral or
written. The Company wishes to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to maximize to the
fullest extent possible the protections of the safe harbor established in the
Reform Act. Accordingly, any such statements are qualified in their entirety by
reference to, and are accompanied by, the following important factors, among
others, that could cause the Company's actual results to differ materially from
those expressed or implied by forward-looking statements of the Company made by
or on behalf of the Company.
The Company cautions that the following important factors, among others
(including but not limited to factors mentioned from time to time in the
Company's reports filed with the Securities and Exchange Commission), could
affect the Company's actual results and could cause the Company's actual
consolidated results to differ materially from those expressed or implied by any
forward-looking statements of the Company made by or on behalf of the Company.
The factors included here are not exhaustive. Forward-looking statements, by
their nature, are speculative and are based on then current expectations
involving a number of known and unknown risks and uncertainties that could cause
the actual results or performance, expressed or implied, by the forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence or
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
expressed or implied by any forward-looking statements. Therefore,
forward-looking statements should not be relied upon as a prediction of actual
future results.
Risk Associated with the Company's Corporate and Financial Structure
The Company is a holding company that depends on distributions from its
subsidiaries and joint ventures to meet its needs.
The Company is a holding company and derives substantially all of its
income and cash flow from its subsidiaries and joint ventures. The Company
expects that future development and acquisition efforts will be similarly
structured to involve operating subsidiaries and joint ventures. The Company is
dependent on the earnings and cash flows of, and dividends, loans, advances or
other distributions from, its subsidiaries and joint ventures to generate the
funds necessary to meet its obligations, including the payment of principal of,
or interest and premium, if any, on, its debt. All required payments on debt and
preferred stock at subsidiary levels will be made before funds from its
subsidiaries are available to the Company. The availability of distributions
from such entities is also subject to:
o their earnings and capital requirements,
o the satisfaction of various covenants and conditions contained in
financing documents by which they are bound or in their organizational
documents, and
o in the case of the Company's regulated utility subsidiaries, regulatory
restrictions which restrict their ability to distribute profits and
other amounts to the Company.
The Company is substantially leveraged and its debt is structurally
subordinated to the indebtedness of its subsidiaries.
The Company's substantial leverage level presents the risk that it
might not generate sufficient cash to service its indebtedness or that its
leveraged capital structure could limit its ability to finance future
acquisitions, develop additional projects, compete effectively and operate
successfully under adverse economic conditions. At June 30, 2002, the Company's
outstanding indebtedness was approximately $2.0 billion (excluding $1.1 billion
in aggregate principal amount of its trust preferred securities, its guarantees
and letters of credit in respect of subsidiary indebtedness aggregating
approximately $231 million and its completion guarantee issued in favor of the
lenders under Kern River Gas Transmission Company's ("Kern River") $875 million
construction loan facility in connection with Kern River's 2003 pipeline
expansion project). On August 16, 2002, the Company issued an additional $950
million of its trust preferred securities in connection with the purchase of
Northern Natural Gas Company ("Northern Natural Gas") and on October 4, 2002,
the Company sold $700 million of its senior notes. In addition, the Company's
subsidiaries have significant amounts of indebtedness. At June 30, 2002, the
Company's consolidated subsidiaries' and joint ventures' total outstanding
indebtedness exceeded $6.0 billion, which does not include $457 million
representing the Company's share of outstanding indebtedness of CE Generation,
LLC, or trade debt of its subsidiaries.
Risks Associated with the Company's Business
The Company's recent growth has been achieved, in part, through
strategic acquisitions, and additional acquisitions may not be successful.
Because the Company's industry is rapidly changing, there are
opportunities for acquisitions of assets and businesses, as well as for business
combinations. The Company investigates opportunities that may increase
shareholder value and build on existing businesses. The Company has participated
in the past and its security holders may assume that at any time the Company may
be participating in bidding or other negotiations for such transactions. Such
participation may or may not result in a transaction for the Company. Any such
transaction that does take place may involve consideration in the form of cash,
debt or equity securities.
In the past six years, the Company has completed several significant
acquisitions, including the acquisitions of Northern Electric, Yorkshire
Electricity, MidAmerican Energy Company ("MidAmerican Energy"), Kern River and
Northern Natural Gas. The Company has successfully integrated Northern Electric,
Yorkshire Electricity, MidAmerican Energy and Kern River. The Company closed on
the acquisition of Northern Natural Gas on August 16, 2002 and is in the process
of integrating its operations. The Company intends to continue to actively
pursue acquisitions in the energy industry to complement and diversify its
existing business for the foreseeable future.
The successful integration of Northern Natural Gas and any businesses
that may be acquired in the future will entail numerous risks, including, among
others, the risk of diverting management's attention from day-to-day operations,
the risk that the acquired businesses will require substantial capital and
financial investments and the risk that the investments will fail to perform in
accordance with expectations. Any substantial diversion of management attention
and any substantial difficulties encountered in the transition and integration
process could have a material adverse effect on the revenues, levels of expenses
and operating results of the Company.
In addition, it has been publicly reported over the past year that many
of the participants in the United States energy industry, including the prior
owners of Kern River and Northern Natural Gas and potentially including other
industry participants from whom the Company may choose to purchase additional
businesses in the future, have recently had or may have liquidity,
creditworthiness and other financial difficulties. As a consequence, there can
be no assurance that any such sellers will not enter into bankruptcy or
insolvency proceedings or that they will otherwise be able, required or willing
to perform on their indemnification obligations to the Company if the Company
should elect to pursue any such claims the Company may have against any of them
under the Company`s acquisition agreements in the future. If the Company's due
diligence efforts were or are unsuccessful in identifying and analyzing all
material liabilities relating to acquired companies and if there were to be any
material undisclosed liabilities, or if there were to be other unexpected
consequences from any such bankruptcy or insolvency proceeding, such as a
successful challenge as to whether the prices paid by the Company constituted
reasonably equivalent value within the meaning of the relevant bankruptcy laws,
then any such bankruptcy or insolvency, or failure by any of these sellers to
perform their indemnification obligations to the Company, could have a material
adverse effect on the Company's business, financial condition, results of
operations and the market prices and rates for the Company's securities.
The Company is actively pursuing, developing and constructing new or
expanded facilities, the completion and expected cost of which is subject to
significant risk.
Through its operating subsidiaries, the Company is continuing to
develop, construct, own and operate new or expanded facilities, including Kern
River's 2003 pipeline expansion project, a zinc recovery project in California
and two planned electric generating plants in Iowa, and in the future it expects
to pursue the development, construction, ownership and operation of additional
new or expanded energy projects (including, without limitation, generation,
distribution, transmission, exploration/production, storage and supply projects
and related activities, infrastructure and services), both domestically and
internationally, the completion of any of which, including any future projects,
is subject to substantial risk and may expose the Company to significant costs.
The Company cannot provide assurance that its development or construction
efforts on any particular project, or its efforts generally, will be successful.
Also, a proposed expansion or project may cost more than planned to
complete, and such excess costs, if related to a regulated asset and found to be
imprudent, may not be recoverable in rates. The inability to successfully and
timely complete a project or avoid unexpected costs may require the Company to
perform under guarantees (such as the Kern River completion guarantee), and the
inability to avoid unsuccessful projects or to recover any excess costs may
materially affect the Company's ability to service its debt obligations. The
Kern River completion guarantee also contains potential acceleration events
based on the Company's credit ratings, its ownership and other customary events
of default.
The Company's subsidiaries are subject to certain operating
uncertainties which may adversely affect revenues, expenses or distributions.
The operation of complex electric and gas utility (including
transmission and distribution systems), pipeline or power generating facilities
involves many operating uncertainties and events beyond the Company's control.
Operating risks include the breakdown or failure of power generation equipment,
compressors, pipelines, transmission and distribution lines or other equipment
or processes, fuel interruption, performance below expected levels of output,
capacity or efficiency, operator error and catastrophic events such as severe
storms, fires, earthquakes or explosions. A casualty occurrence might result in
injury or loss of life, extensive property damage or environmental damage.
Revenues, expenses and distributions may also be adversely affected by general
economic, business, regulatory and weather conditions. The realization of any of
these risks could significantly reduce or eliminate the Company's affiliates'
revenues or significantly increase its affiliates' expenses, thereby adversely
affecting the ability to receive distributions from subsidiaries and joint
ventures.
The Company currently possesses property, business interruption,
catastrophic and general liability insurance, but proceeds from such insurance
coverage may not be adequate for all liabilities incurred, lost revenue or
increased expenses. Moreover, such insurance may not be available in the future
at commercially reasonable costs and on commercially reasonable terms. Changes
in the insurance markets subsequent to the September 11, 2001 terrorist attacks
have made it more difficult for the Company to obtain certain types of coverage.
There can be no assurance that the Company will be able to obtain the levels or
types of insurance it would otherwise have obtained prior to these market
changes or that the insurance coverage it does obtain will not contain large
deductibles or fail to cover certain hazards or that it will otherwise cover all
potential losses.
Acts of sabotage and terrorism aimed at Company facilities could
adversely affect the Company's business.
Since the September 11, 2001 terrorist attacks, the United States
government has issued warnings that energy assets, specifically the nation's
pipeline and utility infrastructure, may be the future targets of terrorist
organizations. These developments have subjected the Company's operations to
increased risks. Any future acts of sabotage or terrorism aimed at Company
facilities, or those of its customers, could have a material adverse effect on
the Company's business, financial condition and results of operations. Any
resulting acts of war or the threat of war as a result of such terrorist attacks
could adversely affect the economy and energy consumption. Instability in the
financial markets as a result of terrorism or war could also materially
adversely affect the Company's ability to raise capital.
The Company is subject to comprehensive energy regulation and changes
in regulation and rates may adversely affect its business, financial condition
and results of operations.
The Company is subject to comprehensive governmental regulation,
including regulation in the United States by various federal, state and local
regulatory agencies, regulation in the United Kingdom and regulation in the
Philippines, all of which significantly influences its operating environment,
rates, capital structure, costs and ability to recover its costs from customers.
These regulatory agencies include, among others, the Federal Energy Regulatory
Commission ("FERC"), the Environmental Protection Agency, the Nuclear Regulatory
Commission, the United States Department of Transportation, the Iowa Utilities
Board, the Illinois Commerce Commission, other state utility boards, numerous
local agencies, the Gas and Electricity Markets Authority, or GEMA, which in
discharging certain of its powers acts through its staff within the Office of
Gas and Electricity Markets, or Ofgem, in the United Kingdom, and various other
governmental agencies in the United Kingdom and the Philippines. The FERC has
jurisdiction over, among other things, wholesale rates for electric transmission
service and electric energy sold in interstate commerce, interstate natural gas
transportation and storage rates, the siting and construction of interstate
natural gas transportation facilities and certain other activities of the
Company's utility subsidiaries. United States federal, state and local agencies
also have jurisdiction over many of the Company's other activities. The utility
commissions in the states where the Company's utility subsidiaries operate
regulate many aspects of its utility operations including siting and
construction of facilities, customer service and the rates that it can charge
customers. The revenues of the Company's United Kingdom distribution businesses
are subject to review and adjustment by GEMA and many other aspects of its
subsidiaries' United Kingdom operations are subject to the jurisdiction of GEMA
and other regulators and agencies in the United Kingdom.
The structure of federal and state energy regulation is currently
undergoing change and has in the past, and may in the future, be the subject of
various challenges, initiatives and restructuring proposals by policy makers,
utilities and other industry participants. In addition to Congressional
initiatives, many states are implementing or considering regulatory initiatives
designed to increase competition in the domestic power generation industry and
increase access to electric utilities' transmission and distribution systems for
independent power producers and electricity consumers. The implementation of
regulatory changes in response to such challenges, initiatives and restructuring
proposals could result in the imposition of more comprehensive or stringent
requirements on the Company or its subsidiaries or other industry participants,
which would result in increased compliance costs and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is unable to predict the impact on its operating results
from the future regulatory activities of any of these agencies or the Securities
and Exchange Commission under the Public Utility Holding Company Act of 1935, as
amended. Changes in regulations or the imposition of additional regulations
could have a material adverse impact on the Company's results of operations.
Recent developments, events and uncertainties which have impacted or could
impact the Company's businesses are described below.
On July 31, 2002, the FERC issued a notice of proposed rulemaking with
respect to Standard Market Design for the electric industry. The FERC has
characterized the proposal as portending "sweeping changes" to the use and
expansion of the interstate transmission and wholesale bulk power systems in the
United States. The proposal includes numerous proposed changes to the current
regulation of transmission and generation facilities designed "to promote
economic efficiency" and replace the "obsolete patchwork we have today,"
according to the FERC Chairman. The final rule, if adopted as currently
proposed, would require all public utilities operating transmission facilities
subject to the FERC jurisdiction to file revised open access transmission
tariffs that would require changes to the basic services these public utilities
currently provide. The proposed rule may impact the pricing of MidAmerican
Energy's electricity and transmission products. The FERC does not envision that
a final rule will be fully implemented until September 30, 2004. The Company is
still evaluating the proposed rule, and believes that the final rule could vary
considerably from the initial proposal. Accordingly, the Company is presently
unable to quantify the likely impact of the proposed rule on it.
The state utility regulatory environment has to date, in general, given
MidAmerican Energy an exclusive right to serve retail electricity customers
within its primary service territory in Iowa and, in turn, the obligation to
provide electric service to those customers. There can be no assurance that
there will not be a change in legislation or regulation in Iowa or in any of the
other states in which the Company operates to allow retail competition in
MidAmerican Energy's service territory.
Because the Kern River and Northern Natural Gas pipeline systems are
interstate natural gas pipelines subject to regulation as natural gas companies
under the Natural Gas Act, as amended, the rates the Company can charge its
customers and other terms and conditions of service are subject to review by the
FERC and the possibility of modification in periodic rate proceedings or at any
time in response to a complaint proceeding initiated by a customer or on the
FERC's own initiative. The rates the Company can charge are required to be just
and reasonable. The objective of the rate setting process is to allow the
Company to recover its costs to construct, own, operate and maintain its
pipelines which are actually and prudently incurred and to afford the Company an
opportunity to earn a reasonable rate of return. Under the terms of the
Company's transportation service contracts and in accordance with the FERC's
ratemaking principles, the current maximum tariff rates are designed to recover
costs included in its pipeline systems' regulatory cost of service that are
associated with the construction and operation of the Company's pipeline systems
that are actually, reasonably and prudently incurred. All costs incurred may not
be recoverable through existing or future rates. Failure to recover material
costs may have a material adverse effect on the Company's business, financial
condition and results of operations.
Revenue from Northern Electric's and Yorkshire Electricity's
distribution business is controlled by a distribution price control formula
which determines the maximum average price per unit of electricity that a
distribution network operator in Great Britain may charge. The distribution
price control formula is expected to have a five-year duration and is subject to
review by the British regulatory body for the energy sector, GEMA, at the end of
each five-year period and at other times in the discretion of GEMA. At each
review, GEMA can propose adjustments to the distribution price control formula.
In December 1999, a review resulted in a reduction in allowed revenue of 24% for
Northern Electric's distribution business and 23% for Yorkshire Electricity's
distribution business, in real terms, with effect from and after April 1, 2000.
The next review of the distribution price control formula is expected to become
effective in April 2005. Any further price reviews by GEMA, including those it
may elect to conduct at any time in its discretion, may have a material adverse
effect on the Company's results of operations.
The Philippine Congress has passed the Electric Power Reform Act of
2001, which is aimed at restructuring the power industry, including
privatization of the National Power Corporation and introduction of a
competitive electricity market, among other things. The implementation of the
bill may have an adverse impact on the Company's operations in the Philippines
and the Philippines power industry as a whole.
The Company is subject to environmental, safety and other laws and
regulations which may adversely impact it.
Through its subsidiaries and joint ventures, the Company is subject to
a number of environmental, safety and other laws and regulations affecting many
aspects of its present and future operations, both domestic and foreign,
including air emissions, water quality, wastewater discharges, solid wastes,
hazardous substances and safety matters. The Company may incur substantial costs
and liabilities in connection with its operations as a result of these
regulations. In particular, the cost of future compliance with federal, state
and local clean air laws, such as those that require certain generators,
including some of the Company's subsidiaries' electric generating facilities, to
limit nitrogen oxide emissions and potential other pollutants, may require the
Company to make significant capital expenditures which may not be recoverable
through future rates. In addition, these costs and liabilities may include those
relating to claims for damages to property and persons resulting from the
Company's operations. The implementation of regulatory changes imposing more
comprehensive or stringent requirements on the Company, to the extent such
changes would result in increased compliance costs or additional operating
restrictions, could have a material adverse effect on our business, financial
condition and results of operations.
In addition, regulatory compliance for existing facilities and the
construction of new facilities is a costly and time-consuming process, and
intricate and rapidly changing environmental regulations may require major
expenditures for permitting and create the risk of expensive delays or material
impairment of value if projects cannot function as planned due to changing
regulatory requirements or local opposition.
Potential pipeline safety legislation and an increase in public
expectations on pipeline safety may also require replacement of some of the
Company's pipeline segments, addition of monitoring equipment, and more frequent
inspection or testing of its pipeline facilities. These requirements coupled
with increases in state and federal agency oversight, if adopted, would
necessitate additional testing and reporting which may result in higher
operating costs and/or capital costs. FERC-approved tariffs or competition from
other natural gas sources may not allow the Company to recover these increased
costs of compliance.
In addition to operational standards, environmental laws also impose
obligations to clean up or remediate contaminated properties or to pay for the
cost of such remediation, often upon parties that did not actually cause the
contamination. Accordingly, the Company may become liable, either contractually
or by operation of law, for remediation costs even if the contaminated property
is not presently owned or operated by it, or if the contamination was caused by
third parties during or prior to the Company's ownership or operation of the
property. Given the nature of the past industrial operations conducted by the
Company and others at its properties, there can be no assurance that all
potential instances of soil or groundwater contamination have been identified,
even for those properties where an environmental site assessment or other
investigation has been conducted. Although the Company has accrued reserves for
its known remediation liabilities, future events, such as changes in existing
laws or policies or their enforcement, or the discovery of currently unknown
contamination, may give rise to additional remediation liabilities which may be
material.
Any failure to recover increased environmental or safety costs incurred
by the Company may have a material adverse effect on its business, financial
condition and results of operations.
Increased competition resulting from legislative, regulatory and
restructuring efforts could have a significant financial impact on the Company
and its utility subsidiaries and consequently decrease the Company's revenue.
The energy market continues to move towards a competitive environment
and is characterized by numerous strong and capable competitors, many of which
have more extensive operating experience and greater financial resources than
the Company and its subsidiaries. Retail competition and the unbundling of
regulated energy and gas service could have a significant adverse financial
impact on the Company and its subsidiaries due to an impairment of assets, a
loss of customers, lower profit margins and/or increased costs of capital. The
total impacts of restructuring may have a significant financial impact on the
Company's financial position, results of operations and cash flows. The Company
cannot predict when it will be subject to changes in legislation or regulation,
nor can it predict the impacts of these changes on its financial position,
results of operations or cash flows.
The generation segment of the electric industry has been and will be
significantly impacted by competition. The introduction of competition in the
wholesale market has resulted in a proliferation of power marketers and a
substantial increase in market activity. Many of these marketers have
experienced financial difficulties and the market continues to be volatile.
As retail competition continues to evolve, margins will be pressured by
competition from other utilities, power marketers and self-generation. Many
states and the federal government are implementing or considering regulatory
initiatives that would increase access to electric utilities' transmission and
distribution systems for independent power producers, utilities, power marketers
and electricity customers. Although the recent and anticipated changes in the
United States electric utility industry may create opportunities, they will also
create additional challenges and risks for utilities. Competition will put
pressure on margins for traditional electric services. Illinois recently enacted
a law that provides for full retail customer choice in 2002. While introduction
of retail competition in Iowa is not presently expected, depending upon the
terms of any such legislation, if introduced it could have a material adverse
effect on the Company. These types of restructurings and other industry
restructuring efforts could materially impact the Company's results of
operations in a manner which is difficult to predict, since such efforts will
depend on the terms and timing of such restructuring.
As a result of the FERC orders, including Order 636, the FERC's
policies favoring competition in gas markets, the expansion of existing
pipelines and the construction of new pipelines, the interstate pipeline
industry has begun to experience some failure to renew, or turn back, of firm
capacity, as existing transportation service agreements expire and are
terminated. Local distribution companies and end-use customers have more choices
in the new, more competitive environment and may be able to obtain service from
more than one pipeline to fulfill their natural gas delivery requirements. If a
pipeline experiences capacity turn back and is unable to remarket the capacity,
the pipeline or its remaining customers may have to bear the costs associated
with the capacity that is turned back. Any new pipelines that are constructed
could compete with the Company's pipeline subsidiaries for customers' service
needs. Increased competition could reduce the volumes of gas transported by the
Company's pipeline subsidiaries or, in cases where they do not have long-term
fixed rate contracts, could force its pipeline subsidiaries to lower their rates
to meet competition. This could adversely affect the Company's pipeline
subsidiaries' financial results.
A significant decrease in demand for natural gas in the markets served
by the Company's subsidiaries' pipeline and distribution systems would
significantly decrease its revenue and thereby adversely affect its business,
financial condition and results of operations.
A sustained decrease in demand for natural gas in the markets served by
the Company's subsidiaries' pipeline and distribution systems would
significantly reduce its revenues. Factors that could lead to a decrease in
market demand include:
o a recession or other adverse economic condition that results in a lower
level of economic activity or reduced spending by consumers on natural
gas;
o an increase in the market price of natural gas or a decrease in the
price of other competing forms of energy, including electricity, coal
and fuel oil;
o higher fuel taxes or other governmental or regulatory actions that
increase, directly or indirectly, the cost of natural gas or that limit
the use of natural gas;
o a shift by consumers to more fuel-efficient or alternative fuel
machinery or an improvement in fuel economy, whether as a result of
technological advances by manufacturers, legislation mandating higher
fuel economy, or otherwise; and
o a shift by the Company's pipeline and distribution customers to the use
of alternate fuels, such as fuel oil, due to price differentials or
other incentives.
Failure of the Company's significant power purchasers and pipeline
customers to pay amounts due under their contracts could reduce its revenues
materially.
The Company's subsidiaries' non-utility generating facilities and both
of the Company's pipeline subsidiaries are dependent upon a relatively small
number of customers for a significant portion of their revenues. As a result,
the Company's profitability and ability to make payments on its debt generally
will depend upon the continued financial performance and creditworthiness of
these customers. Accordingly, failure of one or more of the Company's most
significant customers to pay for contracted electric generating capacity or
pipeline capacity reservation charges, for reasons related to financial distress
or otherwise, could reduce its revenues materially if the Company was not able
to make adequate alternate arrangements and therefore could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's pipeline subsidiaries may not be able to maintain or
replace long-term gas transportation service agreements at favorable rates as
existing contracts expire.
The Company's business, financial condition and results of operations
are dependent in significant part on the ability of Kern River and Northern
Natural Gas to maintain long-term transportation service agreements with
customers subject to favorable transportation rates.
Upon expiration of these long-term transportation service agreements,
existing customers may elect not to extend their contracts at rates favorable to
the Company's subsidiaries or on a long-term basis, or at all. The Company's
pipeline subsidiaries may also be unable to obtain favorable replacement
agreements with other customers. The extension or replacement of the existing
long-term contracts depends on a number of factors beyond the Company's control,
including:
o the availability of economically deliverable natural gas for transport
through the Company's subsidiaries' pipeline systems, including in
particular continued availability of adequate supplies from the Rocky
Mountains, Hugoton, Permian, Anadarko and Western Canadian supply
basins currently accessible to the pipeline subsidiaries;
o existing competition to deliver natural gas to the upper Midwest and
southern California;
o new pipelines or expansions potentially serving the same markets as the
Company's pipelines;
o the growth in demand for natural gas in the upper Midwest and southern
California;
o whether transportation of natural gas pursuant to long-term contracts
continues to be market practice; and
o whether the Company's business strategy, including its expansion
strategy, continues to be successful.
Any failure to extend or replace a significant portion of these
contracts may have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's utility and non-utility businesses are subject to market
and credit risk.
The Company is exposed to market and credit risks in its subsidiaries'
generation, retail distribution and pipeline operations. Specifically, such
risks include commodity price changes, market supply shortages, interest rate
changes and counterparty default. In Iowa, MidAmerican Energy does not have an
ability to pass through fuel price increases in its rates (an energy adjustment
clause), so any significant increase in fuel costs or purchased power costs
could have a negative impact on MidAmerican Energy. To minimize these risks, the
Company requires collateral to be posted if the creditworthiness of
counterparties deteriorates below established levels and enter into financial
derivative instrument contracts to hedge purchase and sale commitments, fuel
requirements and inventories of natural gas, electricity, coal and emission
allowances. However, financial derivative instrument contracts do not eliminate
the risk. The impact of these risks could result in the Company's inability to
fulfill contractual obligations, significantly higher energy or fuel costs
relative to corresponding sales contracts or increased interest expense.
The Company has significant operations outside the United States which
may be subject to increased risk because of the economic or political conditions
of the country in which they operate.
The Company has a number of operations outside of the United States.
The acquisition, ownership and operation of businesses outside the United States
entail significant political and financial risks (including, without limitation,
uncertainties associated with privatization efforts, inflation, currency
exchange rate fluctuations, currency repatriation restrictions, changes in law
or regulation, changes in government policy, political instability, civil unrest
and expropriation) and other risk/structuring issues that have the potential to
cause material impairment of the value of the business being operated, which the
Company may not be capable of fully insuring against. The risk of doing business
outside of the United States could be greater than in the United States because
of specific economic or political conditions of each country. The uncertainty of
the legal environment in certain foreign countries in which the Company operates
or may acquire projects or businesses could make it more difficult for the
Company to enforce its rights under agreements relating to such projects or
businesses. In addition, the laws and regulations of certain countries may limit
the Company's ability to hold a majority interest in some of the projects or
businesses that it may acquire. Furthermore, the central bank of any such
country may have the authority in certain circumstances to suspend, restrict or
otherwise impose conditions on foreign exchange transactions or to restrict
distributions to foreign investors. Although the Company may structure certain
project revenue and other agreements to provide for payments to be made in, or
indexed to, United States dollars or a currency freely convertible into United
States dollars, there can be no assurance that it will be able to obtain
sufficient dollars or other hard currency or that available dollars will be
allocated to pay such obligations.
The Company's international projects may be subject to the risk of being
delayed, suspended or terminated by the applicable foreign governments or may be
subject to the risk of contract abrogation, expropriations or other
uncertainties resulting from changes in government policy or personnel or
changes in general political or economic conditions affecting the country. In
this regard, reference is made to the substantial uncertainties associated with
one of the Company's non-utility power projects in the Philippines, which is
referred to as the Casecnan Project, where certain payments under the primary
project agreement are currently not being made by the government of the
Philippines and are presently the subject of international arbitration.
Specifically, under the terms of a Casecnan Project agreement between CE
Casecnan Water and Energy Company, Inc. ("CE Casecnan") and the Philippine
National Irrigation Administration ("NIA"), NIA has the option of timely
reimbursing CE Casecnan directly for certain taxes CE Casecnan has paid. If NIA
does not so reimburse CE Casecnan, the taxes paid by CE Casecnan result in an
increase in the Water Delivery Fee under the Casecnan Project agreement. The
payment of certain other taxes by CE Casecnan results automatically in an
increase in the Water Delivery Fee. As of June 30, 2002, CE Casecnan has paid
approximately $54.4 million in taxes which as a result of the foregoing
provisions had resulted in an increase in the Water Delivery Fee. NIA has failed
to pay the portion of the Water Delivery Fee each month which relates to the
payment of these taxes by CE Casecnan. As a result of this non-payment, on
August 19, 2002, CE Casecnan filed a Request for Arbitration against NIA,
seeking payment of such portion of the Water Delivery Fee and enforcement of the
relevant provision of the Casecnan Project agreement going forward. The
arbitration will be conducted in accordance with the rules of the International
Chamber of Commerce.
The Company faces exchange rate risk.
Payments from some of the Company's foreign investments, including
without limitation Northern Electric and Yorkshire Electricity, are made in a
foreign currency and any dividends or distributions of earnings in respect of
such investments may be significantly affected by fluctuations in the exchange
rate between the United States dollar and the British pound or other applicable
foreign currency. Although the Company may enter into certain transactions to
hedge risks associated with exchange rate fluctuations, there can be no
assurance that such transactions will be successful in reducing such risks.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Registrant)
/s/ Paul J. Leighton
-------------------------------
Paul J. Leighton
Vice President, Assistant Secretary
and Assistant General Counsel
Date: November 13, 2002